Interim Results

SOCO INTERNATIONAL PLC 21 September 1999 SOCO International plc ('SOCO' or 'the Company') Interim Results for six months ended 30 June 1999 SOCO is an international oil and gas exploration and production company, headquartered in London with operations in Mongolia, Yemen, European Russia, the UK, Thailand, Tunisia and North Korea and a concession pending government approval in Vietnam. SOCO today announces its interim results for the 6 months ended 30 June 1999. HIGHLIGHTS * Turnover increased 10 per cent. to £8.5 million (1998: £7.8 million) * Gross profit almost trebled to £1.1 million (1998: £0.4 million), during period of unprecedented low oil prices * Continued growth in oil production: 6,985 BOPD, (1998: 6,700 BOPD), with Yemeni production expected to double upon completion of drilling programme * Continued reduction in per barrel operating costs: US$5.95, as compared with US$6.75 * £8.7 million cash injection to a debt free balance sheet * Significant network of new industry relationships established, offering potential access to a range of development opportunities * Poised to resume full scale exploration activities: Mongolia, Vietnam and Thailand Ed Story, Chief Executive of SOCO, said: 'SOCO is poised to enter the new millennium in a position of unprecedented strength for a company of its size. The Torobex transaction has enhanced a balance sheet that was already strong but, of greater importance, has resulted in a network of relationships that will provide access to significant oil exploitation projects and low cost production opportunities. ' Improved oil prices support the resumption of our exploration activities in Mongolia, Thailand and Vietnam at a time when oil service costs remain low, thereby offering the possibility of exponential growth for the Company.' 21 September 1999 Enquiries: SOCO International plc Tel: 0171 457 2020 (today) Ed Story, Chief Executive 0171 399 3300 (thereafter) Roger Cagle, Chief Financial Officer College Hill Tel: 0171 457 2020 James Henderson Archie Berens SOCO INTERNATIONAL PLC Interim Results for six months ended 30 June 1999 CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT INTRODUCTION Whilst the oil price recovery has undoubtedly been a significant development for SOCO and for a majority of oil companies this year, the most important step taken by the Company in advancing the objective of building long term shareholder value was the acquisition of Torobex, which was completed in July 1999. This acquisition materially strengthened the Company's already debt- free balance sheet (net cash of approximately £7 million), adding approximately £8.7 million in cash and no debt or additional liabilities. Further details of this transaction are set out below. Of greater importance to the long term future of the Company are the established relationships of the new investor group, which will provide access to new areas of operations and allow SOCO the opportunity to capture lucrative exploitation/development projects with significant reserves. Such projects represent a key element in building a more balanced portfolio by providing a bridge between the Group's excellent exploration portfolio and its high quality, but relatively short-life production assets. Such balance will be achieved by adding long term reserves and near term, low cost production. Completion of this transaction brought to an end approximately ten months of intensive discussions to put a key element of our strategy in place. RESULTS The price of crude oil began a recovery in April, which has been sustained to date. As a result primarily of production gains, but also reflecting some improvement in realisations, turnover was up for the first six months of 1999 to £8.5 million, as compared to £7.8 million for the same period last year (1998 results have been restated to reflect the treatment of Comeco, as more fully described in the Notes section of this report). Operating costs excluding depletion and abandonment decreased over the same period last year dropping from £5.1 million to £4.5 million. On a US$ per barrel basis direct operating costs continue to improve, declining from approximately $6.75 to $5.95. Gross profits were up significantly from £0.4 million reported for the first half of 1998 to £1.1 million for the first six months of 1999. Net profits doubled for the period over the same period last year, rising from £0.3 million to £0.6 million, although the increase was tempered by an almost 70% decline (£0.6 million) in earned interest due to the combination of a lower interest rate environment and lower cash balances. OTHER DEVELOPMENTS Two other transactions in which SOCO has been involved for an extensive period of time reached milestones or were concluded in the first half of 1999. The financing facility of up to US$45 million from the European Bank for Reconstruction and Development (EBRD) for Permtex, the 50% SOCO owned Russian