Audited 2013 Financial Statements/Annual Results

RNS Number : 0552E

Gulfsands Petroleum PLC

04 April 2014

 

Immediate Release

4 April 2014

GULFSANDS PETROLEUM PLC

ANNUAL RESULTS 2013

London, 4^th April 2014:  Gulfsands Petroleum plc ("Gulfsands", the "Group" or the "Company" - AIM: GPX), the oil and gas production, exploration and development company with activities in Syria, Morocco, Tunisia, Colombia and the U.S.A. announces its annual results for the twelve months ended 31 December 2013.

Highlights

·      Assumed operatorship in Morocco, Tunisia and Colombia

·      Audited Group 2P working interest reserves  of 75.8 mmboe and unrisked, best estimate working interest prospective reserves increased to 526 mmboe as at 31 December 2013

·      Conducted 2D and 3D seismic programmes and commenced drilling in Morocco

·      Total bank and cash resources of $53 million at year-end inclusive of $33.8 million of cash and cash equivalents and $19 million in restricted cash

·      Significant reduction in general and administrative expenses

·      Syrian assets remain shut-in and secure during continuation of sanctions

Outlook

·      Drilling planned for Morocco

·      Seismic programmes planned in Morocco for 2014 and Colombia and Tunisia in 2014/15

·      Upgrade existing resource base to reserves status

·      Continue to pursue new business opportunities in existing countries of operation

·      Secure industry and strategic investor relationships to support development of business

Commenting on the Annual Results, Andrew West, Chairman of Gulfsands, said:

"The past year has been one of steady but considerable progress and consolidation.  We have both diversified and rationalised our portfolio with entry into two new countries and now have operatorship of all our licences which represents an important milestone for Gulfsands given our proven status and reputation as a quality Operator.  We have moved swiftly to commence operations in Morocco and Colombia and have successfully laid the foundations for future growth in both of these exciting regions.  Importantly, we have significantly reduced our overheads and will continue to focus on ensuring we operate as efficiently and effectively as possible. 

The year ahead will see increased operational activity across our portfolio with seismic activity in Morocco, Colombia and Tunisia and a multi-well programme in Morocco which will be drilled with the benefit of the newly acquired 3D seismic.  The Board remains confident in the opportunities before us and in the Company's ability to bring those opportunities to fruition."

For further information, please refer to the Company's website www.gulfsands.com or contact:

Gulfsands Petroleum	[phone]
Mahdi Sajjad, Chief Executive Officer Kenneth Judge, Commercial Director
Buchanan	[phone]
Bobby Morse Ben Romney
RBC Capital Markets	[phone]
Stephen Foss Matthew Coakes Daniel Conti
FirstEnergy Capital	[phone]
Majid Shafiq
Jonathan Wright

Chairman's Statement

Dear Shareholder,

The past year, insofar as the Company has been concerned, has been one of steady but considerable progress and consolidation rather than one of dramatic events.  Notwithstanding the absence of early exploration success in Morocco, progress with re-building a viable business and a credible vehicle for long term value creation has been tangible and enhanced our reputation as efficient operators.

I would like to highlight several principal areas of achievement.

Firstly, following the restructuring of our Tunisian interests, the Company now has operatorship of all its exploration licences.  Control of our own destiny in this regard was the key to our success in Syria and will be equally crucial to repeating that success elsewhere.

Secondly, we have extensively restructured our senior management team and our staffing, resulting in both a more effective organisation to meet the challenges of capturing and developing new business opportunities and a significantly reduced cost base.

Thirdly, we have moved swiftly and effectively to commence operations in Morocco and Colombia and, in the latter case, to farm down our interest. The credibility and goodwill this has bought us with, in particular, the authorities in Morocco is incalculable and will be of great benefit as we move into a more serious exploration phase.

These themes are discussed in greater detail in the Chief Executive's Review and the Operations Review.

Although we continue to husband our cash we have not yet generated cash flow from these new business initiatives.  Your Board is acutely aware of the imperative to do so and of the need to ensure the continuing availability of adequate financial resources until the point at which the Company is once again self-sustaining.  This is an important reason for having structured our affairs and interests as we have.  Although the institutional appetite for investment in E&P companies at the corporate level remains tepid at best, from ongoing discussions with potential investors, debt providers and industry partners, it is evident that we have a range of options open to us to fund our operations at the asset or field level.  You may be assured that your Board is evaluating and pursuing those opportunities with vigour.  Further assessment of the Company's going concern status is made on page 13.

There is little of substance to be said about the situation in Syria beyond what you read daily in the media.  A tragic situation shows, all too sadly, very little discernible sign of near-term improvement.  The Company remains in strict compliance with all relevant sanctions while at the same time taking all possible steps to preserve the value of our Syrian assets, including retaining a modest level of staffing in country.  We continue to believe that the Company will in due course return to active operations in Syria but we do not pretend to have any special insights into timing.

Your Board remains confident in the opportunities before us and in the Company's ability to bring those opportunities to fruition.  The task of rebuilding is neither an easy nor a swift one but we never anticipated that it would be.  The important thing is to build the foundations thoroughly, as we are doing, and to maintain our focus.

As ever, I would like to express my personal gratitude and that of the Board to all our shareholders, employees and commercial partners, the staunchness of whose support is the bedrock upon which we build.

Yours sincerely,

Andrew West

Chairman

Chief Executive's Review

2013 represented the beginning of a new era in the Company's history as we became a recognised Operator in two more countries in the MENA region and established our credentials as a recognised Operator in Colombia, made significant changes to the shape of our business and meaningfully reduced our overheads and general costs of operating.

Our objective over the past two years has been to secure new opportunities to grow our Company and create shareholder wealth in countries outside of Syria where the continuing unrest and economic sanctions mean that our oil and gas production capability remains idle and unavailable to generate revenues for the benefit of our stakeholders.

Overall, we are pleased with the progress we made during 2013 to establish a presence in each of these countries and to begin operations that we believe provide our Group with the potential to create projects of significant value and generate revenues with which to build substantial business units that provide necessary diversity in our portfolio. That we have managed to deliver significant progress while continuing to carefully husband our financial resources is of itself a considerable achievement and one for which everyone in our organisation can deservedly be proud.

Morocco

Following the late January completion of the acquisition of the Cabre Maroc portfolio of onshore permits in northern Morocco, we moved swiftly to commence two seismic programmes, a 3D seismic programme on the Rharb permits (100% interest pre-ONHYM participation) to assist in the planning and execution of a nine well, exploration programme and a 2D seismic programme to identify drillable prospects on a planned three well exploration programme on the Fes permit (66.6% interest pre-ONHYM participation).

These two seismic programmes began in late June 2013, with the 220 km² 3D seismic programme on the Rharb permits, being completed in October while the approximately 650 km 2D seismic programme on the Fes permit was concluded in February of this year.

With the benefit of being able to deploy to Morocco a number of our experienced employees from the technical team who contributed to great success in Syria, we were able to quickly evaluate a range of options to permit the commencement of exploration drilling on the Rharb Centre licence and this resulted in the importation to Morocco of a drill rig operated by Cofor, the drilling subsidiary of the Vinci group, one of France's biggest companies and a group already well established in Morocco.

Each of the first three exploration wells drilled on the Rharb Centre permit in the first part of what is planned to be a nine well programme intersected gas bearing reservoirs but unfortunately these were not considered to be of sufficient magnitude as to be commercial with the consequence that each of the wells was plugged and abandoned.  As we now have access to the higher quality 3D seismic data acquired in our contemporaneous data capture programme,  we are hopeful that the subsequent wells to be drilled in this programme utilising this 3D data, will meet with greater success when drilling commences in the next month.

The initial 650 km portion of a 2D seismic programme that will eventually involve the capture of 1,000 km of data over the Fes licence area is now being processed by Spectrum and following interpretation later this year we expect to be in a position to start drilling the first well in a three exploration well programme on the Fes permit area.

Colombia

Following award of the PUT 14 and LLA 50 blocks in the Ronda 2012 bid round, the Group has established itself in Bogota, Colombia with a team of experienced local professionals supplemented by assistance provided by our local partner Luna Energy

Late in the fourth quarter of the year we finalised joint venture farm out arrangements with Luna Energy on both of our blocks resulting in our Group retaining a 55% working interest partially carried by Luna Energy (45%) in each of these joint ventures.

Work is now underway to complete the environmental, community and security assessments that are a necessary preliminary to the commencement of exploration activities on each of our blocks with the end of this year targeted for the commencement of a programme of approximately 100 km of 2D seismic on the PUT 14 block area with a similarly sized programme anticipated to be undertaken on the LLA 50 block during the first half of 2015.

Tunisia

During 2013 we concluded arrangements with our former partners, which remain subject to final regulatory approval, to withdraw from our non-operated 40% interest in the Kerkouane licence offshore Tunisia and the adjacent Pantellaria permit in Italian waters while at the same time we increased our interest in the Chorbane onshore licence to 100% and assumed operatorship.

