Final Results
Soco International PLC
09 March 2006
SOCO International plc
('SOCO' or 'the Company')
Preliminary Results For The Year Ended 31 December 2005
SOCO (LSE:SIA), the international oil and gas exploration and production
company, headquartered in London, traded on the London Stock Exchange and a
constituent of the FTSE 250 Index, today announces its Preliminary Results for
the year ended 31 December 2005.
In a separate announcement today, the Company released the initial results from
the first of a multiple zone test of the TGT-2X appraisal well in Vietnam, which
discovered oil in the Oligocene formation with a stabilised rate of 3,300 BOPD.
Additional flow tests will be conducted from Miocene intervals, one of which
flowed at 9,342 BOEPD in the TGT-1X discovery well drilled last year.
Operating Highlights
• 85% drilling success ratio with six of seven exploration / appraisal wells
drilled in 2005 successful
• 75 million barrels of oil added to Group reserves in Vietnam and Yemen
driven by exploration success, increasing total Group reserves threefold
post Mongolia disposal
• Production, net to the Company's working interest, increased to 5,684 BOPD
from 5,533 BOPD the previous year
• Re-structured asset portfolio to focus on high impact projects:
• Disposed of interests in Mongolia for consideration of up to
approximately US$93 million
• Established a new core area in West Africa with the signature of a PSA
for a 75% stake in Marine XI Block in Republic of Congo (Brazzaville)
Financial Highlights - from continuing operations
• Revenue up over 90% year-on-year to US$57.2 million
(2004 : US$29.4 million)
• Operating profit increased over 120% year-on-year to US$31.3 million
(2004 : US$14.2 million)
• Profit before tax increased over 125% to US$33.7 million
(2004 : US$14.9 million)
Outlook
• US$100 million development and exploration programme planned for 2006
• Further exploration/appraisal drilling within Vietnam and Yemen
• Progression towards Vietnam production with declaration of
commerciality targeted for 1H06
• 3D seismic programme in Congo planned for second half of the year
Ed Story, Chief Executive Officer, commented:
'2005 was a transformative year for SOCO with exploration success generating an
almost 50% growth in reserves. Strategically we re-focused our portfolio to
concentrate on high impact projects; adding a new core area in Africa and
disposing of our assets in Mongolia.
With further exploration success announced today and a US$100 million
exploration and development programme planned for the year ahead the outlook is
extremely positive for continued reserve growth in 2006.'
9 March 2006
Enquiries:
SOCO International plc Tel : 020 7747 2000
Roger Cagle
Executive VP, Deputy CEO and Chief Financial Officer
Pelham PR Tel: 020 7743 6676
James Henderson
Alisdair Haythornthwaite
CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT
Simply stated, 2005 was a great year for SOCO. We had a 100% success ratio in
our Basement drilling programme on Block 10 in Yemen and two wells drilled in
the Cuu Long Basin in Vietnam were significant discoveries. Even the third well
drilled in Vietnam, which was not classified as a discovery, came with a silver
lining as it intersected oil in a previously non-productive interval on Block
9-2. This operational success has led to an impressive addition of approximately
75 million barrels of oil to the Group's net working interest proven and
probable reserves in Vietnam and Yemen, resulting in an increase in total
reserves of 47% over year end 2004 despite disposal of the Group's Mongolia
interest. The result is not only a real numerical increase, but an overall
upgrade in terms of the more immediate impact to shareholders. This momentum has
carried into the first quarter of 2006 with successful tests reported in both
Yemen and Vietnam.
Coupled with the extraordinary drilling result, we reshaped the asset portfolio
to focus on high impact, high quality projects and added capacity to our
financial capability by agreeing a US$45 million reserve-based lending facility
with the International Finance Corporation (IFC). The importance of having the
financial strength to add valuable upside to the portfolio of a smaller company
cannot be over emphasised in the current industry environment where promising
projects command a high premium for entry.
FINANCIAL AND OPERATING RESULTS
After tax profit for the year from continuing operations more than doubled,
rising to US$20.3 million from US$8.2 million in 2004. After tax profit
including discontinued operations fell, reflecting the 2004 disposal of our
Tunisia interests that netted US$21.4 million. The non-current portion of the
consideration for the Group's disposal of its Mongolia interests in 2005 is
classified as a non-current financial asset.
Production net to the Company's working interest increased, rising to 5,684
barrels of oil per day (BOPD) in 2005 from 5,533 BOPD the prior year. The
increase was achieved even though discontinued operations only contributed 155
BOPD during the year from Mongolia, compared to 11 months of Tunisia production
(1,237 BOPD) and a full year of Mongolia production (338 BOPD) in the 2004
statistics.
With full year drilling programmes in both Vietnam and Yemen, the Group had its
largest capital expenditure programme ever in 2005, with a cash spend of US$76.2
million almost trebling the previous year's capital expenditures. The result is
that year on year cash balances declined from US$71.1 million at year end 2004
to US$51.0 million at year end 2005.
SIGNIFICANT EVENTS
Consistent with the Company's stated strategy of rationalising its portfolio by
monetising non-core assets, SOCO sold the entities holding its Mongolia
interests to a subsidiary of PetroChina. The transaction, which closed in August
2005, immediately added approximately US$30 million to the Group's cash position
with an additional US$10 million receivable placed in escrow. Subsequent
compensation of up to approximately US$53 million associated with future
production from the interests sold would bring the total compensation to
approximately US$93 million. Importantly, this transaction allows us additional
flexibility in focusing on other projects that may have a greater near term
impact.
The Company announced in August that its 85% owned subsidiary, SOCO Exploration
and Production Congo (SOCO EPC), signed a production sharing contract with
Societe Nationale des Petroles du Congo (SNPC) wherein it acquired an interest
in the Marine XI Block, offshore the Republic of Congo (Brazzaville). Previous
exploration on this Block led to several discoveries, one of which has been
partially delineated with recoverable reserves of 20 to 60 million barrels.