joint venture, was signed by all parties on 12 May 1999. With the execution of the loan documents, the process of clearing the final hurdles prerequisite to first disbursement, such as obtaining approval by the Central Bank of Russia to establish offshore bank accounts, was initiated. First drawdown on the facility is expected by the end of October, in time for the pipeline construction to begin in the winter. In May 1999, SOCO, Petrovietnam and other minority participants signed Heads of Agreement for the exploration rights to Block 16- 1, offshore Vietnam, in the Cuu Long Basin. The Agreement confirmed SOCO Vietnam Ltd's 30% interest in the Block. SOCO Vietnam Ltd is 70% owned by SOCO. Negotiations continue toward the finalisation of a Joint Operating Contract, which is expected to be finalised before the end of September 1999. Ratification by the government of Vietnam is expected to follow the Ministry of Planning and Investment's review sometime before the end of this year. OPERATIONS Exploration/Development The first half of 1999 was not eventful from a drilling perspective, as most exploration projects were deferred to reflect the low oil price environment at the close of last year and the first three months of this period. The development drilling program in Yemen, which was originally anticipated to begin in May, was delayed due to the lack of availability of a drilling rig. The seven well program began in July and is expected to be substantially complete by the end of this year. Exploration operations continued in North Korea, where well number 401 was drilled to a total depth of 4,301 metres. The well, drilled entirely by a North Korean drilling crew, was logged in July by a logging crew contracted to SOCO Koryo from Huabei Oilfield, a Chinese production, services and refining subsidiary of China National Petroleum Corporation. Results of the logging operation indicate a 25 metre fractured zone from 3,775 to 3,800 metres which warrants further investigation. This well appeared to confirm the geological thesis that this region in West Korea Bay is analogous to the Bohai Bay area of China. Although a moratorium on Mongolian Production Sharing Contracts' work commitments has been in effect since agreed in January of this year, discussions have been underway to attract other parties to farm-in to SOCO's acreage in Mongolia's Tamtsag Basin and thus reduce the Company's almost 100% interest there. Although these discussions continue, the Company recently executed an eight well drilling contract with Huabei Oilfield, under which it will drill additional wells on Contract Area 19 at a substantially reduced cost per well and earn up to a 20% interest in Contract Area 19. The Company anticipates that Huabei will resume drilling in Contract Area 19 later this year. Production Production net to the Group's working interest averaged 6,985 barrels of oil per day (BOPD) for the first six months of 1999, compared to an average of approximately 6,700 BOPD for the same period last year. The only major change from prior period production statistics occurred in Tunisia. Production from the Didon field in Tunisia, which averaged approximately 3,530 gross BOPD during the first six months of 1999 (approximately 2,090 BOPD 1998 full year average gross production), stabilised during the latter part of this period at approximately 4,050 gross BOPD, as many of the initial problems typically associated with start-up were eliminated. Currently the well is producing steadily at more than 5,800 gross BOPD. There has been no pressure decline in the well since production began approximately one year ago. ETAP, the Tunisia state owned oil company, did not exercise its option to back-in to the Didon development, which means that SOCO's interest in that project will continue at 22.22%. SUBSEQUENT EVENTS Torobex Acquisition At an Extraordinary General Meeting held on 12 July 1999, the shareholders of SOCO overwhelmingly voted to approve the acquisition of the entire issued share capital of Torobex. As a result, SOCO issued 17,277,058 ordinary shares plus warrants to subscribe for 3,109,870 additional shares at prices from 55p to 65p to acquire Torobex. Torobex was a special purpose entity, established by an oil and gas investor group to hold operating rights, which the group expected to acquire, for various exploitation and development projects in the Middle East and north and west Africa. The investor group formed an entity to hold its interest in Torobex, Tobex, which is majority owned (in excess of 75%) by Chemsa Limited, Pontoil Intertrade Limited and Societe Internationale d'Investissements Financiers. These entities are in turn owned or controlled by Patrick Maugein, Doctor Mario Contini and the family of Paris Mouratoglou, respectively. As a result of the acquisition, the investor group owned 25% of the enlarged share capital of SOCO. Subsequent to the completion of the acquisition, the investor