Planning is currently underway for a 2D seismic programme of approximately 105 km to be carried out over two areas in the north east corner of this block nearby to existing producing oil fields on an adjacent licence. We plan to commence this programme once local licensing and other regulatory approvals are obtained with the intention of using the data obtained in the programme to locate at least one exploration well which is anticipated to be drilled next year.

Syria

While the situation in Syria remains unresolved and sanctions prevent our returning to active operatorship of the Khurbet East and Yousefieh oil fields held by the Block 26 joint venture in north east Syria (Gulfsands 50% and Operator with Sinochem 50%), we are fortunate to be able to confirm that our facilities remain intact with the two oil fields having remained closed in for almost the entire year save for some very small, intermittent production to provide energy to the local community. Security for our fields and facilities is provided by a combination of central government military personnel and trained volunteers from the local community and together these groups have ensured that these valuable assets remain safe and secure and in a condition to allow us to return the fields to full operation as soon as sanctions permit us to do so.

With our partner Sinochem's unwavering support, we have been able to help our staff to remain safe and their families provided with financial support to help them through this difficult time. Our much reduced but fiercely loyal and dedicated staff in Damascus has enabled us to maintain a continuous local presence in Syria and for that I am and our Board and shareholders are enormously grateful.

Reshaping our Business

During the past twelve months our management has continued to evaluate and capture, where sensible to do so, a number of new business opportunities that have enabled us to diversify our portfolio of projects and, we believe, provide the Group with a bright future.

The pursuit of these opportunities has required the reshaping of our organisation and that has brought with it a number of changes to our management team including my appointment to the role of CEO, Alan Cutler's appointment as Director: Finance & Administration and the addition of a number of highly motivated finance, administration and technical people who have either joined the organisation or been promoted from within. I am especially pleased to report that we have managed to effect all of these changes while at the same time making significant progress with our efforts to further reduce our overheads and general operating costs, a process that will continue during the remainder of this year.

We are acutely conscious of the need to manage carefully the financial resources we have available to help us in building upon these new business initiatives so we will continue to explore the approaches we regularly receive from energy sector participants and investors that might be utilised to finance our business development ambitions at the least possible cost to our existing stakeholders.  Further assessment of the Company's going concern status is made on page 13.

Finally, I would like to express my sincere appreciation for the tremendous effort made by our employees and members of the Board to position the Company to develop the new business units and projects that we now have underway in Morocco, Tunisia and Colombia.

Mahdi Sajjad

Chief Executive Officer

3 April 2014

Operations Review

Syria

Gulfsands is the Operator of the Block 26 Production Sharing Contract ("PSC") and holds a 50% working interest in the PSC along with Sinochem. The Group is not presently involved in any production or exploration activities on Block 26 as force majeure has been declared in respect of the contract following the introduction of EU sanctions against Syria.  The Group has ensured that it remains compliant with all applicable sanctions in relation to Syria and intends to return to production and exploration activities as soon as permitted.

Block 26 covers an area of 5,414 km² in north east Syria and the PSC grants rights to explore, develop and produce hydrocarbons from all depths outside the pre-existing fields within the area and from the deeper stratigraphic levels below the pre-existing discovered fields. The final exploration period of the PSC was set to expire in August 2012 when force majeure was declared in December 2011. It is anticipated that an extension in the exploration period can be negotiated with the Syrian authorities to at least replace that period of time which was lost when force majeure was declared.

Under the Group's operatorship, two oil fields of Cretaceous age have been discovered and developed within the PSC area, Khurbet East and Yousefieh. In addition, two further oil and gas discoveries of Triassic age have been identified beneath the Cretaceous oil producing reservoir in the Khurbet East field and within the Butmah and Kurrachine Dolomite formations. Development approvals for these discoveries were granted in 2011 and 2008 respectively.

Approval for the development of the Khurbet East Triassic age Butmah oil and gas field was granted in December 2011 but as a consequence of compliance with applicable sanctions, the Group is presently unable to progress any activity in respect of this development. However, oil from the Triassic Formations in Khurbet East has already been sampled and found to be lighter than that produced from the Cretaceous Formation, with an API gravity of 34-35°, and it contains a higher gas content. In addition, small amounts of condensate have been recovered from the gas cap in the Butmah Formation. The construction of sour gas sweetening and export facilities at Khurbet East is planned, subject to the lifting of sanctions, to enable commercial production of hydrocarbons both from the Butmah and also from the Triassic Kurrachine Dolomite Formations. Until force majeure was declared, it was expected that the development and production period for operations on the Khurbet East Triassic Butmah Formation would expire in December 2036 although production could at the Contractor's option, be extended for a further 10 years. Once applicable sanctions permit, it is expected that the force majeure will be withdrawn and these periods of entitlement to undertake development and production activities will be extended by a further period reflective of the period of force majeure.

The development and operation of these fields is being undertaken by Dijla Petroleum Corporation ("DPC"), a joint operating company formed between Gulfsands, Sinochem and the General Petroleum Corporation ("GPC") for this purpose, to which staff of both Gulfsands and GPC have previously been seconded. Since the introduction of EU sanctions on 1 December 2011 that identified GPC as a designated entity and the subsequent declaration of force majeure under the PSC, Gulfsands has had no involvement with the operations of DPC, and Gulfsands staff seconded to DPC have been withdrawn, leaving DPC under the management of GPC secondees.

Sanction Compliance

Gulfsands has at all relevant times taken legal advice with respect to its obligations under the sanctions then in place and has liaised regularly with relevant regulators and generally acted cautiously to ensure it remains compliant with all relevant sanctions.

The listing of GPC as a designated entity on 1 December 2011 triggered a review of the Group's relationship with GPC and with DPC and following this review and with effect from 1 December 2011, Gulfsands has:

·   ceased to provide assistance to DPC in the form of seconded staff or indeed have any involvement with the day to day operations of DPC;

·   recused itself from decisions taken by the DPC board;

·   not submitted invoices for the Joint Venture's entitlement share of oil production;

·   exercised strict control over the payment of outstanding supplier invoices to ensure that (a) no payments were made to persons or entities who are included on the list of those subject to the asset freeze, (b) no payment is made for goods or services subject to restrictive measures except after the giving of required notification to the Competent Authority and (c) no payment was made which would constitute a transfer of economic resources to GPC or DPC;

·   ceased (with effect from 18 January 2012, being the date of adoption of EU Regulation 36/2012) to enter into new contracts for the procurement of oil & gas related goods or services into Syria, or for associated technical assistance; and

·   also ceased all exploration, as well as production, activity in Syria.

The Group has relocated its offices into modest offices in the centre of Damascus to allow it to retain a place of business in the country to meet its obligations under the PSC. Unfortunately, the protracted nature of the suspension of operations in Syria has also necessitated the review of staffing levels in the country and it is with great regret that the Group has had to release a proportion of its workforce.

The Board is determined to ensure that the Group's activities remain compliant with all relevant sanctions and management will continue to liaise closely with the relevant regulatory authorities to ensure this objective is achieved while continuing to keep GPC fully informed of the breadth and scope of restrictions on our activities as a result of continuing compliance with applicable sanctions.

Morocco

Gulfsands is the Operator of a highly prospective portfolio of oil and gas exploration permits covering an area of approximately 4,315 km² in northern Morocco.

Gulfsands acquired its interests in the Rharb Centre, Rharb Sud and Fes permits through the acquisition of Cabre Maroc Limited ("Cabre Maroc"), a wholly owned subsidiary of Caithness Petroleum Limited, on 16 January 2013. The total consideration for this transaction involved cash payments totalling approximately $17.3 million by way of adjusted purchase consideration and in addition, the satisfaction of $1.7 million of existing liabilities of Cabre Maroc. In August 2013, Cabre Maroc's name was changed to Gulfsands Petroleum Morocco Limited.  

    
The acquisition delivered to Gulfsands a large, contiguous and highly prospective acreage with proven petroleum systems and multiple exploration leads already identified. The acreage is located in an area where legacy light oil fields have been discovered and produced since the first half of the twentieth century and where light oil seeps appear to be prevalent adjacent to the Fes permit. Modern exploration techniques have been previously used in the area but only to a limited extent. The Group believes that there is significant oil and gas exploration potential related to the fold and thrust belt structures identified in the Rharb Sud and Fes permits. Production of light oil from legacy fields has been predominantly from Jurassic horizons in shallow structures at depths of approximately 800-1,200 metres, and the Group believes that the essentially untested deeper fold and thrust belt structures in these permits have greater potential than the shallow developed structures. There also exist further potential target horizons in the shallower Miocene and Tertiary.

In addition to a focus on light oil exploration, there is considered to be a meaningful near-term value creation opportunity contained within the proven conventional and shallow depth gas play in the Miocene horizons within the Rharb Centre permit.

