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Faroe Petroleum PLC (FPM)

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Tuesday 18 September, 2018

Faroe Petroleum PLC

2018 Interim Results

RNS Number : 0460B
Faroe Petroleum PLC
18 September 2018
 

 

18 September 2018

FAROE PETROLEUM PLC

("Faroe Petroleum", "Faroe", the "Company" or the "Group")

 

Unaudited Interim Results for the six months ended 30 June 2018

Faroe Petroleum, the independent oil and gas company focusing on exploration, appraisal and production opportunities in Norway and the UK, announces its unaudited Interim Results for the six months ended 30 June 2018.

Highlights

Operations - significant resource upgrade following the Iris Hades discovery

·     Successful Iris Hades discovery (Faroe 20%), adding 42 mmboe 2C resources net to Faroe - appraisal well planned for H1 2019

·      Fogelberg (Faroe 15%) appraisal well and production testing completed in June 2018

·      Fenja field development part-divestment (Faroe 7.5%, previously 25%) raised $54.5 million, reduces capex

·     Average H1 2018 production of 12,402 boepd from existing portfolio (H1 2017: 14,800 boepd) - lower rate reflects   temporary production shut-ins on Trym and Tambar in Q1 2018

·      Farm-in to Plantain/Agar well in UKCS announced in August 2018 - drilling operations underway

Finance - strong cash generation from producing assets and robust balance sheet

·    Adjusted revenue £102.2 million (H1 2017: £95.5 million) - reflecting higher commodity prices, partially offset by lower production during period. Statutory revenue of £67.8 million (H1 2017: £80.1 million) - excludes produced but not lifted hydrocarbons (underlift) of £37.3 million (H1 2017: £15.6 million)

·     EBITDAX £77.2 million (H1 2017: £44.0 million) - includes pre-tax net income of £21.3 million in relation to Oselvar     compensation payments

·     Operating profit of £82.5 million (H1 2017: loss £0.3 million) and profit after tax of £42.5 million (H1 2017: loss £2.9 million) - reflecting higher EBITDAX and £24.5 million post-tax gain on Fenja part-divestment

·     Unrestricted cash and net cash at 30 June 2018 £158.6 million and £82.6 million (31 December 2017: £149.1 million and £75.0 million)

·      $250 million reserve based lending ("RBL") facility, undrawn at 30 June 2018 (31 December 2017: £nil)

Outlook - E&A drilling programme ramp-up and ongoing development investments, fully funded

·      Full year 2018 production guidance 12,000-14,000 boepd, approximately two thirds of which is oil

·      Fully-funded near to medium term organic growth target of 35,000 boepd on schedule

·      Ongoing significant multi-field development programme across our portfolio

·      Fully-funded net Group capital expenditure for 2018 is estimated at c. £225 million pre-tax

·      Flagship Brasse development concept selection underway with field sanction scheduled for H2 2019

·      Exploration programme continues with six firm wells targeting unrisked resources in range 80 to 150 mmboe (net)

·      Long term growth to be sustained through continuing annual exploration licence participation

 

   

Graham Stewart, Chief Executive of Faroe Petroleum, commented:

"I am pleased to announce the results for H1 2018 - a period of strong profitability, effective portfolio management and material exploration success. The significant Iris Hades discovery announced in April 2018 is our largest discovery to date and adds an estimated 42 mmboe of 2C oil equivalent net to the Company, substantially increasing our resource base. 

"We remain one of the most dynamic and successful explorers in the sector and have a very active drilling programme underway. Seven E&A wells will be drilled over the coming months including appraisal of Iris Hades, the Agar/Plantain exploration well in the UK currently drilling and the Faroe-operated Rungne exploration well, due to spud soon. The unrisked resource potential net to Faroe targeted by the firm six well exploration campaign programme is estimated to be in the range of 80-150 mmboe.

"In the medium term we are targeting material increase in shareholder value and cashflow with our fully funded investment programme across the portfolio, encompassing exploration, appraisal, development and production. I remain confident in our ability to deliver our stated near to medium term production growth target of 35,000 boepd, and wish to express my sincere gratitude to all our stakeholders for their ongoing support and to our staff and colleagues for their hard work and commitment to delivering the best possible results for all of our shareholders."

 

 

 

Ends

 

For further information, please contact:

Faroe Petroleum plc

Graham Stewart/Jonathan Cooper


Tel: +44 1224 650 920

Stifel Nicolaus Europe Limited

Callum Stewart/Nicholas Rhodes/Ashton Clanfield

 

Tel: +44 20 7710 7600

BMO Capital Markets

Tom Rider/Jeremy Low/Tom Hughes

 

Tel: +44 207 236 1010

FTI Consulting

Ben Brewerton/Emerson Clarke/Ntobeko Chidavaenzi

 

Tel: +44 203 727 1000

Email: [email protected]

 

 

CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT

Faroe has a proven track record of delivering outstanding results in exploration and asset monetisation. In H1 2018, we again had significant successes in both these elements of the business: the Iris Hades discovery added 42 mmboe of 2C resources (net to Faroe) and our partial divestment in the Fenja development project generated a post-tax gain of £24.5 million. Faroe's production portfolio generated EBITDAX of £77.2 million in the first six months, underpinning our significant ongoing field investment programme in Norway.

With gross cash of £158.6 million and an undrawn $250 million RBL facility, Faroe is fully funded for its entire ongoing investment programme and to continue to grow the business further. There has been good progress in exploiting our resources, through development and production-enhancing projects as well as maturing existing discoveries towards development, and we are on track to deliver our stated objective of production levels of 35,000 boepd in the near to medium term, all from the Company's existing assets.