However, the full potential of the Block has not been previously explored as
there is a thick layer of salt which has impeded seismic interpretation.
Application of newer seismic technology, such as that used in Vietnam, can
unlock the potential of the Block. As an exploration led company, the ability to
introduce exciting new prospective areas such as Marine XI to the portfolio is
key to continuing the momentum resulting from our success in Vietnam and Yemen.
2005 OPERATIONS REVIEW
Vietnam
It would be hard to expect a much better scenario than the one that evolved in
Vietnam in 2005, but it could be just setting the stage for a better 2006. Last
year got off to a resounding start with the Ca Ngu Vang (CNV) appraisal well
success on Block 9-2, which tested at 13,040 barrels of oil equivalent per day
(BOEPD). This success was followed by a discovery in the Tertiary sediments of a
new play trend in a previously undrilled region of Block 16-1. The Te Giac Trang
-1X (TGT-1X) tested at 9,432 BOEPD. TGT was the first structure tested in a new
play fairway that extends for some 80 kilometres along the eastern and southern
regions of Block 16-1.
The second appraisal well on the CNV structure on Block 9-2 offshore Vietnam,
CNV-4X, encountered an oil and gas interval with unexpected high pressure in the
sandstone sequence overlying the Basement objective, and had to be temporarily
suspended. The pressures encountered were significantly higher than those seen
previously on the other CNV wells.
The joint venture partners have redesigned the drilling plan for a re-entry into
this well in 2006.
Yemen
The Kharir field, where the majority of the consortium's crude oil production is
sourced in the East Shabwa Development Area on Block 10 in Yemen, was the focus
of the Basement drilling programme for most of 2005. The consortium was rewarded
with wells, which extended the limits of the field, testing at rates ranging
from 7,300 BOPD from the KHA 1-10 well, testing the eastern extension of the
field as then mapped, to 850 BOPD from the KHA 3- 07, which was on the
previously undrilled Kharir North structure.
In addition to Basement appraisal wells drilled in and around the Kharir field,
the consortium initiated step-out exploration wells in the northern area of
Block 10. The first of these wells, the Jathma-1 (JAT-01), tested at over 1,900
BOPD, causing considerable optimism when considering that only relatively poor
quality 2D seismic data were available and the well was essentially a vertical
rather than highly deviated Basement well. The consortium expects to have three
rigs working on the exploration/appraisal/development/injector drilling
programme in 2006.
The 2005/2006 programme for Block 10 in Yemen also involves de-bottlenecking and
other production enhancement efforts. The end result of this is expected to
expand the consortium's export capability significantly, eventually reaching
around 70,000 BOPD by 2007.
CORPORATE
In August 2005, SOCO agreed a credit facility with the IFC, the private sector
arm of the World Bank. The US$45 million reserve-based, revolving credit
facility has a seven year tenor that will be made available to SOCO in two
tranches. The first tranche of US$25 million is immediately accessible and the
second tranche of US$20 million is a standby loan.
We are pleased to have the involvement of the IFC as they not only bring
expertise in the oil and gas sector, but are also leaders on the environmental
and social sustainability front. The long term availability of the financing
will provide us with additional flexibility to finance our current projects and
pursue future opportunities. The IFC is a strong ally in the countries in which
we currently operate as well as those frontier countries in which we hope to
initiate projects in the future.
OUTLOOK
Operationally, 2006 will be a banner year for SOCO. The capital budget will be
the largest in the Group's history, with approximately US$100 million earmarked.
Results from the drill bit will continue to dominate news flow in 2006. We are
off to a very good start to the year in Vietnam. The first drill stem test from
the TGT-2X appraisal well flowed at 3,300 BOPD from the Oligocene 'C' interval,
which was non-productive in the discovery well. Testing operations continue
amidst high expectations. Several analogous prospects and leads have been
mapped along the fairway and we expect that the success at TGT will be repeated.
As we have more successful wells on Block 16-1, we would expect the risk profile
of the drilling programme to be reduced as many of the subsurface questions are
answered. We expect 2006 to be a watershed year in Vietnam as we move toward
development on our projects in the Cuu Long Basin. In Yemen, the exploration
drilling programme, of which an extension of the Kharir field eastward will be a
significant part, will give us a good indication of the upside remaining on
Block 10. As importantly, the production capacity upgrades will start to have a
significant impact as export capability should increase considerably throughout
the year.
Having established the presence of oil in the northern extension of Kharir, we
will now appraise and develop the pool with inclined wells, which should yield
higher flow rates such as those seen in wells in the main part of the field.
There were many positives in 2005 that largely resulted from forces beyond the
control of those who benefited the most. We think that external industry
influences will remain fairly stable during 2006 and companies that are not
positioned to create their own good fortune will be hard pressed to top last
year's performance. While SOCO also benefited to a degree from environmental
influences, as an exploration led company most of our success was due directly
to our own efforts. More importantly, we are well positioned to continue as we
have the portfolio in place and the resources to exploit it.
Whilst we do not think such high drilling success ratios are sustainable in the
long term, we are definitely well placed again to enjoy substantial success in
2006. We have the people, we have the portfolio and we have the materials and
equipment under contract to ensure that this will again be a news driven year.
Last year we spoke of streamlining our portfolio and refocusing our resources.
Although the portfolio is in great shape, we would not hesitate to add
additional projects that offered material upside to our shareholders. We trust
that your confidence in our strategy of recognising opportunity, capturing
potential and realising value will again be confirmed throughout the year.
Patrick Maugein Chairman
Ed Story President and Chief Executive
REVIEW OF OPERATIONS
The long anticipated, high impact drilling programmes in Vietnam and Yemen did
not disappoint in 2005. Three wells were drilled in Vietnam, with the first two
yielding spectacular results. An appraisal well to the 2002 discovery on Block
9-2 on the Ca Ngu Vang (CNV) structure tested at a daily rate of more than
13,000 barrels of oil equivalent (BOEPD). This was followed by the first
exploration well to be drilled on the eastern part of Block 16-1, which tested
the Te Giac Trang (TGT) structure. The TGT-1X tested at more than 9,400 BOEPD.
