TIDMGPX
RNS Number : 4965S
Gulfsands Petroleum PLC
18 March 2016
Gulfsands Petroleum Plc
("Gulfsands" or the "Company")
Annual Audited Results for the year ended 31 December 2015
18 March 2016
Gulfsands, the AIM listed oil and gas company (AIM: GPX) with
activities in Syria, Morocco, Tunisia and Colombia, is pleased to
announce its audited results for the year ended 31 December
2015.
Gulfsands Petroleum Plc
Alastair Beardsall, Chairman +44 (0)20 7024 2130
Cantor Fitzgerald Europe
Sarah Wharry
David Porter +44 (0)20 7894 7000
2015 Summary
-- Group working interest 2C Contingent Resources of 87.3 mmboe.
-- Involvement in Syrian operations remains suspended during continuation of EU sanctions.
-- Initiated farm-out process for remaining Moroccan, Tunisian and Colombian assets.
-- Exploration periods for Fes and Rharb permits in Morocco expired during 2015.
-- Cash available for use by the Group at 31 December 2015 of $0.4 million.
-- Restricted cash balances of $3.7 million after provisions against recovery.
-- Exploration write-offs and impairments of $53.8 million in the year.
-- Continued significant reduction in the ongoing expenses across the Group.
Post period highlights
-- Open offer completed, with 354,837,296 shares subscribed for
and admitted to AIM on 14 January 2016, raising GBP14.2
million.
-- The Convertible Loan Facility was repaid in full on 14 January 2016.
-- Cash available post Open Offer and after the repayment of the loan was $5.6 million.
Executive Chairman's Statement
Dear Shareholder
2015 and early 2016 have continued to be a challenging time for
Gulfsands. The Board has focussed on realigning the strategy of the
Group to be consistent with its financial capacity and risk
tolerance and continues to pursue a strategy of farm-out and
divestiture for the non-Syrian assets. The Syrian assets remain a
core part of the Group's strategy and we monitor the situation
closely and ensure our ongoing readiness to return to operation
when the political situation allows.
During the year the Board prepared an Open Offer to raise
GBP14.2 million which allowed shareholders to participate in the
re-financing of the Company while strengthening the balance sheet
and dramatically reducing the debt burden. Further capital may be
required during the next twelve months, as explained further in the
going concern section of the Financial Review.
During 2015 the Group's interests in Morocco were reduced from
three licences, covering four permits to one licence covering one
permit.
The Moulay Bouchta licence, awarded to Gulfsands during 2014,
covers an area of some 2,800 km(2), including three abandoned
legacy oil fields which demonstrate that there is an active
hydrocarbon system present, likely to be oil prone. The initial two
year exploration period runs to June 2016 during which time the
Group must acquire 500 km of new 2D seismic and reprocess some
existing seismic data. Gulfsands are in discussions with Office
National des Hydrocarbures et des Mines ("ONHYM") regarding the
outstanding work commitments on Moulay Bouchta and are hopeful a
forward plan can be agreed that allows Gulfsands to continue to
participate in the exploration of our remaining interest in
Morocco.
The exploration period of the Fes and Rharb licences in Morocco
expired on 25 September and 9 November 2015 respectively. The
Company continues to work with ONHYM to resolve the outstanding
issues of potential penalties for non-fulfilment of work
obligations, outstanding balances of training budgets and the final
abandonment of wells and site restoration.
In Tunisia the Group was granted a two year extension on its
Chorbane licence during which the work obligation of acquiring 200
km 2D seismic and drilling one exploration well must be completed;
the current exploration phase will expire in July 2017. The Group
is looking to farm-down its 100% interest in exchange for a carried
work programme.
The Group also holds 100% interest in two Colombian exploration
blocks. Under the contracts for Llanos Block 50 and Putumayo Block
14, the Group has a minimum work obligation of acquiring
approximately 100 km of 2D seismic and drilling one exploration
well on each block before the end of the current phase which runs
to November 2016 for Llanos Block 50 and November 2017 for Putumayo
Block 14. The Group is actively seeking farm-in candidates to share
the cost of the exploration programme on these blocks.
Financial overview
The Group posted a loss for the year of $69.2 million, including
E&E write-offs and impairments of $53.8 million. At year end
the Group had total cash and cash equivalents of $0.4 million. At
the date of this Report the Group had unaudited cash and cash
equivalents of $3.5 million.
In 2014 the Group entered into a $20 million Facility Agreement
with Arawak Energy Bermuda Ltd as a means of securing working
capital. In June 2015 the Facility Agreement was acquired by
Waterford Finance and Investment Ltd and Mr. Richard Griffiths who
together continued to provide working capital for the Group through
to January 2016 when the outstanding loan with interest, totalling
$14.5 million, was repaid, out of the proceeds of the Open
Offer.
The Group has material work obligations that must be completed
under its various exploration licences and if these obligations are
not met the Group may be forced to forfeit its working interest in
these contracts and any sums of restricted cash lodged with host
governments as guarantees for our performance of the minimum work
obligations. Furthermore some of the agreements contain provisions
for the payment of penalties if the minimum work obligations are
not fulfilled.
The 2015 Financial Statements have been prepared on a going
concern basis, and further details on this can be found in the
Financial Review.
Board and Management changes
In February 2015 Ken Judge left the Board and was served notice
to terminate his executive services as Gulfsands legal counsel.
On 13 April 2015 Mahdi Sajjad was removed from his role as the
Company's Chief Executive and on 30 June 2015 he was not re-elected
as a Director at the Company's Annual General Meeting. Mr. Sajjad
has brought a claim in the High Court against Gulfsands Petroleum
Levant Limited ("Gulfsands Levant"), a subsidiary of the Group,
which arises out of his removal by the Board as CEO and termination
of his employment. Mr. Sajjad has also brought a claim in the
Employment Tribunal against Gulfsands Levant for constructive
unfair dismissal based on the same factual circumstances as his
High Court claim. In addition Mr. Sajjad also brought a claim
before the Lebanese Arbitration Board against Gulfsands Petroleum
(MENA) Limited in relation to the branch office in Beirut. The
Group is currently engaged in defending Mr. Sajjad's claims and in
pursuing its counter-claim against Mr. Sajjad.
In April 2015 Andrew West stood down as Non-Executive Chairman
and remains on the Board as a Non-Executive Director.
Simultaneously I was appointed to the Board as a Director and
Executive Chairman.
Also in April 2015 Andrew Morris was appointed to the Board as a
Non-Executive Director. Andrew is Chairman of Madagascar Oil
Limited and his career includes a period with the global accounting
firm Ernst & Young. Mr. Morris makes a valuable contribution to
the Board on both technical and financial matters.
In April 2015 Alan Cutler gave notice of resignation from his
executive role as Director - Finance and Administration. He stepped
down from the Board in August 2015 and left the Company in October
2015.
At the Company's Annual General Meeting in June 2015 Ian Conway
retired from the Board and did not stand for re-election. He
continues his executive role as Technical Director.
Outlook for 2016 and beyond
The Group remains committed to maintaining its presence in
Syria, and it considers its partnership with General Petroleum
Corporation ("GPC") as a key element for the safe stewardship of
Block 26 while the various sanctions prevent Gulfsands from a more
active role.
We shall continue to seek to farm-out the assets we hold in
Morocco, Colombia and Tunisia ensuring we can benefit from any
success but without being exposed to the full cost of
exploration.
I would like to thank all our staff for their hard work over the
last twelve months and look forward to working with them in the
future to develop Gulfsands into an oil and gas company we can all
be proud to be part of.
Yours sincerely,
Alastair Beardsall
Executive Chairman
17 March 2016
Disclaimer
This results announcement contains certain forward-looking
statements that are subject to the risk factors and uncertainties
associated with the oil and gas exploration and production
business. Whilst the Group believes the expectations reflected
herein to be reasonable in light of the information available to
them at this time, the actual outcome may be materially different
owing to a variety of factors including specific factors identified
in this statement and other factors outlined in the Group's 2015
Annual Report.
Operations Review
Syria
Gulfsands is the operator of the Block 26 Production Sharing
Contract ("PSC") and holds a 50% working interest in the PSC along
with Sinochem Group (also 50% working interest).
Gulfsands is not presently involved in any production or
exploration activities on Block 26 as Force Majeure has been
declared in respect of the contract following the introduction of
EU sanctions in Syria.
The Group has ensured that it remains compliant with all
applicable sanctions in relation to Syria and intends to return to
production and exploration activities as soon as permitted.
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Position during 2015
-- Continued compliance with applicable sanctions.
-- Block 26 facilities, wells and infrastructure remain secure and predominantly functional.
-- Office presence maintained in Damascus.
-- Retained technical capabilities through staff redeployment.
Block 26 covers an area of 5,414 km(2) in north east Syria and
the PSC grants rights to the joint venture contractors to explore,
develop and produce hydrocarbons from all depths outside the
pre-existing fields within the area and from the deeper
stratigraphic levels below the pre-existing discovered fields.
Rights to the benefits of production from discovered fields last
for a minimum of 25 years from the date of development approval
with an extension of a further ten years thereto at the partners'
option. Gulfsands joint venture partner in Block 26 is Sinochem
Group, a Chinese conglomerate primarily engaged in the production
and trading of chemicals and fertilizer, and exploration and
production of oil.
Under the Group's operatorship, two oil fields containing
reservoirs of Cretaceous age have been discovered and appraised
within the PSC area, Khurbet East (2008) and Yousefieh (2010).
During 2011 combined production from these fields reached a level
of just under 25,000 barrels of oil per day before the impact of EU
sanctions resulted in the curtailing of production levels. Two
additional oil and gas discoveries within reservoirs of Triassic
age have been identified within the Kurrachine and Butmah Dolomite
formations, beneath the Cretaceous aged oil producing reservoir in
the Khurbet East field. Development approvals for these Triassic
discoveries were granted in 2008 and 2011 respectively. A further
oil discovery was made late in 2011 by Gulfsands in the Cretaceous
aged reservoirs penetrated by the Al Khairat exploration well, a
few kilometres east of the Yousefieh field. This discovery awaits
further evaluation and development work, and is not currently
incorporated into the Company's existing Production Licence
areas.