Gulfsands and ONHYM (the Moroccan oil and gas regulator) are co-venturers in respect of the Rharb Centre and Rharb Sud permits (Gulfsands has a 75% working interest post ONHYM participation); whilst Gulfsands and Caithness Petroleum Limited are co-venturers with ONHYM in respect of the Fes permit (Gulfsands has a 50% working interest post ONHYM participation). ONHYM are carried through the exploration phase of each of the Rharb and Fes Petroleum Agreements. Under the terms of the acquisition of Cabre Maroc, Gulfsands agreed to carry Caithness in respect of its share of the first $27 million of expenditure on the Fes permit. Gulfsands is the Operator of all these exploration joint ventures.

Operations

During 2013 the Group established a small office in Rabat with operational staff, transferred from our Syrian operations, who rapidly established the Group's standards of HSE performance in Morocco, suffering a single lost time incident during the course of 313,000 man-hours of activity.  

Fes Permit

The exploration phase of the Fes Petroleum Contract expires in September 2015 but can be extended for an additional two years in the event of a discovery. The Contract terms include a work commitment of 1,000km of 2D seismic, 100 km² of 3D seismic and the drilling of three exploration wells.  In respect of this work commitment the Group has provided financial guarantees as set out in note 6 of the financial information.

An initial 650km 2D seismic programme on the Fes permit was completed on budget in February 2014 by Prospectiuni SA of Romania, although completion of the programme was delayed due to adverse weather and ground conditions. The programme was designed to assist in the identification of additional exploration leads on the Fes permit and to more accurately define existing leads identified using the results of an earlier gravity survey programme and legacy 2D seismic data

As the Fes area is known to be structurally complex, prior to the Group's receipt of this seismic data, it will undergo a number of additional and more sophisticated processing techniques than would usually be the case, including depth migration processing. Notwithstanding the additional time and cost involved in applying these sophisticated processing techniques, it is anticipated that the resulting data set thereby will be significantly enhanced and assist with the interpretation of the data captured during this programme in order to develop the leads into drillable prospects.

It is anticipated that the first exploration drilling target for light oil will be identified during the third quarter of 2014 with drilling of the first exploration well planned to commence as early as the end of the year. Two further light oil exploration wells are planned to follow in 2015. Accordingly the Group has commenced a process to identify and select a suitable rig for drilling on the Fes licence later this year.

Prospective Resources of 478 million barrels of oil equivalent (net unrisked, best estimate) have been booked by the Group at year end 2013 for the Fes permit. These estimates were based on previously identified prospectivity within Jurassic horizons that are known to produce oil in the area.  These bookings have been subject to a competent person third party audit by Senergy (GB) Limited ("Senergy").

Rharb Permits

The exploration phase of the Rharb Petroleum Agreement, covering the Rharb Centre and Rharb Sud permits, containing a minimum work obligation of nine shallow exploration wells expires in July 2014 but can be extended for an additional two years in the event of a discovery during the current drilling programme. In respect of this work commitment the Group has provided financial guarantees as set out in note 6 of the financial information.  Commercial discoveries each become subject to long term exploitation concession agreements.

Whilst a relatively large volume of legacy 2D and swath seismic data were available on the Rharb Centre permit, the Group believes that 3D seismic data is a critical tool for maximising the chances of drilling commercially attractive prospects in the Rharb Centre permit area. A 3D seismic survey covering an area of approximately 220 km² was therefore carried out by Prospectiuni SA over the south-western portion of the Rharb Centre permit area to assist in the further delineation of potential drilling targets for the second phase of the drilling campaign. The seismic acquisition programme was completed under budget after only a slight delay caused by local weather conditions. Processing and interpretation of the acquired data was completed in March 2014 identifying a number of quality prospects for drilling in the second phase of the campaign commencing in the second quarter of 2014.

The Rharb drilling programme is currently focusing on a series of shallow gas anomalies identified in the Rharb Centre permit as Miocene-aged fans and channel sands at depths of 1,000-1,650 metres, in a similar geologic setting to discoveries on adjacent permit areas which are now in commercial production using the substantial gas capture and distribution infrastructure in the area. Gulfsands has contracted with COFOR SAS, an international drilling contractor and subsidiary of France's Vinci group of companies, to provide an onshore drilling unit suitable for the drilling of exploration wells in the Rharb Centre permit area.

During the year three wells were drilled, commencing in October 2013. Each of these wells intersected gas-bearing horizons as identified from pre-drilling seismic interpretation, but they contained less than the required thickness of net gas pay considered necessary to support a declaration of commerciality and so were plugged and abandoned. The location for the drilling of each of these wells was based upon legacy 2D and swath seismic data. It is anticipated that the acquisition and processing of 3D seismic data on the Rharb permit should result in the discovery of commercial gas accumulations during 2014.

Drilling operations for the three first phase wells took, on average, 20 days and cost, on average $2.1 million to drill, fully plug and abandon each well and restore the drill-site to its original condition.

The combined cost to date of acquiring and processing seismic data on the Rharb Centre and Fes permits is $14.2 million.

Prospective Resources of 21.2 billion cubic feet (net unrisked, best estimate) have been booked by the Group at year end 2013 for the Rharb Centre permit based on identified prospectivity within Upper Miocene horizons that are known to produce gas in the area. In addition Contingent Resources of 2.0 billion cubic feet (net unrisked, "2C" or "P50") have been booked based on separate and unrelated discovered gas accumulations at Beni Fdal and Douar Nouaoura that have previously both produced gas to surface. These bookings have been subject to a competent person third party audit by Senergy.

Forward Plans

The second phase of the Rharb drilling campaign is due to commence in the second quarter 2014 following full interpretation of the 3D seismic data acquired in 2013.  The Group continues to evaluate further opportunities to invest in Morocco's expanding onshore oil and gas sector.

Colombia

In 2013, Gulfsands was awarded Exploration and Production Contracts ("E&P Contracts") over two blocks covering approximately 977km² in Colombia as a result of successful bids made in the Ronda 2012 Exploration Licensing bid round, which concluded in late 2012.

The E&P Contract for each block extends for up to seven years from the date of signature of the contract with an initial evaluation period of up to one year followed by two consecutive three year exploration periods the second of which is optional. Gulfsands was successful in acquiring both blocks on fiscal terms that involved minimal "X-factor" royalties and low work obligations of approximately 100km of 2D seismic survey data and one well on each block over the first of the three-year periods.  In respect of these work commitments the Group has provided financial guarantees as set out in note 6 of the financial information.

The Putumayo block 14 ("PUT 14") in the Caguan Putumayo Basin covers an area of 463.6 km² and lies on Colombia's border with Ecuador. It is reported that at least 35 fields containing more than 365 million barrels of oil now have been discovered in this basin, whilst additional world class discoveries and producing fields located in the Oriente Basin in Ecuador lie directly to the south and are on trend towards Colombia's Putumayo permitted acreage.

Exploration prospectivity within the Caguan Putumayo Basin is considerable, with discoveries of light, medium and heavy crudes being located in several different target horizons within the Cretaceous. Deeper potential also exists that is largely untested. A significant number of oil fields are now under production in the Colombian part of this Basin in the vicinity of the PUT 14 block.  The strongly productive Cohembi and Platanillo oil fields are located to the west of the block, and are producing from geological structures considered analogues to structures that can be identified within the PUT 14 block from existing legacy 2D seismic data.

The Llanos block 50 ("LLA 50") is in the mature North Llanos basin, where 100km to the north-west, Occidental discovered the giant Canon Limon field with reported reserves of more than one billion barrels. At 513.7 km² in size, the block is larger than most blocks in the basin.

Following the block awards, Gulfsands entered into farm-out agreements with Luna Energy Inc ("Luna"), a respected local oil field services, resources and transport logistics group, under which the Group retains a 55% working interest in each contract and acts as Operator of both joint ventures.  Luna holds a 45% working interest but is carrying Gulfsands in respect of 10% of expenditures on the minimum exploration programme for each contract area up to a maximum value net to Gulfsands of $3 million.

Operations

The Group has established a fully operational office in Bogota which is managed by highly experienced local personnel and together with personnel made available by our local partner, Luna, the joint venture has commenced the process of consultation with the local and indigenous communities both in the regions and in the block areas, and also with environmental agencies and government security agencies preliminary to the submission of detailed plans for exploration on both blocks.

Initial exploration work on both blocks commenced in the fourth quarter of 2013, at which time the initial evaluation period concluded and the Group entered into the first exploration period under both Contracts. 

The joint venture partners have moved quickly to undertake the significant number of formalities and preliminary activities required to be completed prior to the commencement of 2D seismic acquisition programmes to be undertaken on both blocks. Discussions with operators in the Putumayo and Llanos areas and seismic contractors active in these areas have commenced with a view to coordinating and sharing logistics for the 2D seismic programmes being planned on both blocks.

Forward Plans

It is anticipated that the Group should be ready to commence a programme of 2D seismic data acquisition on the PUT 14 block later this year with a similar programme on the LLA 50 block in early 2015. Following processing, interpretation and analysis of the new seismic data, it is anticipated that an exploration well will be drilled on both blocks, in late 2015 and early 2016 respectively.  The Group continues to evaluate further opportunities to invest in Colombia's very active onshore oil and gas sector.