Iris Hades discovery leads to significant increase in resources

We remain one of the most active and successful explorers in the sector with a finding cost in Norway of less than $1 per barrel (post-tax), a commercial success rate of over one in three and value creation through exploration twice the NCS average.  75% of Faroe's 2P Reserves of 98 mmboe (as at 31 December 2017) have been generated, directly or indirectly, from our exploration drilling. We pursue efficient and sustainable organic growth principally through the drill bit.  Faroe has an outstanding in-house exploration team with an exemplary record in winning licences in application rounds from which a very high proportion progress to being drilled.  

Our latest drilling success was the significant Iris Hades discovery (Faroe 20%) announced in April 2018. This is the largest single discovery we have made so far, with Faroe's estimated net 2C resources on the discovery of 42 mmboe, taking Faroe's net total 2C resources to 113 mmboe.  The Iris Hades partnership has contracted the Deep Sea Bergen drilling rig to drill an appraisal well in H1 2019  targeting an area near the crest of the structure to the south of the discovery well.

Our exploration-led strategy continues with our most active drilling programme to date, substantially funded by Norway's long-established tax refund incentive. Seven committed wells will be drilled over the coming months, comprising six  in Norway, and one in the UK, the low-cost Plantain well (Faroe 25%), currently underway, potentially followed by a contingent side-track to appraise the Agar discovery. The unrisked resource range potential targeted by this ongoing committed exploration programme has been estimated between 80-150 mmboe net to Faroe.

Active portfolio management

In line with our continuous active portfolio management designed to optimise value and returns, in June 2018 we announced the completion of the sale of a partial interest in our ongoing Fenja development project, reducing Faroe's interest, and corresponding field capital expenditure exposure from 25% to 7.5%.  As well as producing an immediate cash return of $54.5 million, the transaction reduces Faroe's net capital expenditure on the Fenja development by 70% to approximately $96 million. This in turn frees up additional liquidity for allocation across our other high quality projects, notably the Brasse development, and ensures we are fully funded to achieve our organic production growth target. 

Projects on schedule, production guidance maintained

Taking full advantage of the materially lower cost base, the Company is pursuing its largest ever investment programme.  Faroe is actively investing in several significant development projects in Norway: the Njord Future Project (Faroe 7.5%), which comprises Njord, Hyme and Bauge; Fenja (Faroe 7.5%); and Oda (Faroe 15%), all of which are on schedule and on budget. Notably the production wells on the Oda field are currently being drilled with first production scheduled for mid-2019. On Tambar (Faroe 45%) two infill wells have been drilled and are now on production, and preparations are underway for the installation of gas lift in order to further increase field productivity.

Faroe's operated Brasse development project (Faroe 50%) is progressing well and to plan. The next key project milestone will be Concept Selection including the reservoir drainage plan and the selection of a host facility for fluid processing and onward transportation.  Field development sanction is scheduled for H2 2019. An exploration well is scheduled to be drilled on Brasse East in Q4 2018, followed by a side-track into the Brasse main structure, with the potential to add further incremental reserves to the existing 2P reserves of 61.4 mmboe (30.7 mmboe net to Faroe) for the planned development.  The Brasse East well will be drilled back-to-back using the Transocean Arctic directly after the Rungne exploration well (Faroe 40% and operator) which is scheduled to commence around the end of September 2018.

Group production averaged 12,402 boepd in H1 2018 which is within guidance but at the lower end of the range.  The main reasons for lower production rates in the first half were the unplanned temporary loss of production on the Faroe-operated Trym gas field in February and March, caused by downstream technical issues in Denmark (in which Faroe has no direct interest), combined with the delayed re-start of production on Tambar following drilling of the two new infill wells earlier this year. Full year production guidance remains 12,000 to 14,000 boepd.

Oil and gas prices have been relatively strong in the period and have more than offset the lower production in terms of cash flow; EBITDAX of £77.2 million in H1 2018 is the highest 6-months EBITDAX the Company has posted to date. Compensation receipts relating to the Oselvar shut-in contributed £21.3 million to the EBITDAX in the period. 

Outlook

Continuing our active drilling programme, we are set to ramp up our E&A activity in 2018 and 2019 with a total of seven exploration and appraisal wells so far committed, one of which, Agar/Plantain in the UK, is already underway.  This exciting and very material programme also takes full advantage of continuing competitive rig rates and, in Norway, the State tax refund incentive, through which 78% of exploration and appraisal costs are recovered.

Faroe has the asset base and funding in place to deliver organic high value production growth to 35,000 boepd.  This outstanding growth programme comes as a result of many years of successful exploration, value accretive M&A and prudent financial management.  Looking ahead, we also expect to add further new organic projects to this already very significant growth plan through the maturing of a number of existing discoveries, including Iris Hades and infill wells.  In addition, there is the real potential of making new discoveries through our sustained drilling campaign. 

Furthermore, we aim to capitalise on our proven M&A track record together with our strong strategic and financial position, as we pursue value-accretive M&A opportunities in our focus areas to complement our organic growth.

We wish to express our sincere gratitude to all our stakeholders for their ongoing support and to our staff and colleagues for their hard work and commitment to delivering the best possible results for all of our shareholders.

 

 

John Bentley                                                                                                                         Graham Stewart

Chairman                                                                                                                              Chief Executive

 

REVIEW OF ACTIVITIES

The Company has continued to make excellent progress across all areas of activity with the operational highlights of H1 2018 being the successful Iris Hades discovery and completion of the infill drilling programme on Tambar.

Exploration and appraisal

In H1 2018, Faroe participated in two E&A wells, the Iris Hades exploration well and the Fogelberg appraisal well. The Company also added eight new licences to the portfolio through awards in the Norwegian APA licensing round.  The drilling programme continues with the Agar/Plantain exploration and appraisal well in the UKCS, currently drilling, and the Rungne exploration well (Faroe 40% and operator), expected to spud in end-September 2018, to be followed back-to-back with the Faroe-operated Brasse East well (50%) with four further committed wells in 2018 and H1 2019: Pabow, Cassidy, Bergknapp (formerly Yoshi), and the Iris Hades appraisal.  Apart from the Agar/Plantain well, all of these wells are in Norway where Faroe receives a tax refund of 78% on all exploration and appraisal expenditure.

