Interim Results
Cairn Energy PLC
05 September 2006
EMBARGOED FOR RELEASE AT 07:00 5 SEPTEMBER 2006
CAIRN ENERGY PLC
INTERIM RESULTS ANNOUNCEMENT
Corporate
•The partial Initial Public Offering (IPO) for Cairn India on the Bombay
Stock Exchange (BSE) and National Stock Exchange of India (NSE) in December
2006 is on track
•Cairn India Board established with three prominent Indian nationals
appointed as independent non-executive directors
•Cairn India Board to be chaired by Cairn Chief Executive, Sir Bill
Gammell
•Cairn Energy PLC to be a holding company for two businesses:
•Cairn India: an Indian exploration, development and production business
A UK head-quartered exploration focused business
•IPO proceeds to be used both to return cash to shareholders and to fund
the continuing businesses
Operations - Rajasthan
•DeGolyer and McNaughton (D&M) independent assessment estimates 3.4
billion barrels of oil equivalent (boe) in place in Rajasthan
•Cairn estimates 3.6 billion boe in place in Rajasthan of which 2.2
billion boe in place are currently under active development planning and 1.4
billion boe in place identified in other fields under review
•Cairn estimates proven plus probable (2P) gross reserves plus contingent
resource estimates for those fields currently under active development
planning total 864 million barrels of oil equivalent (mmboe)
•Initial results from hydraulic fracture programme indicate potential for
new reserves from low permeability reservoirs
•Detailed design work on Mangala processing facilities now well advanced
•Review of potential midstream and upstream integration, discussions
ongoing with the Government of India (GoI) and third parties
•Assessment ongoing to investigate possible integration with the midstream
in line with the continued growth in the Rajasthan reserves and resource
base
•First oil at Mangala now rescheduled to 2009
•First oil from southern fields is anticipated Q4 2006
Operations - Rest of South Asia
•Bids in sixth Indian bid round (NELP-VI) to be submitted by 15 September
2006
•Sustained oil production from Gauri highlights potential for Lakshmi oil
production
•Infill drilling due to start in Ravva Q3 2006
•New drilling programme to commence in Bangladesh Q4 2006
Financial
•$1 billion revolving credit facility signed June 2006 with 14
international banks
•Net cash at 30 June 2006 of $19.5m (H1 2005 restated: $152.7m)
•Average entitlement production 27,346 barrels of oil equivalent per day
(boepd) (H1 2005: 27,909 boepd)
•Profit before tax (pre exceptional items) of $12.7m (H1 2005 restated:
$48.5m)
•Cash generated from operations $72.5m (H1 2005 restated: $71.5m)
Sir Bill Gammell, Chief Executive said:
'I am pleased that we are both on track to proceed with a partial IPO of the
Indian business in December 2006 and that the scale and size of the Rajasthan
discoveries has been supported by independent estimates.
The Rajasthan project continues to grow and we are actively exploring what
options are available with the Government of India and third parties to assess
whether there are long term benefits to Cairn through integration with the
midstream.
As we create a new Indian business, I am delighted to announce the appointments
of Naresh Chandra, Aman Mehta and Dr Omkar Goswami, whose combined talents
significantly strengthen the Cairn India Board.'
Enquiries to:
Cairn Energy PLC: Tel: 0131 475 3000
Analysts/Investors Bill Gammell Chief Executive
Kevin Hart Finance Director
Mike Watts Exploration Director
Media David Nisbet Head of Group Communications
Brunswick Group LLP: Tel: 0207 404 5959
Patrick Handley, Mark Antelme
Interview with Sir Bill Gammell
An interview with Sir Bill Gammell, Chief Executive in video/audio and text is
now available on http://www.cairn-energy.plc.uk/ and on http://www.cantos.com/
Cairn Energy Live Audio Webcast
The webcast of the 2006 Interim results presentation will be available at 09:
00hrs (UK time) on Tuesday, 5 September 2006.
This will be available on the Cairn Energy PLC website:
http://www.cairn-energy.plc.uk
An on demand version of the webcast will be available in the afternoon.
Notes: This summary is qualified by, and should be read in conjunction with, the
following pages of this Interim Results Announcement.
These materials are not an offer to sell, or a solicitation of offers to
purchase, the shares to be offered in the IPO (the 'Shares') in any
jurisdiction. No action will be taken to permit the Shares to be sold in a
public offer in any jurisdiction outside India. In particular, no offer to the
public will be made in any Member State of the European Economic Area or in the
United States. The Shares have not been and will not be registered under the US
Securities Act of 1933, as amended.
These materials contain forward-looking statements regarding Cairn, our
corporate plans, future financial condition, future results of operations,
future business plans and strategies. All such forward-looking statements are
based on our management's assumptions and beliefs in the light of information
available to them at this time. These forward-looking statements are, by their
nature, subject to significant risks and uncertainties and actual results,
performance and achievements may be materially different from those expressed in
such statements. Factors that may cause actual results, performance or
achievements to differ from expectations include, but are not limited to,
regulatory changes, future levels of industry product supply, demand and
pricing, weather and weather related impacts, wars and acts of terrorism,
development and use of technology, acts of competitors and other changes to
business conditions. Cairn undertakes no obligation to revise any such
forward-looking statements to reflect any changes in Cairn's expectations with
regard thereto or any change in circumstances or events after the date hereof.
CHAIRMAN'S STATEMENT
Overview
The Company's business in South Asia continues to experience substantial growth,
driven principally by Cairn's ongoing success in Rajasthan.
Three years ago we estimated that the reserves potential of Rajasthan, after six
wells and three oil discoveries, was 30-500 plus million barrels. Today after
130 wells, 18 discoveries and 21 separate oil and gas accumulations we estimate
a discovered 3.6 billion boe in place with an associated ultimate reserves
potential of around 1 billion boe. We still have wells to drill.
As a result of this transformational change, we can confidently look forward to
a step change in oil production, and the associated cash flow, once the fields
in this world class basin are brought on stream.
With the continued growth of the Rajasthan project, Cairn and the GoI have
started discussions to consider Cairn's involvement in the midstream. Cairn
views this as a possible opportunity to secure the value of the project and
potentially gain further benefit through integration and schedule control. This
is discussed more fully in the Chief Executive's Review.
