Final Results for the Year Ended 31 December 2017

RNS Number : 2101P

Baron Oil PLC

24 May 2018

 

Market Abuse Regulation (MAR) Disclosure

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement.

24 May 2018

Baron Oil Plc

("Baron Oil" or "the Company")

Final Results for the Year Ended 31 December 2017

Baron Oil (AIM: BOIL), the oil and gas company with a strategy of exploring near-term drilling opportunities in established producing areas, is pleased to announce its audited financial results for the year ended 31 December 2017.

Key Points:

·      Net loss before taxation of £2,058,000 (2016: loss of £175,000) with an attributable after-tax loss to equity shareholders of £1,539,000 (2016: loss of £32,000)

·      End of year free cash balance of £3,873,000 (US$5,225,000); (2016: £2,158,000 (US$2,662,000))

·      Increase in cash reserves arises from release of guarantee in Peru of £2,674,000 offset by an operational cash outflow of £959,000

·      Administration costs reduced 27% to £510,000 (2016: £700,000) excluding exchange rate movement which gave rise to an exchange loss of £508,000 (2016: gain of £1,131,000)

·      Relinquishment of Peru block Z-34 and recovery of the US$3.6 million guarantee during the year enabled the Company to execute a change in strategic direction

·      Post year-end farmin to Colter and Wick prospects in UK Offshore will see a well drilled on each in 2018

·      Farmout efforts continue for the El Barco prospect in Peru block XXI

·      Host Government delays continue to hamper progress on the SE Asia initiative

·      Bill Colvin resigned as Chairman in February 2018 and Andy Yeo was appointed as a non-executive director in May 2018.

Commenting on the results, Malcolm Butler, Chairman & CEO, said:

"During 2017 we were finally able to extract the Company from the problems created by our partnership with Union Oil & Gas Group in Peru.  The fact that we were able to relinquish block Z-34 and reclaim the entire amount of the US$3.6 million guarantee bond made for a very satisfactory end to the year.  That put us in a position to execute a change in direction of the Company and take interests in the Colter and Wick prospects in the UK Offshore, both close to existing oilfields and capable of rapid development if successful. A well is planned on each of these prospects in 2018 and success on either would provide shareholders with a meaningful uplift in the asset value of the Company. In the meantime, we continue to seek a partner for Peru block XXI and hope we will be able to drill the El Barco prospect in due course.

"The composition of the board changed after yearend. We were very sorry to accept the resignation of Bill Colvin as Chairman but pleased that Andy Yeo has now joined as an independent non-executive director.

"The Company remains fully funded for its current planned activities in 2018 and we look forward to the commencement of an exciting drilling programme in the UK later in the year."

For further information, please contact:

Baron Oil Plc	[phone]
Malcolm Butler, Chairman & Chief Executive Officer
SP Angel Corporate Finance LLP	[phone]
Nominated Adviser and Broker
Lindsay Mair, Richard Hail, Richard Redmayne

CHAIRMAN'S STATEMENT & OPERATIONS REPORT

FINANCE AND FINANCIAL RESULTS

The net result for the year was a loss before taxation of £2,058,000, which compares to a loss of £175,000 for the preceding financial year, and the loss after taxation attributable to Baron Oil shareholders was £1,539,000, compared to a loss of £32,000 in the preceding year.

Turnover for the year was £nil (2016: £nil), there being no sales activity since the cessation of production in July 2015 from the Nancy-Burdine-Maxine fields ("NBM") in Colombia and the expiry of the licence in October 2015.

During 2017, the local staff of Inversiones Petroleras de Colombia SAS ("Invepetrol") finalised all the steps necessary to administer the relinquishment of the licence, the clearance of equipment from the well site and to obtain all necessary environmental approvals. The remaining staff left the company before the end of the year. The Group has held a 50% interest in Invepetrol since 2014 but consolidated the results as it held effective management control. However, during 2017 our 50% partner, CI International Fuels, took control of the Board and, as a result, Invepetrol has been deconsolidated. Furthermore, steps have been taken to place Invepetrol into liquidation. The effect of deconsolidation is to release net liabilities previously included in the Statement of Financial Position and to give rise to a credit to the Income Statement of £831,000. While the directors believe that the Company will not have any further liabilities from Colombia, we retain sufficient provision in the Statement of Financial Position against any unforeseen eventualities.

