2006 Preliminary Release
Gulf Keystone Petroleum Ld
16 May 2007
GULF KEYSTONE PETROLEUM LTD
("Gulf Keystone" or the "Company")
2006 PRELIMINARY RESULTS ANNOUNCEMENT
Gulf Keystone Petroleum Limited (AIM: GKP), an independent oil and gas
exploration company operating in the Republic of Algeria, today announces its
preliminary results for the year ending 31 December, 2006.
Highlights
• BG joined SONATRACH and Gulf Keystone as a strategic partner in the HBH
licence.
• £13.4 ($24.7) million raised in August 2006 via a placing of 21,600,000
new common shares.
• HBH seismic programme under way. Drilling operations expected to commence
around the year end.
• Block 126a licence extension granted for finalization of commerciality of
GKN and GKS.
• Management and technical teams have been significantly strengthened during
2006.
• Well HEK-3 in Block 129 acid-fractured and tested at a stabilized rate of
1,040 bbl/day in April 2007.
• Proposed acquisition of the company by RAK Petroleum has been recommended
by the Board for shareholder approval.
Todd Kozel, Chief Executive Officer of Gulf Keystone said:
"2006 has been a transformational year for Gulf Keystone. Completion of the HBH
farm out, a successful placing of new shares and the building of both a first
rate technical and executive management team has provided the Company with the
resources to pursue an aggressive programme of activities across its Algerian
portfolio in the coming years."
Enquiries
Gulf Keystone Petroleum: 020 7514 1400
Todd Kozel, CEO
Bill Guest, President
Jon Cooper, Finance Director
Hoare Govett Limited: 020 7678 8000
Andrew Foster
Tristone Capital Limited: 020 7399 2470
Simon Ashby Rudd
Citigate Dewe Rogerson: 020 7638 9571
Media enquiries: Martin Jackson / George Cazenove
Analyst enquiries: Nina Soon
or visit: www.gulfkeystone.com
GULF KEYSTONE PETROLEUM LTD
("Gulf Keystone" or the "Company")
2006 PRELIMINARY RESULTS ANNOUNCEMENT
CHAIRMAN'S STATEMENT
2006 was a pivotal year for the Gulf Keystone. Gazetting of the HBH concession
("HBH") farm out, a successful placing of new shares and the building of a
highly experienced management and technical team placed the Company in a strong
position by the year end.
The subsequent completion of the transaction with the BG Group ("BG") in early
2007 significantly enhanced the Company's financial position and provided the
Company with the resources to pursue an aggressive programme of activities
across its Algerian asset portfolio over the next 18 months.
BG's farm-in to the HBH Concession represented a strategically important
transaction for the Company, substantially enhancing the technical, operational
and commercial capabilities of the joint venture partnership. Under the
agreement, BG assumed the role as operator of the concession and earned a 36.75%
interest in the joint venture, leaving Gulf Keystone and SONATRACH with 38.25%
and 25% interests respectively.
Operationally, the Company has made important strides forward as it embarks on a
new and intensive programme of exploration and appraisal activities. On the
regionally extensive HBH Concession, located in Central Algeria and acquired in
2005, significant progress has already been made on the acquisition of a major
2D seismic survey which, together with a planned 3D survey over the existing HBH
gas discovery, will form the basis for a six well exploration and appraisal
drilling programme, to be initiated in late 2007.
In addition to the gas discovery already made on the HBH Concession, the
Directors believe that this area holds considerable future exploration potential
for gas. Algeria is very well placed to exploit the international gas markets
via pipelines into Southern Europe and as Liquefied Natural Gas into Northern
Europe and other international markets. The Directors believe that BG's and
SONATRACH's expertise in international gas commercialization will play an
important part in ensuring early development and commercialization of gas from
the HBH Concession.
In its northern, oil prone, licences the Company has made important progress in
the exploration and appraisal of its portfolio of leads and prospects, and
towards the development of its existing oil discoveries. On Block 126a, a
significant volume of study work has been carried out in conjunction with our
partner SONATRACH to finalise and optimize the first phase of development of the
GKN and GKS oil discoveries. The reservoir complexity and the requirement, under
new Algerian legislation, to develop a utilization scheme for gas produced in
association with oil in this remote area, has introduced significant delays in
progressing this important project.
However, I am now pleased to be able to report that all the technical elements
relating to this combined development of the GKN and GKS fields have now been
agreed fully with our partner SONATRACH and we now simply await formal approval
from the SONATRACH Executive Committee before proceeding with a joint
Declaration of Commerciality, the pre-cursor to an immediate commencement of
development operations.
Elsewhere on Block 126a we were disappointed that it did not prove possible to
access moveable hydrocarbons during our recent test of the GRJ-2 well and that
well is presently being plugged and abandoned.
On Block 129, important progress has been made towards the evaluation and
exploitation of exploration and appraisal opportunities on this licence. The
Company has recently completed the workover and testing of well HEK-3, an oil
discovery well drilled by SONATRACH in 2004. The Company is very pleased to have
successfully re-entered well HEK-3 and achieved what we believe to be a
commercial rate of oil production. The successful use of acid fracturing
technology on this well, to optimise production performance from this complex
reservoir, provides us with the encouragement to consider a wider use of this
technology within the HEK area and elsewhere within our northern licence areas.
CHAIRMAN'S STATEMENT (continued)
Further activity on Block 129 in 2007 will be geared towards the development and
ranking of prospects ahead of the next phase of exploration drilling.