Tunisia and Italy

At the end of 2013, Gulfsands withdrew from its interests in the Kerkouane exploration permit offshore Tunisia and the Pantelleria exploration permit offshore Southern Italy and increased its interest to 100% in the operated Chorbane exploration permit onshore Tunisia of approximately 1,942 km².

Following completion of a geological and prospectivity review in 2013, Gulfsands decided not to continue its interest in the Kerkouane and Pantelleria permits. In parallel with extensive consultation with the Tunisian authorities, Gulfsands negotiated with ADX Energy Limited, an Australia-based independent E&P company ("ADX") both the withdrawal of its interests in the Kerkouane and Pantelleria permits and the acquisition of ADX's 30% interest in the onshore Chorbane permit to take the Group's working interest in the Chorbane permit to 100%.

Under the agreement with ADX ("the Agreement"), Gulfsands has been either released from or indemnified by ADX with respect to all historic and future obligations associated with its former interests in the Kerkouane and Pantelleria permits and related joint ventures.  No consideration is payable with respect to the withdrawal from these interests. 

The Agreement requires Gulfsands to similarly release from or indemnify ADX with respect to all historic and future obligations associated with its former interests in the Chorbane permit and, additionally, requires Gulfsands to pay $1.75 million to ADX for the 30% interest acquired. $0.25 million of this amount was paid shortly after the year end with the balance payable following satisfaction by ADX of certain conditions. Whilst the transactions have been reached in conjunction with the Tunisian authorities, and are binding as between the two parties, they remain subject to receipt of the final regulatory approvals.

As a result of these transactions, and once the final regulatory approvals are received, the Group no longer has any acreage holdings in Italy and has withdrawn operationally from that country.

Operations

The Chorbane permit is located mainly onshore in central Tunisia. The permit is in close proximity to a number of producing oil fields and associated oil and gas infrastructure. The current exploration period is due to expire in July 2015, with the minimum work programme carrying a commitment to drill one exploration well.

Following the Group having assumed operatorship it has moved quickly to review existing seismic and well log data on the permit. Evaluation work has identified the potential presence of a number of exploration plays, prospects and leads.

In the Sidi Agareb area on the eastern side of the Chorbane permit, exploration targets include late Cretaceous to Tertiary aged carbonate reservoirs that are proven productive for both oil and gas in this part of the Pelagian basin; the Sidi Agareb prospect lies approximately 10 km to the south west of the Sidi El Itayem oil field, which is on course to ultimately produce approximately 50 million barrels of oil from these horizons, with oil recovery boosted by an active natural water drive mechanism. On the western side of the permit, prospectivity is identified in the deeper Jurassic Nara intervals from which wet gas has been recovered in exploration wells on the contiguous Chaal permit to the west.  In the south east part of the permit, there may exist an extension of a trend of off-permit oil fields producing from Cretaceous Bireno formation.  

Prospective Resources of 27 million barrels (net unrisked, best estimate) have been booked on a consolidated basis by the Group at year end 2013 for the Sidi Agareb area prospect.  The booking has been subject to a competent person third party audit by Senergy.

Prospective Resources of 103 billion cubic feet (net unrisked, best estimate) have been booked by the Group at year end 2013 for the Jurassic Nara horizon based on identified prospectivity within horizons that are known to produce gas in the neighbouring Chaal permit.  The booking has been subject to a competent person third party audit by Senergy.

Forward Plans

The Group is preparing for a tender of a 106 km 2D seismic programme over two separate areas of the permit identified as prospective for the location of the next exploration well. The Group is currently in discussion with the Tunisian authorities concerning the final acquisition parameters for this seismic survey prior to undertaking the tender process of contractor selection and completing local permitting approvals. It is anticipated that this tender process should be completed during second quarter of 2014 with seismic acquisition to commence following completion of the permitting process. The data captured in this survey will be used to finalise a drilling location within the Chorbane permit for an exploration well to be drilled in early 2015.

USA

Gulfsands owns a small portfolio of non-operated oil & gas assets in the Gulf of Mexico, in the shallow "shelf" region offshore Louisiana.  These comprise working interests in six producing fields and certain other leases that are no longer commercially producing as well as overriding royalties in other properties.

The assets are relatively mature however, development of booked reserves continues where appropriate to preserve the remaining value of the assets to the Group. Proved and Probable reserves at year end 2013 amounted to 1.4 mmboe on a working interest basis (1.1 mmboe on a net revenue interest basis), comprised of 77% oil and 23% gas.

Operations

Production on a working interest basis, including Natural Gas Liquids ("NGLs"), averaged 226 boepd in 2013, compared with 311 boepd in 2012.  The composition of this production was 53% oil, 43% gas and 4% NGLs.  After tax and royalties, net revenue interest production in 2013 averaged 175 boepd (2012: 239 boepd) generating revenues of $4.4 million (2012: $5.6 million).

The decrease in the average daily rates of the baseline production during 2013 compared to 2012

was due to:

·      the temporary shut-in of production at EI 32 while repairs to a third party owned pipeline were undertaken;

·      repairs at the SS 248 "D" platform, which also required production to be temporarily shut-in;

·      intermittent equipment failures at the WC 310 platform; and

·      natural field production decline.

During the year, the Group participated in development operations on four wells to access booked reserves.  Mid-year 2013, operations were undertaken to recomplete the SS 249 D-5 and the SS 247 F-18 wells resulting in an incremental increase to PDP reserves of 40.2 mboe.  Initially, daily production rates increased up to 140 boepd however, at year-end the contribution was significantly reduced as the SS 249 D-5 well experienced pressure decline, possibly due to limited reservoir volume.  Compression is required to optimise production rates and, as a result, the well is currently shut-in awaiting compressor repairs on the SS 248 D platform, anticipated in April 2014.  As of 31 December 2013, operations had also been undertaken for the recompletion of the EI 32 #33 well and the sidetrack of the EI 32 #30 well which should lead to incremental increases to PDP reserves of 75.3 mboe and reserve additions to PDNP of 37.7 mboe.   Daily average production rates to the Group are expected to increase by 130 boepd as a result of this field development. 

Substantial decommissioning activities were undertaken in 2013 on the WC 533 "A" platform and wells in the EI 32, SS 271 and VR 225/226 fields.

Sale of interests

Despite efforts to divest the remaining portfolio early in the year, the Group did not attract bids that sufficiently value the assets to be sold. The Group continues to consider its options with respect to the US interests but does not consider these interests part of its core business.

Financial Review

Summary

Gulfsands made significant progress during 2013 in reducing its operating cost base resulting in a substantially lower operating cash outflow of $7.9 million (2012: $14.2 million). This reduction reflects a concerted and continuing campaign to reduce general administrative expenses whilst maintaining the Group's operational capacity.  The Group is now Operator in Morocco, Tunisia and Colombia, as well as in respect of its Syrian interests, allowing recovery of, and capitalisation of, elements of its operational overhead.

Despite lower administrative expenses, increased exploration write offs caused the operating loss to be only slightly lower at $26.3 million (2012: $26.8 million).

During the year, Gulfsands completed its acquisition of Cabre Maroc Limited. The results of Cabre Maroc Limited have been included from 16 January 2013 being the date on which the Group gained control of the entity.

The Group continues to value its investment in its Syrian interest at $102 million.  See note 7 of the Consolidated Financial Information.

Total cash and bank resources² totalled $52.9 million at 31 December 2013 (31 December 2012: $98.8 million) inclusive of $33.8 million (31 December 2012: $91.0 million) of cash and cash equivalents and $19.1 million of restricted cash balances (31 December 2012: $7.8 million).

Selected operational and financial data

			Year ended 31 December 2013	Year ended 31 December 2012
Production: Net revenue interest ("NRI")(boepd)			175	239
			$' 000	$' 000
Revenue			4,367	5,622
Gross profit /(loss)			182	(1,320)
Total administrative expenses			(10,924)	(18,375)
Exploration costs written off			(12,301)	(7,082)
Operating loss			(26,331)	(26,811)
Net cash used in operating activities			(7,887)	(14,178)
E&E cash expenditure including acquisition1			(34,405)	(7,830)
Decommissioning cash expenditure			(2,151)	(1,919)
Total cash and bank resources2			52,962	98,819

(1)   comprises cash expenditure on E&E assets and cash expenditure on the acquisition of business combinations

(2)   comprises cash and cash equivalents and restricted cash balances

Operating performance

Average daily NRI production from Gulfsands' interests in the US Gulf of Mexico decreased in 2013 to 175 boepd (2012: 239 boepd). This was a result of: a temporary shut in at EI 32 while repairs to third party owned pipelines were undertaken, repairs at SS 248 "D" platform, intermittent equipment failures at the WC 310 platform and natural field production decline.  Average prices realised in the period for oil were $102.18 per barrel (2012: $102.10 per barrel) and $3.79 per mcf of gas (2012:$3.20 per mcf of gas). This increase in both gas and oil price helped offset the decline in production resulting in a $1.2 million decrease in revenues for the year to $4.4 million (2012: $5.6 million).  Daily average NRI production potential could reach 220 boepd in 2014 with all wells back up and running.

