TIDM3LEG
RNS Number : 8381C
3Legs Resources plc
21 March 2014
3LEGS RESOURCES PLC
Preliminary Results
for the Year ended 31 December 2013
Highlights
3Legs Resources plc (the "Company" and, together with its
subsidiaries, the "Group"), an independent oil and gas group
focused on the exploration and development of unconventional oil
and gas, is pleased to announce its financial results for the year
ended 31 December 2013.
Operational highlights
-- Continued primary focus, with ConocoPhillips, on our three
western concessions in the Polish Baltic Basin, which we believe
represent some of the most prospective shale acreage in Poland
-- Further testing of the Lebien LE-2H lateral well on the
Lebork concession for a 60 day natural flow test, following a 21
day natural flow test in 2012 and initial stimulation and testing
in 2011
-- Successful stimulation and testing of both target shales, the
Piasnica and Sasino formations, in the Strzeszewo LE-1 vertical
well on the Lebork concession, producing gas to surface from both
zones
-- 32 sq km 3D seismic survey on the Karwia concession, meeting
licence commitments, plus 67 km 2D survey on the Lebork concession
for future lateral well placement
-- In order to reduce our expenditure elsewhere, we have allowed
our two remaining southern Poland concessions to lapse, and we have
sold our German concessions to Rose Petroleum plc in exchange for a
EUR400,000 contribution to past costs and a 2% royalty interest
Financial highlights
-- Group cash balances of GBP26.8 million at year end 2013,
against GBP39.5 million at year end 2012, with no debt; fully
funded for the current exploration and appraisal programme on our
Baltic Basin concessions
-- Net oil and gas assets of GBP25.9 million (2012: GBP17.7
million), reflecting the continuing work programme on the Group's
western Baltic Basin concessions and consistent with its stated
strategic plan
-- Net loss for the year of GBP4.3 million (2012: GBP6.0
million), reflecting the Group's share of JV losses in Poland,
other non-capitalised exploration expenses and the (largely
unrealised) net effects of exchange rate movements
Outlook
-- The 2013/14 work programme agreed with ConocoPhillips is well
under way, and proceeding on time and on budget; the two planned
vertical pilot wells have now been drilled in the high-graded area
within our concessions in order to further delineate the extent of
the Piasnica and Sasino horizons and to determine the optimum
placement for the planned lateral well
-- The programme will culminate in a long lateral well, to be
drilled in the Sasino formation by way of a side-track from the
vertical well at our Lublewo location and then completed with a
multi-stage stimulation and test, over the period Q2/Q3 2014
-- The significant learnings to date will help calibrate well
and completion designs for the planned long lateral well, which is
expected to provide a good indication of the commercial potential
of our western Baltic Basin concessions
-- The cost of the 2013/14 committed work programme is
approximately US$63 million gross, or approximately US$19 million
net to the Group; based on the budget agreed with ConocoPhillips,
we currently anticipate a Group cash position of approx. GBP17
million at end Q3 2014, equivalent to approximately 20 pence a
share
For further information contact:
+44 1624 811
3Legs Resources plc Tel: 611
Kamlesh Parmar, Chief Executive Officer
Alexander Fraser, Chief Financial Officer
Jefferies Hoare Govett Tel: +44 207 029 8000
Simon Hardy
Graham Hertrich
Northland Capital Partners Tel: +44 207 796 8800
Louis Castro
Matthew Johnson
FTI Consulting Tel: 44 207 831 3113
Oliver Winters
Shannon Brushe
CHAIRMAN'S STATEMENT
Introduction
During 2013 we have continued to progress our core strategy of
evaluating the shale gas potential of our three western concessions
in the Baltic Basin in northern Poland, which represent the more
gas-prone part of our Baltic Basin acreage. We have long believed,
and continue to believe, that the area of our western Baltic Basin
concessions represents the most prospective region of Poland for
shale gas exploration. ConocoPhillips acts as operator of the three
concessions, following the exercise of its option to acquire a 70%
interest in these concessions in September 2012.
Strategic overview
During the year under review, together with ConocoPhillips we
drilled one vertical well on our concessions and performed three
rounds of testing on two other wells, namely a third round of
testing on the Lebien LE-2H horizontal well and two single-stage
stimulations and tests on the Strzeszewo LE-1 vertical well.
Towards the end of the year we agreed with ConocoPhillips, and
subsequently announced, our 2013/14 drilling programme, which
comprised the drilling of two vertical wells and is planned to
culminate in the drilling of a long-length lateral well in the
Sasino (or Ordovician O3) horizon, our primary shale target. This
lateral section is planned to be stimulated with a multi-stage gel
frac programme and tested for up to 90 days, in the third quarter
of 2014. The design and execution of the lateral well programme
will incorporate all our extensive learnings to date and we are
looking forward to achieving a significant improvement over the
rates achieved from the Lebien LE-2H lateral well, which was
drilled in 2011 and was the last lateral well we drilled which
targeted the Sasino shale.
In our 2012 Annual Report we announced that, following
discussions with major shareholders, the Board had determined that
we should limit the geographical focus of the Group's activities to
Poland - which was already the Group's core area of activity in any
case - so as to be able to give sufficient priority to our
appraisal programme in the Polish Baltic Basin. We have therefore
proceeded to reduce our commitments elsewhere and to restructure
our overhead to reflect our more focused strategy. Further details
are contained in the Chief Executive Officer's Review.