With regard to the Ben Guecha contract, covering Blocks 108 & 128b, formal
approval of the contract has now been given by the Algerian Council of
Ministers. The announcement of this approval in January 2007 marked the
commencement of the first three year period of this exploration contract and
enabled Gulf Keystone to commence the detailed evaluation of these blocks.
The full evaluation of Blocks 108, 128b and 129 during 2007 is geared towards a
three well exploration drilling programme on the northern blocks, presently
scheduled for the first quarter of 2008.
I'm pleased to be able to report the further strengthening of Gulf Keystone's
management team, in particular the building of a strong technical team. This has
completed the building of the management and operational team, and at a time
when the market for skilled and highly qualified upstream personnel is extremely
tight, this places Gulf Keystone in a strong competitive position to develop
further its business activities.
Financially, the Company is now in a strong position. This transformation of the
Company's finances has resulted firstly from the HBH transaction with BG, which
included both a significant cash component and a material carry of the Company's
share of expenditure during the first exploration and appraisal stage. Secondly,
the Company achieved a successful share placing in the middle of the year which
further enhanced its financial position.
However, notwithstanding the success of Gulf Keystone in building its portfolio
of assets within Algeria and developing the prospects of the Company going
forward, the Directors believe that for a Company of Gulf Keystone's size and
resources in Algeria, there will continue to be material challenges in
generating future cash flow and realising the full potential of the Company's
portfolio, in a timely and predictable manner, given the regulatory and
operational environment in which the Company is working.
In this regard, as I have already reported, progress towards securing the
necessary declarations and consents to achieve first oil production from Block
126a has been significantly slower than expected. In addition, the Directors
believe that active portfolio management within Algeria will continue to be a
challenge for the Company and that Gulf Keystone cannot necessarily expect to be
able to pursue the further risk spreading activities that would be an important
part of the strategy of a company of its size. This, together with the
relatively short exploration licence periods that govern the Company's present
Production Sharing Contracts ("PSC's"), leads the Directors to conclude that the
timely realisation of the full value of Gulf Keystone's portfolio would be best
achieved by a Company of greater scale and wider financial and operational
resources.
In the face of these continuing challenges, the unsolicited approach by RAK
Petroleum ("RAK") to acquire the whole of the issued and to be issued share
capital of Gulf Keystone was considered carefully, and ultimately leads to the
proposed acquisition of the Company by RAK which has been recommended, by the
Board, for approval by the Shareholders at the Special General Meeting to be
held on 22nd May, 2007. Further details as to the background of, and remaining
conditions to, this proposed transaction with RAK may be found in the recently
issued Circular to Shareholders.
I would like in conclusion to express my thanks to all those employed by the
Company in London, Algeria and Bermuda for their unstinting efforts in building
the Company to its present position and transforming its prospects going
forward. As the Company goes forward to a new phase in conjunction with RAK
Petroleum, I would also like to express my deepest gratitude to you the
shareholders for your support since the Company's flotation in 2004.
Roger Parsons
Non-executive Chairman
CHIEF EXECUTIVE OFFICER'S STATEMENT
I'm pleased to be able to report on the progress made by Gulf Keystone in its
exploration and production business over the past year.
2006 has been a year of transformation for the Company. We commenced the year
with a radically expanded portfolio of exploration and appraisal assets onshore
Algeria, following significant success in the 6th Algerian International
Licencing Round, and we set ourselves a number of important technical, financial
and strategic objectives for the year, geared towards progressing, diversifying,
and adding value to that portfolio of assets.
I am delighted to inform you that substantial progress has been made on a number
of key fronts. Gulf Keystone commenced the year as operator, and a holder of,
100% of the working interest available to foreign partners in all of its
Algerian Licence interests. A key objective was to embark on a portfolio
management exercise with the objectives of spreading technical risk,
crystallising elements of value from our existing portfolio, and introducing a
strategic partner to make available, to the existing joint venture partnership,
additional operational and commercial expertise. The introduction of BG as a
partner in the Hassi Ba Hamou Concession achieved many of our objectives in that
regard.
A second core objective for the year was to initiate, and make solid progress
on, the exploration and appraisal programmes for the newly acquired licences in
both the northern, oil prone area of Algeria and the gas prone central area, and
again I'm pleased to be able to report important progress on that front. I am
disappointed that it has not, as yet, been possible to secure first production
from our GKN and GKS oil discoveries in Block 126a. This has been due primarily
to a change in Algerian legislation which now precludes gas flaring on future
oil and gas developments, and which therefore required a solution to be found
for any gas that will be produced in association with oil from the joint GKN and
GKS oil development. Together with our partner SONATRACH, a solution to this
challenge has now been found and agreed, which should enable us to progress
towards the commencement of development operations.
A further key objective for the year was a re-financing of the Company to enable
the Company to embark on an aggressive second phase of exploration and appraisal
activities, and to expand further its upstream portfolio. A successful share
placing in August 2006 and completion of the transaction with BG in January 2007
has transformed the financial position of the Company.
Finally, in order to maximise the competitive edge of the Company going forward,
it was important to ensure that, during 2006, we completed the recruitment of a
first rate technical and management team. That team is now in place and the
Company is well positioned to move into the next phase of its development.
Hassi Ba Hamou Perimeter (Blocks 317b, 322b, 347b, 348, 349b)
In August 2006, BG was introduced as a strategic partner to the HBH Concession.
