Audited Results for the year ended 31 December 2011
Gulfsands Petroleum plc (“Gulfsands”, the “Group” or the “Company” – AIM : GPX), the oil and gas production, exploration and development company with activities in Syria, Iraq, Tunisia, Italy and the USA, announces its annual results for the twelve months ended 31 December 2011.
- Profit after tax up by 23% to $55.1 million (2010: $44.7 million)
- Cash from operating activities up by 34% to $94.3 million (2010: $70.2 million)
- Further part-disposal of US business realising aggregate cash of $11.0 million
- Free cash balances at year-end of $124.2 million (2010: $80.6 million)
- Group working interest production down by 17% to 8,542 boepd (2010: 10,308 boepd)
- Group 2P working interest reserves up by 34% to 76.3 mmboe (2010: 56.9 mmboe) of which 74.5 mmboe (2010: 53.6 mmboe) relates to its PSC in Syria
- Group 2C risked contingent resources of 13.0 mmboe
- Six exploration wells drilled in Block 26, Syria resulting in three discoveries
- Potentially commercial onshore oil discovery in Tunisia
- Maintain presence in Syria
- Consolidate position in Tunisia
- Build another viable non-Syrian business
As a consequence of the sanctions imposed on Syria by the EU, the Group declared force majeure in December 2011 on its PSC in Syria. This has had a significant impact on the financial statements.
The Chairman’s and Chief Executive’s Statements are reproduced in full below. The full text of the 2011 Annual Report, incorporating the 2011 Audited Financial Statements, is available in pdf form on the Company’s website www.gulfsands.com and may be found by clicking here.
For more information please contact:
Gulfsands Petroleum (London)
+44 (0)20 7434 6060
Richard Malcolm, Chief Executive Officer
Andrew Rose, Chief Financial Officer
Kenneth Judge, Director: Corporate Development & Communications
+44 (0)20 7466 5000
RBC Capital Markets (London)
+44 (0)20 7653 4000
The year ended 31 December 2011 was overshadowed by the crisis in Syria, a crisis the severity of which few could have predicted a little more than twelve months ago.
At the time of writing the crisis continues unabated and it is impossible to predict with any degree of confidence how or when it will reach a final resolution. The scale of the humanitarian tragedy has rightly dominated the media and public debate and resonates with all of us. Underlying that tragedy is an evolving political and economic conundrum of immense complexity. It is against this backdrop that we as a Company must seek to preserve the value we have built in our Syrian assets and operations, for the long term benefit of both our shareholders and the people of Syria.
Declaration of force majeure
As a result of the progressive tightening of EU Sanctions, the Company declared force majeure under our Production Sharing Contract (“PSC”) on 11 December 2011. We have since that date ceased to be involved in production or exploration activities, one key consequence of which is that currently and for the foreseeable future we can expect to receive no revenue from our principal asset. It is, perhaps, worth noting as an aside that at the date of ceasing our operational involvement we had experienced no security issues in our fields in the north east of Syria, an interesting reflection of just how localised the troubles in that country remain.
A summary of the EU Sanctions and the measures we have taken to comply is set forth later in this report in the section entitled “Sanctions Compliance”. No useful purpose is served by my elaborating further, save to say that your Board has acted at all times and continues to act on the basis of international and local legal advice and has been at pains to keep HM Treasury properly and timely informed of our actions. We have also been, and remain, in regular communication with other international oil companies with assets and operations in Syria, who have of course to deal with the same set of issues.
I have made the point often enough, but it bears repeating, that this Company has no political affiliations or agendas. Our goal is to be a good corporate citizen in all countries and markets in which we operate, to comply with the letter and spirit of our contractual obligations and to obey fully all pertinent laws and regulations. Circumstances such as the present certainly test those intentions to the full.
Our key objectives and near term strategy for Syria
Subject to our overriding legal obligations, your Board has two specific objectives.
First, to the fullest extent within our power, we seek to ensure the safety and well-being of our staff. Not least of the ways in which we are going about this is to continue to employ our local staff in Damascus and to find useful work for them to do during this period of enforced operational “downtime”.
Secondly, we seek to preserve value for our shareholders.
Our legal advice with respect to our declaration of force majeure is that the declaration is valid both as a matter of international law and within the terms of the PSC and as such, the Company’s continuing legal right to its Syrian assets is protected. The PSC also provides legal remedies in the eventuality that the Syrian state, for reasons of national policy, elects to continue to produce oil from the Khurbet East and Yousefieh fields using its own human and technical resources. These remedies include payment for our share of oil produced during the period of force majeure, international arbitration of any matters which cannot be otherwise resolved and, in a final analysis, legal proceedings.