The growth of Cairn is set against a background of economic expansion in India,
which itself is driving an escalating demand for energy. The Cairn operated
Rajasthan production is expected to result in a significant reduction in India's
current oil supply-demand imbalance.
Cairn's existing acreage base, combined with its cash flow, which will be
significantly enhanced when the Rajasthan fields come on stream, place it in an
excellent position to take advantage of the many opportunities being created in
India.
Cairn has made good progress in the Rajasthan upstream project with GoI and
Joint Venture (JV) approvals being obtained for the Mangala, Aishwariya,
Saraswati, Raageshwari Oil and Raageshwari Deep Gas Field Development Plans
(FDPs) and associated budgets. The detailed engineering design for the upstream
development is well advanced and we are ready to order long lead items once
Cairn has finalised the midstream strategy and sanctioned the main part of the
expenditure.
A $1 billion facility has been arranged with a syndicate of 14 international
banks, with the bulk of the funds earmarked for the first phase of the Rajasthan
development.
IPO
As previously announced, the Cairn Board has decided to reorganise its Indian
business. This is being done via a proposed partial IPO of the Company's Indian
business on the BSE and NSE. To this end significant progress has been made
since our initial statement in March.
The Cairn India Board is now constituted. The executive team is led by Rahul
Dhir, Chief Executive Officer and comprises Laurie Smyth, Chief Operating
Officer and Jann Brown, Acting Chief Financial Officer with the appointment of a
permanent Chief Financial Officer imminent. The non-executive Cairn directors
comprise Sir Bill Gammell, Chairman; myself as Deputy Chairman and Hamish
Grossart.
I am also delighted to announce that we have now made the following independent
non-executive appointments to the Cairn India Board:
•Naresh Chandra, who was previously the Chairman of the GoI Committee on
Corporate Governance, the Indian Ambassador to the United States, Advisor to
the Indian Prime Minister, Cabinet Secretary and Chief Secretary of the
State of Rajasthan; he currently sits on a number of boards as a
non-executive director;
•Aman Mehta, who until 2003 was the Chief Executive Officer of HSBC Asia
Pacific; he currently sits as a non-executive director on the boards of Jet
Airways, Tata Consultancy Services and Vedanta Resources plc; and
•Dr Omkar Goswami, who was previously Chief Economist for the
Confederation of Indian Industry and the Editor of Business India. He
founded his own consultancy giving advice to companies on corporate
governance, investor relations, business restructuring and economic
research. Dr Goswami is currently a non-executive director on a number of
boards including Infosys Technologies Ltd.
Work on meeting the IPO schedule of listing in December 2006, assuming
favourable market conditions, is currently on track subject to all regulatory
approvals being obtained. The partial IPO is also subject to Cairn shareholder
approval and the current timetable envisages that an Extraordinary General
Meeting (EGM) of shareholders will be held in late October 2006 for this
purpose.
We have created the structure and have set up the mechanism to develop two world
class businesses; an Indian exploration development and production business, run
from Gurgaon in India and the other, managed from Scotland and more highly
geared to exploration. We have made excellent progress in our efforts to achieve
this.
Staff
I would like to thank all Cairn staff, in particular those in both our CB/OS-2
and Rajasthan operations for their efforts and commitment during recent flooding
in Gujarat and Rajasthan. In CB/OS-2 we continued to supply gas to our customers
from our processing facility, while in Rajasthan our efforts in the relief
operations showed the continuing commitment of Cairn to the communities in which
we operate.
I appreciate this has been a time of change for everybody in our business, but
Cairn is making good progress in shaping the organisation for the changes that
it is facing. The business is always evolving and as part of that evolution
people are moving on to new opportunities both internally and externally.
I would like personally to thank all of those who have been part of the Cairn
growth story over the past decade, in particular our Finance Director, Kevin
Hart, who, on the current timetable, will move to a new role as Chief Executive
at another oil and gas exploration company, following the shareholders' EGM.
Norman Murray
Chairman, 5 September 2006
CHIEF EXECUTIVE'S REVIEW
Overview
The proposed partial IPO of the Indian business is a natural evolution of our
business, building on the decade of success and achievement that Cairn has had
in South Asia. I will take an active role in this process and will remain as
Group Chief Executive as we change the structure of the Group, whilst also
taking on the role of non-executive chairman of Cairn India.
The Cairn Group is being restructured to create two separate sub-groups: one
under Cairn India and the other under a new exploration subsidiary company.
Following the IPO, Cairn India is intended to be a majority owned subsidiary of
Cairn listed in India. The new exploration company already exists as a wholly
owned subsidiary.
The Cairn India sub-group will hold all of the producing development and
exploration interests in India (including Rajasthan) except the three
exploration blocks in the Ganga Valley, which will be shared with the new
exploration company, that will also hold the Bangladesh assets and the
exploration blocks in Nepal.
Rajasthan Upstream
Cairn is making good progress in the Rajasthan upstream project. Our belief in
the Rajasthan block has received a further boost with D&M independently
estimating the hydrocarbons in place for the existing discoveries at around 3.4
billion boe, while Cairn's own estimate is 3.6 billion boe.
Our estimate of the Rajasthan reserves base for the three main northern fields,
Mangala, Bhagyam and Aishwariya has grown significantly since the initial
estimates at the time of each discovery. Ongoing work is highlighting the
potential to raise the recovery rates by applying enhanced oil recovery (EOR)
techniques particularly from Mangala, the biggest of the Rajasthan fields.
The upstream picture in Rajasthan continues to evolve. The 2P hydrocarbons in
place and reserves plus contingent resources of the three main fields (Mangala,
Bhagyam and Aishwariya) plus those of the three small fields (Saraswati,
Raageshwari Oil and Raageshwari Gas) which are currently under development
planning, total 2.2 billion boe and 864 mmboe respectively.
The additional smaller and/or low permeability fields and reservoirs have an
estimated 2P hydrocarbons in place volume of more than 1.4 billion boe. An
ongoing technical challenge over the coming years will be to convert as much of
this contingent resource base into reserves as is possible. Some of these
smaller fields with good quality Fatehgarh reservoir will be developed once the
major infrastructure is established. In addition, the hydraulic fracture
programme that is underway has highlighted the potential for new reserves to be
secured from the low permeability reservoirs. The evaluation of many of these
other fields continues and currently reserves have only been booked for the
Mangala, Raageshwari and Saraswati fields.