BG is a world class operator who brings highly complementary technical and
operational expertise and is firmly focussed on proving and commercialising the
gas from this concession area. Under the agreement, BG has acquired 49% of Gulf
Keystone's interest in HBH and has assumed the role of Operator. Gulf Keystone
now holds a 38.25% interest, BG a 36.75% interest and SONATRACH a 25% interest
in HBH.
The HBH Concession covers 18,380 km2 in the Bechar Oued Namous Basin of Central
Algeria, a gas prone area that includes the HBH gas discovery and a number of
significant leads and prospects. The main reservoir targets lie at Devonian
level where gas is contained in sandstones at average depths of between 750 and
1,000 metres.
In line with the significant prospectivity that we see within this concession,
the partnership has embarked upon a materially expanded work program including
the acquisition of 2,000 line km's of 2D seismic, 500 km2 of 3D seismic and the
drilling of 3 appraisal wells and 3 exploration wells during the initial licence
phase. Acquisition of the 2D seismic commenced in February 2007, and
approximately 600 line kms have been completed to date. Early, field processed,
seismic lines from the first phase of this acquisition programme are
encouraging. The 500 km2 3D seismic survey will be focused on the existing HBH
gas discovery, and this started in May 2007. The first drilling on the block is
scheduled for Q4 2007.
CHIEF EXECUTIVE OFFICER'S STATEMENT (continued)
Northern Blocks
Ben Guecha (Blocks 108/128b) - Gulf Keystone: 75% equity interest
Bottena Perimeter (Block 129) - Gulf Keystone: 75% equity interest
Block 126a - Gulf Keystone: 60% interest
Over the last year the Company has made considerable progress in its technical
understanding of its north-eastern Algerian asset base. The geology of this
tectonically active area is complex with hydrocarbons often residing in
fractured carbonates with low matrix porosity. Commercial exploitation of such
reservoirs requires specific techniques that are likely to include the
acquisition of 3D seismic data, specialist testing and completion techniques,
and, potentially, high angle or horizontal wells. In pursuit of this strategy,
the Company has completed a two well workover and testing operation of potential
oil discoveries in Blocks 129 (well HEK-3) and 126a (well GRJ-2).
In Block 129, the completion of the HEK-3 well test produced a large amount of
good quality engineering data. This, combined with the produced volume of oil
and the long flow and shut in periods, will provide valuable data for reservoir
evaluation and field development study purposes. The well achieved a stablised
flow rate of 1040bopd. Production optimisation studies will be carried out to
analyse options for further increasing well productivity with a view to the
possible early development of this discovery. In this regard, consideration will
be given to pump and/or gas lift options to further improve both the rate and
delivery pressure of the well.
The Company carried out a test of well GRJ-2 located on Block 126a. Well GRJ-2
was drilled by Gulf Keystone in late 2005. The well encountered encouraging
hydrocarbon indications, from both core and log data in Cenomanian / Turonian
carbonates, the same reservoir interval that is producing in the GKN-1 well. At
the time of drilling, the well was not tested due to the lack of availability of
suitable test equipment within Algeria.
During April/May 2007, Gulf Keystone tested two potential reservoir zones and
performed an injectivity and step rate test followed by matrix acidisation (mini
frac) in both zones. The aim of the test program was to connect the fracture and
/or the matrix permeability in the surrounding reservoir, and thereby access
moveable hydrocarbons.
Whilst technically, operations were performed successfully, no hydrocarbons
flowed into the wellbore under test. Although it is unlikely that there will be
any further operations on the GRJ structure, we will, as part of our wider
ongoing technical assessment of the northern blocks, now review all geological,
geophysical and engineering data that was collected during this operation to
establish the likely reasons for lack of commercial flow from this particular
well.
The second phase of the Block 126a exploration and appraisal licence ended in
April 2006. However, a fifteen month licence extension was awarded by the
Algerian authorities to facilitate completion of the process leading to the
Declaration of Commerciality for the GKN/GKS oil discoveries and the testing of
well GRJ-2.
A comprehensive programme of exploration and appraisal activities is now planned
for the northern blocks over the next two years. During the remainder of 2007,
the focus of activities in Block 129 will be on building and ranking an
inventory of exploration leads and prospects utilizing the 3D seismic survey
that the Company has recently processed over the DDN area of the block, and
pre-existing 2D seismic acquired by SONATRACH.
The award of the Block 108 / 128b licence which was negotiated and agreed during
2005, was ratified in January 2007 by publication in the Algerian official
gazette. Publication marks commencement of the first (three year) exploration
and appraisal phase of the licence. Preliminary analysis has already been made
of the 3D seismic survey acquired by the Company in the region of the Ras Toumb
oil field in Block 108 and, as further pre-existing seismic and well data is
acquired from SONATRACH, following this licence award, so the pace of evaluation
of these blocks will accelerate.
The above detailed evaluation of Blocks 108, 128b and 129 is geared towards a
three well drilling programme, currently planned for the first quarter of 2008.
CHIEF EXECUTIVE OFFICER'S STATEMENT (continued)
GKN / GKS oil development
In late 2006, new legislation necessitated a revision to the field development
plan for the GKN Field and the GKS oil discovery. The revised Phase 1
development plan now includes the injection and storage of gas produced in
association with oil, at the nearby Ras Toumb Field. The GKN Field currently
produces approximately 1,000 bopd (from a single well). On entering the
exploitation phase of the licence, the Company will take over production from
the GKN Field and bring the GKS-2 discovery into production. This latter well
produced, under test, at a rate of 4,586 barrels of oil and 4.61 million cubic
feet of gas per day in 2005. In addition, Phase 1 of the combined GKN / GKS
development calls for the acquisition of 3D seismic data over the two
structures, to firm up the reservoir morphology, and the drilling of two further
development wells. Plans for Phases 2 and 3 of the GKN / GKS development will
depend on data acquired during the first phase.