Changing political climate
We have been encouraged by more positive signals across Europe,
suggesting that the shale gas sector may be winning greater
acceptance in the region than it had previously enjoyed. In the UK,
the coalition Government has put considerable effort into promoting
shale gas as an important opportunity for the country to diversify
its sources of energy, while at the same time bringing jobs and
other benefits to the economy. In Brussels, the European Commission
has recently adopted a recommendation designed to ensure that
proper environmental safeguards are in place for hydraulic
fracturing, while encouraging member states to develop their own
regimes for the regulation of shale gas exploration and related
activities.
In Poland, there has been an active debate between policymakers
and industry for over a year now regarding the future taxation,
licensing and regulation of shale gas activities. We were very
pleased when the Government was effectively able to ease the
deadlock which had developed, as was evidenced by some supportive
statements from Prime Minister Tusk and the announcement of two new
senior ministerial appointments. Since then, the Government has
made it clear that it has no intention of placing obstacles in the
way of the development of a shale gas industry in Poland, when the
commercial potential of the Polish shale gas sector has yet to be
demonstrated. The existing fiscal regime is expected to be
maintained for the time being, while modifications to other aspects
of the licensing and regulatory regime for shale activities in
Poland are expected to address a number of the concerns raised by
investors.
Our Chief Executive Officer has recently been re-elected as
President of OPPPW, the Polish upstream industry group, placing him
in an ideal position to ensure industry concerns are heard.
Extraordinary General Meeting
In February 2013, we received a requisition notice from a
minority shareholder calling for an Extraordinary General Meeting
to discuss possible changes to the Board composition and to Group
strategy. The requisition notice proposed a number of resolutions
including: the removal of the majority of the Directors (being all
of the Directors except for Kamlesh Parmar and Richard Hills); the
appointment of two new Directors, whom the Board understood to be
representatives of the requisitioning shareholder; and the proposal
that the Company adopt a new investment strategy as follows: "The
investment objective of the Company is to manage the realisation of
the Company's existing asset portfolio and to maximise the return
of invested capital to shareholders during the period ending on 30
June 2015. During this period the Company shall not make any new
investments other than to support its existing assets."
As required by the requisitioning shareholder, an EGM was duly
convened and held on 19 April 2013, to coincide with our Annual
General Meeting. The Board unanimously advised shareholders to
reject the proposed EGM resolutions, and they were indeed rejected
by majorities of a minimum of 56% of votes cast. The Board welcomed
this affirmation by shareholders of the Group's existing Board and
corporate strategy.
Board changes
A number of Board changes took effect during the first half of
the year, as announced in last year's Annual Report. Robert
Jeffcock and Clive Needham announced their resignations from the
Board on 22 February 2013, although Clive Needham continues to sit
on the board of a number of the Group's subsidiary companies. Barry
Rourke retired by rotation at the Annual General Meeting on 19
April 2013 and decided not to present himself for re-election to
the Board.
This year David Bremner will retire from the Board by rotation
and will present himself for re-election. We continue to keep the
composition of the Board under regular review.
Conclusion
We thank our shareholders for their continued support throughout
the year and we look forward to sharing with them the results of
our current drilling programme.
Tim Eggar
Chairman
20 March 2014
CHIEF EXECUTIVE OFFICER'S REVIEW
Introduction
2013 has seen the Group further consolidate and progress its
activities in the Baltic Basin in northern Poland. Following the
adoption of a narrower geographical focus in early 2013, we have
disposed of our commitments in southern Poland and in southern
Germany, while continuing to channel our resources into the
exploration and appraisal of our western Baltic Basin concessions,
working closely with US oil major ConocoPhillips.
Through the detailed analysis of data gathered from our seismic
and drilling programmes and, where appropriate, from data exchanges
with other operators, we continue to deepen our understanding of
our target shales on our concessions and of how best to optimise
our drilling and completion strategies. Our 2013/14 work programme
is planned to culminate in the drilling, multi-stage stimulation
and testing of a long lateral well on our concessions in the second
and third quarters of this year, and we are confident that we are
well placed to apply the lessons we have learned to date to this
important well.
Baltic Basin concessions, northern Poland
Throughout the year we have focused our activities on our three
western Baltic Basin concessions in northern Poland, which extend
over some 500,000 acres and, we believe, represent some of the most
prospective shale acreage in the onshore Baltic Basin and indeed in
Poland as a whole. We hold a 30% interest in the three concessions,
the remaining 70% interest being held by ConocoPhillips, which has
acted as operator since September 2012. We have continued to
collaborate with ConocoPhillips in all aspects of the design and
implementation of our agreed 2013/14 work programme.
Both of our target shales, the Ordovician-age Sasino formation
and the deeper Cambrian-age Piasnica formation, are believed to
extend across substantially all of the three concessions. Our
geological modelling indicates that the Sasino formation thickens
towards the north of our concessions, while the Piasnica formation
thickens towards the north and west. It is those areas of greater
thickness that form the primary basis of our high-graded area,
which will be a priority focus in any future development
programme.
Further testing of Lebien LE-2H lateral well
The Lebien LE-2H lateral well was originally drilled into the
Sasino formation in 2011 and was tested in 2011 and again in 2012.
When tested on the second occasion, in the fourth quarter of 2012,
the well had flowed at an average rate of 550 mscf/d during a
21-day natural flow test, flowing at approximately 470 mscf/d
immediately prior to that test being suspended.