The FDPs for the Mangala, Aishwariya, Saraswati and Raageshwari fields have been
agreed by the GoI and the funding is now in place for the initial upstream
development.
The detailed engineering design team for the Mangala development consists of
more than a hundred people in Houston, comprising Cairn personnel working
alongside colleagues from Mustang Engineering.
In the south of the Rajasthan block, first commercial production by trucking
from the Saraswati field will begin as soon as the oil sales mechanism has been
finalised with the GoI, currently anticipated by the end of this year. First
commercial production from the Raageshwari oil field will start approximately
three months after Saraswati.
We are also aiming to submit the FDPs to GoI for the second largest field,
Bhagyam along with Shakti early next year.
The impact of the severe recent flooding in Rajasthan on field development
activities is currently being assessed. Detailed surveys of our existing and
planned sites are being conducted.
Taking into account the current worldwide highly competitive market for
resourcing and procurement and the possible integrated approach to the upstream
and midstream, Cairn now believes that first oil from Mangala can be delivered
during 2009.
Rajasthan Midstream
In order that Cairn can ensure efficient offtake of crude oil from the Rajasthan
block and given the continued growth of the business in Rajasthan, the Company
and the GoI have started discussions to consider Cairn's involvement in the
midstream.
Under the terms of the Rajasthan Block Production Sharing Contract (PSC), the
GoI through its nominee is responsible for the purchase of crude oil and the
transportation of the crude oil produced from the delivery point at the field
facilities to the refinery (midstream activities). Transportation entails the
construction of a pipeline downstream of the delivery point to handle the
expected volumes of crude oil.
Through third party discussions and Cairn led studies relating to the evacuation
of the crude, Cairn is building up a comprehensive understanding of the likely
construction timescale for the pipeline and the associated technical and
commercial issues involved.
In the light of that understanding, Cairn, whilst cognisant of the obligations
on the GoI under the PSC, believes that it is appropriate to look at ways to
mitigate the risks to the upstream development associated with the midstream
schedule and to assess the potential to benefit from exposure to the whole
production and oil sales chain. Accordingly, Cairn has now decided to
investigate the possibility of becoming directly involved in the midstream
development to ensure the proper integration of upstream and transport-related
project activities. It is believed that, if suitable commercial arrangements can
be agreed with the GoI and potentially third parties, such involvement would
mitigate scheduling and operational risk and may provide greater flexibility on
maximum off-take.
Results and Financial Performance
Cairn's underlying financial strength, including its recently completed
US$1billion syndicated revolving credit facility provides the flexibility to
fund its initial share of Rajasthan upstream development.
Key statistics
H1 2006 H1 2005** % Increase/
(Decrease)
Production (boepd)* 27,346 27,909 (2)
Average price per boe ($) 31.03 24.39 27
Turnover ($m) 153.9 123.4 25
Average production costs per boe ($) 6.29 4.66 35
Average production costs per boe ($) *** 5.56 5.20 7
Profit before tax (pre-exceptional items)
($m) 12.7 48.5 (74)
(Loss)/profit after tax ($m) (5.8) 55.4 (110)
Cash generated from operations ($m) 72.5 71.5 1
Net assets ($m) 742.7 737.4 1
Net cash ($m) 19.5 152.7 (87)
*on an entitlement interest basis
** restated (where applicable) following mandatory implementation of
International Financial Reporting Standards (IFRS) in 2005, adoption of
successful efforts based accounting policies and US$ reporting.
*** excluding stock adjustments and pre-exploration costs
PROFIT AND LOSS
Turnover
Average production on a working interest basis has increased by 10% to 42,150
boepd (H1 2005: 38,481 boepd). This is principally due to increased gas, oil and
condensate production from the Lakshmi and Gauri fields.
Production for the period has decreased by 2% to 27,346 boepd (H1 2005: 27,909
boepd), on an entitlement interest basis primarily due to lower entitlement at
Sangu following a reduction in development expenditure incurred in H1 2006. This
has been offset by increased entitlement at CBOS/2 following improved field
production.
The Group's production mix continues to be gas biased (circa 75%). This,
combined with the contractual gas price caps, results in an average price
realised by the Group for the period of $31.03 per boe (H1 2005: $24.39 per
boe). Cairn's exposure to world oil prices will increase significantly when
production commences from Rajasthan. Revenue for the period was $153.9m (H1 2005
restated: $123.4m).
Gross Profit
Cost of sales for the period was $104.7m (H1 2005 restated: $76.2m). Cost of
sales includes the write-off of unsuccessful exploration costs of $28.2m (H1
2005 restated: $11.8m) arising following the Group's adoption of successful
efforts based accounting policies and US$ reporting at the end of 2005.
Production costs for the period were $31.1m (H1 2005 restated: $23.5m). These
include pre-exploration costs now expensed under IFRS6 and stock movements.
Excluding these adjustments production costs per barrel remain relatively
unchanged at $5.56 for H1 2006 compared to $5.20 in H1 2005.
The average Group rate for depletion and decommissioning has increased by 13% to
$9.16 per boe (H1 2005: $8.08 per boe). This arises from changes in field mix
and individual rates as depletion is now calculated on a field basis. The Sangu
depletion rate has increased as a consequence of the reserves revision at the
end of 2005 and the Lakshmi/Gauri field depletion has decreased due to the
effect of the ONGC farm out in 2005.
The Group generated a gross profit of $49.2m (H1 2005 restated: $47.3m).
Profit for the Year
Administrative expenses for the period were $22.8m (H1 2005 restated: $18.9m).
This includes a charge of $6.1m (H1 2005 restated: $3.9m) for share based
payments and associated National Insurance Contributions in accordance with
IFRS2.
Net finance costs for the period were $13.6m (H1 2005 restated: net finance
income $20.1m), including a foreign currency exchange loss of $10.0m (H1 2005
restated: gain $18.3m). Realised exchange rate movements in 2006 arose primarily
due to the weakening of the US$ against Sterling in the period and were also
impacted by the recognition of exchange differences on intergroup funding under
IFRS.