Operation of the Khurbet East and Yousefieh fields during the
production phase has been undertaken by Dijla Petroleum Corporation
("DPC"), a joint operating company formed between Gulfsands,
Sinochem and Syrian General Petroleum Company ("GPC") for this
purpose, to which staff of both Gulfsands and GPC had previously
been seconded. As a consequence of the EU's imposition of further
sanctions in Syria which came into effect in early December 2011,
in accordance with the terms of the PSC for Block 26, a Notice of
Force Majeure was served on GPC, the principal counterparty to the
PSC. The imposition of EU Sanctions has prohibited Gulfsands'
involvement in petroleum production operations in Syria and
restricted its activities in relation to Block 26 generally and
unless and until these sanctions are lifted or otherwise modified
so as to permit the Company's return to its prior involvement in
those activities, the Company will be obliged to maintain its
current position with respect to Block 26 PSC matters. Since the
introduction of EU sanctions on 1 December 2011 and the subsequent
declaration of Force Majeure under the PSC, Gulfsands has had no
involvement with the operations of DPC, and Gulfsands staff
seconded to DPC have been withdrawn, leaving DPC under the
management of GPC secondees.
The final exploration period of the PSC was set to expire in
August 2012, eight months after Force Majeure was declared in
December 2011. While the final exploration period legally expired
in August 2012, it is understood that the Syrian authorities may be
prepared to grant the Group an additional period to undertake
exploration work on Block 26 to replace that period of time which
was lost when Force Majeure was declared. The Group has ensured
that it remains compliant with all applicable sanctions in relation
to Syria and intends to return to production and exploration
activities as soon as permitted and conditions allow.
During 2015 the Group's Syria Reserves were reclassified to
Contingent Resources as a result of the continuing EU Sanctions in
Syria. This process was subject to external audit and
confirmation.
Since December 2011 Gulfsands has received from DPC updates on
oil volumes produced from the Group's Syrian fields under DPC's
operation. These updates have been received on an infrequent and
irregular basis and it has not been possible for Gulfsands to
verify the content of the information provided. The Group has been
updating its remaining recoverable resource volumes for these
fields on at least an annual basis based on the information that
has been received from DPC.
In February 2016 the Group received information from DPC stating
that a total volume of 266,934 bbls of oil had been produced from
the Group's fields during 2015 and exported by pipeline to the
regional oil gathering station at Tal Addas, 22 km north east of
the Group's Production Concessions.
In addition at this time DPC reported, for the first time, that
oil also had been lifted from the Group's fields by an alternative
oil export method, via production into tankers using gantry loading
at the Khurbet East Production Facility. Furthermore DPC advised
for the first time that this alternative export method had been in
operation throughout 2014 and 2015, and that oil production during
this period via this export method was an additional 3,138,739 bbls
(2014: 1,984,390 bbls, and 2015: 1,154,349 bbls) .
Based on this new production information the Group has updated
the previously reported total oil production for 2014 of 399,325
bbls of oil to 2,383,715 bbls of oil via both export methods. 2015
total oil production via both export methods is now updated to a
total 1,421,283 bbls of oil. The Group has not recognised any
revenue for this or indeed any production, post the imposition of
EU sanctions, but has updated its remaining recoverable resource
volumes for these fields based on this new production
information.
The Group has evaluated that it holds within the Massive, Butmah
and Kurrachine reservoirs of Khurbet East field, and the Yousefieh
field, 2C Contingent Resources of 69.7 mmbbls of oil and
condensate, and 33.4 bcf of gas (working interest basis).
The Group has also evaluated that the oil discovery at Al
Khairat contains 2C Contingent Resources of 12.0 mmbbls of oil
(working interest basis). These resources have been subject to
external audit.
Sanction compliance
Gulfsands has taken extensive legal advice with respect to its
obligations under the sanctions in place at the time and has
liaised regularly with relevant regulators and generally acted
cautiously to be certain of remaining compliant compliance with all
relevant sanctions. The Board is determined to ensure that the
Group's activities remain compliant and Management will continue to
liaise closely with the relevant regulatory authorities to ensure
this objective is achieved while continuing to keep GPC fully
informed of the breadth and scope of restrictions on our activities
as a result of continuing to comply with applicable sanctions.
Plan to monitor assets during 2016
-- Continued compliance with applicable sanctions.
-- Maintain an office presence in Damascus whilst reducing the
Group's technical capabilities in order to save costs.
-- Continue efforts to assimilate and verify where possible
information from the field regarding:
o asset operations and facility / well integrity.
o overall status of security in the near field area.
-- Re-confirm to the extent that it is possible Gulfsands' position on cost recovery.
-- Update Gulfsands plans to maintain readiness to resume
operational activities when sanctions are lifted.
Morocco
Gulfsands is the operator of the onshore Moulay Bouchta
exploration permit in northern Morocco which incorporates proven
conventional oil and biogenic gas petroleum systems. Moroccan
hydrocarbon exploration and exploitation permits are subject to a
tax/royalty fiscal system which is considered favourable by
international standards.
Moulay Bouchta Contract
Contract expiry First exploration phase, June 2016.
date:
Minimum work Acquisition and processing of 500
obligation: km of 2D seismic data to be captured
in a new survey; reprocessing and
interpretation of selected legacy
2D seismic lines and the existing
3D seismic data; and a legacy oil
field reactivation study.
Further details are provided in
note 3 to the Annual Financial Statements.
---------------- --------------------------------------------
The Group acquired operatorship of the Moulay Bouchta permit
during 2014, taking a 75% participating interest while Morocco's
Office National des Hydrocarbures et des Mines ("ONHYM") retained a
25% participating interest, the attributable cost of which will be
carried by Gulfsands upon the usual terms for such participation
through the exploration phase of the permit and until a commercial
hydrocarbon discovery is made.
The Moulay Bouchta permit encompasses an elongated area running
west to east covering approximately 2,820 km(2), and is located to
the north of the cities of Rabat, Meknes and Fes. It covers terrain
where the existence of a working petroleum system has been
confirmed with the discovery and development of three light oil
fields, the most recent of which was the Haricha Field which had
produced a total of 2.8 mmboe of oil and 4.2 bcf of gas when
production ceased in 1990. The prospectivity within Moulay Bouchta
is considered to relate mainly to the potential for deeper and
possibly larger hydrocarbon bearing structures within Jurassic and
Cretaceous aged reservoirs to exist and be found within the permit
area.
Work programmes are continuing with respect to the meeting of
the minimum work obligation activities on the permit;
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-- prospectivity for exploration and near field appraisal
drilling opportunities as evaluated from existing seismic data is
ongoing;
-- a tender process has been undertaken during 2015 for the
acquisition of 500 km of 2D line seismic within the permit, and a
contractor company has been selected for this work once sanctioned
and fully funded;
-- legacy 2D seismic data from the permit area have been selected for reprocessing;
-- contractors with a good track record for performing
reprocessing work within this type of geological terrain are under
evaluation to reprocess the entire Haricha Field legacy oil field
3D survey data set;
-- a reservoir modelling study of the depleted Haricha Field is
in progress with the aim to identify any potential for infield
and/or area re-activation.
Following interpretation of existing 2D legacy seismic data, and
prior to the acquisition of further 2D data, the Group has
identified best estimate Prospective Resources of 11.4 mmboe of oil
and gas (75% working interest) within the Moulay Bouchta permit
area. These resources have been subject to external audit.
Gulfsands are in discussions with ONHYM regarding the
outstanding work commitments on Moulay Bouchta, and are hopeful a
forward plan can be agreed that allows Gulfsands to continue to
participate in the exploration of its remaining interest in
Morocco.
The Group has initiated a process of divestment or farm-down of
its interest in the Moulay Bouchta Petroleum Agreement, as a means
of reducing its future financial commitments. If the Group is
unable to farm-down or divest its interest in the agreement on
favourable terms the Group is at risk of forfeiting its interest,
and all or part of the $1.75 million of restricted cash held as a
performance guarantee for completing the minimum work programme on
the permit area.
Note that there exists no parent company guarantee under the
Moulay Bouchta Petroleum Agreement.
Other Exploration contracts
Fes contract
The Fes contract expired on 24 September 2015.
During 2015 reprocessing by specialist consultants of 650 km of
2D seismic data acquired by Gulfsands across the Fes permit was
undertaken, and subsequent in-house re-interpretation and remapping
of lead concepts yielded promising results.
A request was made to ONHYM in March 2015 for the granting of a
two year extension to the contract period in order for the Company
to conduct a farm-out process and thereby secure funding for
executing the remaining work programme on the permit.
On 16 October 2015 the Group announced that the extension period
of the Fes Petroleum Agreement had expired and the request to
further extend the agreement was not granted by ONHYM, and
furthermore that:
-- ONHYM advised that Gulfsands Morocco will forfeit its $5.0
million in restricted cash held as a performance guarantee in
relation to its minimum work obligation under the Fes Petroleum
Agreement and the restricted cash had been drawn by ONHYM; and
-- ONHYM had requested details of the costs incurred during the
six year extension period in order to determine if a penalty was
payable, with such penalty being the estimated cost of the minimum
exploration work programme of $18.5 million, less the costs
actually incurred in respect of exploration work required to be
carried out during the extension period. At least $18.5 million has
been spent on exploration activity during the extension period.
The Group believes there are no grounds for any potential claims
for financial sums and penalties and is seeking legal advice on the
matter.
On 25 January 2016 Gulfsands gave notice to ONHYM that if
various matters: including that of any potential penalty for
non-fulfilment of the minimum exploration work programme; and
Gulfsands seeking the return of guarantee funds called; are not
resolved at the end of a 60-day period then Gulfsands reserves the
right to proceed with arbitration as set out under the Fes
Petroleum Agreement.
Note, no parent company guarantee exists under the Fes Petroleum
Agreement.
Rharb contract
A ten month extension to the Rharb exploration contract, which
governs the Rharb Centre and Rharb Sud permits, was granted by
ONHYM in January 2015. Subsequently on 9 November 2015 the Rharb
contract expired.
During 2015, on the Rharb Centre permit area Gulfsands completed
the drilling and testing of its fifth and sixth biogenic gas
exploration wells, at the Dardara South East location ("DRC-1") and
the Douar Ouled Balkhair location ("DOB-1") respectively. Both
wells proved to be gas discoveries, with maximum well test gas flow
rates for each well in excess of 10 million standard cubic feet per
day, and both were completed and then suspended as future gas
production wells.
On the Rharb Sud permit, work continued on the identification of
viable exploration lead concepts from legacy seismic and well
data.
On 9 November 2015, the Group submitted a request to further
extend the Rharb Petroleum Agreement for a period of two years to
allow the Group to appraise the three gas discoveries it had made
during the 2014/15 period within the Rharb Centre permit area.