A third phase of testing was initiated in July 2013, using a 2
3/8 inch tubing string as opposed to the 3 1/2 inch string that was
used on the previous occasion when the well was tested. Down-hole
gauges were placed in the well, to collect pressure data, and
pressurised samples of the produced fluids were also collected.
These data had not, to our knowledge, been gathered from any
previous testing in the Baltic Basin, and have assisted our
understanding of reservoir conditions in the stimulated target
formation.
Following the placing of down-hole gauges, the well was put on a
60-day natural flow test. The well flowed initially at 470 mscf/d,
i.e. the same rate as when the second phase of testing was
suspended, and at the end of the 60-day test period the well was
continuing to flow at approximately 230 mscf/d. The well continued
to clean up during the test and by the end of the test period
approximately 45% of the frac fluid used during the hydraulic
fracturing operation on the well in 2011 had been recovered.
Down-hole gauges were then left in place in order to collect
valuable bottom hole pressure data.
The intention in using a smaller diameter tubing string on the
third phase of testing had been to provide additional flow-rate
velocity during the test, and thereby achieve an improved liquid
unloading. In the event, the use of the smaller diameter tubing
string did not have a significant impact on flow rate, although it
did enable the well to flow at more stable rates. On the other
hand, analysis of the flow test data obtained on both the second
and third phases of testing indicated an area of apparent low
fracture conductivity, potentially impeding the flow of natural gas
into the wellbore. This area of apparent low fracture conductivity
may be explained by a number of factors, many of which are being
addressed in subsequent well and completion design.
Testing of Strzeszewo LE-1 vertical well
The Strzeszewo LE-1 well was drilled in late 2012 as a vertical
well within our high-graded area in order to enable us to evaluate
and test both our target formations, the Sasino shale and the
deeper Piasnica shale, in a key part of our acreage.
Following completion of coring and logging of the well in 2012,
a first DFIT (Diagnostic Fracture Injectivity Test) was performed
in the Piasnica formation, followed by a single stage hydraulic
frac treatment in May 2013. Cleaning up commenced in August 2013,
using a nitrogen lift as planned. After a temporary shut-in to
enable the perforations to be checked and to set down-hole pressure
gauges, the well flowed natural gas and a flare was lit for a short
period. The well was eventually shut in after 15 days of testing in
September 2013, by which time some 22.5% of the frac fluid
originally injected had been recovered. The well flowed natural gas
periodically during the test and gas samples were obtained. A
pressure build-up test was then conducted.
The Strzeszewo LE-1 well is currently the only well where we
have tested the Piasnica shale on our concessions, since our most
recent core and log analysis, discussed below, now indicates that
our Warblino LE-1H lateral well, drilled in 2011, did not in fact
test this zone. As we have indicated previously, the excellent
hydrocarbon generation properties of the Piasnica (or Cambrian
Alum) shale in this region of Europe are well known, as has been
confirmed by the encouraging total organic carbon (TOC), shale
porosities and gas shows recorded when we have drilled through this
formation on our concessions. These parameters would appear to
indicate that the formation is potentially as prospective as the
Sasino shale, and we continue with ConocoPhillips to consider
possible strategies for demonstrating its potential.
Following a further DFIT, a second single-stage hydraulic frac
treatment was successfully executed in the Sasino shale in the
Strzeszewo well in December 2013. Cleaning up of the well commenced
in December 2013, again using a nitrogen lift. The well continued
to clean up for a period of 19 days, during which time the well
flowed natural gas at modest rates and some 63% of the frac fluid
originally injected was recovered. The well was shut in on 12
January 2014 and a pressure build-up test was conducted.
On both occasions, the stimulation was carried out using a
cross-linked gel fluid, and post-frac evaluations indicated that in
each case the proppant was successfully delivered into the target
formation. Data gathered from the programme will help calibrate the
completion programme to be used on our long lateral well, planned
to be drilled in the second quarter of 2014.
Legowo LE-1 well
We drilled the Legowo LE-1 vertical well in 2010 on our Cedry
Wielkie concession (one of our eastern Baltic Basin concessions),
where we remain 100% owner and operator. The well was then cored,
logged and tested with a DFIT. Following the decision to prioritise
our western Baltic Basin concessions for further exploration
activity, it was decided to plug and abandon this well and to
reinstate the well location to its original condition. The plug and
abandon work has now been completed and the well location has been
re-instated and returned to the landowner. The cost of this work is
funded in full by ConocoPhillips under the terms of the Joint
Evaluation Agreement signed in 2009.
Core and log analysis
As in the case of previous vertical wells drilled on our
concessions, a programme of extensive coring and logging was
carried out on the Strzeszewo LE-1 well and, following the year
end, on the Lublewo LEP-1 and Slawoszyno LEP-1 vertical wells (the
latter being logged only).
Some 220 metres of core were taken from across the entire
prospective section in the Strzeszewo LE-1 well and this, in
combination with the well logs, has undergone detailed analysis.
Further analysis has also been carried out on cores and logs taken
from the Lebien LE-1 well and from the vertical pilot well drilled
at Warblino LE-1. The analysis has enabled a significantly improved
understanding of our principal target zones, including their
reservoir properties and materiality.
Analysis of cores and logs from the Warblino LE-1 vertical well,
drilled in 2011, now indicates that the lateral section sidetracked
from this well, and tested in 2011 and 2012, in fact tested the
overlying Sluchowo (or Ordovician O1) shale formation, instead of
the Piasnica shale as originally intended. Log analysis also
appears to confirm the very promising hydrocarbon generation
properties of the Piasnica shale in this area, consistent with the
strong gas shows which we have recorded when drilling through this
formation.