The third well had to be temporarily suspended after encountering hydrocarbons
in an unexpected high pressure environment.
Results from the Yemen appraisal programme were equally impressive beginning
with the 6,500 barrels of oil per day (BOPD) test on the Kharir field well KHA
1-09. This was followed by drilling successes at the KHA 2-16 (5,500 BOPD) and
the KHA 1-10 well (7,300 BOPD) yielding a 100% success ratio in the Yemen
drilling programme. Yemen is now the only country in which the Company has
production following the 2005 disposal of its interests in Mongolia. Even with
the reliance on a sole producing asset since the August disposal, crude oil
production net to the Group's working interest rose from 5,533 BOPD in 2004 to
5,684 BOPD in 2005.
VIETNAM
SOCO holds its interests in Vietnam, all in the Cuu Long Basin offshore, through
its 80% owned subsidiary SOCO Vietnam Ltd (SOCO Vietnam). SOCO Vietnam holds a
25% working interest in Block 9-2, which is operated by the Hoan Vu Joint
Operating Company and a 28.5% working interest in Block 16-1, which is operated
by the Hoang Long Joint Operating Company (together, JOCs). Both Blocks are on
trend with several major Basement and Tertiary discoveries in the Cuu Long
Basin. Both are also contiguous to the Bach Ho field, where 2005 production
reportedly averaged approximately 200,000 BOPD and 200 million cubic feet of gas
per day (MMCFD), and the Rang Dong field, where production reportedly averaged
approximately 48,000 BOPD, primarily from Basement.
Review of 2005 activities
After an almost three year drilling abeyance preparing for this extensive
exploration and appraisal programme, the Group resumed drilling in Vietnam with
the spudding of the CNV-3X appraisal well on Block 9-2 in January. This well was
drilled to a measured depth (MD) of 6,123 metres making it the longest MD well
to be drilled in Vietnam. Reaching target depth on 16 April, the well had an
extensive clean-up period before testing water-free at a maximum combined rate
of 13,040 BOEPD comprising 9,010 BOPD and 22.6 MMCFD. Although the well was
suspended as a potential producer, it will more than likely be used as an
injector well following the drilling of other shallower development wells before
the field goes into production.
Following the CNV-3X test, the rig was towed to Block 16-1 where it spudded the
initial wildcat exploration well on the 'H' prospect on 2 June. The TGT-1X was
drilled to a total MD of 4,478 metres to test several Miocene and Oligocene
intervals in a previously undrilled part of Block 16-1. It was drilled
significantly deeper than the original prognosis due to the continuing presence
of encouraging hydrocarbon shows, reaching target depth in August. A drill stem
test conducted from the Lower Bach Ho formation in the Miocene interval between
2,701 metres and 2,760 metres yielded a combined maximum rate of 9,432 BOEPD
comprising 8,566 BOPD of 37 degree API gravity crude and approximately 4.86
MMCFD through a 80/64 inch choke size. The calculated net pay was approximately
31 metres over the test interval. An additional 33 metres of net pay interval
were not perforated due to the limited equipment and materials available within
the applicable time constraints. Based on the data from the well test, oil
samples from wireline formation tests and well logs, the untested interval is
considered to be oil bearing and capable of production. A brief test was
conducted over a deeper Oligocene interval that also contained significant oil
shows, but the formation was determined to be tight and thus unable to flow
commercial quantities of hydrocarbons.
The rig was moved immediately back to Block 9-2 to spud the CNV-4X, a follow-up
appraisal well to the CNV-3X discovery, on 31 August. The well encountered an
oil and gas interval with unexpected high pressure, significantly higher than
those seen previously on the other CNV wells, in the Oligocene 'E' sequence, the
sandstone sequence overlying the Basement objective.
The well encountered a gross 370 metre vertical section of oil shows with
attendant gas through the Oligocene 'E' sandstone section, based on mud logs,
drilling cuttings analysis and 'logging while drilling' logs. The use of higher
than anticipated mud weights to control the encountered pressures led to
problems higher in the open hole section where the drill string became
differentially stuck while pulling out of the hole to run casing into the top of
Basement. Numerous attempts to fish the stuck drill string were unsuccessful. In
December, the well was temporarily suspended following the loss of the
121/4 inch hole section above the granitic Basement reservoir.
Subsequent events and 2006 outlook
An up-dip appraisal well to the 2005 discovery well on the TGT structure on
Block 16-1 spudded on 18 January 2006. It reached target depth of 3,436 metres
in mid-February after intersecting hydrocarbons in the Miocene and Oligocene
intervals. The TGT-2X well flowed 3,300 BOPD from the first drill stem test in
Oligocene 'C' interval, which failed to flow in the discovery well. At a
minimum, additional flow tests will be conducted from two Miocene intervals, one
which was not tested in the discovery well and the other that flowed at 9,342
BOEPD.
The discovery well on the TGT structure confirmed the presence of a highly
prospective Lower Miocene play fairway extending for some 80 kilometres across
the southern and eastern area of Block 16-1 where several prospects and leads
have been mapped. The success of the second TGT well now sets the stage to fast
track the development of the field and adds significant upside to the remaining
exploration potential. The Hoang Long JOC has contracted to acquire an
additional 3D seismic survey in order to evaluate several leads in the area
between the initial 3D survey on the western portion of the Block and the 3D
survey conducted prior to exploratory operations on the eastern portion of the
Block. The rig currently working is available through July to continue drilling
operations in the Cuu Long Basin. It is expected that the majority of the
remaining work programme for this rig will be conducted on Block 16-1. The JOCs
have contracted the Transocean Triton 9 rig for a nine month period to continue
drilling operations on the Blocks after the current rig contract expires, with
the expectation that it will become available late in the third quarter of 2006.