On 30 November 2015, the Company received a response from ONHYM,
dated 26 November 2015, advising that its request for an extension
to the Rharb Petroleum Agreement had been rejected and furthermore
that:
-- Gulfsands Morocco will forfeit its $1.0 million in restricted
cash held as a performance guarantee in relation to its minimum
work obligation under the Rharb Petroleum Agreement;
-- ONHYM is seeking a penalty equal to the estimated cost of the
minimum exploration work programme of the Rharb Petroleum Agreement
less the costs actually incurred in respect of exploration work
required, whereby ONHYM is claiming a sum of $7.5 million;
-- ONHYM advised they will also, by separate request, seek the
outstanding amount under the training obligation of the Rharb
Petroleum Agreement; and
-- ONHYM was seeking an update on the Group's progress in
relation to the abandonment of the legacy producing wells and the
cleaning and restoring of the well sites in the Rharb Centre permit
area.
The Group strongly refutes the claims for financial sums and
penalties and is seeking legal advice on the matter. The estimated
cost of the minimum exploration work programme under the Rharb
Petroleum Agreement is $15.0 million and at least $15.0 million has
been spent on exploration activity during the extension period.
On 25 January 2016 Gulfsands gave notice to ONHYM that if
various matters: including that of any potential penalty for
non-fulfilment of the minimum exploration work programme; and
Gulfsands seeking the return of guarantee funds called; are not
resolved at the end of a 60-day period then Gulfsands reserves the
right to proceed with arbitration as set out under the Rharb
Petroleum Agreement.
Note, no parent company guarantee exists under the Rharb
Petroleum Agreement.
The Group also holds interests in three exploitation concessions
lying within the Rharb permit area as follows:
-- Zhana 1, a 25 year concession that expires in June 2025 (GPX: 65%, ONHYM: 35%);
-- Zhana 2, a 15 year concession that expires in February 2018 (GPX: 75%, ONHYM: 25%); and
-- Sidi Amer 1, a 15 year concession that expires in July 2019 (GPX: 75%, ONHYM: 25%).
There are four wells on these three concessions that penetrate
depleted, or near depleted gas reservoirs. The Group has no plans
to re-enter or produce from these four legacy wells or gas fields
as such activities have been evaluated to be economically
unattractive for re-activation work.
Tunisia
Gulfsands has a 100% interest in the operated Chorbane
exploration permit onshore Tunisia covering approximately 1,942
km(2). The permit is subject to a PSC signed in 2009. The fiscal
terms of the PSC are considered reasonable when compared on an
international basis.
Chorbane contract
Contract expiry Second phase July 2017 following
date: approval by the Ministry of a two
year extension.
Minimum work Drilling one exploration well; and
obligation: acquisition of 200km seismic data.
Further details are provided in
note 3 to the Annual Financial Statements.
---------------- --------------------------------------------
The current exploration period under the contract originally ran
to-mid July 2015. In May 2015 Gulfsands submitted an application
for a two year extension to this period during which the work
obligation of acquiring 200 line km of 2D seismic and the drilling
of one exploration well must be completed. The application was
confirmed as being successful by the Tunisian Ministry of Industry,
Energy and Mines during December 2015, and the contract thereby
extended to July 2017. The Group will now proceed to divest the
asset or alternatively farm-down its 100% interest in exchange for
a carried work programme.
The exploration risk level associated with the drilling of
identified prospects and leads is considered to be medium for light
oil in Eocene and Cretaceous aged formations which exhibit moderate
to good reservoir quality, but relatively high for wet gas in
deeper Jurassic aged formations which are anticipated to be of low
reservoir quality.
The Group has identified best estimate Prospective Resources of
44 mmboe of oil and gas (100% working interest) within the Chorbane
permit area. This resource estimate has been subject to external
audit.
Colombia
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Gulfsands has Exploration and Production Contracts ("E&P
contracts") over two onshore contract areas, Llanos Block 50 ("LLA
50") and Putumayo Block 14 ("PUT 14"), covering approximately 514
km(2) and 464 km(2) respectively. Gulfsands is operator of both
Blocks with 100% working interest. Both contracts were awarded as
part of the Ronda 2012 national licencing round, and are subject to
tax/royalty systems incorporating a low bid level of additional "X"
factors royalties and work programme contributions.
Llanos Block
50
Contract expiry First exploration phase, November
date: 2016.
Minimum work Acquisition of an additional 103
obligation: km of 2D seismic data to be captured
in a new survey; and drilling one
exploration well.
Further details are provided in
note 3 to the Annual Financial Statements.
Putumayo Block
14
Contract expiry First exploration phase, November
date: 2017.
Minimum work Acquisition of an additional 93
obligation: km of 2D seismic data to be captured
in a new survey; and drilling one
exploration well.
Further details are provided in
note 3 to the Annual Financial Statements.
---------------- --------------------------------------------
The Group continues to undertake the studies required prior to
the commencement of either 2D or possibly exploration-oriented 3D
seismic acquisition programmes on the contract areas.
The Group requires funding to execute the work programme on the
permit and to this end has initiated during 2015 a farm-out or
divestment exercise for its interests in the contract areas prior
to any significant financial commitment with respect to further
exploration work. This process is ongoing.
During the first quarter of 2015 Gulfsands Sud America Limited
informed its then joint venture partner in Colombia, Luna Energy,
that it was obliged to serve notice of default on Luna, on account
of non-payment of outstanding cash calls relating to the LLA 50 and
PUT14 E&P contracts. Subsequently, as payment remained
non-forthcoming, Luna defaulted on its interests and Gulfsands
assumed 100% working interest in both Blocks.
Reserves and Resources Report
Reserves
Reserves are categorised into Proved, Probable and Possible
Reserves in accordance with the 2007 Petroleum Resources Management
classification system ("PRMS") of the Society of Petroleum
Engineers ("SPE"). Definitions for Proved, Probable and Possible
Reserves are contained in the Glossary.
Working interest reserves estimates for Syria have to date
represented the proportion, attributable to the Group's 50%
participating interest, of forecast future hydrocarbon production
during the economic life of the Block 26 PSC, including the share
of that production attributable to General Petroleum Corporation
("GPC"). Hydrocarbons discovered on the Block 26 PSC contract area
in Syria have been evaluated as reserves for several years leading
up to, and after, the imposition of EU Sanctions in Syria. The
Group's reserves over this period have been based on estimates made
by Gulfsands' technical teams which are then reviewed by
independent petroleum engineers from external parties. External
reviews of the Group's reserves have been performed by Senergy (GB)
Limited ("Senergy") since 2009. Since this time commercial oil
production from the Block 26 area has exceeded 21 mmbbls.
The Company recognises that it cannot give a definite timeline
for the resumption of the full field development of the discovered
fields within Block 26 that was suspended under the declaration of
Force Majeure in 2011. Furthermore, the SPE PRMS Guidelines suggest
that if the (re)commencement of development is five or more years
from the date of evaluation then the volumes of hydrocarbons should
be classified as Contingent Resources. The Company has concluded as
of December 2015 that the uncertainty in any timeline over which EU
sanctions in Syria may be lifted require that the volumes of oil,
gas and condensate previously reported as Syria reserves be
reclassified by the Company as Contingent Resources. This is
discussed further in the Resources section.
Whilst no definite timeline for the conflict can be
substantiated, the Board believes that the EU Sanctions ultimately
will be lifted and will continue to monitor all activity focused on
resolving the situation in Syria and reconsider the basis for
reversing this reclassification in line with any future
developments.
Resources
The Group's resources are based on estimates made by Gulfsands'
technical teams which are then reviewed by independent petroleum
engineers from external parties. External reviews of the Group's
resources have been performed for the Group by Senergy since
2009.
Summary of Contingent Resources
Contingent Resources are those quantities of petroleum
estimated, as of a given date, to be potentially recoverable from
known accumulations by the application of development projects, but
are not currently considered to be commercially recoverable due to
one or more contingencies. Contingent Resources are further
categorised by the SPE into 1C, 2C and 3C according to the level of
uncertainty associated with the estimates.
In accordance with the 2007 SPE PRMS, a guideline risk factor
should be stated associated with the Contingent Resources quoted
for each category; the risk factor indicates the likelihood that
the Group will ultimately commercially develop the resource. The
risk factor considers all technical and non-technical factors that
are impacting or are likely to impact on the likelihood of
development, and is termed the "Chance of Development".
The estimation and reclassification of Syrian reserves
attributed to the Block 26 Khurbet East and Yousefieh Production
Concessions to Contingent Resources conducted in December 2015 has
been prepared by the Company and reviewed by Senergy. In estimating
the resources it has been assumed that the period of time elapsed
during which the Group has declared Force Majeure on its Block 26
development and production activities will ultimately be added as
an equivalent time period extension to the contractually specified
time period following which the Block 26 Production Concessions
were due to expire.
As a consequence of the EU's imposition of further sanctions in
Syria which came into effect in early December 2011, GPC has
assumed operational full control and responsibility for the
management of DPC (the joint venture operating company set up for
managing development and production operations within Block 26),
and Gulfsands has withdrawn all of its staff previously seconded to
DPC.
Since December 2011 Gulfsands has received from DPC updates on
oil volumes produced from the Group's Syrian fields under DPC's
operation. These updates have been received on an infrequent and
irregular basis and it has not been possible for Gulfsands to
verify the content of the information provided. The Group has
updated its remaining recoverable resource volumes for these fields
on at least an annual basis based on the information that has been
received from DPC.
In February 2016 the Group received information from DPC stating
that a total volume of 266,934 bbls of oil had been produced from
the Group's fields during 2015 and exported by pipeline to the
regional oil gathering station at Tal Addas, 22 km north east of
the Group's Production Concessions.
In addition at this time DPC reported, for the first time, that
oil also had been lifted from the Group's fields by an alternative
oil export method, via production into tankers using gantry loading
at the Khurbet East Production Facility. Furthermore DPC advised
for the first time that this alternative export method had been in
operation throughout 2014 and 2015, and that oil production during
this period via this export method was an additional 3,138,739 bbls
(2014: 1,984,390 bbls, and 2015: 1,154349 bbls) .
Based on this new production information the Group has updated
the previously reported total oil production for 2014 of 399,325
bbls of oil to 2,383,715 bbls of oil via both export methods. 2015
total oil production via both export methods is now updated to a
total 1,421,283 bbls of oil.
These revised reported produced oil volumes for 2014 and 2015
have been used by the Gulfsands technical team to update the
Group's Contingent Resource bookings (Gulfsands working interest
50%), which are stated as of 1 January 2016. The resource figures
have not been reviewed by independent resource engineers.