group has purchased 950,000 additional shares in the market, bringing its ownership interest to 18,227,058 shares or approximately 26.4% of the 69,140,732 total shares issued. The investor group added three members, including the non-executive chairman, to the Board of Directors of the Company. These directors replace retiring directors Pierre Simandoux, Dan Mercier and Tim Taylor, all of whom continue an association with the Company, as described below. The new members of the Board are Patrick Maugein (Chairman), Rui de Sousa and Olivier Barbaroux, all of whom bring additional strength through their experience in the oil and gas industry or related activities and through their extensive contacts in significant oil producing regions. Management Management changes accompanied the operational and transactional developments described above. SOCO's new major shareholding group added three non-executives, including the Chairman, to the Board of Directors, bringing added strength to the non-executive Director group. Peter Kingston becomes Deputy Chairman and continues as the senior independent non-executive and as chairman of the audit and remuneration committees. We wish to acknowledge the tremendous contribution Peter made to the Company and the leadership he provided from the initial listing of the Company, through the formation stages, to the severe industry downturn and the most recent repositioning. We would also like to acknowledge the contributions of three directors who have resigned from the Board-Pierre Simandoux, Tim Taylor and Dan Mercier-to make way for our new incoming Directors. All three will continue as associate directors of the Company. Pierre will remain an advisor to the Company. Tim and Dan will continue to serve as Company executives and regular Board attendees. Associated with the change in the composition of the Board and as the Company gains more balance between exploration and operational activities, the executive group responsibilities have been realigned to allow the Company to take greater advantage of the available expertise. Tim Taylor becomes Vice President of Engineering, while Dan Mercier, who joined from Territorial with the acquisition of that company in 1998, will continue as Vice President of Operations. This realignment will ensure that executives' complementary skills are more effectively employed on all projects, rather than on geographical areas of responsibility. Prospects In the near term, the Company expects a considerable amount of operational activity within its existing portfolio. The Yemen phase II programme consisting of drilling five production wells and two water injection wells should be substantially complete by this year end. It is anticipated that gross production will almost double upon successful completion of this programme. Completion of the northern pipeline in Russia which is expected by the end of the first quarter next year will also favourably impact production but significant increases will likely not be seen until near the year end 2000 as additional wells connected to the contract area pipeline are brought on-stream. On the exploration front, drilling activity in Mongolia is expected to commence soon on Block 19 with the possibility of two wells being drilled this year out of an eight well total. A well is expected to be drilled in Thailand on Block B8/38 before the end of the first quarter of next year. The well will test a large structure on the block which was identified through reinterpretation of existing seismic data. The award on Block 16- 1 offshore Vietnam is expected to be approved by the Vietnamese government before the end of this year. Operational activity should commence early next year. OUTLOOK There is good reason for renewed optimism in the prospects for SOCO. The acquisition of Torobex and the establishment of a new network of individuals who can both supplement and complement SOCO's existing pool of talent gives the Company the platform to enhance shareholder value significantly in the near term. The intervening period since the transaction has been particularly eventful with a number of initiatives underway. All the Directors and executives are working in concert to bring successful, quality projects to fruition. The Torobex transaction was the first step in repositioning SOCO in the market. It has made SOCO a stronger company with the potential to be a significant force in the independent oil and gas exploration and production sector. The Company will in the future be less exposed to the vagaries of the oil price or other variables beyond the control of management. Shareholders' patience with the process and their support in the meantime are most appreciated. Patrick Maugein Ed Story Chairman Chief Executive 21 September 1999 SOCO INTERNATIONAL PLC Interim Results for six months ended 30 June 1999 Consolidated Profit and Loss Account (unaudited) (unaudited) (restated) (restated) six