Profit before tax and pre exceptional items was $12.7m (H1 2005 restated: profit
$48.5m). The majority of the $12.8m tax charge (H1 2005 restated: $8.3m) arises
on profits in India. The effective tax rate is high as potential deferred tax
assets in 2006 of $4.7m in the UK have not been recognised.
Exceptional items
The exceptional oil and gas write down of $5.7m relates to impairment on Sangu
arising under IAS 36 due to a rephasing of future expenditure and production.
The prior period exceptional gain of $15.3m relates to the gain arising on sale
of assets to ONGC.
The Group made a loss for the period of $5.8m (H1 2005 restated: profit $55.4m).
BALANCE SHEET
Capital expenditure
Capital expenditure during the period was $128.7m (H1 2005 restated: $132.0m),
comprising $88.8m on exploration/appraisal activities, $33.5m on development
activities and $6.4m on other fixed assets. The exploration/appraisal
expenditure during the period relates principally to the continued drilling
programme in Rajasthan. The majority of the development expenditure was
pre-development expenditure in Rajasthan.
CASH FLOW
Cash flows from operating activities
Cash generated from group operations has increased to $72.5m (H1 2005 restated:
$71.5m). Tax payments during 2006 were $3.1m (H1 2005 restated: $3.5m).
Cash flows from investing activities
Cash outflow from capital expenditure during the period was $124.7m, comprising
$91.0m exploration/appraisal expenditure, $30.6m development expenditure and
$3.1m other expenditure. (H1 2005: $175.7m - $101.5m exploration/appraisal,
$71.9m development and $2.3m other).
Net assets/net cash
Net assets at 30 June 2006 were $742.7m (H1 2005: restated $737.4m). At the year
end the Group had net cash of $19.5m (H1 2005: $152.7m). The Group signed a
US$1billion syndicated revolving credit facility on 27 June 2006 principally to
finance development activities in Rajasthan. Discussions are taking place with
the banks for Cairn India to adapt this facility to accommodate the proposed IPO.
Outlook
The scale of the finds in Rajasthan continues to evolve. The increases in the
reserves and resource base and the progress made on the development project for
the northern fields are all encouraging. It is in the best interest of both
India and Cairn that production commences as soon as possible from these fields.
The IPO planning for Cairn India is well underway, as is the planning for the
new exploration orientated company. The opportunities for both of these
businesses are substantial and will form the next stage of the continued growth
story at Cairn.
India continues to offer excellent growth opportunities and Cairn intends to
take an active part in the forthcoming NELP-VI bid round where 55 blocks, 25
onshore and 30 offshore, are on offer.
The GoI Minister for Petroleum and Natural Gas said recently 'what has been good
for Cairn has also been good for India!': I believe this will continue to be the
case.
Sir Bill Gammell
Chief Executive, 5 September 2006
OPERATIONAL REVIEW
Cairn's gross operated production across South Asia during the first half of
2006 was 111,700 boepd (net entitlement 27,346 boepd).
The majority of Cairn's operational activity has been focused on the exploration
and appraisal of its Rajasthan block in North West India. This effort has
resulted in 18 discoveries including the world class Mangala and Bhagyam oil
fields in the northern part of the block. The independent firm, D&M, in August
2006 estimated 3.4 billion boe oil in place in Rajasthan.
Five fields comprising Mangala, Aishwariya, Saraswati, Raageshwari Oil and
Raageshwari Deep Gas have GoI development approval while work on approvals for
development of other discoveries, in particular Bhagyam and Shakti, is ongoing.
The remaining discoveries require further appraisal or evaluation.
RAJASTHAN BASIN - North West India
Development Area (Cairn 70% (Operator); ONGC 30%)
The Company has made good progress on the proposed development of the Mangala
and Raageshwari Deep Gas fields. All of the required regulatory clearances have
been obtained, the land for the process facilities and the majority of the
drilling sites have been acquired and the detailed engineering has progressed to
a point where ordering of long lead equipment can begin once Cairn has finalised
the midstream strategy and sanctioned the main part of the expenditure.
The main focus remains to bring Mangala on stream at the earliest opportunity,
followed by Bhagyam and then Aishwariya.
Following further evaluation the estimated 2P oil in place for Bhagyam has
increased from 408 million barrels of oil (mmbbls) to 468 mmbbls. Work to
estimate the associated reserves is still ongoing.
As part of the Mangala development work, a new 120 km2 high density three
dimensional (3D) survey over the field commenced acquisition on 5 August 2006.
This new 3D will enable detailed reservoir characterisation studies and
improved structural interpretation as well as providing the basis for improved
development well planning for the field.
All the required regulatory consents have been secured and the engineering work
completed to enable first commercial production from the Saraswati and
Raageshwari fields once the oil sales mechanism has been finalised with the GoI.
Northern Appraisal Area (Cairn 100%)
In June 2005, Cairn was granted an 18 month extension to complete its activities
in the northern appraisal area to the north and west of the Development Area.
A 524 km2 3D seismic programme was completed on 5 August 2006. The data
processing has been fast tracked and new prospects are emerging from the
interpretation of the 3D dataset. Up to 5 wells are planned in the area prior
to possible relinquishment on 14 November 2006. An application has been
submitted to the government for a 6 month extension of the Northern Appraisal
Area to enable full evaluation of the area and retention of discoveries prior to
any relinquishment.
Reservoir Stimulation Programme
A programme of hydraulic fracture stimulation on various lower permeability
reservoirs is now complete. The hydraulic fracture programme has highlighted the
potential for new reserves to be secured from the low permeability reservoirs.
The in place volumes associated with these reservoirs is more than 1 billion
bbls.
The test results from the two Barmer Hill wells (Aishwariya-4 & Mangala-6) were
reported previously and highlight the potential to unlock material oil resources
in this reservoir at two of the main three fields. Additional work is needed to
quantify the potential and will be addressed during the development drilling
programme at Mangala & Aishwariya.
Results on the Raageshwari deep gas field from a single tested zone in
Raageshwari 5 indicated a two-fold increase in productivity. Testing on
Raageshwari 7 is on-going following a three stage fracture stimulation
treatment, with a stabilised rate of approximately 4mmscf/d. A two stage
hydraulic fracture treatment has also been completed on Raageshwari-4z. The
well is currently being tested.