Efforts continue towards a declaration of commerciality for the CNV structure.
The front-end work required to transition operations from the exploratory phase
to the development phase has been completed. Although the timing is uncertain,
the CNV-4X will be re-entered in 2006 incorporating a different drilling fluid
and casing design to enable the overpressured section to be redrilled safely.
YEMEN
The focus on targeting Basement exploration and appraisal has completely
transformed the East Shabwa Development Area (ESDA) from a rapidly declining
Cretaceous producer to an asset with expectations of accelerated production
through the next several years. The success here has allowed the Company to rely
on this asset in the short term as its sole contributor to operating cash flow.
ESDA production averaged 32,937 BOPD for 2005 increasing almost 40% from 23,635
BOPD the previous year.
The Group is a 58.75% majority shareholder of Comeco Petroleum, Inc. (Comeco),
which holds a 28.57% direct interest in the ESDA. A subsidiary of Occidental
Petroleum, which is also a co-venturer in the ESDA with a 28.57% interest, holds
the remaining interest in Comeco. Total E&P Yemen, with an interest equal to
Comeco's, operates the concession and a subsidiary of Kufpec, the Kuwaiti
foreign oil company, holds the remaining 14.29%. Production from the ESDA, which
currently originates primarily from the Kharir field, is transported by pipeline
and commingled with production from the neighbouring Masila Block before
transportation by pipeline to the coastal Ash Shihr export terminal. SOCO's
crude entitlement is sold under a 12-month spot market contract.
Review of 2005 activities
The successful drilling programme that began in 2004 featuring highly deviated
wells targeting Basement continued throughout 2005. The three part programme for
the year was designed to further appraise the Kharir Basement structure, to
increase reserves through exploration and to increase production. The consortium
enjoyed a 100% success ratio during the year. By the end of 2005, three drilling
rigs were working in the ESDA. During the year, the consortium agreed a new well
designation scheme proposed by the Yemeni government.
Although the KHA 1-09 well (formerly KHA-403) spudded in December 2004, it
wasn't tested until February 2005. The objectives of the well were to delineate
the Basement and evaluate reservoir development in the undrilled western
extension of the structure. The well reached a total depth of 3,383 metres and
produced over 6,500 BOPD when tested. A second delineation well, the KHA 2-16
(formerly KHA-404), spudded in the northern extension of the Kharir structure on
1 February 2005 and reached a total depth of 3,539 metres. It produced more than
5,500 BOPD when tested in April. A well drilled to evaluate the eastern
extension of the Kharir field spudded at the end of March. The KHA 1-10 well
(formerly KHA-405) reached a total depth of 3,755 metres and was tested in June.
The test was limited by capacity restrictions in the main production facility
but yielded more than 7,300 BOPD.
The third Basement well spudded in the 2005 ESDA drilling programme, the KHA
2-17 (formerly KHA-406), spudded on 11 June and was designed to be a water
injection well for pressure maintenance of the reservoir. It was the source of a
water injectivity test that began in September.
The KHA 3-07 (formerly KHA-407) was the first well to target Basement on the
Kharir North prospect. It spudded at the end of August and reached a total depth
of 3,472 metres. The well tested in mid-November and yielded more than 850 BOPD
against a 26/64 inch choke. After primarily focusing on appraisal and step-out
wells in and around the Kharir field, the rig was moved to drill the Jathma
exploration well (JAT-01) to test a new Basement prospect in the northern area
of Block 10. The well spudded on 22 October 2005 and reached a total depth of
3,175 metres. The well tested over 1,900 BOPD against a 56/64 inch choke with an
API gravity of 35 degrees.
In December 2005, a second drilling rig was brought in to spud the JAT-02 well
at a location in the northern part of the Jathma prospect. A third drilling rig
was also commissioned during the month and on 12 December it commenced drilling
a production well on the Atuf Northwest field located in the southern area of
Block 10, which produces from the Cretaceous Biyad interval.
During the year almost 70% of the production was sourced from the Basement
although, historically, production was sourced from the Cretaceous clastic Biyad
reservoir. The former has associated gas whilst the latter is characterised by
high water cuts as are typical of wells producing from this reservoir in the
region. Accordingly, efforts are underway to deal with declining water disposal
requirements and increasing gas disposal capabilities. Work continued during the
period on de-bottlenecking production facilities and increasing oil handling
capacity.
Subsequent events and 2006 outlook
Although the JAT-02 well encountered a significant oil column, the well did not
produce when production tested, which indicated poor fracture development at
this location. Further evaluation of the results of this and the JAT-01 test
will be carried out to establish the most appropriate scenarios for appraisal
and/or development. The JAT-03 well drilled on the eastern border of Block 10
was plugged and abandoned in March after failing to encounter hydrocarbons in
the Basement.
Three drilling rigs are expected to continue operating throughout the year. As
at the date of this publication, two rigs are drilling production and injection
wells in the Kharir field. A third rig is continuing the evaluation of the
Jathma/Wadi Taribah field.
Additional short term production capacity was added on a temporary basis when
the consortium leased a portable production unit from another area operator.
This will serve to provide a production uplift whilst work continues on
permanently expanding current facilities. This, together with adding water
injection capability to improve pressure maintenance in the Basement reservoir,
should add considerable productive capability from the interval.
CONGO (Brazzaville)
The Company has spent more than three years targeting areas that would allow it
to focus its expertise, yet provide large enough interests and significant
upside to continue its highly successful exploration led strategy. West Africa
met all the criteria. As industry exploration efforts in West Africa move into
ever deeper waters, the application of new technology provides access to
significant reserve potential in under-explored shallow water areas. Thus
negotiations began with the appropriate authorities in targeted countries
several years ago to establish a foothold in the region. Marine XI was a
significant first step, providing a cornerstone in the region.