months six months ended ended year to 30 Jun 99 30 Jun 98 31 Dec 98 £000 £000 £000 Turnover 8,526 7,757 15,519 Cost of sales (7,445) (7,375) (15,896) Gross profit / (loss) 1,081 382 (377) Administrative expenses (750) (609) (1,413) Operating profit / (loss) 331 (227) (1,790) Investment income 581 899 1,570 Interest payable and similar (85) (207) (381) charges Profit / (loss) on ordinary activities before taxation 827 465 (601) Tax on profit on ordinary (202) (138) (235) activities Profit / (loss) for the 625 327 (836) financial period Earnings / (loss) per share Basic 1.2p 0.7p (1.7)p Diluted 1.2p 0.7p (1.7)p Consolidated Statement of Total Recognised Gains and Losses (unaudited) (unaudited) (restated) (restated) six months six months ended ended year to 30 Jun 99 30 Jun 98 31 Dec 98 £000 £000 £000 Profit / (loss) for the 625 327 (836) financial period Unrealised currency 3,970 (338) (295) translation differences Total recognised gains / 4,595 (11) (1,131) (losses) for the period SOCO INTERNATIONAL PLC Interim Results for six months ended 30 June 1999 Consolidated Balance Sheet (unaudited) (unaudited) (restated) (restated) 30 Jun 99 30 Jun 98 31 Dec 98 £000 £000 £000 Fixed assets Tangible assets 73,145 71,534 69,944 Investments 368 - 368 73,513 71,534 70,312 Current assets Stocks 1,002 613 489 Debtors 8,139 6,875 6,370 Investments 4,230 11,734 7,769 Cash at bank and in hand 2,754 3,222 1,563 16,125 22,444 16,191 Creditors: Amounts falling due (2,639) (4,382) (4,295) within one year Net current assets 13,486 18,062 11,896 Total assets less current 86,999 89,596 82,208 liabilities Provisions for liabilities and (2,951) (2,660) (2,776) charges Minority interests (175) (7,945) (157) Net assets 83,873 78,991 79,275 Capital and reserves Called-up equity share capital 10,366 9,870 10,365 Share premium account 38,360 37,449 38,358 Other reserves 29,933 29,933 29,933 Profit and loss account 5,214 1,739 619 Shareholders' funds 83,873 78,991 79,275 SOCO INTERNATIONAL PLC Interim Results for six months ended 30 June 1999 Consolidated Cashflow Statement (unaudited) (unaudited) (restated) (restated) six months six months ended ended year to 30 Jun 99 30 Jun 98 31 Dec 98 £000 £000 £000 Net cash inflow from operating 1,040 1,675 4,088 activities Returns on investments and servicing of finance Interest received 268 821 1,243 Interest paid (10) (137) (38) 258 684 1,205 Taxation paid (70) (190) (686) Capital expenditure and investment in associate Purchase of tangible fixed (3,969) (12,377) (20,480) assets Sale of tangible fixed assets - 14 20 Investment in associate - (2,928) (2,928) (3,969) (15,291) (23,388) Acquisitions Purchase of subsidiary - - (114) undertaking Cash acquired with subsidiary - 17 54 undertakings - 17 (60) Cash outflow before management of liquid resources and financing ( 2,741) (13,105) (18,841) Management of liquid resources Decrease in cash on short term 3,590 12,978 17,035 deposit Advance to Comeco Petroleum, - (2,681) (2,681) Inc. 3,590 10,297 14,354 Financing Issue of ordinary share 2 - 2 capital Issue of preference shares to 8 155 184 minority interests 10 155 186 Increase / (decrease) in cash 859 (2,653) (4,301) in the period SOCO INTERNATIONAL PLC Interim Results for six months ended 30 June 1999 Notes Accounting policy change Effective 1 January 1999 the Group adopted Financial Reporting Standard 12 ('FRS 12'), which sets out the principles of accounting for provisions, contingent liabilities and contingent assets, resulting in a change in the accounting policy under which the Group recognises a provision for decommissioning costs. The Group now recognises a decommissioning asset within tangible fixed assets, calculated at the net present value of the estimated future cost of decommissioning and site restoration required as a result of facilities in place. An associated decommissioning provision is recognised. The decommissioning asset is amortised for each cost pool on a unit of production basis in accordance with the Group's policy for depletion and depreciation of tangible fixed assets. Period charges for changes in the net present value of the decommissioning provision are included in interest expense. Prior to the adoption of FRS 12, the Group recognised a provision for the estimated cost of decommissioning and site restoration which may be incurred at the end of the producing life of a field over the producing life as calculated for each geographical pool on a unit of production basis. Prior period figures as at 30 June 1998 and 31 December 1998 have been restated to reflect the accounting policy change, including an increase of £1.2 million in fixed assets, an increase of £1.5 million in provisions and a decrease of £0.3 million in shareholders' funds. Results for 30 June 1998 and 31 December 1998 reflect an increase in interest payable of £0.07 million and £0.14 million, respectively. Comeco Petroleum, Inc. The dispute arising in November 1998 with the