Gas from the Raageshwari wells will be utilised as fuel for the Mangala
development and subsequent northern area developments.
The Vijaya, Vandana, N-R and southern fields are also potential candidates for
future fracture stimulation to access new reserves or accelerate production.
CAMBAY BASIN - Western India
Block CB/OS-2: Lakshmi and Gauri Gas Fields (Cairn 40% (Operator))
Lakshmi and Gauri production for the half year is up from 15,211 boepd to 24,754
boepd gross, due to increased gas, oil and condensate production. Gross oil and
condensate production averaged 3,783 barrels of oil per day (bopd) for the 6
month period. Gas deliverability is set to decline in the second half due to
natural depletion and water production in one of the gas wells.
In view of the encouraging oil production from the Gauri GA-3 well, further
evaluation of the oil play is planned and a Lakshmi Oil Development Plan has
been submitted to the JV for approval with implementation planned for early next
year.
Studies are underway to review alternative ways of exporting the produced oil
from the oil storage facilities on a long term basis and to examine increasing
the oil handling facilities at the plant to 9,000 bopd.
The small Ambe gas field is being considered as a potential future satellite
development to Lakshmi, particularly in the light of present high local gas
prices.
The small CB-X field is being developed and first gas is anticipated in 2007.
CB-ONN-2001/1 (Cairn 30%; ONGC (Operator))
The Vanthvali-1 exploration well was drilled in 2005 and suspended for further
workover. The Utarsanda-1 well was completed Q2 2006 and was also suspended. One
further exploration well is planned in the second half of 2006.
CB-ONN-2002/1 (Cairn 30%; ONGC (Operator))
The second phase of 3D seismic acquisition on the block has been completed. The
Operator is preparing to drill two exploration wells in the second half of 2006.
KRISHNA-GODAVARI (KG) BASIN - Eastern India
Ravva (Cairn 22.5% (Operator))
The Ravva field has remained at a plateau rate of approximately 50,000 bopd in
the first half of 2006. Gas production is approximately 70 million standard
cubic feet of gas per day (mmscfd).
The offshore drilling programme of 6 infill wells and 1 or 2 exploration well is
scheduled to commence from mid September 2006. An exploration well (RX-9),
spudded in June 2006 has now been plugged and abandoned after a test confirmed
low volumes of gas and a negligible quantity of high viscous oil.
KG-DWN-98/2 (Cairn 10%, ONGC (Operator))
Four exploratory wells were drilled in this block between the third quarter of
2005 and the second quarter of 2006. A fifth well will be completed in the
second half of 2006. One well encountered gas-bearing sands and the other three
flowed gas during testing. Almost 1,100 km2 of 3D Q-marine seismic data were
acquired during the first half of 2006. Two further wells are planned for
drilling in the second half of 2006. One of these wells will be drilled in an
untested part of the basin on a high impact structure in approximately 3,000m
water depth in the south of the contract area.
HIMALAYAN FORELAND BASIN - Nepal & Northern India
Nepal Blocks 1,2,4,6 & 7 (Cairn 100% (Operator))
The Company continues to monitor security developments in Nepal with a view to
commencing field operations at the earliest opportunity. In the meantime the
contracts remain under force majeure.
Northern India - GV-ONN-2002/1 (Cairn 100% (Operator))
An airborne geophysical survey is planned over this acreage in Q4 2006. A two
dimensional (2D) seismic acquisition programme is planned to commence in fourth
quarter of 2006 or first quarter of 2007.
Northern India - GV-ONN-97/1 (Cairn 30%; ONGC (Operator))
The first exploration well in the Himalayan Foreland Basin in which Cairn is
participating, Tisua-1, is currently operating.
NELP-VI
The sixth Indian Government exploration bidding round, NELP-VI, closes 15
September 2006. Cairn intends to be an active participant in bidding in this
round.
BENGAL BASIN - Bangladesh
Development and Production
Sangu (Cairn 75% (Operator))
The Sangu gas plant continues to perform well and gas sales from the field have
averaged 145 mmscfd during the first half of 2006. The demand pattern is
variable depending on the power and fertiliser sector, but the underlying demand
in the southern region of Bangladesh is expected to increase steadily. The Sangu
field is in natural decline and the next phase of development drilling is
scheduled to start in December 2006 with the objective of increasing the
production potential.
Exploration and Appraisal
Cairn signed an agreement with Government of Bangladesh extending its rights to
drill exploration prospects in parts of Block 16 outwith the Sangu Development
Area in 2005. This agreement has now been ratified by Cairn's JV partner and the
Hatia prospect, 10 kilometres north west of Sangu, will be included in the
drilling campaign. Subject to the duration of the drilling weather window and
partner approval, Cairn intends to drill either a further exploration well on
the non-Sangu areas or an appraisal of a Sangu satellite field, South Sangu.
Blocks 5 (Cairn 90% (Operator) & 10 (Cairn 90% (Operator)).
Additional seismic is being planned for the 2006/2007 field season based on the
encouraging findings of an initial seismic programme acquired in 2004.
In Block 10 the objective is to delineate the limits of an onshore prospect
which could be considered for drilling in late 2007.
Block 7 (Cairn 45%)
The Operator Chevron has recently completed a 1,075 km 2D seismic survey on the
block.
Group Production
The Group entitlement production for the first six months of 2006 was 27,346
boepd net to Cairn (H1 2005: 27,909 boepd).
Production (approximate boepd) Ravva Sangu Lakshmi & Gauri Total
(H1 2006)
Gross field 62,700 24,200 24,800 111,700
Working interest 14,100 18,100 9,900 42,100
Entitlement interest 6,400 10,300 10,600 27,300
Due to the Group's current production mix being heavily gas biased and the
existence of contractual caps on the price received for this gas, the average
price realised for the six months to 30 June 2006 was $31.03 (H1 2005: $24.39).
Group Reserves
Reserves at Produced Additions Disposals Revisions Reserves at
31/12/05 in 2006 in 2006 in 2006 in 2006 30/06/06
mmboe mmboe mmboe mmboe mmboe mmboe
South 237.9 (4.9) 0.1 - 3.5 236.6
Asia
The table above shows the Group's estimated reserves information at the end of
June 2006 on an entitlement basis for the Group (at $20 / bbl).