Drilling operations

In April 2018 the Company announced the results of the Iris Hades exploration well (Faroe 20%).  Faroe estimates gross contingent resources for Iris Hades at 63 mmboe (1C), 210 mmboe (2C) and 322 mmboe (3C). The Iris Hades resources estimates include condensate, which based on preliminary fluid analysis constitute approximately 25% of the contingent resource. The Iris Hades partnership has contracted the Deep Sea Bergen drilling rig to drill an appraisal well targeting an area near the crest of the structure and to the south of the discovery well. The appraisal well is expected to spud in H1 2019.

On Fogelberg (Faroe 15%) an appraisal well and associated drill stem test (DST) were undertaken in H1 2018. During the DST, the well flowed at a maximum constrained and stable rate of 21 mmscf per day and condensate at 547 bpd (aggregate 4,047 boepd) on a 22/64 inch choke for 24 hours. An update on the volumetrics will be provided after the new data have been fully interpreted and incorporated into an updated reservoir model and ahead of development studies for the potential Fogelberg subsea tie-back to the Åsgard B host.

Faroe is currently drilling the Plantain exploration prospect (Faroe 25%) in the UK Continental Shelf (UKCS) following a farm-in agreement with Azinor Catalyst Limited, announced in August 2018.  A contingent side-track to appraise the Agar oil field, discovered in 2014, may follow.  Operator volumes in Agar and Plantain have been estimated by Catalyst at a combined mid-case resource of 60 mmboe, with an upside case of 98 mmboe.  Plantain is an Eocene oil prospect which follows on from the original Agar oil discovery in 2014 (9/14a-15 A) and the analogous Frosk oil discovery (24/9-12 S) made in Norway by AkerBP earlier this year.

Well planning is progressing on schedule for the Faroe-operated Rungne exploration well (Faroe 40%) which is scheduled to spud around the end of September 2018 using the Transocean Arctic semi-submersible rig. The unrisked gross resource range (100%) in the prospect targeted is approximately 70-110 mmboe.  The Faroe-operated Brasse East well (50%) will be drilled back-to-back following the Rungne well, again using the Transocean Arctic. The unrisked gross resources (100%) targeted for Brasse East are 12.5 mmboe, and success on this well could add further incremental reserves to the existing 2P reserves of 30.7 mmboe (net to Faroe at 50%) for the planned Brasse field development. The Brasse East well also has the potential to significantly de-risk the Brasse Extension exploration prospect with gross resource potential of 40-70 mmboe.

A further exploration well is expected to spud in early 2019 on the Equinor-operated Pabow prospect (Faroe 20%) in the Stord basin to the east of the prolific Utsira High.  The Cassidy exploration well (Faroe 15%) is also scheduled to be drilled in Q1 2019, back-to-back with the production wells in Oda.  Cassidy sits within the PL405 Oda licence to the north of Oda.  Bergknapp (formerly Yoshi) (Faroe 30%) is expected to be drilled in 2019. The prospect is located in licence PL 836 S immediately to the south west of the Smørbukk South field.

Norwegian licence round awards

In January 2018, Faroe was awarded eight new prospective exploration licences including four operatorships under the 2017 Norwegian APA Licence Round on the Norwegian Continental Shelf.  The licences included extensions of existing exploration acreage but also included new targets, notably Blue Libelle (Faroe 40% and operator) on the north western margin of the North Viking Graben, the Statoil-operated Århus (Faroe 30%) located north of the Trym field and the BP-operated Skræmetindan located in the Central Graben.

In May 2018 Faroe was awarded a new prospective exploration licence in the 30th Licensing Round on the UKCS on block 30/14b (Faroe 100% and operator).  On this licence the Edinburgh prospect straddles the UK/Norway border in the Central North Sea.  Work is underway to form an aligned joint venture to explore both sides of this prospective area.

 

 

Production

During H1 2018, Faroe achieved net average production of 12,402 boepd (H1 2017: 14,800 economic production) at the lower end of production guidance.  This reduction in production rates was attributable to two main factors, notably the Tambar oil field having been off line for much of Q1, whilst the two new infill wells were drilled before being brought on stream to add significant new production, along with a temporary loss of production from the Trym gas field caused by a technical fault in the downstream export system.  

Production guidance remains between 12,000 and 14,000 boepd.  Average operating expenditure per barrel of oil equivalent (opex/boe) in the period was $27 (2017: $26). 

On Tambar (Faroe 45%) operated by AkerBP, the two new infill production wells are on production, and preparations are underway for the gas-lift installation, to boost production further.  On Brage (Faroe 14.3%) a further long reach infill well has been sanctioned for drilling in H2 2018 targeting the prolific Sognefjord reservoir.

The principal producing fields in the UK in H1 2018 were Blane, Enoch, Schooner and Ketch.  All fields have performed in line with expectations over the period. Production from Schooner and Ketch ceased on 15 August 2018 following the planned closure of the Conoco-operated Theddlethorpe onshore host facility. The Company is actively investigating the potential for alternative export routes for these two fields in the near term.

Development and field investment projects

On Ula (Faroe 20%) a number of significant upgrades to the field facilities are underway which will support future infill drilling and long term production.  It is planned to drill three or more new infill wells in 2019-20 based on the results of the recent time-lapse 3D seismic survey. This will include new injection wells to extend the Water Alternating Gas pattern for the Ula field, together with infill production targets.