Review of 2005 activities
The Company announced in August that its 85% owned subsidiary, SOCO Exploration
and Production Congo (SOCO EPC), signed a production sharing contract with
Societe Nationale des Petroles du Congo (SNPC) wherein it acquired an interest
in the Marine XI Block, offshore the Republic of Congo (Brazzaville).
SOCO EPC will be the operator with a 75% working interest in the Block that was
licenced to SNPC by presidential decree in July 2005. The exploration and
production branch of SNPC (15%) and Africa Oil & Gas Corporation (10%) hold the
remaining interests. The Block, located in the Lower Congo Basin, is in shallow
water adjacent to the coast with water depths ranging up to 110 metres and
covers approximately 1,400 square kilometres. There has been previous
exploration activity on the Block resulting in four small oil discoveries, the
largest of which has initial recoverable reserves estimated to be in the 30
million barrel range.
The previous discoveries are located in the shallower horizons of the
sedimentary section in Marine XI. The deeper section, productive onshore and on
trend to the south in Cabinda, has not been adequately evaluated as it could not
be accurately mapped using older seismic data.
Subsequent events and 2006 outlook
The Group has issued bid documents for a 3D seismic programme which it expects
to conduct in the second half of 2006. By employing the modern seismic
techniques that the Company successfully applied in Vietnam to map the Basement
reservoir, SOCO EPC expects to exploit the potential of the deeper section.
Although the Group is in discussions with various parties to farm-out a portion
of its interests in Marine XI, it would retain a significant portion of the
Block and operatorship.
THAILAND
SOCO's 99.93% owned Thailand subsidiary holds a 100% interest in Block B8/38
located offshore in the Gulf of Thailand. The Group filed an application and
development plan in 2005 with the Thailand Department of Mineral Fuels to
convert the concession to a production licence on the Bualuang (renamed from
Pornsiri). The application was approved in March 2006.
The preferred development scenario is for the Group to farm-out a portion of its
interest to a third party with expertise in development in the region.
Accordingly, the Group expects to conclude discussions with various interested
parties to begin development of the Bualuang field during 2006.
OTHER AREAS OF INTEREST
Libya
The Group maintains its shareholding in the ODEX Exploration Limited (ODEX)
joint venture. The ODEX shareholding comprises SOCO North Africa Ltd. (34%), and
subsidiaries of Oilinvest (Netherlands) B.V. (46%) and Joint Stock Bank of the
Gas Industry Gazprombank (20%). From SOCO's standpoint, the niche for ODEX was
to participate with one or more indigenous Libyan companies in exploiting
existing but problematic development opportunities. With the recent focus of the
Libyan National Oil Company on open exploration bid rounds, significant progress
in other areas is unlikely to be made in the near term.
Accordingly, the Group will continue to assess its participation in the
consortium in light of reasonable expectations of success. It is anticipated
that ODEX will continue to be the vehicle through which the Group will explore
various opportunities that may arise in Libya and certain parts of Africa as the
consortium is well placed to take advantage of its strong regional
relationships.
West Africa
The Group is interested in extending its holdings in West Africa beyond the
Republic of Congo (Brazzaville) and is in various stages of negotiations with
other sovereignties in the region. Under a memorandum of understanding signed
with the Democratic Republic of Congo (Kinshasa), the Company carried out an
initial aeromagnetic gravity survey in 2005 to further delineate prospective
potential in certain areas of the country. Work continues on interpreting the
results of the survey.
Mongolia
In April 2005, the Company entered into an agreement to sell the whole of its
Mongolia interest to Daqing Oilfield Limited Company, a subsidiary of
PetroChina. The transaction was approved by SOCO shareholders at an EGM on 10
May 2005 and was completed on 18 August 2005.
CONSOLIDATED INCOME STATEMENT
for the year to 31 December 2005
Notes 2005 2004
$000s $000s
Continuing operations
Revenue 3 57,160 29,386
Cost of sales (19,588) (11,347)
_______ _______
Gross profit 37,572 18,039
Administrative expenses (5,295) (4,039)
Exploration expenses (1,013) (1,946)
Gain on disposal of exploration venture - 2,156
_______ _______
Operating profit from continuing operations 3 31,264 14,210
Investment revenue 2,042 659
Other gains and losses 853 113
Finance costs (497) (95)
_______ _______
Profit before taxation from continuing operations 33,662 14,887
Tax 4 (13,366) (6,686)
_______ _______
Profit for the year from continuing operations 20,296 8,201
Discontinued operations
Operating profit from discontinued operations 3,5 - 9,261
Other expenses from discontinued operations 5 (13) (249)
Profit on disposal 5 194 15,856
_______ _______
Profit before tax from discontinued operations 181 24,868
Tax 4 - (3,498)
_______ _______
Profit for the year from discontinued operations 181 21,370
_______ _______
Profit for the year 20,477 29,571
Earnings per share (cents) 6
Basic
Profit from continuing operations 29.0 11.8
Profit from discontinued operations 0.3 30.6
_______ _______
Profit 29.3 42.4
Diluted
Profit from continuing operations 25.6 10.4
Profit from discontinued operations 0.2 27.1
_______ _______
Profit 25.8 37.5
BALANCE SHEETS
as at 31 December 2005
Group Company
Notes 2005 2004 2005 2004
$000s $000s $000s $000s
Non-current assets
Intangible assets 151,213 152,990 - -
Property, plant and equipment 29,988 25,273 737 821
Investments - - 179,690 187,555
Financial asset 5 31,882 - - -
Other receivable 5 10,134 - - -
Deferred tax assets 2,591 2,118 - -
_______ _______ _______ _______
225,808 180,381 180,427 188,376
Current assets