The Rajasthan component of these reserves currently only comprises estimates
contained in the Mangala, Raageshwari and Saraswati field FDPs taken out to the
year 2020.
The Company's estimated entitlement to reserves at 30 June 2006 is 216.4 mmboe
(at $30 / bbl) and 119.6 mmboe (at $40 / bbl).
On a direct working interest basis, reserves at 30 June 2006 totalled 268.5
mmboe (31 December 2005: 275.7 mmboe).
Group Income Statement
For the six months to 30 June 2006
----------------------- ------ -------- -------- ---------
Notes Six months Six months Year ended
to 30 June to 30 June 31 December
2006 2005 2005
(unaudited) (restated) (audited)
$'000 (unaudited) $'000
$'000
----------------------- ------ -------- -------- ---------
Revenue 153,861 123,427 262,562
Cost of sales
Production costs (31,115) (23,544) (50,235)
Unsuccessful exploration (28,238) (11,777) (26,867)
costs
Depletion and decommissioning
charge (45,347) (40,839) (91,740)
----------------------- ------ -------- -------- ---------
Gross profit 49,161 47,267 93,720
Administrative expenses (22,833) (18,878) (38,088)
Exceptional write down of oil
and gas assets (5,710) - -
Exceptional gain on sale of
oil - 15,272 15,272
and gas assets ------ -------- -------- ---------
-----------------------
Operating profit 20,618 43,661 70,904
Finance income 1,525 21,224 32,543
Finance costs (15,156) (1,152) (2,236)
----------------------- ------ -------- -------- ---------
Profit before taxation 6,987 63,733 101,211
----------------------- ------ -------- -------- ---------
Taxation on profit 4,448 - (4,386)
- UK (17,229) (8,295) (17,753)
- Overseas
----------------------- ------ -------- -------- ---------
(Loss)/profit for the period
attributable to equity (5,794) 55,438 79,072
holders ------ -------- -------- ---------
-----------------------
Earnings per ordinary share -
basic (cents) 1 (3.68) 35.35 50.37
Earnings per ordinary share -
diluted (cents) 2 (3.68) 35.17 50.10
----------------------- ------ -------- -------- ---------
Notes:
1. The basic earnings per ordinary share is calculated on a loss of
$5,794,000 (H1 2005: profit of $55,438,000) on a weighted average of 157,538,718
(H1 2005: 156,806,174) ordinary shares.
2. In respect of the six months to 30 June 2006, 835,055 potential
ordinary shares were anti-dilutive. In respect of the six months to 30 June
2005, the diluted earnings per ordinary share is calculated on a profit of
$55,438,000 on 157,628,121 ordinary shares, being the basic weighted average of
156,806,174 ordinary shares and the dilutive potential ordinary shares of
821,947 ordinary shares relating to share options.
3. No dividend has been declared (2005: nil).
Group Statement of Changes in Equity
For the six months to 30 June 2006
Six months Six months Year ended 31
to 30 June to 30 June December
2006 2005 2005
(unaudited) (restated) (audited)
$'000 (unaudited) $'000
$'000
Opening equity 757,598 711,197 711,197
Currency translation
differences 8,769 (16,576) (23,893)
---------------------------- --------- -------- ---------
Total income/(expense)
recognised direct in equity 8,769 (16,576) (23,893)
(Loss)/profit for the
period (5,794) 55,438 79,072
---------------------------- --------- -------- ---------
Total recognised expense
and income for the period 2,975 38,862 55,179
---------------------------- --------- -------- ---------
New shares issued in
respect of employee share
options 1,681 2,570 3,782
Cost of share based
payments 2,722 1,883 4,592
Cost of shares purchased (22,294) (17,152) (17,152)
---------------------------- --------- -------- ---------
Closing equity attributable
to the equity holders 742,682 737,360 757,598
---------------------------- --------- -------- ---------
Group Balance Sheet
As at 30 June 2006
Note As at 30 June As at 30 June As at
2006 2005 31 December
(unaudited) (restated) 2005
$'000 (unaudited) (audited)
$'000 $'000
Non-current assets
Intangible exploration/appraisal
assets 380,871 346,053 321,855
Property, plant & equipment -
development/producing assets 445,194 387,666 456,929
Property, plant and equipment - other 6,738 2,355 4,158
Intangible assets - other 3,295 2,092 2,601
Investments 96 96 96
Deferred tax assets 6,784 7,866 2,606
------------------------------ ---------- --------- --------
842,978 746,128 788,245
------------------------------ ---------- --------- --------
Current assets
Inventory 3,728 5,046 5,533
Trade and other receivables
2 164,317 140,196 124,725
Current tax debtor 5,938 - -
Bank deposits - 20,000 20,000
Cash and cash equivalents 44,476 132,667 75,509
------------------------------ ---------- --------- --------
218,459 297,909 225,767
------------------------------ ---------- --------- --------
Total assets 1,061,437 1,044,037 1,014,012
------------------------------ ---------- --------- --------
Current liabilities
Trade and other payables 105,445 113,527 94,736
Obligations under finance leases 1,101 - -
Income tax liabilities 15,164 12,673 7,550
------------------------------ ---------- --------- --------
121,710 126,200 102,286
------------------------------ ---------- --------- --------
Non-current liabilities
Deferred tax liabilities 147,893 126,750 136,672
Bank loans 25,000 - -
Obligations under finance leases 3,546 - -
Provisions 20,606 53,727 17,456
------------------------------ ---------- --------- --------
197,045 180,477 154,128
------------------------------ ---------- --------- --------
Total liabilities 318,755 306,677 256,414
------------------------------ ---------- --------- --------
Net assets 742,682 737,360 757,598
------------------------------ ---------- --------- --------
Equity
Called-up share capital 25,824 25,737 25,775
Share premium 199,527 196,721 197,895
Shares held by the ESOP Trust (54,792) (40,776) (37,311)
Foreign currency translation 842 (563) (7,927)
Other reserves 37,284 37,284 37,284
Capital reserves - non-distributable 45,331 45,331 45,331
Capital reserves - distributable 178,429 178,429 178,429
Retained earnings 310,237 295,197 318,122
------------------------------ ---------- --------- --------
Total equity attributable to the
equity holders 742,682 737,360 757,598
------------------------------ ---------- --------- --------
Group Statement of Cash Flows
For the six months to 30 June 2006
Six months Six months Year ended
to 30 June to 30 June 31 December