In July 2018, development drilling on Oda commenced (Faroe 15%) with the first of three development wells. The project is on track for production start-up in mid-2019 as planned.  Oselvar (Faroe 55%) ceased production in April 2018 and has now received the final compensation payment from the Oda field partners (Faroe 15%) which, due to its formulaic nature, has resulted in a higher payment than expected amounting to a total of £35.7 million net to Faroe (including the £7.4 million net received in June 2017).

In the Greater Njord Area, following our partial sale of Fenja to Suncor, Faroe now has an aligned 7.5% interest across the area encompassing Njord, Hyme and Bauge (the Njord Future Project), operated by Equinor, and in Fenja, operated by VNG.  Key milestones in 2018 on the Njord Future Project include installation on the Njord A platform of blisters to enhance stability on all four columns, installation of column top extensions and deck boxes.  The Njord B FSO entered the dry dock in Haugesund in July 2018 and upgrade work has commenced according to plan.  Njord and Hyme are expected to recommence production in Q4 2020 followed by first oil on Bauge shortly thereafter. The Fenja development is progressing in parallel and is on schedule and within budget. Production start-up on Fenja is planned for Q1 2021.  

The Brasse project is progressing to plan towards the next major milestone, which is Concept Selection, to be followed by Field Development Plan submission in end-2019. Key activities in the period have been detailed studies to determine the reservoir drainage strategy and the subsea architecture and layout. In parallel, technical and commercial work has continued for the selection of the preferred host facility.

 

 

 

FINANCE REVIEW

H1 2018 saw gross cash increase to £158.6 million (net £82.6 million) from £149.1 million (net £75.0 million) at 31 December 2017.  This increase was mainly due to strong commodity prices, the successful divestment of 17.5% of Fenja for a consideration of $54.5 million (£40.4 million) and the net compensation receipt of £21.3 million from Oda partners (Faroe 15%) to Oselvar partners (Faroe 55%), offset by significant levels of capital expenditure (£98.6 million) in Faroe's significant ongoing field investment and development and exploration drilling programmes.      

Income statement

Revenue, adjusted for underlift and including realised hedging losses, totalled £102.2 million, averaging $62.5 per boe (H1 2017: $45.2 per boe).  Operating costs, excluding depreciation, depletion and amortisation (DDA) increased to $27.1 per boe[1] compared to $26.0 per boe in 2017, but is expected to fall with production increase in H2 2018.  DDA per boe decreased to $7.5 compared to $10.0 in H1 2017. EBITDAX in H1 2018 increased to £77.2 million compared to £44.0 million in H1 2017.

Statutory revenue in the period was £67.8 million (H1 2017: £80.1 million). This is different to 'adjusted revenue' of £102.2 million (H1 2017: £95.5 million) as the former excludes volumes of oil and gas produced but not physically lifted in the period ("Underlift").  The underlift movement of £37.3 million (H1 2017: £15.6 million) is credited to cost of sales under IFRS.  The increase in adjusted revenue reflects higher oil and gas prices in H1 2018 compared with H1 2017, partially offset by lower production during H1 2018.

Cost of sales for the period was £21.3 million (H1 2017: £74.3 million).  Adjusted cost of sales excluding net underlift movement (see paragraph above) was £58.6 million (H1 2017: £89.9 million).  The reduction in the adjusted cost of sales compared to the prior period reflects one-off future upgrade tariff costs of £11.9 million falling due to Ula as a result of the planned shut-down of Oselvar, and other infrastructure costs of £8.5 million which were accrued in H1 2017.  DDA for the period was £12.3 million (H1 2017: £20.5 million) and reflects lower production in H1 2018 and a lower DDA per boe due to prior year impairments.

Other income was £18.7 million (H1 2017: £21.7 million), of which £21.3 million related to compensation income received by the Oselvar partnership (Faroe 55%) from the Oda partnership (Faroe 15%).  In H1 2018, Faroe received the final instalments from the Oda partnership of £35.7 million, of which £7.4 million was accrued in 2017.  The compensation income is partially offset due to the Group's ownership of Oda, with capex costs of £9.9 million being paid in 2018, of which £2.9 million was accrued in 2017.  The net compensation income is partially offset by realised hedging losses in the period of £2.9 million.

Pre-tax expensed exploration costs for the half year were £2.0 million (H1 2017: £22.8 million) and relates to £2.0 million (H1 2017: £1.6 million) of pre-award expenditure.  There were no material write-offs of previously capitalised exploration expenditure in H1 2018 due to the successful drilling campaign (H1 2017: £21.2 million).

Expensed administration costs in H1 2018 were £5.3 million (H1 2017: £2.0 million).  The increase in administrative expenses was mainly due to the valuation of cash-settled share options, the last of which vested in July 2018. 

In May 2018, the partial divestment of the Fenja asset was completed for a consideration of $54.5 million, leading to a post-tax gain on disposal of £24.5 million including a £1.9 million reclassification of foreign exchange movements accumulated in the currency translation reserve being reclassified to the income statement.    

The Group made a profit before tax of £73.0 million (H1 2017: loss £6.1 million).  Finance charges were £10.2 million, of which £6.6 million relates to accretion on decommissioning provisions and is non-cash and £3.1 million relates to semi-annual interest paid on the bond.  The tax charge recognised in the income statement in the period of £30.5 million (H1 2017: credit £3.2 million) is a non-cash movement in deferred tax and largely reflects higher profits from operations, resulting in a post-tax profit of £42.5 million (H1 2017: loss £2.9 million). 

Taxation

Faroe is able to pursue a multi-well exploration programme in Norway for a much lower net cost of a similar programme outside Norway, due to Norway's progressive fiscal incentive for exploration through which the Company benefits directly from a 78% exploration tax rebate.  The Group had a tax receivable at 30 June 2018 of £62.5 million (31 December 2017: £35.6 million) consisting of 78% of exploration expenditure, net of production profits in Norway.  The Company will receive the 2017 tax rebate of £35.6 million in November 2018. 