All discussions with our partner SONATRACH relating to the technical,
operational and environmental plans for Phase 1 of the GKN / GKS development
have now been completed. Commencement of the Exploitation Phase of the licence
now awaits formal approval from SONATRACH and gazetting by the competent
authorities.
Management
2006 has seen a strong focus on building the optimum technical and management
team to run and grow our business. During the year, the Company recruited 7
additional technical staff in the key disciplines; geology, geophysics,
engineering and economics. The Company also completed the building of its
Executive Team with a Finance Director, a group Commercial / Legal Director and
an EVP of Exploration and Technical. We believe that this is a particularly
strong achievement given the background of an unprecedented skills shortage
within the industry.
Financial
Following the successful share placing in August 2006 and completion of the HBH
deal in January 2007, Gulf Keystone is on a solid financial footing. The
Company reports a profit for the year after taxation of US$46.3 million (2005
loss US$40.8 million). At the end of the year, the Company had cash and cash
equivalents of US$59.3 million (2005 US$51.4 million) and trade and other
receivables US$60 million (2005 US$3.4 million). The increase in profit and the
trade and other receivables was primarily a result of the HBH farm out
transaction. The conditions of this transaction were fully satisfied prior to
the end of 2006 hence the transaction has been accounted for as a 2006 event.
However, the outstanding cash consideration contained within trade receivables
was paid by BG during January 2007 following legal completion of the deal. The
Company has US$21.6 million (2005 US$34.7 million) of cash guarantees in place
for the Company's Algerian work programme. The Company had trade and other
payables of US$10.8 million (2005 US$8.5 million). This included US$5 million
of short term debt that was repaid shortly after the year end.
Todd Kozel
Chief Executive Officer
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006
NOTES 2006 2005
$'000 $'000
Continuing Operations
Other income/(expense):
Gain on sale of assets 3 61,103 -
Impairment of intangible exploration assets - (35,145)
General and administrative expenses (16,589) (7,719)
Profit/(Loss) from operations 44,514 (42,864)
Interest revenue 2,160 2,213
Interest expense (229) -
Profit/(Loss) before tax 46,445 (40,651)
Tax expense (136) (135)
Profit/(Loss) after tax for the year 46,309 (40,786)
Profit/(Loss) per share (cents)
Basic 1 17.69 (16.08)
Diluted 16.74 (16.08)
CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2006
NOTES 2006 2005
$'000 $'000
Non-current assets
Property, plant and equipment 2 26,782 25,594
Intangible assets (2005 restated -note 3) 3 19,955 16,851
Financial asset 5,597 -
52,334 42,445
Current assets
Inventories 4,711 3,472
Trade and other receivables 59,999 3,386
Cash and cash equivalents 59,328 51,439
124,038 58,297
Total Assets 176,372 100,742
Current liabilities
Trade and other payables 10,835 8,491
Tax liabilities 136 135
Provisions 2,050 2,050
Total liabilities (2005 restated - note 3) 13,021 10,676
Net Assets 163,351 90,066
Equity
Share capital 1,853 1,638
Share premium account 159,063 135,349
Share option reserve 3,535 502
Exchange translation reserve (43) (57)
Accumulated losses (1,057) (47,366)
Total Equity 163,351 90,066
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2006
Attributable to equity holders of the Group
Share
based Exchange
Share Share Payment Convertible Accumulated Translation Total
Capital premium reserve warrants Deficit Reserve Equity
$'000 $'000 $'000 $'000 $'000 $'000 $'000
Balance as at 1 January 2005 1,626 135,349 108 12 (6,580) - 130,515
Share based payment expense - - 394 - - - 394
Exchange differences arising on - - - - - (57) (57)
translation of overseas operations
Warrants subscribed 12 - - (12) - - -
Net profit for the year - - - - (40,786) - (40,786)
Balance at 1 January 2006 1,638 135,349 502 - (47,366) (57) 90,066
Share based payment expense - - 3,033 - - - 3,033
Exchange differences arising on - - - - - 14 14
translation of overseas operations
Share conversion and issue 215 23,714 - - - - 23,929
Net profit for the year - - - - 46,309 - 46,309
Balance at 31 December 2006 1,853 159,063 3,535 - (1,057) (43) 163,351
CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006
NOTES 2006 2005
$'000 $'000
Operating activities
Cash used in operations 4 (13,418) (13,932)
Interest received 2,160 2,213
Net cash (used)/generated in operating activities (11,258) (11,719)
Investing Activities
Purchase of intangible assets (3,166) (25,863)
Purchase of property, plant and equipment (1,401) (804)
Net cash used in investing activities (4,567) (26,667)
Financing activities
Interest paid (229) -
Proceeds on issue of share capital 23,929 -
Net cash generated in financing activities 23,700 -
Net increase/(decrease) in cash and cash equivalents 7,875 (38,386)
Cash and cash equivalents at beginning of year 51,439 89,882
Effect of foreign exchange rate changes 14 (57)
Cash and cash equivalents at end of the year being bank 59,328 51,439
balances and cash
CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Information
The Company is incorporated in Bermuda and it is quoted on the Alternative
Investment Market of the London Stock Exchange. The Company serves as the
holding company for the Group, which is engaged in oil and gas exploration,
operating in the Republic of Algeria.
