Final Results -21-
March 17 2009 - 3:00AM
UK Regulatory
compensate for the change due to currency movements. For this reason, the Group
does not hedge the net investments in foreign subsidiaries.
If the average sterling/US dollar rate had been 10% higher during 2008, post-tax
profit for the year and equity would have been GBP10,573,000 higher (2007:
GBP9,450,000 higher). If the average sterling/US dollar rate had been 10% lower
during 2008, post-tax profit for the year and equity would have been
GBP8,651,000 lower (2007: GBP7,732,000 lower).
If the closing sterling/US dollar rate was 10% higher at 31 December 2008, the
post-tax profit for the year and equity would have been GBP3,256,000 higher
(2007: GBP6,296,000 higher). If the closing sterling/US dollar rate was 10%
lower at 31 December 2008, the post-tax profit for the year and equity would
have been GBP2,664,000 lower (2007: GBP5,151,000 lower).
Commodity Price Risk
The Group has exposure to price risk related to anticipated revenues from crude
oil and natural gas. A change in those prices may alter the gross margin of the
Group. Accordingly, it enters into commodity futures, forward and option
contracts to manage fluctuations in prices of anticipated revenues.
To manage commodity price risk and deliver stability to the investment
programme, the Group's policy is to allow hedging of commodity price exposure up
to 50% of its oil and gas production. In exceptional circumstances and only with
the prior approval of the Board, up to 75% of such production may be hedged.
Hedges have been put in place with a variety of providers.
If the average gas price had been 10% higher or lower during 2008, post-tax
profit for the year and equity would have been GBP6,944,000 higher or lower
(2007: GBP4,365,000 higher or lower).
If the average oil price had been 10% higher or lower during 2008, post-tax
profit for the year and equity would have been GBP4,758,000 higher or lower
(2007: GBP4,253,000 higher or lower).
Interest Rate Risk
The Group manages its net exposure to interest rate risk through negotiating
fixed rate financial debt in its financial debt portfolio. The Group has no
exposure to variability in its cash flows due to interest rate risk as it
borrows at rates of interest which are fixed in advance. At 31 December 2008,
all of the Group's drawn borrowings were at fixed rates.
Credit Risk
Credit risks arise from the possibility that customers may not be able to settle
their obligations as agreed. To manage this risk, the Group periodically
assesses the financial reliability of customers. The Group's major customers are
typically large companies which have strong credit ratings assigned by
international credit rating agencies. The nominal value less impairment
provision of trade accounts receivables and payables are assumed to approximate
their fair value.
The Group's policy is to deal with customers with an 'A' rating or better where
possible. At 31 December 2008, 100% (2007: 100%) of trade receivables were such
customers.
The Group also has credit risk relating to cash held on deposit. The Group's
policy is to deposit cash at institutions with an 'A' rating or better where
possible. 100% of the cash held on deposit at 31 December 2008 (2007: 100%) was
held with such institutions.
The Group monitors other counterparties such as joint venture partners to ensure
they are able to meet their obligations, and only enters into derivative
financial instruments with parties with an 'A' rating or better.
Liquidity Risk
Liquidity risk is defined as the risk that the Group will not be able to settle
or meet its obligations on time or at a reasonable price. Liquidity, funding
risks and related processes and policies are overseen by management. Venture
manages its liquidity risk on a consolidated basis based on business needs and
through numerous sources of finance in order to maintain flexibility.
At the year end the Group is in a strong financial position due to the amount of
capital available to the business. It has both cash balances of GBP207,969,000
and an undrawn committed five year debt facility of which GBP346,215,000 is
available.
Capital Risk
The Group seeks to maintain an optimal capital structure with a diversified
range of funding including equity, convertible bonds, bank debt and privately
placed loan notes. The Group continually monitors its capital structure, to
ensure this is in line with business needs, ongoing asset development and to
fund potential future acquisitions. In 2007, its borrowing base banking facility
was replaced with a medium term committed corporate debt facility of
GBP365,000,000, GBP151,000,000 was raised through the issue of 3.25% unsecured
convertible bonds and a further $424,000,000 and GBP25,000,000 in a private
placement of notes was secured with US and UK institutional investors. As a
result, there are externally imposed covenant requirements with which the Group
is fully compliant.
There are three key financial covenants the Group must comply with. These are:
leverage, net borrowings should not exceed three times the EBITDA; interest
cover, the ratio of EBITDA to net finance cost is less than 5:1; and net
borrowings should not exceed one times the hydrocarbon covenant dollar
equivalent, which is calculated as $7.5 multiplied by the proved and probable
reserves.
Derivative Financial Instruments
The following tables show the fair values of derivative financial instruments
analysed by type of contract at 31 December 2008 and 2007. The fair values are
determined by reference to market prices at 31 December 2008 and 2007.
+----------------------------------+----------+---------+----------+----------+
| Group | Positive fair | Negative fair |
| | values | values |
+----------------------------------+--------------------+---------------------+
| | 2008 | 2007 | 2008 | 2007 |
| | GBP'000 | GBP'000 | GBP'000 | GBP'000 |
+----------------------------------+----------+---------+----------+----------+
| | | | | |
+----------------------------------+----------+---------+----------+----------+
| Currency related instruments | | | | |
+----------------------------------+----------+---------+----------+----------+
| Forward foreign exchange rate | - | 498 | (5,753) | - |
| contracts | | | | |
| | | | | |
+----------------------------------+----------+---------+----------+----------+
| Oil price related instruments | | | | |
+----------------------------------+----------+---------+----------+----------+
| Collars | - | - | - | (1,813) |
+----------------------------------+----------+---------+----------+----------+
| Commodity swaps | 42,842 | - | - | (40,685) |
+----------------------------------+----------+---------+----------+----------+
| Total of oil price related | 42,842 | - | - | (42,498) |
| instruments | | | | |
| | | | | |
+----------------------------------+----------+---------+----------+----------+
| Gas price related instruments | | | | |
+----------------------------------+----------+---------+----------+----------+
| Collars | 4,024 | - | - | - |
+----------------------------------+----------+---------+----------+----------+
| Commodity swaps | 2,204 | - | (7,633) | (25,493) |
+----------------------------------+----------+---------+----------+----------+
| Total of gas price related | 6,228 | - | (7,633) | (25,493) |
| instruments | | | | |
| | | | | |
+----------------------------------+----------+---------+----------+----------+
| Total derivative financial | 49,070 | 498 | (13,386) | (67,991) |
| instruments | | | | |
+----------------------------------+----------+---------+----------+----------+
+----------------------------------+----------+---------+----------+---------+
| Company | Positive fair | Negative fair |
| | values | values |
+----------------------------------+--------------------+--------------------+
| | 2008 | 2007 | 2008 | 2007 |
| | GBP'000 | GBP'000 | GBP'000 | GBP'000 |
+----------------------------------+----------+---------+----------+---------+
| | | | | |
+----------------------------------+----------+---------+----------+---------+
| Currency related instruments | | | | |
+----------------------------------+----------+---------+----------+---------+
| Forward foreign exchange rate | - | 498 | (5,753) | - |
| contracts | | | | |
+----------------------------------+----------+---------+----------+---------+
| Total derivative financial | - | 498 | (5,753) | - |
| instruments | | | | |
+----------------------------------+----------+---------+----------+---------+
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