Exploration and evaluation expenditure written off included in the Income Statement amounts to £109,000. This arises from £90,000 in costs regarding the South East Asia Joint Study Agreement with SundaGas, mainly relating to the period up to 31 March 2017, and residual costs of £19,000 on block Z-34 in Peru (see below).

In Peru, the decision to relinquish block Z34 leads to a write off in the Income Statement of £1,837,000. This reflects primarily the write off of the US$2 million receivable from Union Oil & Gas Group following their failure to meet their obligation under the farm-out agreement, plus some additional expenditure incurred locally in Peru. This should be considered in the context of US$3.6 million being released from cash cover to support the Z-34 guarantee to Perupetro, this amount being added to the free cash resources of the Group as shown in the cash flow statement.

A further effect of the write off of the Union Oil and Gas Group receivable is a write back of the related provision for Peruvian tax amounting to £519,000, this amount being credited to the Income Statement.

Also in Peru, the Group incurred expenditure totaling £84,000 on our 100%-owned onshore block XXI, arising from both direct costs and local staff and support costs. In accordance with our accounting policy, the Group has been charging unsuccessful exploration costs direct to the Income Statement; however, the results of the 2015/16 2D seismic on block XXI were encouraging and may lead to the drilling of an exploration well during 2018. Accordingly, the Board are of the view that this phase of exploration is ongoing and that the expenditure should remain on the Balance Sheet as capitalised exploration and evaluation expenditure until the results of any such well are known, the carrying amount being £1,260,000.

Administration expenditure for the year was £510,000, down from £700,000 in the preceding year, excluding the effects of exchange rate movements. This cost saving arises from the cessation in activities in Colombia at £122,000, reduced cost in Peru of £49,000, with the remainder due to cost reductions in the UK.

During the year, we saw a relative weakening in the US Dollar and, with the majority of the group's assets being denominated in that currency, this has given rise to a loss of £508,000. This compares with a gain of £1,131,000 in the preceding year, when there was a major impact on the Pound Sterling following the Brexit referendum result.

At the end of the financial year, free cash reserves of the Group had increased to £3,873,000 from a level at the preceding year end of £2,158,000. This increase in cash reserves arises from the release of cash cover funds held against the guarantee in respect of Peru block Z-34 at £2,674,000 (US$3,600,000), offset by an operational cash outflow of £959,000.

The Group continues to pursue a conservative view of its asset impairment policy, giving it a Balance Sheet that consists largely of net current assets and a realistic value for its remaining exploration assets. Given the limited cash resources, the Board will take a prudent approach in entering into new capital expenditures beyond those already committed to existing ventures.

NEW EXPLORATION ACTIVITY

Following the recovery of $3.6 million from the relinquishment of Peru block Z-34, of which details are given below, Baron has followed a new strategy concentrating on near-term drilling opportunities in the United Kingdom, as follows: 

UNITED KINGDOM OFFSHORE LICENCE P2235 ("WICK" PROSPECT) (BARON 15%)

Baron announced on 19 February 2018 that it had signed an option to farm in to UK Offshore Licence P2235 (Block 11/24b) containing the Wick Prospect. This option was exercised on 13 March 2018, when Baron signed a definitive Farmout Agreement with Corallian Energy Limited, ("Corallian") under which the Company will pay 20% of the costs of the Wick well, up to a maximum gross cost of £4.2 million, and 15% of other costs on the licence to earn a 15% working interest in P2235. The Wick Prospect lies close to the shore of NE Scotland, 5 kilometres north and updip from the Lybster Field, which has been developed from onshore facilities.  The prospect has been defined by 3D seismic mapping by Baron and others and a recent announcement by Upland Resources Limited stated it has estimated in-place P50 Prospective Resources of around 250 million barrels of oil (unrisked) in sands of Jurassic and Triassic age in the licence area, a large part of which will be tested by the Wick well.  The Wick well will be drilled to a total depth of 1,250 metres subsea in a water depth of 38 metres.  Baron announced on 15 May 2018 that Corallian had entered into a letter of intent with Ensco UK Limited to provide a jack-up drilling rig to drill this prospect in the third or fourth quarter of 2018, subject to necessary approvals and consents. The total well cost has increased, due largely to more rigorous site survey requirements and substantially higher fuel costs, and is currently estimated at £5.2 million. Including a 15% share of back costs unrelated to the well, the total payable by the Company is currently estimated at some £1,020,000 to earn a 15% interest in the licence¹.