Our primary objective on our concessions remains the Sasino
shale interval, which is estimated to have a thickness of 25 to 40
metres across our high-graded area. The Piasnica shale interval
represents a potentially important additional objective. This zone,
which was not included in our Competent Person's Report at the time
of our IPO, is estimated to have a thickness of 15 to 20 metres
across the high-graded area. Each interval is being separately
evaluated on the basis that either might potentially justify a
field development.
Seismic acquisition
The acquisition of 32 sq km of 3D seismic data on the Karwia
concession was completed in July 2013 and the new data have
undergone processing and interpretation. This seismic survey was
conducted both to meet existing licence commitments on the
concession and to support future drilling activity.
A second campaign, involving the acquisition of 67 km of 2D
seismic data on our Lebork concession, was completed in January
2014. This seismic programme, together with data gathered from the
recent Lublewo LEP-1 and Slawoszyno LEP-1 vertical wells and the
results of the planned long lateral well, will assist in the
placement of a second long lateral well and ultimately will assist
in the location and implementation of any future pilot development
programme.
2013/14 drilling programme
During discussions on the 2013/14 drilling programme, we
concluded with ConocoPhillips that although the testing of our
target zones in a vertical well, as in Strzeszewo LE-1, could yield
valuable data, it was nevertheless unlikely to provide sufficient
information to enable flow rates from a long lateral section to be
reliably projected. We therefore agreed to include in this
programme a long-length lateral well, to be stimulated with a
multi-stage treatment and then tested for up to 90 days. We agreed
also that our primary target remains the Sasino horizon, while the
Piasnica horizon remains an important secondary objective. The
2013/14 well programme is designed both to meet current licence
commitments and to progress the exploration of our target
shales.
The first stage of the 2013/14 programme comprised the drilling
of two new vertical wells, the Lublewo LEP-1 and the Slawoszyno
LEP-1. These wells are intended to improve our understanding of our
two target formations in our high-graded area, including depth,
thickness and shale reservoir properties, and hence to determine
the optimum placement of the planned lateral section. The wells
also enabled a decision on the location of the planned lateral well
to be taken following an evaluation of our primary target, the
Sasino horizon, at both locations.
Learnings to be applied
An important factor in maximising productivity from our target
formations will be managing their sensitivity to water. Based on
our core analysis, we are continually improving the mud programme
and the choice of stimulation fluids.
Our completion designs are now based on a cross-linked gel,
rather than a slick-water fluid as was used on the initial
stimulation of the Lebien LE-2H lateral well in 2011. Using a
cross-linked gel will effectively stimulate the target horizon
while reducing the amount of water needed for each stage and
optimising the amount of proppant delivered into the target
formation.
Ongoing core analysis and testing from our wells is helping us
to prepare for and manage other rock sensitivities with a view to
optimising completion design. Test data have indicated that an
optimum strategy for improving formation productivity is to
stimulate a larger number of smaller fractures, but using high
volumes of proppant in each case (i.e. significantly higher than
those used in our Lebien LE-2H lateral well). We have also
concluded that the most suitable proppant for the main part of the
stimulation programme is a 30/50 mesh high quality white sand as
opposed to, for example, a ceramic or resin-coated proppant.
Drilling of Lublewo LEP-1 and Slawoszyno LEP-1 vertical
wells
The Lublewo LEP-1 vertical well was spudded in December 2013,
reaching target depth in January 2014. The well was drilled to
2,924 metres true vertical depth into the Middle Cambrian interval.
Some 141 metres of full-diameter 4-inch core were recovered from
the well over the Lower Silurian, Ordovician, and Cambrian
intervals, and an extensive suite of logs was also run on the well
at total depth. The cores and logs are now undergoing processing
and analysis.
Drilling of the Slawoszyno LEP-1 vertical well, the second well
in our programme, was commenced on 15 February 2014 and has now
been completed. The well was drilled to 2,819 metres true vertical
depth into the Middle Cambrian interval. An extensive suite of logs
has been run on the well over the Lower Silurian, Ordovician, and
Upper Cambrian intervals, which are now undergoing processing and
analysis. Both wells have been cased and cemented and temporarily
suspended at intermediate casing depth.
Preliminary analysis confirms our earlier modelling of the
Piasnica and Sasino formations across the northern portions of our
western Baltic Basin concessions, and hence the extent of the
high-graded area which we have previously identified. While the
precise thicknesses of the two formations will be determined
following final processing and analysis, the data indicate that
both wells encountered a Sasino section of similar thickness to
that seen in the Strzeszewo LE-1 vertical well, and a Piasnica
horizon which is slightly thinner than the same formation
encountered at the Strzeszewo LE-1 vertical well, thus confirming
our earlier modelling in both cases.
Planned lateral well
Following a review of the data gathered from both the Lublewo
LEP-1 and the Slawoszyno LEP-1 wells, and of the 2D seismic
recently acquired in the Lublewo area, we have agreed with
ConocoPhillips to select the Lublewo LEP-1 well as the location for
the planned long lateral well, which is the third and final well in
the 2013/14 drilling programme. This lateral well, Lublewo
LEP-1ST1H, is planned to be drilled by way of a sidetrack in the
Sasino shale and is expected to involve a long lateral section of
up to 1,600 metres, as compared to the lateral section of 1,000
metres at the Lebien LE-2H well. The well will then be completed
with a multi-stage stimulation using a cross-linked gel fluid. The
completion programme is also expected to involve a larger number of
perforations per stage, and larger volumes of proppant per stage,
as compared with the Lebien LE-2H well.