Operating performance continued

US operations provided a gross profit for the year of $0.2 million (2012: gross loss $1.3 million).  This improvement on 2012 was largely due to the fact that $1.1 million costs in excess of provisions were incurred in 2012 on decommissioned assets.  There have been no similar costs incurred this year.

Total administrative expenses decreased significantly to $10.9 million (2012: $18.4 million). This decrease results in part from the sustained focus on cost reduction across the Group which has meant that even though the Group has acquired new local operational offices in the year in Morocco, Tunisia, Lebanon and Colombia, total costs have still decreased significantly.  The cost reduction program has encompassed all areas of general and administrative costs.  In addition to this program, during 2013 the Group substantially changed its business, diversifying its exploration opportunities and focusing on operatorship of its interests, taking on operatorship of the Tunisian Chorbane permit and its Moroccan and Colombian interests.  As a result it has been able to both recover overhead from partners and capitalise costs relating to operational offices. 

Exploration write-offs in the year totalled $12.3 million (2012: $7.1 million).  These consisted of write offs of Tunisian and Moroccan expenditures.  $3.2 million was written off in respect of expenditures attributed to the Kerkouane permit in Tunisia after withdrawal from the permit as part of an agreement with ADX in December 2013.  This was offset by a release of the decommissioning provision previously held for the Kerkouane assets of $1.0 million as all historic and future obligations associated with the Kerkouane interest have been assumed by ADX.  $10.1 million was written off during 2013 in relation to the expenditures and acquisition fair value attributed to the three wells drilled on the Rharb Centre permit in Morocco.  The drilling programme commenced in October 2013.  All of these wells were determined non commercial and so were plugged and abandoned.

Due to a theft at the Qamishli warehouse in Syria in the year a loss of $0.7 million of inventory has been recognised.  Management have not provided for the potential insurance recovery as the claims process has not yet been concluded and Management are not virtually certain of its recovery.  Management have decided to fully provide against the remaining Syrian inventory balance of $2.2 million as at 31 December 2013 (2012: $nil) as Gulfsands currently do not have full control over and access to the warehouse in which the inventory is held due to the imposition of EU sanctions. 

The Group reported a loss before tax for the year of $26.8 million (2012: $27.0 million).

Balance sheet

Gulfsands has added to its exploration portfolio during the year with new exploration permits in Morocco as a result of the acquisition of Cabre Maroc Limited and the award of two E&P contracts in Colombia.  Capital expenditures on exploration and evaluation assets have, therefore, increased substantially in the year and totalled $46.1 million (2012: $5.0 million) on an accrued basis.  This included $19.3 million of fair value attributed to the Group's Moroccan interests at acquisition and $2.3 million in respect of Gulfsands progressive acquisition of partners' interests in the Chorbane permit in Tunisia.

The most significant capital expenditures in the year were the drilling and seismic costs in the Rharb Centre and Fes permits in Morocco.  Drilling related costs of $5.9 million were incurred in respect of the three well drilling program in Rharb Centre which commenced in the fourth quarter of 2013.  The 3D seismic acquisition for Rharb was completed in 2013 with processing continuing into 2014.  Seismic related costs for Rharb in 2013 totalled $4.9 million.  The 2D seismic acquisition for the Fes area commenced in 2013 and continued into 2014. The 2013 seismic related costs for Fes totalled $5.5 million.  As noted above, as a result of a change in the Group's business with the acquisition of new operatorships in Morocco, Tunisia and Colombia, $5.3 million of costs associated with offices which are operational in nature have been capitalised and attributed to related exploration assets. 

The Group' producing oil and gas assets were held at a net book value of $12.4 million (2012: $13.2 million).  Movements consisted of $2.5 million of capital expenditure, offset by $1.3 million depletion charge and $1.9 million reduction in decommissioning cost estimates, as discussed in more detail below.  The capital expenditures represented the Group's participation in development operations on four wells in the Gulf of Mexico USA to access booked reserves.

Decommissioning provisions have decreased to $13.2 million (2012: $17.7 million) principally as a result of decommissioning expenditures of $2.2 million on US properties in 2013, a change in decommissioning estimates of $1.9 million on the US properties still to be decommissioned and a release of the $1.0 million provision held for the Kerkouane assets after withdrawing from the permit at the end of 2013.

Balance sheet continued

The fair value of the Group's net investment in DPC remains unchanged at $102.0 million: the Board having concluded that there have been no significant changes in the period to the key judgements and estimates that underpin that valuation, as further explained in note 7 of the consolidated financial information.

Whilst trade and other receivables and trade and other payables have both reduced consequent to the review of Syrian balances, payables still increased due to the increased activity in Morocco with Moroccan payable balances of $12.6 million as at 31 December 2013.

Cash flow

Operating cash outflow was substantially reduced in the year to $7.9 million (2012: $14.2 million) largely as a consequence of cost reductions.

Net cash used in investing activities increased to $49.2 million (2012: $19.1 million) mainly reflecting the $17.1 million paid in respect of the Cabre Maroc acquisition in 2013, $5.0 million of additional letters of credit posted with the Moroccan authorities in respect of interests acquired, $3.2 million of letters of credit posted with the Colombian authorities in respect of interests awarded and $17.3 million of exploration and evaluation expenditure.

The total decrease in cash and cash equivalents during the year was $57.2 million (2012: $33.3 million).

Business combination

On 16 January 2013 the Group acquired 100% of the share capital of Cabre Maroc Limited and its results have been included from this date.  Provisional amounts for the identifiable assets acquired and liabilities assumed were recognised at the date of acquisition and published in the 2013 Interim report.  In line with IFRS 3 Business Combinations, adjustments to these provisional amounts have been made within the twelve month 'measurement period' as new information was obtained about facts and circumstances that were in existence at the acquisition date. Further information on the fair values reported are provided in note 10 of the Consolidated Financial Information. 

Financial position

The Group had total cash and bank resources of $52.9 million (31 December 2012: $98.8 million) inclusive of cash and cash equivalents at 31 December 2013 of $33.8 million (31 December 2012: $91.0 million) of which approximately $27.3 million was held in Money Market Funds with EU financial institutions, and a further $2.7 million was held in accounts with banks in the UK and USA.

Restricted cash balances at 31 December 2013 totalled $19.1 million (31 December 2012: $7.8 million) representing funds securitised as collateral in respect of future work obligations - principally in respect of the Group's Moroccan interests. These funds will be released to the Group as work programmes are completed with $2.5 million funded by, and to be repaid to, Caithness Petroleum, the former parent of Cabre Maroc Limited.

Going concern

The financial statements have been prepared on the going concern basis which has been approved by the Board.  The basis on which the Board has reached this decision is as follows:

The Group maintains rolling cash flow forecasts for the forward three year period which are reviewed regularly by the Board of Directors. These cash flows reflect the Group's net share of all exploration contract work obligations and the contract term over which the applicable commitment for each capital project is required to be performed.

The Group's processes require that each project is routinely reviewed to confirm that it continues to meet the Group's criteria for further investment; a process that considers the exploration contract term, the prospective value of the project, as well as the required financial investment, to determine the schedule on which any particular project can or should be performed and the appropriate financial and commercial resources ("resources") for completion of the project - whether from current resources or new sources.

Going concern continued

Following a review of all available information, the Board has concluded that the Company and the Group have sufficient resources to cover their minimum expenditure requirements, including licence commitments, over the forthcoming year and indeed that there is further potential to reduce the Group's cost base.

The Board recognises that for additional projects, being expenditures on projects and other activities beyond the Group's minimum expenditure requirements, additional resources or restructuring of commitments will be required. Based upon its experience and discussions with potential investors, debt providers and industry partners, the Board is confident that the Group will be able to access appropriate resources for approved additional projects or as otherwise required on a timely basis

Sources of additional resources may include asset farm-out or similar risk-sharing arrangements, further direct investment in the Company itself or corporate arrangements that may bring resources into the Company and/or the Group in the form of debt or equity or any combination thereof. The Board is currently pursuing discussions on all of these alternatives in order to maximise its options and the value attributable to existing shareholders.

However, as required by FRC guidance, the Directors have been required to conclude that at this time, there is material uncertainty that such additional resources can be procured.  Failure to procure appropriate resources would require the Group to restructure its work and expenditure commitments and might cast significant doubt upon the Company's and the Group's ability to continue as a going concern and that the Company and the Group may therefore be unable to realise their assets and discharge their liabilities in the normal course of business. Such scenario could impact upon the carrying value of intangible exploration and evaluation assets (as disclosed in note 4) and on the recoverability of certain restricted cash amounts (as disclosed in note 6) held in escrow to support guarantees of performance of minimum work obligations.

Following completion of its review at the meeting of the Board of Directors on 1 April 2014, and taking into account the uncertainties described above, the Board has concluded that, with total consolidated cash and bank resources at the date of this report of approximately $40.0 million, inclusive of $21.0 million of consolidated cash and cash equivalents, and taking into account  new financial resources that the Board might reasonably expect to become available to the Company and the Group, the Company and the Group have sufficient resources to continue in operational existence for the foreseeable future, a period not less than twelve months from the date of approval of this Annual Report. Accordingly, the Directors consider it appropriate to continue to adopt the going concern basis in preparing these financial statements.