UNITED KINGDOM OFFSHORE LICENCE P1918 ("COLTER" PROSPECT) AND ONSHORE PEDLs 330 & 345 (BARON 5%)

Baron entered into a Farmout Agreement with Corallian on 5 March 2018 under which it will earn a 5% working interest in UK Offshore Licence P1918, which contains the Colter Prospect, on which a well is planned to be drilled this year. By participating in this well, Baron will also earn a 5% interest in nearby onshore licences PEDL 330 and PEDL 345.

The Colter Prospect lies in Poole Bay, immediately southeast of the Wytch Farm oilfield which has been developed from onshore facilities. Recent re-mapping of pre-stack depth migrated 3D seismic data by Corallian indicates that the 98/11-3 well, which encountered oil in the Triassic Sherwood sandstone reservoir, lies on the flank of a structure that has the potential to hold unrisked Mean Prospective Resources of 23 million barrels of recoverable oil equivalent. The Colter Prospect will be appraised by a well drilled to a total depth of 1,850 metres subsea in a water depth of 16 metres. Baron announced on 15 May 2018 that Corallian had entered into a letter of intent with Ensco UK Limited to provide a jack-up drilling rig to drill this prospect in the third or fourth quarter of 2018, subject to necessary approvals and consents. The total well cost has increased, due largely to more rigorous site survey requirements and substantially higher fuel costs, and is currently estimated at £7.2 million. Under the terms of the agreement with Corallian, subject to governmental consents, the Company would pay 6.67% of the costs related to this well, capped at a gross cost of £8.0 million: costs above this cap would be funded at 5%. Including a 5% share of back costs unrelated to the well, the total payable by the Company is currently estimated at some £490,000 to earn a 5% interest in the licence¹.

legacy Exploration activity

PERU OFFSHORE Block Z-34 (Baron Oil 50% interest RELINQUISHED IN DECEMBER 2017)

In November 2017, the Company elected to relinquish the contract for block Z-34, in which it held a 50% interest through its Peruvian subsidiary, Gold Oil Peru SAC ("GOP").  Earlier in the year, Union Oil & Gas Group (UOGG) defaulted on its obligation to pay GOP US$2 million when a 30% interest in Z-34 was formally assigned to it by the Peruvian Government under a Public Deed.  Following protracted discussions, it was agreed to terminate and unwind the 2013 Farmout Agreement with UOGG and the 30% interest under the Joint Operating Agreement ("JOA") was returned to GOP on 10 September 2017.  UOGG retained ownership of Plectrum Petroleum Limited, which continued to hold a 50% interest in Z-34. However, neither UOGG nor Plectrum paid cash calls due to GOP as operator under the terms of the JOA. On 1 September 2017 both UOGG and Plectrum were formally placed into default for non-payment of the August cash call and, following termination of the Farmout Agreement, Plectrum compounded its default position by not paying cash calls for September and November.

Taking into account the partner default, the failure of an extended effort by UOGG to farm out its interests in Z-34 and the fact that the contract had been in Force Majeure since 2014 because of the lack of legislation and regulations necessary to allow drilling operations in this deep-water environment, GOP proposed that the block be relinquished. An Operating Committee Meeting was held in accordance with the JOA at the beginning of November 2017, at which Plectrum could not exercise its vote because of its default, and the unanimous decision was made to relinquish block Z-34.

Notice of relinquishment was given to Perupetro on 9 November 2017 and the relinquishment became effective on 9 December.  At this point, GOP notified Perupetro that the terms of the Z-34 contract allowed it to claim the release of the $3.6 million bond held as guarantee for the work programme if the contract had been in Force Majeure for a period exceeding one year.  This was accepted by Perupetro on 14 December 2017 and the funds were released on 19 December. Following delays over the Christmas period, the funds were finally cleared in the Company's UK bank account on 5 January 2018.

PERU ONSHORE Block XXI (Baron Oil 100%)

The Company owns a 100% interest in the contract for block XXI through GOP. The block lies onshore in the Sechura Desert, close to the town of Piura, and covers a current area of 2,425 square kilometres.

The El Barco prospect has been identified in the area to the northeast of the 1954 Minchales-1X well and a drilling prognosis has been prepared for a well to 1,850 metres.  Mapping of the El Barco prospect by GOP indicates that unrisked Prospective Resources are in the range of 6.4 billion cubic feet of recoverable gas in a low-risk shallow sand and 7.1 million barrels of recoverable oil in a much higher risk fractured basement play.  Initial estimates are that the actual drilling of this well will cost some US$1.4 million but additional costs of some US$500,000 are expected to be incurred for the necessary civil engineering and environmental work involved in building a suitable track from the Pan-American Highway across the desert and scrub to the proposed wellsite, a distance of some 15 kms.