We expect our refined completion design to yield a significant
improvement in flow rates as compared with flow rates achieved to
date. Once stimulated and cleaned up, the well will be put on test
for up to 90 days. We expect testing of the planned long lateral
well to take place in the third quarter of 2014.
We are pleased to report that our 2013/14 programme is to date
proceeding on time and on budget. A decision on the drilling,
stimulation and testing of a second long lateral well, most likely
in the underlying Piasnica shale horizon, will be made following
the receipt of results from the test of the first lateral well. If
we achieve positive results from the tests of one or both lateral
wells, we will then consider with ConocoPhillips whether to proceed
to design and implement a pilot production programme.
Balance sheet impact
The cost of the 2013/14 work programme which we have committed
to is expected to be approximately US$63 million gross, or
approximately US$19 million net to the Group. We anticipate that
following implementation of the programme outlined above and based
on the budget we have agreed with ConocoPhillips, we will have cash
reserves of approximately GBP17 million at the end of the third
quarter of 2014, equivalent to approximately 20 pence a share.
While we are committed to the programme outlined above, we will
not commit to any further expenditure on our western Baltic Basin
concessions in the absence of positive initial results from the
planned lateral well. If such positive initial results do not
materialise, we will consider all options at that stage including
discussing with ConocoPhillips alternative options for the further
exploration and appraisal of the western Baltic Basin concessions,
which may include reviewing our continued participation in these
concessions. In addition, 3Legs has a one-time right to cease its
participation in these concessions at the point that 3Legs'
expenditure on this work programme reaches US$19 million on or
before 31 December 2014.
Other assets
Following discussions with our shareholders, we committed last
year to limit the geographical focus of our activities to Poland in
order to enable us to maximise our focus on our Baltic Basin
concessions, in particular our western Baltic Basin concessions.
Since then, we have decided to relinquish our two remaining
concessions near Krakow in southern Poland, rather than incur any
further expenditure on these concessions. This follows the earlier
surrender, in 2012, of one of our three concessions there.
In August 2013 we entered into a contract for the sale of our
two German concessions (then undergoing renewal) to Rose Petroleum
plc, in exchange for a 2% royalty interest and a EUR400,000
contribution to past costs, of which EUR300,000 was paid at
signing. Renewal of the concessions was completed in December 2013
and the sale to Rose Petroleum was completed in January 2014, when
the remaining EUR100,000 was paid. We continue to investigate
possible options for our three eastern Baltic Basin concessions,
and are in active discussions with potential partners in relation
to these.
Polish oil & gas sector
Throughout the year we have played an active role in discussions
relating to the future development of the oil & gas sector in
Poland. In June 2013 I was elected President of the Management
Board of OPPPW, the Polish exploration and production industry
organisation, and in March 2014 I was re-elected for a further term
as both a member of the Management Board and President.
The Polish Government continued throughout most of 2013 to
advocate its previously-announced proposals for the modification of
the fiscal and licensing regime relating to the Polish oil &
gas sector. At the same time, industry representatives including
OPPPW continued to express serious concerns about a number of
aspects of the proposed reforms, including increases in the
applicable tax and royalty rates, provisions for mandatory state
participation in private sector exploration and production
activities, and changes to the rules for granting and/or extending
exploration and production licences.
It was pleasing to see the Government signal a change of policy
in recent months, concluding that it was premature to create
excessive fiscal and regulatory barriers to the development of a
domestic shale gas sector, before its commercial viability had yet
been demonstrated. As a result, there is now a good prospect that a
number of the more contentious parts of the Government's proposals
will be either dropped or postponed. We welcome the change of
approach adopted by the Government, which we believe was to a large
degree facilitated by the coordinated but collaborative attitude
adopted by the OPPPW in its dialogue with the relevant
ministries.
Overhead reduction
In our last Annual Report, we committed to make a number of
changes in the way the Group is organised and staffed, with a view
to tightening the Group's focus and reducing our cash
administrative expenses, before foreign exchange movements, by
approximately 50%. These changes were implemented so that, with
effect from 1 July 2013, we are on track to achieve the targeted
savings.
Conclusion
Although we have yet to demonstrate commercial flow rates, we
believe that our activity in 2013 has enabled us to make
substantial advances in our understanding of our target formations
on our western Baltic Basin concessions, and of the techniques
required to enhance the effectiveness of our stimulation and
completion techniques in future wells. We look forward to
continuing to improve our understanding as we proceed with the rest
of our 2013/14 programme, with a view to applying the lessons
learned to our long lateral well test planned for the third quarter
of this year.
We thank our shareholders for their continued support and look
forward to sharing with them information on the progress of our
2013/14 work programme as we go forward.
Kamlesh Parmar
Chief Executive Officer
20 March 2014
FINANCIAL REVIEW
Introduction
3Legs continues to maintain a strong balance sheet, with
sufficient funding to see it through its decisive 2013/14
exploration programme and the period beyond.
Balance sheet
Cash and cash equivalents at year end were GBP26.8 million
(2012: GBP39.5 million), and the Group has no debt. Foreign
exchange rate movements during the year increased the sterling
equivalent of cash and cash equivalents at year end by GBP0.1
million (2012: foreign exchange loss of GBP1.2 million).