In addition, Contingent Resources are estimated for the oil
discovery at Al Khairat which is located a few kilometres outside
of the Company's existing Block 26 Production Concession areas, and
these estimates have been reviewed by Senergy.
Unrisked working interest basis
As at 1 January 2016
Risk factor
(Chance
of
Constituent 1C 2C 3C development)
-------------------------------------------- ----- ------ ------ --------------
Syria Block 26
(Working interest
50%)
Khurbet East & Oil + Condensate,
Yousefieh mmbbl 39.4 69.7 112.1 90%
Production Concessions Gas, bcf 14.7 333.4 68.7 90%
Al Khairat discovery Oil, mmbbl 2.9 12.0 45.7 30%
------------------------ ------------------- ----- ------ ------ --------------
Total mmboe 44.7 87.3 169.3
------------------------ ------------------- ----- ------ ------ --------------
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Risked working interest basis
Total mmboe 38.5 71.4 124.9
------- -------- ----- ----- ------
NB Certain figures may not add up due to roundings.
"Oil" includes condensate and NGLs.
Gas is converted to mmboe at the conversion factor 1 bcf =
0.1667 mmboe.
Summary of Prospective Resources
Prospective Resources are those quantities of petroleum
estimated, as of a given date, to be potentially recoverable from
undiscovered accumulations. They are further categorised by the
2007 SPE PRMS into Low, Best and High estimates. The quoted Low,
Best and High estimates are the 90% probability ("P90"), 50%
probability ("P50") and 10% probability ("P10") values respectively
derived from probabilistic estimates generated using a "Monte
Carlo" statistical approach.
In accordance with the 2007 SPE PRMS, a guideline risk
assessment should be provided associated with the Prospective
Resources quoted for Low, Best and High estimate categories. The
risk assessment here is the Chance of Discovery; the additional
risk assessment relating to the Chance of Development is not
normally quantified at this level of resource classification.
The Group has estimated Prospective Resources for its Moroccan
Moulay Bouchta and Tunisian Chorbane onshore permits, and these
estimates have been reviewed by Senergy.
Unrisked working interest basis
As at 1 January 2016
Risk factor
(Chance
of
Constituent Low Best High discovery)
----------------------- ---------------- ----- ------ ------ --------------
Morocco Moulay Bouchta permit
(Working interest
75%)
Oil and Sales
Jurassic leads Gas, mmboe 1 11 75 Medium-High
----------------------- ---------------- ----- ------ ------ --------------
Morocco total mmboe 1 11 75
----------------------- ---------------- ----- ------ ------ --------------
Risk factor
(Chance
of
Constituent Low Best High discovery)
------------------------ --------------- ----- ------ ------ --------------
Tunisia Chorbane permit
(Working interest
100%)
Sidi Agareb prospect
Eocene / Upper
Cretaceous Oil, mmbbl 8 27 63 9%-25%
Lafaya Deep &
Sidi Daher prospects Sales Gas,
Jurassic leads bcf 21 103 398 11%
------------------------ --------------- ----- ------ ------ --------------
Tunisia total mmboe 12 44 129
------------------------ --------------- ----- ------ ------ --------------
NB Certain figures may not add up due to roundings.
"Oil" includes condensate and NGLs.
Gas is converted to mmboe at the conversion factor 1 bcf =
0.1667 mmboe.
Financial Review
Selected operational and financial data
Year ended Year ended
31 December 31 December
2015 2014
$' 000 $' 000
----------------------------------------- ------------- -------------
General administrative expenses (6,965) (5,469)
Exploration costs written-off/impaired (53,799) (6,040)
Loss from continuing operations (69,200) (12,113)
E&E cash expenditure (10,085) (26,987)
Cash and cash equivalents 420 7,907
Restricted cash balances 3,691 11,514
----------------------------------------- ------------- -------------
Financial highlights for the year ended 31 December 2015
-- The loss for the year from continuing operations was $69.2 million (2014: $12.1 million).
-- Gulfsands has continued to reduce its office expenses which,
excluding restructuring costs, have reduced by 36% in the year
compared with 2014.
-- $51.0 million of E&E assets related to the Moroccan Fes
and Rharb Petroleum Agreements have been written-off in the year
following the expiry of the contracts in September and November
respectively; in addition the related restricted cash balances of
$6.0 million have also been provided against.
-- $2.8 million of E&E assets related to the Moroccan Moulay
Bouchta Petroleum Agreement have been fully impaired at 31 December
2015; in addition the related restricted cash balances of $1.75
million have also been provided against.
-- The Group continues to value its investment in its Syrian interest at $102.0 million.
-- The Arawak Loan Facility was assigned to Weighbridge Trust
Limited in June 2015. During the year, prior to the assignment $5.0
million was drawn-down under the facility. A further $3.2 million
was drawn-down under the facility post assignment.
-- Cash and cash equivalents reduced by $7.5 million in the year
to $0.4 million at 31 December 2015 (31 December 2014: $7.9
million).
Operating performance
Year ended Year ended
31 December 31 December
2015 2014
General administrative expenses $' 000 $' 000
---------------------------------- ------------- -------------
Office expenses 8,727 13,640
Partner recoveries (552) (2,137)
Restructuring costs 1,044 -
Depreciation and amortisation 506 602
Office expenses capitalised (2,760) 6,636
---------------------------------- ------------- -------------
General administrative expenses 6,965 5,469
---------------------------------- ------------- -------------
General administrative expenses for the year ended 31 December
2015 total $7.0 million (2014: $5.5 million). This increase
reflects: one-off restructuring costs incurred in the year as part
of the Management restructuring; a decreased level of partner
recoveries resulting in part from the termination of the Colombian
joint venture agreement at the start of 2015; and a reduction in
costs capitalised against E&E assets as a result of the reduced
operational activity in the year and the expiry of the Moroccan
Rharb and Fes Petroleum Agreements. Underlying office expenses have
actually decreased significantly, by some 36%, resulting from the
increasing efforts to manage costs to fit the current business
model and strategy.
Exploration write-offs in the year totalled $51.0 million (2014:
$6.0 million) and are a result of the expiry of both the Fes and
Rharb Petroleum Agreements in Morocco during the year. The Fes
Petroleum Agreement expired on 24 September 2015 and all E&E
expenditure related to the Fes permit has been fully written-off in
the year, with write-offs totalling $22.2 million, inclusive of
$12.0 million fair value recognised on acquisition. The Rharb
Petroleum Agreement expired on 9 November 2015, and the Group's
request to further extend the agreement for a period of two years
to allow the Group to appraise the gas discoveries made in 2014/15
was rejected. All E&E expenditure related to the Rharb Centre
and Rharb Sud permits has been fully written-off in the year, with
write-offs totalling $28.8 million, inclusive of $5.8 million fair
value recognised on acquisition.
On the expiry of the contracts, ONHYM advised that Gulfsands
Morocco would forfeit its restricted cash held as performance
guarantees in relation to its minimum work obligations under the
Fes Petroleum Agreement and the Rharb Petroleum Agreement. ONHYM
drew the $5.0 million restricted cash held under the Fes contract
during the year and this has been written-off in the year. $1.5
million of the restricted cash balance was due back to a third
party in the event of its release so the net charge to the Income
Statement in the year is $3.5 million. ONHYM did not draw the $1.0
million restricted cash held under the Rharb contract until January
2016 but the recovery of this has been fully provided against at 31
December 2015. $0.5 million of the restricted cash balance was due
back to a third party in the event of its release so the net charge
to the Income Statement in the year is $0.5 million.
E&E asset impairments for the year were $2.8 million (2014:
Nil) and relate to the Moroccan Moulay Bouchta permit only. The
financial commitments of the Moulay Bouchta contract are
inconsistent with the Group's revised strategy and Gulfsands have
therefore initiated a farm-out process for this contract. However
given the licence expiry date for the initial exploration phase in
June 2016, the outstanding work commitments on the permit which
could not physically be fulfilled before this date and the
uncertainty of securing an industry partner before licence expiry,
the expenditure to date attributed to the Moulay Bouchta permit of
$2.8 million, inclusive of a potential $1.75 million penalty for
non completion of the minimum work obligations, has been fully
impaired at 31 December 2015. In addition, the recovery of
restricted cash balances of $1.75 million held as a performance
guarantee in relation to the minimum work obligation under the
Moulay Bouchta contract has been fully provided against at 31
December 2015.
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The Group reported a loss before tax for continuing operations
for the year ended 31 December 2015 of $69.2 million (2014: loss
from continuing operations $12.1 million). The results of 2014 also
included a loss from discontinued operations of $4.0 million in
respect of the US Gulf of Mexico operations which were disposed of
in December 2014.
Balance Sheet
The Group's intangible exploration and evaluation assets are
held at a net book value of $7.1 million at 31 December 2015 (31
December 2014: $53.0 million) and relate to Tunisian and Colombian
assets only. Capital expenditures for the year totalled $8.5
million (2014: $21.0 million) and predominantly relate to the
drilling of the DRC-1 and DOB-1 Rharb Centre wells in Morocco. The
DRC-1 well commenced drilling in December 2014 and the DOB-1 well
commenced drilling on 28 January 2015. Both the DRC-1 and DOB-1
wells were successfully drilled in the year to target depth,
discoveries declared and the wells temporarily suspended as future
gas producers. The Rharb Petroleum Agreement expired in November
2015 so these costs have since been fully written-off. There have
been write-offs totalling $51.0 million in the year and E&E
impairments of $2.8 million all which relate to the Moroccan
assets.
Management has reviewed the carrying value of all its remaining
E&E assets at the date of this Report and notes that there are
uncertainties caused by the upcoming expiry dates on certain
contracts and the potential non fulfilment of work obligations in
the necessary timeframes which could result in termination of those
contracts. Management's strategy is to protect the value of all of
its exploration and evaluation assets, and it is seeking contract
extensions and the restructuring of certain of its work obligations
to allow the contracts to be appropriately farmed-down or divested.
It should be noted that if Management is unsuccessful in their
strategies for the E&E assets, the carrying value of the
related assets and the restricted cash securing those work
obligations could become impaired. The contract/licence expiry
dates, capital commitments and restricted cash balances held are
detailed further in note 3 to the Annual Financial Statements.