2006 2005 2005
(unaudited) (restated) (audited)
$'000 (unaudited) $'000
$'000
Cash flows from operating activities
Cash generated from operations 72,477 71,481 139,621
Interest paid (1,510) (617) (1,201)
Income tax paid (3,148) (3,548) (6,563)
--------------------------- --------- -------- --------
Net cash generated from operating
activities 67,819 67,316 131,857
--------------------------- --------- -------- --------
Cash flows from investing activities
Expenditure on exploration/appraisal
assets (91,003) (101,513) (218,324)
Expenditure on development/producing
assets (30,580) (71,895) (64,921)
Purchase of property, plant and
equipment - other (821) (801) (4,079)
Purchase of intangible assets - other (2,295) (1,497) (3,623)
Proceeds on disposal of
exploration/appraisal assets - 91,930 91,930
Proceeds on disposal of
development/producing assets - 45,257 35,574
Proceeds on disposal of property,
plant 43 6 95
and equipment - other
Movement in funds on bank deposit 20,000 (5,656) (5,656)
Interest received 2,824 1,787 4,378
--------------------------- --------- -------- --------
Net cash used in investing activities (101,832) (42,382) (164,626)
--------------------------- --------- -------- --------
Cash flows from financing activities
Proceeds from issue of shares 1,681 2,570 3,782
Payment of finance lease liabilities (607) - -
Purchase of own shares (22,294) (17,152) (17,152)
Drawdown of loan facilities 25,000 - -
--------------------------- --------- -------- --------
Net cash flows from/(used in)
financing 3,780 (14,582) (13,370)
activities --------- -------- --------
---------------------------
Net (decrease)/increase in cash and
cash equivalents (30,233) 10,352 (46,139)
Opening cash and cash equivalents at
beginning of period 75,509 122,961 122,961
Exchange (losses) on cash and cash
equivalents (800) (646) (1,313)
--------------------------- --------- -------- --------
Closing cash and cash equivalents 44,476 132,667 75,509
--------------------------- --------- -------- --------
Reconciliation of operating profit to net cash inflow from operating activities
For the six months to 30 June 2006
Six months Six months Year ended
to 30 June to 30 June 31 December
2006 2005 2005
(unaudited) (restated) (audited)
$'000 (unaudited) $'000
$'000
Operating profit 20,618 43,661 70,904
Depletion, depreciation,
decommissioning and amortisation 48,590 42,703 96,680
Share based payments 2,722 1,883 4,592
Inventory movement 1,805 (2,885) (3,373)
Debtors movement (28,300) (14,795) (16,590)
Creditors movement (5,287) 8,407 14,551
Movement on other provisions (1,605) (3,323) (39,048)
Exceptional gain on sale of oil and
gas - (15,272) (15,272)
assets
Exceptional write down of oil and gas
assets 5,710 - -
Gain on sale of other fixed assets (2) (6) (41)
Unsuccessful exploration costs 28,238 11,777 26,867
Foreign exchange differences (12) (669) 351
---------- ----------- -----------
Net cash inflow from operating
activities 72,477 71,481 139,621
---------- ----------- -----------
Net Funds
As at 30 June 2006
At 1 January Cash flow New Finance Exchange At 30 June
2006 Leases movements 2006
$'000 $'000 $'000 $'000 $'000
Bank 20,000 (20,000) - - -
deposits ---------- --------- --------- -------- -------
Bank 20,000 (20,000) - - -
deposits ---------- --------- --------- -------- -------
Cash at 15,831 6,985 - (1,046) 21,770
bank
Short term
deposits 59,678 (37,218) - 246 22,706
---------- --------- --------- -------- -------
Cash and
cash 75,509 (30,233) - (800) 44,476
equivalents ---------- --------- --------- -------- -------
Finance - 607 (5,318) 64 (4,647)
leases
Bank loans - (25,000) - - (25,000)
---------- --------- --------- -------- -------
Net funds 95,509 (74,626) (5,318) (736) 14,829
---------- --------- --------- -------- -------
Notes to the Accounts
For the six months to 30 June 2006
1. Accounting Policies
Basis of Preparation
This Interim Report has been prepared on a basis consistent with the accounting
policies expected to be applied for the year ended 31 December 2006, and which
is also consistent with the accounting policies applied for the year ended 31
December 2005. The disclosed figures are not statutory accounts in terms of
section 240 of the Companies Act 1985. Statutory accounts for the year ended 31
December 2005, on which the auditors gave an unqualified report, have been filed
with the Registrar of Companies.
Comparative information for the six months to 30 June 2005
Comparative information for the 6 months to 30 June 2005 has been restated to
comply with the IFRS accounting policies applied in the Group's Annual Report
and Accounts for the year ended 31 December 2005.
a) Change in Oil and Gas Accounting policy
In preparing the accounts for the six months to 30 June 2005, Cairn followed the
full cost method of accounting for oil and gas assets. Under this method, all
expenditure incurred in connection with and directly attributable to the
acquisition, exploration, appraisal and development of oil and gas assets were
capitalised in the South Asia cost pool. Following guidance from International
Financial Reporting Interpretations Committee (IFRIC) in November 2005 it is no
longer permissible to continue this treatment for development/producing assets.
Cairn therefore decided to change accounting policies for both exploration/
appraisal and development/producing assets to a successful efforts based policy,
effective from the year ended 31 December 2005. The comparative information for
the 6 months to 30 June 2005 has been restated accordingly. The impact on the
restated 30 June 2005 Group Income Statement as a result of implementing this
accounting policy is the recognition of an additional charge for unsuccessful
exploration costs of $11.8 million, an increase in depletion of $8.5 million and
a reduction in the tax charge of $5.3 million.
b) Change in Presentational Currency
The functional currency of Cairn Energy PLC, the ultimate parent company of the
Group, is Sterling. These accounts have been presented in $, the functional
currency of most companies within the Group. This is a change from 30 June 2005
when the accounts were presented in the functional currency of the parent. It is
deemed to be more appropriate to present the financial statements in line with
the functional currency of the majority of the Group.