Inventories 310 205 - -
Trade and other receivables 6,285 8,327 244 204
Tax receivables 1,138 999 104 58
Cash and cash equivalents 50,967 71,122 360 113
_______ _______ _______ _______
58,700 80,653 708 375
_______ _______ _______ _______
Total assets 284,508 261,034 181,135 188,751
Current liabilities
Trade and other payables (15,233) (10,588) (974) (2,210)
Tax payables (446) (62) (446) (59)
_______ _______ _______ _______
(15,679) (10,650) (1,420) (2,269)
_______ _______ _______ _______
Net current assets 43,021 70,003 (712) (1,894)
Non-current liabilities
Long-term provisions (2,590) (3,197) - -
_______ _______ _______ _______
Total liabilities (18,269) (13,847) (1,420) (2,269)
Net assets 266,239 247,187 179,715 186,482
Equity
Share capital 23,479 23,348 23,479 23,348
Share premium account 68,221 67,877 68,221 67,877
Other reserves 54,259 53,502 (658) (689)
Retained earnings 120,280 102,460 88,673 95,946
_______ _______ _______ _______
Total equity 7 266,239 247,187 179,715 186,482
CASH FLOW STATEMENTS
for the year to 31 December 2005
Group Company
Notes 2005 2004 2005 2004
$000s $000s $000s $000s
Net cash from (used in) operating activities 8 30,536 19,157 (5,409) (3,686)
_______ _______ _______ _______
Investing activities
Purchase of intangible assets (65,268) (19,572) - -
Purchase of property, plant and equipment (10,907) (8,011) (150) (834)
Investment in subsidiary undertakings - - (12,883) (37,845)
Dividends received from subsidiary undertakings - - 20,617 20,833
Proceeds on disposal of subsidiary undertaking 5 27,510 17,743 - 20,196
Proceeds on disposal of exploration venture - 2,156 - -
_______ _______ _______ _______
Net cash (used in) from investing activities (48,665) (7,684) 7,584 2,350
Financing activities
Share-based payments (1,837) - (1,837) -
Proceeds on issue on ordinary share capital 14 660 14 660
_______ _______ _______ _______
Net cash (used in) from financing activities (1,823) 660 (1,823) 660
Net (decrease)/increase in cash and cash (19,952) 12,133 352 (676)
equivalents
Cash and cash equivalents at beginning of year 71,122 58,893 113 693
Effect of foreign exchange rate changes (203) 96 (105) 96
_______ _______ _______ _______
Cash and cash equivalents at end of year 50,967 71,122 360 113
STATEMENTS OF RECOGNISED INCOME AND EXPENSE
For the year to 31 December 2005
Group Company
2005 2004 2005 2004
$000s $000s $000s $000s
Profit for the year 20,477 29,571 15,372 44,915
Unrealised currency translation differences (363) 341 (20,351) 9,969
_______ _______ _______ _______
Total recognised income (loss) for the year 20,114 29,912 (4,979) 54,884
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. General information
The information for the years ended 31 December 2005 and 2004 does not
constitute statutory accounts as defined in Section 240 of the Companies Act
1985 (Act). A copy of the statutory accounts for 2004 has been delivered to the
Registrar of Companies and those for 2005 will be delivered following the
Company's annual general meeting. The auditors' report on those accounts was
unqualified and did not contain statements under Section 237(2) or (3) of the
Act. Whilst the financial information included in this preliminary announcement
has been computed in accordance with International Financial Reporting Standards
(IFRS), this announcement does not itself contain sufficient information to
comply with IFRS. The Company expects to publish full financial statements that
comply with IFRS in its Annual Report and Accounts 2005.
For the first time the financial statements are presented in US dollars which is
the functional currency of each of the Company's subsidiary undertakings. The
Directors do not recommend the payment of a dividend.
This preliminary announcement was approved by the Board on 8 March 2006.
2. Basis of preparation
The financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS) for the first time. The same accounting
policies and methods of computation are followed in the financial statements as
published by the Company on 23 September 2005 in its IFRS transition document
which is available on the Company's website at www.socointernational.co.uk.
That document set out SOCO's comparative 2004 financial information for the year
ended 31 December 2004, restated under IFRS in US dollars, including
reconciliations of the income statements, balance sheets and cash flow
statements between UK GAAP and IFRS. The document additionally sets out the
Group's balance sheet under IFRS at the transition date of 1 January 2004,
including a reconciliation to the UK GAAP balance sheet at that date. The above
statements and reconciliations will be included as a note to the 2005 Annual
Report and Accounts.
The financial statements have also been prepared in accordance with IFRS adopted
for use in the European Union and therefore comply with Article 4 of the EU IAS
Regulation and with those parts of the Act applicable to companies reporting
under IFRS. The financial statements have been prepared under the historical
cost basis.
IFRS 6 Exploration for and Evaluation of Mineral Resources has been adopted
early for 2005. At the date of approval of these financial statements the Group
has not applied the following IFRS and International Financial Reporting
Interpretations Committee (IFRIC) interpretations which are in issue but not yet
effective:
• IFRS 7 Financial Instruments: Disclosures; and the related
amendment to IAS 1 on capital disclosures
• IFRIC 4 Determining whether an Arrangement contains a
Lease
• IFRIC 5 Right to Interests Arising from Decommissioning,
Restoration and Environmental Rehabilitation Funds
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Basis of preparation (continued)
• IFRIC 8 Scope of IFRS 2
The adoption of these IFRS and IFRICs in future periods is not expected to have
a material impact on the financial statements of the Group.
3. Segment information
Geographical segments
Geographical segments form the basis on which the Group reports its primary
segment information.