Investment in the Group's oil and gas assets at year end stood
at GBP25.9 million (2012: GBP17.7 million). The additional
investment in 2013 represents the Group's share of costs incurred
in connection with exploration and appraisal activities on the
Group's western Baltic Basin concessions, as described in the Chief
Executive Officer's Review.
Trade and other payables at year end declined to GBP0.4 million
against GBP1.0 million at year end 2012, as a result primarily of a
reduction in staff bonuses. Provisions reduced to GBPnil million at
year end, from GBP0.6 million at year end 2012, as the Group
discharged its liability for decommissioning at the Legowo LE-1
well. The cost of this decommissioning is covered in full by
ConocoPhillips.
Income statement
The Group recorded a net loss after tax of GBP4.3 million (2012:
GBP6.0 million). This loss is attributable in part to: share of JV
losses of GBP0.9 million (2012: GBP0.1 million); foreign exchange
losses on the translation of foreign currency cash balances of
GBP0.6 million (2012: GBP1.6 million); non-capitalised exploration
expenses of GBP0.5 million (2012: GBPnil); the impairment of the
Group's interest in its German concessions of GBP0.1 million (2012:
GBPnil); and the impairment of a loan to Cowley Mining plc of
GBP0.2 million (2012: GBPnil).
The Group recorded nil other income in 2013 (2012: GBP1.1
million), as no further payments were due from ConocoPhillips under
the Joint Evaluation Agreement. The share of JV losses represents
the Group's share of expenditure incurred by Lane Energy Poland on
the western Baltic Basin concessions which cannot be capitalised
under IFRS 6.
In previous years substantially all of the Group's exploration
expenses incurred in connection with the Baltic Basin concessions
have been capitalised as intangible exploration and evaluation
assets, reflecting common industry practice. Following the
transfer, in 2012, of operatorship of the three western Baltic
Basin concessions to ConocoPhillips, the Group elected to account
for its interest in the three concessions using the equity
accounting method, in accordance with IAS 31 Interest in Joint
Ventures. Consequently, exploration expenses incurred directly by
the Group in connection with its western Baltic Basin concessions
can no longer be capitalised as before. These expenses are
therefore recorded separately in the income statement as
non-capitalised exploration expenses.
In August 2013 the Group entered into a contract for the sale of
its two German concessions to Rose Petroleum plc, in exchange for a
2% royalty interest and a EUR400,000 contribution to past costs, of
which EUR300,000 was paid at signing. The sale to Rose Petroleum
was completed in January 2014, when the remaining EUR100,000 was
paid. The Group has recorded an impairment equal to the excess of
the carrying value of the concessions over the disposal
proceeds.
Cowley Mining plc was demerged from the Group in 2010, before
the Group's initial public offering on AIM in 2011. Under the
demerger terms, Cowley Mining retained an unsecured, non-interest
bearing loan of GBP226,500 from the Group, later varied to an
interest-bearing loan with warrants. In January 2014, Cowley Mining
announced its intention to negotiate a restructuring with its
shareholders and creditors. The Group has recorded an impairment
for the full value of the loan.
The Group recorded aggregate administrative expenses of GBP2.1
million in 2013, against GBP3.6 million in 2012. Cash
administrative expenses, i.e. excluding share-based payments, were
GBP2.0 million in 2013 (2012: GBP3.4 million). Staff costs
including share-based payments declined to GBP1.0 million (2012:
GBP2.0 million), reflecting the staff reorganisation which was
implemented following the adoption of a narrower focus for the
Group's activities.
Foreign exchange losses in 2013 of GBP0.6 million (2012: GBP1.6
million) represent almost entirely the impact of unrealised foreign
exchange movements on the Group's long-term intra-group funding
arrangements, whereas in 2012 foreign exchange losses resulted
primarily from translation losses on foreign currency cash
balances.
Going concern
The Directors have reviewed the Group's budgets and forecast
cash flows through to June 2015. Taking into consideration the
risks outlined in this financial review, the Directors are
satisfied that the Group has adequate resources to continue in
business for the foreseeable future. It is therefore appropriate to
adopt the going concern basis in the preparation of its financial
statements.
Outlook
The Group is well funded for the rest of its 2013/14 Baltic
Basin exploration programme, which will see it through the
drilling, stimulation and testing of a long lateral well, as
described in the Chief Executive Officer's Review. Following the
testing of the planned long lateral well, the Group will review its
funding requirements in the light of its operational objectives in
the Baltic Basin. The Group will continue to manage its cash
resources in a conservative manner so as to ensure that it has
sufficient funding to meet its near-term objectives.