At 30 June 2018 the Group had unrelieved UK tax losses of approximately £45.7 million (31 December 2017: £53.0 million).  The unrelieved tax losses are available indefinitely for offset against future taxable profits in the UK.  The carried forward losses are expected to be utilised in coming years, depending upon commodity prices, and are recognised as a deferred tax asset at the prevailing rate of 40%, being corporation tax of 30% and supplementary corporation tax of 10%. 

Development capex in Norway is depreciated on a straight line basis over six years for tax purposes.  In addition, an uplift of 21.6% can be offset against the 53% special tax.  The uplift is taken on a straight line basis over four years.  This means that close to 90% of capex spend is recovered through the tax system.  At 30 June 2018, Faroe had carried forward capex balances of £111.3 million and carried forward capex uplift of £45.9 million in Norway.  In addition, at 30 June 2018, Faroe had unrelieved tax losses in Norway of £22.0 million and £6.3 million for corporation tax and special tax respectively. 

In June 2018, the Company had a deferred tax asset of £61.1 million in respect of carried forward tax losses, capex balances and uplifts in the UK and Norway, net of other temporary differences.

Balance sheet and cash flow

Pre-tax expenditure of £98.6 million (H1 2017: £55.4 million) on intangible and tangible assets was made in the period, of which £38.6 million (post tax £8.5 million) related to exploration expenditure, primarily on Iris Hades and Fogelberg.  £60.0 million related to development expenditure, principally on Tambar, Oda and Njord Future Project.

The Group recognises the discounted cost of decommissioning when obligations arise.  The amount recognised is the present value of the estimated future expenditure, net of amounts carried by third parties.  At 30 June 2018 the Group had decommissioning provisions of £271.1 million (31 December 2017: £262.2 million), of which £56.3 million is shown as a current provision.  Most of this expenditure is expected in the period from 2020 to 2035.

Trade and other receivables increased in H1 2018 to £156.1 million (31 December 2017: £102.1 million).  £70.9 million of the trade and other receivables balance relates to underlift and has increased substantially due to infrequent liftings and rising oil prices.  A significant proportion of the underlift is driven by oil, of which there were 1.1 million barrels underlifted at the period end.  Furthermore, there was an increase in trade and other payables in H1 2018 to £150.2 million (31 December 2017: £114.0 million).  £55.0 million of the trade and other payables balance relates to deferred income (payments on account in respect of produced but not lifted oil) and has increased substantially due to infrequent liftings.  In August 2018, liftings of 761,000 barrels of oil were made leading to a reduction in deferred income with a corresponding increase in revenue and a reduction in the underlift balance with a corresponding increase in cost of sales.

The net assets of Faroe Petroleum increased in H1 2018 to £272.4 million (31 December 2017: £226.0 million).  

Cash and net cash at 30 June 2018 were £158.6 million and £82.6 million (31 December 2017: £149.1 million and £75.0 million).  This excludes restricted cash of £7.6 million (31 December 2017: £7.4 million) consisting of monies set aside for asset retirement obligations on certain assets.  The increase in cash is primarily due to the partial divestment of the Fenja licence, improved EBITDAX (related to higher commodity prices and compensation income received) offset by capital expenditure.

Hedging

Hedged volumes, on a post-tax basis, amounted to approximately 100% of total gas production in H1 2018.  The hedging instruments were primarily put options and swaps at a weighted average of 42 pence per therm.  Approximately 68% of post-tax oil production in H1 2018 was hedged with put options at a weighted average strike price of $56/bbl.  These hedging instruments generated hedging losses of £1.1 million (H1 2017: gain £0.8 million) before incurring hedging premiums of £1.8 million (H1 2017: £1.1million) leading to a realised hedging loss of £2.9 million (H1 2017: £0.3 million) which are included in other income/(expense).

Open hedge contracts are marked to market at the end of each period with unrealised gains or losses taken to the Income Statement as other income/expense as a non-cash item.  Hedged volumes, on a post-tax basis currently amount to approximately 96% of total estimated gas production and 60% of oil production in H2 2018 and 37% of oil production in H1 2019.  Unrealised hedging gains for H1 2018 were £0.3 million (H1 2017: £4.0 million). 

Dividend

The Directors do not recommend payment of a dividend.

 

 

 

 

 

Group Income Statement

Unaudited

Six months to

30 June 2018     

Unaudited

Six months to

30 June 2017     

Audited

Year to 31 December 2017

 

£'000

£'000

£'000

 

 

 

 

Revenue

67,840

80,139

152,924

Cost of sales

(21,280)

(74,324)

(132,508)

Asset impairment

-

(3,000)

(12,992)

 

               

               

              

Gross profit

46,560

2,815

7,424

 

 

 

              

Other income

18,735

21,725

17,353

Gain on disposal of asset

24,520

-

7,229

Exploration and evaluation expenses

(2,049)

(22,796)

(25,851)

Administrative expenses

(5,274)

(2,021)

(7,678)

 

               

               

              

Operating profit /(loss)

82,492

(277)

(1,523)

 

 

 

 

 

 

 

 

Finance revenue

617

238

4,790

Finance costs

(10,151)

(6,092)

(17,006)

 

               

               

              

Profit / (loss) on ordinary activities before tax

72,958

(6,131)

(13,739)

 

 

 

 

Tax (charge) / credit

(30,488)

3,191

2,313

 

               

               

              

Profit / (loss) for the period

42,470

(2,940)

(11,426)

 

               

               

              

 

 

 

 

Earnings / (loss) per share - basic (pence)

11.54

(0.80)

(3.1)

Earnings / (loss) per share - diluted (pence)