Disclaimer

This results announcement contains certain forward-looking statements that are subject to the risk factors and uncertainties associated with the oil and gas exploration and production business.  Whilst the Group believes the expectations reflected herein to be reasonable in light of the information available to them at this time, the actual outcome may be materially different owing to a variety of factors including specific factors identified in this statement and other factors outlined in the Group's 2013 Annual Report.

Consolidated Income Statement

For the year ended 31 December 2013

	Notes	2013 $'000	2012 $'000
Revenue	1	4,367	5,622
Cost of sales
Depletion	3	(1,267)	(1,430)
Impairment	3	(58)	(568)
Other cost of sales		(2,860)	(4,944)
Total cost of sales		(4,185)	(6,942)
Gross profit/(loss)		182	(1,320)
General administrative expenses		(10,408)	(16,624)
Share-based payments		(516)	(1,751)
Total administrative expenses		(10,924)	(18,375)
Exploration costs written off	4	(12,301)	(7,082)
Syrian inventory impairment / write off	5	(2,905)	-
Other Syrian adjustments	7	(383)	(34)
Operating loss		(26,331)	(26,811)
Foreign exchange gains/(losses)		89	(26)
Bank fees and charges		(104)	(92)
Discount expense on decommissioning provision	8	(500)	(476)
Net interest income		89	375
Loss before taxation from continuing activities		(26,757)	(27,030)
Taxation		-	-
Loss for the year - attributable to owners of the Parent Company		(26,757)	(27,030)
Loss per share from continuing operations (cents):
Basic	2	(22.70)	(22.94)
Diluted	2	(22.70)	(22.94)

There are no items of comprehensive income outside of the Income Statement.

The results relate entirely to continuing operations.

Consolidated Balance Sheet

As at 31 December 2013

	Notes	2013 $'000	2012 $'000
Assets
Non-current assets
Property, plant and equipment	3	12,893	13,872
Intangible assets	4	37,558	6,207
Long-term financial assets	6	19,138	7,837
Investments	7	102,000	102,000
		171,589	129,916
Current assets
Inventory	5	2,247	2,905
Trade and other receivables		3,542	8,560
Cash and cash equivalents	6	33,824	90,982
		39,613	102,447
Total assets		211,202	232,363
Liabilities
Current liabilities
Trade and other payables		15,245	11,779
Provision for decommissioning	8	2,573	2,352
		17,818	14,131
Non-current liabilities
Trade and other payables		6,155	-
Provision for decommissioning	8	10,578	15,309
		16,733	15,309
Total liabilities		34,551	29,440
Net assets		176,651	202,923
Equity
Capital and reserves attributable to equity holders
Share capital	9	13,131	13,131
Share premium		105,926	105,926
Merger reserve		11,709	11,709
Treasury shares		(11,502)	(11,619)
Retained profit		57,387	83,776
Total equity		176,651	202,923

Consolidated Statement of Changes in Equity

For the year ended 31 December 2013

	Share capital $'000	Share premium $'000	Merger reserve $'000	Treasury shares $'000	Retained profit $'000	Total equity $'000
At 1 January 2012	13,131	105,926	11,709	(11,902)	109,323	228,187
Options exercised	-	-	-	283	(149)	134
Purchase of own shares	-	-	-	-	(119)	(119)
Share-based payment charge	-	-	-	-	1,751	1,751
Loss for 2012	-	-	-	-	(27,030)	(27,030)
At 31 December 2012	13,131	105,926	11,709	(11,619)	83,776	202,923
Options exercised	-	-	--	117	(148)	(31)
Share-based payment charge	-	-	-	-	516	516
Loss for 2013	-	-	-	-	(26,757)	(26,757)
At 31 December 2013	13,131	105,926	11,709	(11,502)	57,387	176,651

The Group has re-presented its Statement of Changes in Equity to include the share-based payments reserve as part of retained profit and to separate treasury shares from retained profit, both as permitted by IFRS.

The merger reserve arose on the acquisition of Gulfsands Petroleum Ltd and its subsidiaries by the Company by way of share-for-share exchange in April 2005, in conjunction with the flotation of the Company on the Alternative Investment Market of the London Stock Exchange.

Consolidated Cash Flow Statement

For the year ended 31 December 2013

	Notes	2013 $'000	2012 $'000
Cash flows from operating activities
Operating loss from continuing operations		(26,331)	(26,811)
Depreciation, depletion and amortisation	3&4	2,144	2,430
Impairment charge	3	58	568
Exploration costs written off	4	12,301	7,082
Other Syrian adjustments	7	383	34
Decommissioning costs in excess of provision		-	1,104
Share-based payment charge		516	1,751
Syrian inventory impairment / write off	5	2,905	-
Increase in receivables		(286)	(152)
Increase / (decrease) in payables		349	(441)
Interest received		89	375
Foreign exchange gains / (losses)		89	(26)
Bank fees		(104)	(92)
Net cash used in operating activities		(7,887)	(14,178)
Investing activities
Acquisition of subsidiary undertaking	10	(17,103)	-
Exploration and evaluation expenditure		(17,302)	(7,830)
Oil and gas properties expenditure		(1,245)	(312)
Increase in inventory	5	(2,247)	(1,086)
Other capital expenditures		(642)	(1,019)
Change in restricted cash balances		(8,550)	(3,872)
Decommissioning costs paid	8	(2,151)	(1,919)
Movements in balance due to or from oil and gas partnerships		-	(3,057)
Net cash used in investing activities		(49,240)	(19,054)
Financing activities
Cash proceeds from issue of shares		-	145
Purchase of own shares		-	(119)
Other payments in connection with options exercised		(31)	(11)
Net cash (used in) / provided by financing activities		(31)	15
Decrease in cash and cash equivalents		(57,158)	(33,258)
Cash and cash equivalents at beginning of year		90,982	124,240
Cash and cash equivalents at end of year	6	33,824	90,982

Condensed Notes to the Preliminary Financial Statements

For the year ended 31 December 2013

General information

Gulfsands Petroleum plc is a public limited company listed on the Alternative Investment Market ("AIM") of the London Stock Exchange and incorporated in the United Kingdom. The principal activities of the Company and its subsidiaries ("the Group") are that of oil and gas production, exploration and development.  The address of the registered office is 1 America Square, Crosswall, London, United Kingdom, EC3N 2SG. This preliminary announcement was authorised for issue in accordance with a resolution of the Board of Directors on 3 April 2014.

The financial information for the year ended 31 December 2013 set out in this announcement does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2012 were approved by the Board of Directors on 8 April 2013 and delivered to the Registrar of Companies and those for 2013 will be delivered following the Company's Annual General Meeting ("AGM").

While the financial information included in this preliminary announcement has been prepared in accordance with International Financial Reporting Standards ("IFRS"), this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to distribute the full financial statements that comply with IFRS in April 2014.

Audit Report

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2013 or 2012, but is derived from those accounts. The Auditor has reported on those accounts; its reports were unqualified, but did contain an emphasis of matter in 2013 in respect of going concern, further details are available below and in the Financial Review on page 13, and in respect of the valuation of the Syrian investment, further details in note 7 to the financial information. The Auditor's Report did not contain statements under sections 498(2) or (3) of the Companies Act 2006.

Basis of preparation

The financial information has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards adopted for use in the European Union. However, this announcement does not itself contain sufficient information to comply with IFRS. The Company will publish full financial statements that comply with IFRS in April 2014.

The financial information has been prepared under the historical cost convention except for the share based payments and the valuation of available-for-sale investments. 

This Consolidated Financial Information is presented in US Dollars. The majority of all costs associated with foreign operations are denominated in US Dollars and not the local currency of the operations. Therefore the presentational and functional currency of the Group, and the functional currency of all subsidiaries, is the US Dollar.

Going concern

The financial information has been prepared on the going concern basis which has been approved by the Board, notwithstanding the material uncertainty, as discussed in the going concern section of the Financial Review on pages 11 to 14.

Accounting policies

The accounting policies applied in this announcement are consistent with those of the annual financial statements for the year ended 31 December 2012, as described in those annual financial statements. A number of amendments to existing standards and interpretations were applicable from 1 January 2013. The adoption of these amendments did not have a material impact on the Group's financial statements for the year ended 31 December 2013.

1. Total revenue and segmental information

The total revenue of the Group, as defined by IAS 18, for 2013 was $4.5 million (2012: $6.0 million) comprising sales of hydrocarbons and incidental income of $4.4 million (2012: $5.6 million) and interest income of $0.1 million (2012: $0.4 million).

For management purposes, at 31 December 2013 the Group operated in four geographical areas, Morocco, Tunisia, Colombia and the US with suspended operations in Syria.  All segments are involved with production and exploration of oil and gas. Other represents corporate and head office costs.