Alexander Fraser
Chief Financial Officer
20 March 2014
Consolidated Income Statement 2013 2012
For the year ended 31 December 2013 Notes GBP'000 GBP'000
Continuing operations
Revenue - -
--------- ---------
Other income - 1,067
Administrative expenses (2,133) (3,605)
Foreign exchange losses (632) (1,587)
Non-capitalised exploration and evaluation
expense 4 (451) -
Impairment of intangible exploration
and evaluation assets 5 (135) (2,077)
Impairment of loan 6 (226) -
--------- ---------
Operating loss (3,577) (6,202)
Share of results of joint venture 7 (902) (123)
Investment income 172 296
--------- ---------
Loss before tax (4,307) (6,029)
Tax - (1)
--------- ---------
Loss for the year (4,307) (6,030)
========= =========
Attributable to:
Equity holders of the parent (4,307) (6,030)
(4,307) (6,030)
========= =========
Loss per Ordinary Share
Basic and diluted, pence per share 8 (0.05p) (0.07p)
========= =========
Consolidated Statement of Comprehensive 2013 2012
Income GBP'000 GBP'000
For the year ended 31 December 2013
Loss for the year (4,307) (6,030)
Other comprehensive income
Exchange differences arising on translation
of foreign operations 62 805
--------- ---------
Total comprehensive income for the
year attributable to owners of the
parent company (4,245) (5,225)
========= =========
Consolidated Balance Sheet 2013 2012
As at 31 December 2013 Notes GBP'000 GBP'000
Assets
Non-current assets
Intangible exploration and evaluation
assets 2,357 2,839
Investment accounted for using the equity
method 23,515 14,905
-------- --------
25,872 17,744
-------- --------
Current assets
Trade and other receivables 323 977
Cash and cash equivalents 26,792 39,531
-------- --------
27,115 40,508
-------- --------
Total assets 52,987 58,252
======== ========
Liabilities
Current liabilities
Trade and other payables (398) (986)
Provisions (25) (573)
-------- --------
(423) (1,559)
-------- --------
Non-current liabilities
Provisions - -
-------- --------
Total liabilities (423) (1,559)
-------- --------
Net assets 52,564 56,693
======== ========
Equity
Share capital 21 21
Share premium account 68,347 68,330
Share-based payment reserves 889 790
Accumulated deficit (16,362) (12,055)
Cumulative translation reserves (331) (393)
-------- --------
Total equity 52,564 56,693
======== ========
Consolidated Cash Flow Statement 2013 2012
For the year ended 31 December 2013 Notes GBP'000 GBP'000
Net cash outflow from operating activities 9 (2,783) (4,863)
-------- --------
Investing activities
Interest received 172 296
Purchases of intangible exploration
and evaluation assets (40) (1,807)
Proceeds of disposal of intangible exploration
and evaluation assets 250 -
Investment in joint venture (10,148) (2,742)
-------- --------
Net cash used in investing activities (9,766) (4,253)
-------- --------
Financing activities
Issue of share capital 17 -
Repayment of shareholder borrowings - (1,171)
-------- --------
Net cash inflow/(outflow) from financing
activities 17 (1,171)
-------- --------
Net decrease in cash and cash equivalents (12,532) (10,287)
Effect of foreign exchange rate changes
on cash and cash equivalents (207) (1,060)
Effect of equity accounting - (52)
Cash and cash equivalents at beginning
of year 39,531 50,930
-------- --------
Cash and cash equivalents at end of
year 26,792 39,531
======== ========
Consolidated Statement of Changes in Equity
For the year ended 31 December 2013
Share Share-based Cumulative
Share premium payment Accumulated translation
capital account reserves deficit reserves Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 1 January
2012 21 68,330 652 (6,141) (1,198) 61,664
Loss for the year - - - (6,030) - (6,030)
Other comprehensive
income: -
Currency translation
differences - - - - 805 805
Total comprehensive
income for the year - - - (6,030) 805 (5,225)
--------- --------- ------------ ------------- ------------- ---------
Share-based payments - - 254 - 254
Transfer to retained
earnings in respect
of lapsed warrants - - (116) 116 - -
--------- --------- ------------ ------------- ------------- ---------
As at 1 January
2013 21 68,330 790 (12,055) (393) 56,693
--------- --------- ------------ ------------- ------------- ---------
Transactions with
owners in their
capacity as owners:
Issue of equity
shares - 17 - - - 17
Total transactions
with owners in their
capacity as owners - 17 - - 17
Loss for the year - - - (4,307) - (4,307)
Other comprehensive
income:
Currency translation
differences - - - - 62 62
--------- --------- ------------ ------------- ------------- ---------
Total comprehensive
income for the year - - - (4,307) - (4,245)
--------- --------- ------------ ------------- ------------- ---------
-
Share-based payments - - 99 - - 99
--------- --------- ------------ ------------- ------------- ---------
As at 31 December
2013 21 68,347 889 (16,362) (331) 52,564
1 General information
3Legs Resources plc (the 'Company' and, together with its
subsidiaries, the "Group") is incorporated in the Isle of Man,
British Isles under the Isle of Man Companies Act 2006. The address
of the registered office is Commerce House, 1 Bowring Road, Ramsey,
Isle of Man, British Isles, IM8 2LQ.
The nature of the Group's operations and its principal
activities are the exploration, evaluation and development of oil
and gas targets, primarily from unconventional resource plays.
These financial statements are presented in pounds sterling.
The financial information included in this preliminary results
announcement does not constitute statutory accounts of the Group
for the years ended 31 December 2013 and 31 December 2012 but is
derived from the consolidated accounts prepared by the Company. As
an Isle of Man Company, there is no requirement to prepare audited
consolidated statutory accounts but audited consolidated non
statutory accounts for the year ended 31 December 2012 are
available from the Company's website and those for 2013 will be
available in due course. The auditor has reported on the 2013
accounts; their report was unqualified and did not include a
reference to any matters to which the auditor drew attention by way
of emphasis without qualifying their report.
The preliminary results announcement has been prepared in
accordance with the accounting policies adopted in the financial
statements which were approved by the Board of Directors on 20
March 2014.