The Group's investment in DPC, the entity established in Syria,
pursuant to the PSC, to administer the Group's Syrian oil and gas
development and production assets (and which is considered to also
include the related rights to production under the PSC), is
recorded as an available-for-sale investment. Due to the unknown
duration of EU sanctions in force against Syria and uncertainty
over the eventual outcome of events in the country, any valuation
attributed to the investment is highly subjective and subject to
material change and uncertainty. Management have reviewed their
internal valuation methodology and believe that as a result of the
further passage of time and the high degree of judgement required,
it is no longer possible to reliably estimate the investment's fair
value. Management will therefore carry forward the last valuation
which could be reliably determined, being the $102 million
previously disclosed and will carry forward this value. This value
will be reviewed periodically for impairment and any impairment
losses recognised through the Income Statement.
At 31 December 2015 Management have carried out an impairment
review, using an economic model of the estimated future cash flows
that could be generated in respect of the Group's entitlement
volumes in Block 26. The Management team have reviewed this
economic model in detail and believe due to the high degree of
subjectivity inherent in the valuation it is imperative that the
valuation model and its key drivers and assumptions are as
transparent as possible. Management assessed the key drivers to be:
the oil price, and the delay to resumption of production. For the
year ended 31 December 2015 Management have decided to use the
Brent forward curve to 2022 for its oil price assumption, and then
a 2% per annum escalation factor applied thereafter as the forecast
for the 'base case' comparative. Given the other sources of oil
price data reviewed, Management consider this to be a conservative
approach. Gulfsands cannot give a definite timeline for the
resumption of the full field development of the discovered fields
within Block 26 that was suspended under the declaration of Force
Majeure in 2011. Whilst no definite timeline can be substantiated,
the Board continues to believe that the EU Sanctions will be lifted
within five years and will continue to monitor all activity focused
on resolving the situation in Syria. Management have decided to use
commencement of production in five years as the 'base case'
comparative.
The 'base case' comparative model calculates: a gross Contractor
undiscounted NPV(0) of $1.48 billion; Gulfsands 50% interest NPV(0)
of $0.74 billion and Gulfsands discounted NPV(15) of $107.2
million. Therefore Management believe no impairment is necessary
and have maintained the $102 million carrying value on the Balance
Sheet at year end.
The Board's view is that there has been little significant
change to the circumstances and status of the Group's Syrian
interests. The Board are still unable to provide a firm view as to
the eventual outcome and the timing of resolution of the situation
in Syria that would lead to the EU lifting sanctions against Syria,
allowing Gulfsands to return, however, they continue to consider
that its position in respect of its interests remains strong and
all indications are that the Syrian authorities expect Gulfsands
and its partner to return to operational control of their interests
in accordance with the terms of the PSC as soon as circumstances
permit. The Directors have reviewed the carrying value of this
available-for-sale financial asset at 31 December 2015 and are of
the opinion that the carrying value, although subject to
significant uncertainty, remains appropriate in the
circumstances.
Inventory held at 31 December 2015 totals $1.1 million (2014:
$2.4 million). Due to Management's revised strategy to
farm-out/divest its remaining Moroccan licence, it is anticipated
that the inventory will not be utilised on future drilling and
production activities in Morocco and instead value will be
extracted via disposal. Therefore a provision of $1.1 million has
been made at 31 December 2015 to reduce the value of the inventory
to its expected net realisable value of $1.1 million.
At 31 December 2015 the Group has decommissioning and/or
restoration obligations in respect of a number of wells and well
sites in Morocco under the Moroccan Hydrocarbon Code totalling $0.4
million (2014: $1.0 million). The wells and well sites are located
on the expired Rharb and Fes permits and on the three exploitation
concessions located within these permits. These include the three
discoveries on the Rharb Centre permit: LTU-1, DRC-1 and DOB-1,
which have all been temporarily suspended. Included within the
decommissioning and/or restoration obligations are obligations on
all legacy wells drilled prior to the Group's acquisition of those
interests. Following further examination during 2015 of the scope
of work involved, it is anticipated that the fulfilment of these
obligations can be completed via rigless operations, resulting in a
reduction in the provision. As the Rharb and Fes petroleum
contracts expired during the year, at 31 December 2015 all
decommissioning provisions are disclosed as current liabilities and
no discount rate has been applied to the estimated cost of
decommissioning works.
The outstanding balance on the Weighbridge Loan Facility at 31
December 2015 is $14.4 million (31 December 2014: $4.9 million)
following the draw-down of a further $8.2 million and interest and
facility fees rolled up during the year. The Company announced on
30 June 2015 that Arawak had entered into an assignment agreement
with Weighbridge Trust Limited ("Weighbridge"), acting as agent for
Waterford Finance and Investment Limited ("Waterford") and Mr.
Griffiths, to acquire the Convertible Loan Facility from Arawak. On
22 June 2015, the Group and Weighbridge entered into an agreement
pursuant to which Weighbridge, acting as trustee for Waterford and
Mr. Griffiths with respect to their interests in the Convertible
Loan Facility, provided certain undertakings to the Company. Under
the terms of the agreement, Weighbridge provided undertakings that
it would not, at any time prior to 23 September 2015, exercise its
rights to call for repayment of all outstanding amounts, whether
immediately or within the notice period of 90 days, to exercise its
conversion rights or to exercise its right to participate in any
issue of new ordinary shares pursuant to the terms of the
Convertible Loan Facility. Under the terms of the agreement, the
Company agreed to grant its consent to the assignment of the
Convertible Loan Facility from Arawak to Weighbridge. On 27 August
2015, Weighbridge agreed to extend each of its undertakings to 31
January 2016, being the Open Offer Long Stop Date. It also agreed
to release the Company from its undertakings regarding necessary
share authorities contained in the Convertible Loan Facility
agreement. In providing the undertakings to subscribe for their
existing entitlements under the Open Offer, and to Underwrite the
remaining Open Offer Shares to be issued under the Open Offer, it
was agreed that the principal amount and interest and all fees and
penalties accrued and outstanding under the Convertible Loan
Facility would be applied in paying up in full the Open Offer
Shares to be subscribed pursuant to the Open Offer and the
Underwriting. Post year end the loan was discharged in full on 14
January 2016.
Cash flow
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The total decrease in cash and cash equivalents during the year
was $7.5 million (2014: $25.9 million). Operating cash outflow from
continuing operations increased in the year to $5.5 million (2014:
$3.8 million) largely as a result of exceptional recoveries from
partners in 2014 in relation to historic expenditure. Investing
cash outflow from continuing operations during the period totalled
$10.1 million (2014: $24.0 million). This predominantly consists of
exploration expenditure inclusive of $8.0 million spent on Moroccan
operations and $1.5 million paid in final settlement of the amount
payable for the 2013 acquisition of the additional interest in the
Chorbane contract. Cash received from financing activities totalled
$8.2 million, due to further draw-downs under the Weighbridge Loan
Facility following its assignment.
Financial position
At 31 December 2015 the Group had total unrestricted cash and
cash equivalents of $0.4 million (31 December 2014: $7.9
million).
Restricted cash balances at the end of the year (which are
presented as long-term financial assets in the Balance Sheet)
totalled $3.7 million (31 December 2014: $11.5 million), and
represent funds securitised as collateral in respect of future work
obligations - with amounts not provided against principally in
respect of the Group's Colombian interests. At 31 December 2015 a
provision of $2.75 million has been made against the restricted
cash balances securitised as collateral in respect of future work
obligations on the Rharb and Moulay Bouchta permits. During 2015
$5.0 million of restricted cash balances were written-off in
relation to the Fes Petroleum Agreement as ONHYM called these
funds. It should be noted that if Management are unsuccessful in
their strategy of contract/licence extensions and farm-outs then
the carrying value of the remaining restricted cash securing the
work obligations may become impaired.
Going concern
As at the date of this Report, the Group has cash balances
immediately available to it totalling approximately $3.5 million
with net current trade and other payables of approximately $1.2
million and ongoing costs expected to further decrease in the
second half of 2016 approximating to $0.2 million per month.
Significant focus has been given during the year to
strengthening the Balance Sheet of the Group. On 27 August 2015,
the Company announced a Capital Raising to raise gross proceeds of
approximately $22.0 million before costs by way of an Open Offer.
The Open Offer was conditional upon, among other things, the
passing of certain resolutions to permit the Open Offer to proceed.
On 14 September 2015, the Company convened a general meeting of
shareholders to vote on the resolutions, at which all the
resolutions were duly passed by shareholders. As a result, on 16
December 2015 the Company dispatched its Prospectus to shareholders
setting out the detailed terms and conditions of the Open Offer.
The Open Offer was made to all Qualifying Shareholders (which
excludes those shareholders resident in Australia and the US) to
provide an opportunity to subscribe for an aggregate of 354,837,296
Open Offer Shares (representing a subscription of 350,733,941 new
Ordinary Shares and a purchase of 4,103,355 Treasury Shares) on the
basis of 3.01 Open Offer Shares for every 1 Existing Share held as
at the Record Date, being 5:00 p.m. on 14 December 2015, at an Open
Offer Price of 4.0 pence per Open Offer Share. Waterford and Mr.
Griffiths, as existing shareholders in the Company, each
irrevocably undertook to subscribe for their full entitlements
under the Open Offer and undertook to underwrite the remaining Open
Offer Shares whereby they would acquire any of the shares that were
not subscribed for by Qualifying Shareholders under the Open Offer.
In providing the undertakings to subscribe for their existing
entitlements under the Open Offer, and to Underwrite the remaining
Open Offer Shares to be issued under the Open Offer, it was agreed
that the principal amount and interest and all fees and penalties
accrued and outstanding under the Convertible Loan Facility would
be applied in paying up in full the Open Offer Shares to be
subscribed pursuant to the Open Offer and the Underwriting. The
Open Offer closed for acceptances at 11:00 a.m. on 12 January 2016
and the Company announced that it had received valid acceptances in
respect of 151,760,157 Open Offer Shares from Qualifying
Shareholders, and that pursuant to the Underwriting, a further
203,077,139 Open Offer Shares had been subscribed for by Waterford
and Blake, a company owned and controlled by Mr. Griffiths, such
that a total of 354,837,296 Open Offer Shares had been subscribed
for under the Open Offer representing share proceeds of
approximately GBP14.2 million ($20.4 million). At the closing of
the Open Offer and after satisfaction of the Convertible Loan
Facility, the Group had cash and cash equivalents of $5.6
million.
The Group has continued a strategy of reducing costs and trying
to reduce its net financial exposure to its oil and gas operations.