Group's co-venturer in Comeco was unresolved at 30 June 1999. Accordingly the Group's results continue to consolidate its share of the assets, liabilities and cashflows at the current equity interest of 50%, and the amount of $4.4 million contributed to Comeco in excess of the Group's 50% share has been included within debtors. The issued interim statement as at 30 June 1998 was prepared on the basis that Comeco was a subsidiary undertaking. The comparative information for that period has been restated to be consistent with the presentation adopted for the Group accounts as at 31 December 1998 as described above. The effects of this restatement on key profit and loss and balance sheet lines are summarised in the table below and are presented before taking into effect the period's restatement for a change in accounting policy, as described above. (unadjusted) (as adjusted) six months six months ended ended 30 Jun 98 30 Jun 98 £000 £000 Turnover 10,196 7,757 Gross profit 1,241 382 Minority interest (865) - Profit for the financial period 397 397 (unadjusted) (as adjusted) 30 Jun 98 30 Jun 98 £000 £000 Fixed assets 85,046 70,360 Minority interests (22,649) (7,945) Net assets 79,242 79,242 Earnings per share The calculation of basic earnings per share is based on the profit for the financial period and on 51,230,967 ordinary shares, being the weighted average number of ordinary shares in issue and ranking for dividend during the period. The calculation of diluted earnings per share is based on the profit for the financial period and on 51,830,967 ordinary shares, being the weighted average number of ordinary shares in issue and ranking for dividend during the period, including 600,000 ordinary shares of the Company held by the Group. Reconciliation of operating profit to operating cash flows six months six months ended ended year to 30 Jun 99 30 Jun 98 31 Dec 98 £000 £000 £000 Operating profit (loss) 331 (227) (1,790) Depreciation and depletion 2,901 2,195 5,740 Decommissioning provision 48 85 105 Profit on sale of fixed - (11) (6) assets Movement in stocks (314) 102 233 Movement in debtors (1,283) (93) 613 Movement in creditors (643) (376) (807) Net cash inflow from 1,040 1,675 4,088 operating activities Subsequent events Acquisition of Torobex Limited On 12 July 1999 the Group acquired the entire share capital of Torobex for consideration of 17,277,058 new ordinary shares of the Company with a nominal value of £0.20 ('Shares') and warrants to subscribe for 3,109,870 Shares. The acquisition of Torobex, whose net assets solely comprised US$13.9 million cash on the date of acquisition, provides the Group with new associations through an investor group with the potential to introduce new assets or projects into the Group. Comeco litigation The Company has entered into settlement negotiations with the litigating co-venturer in Comeco. This dispute centres around certain interests in, and other rights and obligations of, Comeco. Pending the uncertainty associated with conclusion of these negotiations, the Company continues to carry its interest in Comeco at 50% resulting in a 14.285% indirect interest in the Yemeni East Shabwa Development Area. The outcome of these negotiations will determine the form in which the Group receives value for its US$4.4 million advance to Comeco. Year 2000 The Directors believe that the Company has taken prudent steps as reported in the 1998 Annual Report and Accounts to identify, isolate and address any material potential problems in its operations associated with systems failure as a result of shortcomings in year 2000 date/time rollover programmes. As the exact nature of problems is subject to considerable uncertainty and the correction of problems not directly within the Company's control cannot be assured, the Company is also developing a comprehensive action plan in an attempt to minimise any residual problems which may arise. As most of the Company's operations are in developing nations and a substantial portion is independent of automatic system intervention, the estimated cost to the Company to correct identified deficiencies and to initiate appropriate responses is immaterial to the Group. Dividend The Directors do not recommend the payment of a dividend. Basis of preparation The financial information presented above does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985. The financial information for the year ended 31 December 1998 has been derived from the statutory accounts for that year. Those statutory accounts, upon which the auditors' issued an unqualified opinion, were delivered to the Registrar of Companies. The interim accounts, which are unaudited, have been prepared on the basis of the accounting policies set out in the Group's statutory accounts for the year ended 31 December 1998 with the exception of the change in accounting policy resulting from the adoption of FRS12.

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