Continuing operations Discontinued 2005
operations1
Middle SE Unallocated Total Central North Group
East Asia $000s $000s Asia Africa $000s
$000s $000s $000s $000s
Oil sales 57,160 - - 57,160 1,498 - 58,658
Operating profit 37,263 - (5,999) 31,264 - - 31,264
Assets 39,950 125,346 119,212 284,508 - - 284,508
Liabilities 8,696 5,498 4,075 18,269 - - 18,269
Capital additions 11,845 41,825 28,250 81,920 (630) - 81,290
Depletion and 7,149 - 176 7,325 - - 7,325
depreciation
Continuing operations Discontinued 2004
operations1
Middle SE Unallocated Total Central North Group
East Asia $000s $000s Asia Africa $000s
$000s $000s $000s $000s
Oil sales 29,386 - - 29,386 3,188 13,413 45,987
Operating profit 17,815 - (3,605) 14,210 - 9,261 23,471
Assets 33,323 84,170 71,277 188,770 72,264 - 261,034
Liabilities 4,702 4 2,183 6,889 6,958 - 13,847
Capital additions 4,912 8,613 931 14,456 6,614 2,592 23,662
Depletion and 4,943 - 159 5,102 - 1,359 6,461
depreciation
1In December 2004 the Group disposed of its North Africa segment which comprised
its Tunisia interest. In August 2005 the Group disposed of its Central Asia
segment which comprised its Mongolia interest (see Note 5). The results of
these segments are therefore included in discontinued operations.
Business segment
The Group has one principal business activity being oil and gas exploration and
production. Revenue by destination does not materially differ from revenue by
origin. There are no inter-segment sales.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Tax
Continuing operations Discontinued operations Group
2005 2004 2005 2004 2005 2004
$000s $000s $000s $000s $000s $000s
Current tax 13,839 5,889 - 3,135 13,839 9,024
Deferred tax (473) 797 - 363 (473) 1,160
_______ _______ _______ _______ _______ _______
13,366 6,686 - 3,498 13,366 10,184
UK corporation tax is calculated at 30% (2004 - 30%) of the estimated assessable
profit for the year. Taxation in other jurisdictions is calculated at the rates
prevailing in the respective jurisdictions. During 2004 and 2005 both current
and deferred taxation have arisen in overseas jurisdictions only.
The charge for the year can be reconciled to the profit per the income statement
as follows:
2005 2004
$000s $000s
Profit before tax on continuing operations 33,662 14,887
Profit before tax on discontinued operations 181 24,868
_______ _______
33,843 39,755
Profit before tax multiplied by standard rate of corporation 10,153 11,927
tax in the UK of 30% (2004 - 30%)
Effects of:
Expenses not expected to be utilised as a tax loss 1,423 1,186
Non taxable profit on disposal (58) (4,758)
Utilisation of tax credits - (205)
Higher tax rates on overseas earnings 1,906 2,469
Adjustments to tax charge in respect of previous years (58) (435)
_______ _______
Tax charge for the year 13,366 10,184
The tax charge in future periods may also be affected by these factors.
The Group's overseas tax rates are higher than those in the UK, primarily
because the profits earned in Yemen are taxed at a rate of 35% and those earned
in Tunisia were taxed at a rate of 50%.
5. Disposal of Mongolia
In April 2005 the Group entered into a Sale and Purchase Agreement (Agreement)
with an economic effective date of 1 January 2005, to sell its 100% owned
subsidiaries SOCO Tamtsag Mongolia, LLC (SOTAMO) and SOCO Mongolia Ltd (SOCO
Mongolia) to Daqing Oilfield Limited Company (Daqing), a subsidiary of
PetroChina. Together SOTAMO and SOCO Mongolia held the Group's Mongolia
interest. In August 2005 the Group completed the transaction. Under the terms
of the Agreement the Group will receive consideration of up to approximately
US$93.0 million comprised of cash consideration of US$40.0 million plus a
subsequent payment based on total crude oil produced from the Mongolia interest
after the effective date in excess of 27.8 million barrels of oil.
The US$40.0 million cash consideration was payable in two tranches. The first
US$30.0 million was paid, less applicable settlement adjustments of US$0.4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Disposal of Mongolia (continued)
million, in August 2005 upon completion. The second tranche of US$10.0 million
was paid into an interest bearing escrow account by Daqing upon completion to be
released to the Group 18 months later upon the satisfaction of the condition
that no material undisclosed additional liabilities are discovered and is
disclosed in the balance sheet under non-current assets as an other receivable.
The remaining consideration is payable, once cumulative production reaches 27.8
million barrels of oil as described above, at the rate of 20% of the average
monthly posted marker price for Daqing crude multiplied by the aggregate
production for that month, up to a total of approximately US$53.0 million based
on the estimated recoverable costs incurred to 31 December 2004, as approved by
the Mineral Resources and Petroleum Authority of Mongolia.
The subsequent payment amount is included in non-current assets as a financial
asset at fair value through profit or loss. The timescale for the production of
crude oil in excess of 27.8 million barrels and the price of Daqing marker crude
oil
are factors that cannot accurately be predicted. However, based upon the
Directors' current estimates of proven and probable reserves from the Mongolia
interests and the development scenarios as discussed with the buyer, the
Directors believe that the full subsequent payment amount will be payable. The
fair value of the subsequent payment amount was determined using a valuation
technique as there is no active market against which direct comparisons can be
made. Assumptions made in calculating the fair value include the factors
mentioned above, risked as appropriate, with the resultant cash flows discounted
at a commercial risk free interest rate. The fair value of the financial asset
at the date of completion of the sale was US$31.5 million. As at 31 December
2005 the fair value was US$31.9 million after accounting for the unwinding of
the discount.