The Group is running a farm-out process for its interests in
projects in Colombia, Tunisia and Morocco and is optimistic to
recover its performance bonds where appropriate and receive some
consideration in recognition of the work already completed on the
various projects. The Group is also seeking to recover the
restricted cash, placed with banks as a guarantee for the
completion of exploration activities on the Rharb and Fes permits,
and recently drawn on by ONHYM. However, there is no certainty that
these initiatives will be successful or that material cash in-flow
will be achieved. If these initiatives are not successful the
Group's cash forecast indicate that further funding would be
required in approximately eight months time.
Based upon its experience and ongoing discussions with existing
shareholders and potential partners, the Board is confident that
the Group will be able to access appropriate resources to finance
the revised strategy that it is moving forward with, however there
are no binding agreements or commitments in place.
Following completion of a review of the going concern position
of the Company and Group at the meeting of the Board of Directors
on 16 March 2016, including the uncertainties described above, the
Board has concluded that, with current consolidated cash and cash
equivalents totalling $3.5 million and taking into account both the
Board's strategy of farming-down or divesting assets and the new
financial resources that the Board might reasonably expect to
become available, the Company and the Group will have sufficient
resources to continue in operational existence for the foreseeable
future, a period not less than twelve months from the date of
approval of this Financial Report. Accordingly, the Directors
consider it appropriate to continue to adopt the going concern
basis in preparing these Financial Statements.
Notwithstanding the confidence that the Board has in its ability
to finance the Group's re-shaped business, the Directors, in
accordance with Financial Reporting Council guidance in this area,
conclude that at this time there is material uncertainty that such
finance can be procured and failure to do so might cast significant
doubt upon the Company's and the Group's ability to continue as a
going concern and that the Company and the Group may therefore be
unable to realise their assets and discharge their liabilities in
the normal course of business. These Financial Statements do not
include the adjustments that would result if the Group was unable
to continue as a going concern.
Consolidated Income Statement
for the year ended 31 December 2015
2015 2014
Notes $'000 $'000
-------------------------------------------- ----- -------- --------
Continuing Operations
General administrative expenses (6,965) (5,469)
Share-based payments - (56)
Exploration costs written-off/impaired 3 (53,799) (6,040)
Restricted cash balances forfeited/provided
against (5,750) -
Inventory impairment (1,117) -
Other Syrian adjustments - (202)
-------------------------------------------- ----- -------- --------
Operating loss 1 (67,631) (11,767)
Foreign exchange losses (43) (218)
Loan facility finance cost 5 (1,351) (70)
Other finance expenses (188) (76)
Other finance income 13 18
-------------------------------------------- ----- -------- --------
Loss before taxation from continuing
activities (69,200) (12,113)
Taxation from continuing activities - -
Loss for the year from continuing
operations (69,200) (12,113)
Discontinued Operations
Loss for the year from discontinued
operations - (3,978)
-------------------------------------------- ----- -------- --------
Loss for the year attributable
to owners of the parent company (69,200) (16,091)
-------------------------------------------- ----- -------- --------
Loss per share from continuing
operations (cents)
Basic and diluted 2 (58.70) (10.28)
-------------------------------------------- ----- -------- --------
Loss per share attributable to
the owners of the parent company
(cents)
Basic and diluted 2 (58.70) (13.65)
-------------------------------------------- ----- -------- --------
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There are no items of comprehensive income outside of the
Consolidated Income Statement.
Consolidated Balance Sheet
as at 31 December 2015
2015 2014
Notes $'000 $'000
---------------------------------- ----- -------- --------
Assets
Non-current assets
Property, plant and equipment 159 285
Intangible assets 3 7,168 53,352
Long term financial assets 3,691 11,514
Investments 4 102,000 102,000
---------------------------------- ----- -------- --------
113,018 167,151
---------------------------------- ----- -------- --------
Current assets
Inventory 1,096 2,361
Trade and other receivables 790 1,028
Cash and cash equivalents 420 7,907
2,306 11,296
---------------------------------- ----- -------- --------
Total assets 115,323 178,447
---------------------------------- ----- -------- --------
Liabilities
Current liabilities
Trade and other payables 5,719 5,882
Loan facility 5 14,406 -
Provision for decommissioning 448 580
20,573 6,462
---------------------------------- ----- -------- --------
Non-current liabilities
Trade and other payables 3,427 6,178
Provision for decommissioning - 397
Loan facility 5 - 4,855
---------------------------------- ----- -------- --------
3,427 11,430
---------------------------------- ----- -------- --------
Total liabilities 24,000 17,892
---------------------------------- ----- -------- --------
Net assets 91,324 160,555
---------------------------------- ----- -------- --------
Equity
Capital and reserves attributable
to equity holders
Share capital 13,131 13,131
Share premium 105,926 105,926
Merger reserve 11,709 11,709
Treasury shares (11,502) (11,502)
Retained (losses)/profit (27,940) 41,291
---------------------------------- ----- -------- --------
Total equity 91,324 160,555
---------------------------------- ----- -------- --------
Consolidated Statement of Changes in Equity
for the year ended 31 December 2015
Share Share Merger Treasury Retained Total
capital premium reserve shares profit equity
$'000 $'000 $'000 $'000 $'000 $'000
-------------------- -------- -------- -------- -------- -------- --------
At 1 January 2014 13,131 105,926 11,709 (11,502) 57,387 176,651
Loss for 2014 - - - - (16,091) (16,091)
Transactions with
owners:
Options settled
or exercised - - -- - (61) (61)
Share-based payment
charge - - - - 56 56
-------------------- -------- -------- -------- -------- -------- --------
Total transactions
with owners - - - - (5) (5)
At 31 December 2014 13,131 105,926 11,709 (11,502) 41,291 160,555
-------------------- -------- -------- -------- -------- -------- --------
Loss for 2015 - - - - (69,200) (69,200)
Transactions with
owners:
Options settled
or exercised - - -- - (31) (31)
Total transactions
with owners - - - - (31) (31)
At 31 December 2015 13,131 105,926 11,709 (11,502) (27,940) 91,324
-------------------- -------- -------- -------- -------- -------- --------
The merger reserve arose on the acquisition of Gulfsands
Petroleum Ltd and its subsidiaries by the Company by way of
share-for-share exchange in April 2005, in conjunction with the
flotation of the Company on the Alternative Investment Market of
the London Stock Exchange.
Consolidated Cash Flow Statement
for the year ended 31 December 2015
2015 2014
Notes $'000 $'000
-------------------------------------------- ----- -------- --------
Cash flows from operating activities
Operating loss from continuing
operations (67,631) (11,767)
Depreciation and amortisation 507 602
Loss on disposal of tangible fixed
assets 10 -
Exploration costs written-off/impaired 3 53,799 6,040
Restricted cash balances forfeited/provided
against 5,750 -
Inventory impairment 1,117 -
Other Syrian adjustments - 202
Share-based payment charge - 56
Decrease in receivables 516 1,598
Increase / (decrease) in payables 522 (254)
Foreign exchange losses (43) (218)
Finance expenses paid (101) (76)
Interest received 13 18
Net cash used in operating activities
by continuing operations (5,541) (3,799)
-------------------------------------------- ----- -------- --------
Net cash generated by operating
activities of discontinued operations - 2,347
-------------------------------------------- ----- -------- --------
Total net cash used in operating
activities (5,541) (1,452)
-------------------------------------------- ----- -------- --------
Investing activities
Exploration and evaluation expenditure (10,085) (26,987)
Inventory purchased - (1,420)
Other capital expenditures (30) (340)
Change in restricted cash balances - 4,750
Net cash used in investing activities
by continuing operations (10,115) (23,997)
-------------------------------------------- ----- -------- --------
Net cash used in investing activities
by discontinued operations - (5,011)
-------------------------------------------- ----- -------- --------
Total net cash used in investing
activities (10,115) (29,008)
-------------------------------------------- ----- -------- --------
Financing activities
Loan draw-down 5 8,200 5,000
Transaction costs paid on loan
facility 5 - (215)
Other payments in connection with
options exercised (31) (61)
-------------------------------------------- ----- -------- --------
Net cash provided by financing
activities of continuing operations 8,169 4,724
-------------------------------------------- ----- -------- --------
Net cash used in financing activities
of discontinued operations - -
Total net cash provided by financing
activities 8,169 4,724
Cash disposed as part of disposal
of discontinued operations - (181)
Decrease in cash and cash equivalents (7,487) (25,917)
Cash and cash equivalents at beginning
of year 7,907 33,824
-------------------------------------------- ----- -------- --------
Cash and cash equivalents at end
of year 420 7,907
-------------------------------------------- ----- -------- --------
Condensed Notes to the Annual Financial Statements
for the year ended 31 December 2015
General information
Gulfsands Petroleum plc is a public limited company listed on
the Alternative Investment Market ("AIM") of the London Stock
Exchange and incorporated in the United Kingdom. The principal
activities of the Company and its subsidiaries ("the Group") are
that of oil and gas production, exploration and development. The
address of the registered office is 1 America Square, Crosswall,
London, United Kingdom, EC3N 2SG. This announcement was authorised
for issue in accordance with a resolution of the Board of Directors
on 17 March 2016.
The financial information for the year ended 31 December 2015
set out in this announcement does not constitute statutory accounts
within the meaning of section 434 of the Companies Act 2006.
Statutory accounts for the year ended 31 December 2014 were
approved by the Board of Directors on 19 May 2015 and delivered to
the Registrar of Companies and those for 2015 will be delivered
following the Company's Annual General Meeting ("AGM").
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While the financial information included in this announcement
has been prepared in accordance with International Financial
Reporting Standards ("IFRS"), this announcement does not itself
contain sufficient information to comply with IFRS. The Company
expects to distribute the full financial statements that comply
with IFRS in April 2016.
Audit Report
The financial information set out above does not constitute the
Company's statutory accounts for the year ended 31 December 2015 or
2014, but is derived from those accounts. The Auditor has reported
on those accounts; its reports were unqualified, but did contain
two emphasis of matter paragraphs in 2015 in respect of: going
concern, on which further details are available below and in the
Financial Review; and in respect of the carrying value of the
Syrian investment, on which further details are included in note 4
to the Annual Financial Statements. The Auditor's Report did not
contain statements under sections 498(2) or (3) of the Companies
Act 2006.
Basis of preparation
The Annual Financial Statements have been prepared in accordance
with the recognition and measurement criteria of International
Financial Reporting Standards adopted for use in the European
Union. However, this announcement does not itself contain
sufficient information to comply with IFRS. The Company will
publish full financial statements that comply with IFRS in April
2016.
The Annual Financial Statements have been prepared under the
historical cost convention except for the share-based payments.