This preliminary results announcement is for the year ended 31 December 2006.
While the financial information contained in this preliminary results
announcement has been computed in accordance with International Financial
Reporting Standards ("IFRS"), this announcement does not itself contain
sufficient information to comply with IFRS. For these purposes, IFRS comprise
the Standards issued by the International Accounting Standards Board ("IASB")
and Interpretations issued by the International Financial Reporting
Interpretations Committee ("IFRIC").
The financial information set out above does not constitute the company's Annual
Report for the years ended 31 December 2006 or 2005, but is derived from those
accounts and is consistent with the accounting policies described therein. The
auditors have reported on those accounts; their reports were unqualified.
Basis of accounting
The financial statements have been prepared in accordance with International
Financial Reporting Standards ("IFRS").
The financial statements have been prepared under the historical cost accounting
rules, except for the valuation of share options and contingent deferred
consideration, and on a going concern basis. The principal accounting policies
adopted are set out below.
At the date of authorisation of these financial statements the following
Standards and Interpretations which have not been applied in these financial
statements were in issue but not yet effective:
IFRS 7 Financial instruments: Disclosures; and the related amendment to
IAS 1 on capital disclosures
IFRS 8 Operating Segments
IFRIC 8 Scope of IFRS 2 Share -based Payment
IFRIC 9 Reassessment of Embedded Derivatives
IFRIC 10 Interim Financial Reporting and Impairment
IFRIC 11 IFRS-2 Group and Treasury Share Transactions
IFRIC 12 Service Concession Arrangements
The Directors anticipate that the adoption of these Standards and
Interpretations in future periods will have no material impact on the financial
statements of the Group when the relevant standards come into effect for periods
commencing on or after 1 January 2007 (IFRS 8: 1 January 2008).
CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and enterprises controlled by the Company (its subsidiaries) made up
to 31 December each year. The Group uses the purchase method of accounting for
the acquisition of subsidiaries.
The results of subsidiaries acquired or disposed of during the year are included
in the consolidated income statement from the effective date of acquisition or
up to the effective date of disposal, as appropriate. Where necessary,
adjustments are made to the financial statements of subsidiaries to bring the
accounting policies used into line with those of the Group.
All intra-Group transactions, balances, and unrealised gains on transactions
between Group companies are eliminated on consolidation. Unrealised losses are
also eliminated unless the transaction provides evidence of an impairment of the
asset transferred.
Leasing
Rentals payable under operating leases are charged to income on a straight-line
basis over the term of the relevant lease.
Benefits received and receivable as an incentive to enter into an operating
lease are also spread on a straight line basis over the shorter of the period to
the next rent review date and the lease term.
Foreign currencies
The functional and presentation currency of the Company is US Dollars.
Transactions in currencies other than US Dollars are recorded at the rates of
exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign currencies
are retranslated at the rates prevailing on the balance sheet date. Non-monetary
assets and liabilities carried at fair value that are denominated in foreign
currencies are translated at the rates prevailing at the date when the fair
value was determined. Gains and losses arising on retranslation are included in
the income statement for the period.
On consolidation, the assets and liabilities of the Group's operations which use
functional currencies other than the US Dollar are translated at exchange rates
prevailing on the balance sheet date. Income and expense items are translated at
the average exchange rates for each month in the period. Exchange differences
arising, if any, are classified as equity and transferred to the Group's
translation reserve. Such translation differences are recognised as income or as
expenses in the period in which the operation is disposed of.
Taxation
The tax expense represents the sum of tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year earned in the
United Kingdom by the Group's subsidiary. Taxable profit differs from net profit
as reported in the income statement because it excludes items of income or
expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. The Group's liability for current
tax is calculated by using tax rates that have been enacted or substantively
enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if
CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
the temporary difference arises from the initial recognition of goodwill or from
the initial recognition of other assets and liabilities in a transaction that
affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates and interests in joint
ventures, except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that is no longer probable that sufficient
taxable profits will be available to allow all or part assets to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.
Property, plant and equipment other than oil and gas interests
Property, plant and equipment are stated at cost less accumulated depreciation
and any accumulated impairment losses. Depreciation is provided at rates
calculated to write each asset down to its estimated residual value evenly over
its expected useful life as follows:-
Fixtures and equipment - 20% straight line
Intangible assets other than oil and gas
Intangible assets, other than oil and gas assets, have finite useful lives and
are measured at cost and amortised over their expected useful economic lives as
follows:-
Computer software - 33% straight line
Intangible and tangible non current assets - oil and gas interests
The Group adopts the full cost method of accounting for its oil and gas
interests. Under the full cost method of accounting all costs relating to the
exploration for and development of oil and gas exploration and evaluation
interests, whether productive or not, are accumulated and capitalised as
non-current assets within geographic costs pools. Exploration and evaluation
costs are generally classified as intangible non-current assets during the
exploration and evaluation phase and are carried forward where activities in an
area have not yet reached a stage which permits reasonable assessment of the
existence of economically recoverable reserves, and subject to there being no
impairment.
Costs dealt with in this way include seismic data, licence acquisition costs,
technical work, exploration and appraisal drilling, general technical support
and directly attributable administrative and overhead costs.
