Afren Announces Half Yearly Results

By John Lee.

Afren have released their Half-yearly Results for the six months ended 30 June 2014 and an update on its operations year-to-date 2014, in accordance with the reporting requirements of the EU Transparency Directive.  Below is a summary of their Iraq operations and general financial results. Information contained within this release is un-audited and is subject to further review.

Kurdistan region of Iraq

Barda Rash

Post period end on 8 August 2014, Afren announced that it had taken the precautionary step to temporarily suspend operations at the Barda Rash field in light of heightened regional security related issues.  Working with our local security advisors, Afren implemented a phased withdrawal of non-essential personnel from the field.  Afren will continue to closely monitor events on the ground in consultation with our security team and the relevant authorities. It is expected that Afren will return to field operations as soon as it is prudent to do so. Given the relatively low production to date, the suspension is not expected to have a significant impact on the Group's cash flow.

During 1H 2014, gross production at the field averaged 536 bopd.  As part of the second phase of development of the field, the BR-4 well tested at a combined rate for 7,850 bopd from two zones in the Triassic Kurra Chine formation. The BR-5 well, which reached total depth (TD) of 14,787 ft, is expected to demonstrate similar production capacity from the Kurra Chine reservoir as soon as drilling operations recommence. Multiple dispersion studies of the flared gas during testing of the BR-4 well indicated high levels of Sulphur Dioxide (SO₂) would be released into the atmosphere at the planned sustained rates of 5,000 to 6,000 bopd. As a result, Afren has elected to limit production to circa 1,000 bopd whilst working with the Ministry of Natural Resources (MNR) to put an interim gas solution in place that will allow the production capacity of the wells to be fully utilised.  

Ain Sifni

In November 2013 Hunt Oil declared commerciality on the Ain Sifni block and has submitted an FDP which is pending approval by the MNR. The Maqlub-1 well spudded by Hunt Oil in June 2013 has been drilled to TD in the Triassic and a testing programme is awaiting MNR approval.

Simrit-4 was spudded in early 2014 and to date has successfully tested 14 deg API quality crude oil from the Sargelu and Naokelekan formations using downhole pumps at rates of 6,200 bopd and 5,000 bopd respectively.  This well has been drilling ahead to test deeper Jurassic and Triassic objectives, drilling will continue as soon as operations recommence.

Financial highlights

(1)   From continuing operations, for further details see Note 8 of the condensed financial statements                                                                                                                                                                            

(2)   See Note 4 of the condensed financial statements

(3)   Operating cash flow before movements in working capital

Operations Update

^{(1)  Afren's net production includes its 50% economic interest plus additional barrels to recover costs of capital investment funded by Afren.}

Finance Review

1. Results for the period

Profit after tax from continuing activities increased in the period to US$160 million (1H 2013: US$62 million). This was a consequence of various factors:

Revenue

Revenue for the period was US$565 million (1H 2013: US$797 million). This reflects a decrease in sales volumes offset by an increase in the average realised oil price.

Total working interest production from continuing operations for the period decreased from 44,712 boepd in 1H 2013 to 33,488 bopd during 1H 2014. This was primarily due to a reduced share of production and liftings from the Ebok field following the achievement of cost recovery in the period. Post cost recovery, Afren continues to fund 100% of the capital expenditure at Ebok and recovers this from field revenues.  

The fall in sales volume was partially offset by a 4% increase in the average realised oil price to US$107.6/bbl (1H 2013: US$103.6/bbl). The average Brent price for the period was US$109.0/bbl (1H 2013: US$110.0/bbl).

Cost of sales

Cost of sales for the period was 12% lower at US$371 million (1H 2013: US$420 million). The decrease was largely due to lower net working interest production, partly offset by higher depreciation cost per barrel driven by recent investment in the Group's producing fields to progress their development.

Finance charges and financial instruments

Finance costs for the period were in line with the corresponding period of the prior year at US$37 million (1H 2013: US$38 million).  During the period, the Group recognised a loss of US$9 million (1H 2013: US$27 million) relating to crude oil hedging contracts and interest rate swaps.

Tax

An income tax credit of US$27 million occurred for the period whereas an income tax charge of US$198 million is shown for the corresponding period of 2013. This change is largely the consequence of the award during the second half of 2013 of a five-year tax exemption to the subsidiary holding the Ebok asset. This five-year tax exemption was back-dated to 2011 and will cease in May 2016.

2. Hedging and hedging strategy

At 30 June 2014, crude oil hedges covering approximately 4.8 million barrels are in place for the period 1 July 2014 to 31 December 2015, providing minimum floor prices on these volumes of between US$90-US$95/bbl before premiums.

As in prior periods, the policy of the Group is to protect its minimum cash flow requirement against a sustained downturn in oil prices. As such the maximum amount of working interest Afren would seek to protect with these arrangements is between 25-35% of estimated production for a rolling period of 18 to 24 months forward.

3. Cash flow, financing and capital structure

Operating cash flow before movements in working capital for the period was US$354 million (1H 2013: US$564 million). Of this, US$266 million (1H 2013: US$384 million) has been used to fund the Group's investment in development, appraisal and exploration activities.

Gross debt as at 30 June 2014 was US$1,153 million (30 June 2013: US$1,178 million) excluding finance leases. Cash at bank as at 30 June 2014 was US$433 million, resulting in net debt (excluding finance leases) of US$720 million (30 June 2013: cash of US$588 million; net debt of US$590 million).

 4. Development, appraisal and exploration activities

The Group invested US$56 million in exploration and evaluation assets in 1H 2014 (1H 2013: US$166 million). Of this expenditure, US$21 million related to Nigeria and  other West African assets  (including US$11 million for a 3D seismic survey on OPL 310 covering 2,716km²), testing and drilling at Ain Sifni in the Kurdistan region of Iraq (US$18 million), and seismic and other pre-drilling activities in East Africa (total of US$17 million).

Additions to oil and gas assets, excluding transfers from Intangible exploration and evaluation assets, was US$271 million. This largely related to the continued development at Ebok (US$145 million).

In the context of the precautionary step taken to temporarily suspend operations at the Barda Rash project as described in the Operations Update, management has considered the carrying value of the Barda Rash field which is considered to be a cash generating unit ("CGU"). No impairment to the carrying value was identified; however the recoverable amount of the CGU remains sensitive to key assumptions including proven and probable reserves, realised oil price, delays in the capital programme and discount rate.

5. Related party transactions

There have been no material changes to the level or nature of related party transactions since the 2013 Annual Report and Accounts which is available at www.afren.com.

6. Principal risks to 2014 performance

The principal risks and uncertainties faced by the Group were documented in the Annual Report and Accounts for the year ended 31 December 2013. The Directors consider the risks the Group faces to remain the same for the remainder of 2014.  Following the suspension of two principal executives and two associate directors, the Directors consider there is a heightened risk of disruption including due to possible loss of staff, potential difficulties in relationships with partners, providers of finance and other stakeholders.

 7. Going concern

As stated in Note 1 to the condensed financial information, the Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, being a period of not less than twelve months from the date of this report. Accordingly, they continue to adopt the going concern assumption in preparing the condensed financial information.

8. Financial outlook and strategy

Afren's financial strategy continues to be to achieve a balance of operational cash flow with longer-term financing to support the Group's on-going appraisal and development activities.