As the Group's Mongolia asset is now classed as a discontinued operation the
revenue and cost of sales have been removed from continuing operations. There is
no impact on operating profit as revenue arose from test production during an
appraisal programme and an amount was charged from appraisal costs to cost of
sales so as to reflect a zero net margin. Revenue attributable to the Mongolia
interest up to the date of completion was US$1.5 million (2004 - US$3.2
million). Immediately prior to the sale the Group's share of net assets held by
the Mongolia interest was US$68.8 million (2004 - US$65.4 million) comprising
intangible assets of US$71.0 million (2004 - US$71.6 million), current assets of
US$ nil (2004 - US$0.7 million), current liabilities of US$0.4 million (2004 -
US$5.2 million) and long-term provisions of US$1.8 million (2004 - US$1.7
million). Immediately after the completion of the sale the Group recognised
cash inflow of US$29.6 million, other receivables of US$10.0 million, a gain of
US$0.2 million based on the fair value of the financial asset of US$31.5 million
(see above) and transaction costs of US$2.1 million.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Earnings per share
The calculation of the basic and diluted earnings per share is based on the
following data:
2005 2004
$000s $000s
Earnings from continuing operations 20,296 8,201
Earnings from discontinued operations 181 21,370
_______ _______
20,477 29,571
Number of shares
2005 2004
Weighted average number of ordinary shares for the purpose of 70,003,067 69,740,521
basic earnings per share
_______ _______
Effect of dilutive potential ordinary shares:
Share options and warrants 7,010,483 6,597,168
Ordinary shares of the Company held by the Group 2,423,300 2,475,000
_______ _______
Weighted average number of ordinary shares for the purpose of 79,436,850 78,812,689
diluted earnings per share
The denominators used for the purposes of calculating earnings per share on both
continuing and discontinued operations are the same.
7. Reconciliation of movements in Group total equity
2005 2004
$000s $000s
As at 1 January 247,187 216,722
New shares issued 475 661
Share-based payments (1,773) 55
Unrealised currency translation differences (127) 178
Retained profit for the year 20,477 29,571
_______ _______
As at 31 December 266,239 247,187
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Reconciliation of operating profit to operating cash flows
Group Company
2005 2004 2005 2004
$000s $000s $000s $000s
Operating profit (loss) from continuing 31,264 14,210 (5,150) (3,866)
operations
Operating profit from discontinued operations - 9,261 - -
_______ _______ _______ _______
31,264 23,471 (5,150) (3,866)
Share-based payments 521 55 521 55
Depletion and depreciation 7,325 6,461 148 122
Gain on disposal of exploration venture - (2,156) - -
_______ _______ _______ _______
Operating cash flows before movements in working 39,110 27,831 (4,481) (3,689)
capital
Increase in inventories (172) (599) - -
(Increase) decrease in receivables (710) (649) (140) 73
Increase (decrease) in payables 4,754 (1,886) (681) (111)
_______ _______ _______ _______
Cash generated by operations 42,982 24,697 (5,302) (3,727)
Interest received 1,943 653 12 50
Interest paid (460) (52) (119) (9)
Income taxes paid (13,929) (6,141) - -
_______ _______ _______ _______
Net cash from operating activities 30,536 19,157 (5,409) (3,686)
Cash generated from operating activities
comprises:
Continuing operating activities 30,536 9,663 (5,409) (3,686)
Discontinued operating activities - 9,494 - -
_______ _______ _______ _______
30,536 19,157 (5,409) (3,686)
Cash and cash equivalents (which are presented as a single class of asset on the
balance sheet) comprise cash at bank and other short term highly liquid
investments with a maturity of three months or less.
9. Preliminary results announced
Copies of the announcement will be available from the Company's head office, St
James's House, 23 King Street, London, SW1Y 6QY. The Annual Report and Accounts
2005 will be posted to shareholders in due course.
RESERVE STATISTICS
Unaudited, net working interest (mmboe)
Net proven oil and gas reserves
Total Mongolia1 Thailand Vietnam2 Congo2 Yemen3
Reserves as at 31 December 2004 53.6 37.1 5.0 - - 11.5
Changes in the year
Additions 30.0 - - 30.0 - -
Revision to previous estimates 5.7 - - - - 5.7
Purchase of reserves 9.5 - - - 9.5 -
Change of interest - - - - - -
Sales of reserves (37.0) (37.0) - - - -
Production (2.1) (0.1) - - - (2.0)
_______ _______ _______ _______ _______ _______
Reserves as at 31 December 2005 59.7 - 5.0 30.0 9.5 15.2
Net proven and probable oil and gas reserves
Total Mongolia1 Thailand Vietnam2 Congo2 Yemen3
Reserves as at 31 December 2004 90.7 56.1 18.4 - - 16.2
Changes in the year
Additions 68.3 - - 68.3 - -
Revision to previous estimates 8.5 - - - - 8.5
Purchase of reserves 23.8 - - - 23.8 -
Change of interest - - - - - -
Sales of reserves (56.0) (56.0) - - - -
Production (2.1) (0.1) - - - (2.0)
_______ _______ _______ _______ _______ _______
Reserves as at 31 December 2005 133.2 - 18.4 68.3 23.8 22.7
Net proven and probable oil and gas reserves year comparison
2005 2004 2003 2002 2001
Reserves as at 31 December 90.7 92.5 75.4 77.0 88.4
Changes in the year
Additions 68.3 - - - -
Revision to previous estimates 8.5 6.0 9.9 0.6 40.6
Purchase of reserves 23.8 - - - -
Change of interest - - 9.2 - -
Sales of reserves (56.0) (5.8) - - (48.8)
Production (2.1) (2.0) (2.0) (2.2) (3.2)
_______ _______ _______ _______ _______
Reserves as at 31 December 133.2 90.7 92.5 75.4 77.0
Note: mmboe denotes millions of barrels of oil equivalent
1 Mongolia reserves were previously shown on an entitlement basis. On an
entitlement basis at 31 December 2004 proven reserves were 27.7 mmboe and proven
and probable reserves were 41.9 mmboe.
2 Reserves are shown before deductions for minority interests which are funded
by the Group. The Group is entitled to recieve 100% of the cashflows until it
has recovered its funding of the minority interest plus accrued interest from
the minority interests' pro rata portion of those cashflows.
3 Yemen reserves were previously shown on an entitlement basis. On an
entitlement basis at 31 December 2005 proven reserves were 6.1 mmboe (2004 - 5.4
mmboe) and proven and probable reserves were 8.4 mmboe (2004 - 6.8 mmboe).
Entitlement volumes are used as the basis for calculating depletion on the unit
of production method.
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