10.83

(0.80)

(3.1)

 

 

 

 

 

 

 

 

 

 

Statement of Other Comprehensive Income

Unaudited

Six months to

30 June 2018     

Unaudited

Six months to

30 June 2017     

Audited

Year to 31 December 2017

 

£'000

£'000

£'000

 

 

 

 

Profit / (loss) for the period

42,470

(2,940)

(11,426)

Items that may be reclassified subsequently to profit or loss:

 

 

 

Exchange differences reclassified to profit and loss on partial disposal of foreign operations

1,915

-

-

Exchange differences on retranslation of foreign operations net of tax

 

4,763

 

(7,160)

 

(13,274)

 

               

               

               

Total comprehensive income / (loss) for the period

49,148

(10,100)

(24,700)

 

               

               

              

 

 

 

 

 

 

Group Balance Sheet

Unaudited

30 June

2018

Unaudited

30 June

2017

Audited

31 December 2017

 

£'000

£'000

£'000

 

 

 

 

Non-current assets

 

 

 

Goodwill

9,635

7,534

9,386

Intangible assets

110,382

110,203

68,857

Property, plant and equipment:
development & production

 

259,628

 

159,986

 

201,216

Property, plant and equipment: other

701

495

695

Deferred tax asset

61,115

112,974

114,499

 

               

               

              

 

441,461

391,192

394,653

Current assets

 

 

              

Inventories

11,015

10,478

10,644

Trade and other receivables

156,053

86,931

102,088

Current tax receivable

62,517

50,999

35,610

Financial assets

-

2,072

-

Cash and cash equivalents

158,596

117,574

149,084

 

               

               

               

 

388,181

268,054

            297,426

Assets held for sale

-

-

50,987

 

               

               

               

Total assets

829,642

659,246

743,066

 

 

 

 

Current liabilities

 

 

              

Trade and other payables

(150,178)

(105,436)

(113,989)

Current Taxation

(1,286)

-

(65)

Provisions

(61,196)

-

(10,002)

Financial liabilities - borrowings

(54,115)

(44,968)

(32,948)

Financial liabilities - other

(1,085)

-

(767)

 

               

               

              

 

(267,860)

(150,404)

(157,771)

Non-current liabilities

 

 

 

Interest bearing loans and borrowings

(74,726)

-

(72,742)

Provisions

(214,635)

(270,533)

(254,697)

 

               

               

              

 

(289,361)

(270,533)

(327,439)

Liabilities directly associated with assets held for sale

-

-

(31,854)

 

               

               

               

Total liabilities

(557,221)

(420,937)

(517,064)

 

 

 

              

 

 

 

 

Net assets

272,421

238,309

      226,002

 

               

               

               

Equity attributable to equity holders

 

 

              

Equity share capital

37,284

36,657

36,664

Share premium account

315,580

315,580

315,580

Cumulative translation reserve

11,144

10,580

6,381

Retained earnings

(91,587)

(124,508)

(130,708)

Reserves of a disposal group held for sale

-

-

(1,915)

 

               

               

               

Total equity

272,421

238,309

226,002

 

               

               

               

 

 

Condensed Group Cash Flow Statement

Unaudited

Six months to

30 June 2018     

Unaudited

Six months to

30 June 2017     

Audited

Year to 31 December 2017

 

£'000

£'000

£'000

 

 

 

 

Profit / (loss) before tax

72,958

(6,131)

(13,739)

Depreciation, depletion and amortisation

12,259

20,663

45,179

Exploration asset write off

63

21,175

21,524

Unrealised hedging losses

(344)

(3,975)

(369)

Asset impairment

-

3,000

12,992

Fair value of share based payments

3,615

1,662

4,948

Cash settlement of share options

-

-

(670)

Gain on disposal of asset

(24,520)

-

(7,229)

Disposal of decommissioning provision

-

-

(1,092)

Decommissioning expenditure

(3,998)

-

-

Purchase of SIP shares

(104)

-

(216)

Movement in trade and other receivables

(53,965)

(25,940)

(42,263)

Movement in inventories

(371)

(22)

(188)

Movement in trade and other payables

36,507

50,153

61,728

Currency translation adjustments

(1,803)

(1,988)

(4,060)

Interest receivable

(617)

(238)

(730)

Interest and financing fees payable

11,955

8,081

17,006

Tax rebate / (payment)

64

(193)

41,031

 

               

               

              

 

 

 

 

Net cash generated from operating activities

51,699

66,247

133,852

 

 

 

 

Investing activities

 

 

 

Purchases of intangible and tangible assets

(98,636)

(55,432)

(144,239)

Proceeds from sale of tangible assets

40,430

-

-

Interest received

617

238

730

 

              

              

              

Net cash used in investing activities

(57,589)

(55,194)

(143,509)

 

 

 

 

Financing activities

 

 

 

Proceeds from bond

-

-

75,915

Issue costs of bond instruments

-

-

(1,920)

Proceeds from issue of equity instruments

-

204

-

Net proceeds / (repayments) from borrowings

19,637

9,123

(1,404)

Interest and financing fees paid

(4,935)

(1,661)

(4,022)

 

               

               

              

Net cash inflow provided from financing activities

14,702

7,666

68,569

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

8,812

18,719

58,912

 

 

 

 

Cash and cash equivalents at the beginning of period/year

 

149,084

 

96,769

 

96,769

Effect of foreign exchange rate changes

700

2,086

(6,597)

 

               

               

              

Cash and cash equivalents at end of period/year

158,596

117,574

149,084

 

               

               

               

             
 

 

 

Group Statement of Changes in Equity for the period ended 30 June 2018

 

Share

premium

account

 

Cumulative

translation

reserve

 

Reserves of a disposal group held for sale

 

 

Total

 

£000

£000

£000

£000

 

 

 