The Annual Financial Statements are presented in US Dollars. The
majority of all costs associated with foreign operations are
denominated in US Dollars and not the local currency of the
operations. Therefore the presentational and functional currency of
the Group, and the functional currency of all subsidiaries, is the
US Dollar.
Going concern
The Annual Financial Statements have been prepared on the going
concern basis which has been approved by the Board, notwithstanding
the material uncertainty, as discussed in the going concern section
of the Financial Review.
Accounting policies
The accounting policies applied in this announcement are
consistent with those of the annual financial statements for the
year ended 31 December 2014, as described in those annual financial
statements. A number of amendments to existing standards and
interpretations were applicable from 1 January 2015. The adoption
of these amendments did not have a material impact on the Group's
financial statements for the year ended 31 December 2015.
1. Segmental analysis of continuing operations
For management purposes, at 31 December 2015 the Group operated
in three geographical areas: Morocco, Tunisia and Colombia with
suspended operations in Syria as discussed in note 4. All segments
are involved with the production of, and exploration for, oil and
gas. The "Other" segment represents corporate and head office
costs.
The Group's result and certain asset and liability information
for the year are analysed by reportable segment as follows.
Year ended 31 December 2015
Syria Morocco Tunisia Colombia Other Total
$'000 $'000 $'000 $'000 $'000 $'000
-------------------------- -------- ---------- --------- --------- --------- ----------
Total administrative
expenditure (180) (950) (418) (112) (5,305) (6,965)
Exploration costs
written-off/impaired - (53,799) - - - (53,799)
Restricted cash
balances forfeited/
provided against - (5,750) - - - (5,750)
Inventory impairment - (1,117) - - - (1,117)
-------------------------- -------- ---------- --------- --------- --------- ----------
Operating loss (180) (61,616) (418) (112) (5,305) (67,631)
Financing cost (1,569)
----------
Net loss from continuing
activities (69,200)
-------------------------- -------- ---------- --------- --------- --------- ----------
Total assets 102,574 1,385 5,294 1,913 4,157 115,323
Total liabilities (3,929) (3,211) (74) (49) (16,737) (24,000)
-------------------------- -------- ---------- --------- --------- --------- ----------
E&E capital expenditure - 7,773 75 654 - 8,502
-------------------------- -------- ---------- --------- --------- --------- ----------
Year ended 31 December 2014
Syria Morocco Tunisia Colombia Other Total
$'000 $'000 $'000 $'000 $'000 $'000
-------------------------- -------- -------- -------- --------- -------- ---------
Total administrative
expenditure (482) (149) 10 (168) (4,736) (5,525)
Exploration costs
written-off - (5,246) (794) - - (6,040)
Other Syrian adjustments (202) - - - - (202)
Operating loss (684) (5,395) (784) (168) (4,736) (11,767)
Financing cost (346)
---------
Net loss from
continuing activities (12,113)
-------------------------- -------- -------- -------- --------- -------- ---------
Total assets 102,325 51,845 5,256 1,324 17,697 178,447
Total liabilities (3,827) (6,486) (1,587) (69) (5,923) (17,892)
-------------------------- -------- -------- -------- --------- -------- ---------
E&E capital expenditure - 19,188 794 982 - 20,964
-------------------------- -------- -------- -------- --------- -------- ---------
2. Loss per share
The basic and diluted loss per share has been calculated using
the loss for the year ended 31 December 2015 of $69.2 million
(2014: $12.1 million) for continuing operations and $69.2 million
(2014: $16.1 million) for the loss attributable to the owners of
the parent company. The basic loss per share was calculated using a
weighted average number of ordinary shares in issue less treasury
shares held of 117,886,145 (2014: 117,886,145). The weighted
average number of ordinary shares, allowing for the exercise of
share options, for the purposes of calculating the diluted loss per
share was 117,965,804 (2014: 118,210,676).
Where there is a loss, the impact of share options is
anti-dilutive and hence, basic and diluted loss per share are the
same.
3. Intangible assets
Exploration and Evaluation assets
Computer
Syria Morocco Tunisia Colombia software Total
$'000 $'000 $'000 $'000 $'000 $'000
Cost:
At 1 January 2014 10,505 31,636 5,195 243 2,483 50,062
Additions - 19,188 794 982 10 20,974
Change in decommissioning
estimates - 977 - - - 977
Disposals - - - - (123) (123)
Exploration expenditure
written-off - (5,246) (794) - - (6,040)
At 31 December 2014 10,505 46,555 5,195 1,225 2,370 65,850
-------------------------- -------- --------- ------- ---------- --------- --------
Additions - 7,773 75 654 2 8,504
Change in decommissioning
estimates - (529) - - - (529)
Exploration expenditure
written-off - (51,007) - - - (51,007)
-------------------------- -------- --------- ------- ---------- --------- --------
At 31 December 2015 10,505 2,792 5,270 1,879 2,372 22,818
-------------------------- -------- --------- ------- ---------- --------- --------
Accumulated amortisation:
At 1 January 2014 - - - - (1,524) (1,524)
Charge for 2014 - - - - (46) (46)
Disposals - - - - 52 52
At 31 December 2014 - - - - (1,518) (1,518)
-------------------------- -------- --------- ------- ---------- --------- --------
Charge for 2015 - - - - (360) (360)
At 31 December 2015 - - - - (1,878) (1,878)
-------------------------- -------- --------- ------- ---------- --------- --------
Accumulated impairment:
At 1 January 2014
and 31 December 2014 (10,505) - - - (475) (10,980)
-------------------------- -------- --------- ------- ---------- --------- --------
Impairment provision
for 2015 - (2,792) - - - (2,792)
-------------------------- -------- --------- ------- ---------- --------- --------
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At 31 December 2015 (10,505) (2,792) - - (475) (13,772)
-------------------------- -------- --------- ------- ---------- --------- --------
Net book value at
31 December 2015 - - 5,270 1,879 19 7,168
-------------------------- -------- --------- ------- ---------- --------- --------
Net book value at
31 December 2014 - 46,555 5,195 1,225 377 53,352
-------------------------- -------- --------- ------- ---------- --------- --------
Syria
The accumulated costs of E&E assets in Syria represent the
Group's share of the drilling costs of the Al Khairat, Twaiba and
Wardieh wells and certain 3D seismic surveys. The Al Khairat well
was successfully tested but commercial development approval is yet
to be granted by the government of the Syrian Arab Republic. The
Twaiba and Wardieh wells are still under evaluation.
Following the imposition of EU sanctions against the oil
industry in Syria, an impairment test was conducted and the
carrying value of all E&E assets in Syria was impaired to nil
as it is was unclear whether the Group would be able to apply for
commercial development approval in the manner contemplated by the
Production Sharing Contract. That position remains at the date of
this Report.
Morocco
Moroccan E&E assets at 31 December 2015 represent
exploration expenditure on the Moulay Bouchta permit. The financial
commitments of the Moulay Bouchta contract are inconsistent with
the Group's revised strategy and therefore Gulfsands have initiated
a farm-out process for the Moulay Bouchta contract. However given
the licence expiry date for the initial exploration phase in June
2016, the outstanding work commitments on the permit which could
not physically be fulfilled before this date and the uncertainty of
securing an industry partner before licence expiry, the expenditure
to date attributed to the Moulay Bouchta permit of $2.8 million,
inclusive of $1.75 million potential penalty for non completion of
the minimum work obligations, has been fully impaired at 31
December 2015.
On 24 September 2015 the Fes Petroleum Agreement expired. All
E&E expenditure related to the Fes permit has been fully
written-off in the year, with write-offs totalling $22.2 million,
inclusive of $12.0 million fair value recognised on
acquisition.
On 9 November 2015, the extension period of the Rharb Petroleum
Agreement expired and the Company's request to further extend the
Rharb Petroleum Agreement for a period of two years to allow the
Company to appraise the gas discoveries made in 2014/15 was
rejected. All E&E expenditure related to the Rharb Centre and
Rharb Sud permits has been fully written-off in the year, with
write-offs totalling $28.8 million, inclusive of $5.8 million fair
value recognised on acquisition.
Tunisia
At 31 December 2015 the Tunisian E&E assets represent
expenditures under the Chorbane contract including amounts paid
during 2013 and 2015 to increase participation in the contract. A
two year extension to the PSC was granted on 22 December 2015,
extending the contract date to 12 July 2017. Management's strategy
is to farm-down or divest the Group's interests in the PSC and has
initiated a farm-out process. Management has reviewed its
intentions for the Chorbane asset, and believes it is too early to
make a prediction on the likelihood of a successful farm-out or to
determine what price could be achieved. Therefore they have
concluded that there are no indicators of impairment and no
impairment of the carrying value is required. The asset carrying
value could become impaired should the Group fail to satisfy the
work obligations or to realise sufficient value from any divestment
or farm-out.
Colombia
The Group has interests in E&P contracts over two blocks in
Colombia: Llanos 50 and Putumayo 14, which expire in November 2016
and November 2017 respectively. At 31 December 2015 the E&E
assets of $1.9 million represent costs incurred in respect of these
blocks which are in the early stages of exploration. Management's
strategy is to farm-down or divest the Group's interests in these
contracts and a broker has been engaged to run the farm-out process
in-country. Management has reviewed its intentions for these
assets, and believes it is too early to make a prediction on the
likelihood of a successful farm-out or to determine what price
could be achieved. Management intend to apply for extensions to
both contracts. Therefore they have concluded that there are no
indicators of impairment and no impairment of the carrying value is
required. Both the asset carrying values and the restricted cash
amounts could become impaired should the Group fail to satisfy the
work obligations or to realise sufficient value from any divestment
or farm-out.
Work obligation commitments
At 31 December 2015 the Group had the following capital
commitments in respect of its exploration activities:
Morocco
Moulay Bouchta permit - initial Exploration phase expiry date
and deadline for fulfilment of capital commitments; June 2016
-- Acquisition and processing of a 500 km of 2D seismic.
-- Reprocessing and interpretation of selected legacy 2D seismic
lines and existing 3D seismic data.
-- Legacy oil field reactivation survey.
-- Total cost of commitments estimated at $3.9 million.
$1.75 million (31 December 2014: $1.75 million) of deposits have
been lodged to support guarantees given to ONHYM in respect of
completion of these minimum work commitments. These have been fully
provided against at 31 December 2015 as, given the licence expiry
date for the initial exploration phase in June 2016, the
outstanding work commitments on the permit could not physically be
fulfilled before this date and therefore it is likely the deposit
would not be recoverable. After the potential forfeiture of
restricted cash balances a further $1.75 million potential penalty
for non completion of the minimum work obligations could be
enforced on the Group. This has been provided for as a liability
within these accounts.