Farmout negotiations with interested parties continue since, as previously stated, the directors wish to find a partner to pay at least 50% of the costs of the El Barco well. Discussions are also underway with qualified drilling contractors.  The block XXI contract is currently in Force Majeure, because of local opposition to the drilling at El Barco, which adds a further potential expense to the drilling operation. If the well is not drilled within 6 months of expiry of the current Force Majeure situation, the contract will terminate and the Company will forfeit its guarantee bond of US$160,000.

NORTHERN IRELAND ONSHORE LICENCE PL 1/10 licence (Baron Oil 12.5%)

No significant activity took place on this licence in 2017 and in February 2018 Baron gave notice that it would withdraw from the licence. This became effective in April 2018 and the Company has no further obligations.

OPERATIONS IN COLOMBIA

During the year, the remaining staff in Colombia completed the administration of the cessation of the NBM licence, which took effect in October 2015. By the end of the year, all staff had left the local operation. NBM was operated by Invepetrol in which we are 50% shareholders and in which control effectively passed to our partner, CI International Fuels, in 2017. Proceedings to liquidate this company are expected to commence shortly.

SE ASIA STUDY GROUP

Baron entered into a joint study agreement in September 2016 with SundaGas Pte Ltd, based in Singapore.  The purpose was to give the Company accelerated access to a range of exploration and production activities in prospective areas of South East Asia without the need to increase its own staff and overhead.  The agreement ran for a six-month period to 31 March 2017, during which time the group considered a broad range of possibilities and entered into preliminary negotiations on several potential projects, one of which is still active.  The directors had hoped that this project would come to fruition during 2017 but a decision by the host government continues to be delayed and it seems unlikely that an award, if any, will be made before the fourth quarter of 2018.

Conclusions

Although the directors were forced to spend a great deal of time during the year in difficult negotiations with our recalcitrant partners in Peru block Z-34, the final outcome at year-end was a satisfactory one. It had become clear that it would be impossible to drill the block in the timeframe of the contract for administrative, technical and financial reasons and the block was relinquished in a way that enabled the Company to recover the entire guarantee bond.  The additional US$3.6 million of free cash has enabled the Company to be re-positioned and, after due consideration, the board has decided that near-term drilling activities in areas where discoveries can easily and profitably be developed represent the best way forward.  Each of the Wick and Colter prospects offers an excellent opportunity to drill a relatively low-risk well this year with significant potential and provides the possibility of early, low cost development.  Success in either of these wells would provide shareholders with a meaningful uplift in the asset value of the Company.

The Company remains debt-free and is fully funded for its currently planned activities in 2018.

I would like to pay a personal tribute to Bill Colvin, who resigned as Chairman in February 2018. Bill took over the reins under very difficult circumstances in January 2015 and guided the Company through the difficult period when our partners in block Z-34 prevented us from moving forward with activities on the block, refused to honour their obligations under the Farmout Agreement and defaulted on their payment obligations under the JOA.  It was good that he was able to savour the success of regaining the guarantee bond and participate in the re-positioning of the Company.  We wish him every success in his other ventures.

I would also like to welcome Andrew Yeo as an independent non-executive director.  His experience in the City and in the oil industry will be of great value to the board and he has been appointed to chair the audit and remuneration committees.

Malcolm Butler

Chairman and Chief Executive

23 May 2018

_________________________________

¹ Under pre-existing agreements between Corallian and InfraStrata plc, Baron is obligated to pay to InfraStrata plc on a monthly basis an

amount equivalent to 1% of the pre-tax net profits generated to Baron from the sales of oil and gas from licences P1918 and P2235, taking into account, in each case, cumulative costs and expenses of exploration, appraisal, development and production.