 

 

As at 1 January 2018

315,580

6,381

(1,915)

226,002

 

 

 

 

 

 

 

Profit for the period

-

-

-

42,470

-

42,470

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

Exchange differences reclassified to profit and loss on partial disposal of foreign operations

-

-

-

-

1,915

1,915

Gain on retranslation of foreign subsidiaries

-

-

4,763

-

-

4,763

 

              

              

              

              

              

              

Total comprehensive income

-

4,763

1,915

49,148

 

 

 

 

 

Purchase of shares held under EBT

-

-

-

(3,862)

Purchase of SIP shares

-

-

-

(104)

Issue of ordinary shares under EBT

-

-

-

-

Share based payments

-

-

-

1,237

 

              

              

              

              

As at 30 June 2018

315,580

11,144

-

272,421

 

              

              

              

              

 

 

               

 

Group Statement of Changes in Equity for the period ended 30 June 2017

 

Share

capital

Share

premium

account

Cumulative

translation

reserve

 

Retained

earnings

 

 

Total

 

£000

£000

£000

£000

£000

 

 

 

 

 

 

As at 1 January 2017

36,453

315,580

17,740

(123,235)

246,538

 

 

 

 

 

 

Loss for the period

-

-

-

(2,940)

(2,940)

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

Loss on retranslation of foreign subsidiaries

-

-

(7,160)

-

(7,160)

 

              

              

              

              

              

Total comprehensive loss

-

-

(7,160)

(2,940)

(10,100)

 

 

 

 

 

 

Issue of ordinary shares under EBT

204

-

-

-

204

Share based payments

-

-

-

1,667

1,667

 

              

              

              

              

              

As at 30 June 2017

36,657

315,580

10,580

(124,508)

238,309

 

              

              

              

              

              

 

 

 

 

 

 

 

 

 

Group Statement of Changes in Equity for the period ended 31 December 2017

 

Share

capital

Share

premium

account

Cumulative

translation

reserve

 

Reserves of a disposal group held for sale

 

 

Total

 

£000

£000

£000

£000

£000

 

 

 

 

 

 

As at 1 January 2017

36,453

315,580

17,740

-

246,538

 

 

 

 

 

 

Loss for the year

-

-

-

-

(11,426)

Other comprehensive income:

 

 

 

 

 

Gain on retranslation of foreign subsidiaries

-

-

(13,274)

 

-

(13,274)

 

              

              

              

              

              

Total comprehensive income / (loss)

-

-

(13,274)

-

(24,700)

 

 

 

 

 

 

Issue of ordinary shares under EBT

211

-

-

-

-

Purchase of SIP shares

-

-

-

-

(216)

Share based payments

-

-

-

-

4,380

Assets held for sale

-

-

1,915

(1,915)

-

 

              

              

              

              

              

As at 31 December 2017

36,664

315,580

6,381

(1,915)

226,002

 

              

 

              

              

              

Notes

1.             Basis of preparation

As required in AIM Rule 18, the interim financial information for the six months ended 30 June 2018 is presented and prepared in a form consistent with those that which will be adopted in the annual statutory financial statement for the year ended 31 December 2018 and having regard to the International Financial Reporting Standards ("IFRS") applicable to such annual accounts.

The financial information contained in this announcement for the year ended 31 December 2017 does not constitute statutory financial statements within the meaning of Section 435 of the Companies Act 2006.

An unqualified audit opinion was expressed on the statutory accounts for the year ended 31 December 2017, as delivered to the Registrar.  This unqualified audit opinion did not contain a statement under s498(2) or s498(3) of the Companies Act 2006.

2.             Earnings per share

The calculation of earnings per share is based upon the weighted average number of ordinary shares in issue during the period of 367,932,242 (30 June 2017: 365,352,143 and 31 December 2017: 365,982,872). 

Total shares in issue as at 30 June 2018 amounted to 372,838,872 with potential for an additional 28,349,389 contingently issuable shares under the Company Share Option and Company Incentive Plan schemes.  The contingently issuable shares are dilutive as their conversion would decrease the earnings per share.

 

3.             Dividend

The Directors do not recommend payment of a dividend.

4.             Foreign currencies

The assets and liabilities of foreign operations are translated into sterling at the rate of exchange ruling at the balance sheet date. The resulting exchange differences are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. 

 

5.             Taxation

 

 

 

Tax on profit on ordinary activities

Unaudited

Six months to

30 June 2018     

Unaudited

Six months to

30 June 2017    

Audited

Year to 31 December 2017

 

£'000

£'000

£'000

Current tax

 

 

 

Overseas tax credit

                  25,928

                        10,367

                   35,610

UK Tax charge

(1,286)

-

(71)

Amounts (underprovided) / overprovided in previous period/ year

 

(331)

 

(163)

 

138

 

                

                

                

Total current tax credit

24,311

10,204

35,677

 

 

 

 

Deferred tax

 

 

 

Origination of temporary differences

(55,609)

(6,238)

(34,660)

Change of tax rate

-

-

525

Prior period/year adjustment

39

(702)

1,843

 

                

                

                

Total deferred tax charge

(55,570)

(6,940)

(32,292)

 

 

 

 

Foreign exchange differences

 

 

 

Differences arising from the use of period end
  and average exchange rates

771

(73)

(1,072)

 

                

                

                

Total foreign exchange differences

771

(73)

(1,072)

 

                

                

                

Total tax (charge) / credit in the Income

Statement*

(30,488)

3,191

2,313

 

                

                

                

* Non-cash tax credit / (charge)

 

6.             Cost of sales

 

 

Analysis of cost of sales

Unaudited
six months to
30 June 2018

Unaudited
six months to 30 June 2017

Audited
Year to 31 December 2017

 

£000

£000

£000

 

 

 

 