Tunisia
Chorbane permit - second phase of contract expiry date and
deadline for fulfilment of capital commitments; July 2017
-- Drilling of one exploration well.
-- Acquisition of 200 km 2D seismic data
-- Total commitments outstanding estimated at $10.7 million.
Colombia
Putumayo 14 - licence expiry date and deadline for fulfilment of
capital commitments; November 2017
-- Drilling of one exploration well.
-- 2D seismic minimum 93 km.
-- The Company has also undertaken to spend $100,000 on an
additional work programme obligation which may be satisfied via the
acquisition of an additional 5km of 2D seismic.
-- Total commitments outstanding estimated at $16.1 million.
Llanos 50 - licence expiry date and deadline for fulfilment of
capital commitments; November 2016
-- Drilling of one exploration well.
-- 2D seismic minimum 103 km.
-- The Company has also undertaken to spend $100,000 on an
additional work programme obligation which may be satisfied via the
acquisition of an additional 5km of 2D seismic.
-- Total commitments outstanding estimated at $13.9 million.
$3.2 million (2014: $3.2 million) of deposits have been lodged
to support guarantees given to the Agencia Nacional de
Hidrocarburos in respect of completion of these minimum work
commitments on Putumayo 14 and Llanos 50.
The deposits referenced in this note are shown as long-term
financial assets in the Balance Sheet.
4. Investments
The Group is party to a PSC for the exploitation of hydrocarbon
production in Block 26 in Syria. Pursuant to the PSC the Group
operates its Syrian oil and gas production assets through a joint
venture administered by DPC in which the Group has a 25% equity
interest. The Group lost joint control of DPC on 1 December 2011
following the publication of European Union Council Decision
2011/782/CFSP. For the purposes of EU sanctions, DPC is considered
to be controlled by General Petroleum Corporation. Since the Group
has neither joint control nor significant influence over the
financial and operating policy decisions of the entity, it carries
its investment in DPC and the associated rights under the Block 26
PSC as an available-for-sale financial asset. The carrying value of
the available-for-sale investment at 31 December 2015 is $102
million (2014: $102 million).
Due to the unknown duration of EU sanctions in force against
Syria and uncertainty over the eventual outcome of events in the
country, any valuation attributed to the investment is highly
subjective and subject to material change and uncertainty.
Management have reviewed their internal valuation methodology and
believe that as a result of the further passage of time and the
high degree of judgement required, it is no longer possible to
reliably estimate the investment's fair value. Management will
therefore carry forward the last valuation which could be reliably
determined, being the $102 million previously disclosed. This value
will be reviewed periodically for impairment and any impairment
losses recognised through the Income Statement.
Impairment review of the Group's investment in DPC
In order to carry out an impairment review, Management use an
economic model of the estimated future cash flows that could be
generated in respect of the Group's entitlement volumes in Block
26. The Management team have reviewed this in detail and believe
due to the high degree of subjectivity inherent in the valuation it
is imperative that the valuation model and its key drivers and
assumptions are as transparent as possible. Management assessed the
key drivers to be:
-- the oil price, and
-- the delay to resumption of production.
1. Oil price
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There has been a significant downward movement in the oil price
in the latter part of 2014, throughout 2015 and to date in 2016. It
is difficult to assess at this early stage whether this will be a
medium term price shock or a rebasing of the oil price. For the
year ended 31 December 2015 Management have used the Brent forward
curve to 2022 and then a 2% per annum escalation factor applied
thereafter as the forecast for the 'base case' comparative
valuation for the impairment review. Given the other sources of oil
price data reviewed, Management consider this to be a conservative
approach.
2. Delay to resumption of production
Gulfsands cannot give a definite timeline for the resumption of
the full field development of the discovered fields within Block 26
that was suspended under the declaration of Force Majeure in 2011.
Whilst no definite timeline can be substantiated, the Board
continues to believe that the EU Sanctions will be lifted within
five years and will continue to monitor all activity focused on
resolving the situation in Syria. Management have decided to use
commencement of production in five years as the estimate 'base
case' comparative valuation for the impairment review.
Other model assumptions
The model uses the production profiles based upon 2C contingent
resources at Khurbet East (Massive, Butmah and Kurrachine Dolomite)
and Yousefieh. Receivables are included in relation to oil produced
and invoiced but not yet received, and oil produced and not yet
invoiced, on the expectation that these amounts will be recovered
once EU sanctions are lifted. A 15% discount rate is then applied
to give a net present value ("NPV").
The valuation model calculates:
a Gross Contractor undiscounted NPV(0) of $1.48 billion
Gulfsands 50% interest NPV(0) of $0.74 billion.
Gulfsands discounted NPV(15) of $107.2 million.
The Group has used the NPV (15) of $107.2 million to conclude
that no impairment is necessary but the following table sets out
the NPV(15)'s calculated when adjusting the two key drivers: oil
price and time delay to resumption of production. All figures are
presented in $'000:
Oil price Delay to first production
--------------------- --------------------------------------
3 year
delay 5 year delay 7 year delay
--------------------- -------- ------------- -------------
20% decrease 90,797 69,409 52,687
--------------------- -------- ------------- -------------
10% decrease 114,959 88,352 67,582
--------------------- -------- ------------- -------------
Brent forward curve 138,955 107,234 82,393
--------------------- -------- ------------- -------------
10% increase 162,941 126,099 97,239
--------------------- -------- ------------- -------------
20% increase 186,809 144,872 112,012
--------------------- -------- ------------- -------------
30% increase 210,603 163,587 126,740
--------------------- -------- ------------- -------------
The following table sets out the impact that changes in the key
variables would have on the comparative valuation of the asset,
$107.2 million, for the impairment review.
Change in comparative valuation
of investment from $107.2
million
$'000
Delay until first
production
7 years (24,841)
3 years 31,722
---------------------- --------------------------------
Oil price
20% decrease (37,825)
10% decrease (18,882)
10% increase 18,866
20% increase 37,639
30% increase 56,354
---------------------- --------------------------------
Change in discount
rate to
20% (45,079)
10% 84,692
---------------------- --------------------------------
Change in forecast
capex
5% increase (3,916)
5% decrease 3,916
---------------------- --------------------------------
Change in forecast
opex
5% increase (2,836)
5% decrease 2,823
---------------------- --------------------------------
The Directors have reviewed the carrying value of this
available-for-sale financial asset at 31 December 2015 and are of
the opinion that no impairment is required to the carrying value.
Although the carrying value is subject to significant uncertainty,
Management believe it remains appropriate in the circumstances,
although not necessarily reflective of the value of the Group's
investments in its Syrian operations over the long-term. Management
reiterate that there is a high degree of subjectivity inherent in
the valuation calculated for impairment purposes, due to the
unknown duration of the sanctions and the eventual outcome of
events in Syria. Accordingly it may change materially in future
periods depending on a wide range of factors and an impairment may
then be required.
5. Convertible loan
On 18 November 2014, the Group and Arawak Energy Bermuda Ltd
("the Lender") entered into an agreement pursuant to which the
Lender agreed to provide a three year loan facility of up to $20.0
million. The Convertible Loan Facility (including amounts drawn,
accrued but unpaid interest and fees) was convertible at any time
prior to maturity into ordinary shares, initially at a price of
GBP0.80, a premium of approximately 100% to the share price at the
close of trading on the date of the agreement.
In the event that the Company issued new ordinary shares prior
to conversion, repayment or maturity of the Convertible Loan
Facility, the Lender had the right but not the obligation to
subscribe for new ordinary shares, up to the amount of the loan
facility outstanding at that time, at the same subscription price
per share as paid by the other subscribers. If the Lender elected
not to participate in such issue of new ordinary shares, the
mechanics of conversion of the Convertible Loan Facility provided
that an adjustment be made in order that the Lender's conversion
rights continued to represent an entitlement to the same proportion
of the Company's issued share capital after the new issue of
ordinary shares as they represented prior to such new issue of
ordinary shares.
Except with the prior agreement of the Lender, in the event of a
new issue of ordinary shares the Company was required to apply any
proceeds of such issue in excess of $10.0 million to the repayment
of amounts outstanding under the Convertible Loan Facility at that
time.
The Company may require conversion of the outstanding balance of
the Convertible Loan Facility into ordinary shares in the event
that the quoted price for the Company's ordinary shares on AIM, on
an unadjusted basis, exceeds GBP1.04 for a period of more than 20
consecutive trading days at any time prior to the expiry of the
term of the Convertible Loan Facility.
Interest at the rate of 10% per annum was capitalised quarterly
and was to be repaid at the end of the term. A commitment fee was
also capitalised quarterly and was to be repaid at the end of the
term, equivalent to 3% of available undrawn amounts during the
twelve month availability period.
An initial advance of $5.0 million was made by the Lender to the
Group in November 2014 and a further $5.0 million was advanced in
January 2015, of which half was to fund the Group's ongoing
exploration and development activities in Morocco and half to
provide working capital for the Group's general corporate purposes.
Under the terms of the Convertible Loan Facility, two further
advances, each of $5.0 million, were to be made available
contingent upon additional exploration drilling success in Morocco,
satisfactory to the Lender. The further advances were to be
available exclusively to progress the Group's Moroccan work
programme.
The Convertible Loan Facility was secured by a floating charge
over all of the assets of Gulfsands Petroleum Holdings Ltd, the
holding company for the Group's interest in Block 26, and a share
mortgage over the shares in Gulfsands Petroleum Morocco Ltd (the
holding company for the Group's interests in Morocco) with further
credit support provided by a guarantee from the Company. The
Convertible Loan Facility contained representations, warranties and
indemnities in favour of the Lender and provides for events of
default and a negative pledge.
The Group was entitled to retain any collateralised deposits
released to it during the term of the Convertible Loan Facility
together with the first $5.0 million proceeds of any farm-out
arrangement into which it enters with respect to its Moroccan
interests, provided that such cash is retained and applied to the
Group's Moroccan work programme.
The Company may prepay the facility upon 60 days' notice.
The Lender could require repayment of the Convertible Loan
Facility in certain circumstances, namely in the event of (a) a
change of control of the Company; (b) the dismissal of two or more
of the Company's Executive Directors; (c) the removal of two of the
Directors of the Company at a General Meeting; and (d) Gulfsands'
termination of the strategic cooperation agreement with Arawak
International Energy International Ltd ("Arawak").
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