Exploration and evaluation costs are transferred to property, plant and
equipment upon declaration of commerciality and amortised, together with
development costs, over the life of the area, generally the field.
Upon cessation of exploration on each licence, or otherwise when an impairment
of an exploration and evaluation asset arises, an impairment test is performed
for the pool and any balance of unsuccessful exploration and evaluation costs
carried forward in the pool is amortised over the life of the pool.
Depreciation, depletion and amortisation is provided under the unit of
production method which uses the estimated remaining commercial reserves and the
net book value and any further anticipated costs to develop such reserves.
CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of tangible and intangible non-current assets
At each balance sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication exists,
the recoverable amount of the asset, or group of assets, is estimated in order
to determine the extent of the impairment loss (if any). For exploration and
evaluation assets, the group of assets considered is the pool. For other assets
where the asset does not generate cash flows that are independent from other
assets, the Group estimates the recoverable amount of the cash-generating unit
to which the asset belongs, generally the field.
Recoverable amount is the higher of fair value less costs to sell and value in
use. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the
asset for which the estimates of future cash flows have been adjusted.
If the recoverable amount is estimated to be less than its carrying amount, the
carrying amount is reduced to its recoverable amount. An impairment loss is
recognised as an expense immediately.
Disposals of oil and gas interests
The difference between the fair value of the consideration receivable and the
carrying value of the relevant proportion of the oil and gas asset disposed of
is first applied to reduce any unsuccessful exploration and evaluation cost
carried in the pool, with any excess gain recognised in the income statement.
Carry of expenditures and farm-in arrangements
Where the Group enters into a commercial agreement which includes carry of
expenditures or a farm-in, the arrangement is accounted for according to its
commercial substance. Generally, in the case of a farm-in, the substance is that
the counterparty has acquired a share, or a greater share, of the underlying oil
and gas reserves and the arrangement is treated as a partial disposal. Where the
substance is that the counterparty has acquired a right, or a conditional right
to be reimbursed by the Group out of future production, a liability is
recognised at the time the obligation arises. In the case of a carry, a
liability is recognised when the obligation is probable and is no longer
conditional upon factors under the Group's control.
Inventories
Inventories relate to materials acquired for use in exploration activities.
These are valued at the lower of cost and net realisable value.
Warrants
Proceeds in respect of convertible warrants subscribed are shown as a reserve,
and upon issue of the shares, the proceeds are transferred to share capital.
Capitalisation of Interest
Any interest payable on funds borrowed to for the purpose of obtaining a
qualifying asset will be capitalised as a cost of that asset. However, any
associated interest charge from funds borrowed principally to address a short
term cash flow shortfall during the suspension of development activities shall
be expensed in the period.
CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments
The Group's financial instruments comprise of cash and borrowings together with
various items such as other receivables and trade payables, which arise directly
from its operations. The main purpose of these financial instruments is to
provide working capital.
Financial assets and financial liabilities are recognised on the Group's balance
sheet when the Group has become a party to the contractual provisions of the
instrument.
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal
value as reduced by appropriate allowances for estimated irrecoverable amounts.
Contingent deferred consideration
Contingent deferred consideration embedded in certain asset sale contracts is
treated as a financial instrument and recognised immediately at its fair value
and then reviewed on a periodic basis until the contractual rights to the cash
flows from the financial asset expire. Movements in the fair value are taken to
the income statement.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into. An equity instrument is
any contract that evidences a residual interest in the assets of the Group after
deducting all of its liabilities.
Borrowings
Interest-bearing loans and overdrafts are recorded at the proceeds received, net
of direct issue costs. Finance charges, including premiums payable on settlement
or redemption, are accounted for on an accrual basis and are added to the
carrying amount of the instrument to the extent that they are not settled in the
period in which they arise.
Trade payables
Trade payables are not interest bearing and are stated at their nominal value.
Cash and Cash Equivalents
Cash and cash equivalents comprise of cash on hand and demand deposits and other
short-term highly liquid investments that are readily convertible to a known
amount of cash and are subject to an insignificant risk of changes in value.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received,
net of direct issue costs.
Provisions
Provisions are recognised when the Group has a present obligation as a result of
a past event which it is probable will result in an outflow of economic benefits
that can be reliably estimated.
Decommissioning provision
The decommissioning provision represents management's best estimate of the
Group's liability for restoring the sites of drilled wells to their original
status, discounted where the effect is material.
CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Share-based payments
The Group has applied the requirements of IFRS 2 to bonus shares and share
option schemes allowing certain employees within the Group to acquire or receive
shares of the Company. For all grants of bonus shares and share options, the
fair value as at the date of grant is calculated using an appropriate option
pricing model and the corresponding cost is recognised over the expected life of
the option. The fair value of the bonuses granted is recognised as an employee
expense with a corresponding increase in equity. The fair value of the bonuses
granted is measured using the standard methodology applied by the Company taking
into account the terms and conditions upon which the bonuses were granted.
Critical accounting estimates and judgements
Estimates and judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances. The Group makes estimates and
assumptions concerning the future. The resulting accounting estimates and
assumptions will, by definition, seldom equal related actual results. The
estimates and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below.
Decommissioning costs
The Group has estimated that decommissioning costs for wells will now be
$550,000 per well discounted to money of the day. It has provided for this
amount for GKS-3, RDL-1, GRJ-1, GRJ-2 and GKS-3. The total amount provided in
the balance sheet as at 31 December 2006 at net present value is $2,050,000.