Operating costs*

34,478

36,416

72,077

Commercial tariffs*

10,242

17,684

44,386

Commercial tariffs relating to future upgrades

-

11,944

-

Depreciation, depletion and amortisation

12,259

20,473

44,806

(Underlift) in the year

(37,325)

(15,632)

(30,729)

Other cost of sales*

1,626

3,439

1,968

 

              

              

              

Total cost of sales

21,280

74,324

132,508

 

              

              

              

* included in the opex per boe metric

 

 

 

 

 

 

7.             Other income / (expense)

 

 

Analysis of other income

Unaudited
six months to
30 June 2018

Unaudited
six months to 30 June 2017

Audited
Year to 31 December 2017

 

£000

£000

£000

 

 

 

 

Compensation income

21,310

18,060

18,843

Realised hedging losses*

(2,919)

(310)

(1,859)

Unrealised hedging gains

344

3,975

369

 

              

              

              

Total other income

18,735

21,725

17,353

 

              

              

              

* included in the revenue per boe metric

 

 

 

 

 

8.             Earnings before interest, tax, depreciation, amortisation and exploration expenses

 

 

Unaudited
six months to
30 June 2018

Unaudited
six months to 30 June 2017

 

 

£000

£000

 

 

 

 

Revenue

 

67,840

80,139

Realised hedging losses

 

(2,919)

(310)

Other income

 

21,310

18,060

Operating costs

 

(34,478)

(36,416)

Commercial tariffs

 

(10,242)

(29,628)

Underlift movement in the period

 

37,325

15,632

Other cost of sales

 

(1,626)

(3,439)

 

 

              

              

EBITDAX

 

77,210

44,038

 

 

              

              

         

9.             Trade and other receivables

 

 

 

 

Unaudited
six months to
30 June 2018

Audited
Year to 31 December 2017

 

 

£000

£000

 

 

 

 

Trade receivables

 

24,695

17,301

Underlift

 

70,919

27,746

Other receivables

 

49,274

42,429

Prepayments and accrued income

 

3,527

7,182

Restricted cash deposits

 

7,638

7,430

 

 

              

              

Trade receivables

 

156,053

102,088

 

 

              

              

 

 

 

 

 

 

 

10.          Trade and other payables 

 

 

 

 

Unaudited
six months to
30 June 2018

Audited
Year to 31 December 2017

 

 

£000

£000

 

 

 

 

Trade creditors

 

18,302

21,569

Deferred income

 

55,020

24,999

Other payables

 

6,388

515

Accruals

 

70,468

66,906

 

 

              

              

Trade payables

 

150,178

113,989

 

 

              

              

 

11.          Post balance sheet events

On 14 August 2018, the Group announced the farm in to the UK Continental Shelf Agar Plantain exploration and appraisal well close to the UK/Norwegian median line, operated by Azinor Catalyst Limited. Drilling on the Agar Plantain is currently scheduled to commence later this month using the Transocean Leader at a total estimated gross cost of US$15 million.  Faroe (25%) joins Azinor Catalyst Limited and Cairn Energy PLC in this sole-risk well.

 

 

Glossary

Adjusted revenue

Revenue, movement in under/(over)lift and realised hedging gains or losses during the period

APA

awards in pre-defined areas

boe

barrels of oil equivalent

boepd

barrels of oil equivalent per day

Bpd

barrels per day

DDA

depletion, depreciation and amortisation

EBT

Employee Benefit Trust

EBITDAX

earnings before interest, taxation, depreciation, amortisation and exploration expenditure

economic production

production to which the Company has an economic entitlement. It includes production between the effective (economic) date and the completion date of an acquisition. Accounting production excludes all pre-completion production.

mmboe

million barrels of oil equivalent

MMSCF

Million standard cubic feet

NCS

Norwegian Continental Shelf

net cash

cash and cash equivalents less financial liabilities excluding the balance of the Exploration Financing Facility which is directly linked to the Norway tax rebate (disclosed as tax receivable in the balance sheet).

SIP

Share Incentive Plan

UKCS

United Kingdom Continental Shelf

Underlift

Volumes of oil and gas produced but not physically lifted in the period

John Wood, is the UK Asset Manager of Faroe Petroleum and an engineer (M.Sc in Petroleum Engineering, Imperial College, London), who has been involved in the energy industry for more than 20 years, has read and approved the technical disclosure in this regulatory announcement.

Andrew Roberts, Group Exploration Manager of Faroe Petroleum and a Geophysicist (BSc. Joint Honours in Physics and Chemistry from Manchester University), who has been involved in the energy industry for more than 30 years, has read and approved the exploration and appraisal disclosure in this regulatory announcement.

Estimates of reserves and resources contained in this announcement were prepared in accordance with the Petroleum Resource Management System guidelines endorsed by the Society of Petroleum Engineers, World Petroleum Congress, American Association of Petroleum Geologists and Society of Petroleum Evaluation Engineers.

The information contained within this announcement is considered to be inside information prior to its release, as defined in Article 7 of the Market Abuse Regulation No. 596/2014, and is disclosed in accordance with the Company's obligations under Article 17 of those Regulations.

Forward looking statements and dates referenced in this announcement, in relation to Faroe's exploration, development and production assets are estimates and subject to change. Oil and gas operations, particularly those relating to development stage assets are subject to varying inputs that may impact timing, including inter alia permitting; environmental regulation; changes to regulators and regulation; third party manufacturers and service providers; the weather and asset partner and operator actions. The Company's estimates of timing for forward looking operations are based on the best information it has to hand at the time, however these timings may change with little or no notice to the Company. The Company will update the market as and when it becomes aware of a material change to any of the operations or timings referenced in this announcement.

 

[1] Opex per boe excludes opex on development assets and non-producing assets and tariff costs in relation to future upgrades


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.
 
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