2 Going concern
The Directors have a reasonable expectation that the Company has
adequate resources to continue in operational existence for the
foreseeable future. The Directors therefore consider it appropriate
to prepare the preliminary results on a going concern basis.
3 Critical accounting judgements and key sources of estimation and uncertainty
In the application of the Group's accounting policies, the
Directors are required to make judgements, estimates and
assumptions about the carrying amounts of the assets and
liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical
experience and other factors that are considered to be relevant.
Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period or in the period of the revision and future
periods if the revision affects both the current and future
periods.
The following are the critical judgements and estimations that
the Directors have made in the process of applying the Group's
accounting policies and that have the most significant effect on
the amounts recognised in the financial statements:
Recoverability of exploration and evaluation assets
Determining whether an exploration and evaluation asset is
impaired requires an assessment of whether there are any indicators
of impairment, including by reference to specific impairment
indicators prescribed in IFRS 6 Exploration for and Evaluation of
Mineral Resources. If there is any indication of potential
impairment, an impairment test is required based on value in use of
the asset. The value in use calculation requires the entity to
estimate the future cash flows expected to arise from the
cash-generating unit and a suitable discount rate in order to
calculate present value. The carrying amount of exploration and
evaluation assets at the balance sheet date was GBP2.4 million
(2012: GBP2.8 million) and impairments of GBP0.1 million (2012:
GBP2.1 million) were identified and recognised in the period.
Provisions for liabilities
As a result of exploration activities the Group is required to
make provision for decommissioning. Significant uncertainty exists
as to the amount of decommissioning obligations which may be
incurred due to the impact of possible changes in environmental
legislation. A provision of GBPnil has been recognised at 31
December 2013 (2012: GBP0.6 million).
Share-based payments
The Group has an equity-settled share option scheme available to
certain Directors, employees and consultants. In accordance with
IFRS 2 Share-based payment, in determining the fair value of
options granted, the Group has applied the Black-Scholes and the
Monte Carlo model. As a result, the Group makes assumptions for
expected volatility and expected life.
4 Non-capitalised exploration and evaluation expenditure
2013 2012
GBP'000 GBP'000
Baltic Basin expenditure 451 -
======== ========
5 Impairment of intangible exploration and evaluation assets
2012 2011
GBP'000 GBP'000
Germany 135 -
Southern Poland (Krakow) - 2,077
======== ========
During the year, the Group entered into an agreement for the
sale of the German concessions in exchange for a contribution of
EUR400,000 towards past costs and a 2% royalty. The two licences
were renewed for terms of two years each on 20 December 2013 and
the sale was completed on 20 January 2014. The related exploration
and evaluation cost has been impaired down to the value of the
disposal proceeds.
6 Impairment of loan
2013 2012
GBP'000 GBP'000
Cowley Mining plc 226 -
======== ========
The loan to Cowley Mining plc, a related party was impaired in
full at 31 December 2013. The Directors consider this to
approximate the fair value at the balance sheet date.
7 Share of loss of joint venture
Share of loss of joint venture represents the Group's share of
exploration expenditure incurred on its western Baltic Basin
concessions which is not capitalised on the balance sheet of Lane
Energy Poland Sp. z o.o.
2013 2012
GBP'000 GBP'000
Lane Energy Poland Sp. z o.o. 902 123
======== ========
8 Loss per Ordinary Share
Basic loss per Ordinary Share is calculated by dividing the net
loss for the year attributable to Ordinary equity holders of the
parent by the weighted average number of Ordinary Shares
outstanding during the year. The calculation of the basic and
diluted loss per Ordinary Share is based on the following data:
2013 2012
GBP'000 GBP'000
Losses
Loss for the purposes of basic loss per share
being net loss attributable to equity holders
of the parent (4,307) (6,030)
========== ==========
2013 2012
Number Number
Number of shares
Weighted average number of Ordinary Shares
for the purposes of basic loss per share 84,804,650 84,782,544
========== ==========
2013 2012
GBP GBP
Loss per Ordinary Share
Basic and diluted, pence per share (0.05)p (0.07)p
Dilutive loss per Ordinary Share equals basic loss per Ordinary
Share as, due to the losses incurred in 2012 and 2013, there is no
dilutive effect from the subsisting share options.
9 Notes to the cash flow statement
2013 2012
GBP'000 GBP'000
Loss before tax (4,307) (6,029)
Adjustments for:
Effect of foreign exchange rate changes 879 901
Impairment of E&E assets 135 2,077
Reversal of provision for E&E licences 75 -
Investment income (172) (296)
Share-based payments 99 254
Share of results of joint venture 902 123
Fair value gains on financial instrument - (316)
-------- --------
Operating cash flows before movements in
working capital (2,389) (3,286)
Decrease in receivables 194 2,837
Decrease in payables (588) (4,413)
-------- --------
Cash used in operations (2,783) (4,862)
Taxation paid - (1)
-------- --------
Net cash outflow from operating activities (2,783) (4,863)
======== ========
Cash and cash equivalents (which are presented as a single class
of assets on the balance sheet) comprise cash at bank and short
term bank deposits with an original maturity of three months or
less. The carrying value of these assets is approximately equal to
their fair value.
10 Events after the balance sheet date
On 20 January 2014 the Group completed the sale to Rose
Petroleum plc of Parkyn Energy Holdings plc, the holding company of
Parkyn Energy (Germany) Ltd., which in turn held the Group's two
German concessions and received payment of the remaining EUR100,000
due under the share purchase agreement. This completed the disposal
of these two concessions.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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