Impairment review of GKN and GKS
The Group employs an economist to calculate the net present value of GKN and GKS
based on, and with sensitivities associated with, a gross production profile of
4 thousand barrels per day, an oil price of $45 - $60bbl and a discount rate of
10%. The positive net present value from this model exceeded the carrying value
as at 31 December 2006 of $26.8 million which was, therefore, retained as
tangible assets.
Contingent deferred consideration from HBH sale
As part of the HBH agreement with the BG group ("BG"), if gas reserves of the
HBH field are agreed (in accordance with the agreement) to be greater than 800
bcf BG will pay the Group an additional $4,000,000 for every 100 bcf over 800
bcf from a minimum of 900 bcf up to a maximum of 1,300 bcf. The Group estimates,
based on an independent review of potential reserves that the Group will
receive $8,000,000 contingent deferred income, which discounted to money of the
day at 10% per annum results in an estimated receivable contingent deferred
income of $5,597,000 at 31 December 2006.
Carry value of intangible exploration and evaluation assets
The outcome of ongoing exploration, and therefore whether the carrying value of
intangible exploration and evaluation assets will ultimately be recovered, is
inherently uncertain. Management makes the judgments necessary to implement the
Group's policy with respect to exploration and evaluation assets and considers
these assets for impairment at least annually with reference to indicators in
IFRS6.
NOTES
1 EARNINGS PER SHARE
The calculation of the basic and diluted earnings per share is based on the following data:
Earnings 2006 2005
$'000 $'000
Profit/(Loss) for the purposes of basic and diluted loss per 46,309 (40,786)
share
Number of shares 2006 2005
Number Number
Weighted average number of ordinary shares for the purposes of 261,769,050 253,677,757
basic profit/(loss) per share
Adjustments for:
-bonus shares 1,669,707 -
-share options 13,240,500 -
Weighted average number of ordinary shares for the purposes of 276,679,257 253,677,757
diluted profit/(loss) per share
There is a dilutive effect from the options and bonus shares issued by the
company.
2 PROPERTY, PLANT AND EQUIPMENT
Oil & Gas Fixtures &
Properties Equipment Total
$'000 $'000 $'000
At 1 January 2005
Cost - 119 119
Accumulated depreciation - (36) (36)
Net book value - 83 83
Year ended 31 December 2005
Opening net book value - 83 83
Additions - 804 804
Transfer from intangible assets 24,849 - 24,849
Depreciation charge - (142) (142)
Closing net book value 24,849 745 25,594
At 31 December 2005
Cost 24,849 923 25,772
Accumulated depreciation - (178) (178)
Net book value 24,849 745 25,594
Year ended 31 December 2006
Opening net book value 24,849 745 25,594
Additions 1,233 167 1,400
Transfer from intangible assets - - -
Depreciation charge - (212) (212)
Closing net book value 26,082 700 26,782
At 31 December 2006
Cost 26,082 1,090 27,172
Accumulated depreciation - (390) (390)
Net book value 26,082 700 26,782
In 2005, $24.8 million was transferred from oil & gas exploration and evaluation
costs to oil & gas properties within property, plant and equipment during the
year. This transfer was triggered by the SONATRACH and Gulf Keystone Petroleum
Limited joint venture management committee i) recognising the potential
commerciality of the GKN field, which in turn is expected to lead to
confirmation of commerciality by Sonatrach and then in turn to the Ministry of
Energy and Mining in Algeria endorsing a production license and; ii) the
anticipated declaration of commerciality of GKS and subsequent recommendation
via SONATRACH to the Ministry of Energy and Mining in Algeria for the award of
an early production license. The additions in 2006 represent the continuing
expenditures on these assets.
3 INTANGIBLE ASSETS Exploration & Computer
evaluation costs software Total
$'000 $'000 $'000
At 1 January 2005
Cost and net book value 41,708 - 41,708
Year ended 31 December 2005
Opening net book value 41,708 - 41,708
Additions (restated) 35,008 156 35,164
Transferred to tangible assets (24,849) - (24,849)
Impairment write off (35,145) - (35,145)
Amortisation charge - (27) (27)
Closing net book value 16,722 129 16,851
At 31 December 2005
Cost (restated) 51,867 156 52,023
Accumulated amortisation (35,145) (27) (35,172)
Net book value 16,722 129 16,851
Year ended 31 December 2006
Opening net book value 16,722 129 16,851
Additions 3,330 61 3,391
Disposal of HBH (223) - (223)
Amortisation charge - (64) (64)
Closing net book value 19,829 126 19,955
At 31 December 2006
Cost 54,974 217 55,191
Accumulated amortisation (35,145) (91) (35,236)
Net book value 19,829 126 19,955
The expiry of the exploration license on Block 126a in April 2006 and the
Group's decision only to focus on the GKN,GKS and GRJ fields within Block 126a
triggered an impairment test under IFRS 6 and IAS 36 for Block 126a's group of
cash generating units. This led to a $35.1 million write off in 2005.
The additions to oil & gas exploration and evaluation costs in the period relate
to the wells in the GRJ field on block 126a (see note 25) that was granted a
licence extension until July 2007 and expenditures on the Group's other Bottena
and Ben Guecha blocks whose exploration licences expire late in 2008 and early
2010 respectively
Restatement of prior year exploration and evaluation costs:
Under the terms of various of the Group's production sharing agreements,
SONATRACH is entitled to receive an amount of any future production to the value
of $11.8m as cost recovery for past exploration expenditures. However, if no
commercially exploitable deposits are discovered, the Group does not owe
SONATRACH for the data acquired. In prior years, such obligations had been
recorded as liabilities with the associated cost included in non-current assets.