The Group's revenue, result and certain asset and liability information for the year are analysed by reportable segment as follows:

Year End 31 December 2013	Syria $'000	Morocco $'000	Tunisia $'000	US $'000	Colombia $'000	Other $'000	Total $'000
Sale revenues	-	-	-	4,367	-	-	4,367
Operating loss	(4,471)	(10,165)	(2,434)	(820)	(11)	(8,430)	(26,331)
Financing cost							(426)
Net loss							(26,757)
G&A expenditure	(1,573)	(18)	(280)	(1,000)	(11)	(7,526)	(10,408)
Total assets	104,128	39,924	5,673	16,348	489	44,640	211,202
Total liabilities	(3,766)	(12,562)	(1,835)	(14,836)	(347)	(1,205)	(34,551)
Capital expenditure:
Exploration and evaluation	474	41,783	3,553	-	243	-	46,053
Oil & gas properties	-	-	-	2,467	-	-	2,467

Exploration costs write off	-	(10,147)	(2,154)	-	-	-	(12,301)
Impairment of oil and gas assets	-	-	-	(58)	-	-	(58)
Impairment of Syrian exploration activities	(474)	-	-	-	-	-	(474)
Inventory write off	(701)	-	-	-	-	-	(701)
Inventory provision	(2,204)	-	-	-	-	-	(2,204)

Year End 31 December 2012	Syria $'000	Morocco $'000	Tunisia $'000	US $'000	Colombia $'000	Other $'000	Total $'000
Sale revenues	-	-	-	5,622	-	-	5,622
Operating loss	(4,812)	-	(7,471)	(1,758)	-	(12,770)	(26,811)
Financing cost							(219)
Net loss							(27,030)
G&A expenditure	(3,078)	-	-	(1,717)	-	(11,829)	(16,624)
Total assets	108,005	-	5,497	17,406	-	101,455	232,363
Total liabilities	(8,753)	-	(2,095)	(17,259)	-	(1,333)	(29,440)
Capital expenditure:
Exploration and evaluation	17	-	5,026	-	-	-	5,043
Oil & gas properties	--	-	-	1,461	-	-	1,461

Exploration costs write off	17	-	(7,099)	-	-	-	(7,082)
Impairment of oil and gas assets	-	-	-	(568)	-	-	(568)
Impairment of Syrian exploration activities	(34)	-	-	-	-	-	(34)
Inventory write off	-	-	-	-	-	-	-
Inventory provision	-	-	-	-	-	-	-

2. Loss per share

The basic and diluted loss per share have been calculated using the loss for the year ended 31 December 2013 of $26.8 million (2012: $27.0 million). The basic loss per share was calculated using a weighted average number of shares in issue less treasury shares held, of 117,855,702 (2012: 117,844,680). The weighted average number of ordinary shares, allowing for the exercise of share options, for the purposes of calculating the diluted loss per share was 118,192,648 (2012: 118,202,604).   Where there is a loss, the impact of share options is anti-dilutive and hence, basic and diluted loss per share are the same.

3. Property, plant and equipment
	Oil and gas properties $'000	Other fixed assets $'000	Total $'000
Cost:
At 1 January 2012	41,267	1,796	43,063
Additions	1,461	601	2,062
Disposals	(7,929)	-	(7,929)
At 31 December 2012	34,799	2,397	37,196
Additions	2,467	217	2,684
Changes to decommissioning estimates	(1,859)	-	(1,859)
At 31 December 2013	35,407	2,614	38,021
Accumulated depreciation and depletion:
At 1 January 2012	(21,743)	(1,270)	(23,013)
Charge for 2012	(1,430)	(421)	(1,851)
Disposals	5,822	-	5,822
At 31 December 2012	(17,351)	(1,691)	(19,042)
Charge for 2013	(1,267)	(479)	(1,746)
At 31 December 2013	(18,618)	(2,170)	(20,788)
Accumulated impairment:
At 1 January 2012	(5,821)	-	(5,821)
Impairment charge for 2012	(568)	-	(568)
Disposals	2,107	-	2,107
At 31 December 2012	(4,282)	-	(4,282)
Impairment charge for 2013	(58)	-	(58)
At 31 December 2013	(4,340)	-	(4,340)
Net book value at 31 December 2013	12,449	444	12,893
Net book value at 31 December 2012	13,166	706	13,872

Impairment charges relate to provisions against certain of the Group's carrying values of its US producing assets, following a review of reserves at the year end.

Impairment for the assets in the Gulf of Mexico has been assessed, based on a value in use calculation, and using a pre-tax discount rate of 6% (2012: 6%), a long-term Brent crude oil price of $90/bbl (2012: $90/bbl) and a long-term gas price of $4.0/mcf (2012: $4.0/mcf). In determining the appropriate discount rate to be used consideration is given to the risk directly incorporated in the underlying cash flow forecasts.

3. Property, plant and equipment continued

At the end of 2013 an independent third party review of decommissioning estimate was undertaken by TSB offshore, Inc. As a result of this report the estimates used to calculate the decommissioning provision were revised reducing the cost of the decommissioning asset by $1.9 million.

4. Intangible assets

	Exploration & evaluation assets
	Morocco $'000	Colombia $'000	Syria $'000	Tunisia $'000	Computer software $'000	Total $'000
Cost:
At 1 January 2012	-	-	9,997	6,869	2,135	19,001
Additions	-	-	17	5,026	402	5,445
Exploration expenditure (written off) / written back	-	-	17	(7,099)	-	(7,082)
At 31 December 2012	--	-	10,031	4,796	2,537	17,364
Additions	41,783	243	474	3,553	421	46,474
Other write offs	-	-	-	(1,000)	(475)	(1,475)
Exploration expenditure written off	(10,147)	-	-	(2,154)	-	(12,301)
At 31 December 2013	31,636	243	10,505	5,195	2,483	50,062
Accumulated amortisation:
At 1 January 2012	-	-	-	-	(547)	(547)
Charge for 2012	-	-	-	-	(579)	(579)
At 31 December 2012	-	-	-	-	(1,126)	(1,126)
Charge for 2013	-	-	-	-	(398)	(398)
At 31 December 2013	-	-	-	-	(1,524)	(1,524)
Accumulated impairment:
At 1 January 2012	-	-	(9,997)	-	-	(9,997)
Impairment provision for 2012	-	-	(34)	-	-	(34)
At 31 December 2012	-	-	(10,031)	-	-	(10,031)
Impairment provision for 2013	-	-	(474)	-	(475)	(949)
At 31 December 2013	-	-	(10,505)	-	(475)	(10,980)
Net book value at 31 December 2013	31,636	243	-	5,195	484	37,558
Net book value at 31 December 2012	-	-	-	4,796	1,411	6,207

Tunisia

In 2013 the Group wrote off a total of $3.2 million of costs in respect of the Kerkouane permit on withdrawal from the permit at the end of 2013. This was offset by a release of the decommissioning provision previously held for the Kerkouane assets of $1.0 million.  At 31 December 2013 the Tunisian E&E assets represent expenditures on the Chorbane permit including seismic acquisition and related costs plus amounts paid during 2013 to increase participation in the licence.

4. Intangible assets continued

Morocco

In 2013 the Group acquired interests in the Rharb Centre, Rharb Sud and Fes permits through the acquisition of Cabre Maroc Limited.   Included within additions for the year is $19.3 million fair value of E&E assets acquired as part of this business combination. 

In respect of the Rharb Petroleum contract, three wells were drilled in the first phase of drilling, AKR-1 and OZI-1 were completed prior to the year end and BFD-2 completed shortly after the year end. All of these wells were considered non commercial so were plugged and abandoned. As a result, $10.1 million of costs have been written off in the year. At 31 December 2013 the Moroccan E&E assets represents the fair value attributed at acquisition to the Fes, Rharb Sud and Rharb Centre permits after a write off of part of the fair value attributed at acquisition to the Rharb Centre permit, and acquiring and processing seismic data on the Rharb Centre and Fes permits.

Syria

The accumulated costs of E&E assets in Syria represent the Group's share of the drilling costs of the Al Khairat, Twaiba and Wardieh wells and certain 3D seismic surveys. The Al Khairat well was successfully tested but commercial development approval is yet to be granted by the Syrian Arab Republic. The Twaiba and Wardieh wells are still under evaluation.

Following the imposition of EU sanctions against the oil industry in Syria, an impairment test was conducted and the carrying value of all E&E assets in Syria has been impaired to $nil as it is presently unclear whether the Group will be able to apply for commercial development approval in the manner contemplated by the Production Sharing Contract.

Colombia

In 2013 the Group was awarded E&P contracts over two blocks in Colombia; PUT 14 and LLA 50. At 31 December 2013 the E&E assets of $0.2 million (2012: $nil) represent costs related to these blocks incurred in the year.

5. Inventory

	2013 $'000	2012 $'000
Drilling inventory	4,451	2,905
Provisions	(2,204)	-
	2,247	2,905

During 2013 $0.7 million of inventory held for Syrian operations was written off due to a theft at the warehouse. An insurance claim for the full value was submitted during the year however due to complications as a result of EU sanctions it is not appropriate to recognise the claim as an asset as it is not virtually certain that a settlement would be paid.