2. Trade and Other Receivables
Included within the Trade and Other Debtors balance are outstanding and overdue
cash calls of $47 million receivable from the Rajasthan JV partner ONGC (Oil and
Natural Gas Corporation). Management is currently pursuing payment of the
outstanding amount.
3. Contingent Liabilities
Ravva Arbitration
Cairn continues to maintain their challenge in the Malaysian Courts to the GoI's
appeal against the arbitration award of October 2004. It is expected that this
appeal will be heard sometime during 2007. Further details of this dispute are
located in the Contingent Liabilities note of the 2005 Annual Report.
In a quite separate and unrelated dispute in relation to the profit petroleum
calculations under the Ravva PSC, Cairn, which holds a 22.5% participating
interest share in the Ravva Joint Venture has received a claim from the
Directorate General of Hydrocarbons (DGH) in India for the sum of US$37,441,281
net to Cairn of additional Profit Petroleum and interest for late payment of
$6,882,811 net to Cairn, which the DGH believe is due to the GoI, from the
Ravva oil and gas field.
Cairn's view, and that of the other JV parties, is that such a claim is
unsustainable under the terms of the contract and, even if upheld, the DGH have
grossly miscalculated the sums that would be due to the GoI in such
circumstances.
Cairn, has together with the other JV parties, strongly refuted the claim.
Notes to Editors:
•Unless otherwise stated, the reserves and resource numbers within this
announcement represent the views of Cairn, and do not represent the views of
any other party, including the GoI.
•Cairn focuses its activities on the geographic region of South Asia. The
Group holds material exploration and production positions in west India,
east India and Bangladesh along with new exploration rights in India and
Nepal.
• This focus on South Asia has already resulted in a significant number of
oil and gas discoveries. In particular, the Company made a major oil
discovery (Mangala) in Rajasthan in the north west of India at the beginning
of 2004. Cairn has now made 18 discoveries in Rajasthan block RJ-ON-90/1.
•Cairn operates Block RJ-ON-90/1 under a PSC signed on 15 May 1995. The
Development Area (1,858 km2), which includes Mangala, Aishwariya, Saraswati
and Raageshwari, is shared between Cairn and ONGC, with Cairn holding 70%
and ONGC having exercised their back in right for 30%.
•The terms upstream and midstream are used in the following sense:
+ •Upstream - all activities from the reservoir through to the outlet
flange of the Mangala field storage facilities
+ •Midstream - all activities from the outlet flange of the Mangala
field storage facilities to a refinery or ultimate distribution point
•India currently imports approximately 2,000,000 bopd. It produces
approximately 650,000 bopd itself of which 50,000 bopd comes from the Cairn
operated Ravva field on the east coast of India.
•Cairn has recently opened a new Indian headquarters at Gurgaon on the
outskirts of Delhi to provide improved support for the Rajasthan project
team and to manage the Company's business interests in India.
•Cairn was advised on the appointment of the non-executive directors to
the Indian Board by Ridgeway Partners.
•'Cairn' where referred to in this release means Cairn Energy PLC and/or
its subsidiaries, as appropriate.
• Unless otherwise stated any reference to reserves refers to gross life
of field 2P reserves. Any reference to resource base refers to gross 2P
reserves plus contingent resources.
For further information regarding Cairn see www.cairn-energy.plc.uk
These materials are not an offer to sell, or a solicitation of offers to
purchase, the shares to be offering in the IPO (the 'Shares') in any
jurisdiction. No action will be taken to permit the Shares to be sold in a
public offer in any jurisdiction outside India. In particular, no offer to the
public will be made in any Member State of the European Economic Area or in the
United States. The Shares have not been and will not be registered under the US
Securities Act of 1933, as amended.
These materials contain forward-looking statements regarding Cairn, our
corporate plans, future financial condition, future results of operations,
future business plans and strategies. All such forward-looking statements are
based on our management's assumptions and beliefs in the light of information
available to them at this time. These forward-looking statements are, by their
nature, subject to significant risks and uncertainties and actual results,
performance and achievements may be materially different from those expressed in
such statements. Factors that may cause actual results, performance or
achievements to differ from expectations include, but are not limited to,
regulatory changes, future levels of industry product supply, demand and
pricing, weather and weather related impacts, wars and acts of terrorism,
development and use of technology, acts of competitors and other changes to
business conditions. Cairn undertakes no obligation to revise any such
forward-looking statements to reflect any changes in Cairn's expectations with
regard thereto or any change in circumstances or events after the date hereof.
Glossary of Terms
The following are the main terms and abbreviations used in this announcement:
Corporate
2P proven plus probable
Board the Board of Directors of Cairn Energy PLC
BSE Bombay Stock Exchange
Cairn the Company and/or its subsidiaries as appropriate
Company Cairn Energy PLC
D&M DeGolyer & MacNaughton
DGH Directorate General of Hydrocarbons
EGM Extraordinary General Meeting
GoI Government of India
Group the Company and/or its subsidiaries as appropriate
IPO Initial public offering
JV Joint Venture
KG Krishna-Godavari
NELP-V 5th New Exploration Licensing Policy
NELP-VI 6th New Exploration Licensing Policy
NSE National Stock Exchange of India
ONGC Oil and Natural Gas Corporation Ltd and/or its subsidiaries as
appropriate
Technical
2D / 3D two dimensional / three dimensional
boepd barrels of oil equivalent per day
bopd barrels of oil per day
EOR enhanced oil recovery
FDP field development plan
mmbbls million barrels of oil
mmscfd million standard cubic feet of gas per day
PSC production sharing contract
Accounting
ESOP Trust Employee Share Ownership Plan Trust
IFRIC International Financial Reporting Interpretations Committee
IFRS International Financial Reporting Standards
IFRS2 International Financial Reporting Standard 2 'Share-based Payment'
IFRS6 International Financial Reporting Standard 6 'Exploration for and
Evaluation of Mineral Resources'
IAS 36 International Accounting Standard 36 'Impairment of Assets'
$ / US$ United States Dollars
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