In these financial statements, the Group has restated non-current assets to
derecognise this liability, on the basis that these amounts are more
appropriately regarded as an integral part of the future production attributable
to SONATRACH under the production sharing contract.
3 INTANGIBLE ASSETS (continued)
Disposal of 36.75 per cent interest in HBH
In August 2006, Gulf Keystone announced the introduction of BG North Sea
Holdings Limited, a subsidiary of BG Group Plc, as strategic partner in the
Hassi Ba Hamou Perimeter exploration, appraisal and exploitation contract. Under
the joint venture agreement ("JV"), BG has acquired 49 per cent of Gulf
Keystone's interest in HBH and assumed the role of Operator. Gulf Keystone holds
a 38.25 per cent interest, BG a 36.75 per cent interest and SONATRACH a 25 per
cent interest in HBH. In accordance with Article 14 of the HBH Contract, the
rate of participation of the investors in the financing of the investment costs
for exploration, evaluation, development, exploitation and operating costs is
set at 25 per cent for SONATRACH, 38.25 per cent for Gulf Keystone and 36.75 per
cent for BG. However, in the absence of the discovery of a commercially
exploitable deposit, the JV partners may not claim any reimbursement or
compensation from SONATRACH. As part of the joint venture agreement, BG carries
Gulf Keystone for up to $30 million of its share of exploitation expenditures on
the block, which is repayable from Gulf Keystone's share of future production.
As a result of the benefit of the cost carry under the HBH sale agreement, the
Group carries no intangible assets on HBH, other than the expenditures incurred
prior to entering the transaction with BG. The gain on sales of assets was
principally comprised of funds received from the farm in deal with BG.
4 RECONCILIATION OF PROFIT/(LOSS) FROM OPERATIONS TO NET CASH 2006 2005
USED IN OPERATING ACTIVITIES $'000 $'000
Profit/(loss) from operations 44,514 (42,864)
Adjustments for:
Depreciation of property, plant & equipment 212 142
Amortisation of intangible assets 64 27
Impairment of intangible exploration assets - 35,145
Share based payment expense 3,033 394
Increase in inventories (1,239) (987)
Increase in provision - 2,050
Increase in receivables (62,210) (2,961)
Increase/(decrease) in payables 2,208 (4,878)
Net cash (used)/generated in operating activities (13,418) (13,932)
5 BANK GUARANTEES
As part of the contractual terms of the Algerian contracts, the Group has given
bank guarantees to SONATRACH of $21.6 million. These are cash backed guarantees
which effectively reduce the free cash available that the Group has on its
balance sheet. The US$21.6 million total is comprised of, $6 million for the
Bottena ("129 Contract") work programme and $15.6 million for the Ben Guecha ("
108/128b Contract") work programme. These guarantees are for the exploration and
evaluation work programmes stipulated in the contracts and are reduced as the
work programmes are completed. A previous guarantee of $13.1 million for the
Hassi Be Hamou (Blocks 317b, 322b3, 347b, 348 and 349b) work programme was
replaced by a BG guarantee as part of the JV agreement.
6 SUBSEQUENT EVENTS
On 13 April 2007 the board of directors of Gulf Keystone, RAK Petroleum and RAK
Bermuda, a wholly owned subsidiary of RAK Petroleum, announced the terms of a
recommended acquisition of Gulf Keystone by RAK Petroleum to be effected by way
of an amalgamation of Gulf Keystone with RAK Bermuda. Under the terms of the
proposed amalgamation Gulf Keystone shareholders will receive amalgamation
consideration of 74 pence per Gulf Keystone share, which are to be cancelled
pursuant to the amalgamation. The total consideration on a fully diluted basis
including the cash cancellation consideration for in the money Gulf Keystone
options and amounts due under the Gulf Keystone Executive bonus scheme is
approximately £208 million ($412 million).
On 13 January 2007 the Group repaid in full its outstanding debts to GIBCA
Limited and Falcon Partners Trust, both related parties, who had provided an
unsecured debt facility in aggregate of $5 million at an interest rate of 7% and
for a term of up to 12 months.
On 7th April 2007 Gulf Keystone commenced workover operations on well HEK-3 an
oil and gas discovery well drilled by SONATRACH in 2004. At that time, the well
was tested over the Cretaceous, Coniacian limestone interval and achieved, post
acidisation, flow of 184 barrels of oil over a 4 hour period, prior to the well
being suspended. Gulf Keystone re-entered the well and tested the same zone,
over the measured interval 2,439 to 2,446 metres, employing an acid fracturing
technique to improve connectivity between the reservoir and the wellbore. After
cleaning up the well, a stabilised flow rate of 1,040 barrels per day of 31
degrees API oil was achieved through a 32/64 inch choke.
During April Gulf Keystone performed well test operations on well GRJ-2, no
hydrocarbons flowed into the wellbore under test and this well is being plugged
and abandoned. Whilst final expenditures on the GRJ field are forecast to be
around US$24 million, as at 31 December 2006 expenditures of US$18.9 million are
included in intangible assets. In accordance with the Group's accounting
policies for intangible oil and gas interests, these amounts will be subject to
an impairment test in 2007.
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