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2017
				Notes	2017	2016
					£'000	£'000
	Revenue				-	-
	Cost of sales				-	-
	Gross profit				-	-
	Exploration and evaluation expenditure				(109)	(739)
	Intangible assets written off				(1,837)	-
	Intangible asset impairment			11	-	(370)
	Property, plant and equipment impairment and depreciation			10	-	95
	Goodwill impairment			12	-	(81)
	Receivables and inventory impairment			3	43	73
	Disposal of Colombian subsidiary				831	-
	Disposal of Colombia branch operations				-	31
	Administration expenses				(510)	(700)
	(Loss)/profit on exchange				(508)	1,131
	Other operating Income			4	21	319
	Operating loss			3	(2,069)	(241)
	Finance cost			6	(8)	(35)
	Finance income			6	19	101
	Loss on ordinary activities
	before taxation				(2,058)	(175)
	Income tax credit/(expense)			7	519	(113)
	Loss on ordinary activities
	after taxation				(1,539)	(288)
	Dividends				-	-
	Loss for the year				(1,539)	(288)
	Loss on ordinary activities
	after taxation is attributable to:
	Equity shareholders				(1,539)	(32)
	Non-controlling interests				0	(256)
					(1,539)	(288)
	Earnings per ordinary share - continuing			9
	Basic				(0.112p)	(0.002p)
	Diluted				(0.112p)	(0.002p)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2017
			Notes	2017	2016
				£'000	£'000
Assets
Non current assets
Property plant and equipment
--- oil and gas assets			10	-	3
--- others			10	-	-
Intangibles			11	1,260	1,325
Goodwill			12	-	-
				1,260	1,328
Current assets
Trade and other receivables			14	18	2,070
Cash and cash equivalents			15	3,992	5,231
				4,010	7,301
Total assets				5,270	8,629
Equity and liabilities
Capital and reserves attributable to owners of the parent
Share capital			17	344	344
Share premium account			18	30,237	30,237
Share option reserve			18	122	81
Foreign exchange translation reserve			18	1,723	1,688
Retained earnings			18	(28,163)	(26,624)
Capital and reserves attributable to non-controlling interests			19	-	347
Total equity				4,263	6,073
Current liabilities
Trade and other payables			16	195	1,054
Taxes payable			16	812	1,502
				1,007	2,556
Total equity and liabilities				5,270	8,629
The financial statements were approved and authorised for issue by the Board of Directors on 23 May 2018 and were signed on its behalf by:
Malcolm Butler			Geoffrey Barnes
Director			Director
Company number: 5098776

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017
		Group	Company	Group	Company
		2017	2017	2016	2016
		£'000	£'000	£'000	£'000
Operating activities		(680)	(508)	(2,326)	284
Investing activities
Return from investment and servicing of finance		19	19	101	90
Sale of Intangible assets		-	-	1,784	-
Cash previously not available now released		2,674	2,674
Disposal of tangible assets				82	82
Loan to subsidiary (advanced)/repaid		-	(283)	-	(246)
Acquisition of intangible assets		(298)	(119)	(492)	(74)
Acquisition of tangible fixed assets		-	-	(1)	-
		2,395	2,291	1,474	(148)
Financing activities
Proceeds from issue of share capital		-	-	-	-
Net cash inflow		1,715	1,783	(852)	136
Cash and cash equivalents at the beginning of the year		2,158	2,080	3,010	1,944
Cash and cash equivalents at the end of the year		3,873	3,863	2,158	2,080
Reconciliation to Consolidated Statement of Financial Position
Cash not available for use		119	-	3,073	2,943
Cash and cash equivalents as shown in the Consolidated Statement of Financial Position		3,992	3,863	5,231	5,023

CONSOLIDATED AND COMPANY STATEMENT OF CASH FLOWS FOR THE
YEAR ENDED 31 DECEMBER 2017
		Group	Company	Group	Company
		2017	2017	2016	2016
		£'000	£'000	£'000	£'000
Operating activities
Loss for the year attributable to controlling interests		(1,539)	(1,342)	(32)	47
Depreciation, amortisation and impairment charges		2	-	331	61
Loss on disposal of assets		-	120	-	-
Share based payments		41	41	-	-
Non-cash movement arising on consolidation of non-controlling interests		(347)	-	(257)	-
Impairment of investment		-	74	-	246
Finance income shown as an investing activity		(19)	(19)	(101)	(90)
Tax (benefit)/expense		(519)	-	113	-
Foreign exchange translation		512	478	(1,319)	(430)
Operating cash outflows before movements in working capital		(1,869)	(648)	(1,265)	(166)
(Increase)/decrease in receivables		2,052	148	(440)	1,178
Tax paid		(4)	(4)	71	(2)
Increase/(Decrease) in payables		(859)	(4)	(692)	(726)
Net cash (outflows)/ inflows from operating activities		(680)	(508)	(2,326)	284

 

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