At 31 December 2013 a further provision of $2.2 million (2012: $nil) has been made against the value of the remaining Syrian stock. Management believe this is appropriate in light of the theft in the year and the lack of full control over, and access to, the warehouse that Management have at this present time due to the situation in Syria.

6. Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and deposits repayable on demand by banks and other short-term investments with original maturities of three months or less. Balances held in bank accounts subject to escrow agreements as collateral for performance bonds issued are excluded from cash and cash equivalents and are shown as long-term financial assets.

	2013 $'000	2012 $'000
Cash at bank and in hand	33,824	90,982
Restricted cash balances	19,138	7,837
Total cash and bank resources	52,962	98,819
Included in long-term financial assets	(19,138)	(7,837)
Total cash and cash equivalents	33,824	90,982

The restricted cash balances at 31 December 2013 include:

·      $2.9 million (2012: $2.7 million) held in escrow to cover decommissioning expenditures under the requirements of the regulatory authorities that manage the oil and gas and other mineral resources in the Gulf of Mexico.

·      $10.0 million (2012: $5.0 million) held in escrow to guarantee minimum work obligations on the Rharb and Fes permits in Morocco.

·      An additional $2.5 million (2012: $nil) held in escrow to guarantee minimum work obligations on the Rharb and Fes permits which was acquired as part of the acquisition of Cabre Maroc Limited (see note 10) which is due back to the previous Parent company on it release under the terms of the sale and purchase agreement.

·      $3.2 million (2012: $nil) held in escrow to guarantee minimum work obligations on the Putumayo block 14 and Llanos block 50.

7. Investments

The Group is party to a PSC for the exploitation of hydrocarbon production in Block 26 in Syria. Pursuant to the PSC the Group operates its Syrian oil and gas production assets through a joint venture administered by DPC in which the Group has a 25% equity interest. The Group lost control of DPC on 1 December 2011 following the publication of European Union Council Decision 2011/782/CFSP. For the purposes of EU sanctions, DPC is considered to be controlled by General Petroleum Corporation.  Since the Group has neither joint control nor significant influence over the financial and operating policy decisions of the entity, it carries its investment in DPC and the associated rights under the Block 26 PSC as an available-for-sale financial asset.  The fair value attributed to DPC at 31 December 2013 is $102 million (31 December 2012: $102 million).

The basis of calculation of the fair value of the investment in DPC continues to be the estimated future cash flows that could be generated in respect of the Group's entitlement reserves in Block 26, using a long-term Brent oil price assumption of $90/bbl, discounted at a rate of 15% per annum. The resulting net present value is further reduced to reflect the Board's view of the specific risks associated with investments in the Syrian oil and gas sector at the current time. Such risks include potential delay in resumption of oil production and in receipt of revenues from Block 26, potential additional costs associated with re-commencement of operations and the potential inability to resume operations in Block 26. The impact of this risking methodology has been to reduce the valuation of the asset by 80%. The valuation represents a level 3 measurement basis as defined by IFRS 7.

There is a high degree of subjectivity inherent in the valuation due to the unknown duration of the sanctions and the eventual outcome of events in Syria. Accordingly it may change materially in future periods depending on a wide range of factors. The following table sets out the impact that changes in the key variables would have on the carrying value of the asset:

	Change %	Change in carrying value of investment $'000
Increase in forecast capital expenditure	5%	(1,902)
Decrease in long-term commodity prices	5%	(11,610)
Increase in forecast operating expenditure	5%	(1,113)
Change in discount rate to 10%	5%	31,907
Change in discount rate to 20%	5%	(21,916)
Change in the Syrian oil and gas sector risk to 90%	10%	(51,000)

7. Investments continued

The Directors have reviewed the carrying value of this available-for-sale financial asset at 31 December 2013 and are of the opinion that the valuation, although subject to significant uncertainty, is appropriate. The valuation methodology reflects the difficulty of predicting the timing of future activities in Syria, taking into consideration the current exceptional circumstances in the country and is not necessarily reflective of the value of the Group's investments in its Syrian operations over the long term.

8. Decommissioning

The provision for decommissioning relates to the expected present value of costs of plugging and abandoning the exploration and development assets held by Gulfsands Petroleum USA, Inc and Darcy Energy LLC. The provision for decommissioning is estimated after taking account of inflation, years to abandonment and an appropriate discount rate. At 31 December 2013, the oil and gas properties had estimated abandonment dates between 2014 and 2027.

Actual decommissioning costs will ultimately depend upon future market prices for the decommissioning work required, which will reflect market conditions at the relevant time. Furthermore, the timing of decommissioning is likely to depend on when the fields cease to produce at economically viable rates. This in turn will depend upon future oil and gas prices, which are inherently uncertain.  The actual amounts paid for decommissioning may ultimately vary significantly from the provision at 31 December 2013 requiring potentially material adjustments to the carrying value of the obligations.

The movement in the provision for decommissioning was as follows:

	$'000
At 1 January 2012	16,883
Changes in estimates	1,117
Costs in excess of provision	1,104
Decommissioning expenses	(1,919)
Discount expense	476
At 31 December 2012	17,661
Current portion	2,352
Non-current portion	15,309
At 1 January 2013	17,661
Changes in estimates	(1,859)
Decommissioning expenses	(2,151)
Discount expense	500
Disposal	(1,000)
At 31 December 2013	13,151
Current portion	2,573
Non-current portion	10,578

At the end of 2013 the Group withdrew from its interest in the Kerkouane permit as part of a settlement with ADX Energy Limited ("ADX"). As part of the settlement all existing and future liabilities in relation to the Kerkouane permit are assumed by ADX.  Therefore the $1.0 million decommissioning provision previously provided for in respect of this the permit has been released.

At the end of 2013 an independent engineer's report of the future costs of decommissioning the US assets was commissioned which reported decommissioning estimates lower than carried which resulted in an adjustment to the decommissioning provision of $1.9 million in 2013.

9. Share capital

	2013 Number	2012 Number
Authorised:
Ordinary shares of 5.714 pence each	175,000,000	175,000,000

	2013 $'000	2012 $'000
Allotted, called up and fully paid:
121,989,500 (2012:121,989,500) ordinary shares of 5.714 pence each	13,131	13,131

The movements in share capital and share options were:

	Number of ordinary shares	Number of share options	Number of restricted shares	Weighted average price of options £
At 31 December 2012	121,989,500	7,436,000	446,139	2.18
Restricted shares settled cashless	-	-	(79,990)	-
Restricted shares cash settled	-	-	(2,500)	-
Share options and restricted shares lapsing unexercised	-	(5,800,000)	-	2.03
At 31 December 2013	121,989,500	1,636,000	363,649	2.72

All restricted shares have an exercise price of 5.714 pence per restricted share.

Pursuant to a share buyback programme in 2011 the Company holds 4,103,355 shares in Treasury at 31 December 2013 (2012: 4,144,820). During 2013, 41,465 shares were issued from Treasury to satisfy the exercise of options and restricted shares.

In 2010 a Restricted Share Plan ("RSP") was established to complement the existing Share Option Plan. Under the RSP restricted (deferred) shares are awarded at par value to employees. Other than the lower exercise price the restricted shares operate in the same manner as the ordinary share options.

10. Business combinations

The acquisition of 100% of the issued share capital of Cabre Maroc Limited ("Cabre Maroc") was completed on 16 January 2013 and the results from operations of Cabre Maroc are included in the Group results from that date.

Cabre Maroc is a Cyprus-registered company with oil and gas exploration and production operations in Morocco. It changed its name to Gulfsands Petroleum Morocco Limited on 1 August 2013.  Further details of its activities are included in the Operations Review in this Report. The purchase of Cabre Maroc delivers to Gulfsands a large, contiguous and highly prospective acreage in an area with proven petroleum systems, revenues from near-term production and multiple drilling targets.

On completion of the accounting for the business combination, the final amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below:

			$'000
Financial assets			2,654
Intangible exploration & evaluation assets			19,280
Financial liabilities			(4,661)
Total identifiable assets			17,273
Total consideration			17,273
Satisfied by:
Cash			17,273
Total consideration transferred			17,273

Net cash outflow arising on acquisition
Cash consideration		17,273
Less: cash consideration paid in 2012		(100)
Less: cash and cash equivalents acquired		(70)
		17,103

The fair value of intangibles exploration and evaluation assets acquired consists of the fair value attributed to the Rharb Centre, Rharb Sud and Fes permits acquired. No deferred tax liability has been recognised in respect of the accounting for the business combination.   

The contribution of Cabre Maroc to the Group's loss for the period since the date of acquisition was $10.4 million and capital expenditures in that period totaled $22.5 million.

To view the table of Summary of Reserves and Resources please click the following link: 

http://www.rns-pdf.londonstockexchange.com/rns/0552E_-2014-4-4.pdf

 

END

 

 

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