On a more pragmatic level, again subject to the Company’s overriding legal obligations, we have sought to continue to maintain good working level relations with the Oil Ministry and with General Petroleum Corporation, the state oil company which is our partner under the PSC.
We are also continuing, where it makes sense to do so and we are confident of making a meaningful contribution to the well-being of the communities amongst whom we operate, to make funding available for high impact Corporate Social Responsibility initiatives.
As a Board, we are convinced that maintaining this balanced approach to a bewilderingly complicated and constantly evolving situation is the best possible way to seek to preserve our position in Syria for when sanctions are eventually lifted.
The damage done to the Company by the events of the past twelve months is plain to see in our share price and in the exodus of many institutions from our share register. However, the position is far from hopeless and your Board remains resolute.
Financial reporting implications
One immediate consequence of our declaration of force majeure which does merit an explanation is its impact on the Group’s financial reporting. This is a highly technical subject but the simplified explanation is as follows.
Pursuant to the PSC, the Group holds its interest in its Syrian oil and gas production assets through a joint venture which is administered through a company, Dijla Petroleum Company (“DPC”), in which the Syrian State is a 50% shareholder. In accordance with International Financial Reporting Standards (“IFRS”), the Group has in prior periods proportionally consolidated the assets and liabilities of the joint venture.
Now that DPC has been declared a “designated entity” under the EU Sanctions and the Group is precluded (temporarily but indefinitely) from any involvement in its affairs, the Group has for the time being lost its ability to control the deployment and utilisation of its production assets. Despite this being what we anticipate to be a temporary state of affairs and despite the fundamental protections afforded by the PSC, IFRS mandates that the Company now cease proportionate consolidation. Instead, the Group is required to account for its Syrian production assets in the Balance Sheet as an investment and we have disclosed these operations separately in the Income Statement as a “Suspended Activity”. As such, the Directors are required to attribute to such investment a highly judgemental “Fair Value” which has been referenced, as a practical matter, to the Company’s current market capitalisation (as adjusted for its substantial net cash balance). More detailed reference to these concepts will be found in the Financial Review and in the detailed notes to the Financial Statements.
The IFRS requirement to deconsolidate our Syrian operations is mandatory as a matter of International Accounting Standards and the Board has no discretion or flexibility in the matter.
For the avoidance of doubt, your Board does not regard the current market capitalisation of the Company as an accurate reflection of its long term potential value and we have no present intention of seeking to dispose of our Syrian assets.
The “political risk” inherent in an investment in Gulfsands Petroleum is a matter for each individual shareholder or prospective shareholder to quantify. For its own part, your Board remains determined to do all in its power to ensure that the present hiatus in the Group’s ability to exploit its Syrian assets is in due course reversed.
Achievements in 2011
As described more fully in the Chief Executive’s Report and in the Operations Review, the operating performance of our Syrian assets until the disruption began in mid-2011, the 40% underlying increase in our year–end 2P reserves (34% net of production) and our recent successes in exploration drilling are most encouraging for the long term. Furthermore, the strength of our balance sheet and our net cash balance of close to $125 million, coupled with strong technical and management competence, render us well-equipped both to withstand a long period of uncertainty in Syria and to pursue attractive opportunities in other markets.
Directors’ incentive compensation
Your Board is acutely conscious of the severely adverse impact of the Syrian situation upon the Company’s share price. Although this situation is quite clearly beyond our control, we feel it is inappropriate in the circumstances that Directors receive incentive compensation that would otherwise be payable in respect of the year ended 31 December 2011. Accordingly, cash bonus payments due to Directors in respect of their 2011 performance and contribution will be deferred and will not become payable until the Company is once again receiving payment for production from its Syrian interests. Furthermore, no awards will be made pursuant to the Company’s Executive Share Option Plan in respect of 2011 performance and contribution.
I have two sets of thanks to offer. First, to our 50% working interest partners Sinochem, who have been and continue to be strong and loyal supporters and collaborators throughout this most difficult period. Secondly, to our Chief Financial Officer, Andrew Rose, who will be leaving the Company shortly to pursue other interests. He has made a sterling contribution over the past three and a half years and leaves to his eventual successor a first-class financial reporting platform.
In conclusion, we can but hope that the coming months will bring some respite from the present acute difficulties in Syria, most importantly for the population but also for the Company and its shareholders. In the interim, we are leaving no stone unturned in our continuing efforts to find attractive opportunities to deploy our financial and technical firepower into “fast track” geographical diversification.
2 April 2012
Chief Executive’s Report
As a consequence of the Group’s principal assets being held in Syria, the Syrian crisis that began in early 2011 has had a profound impact on our business. During the year a progressive tightening of European Union sanctions took place, some of which specifically targeted the oil industry. This eventually resulted in the Group, on 1 December 2011, ceasing all exploration, development and production operations in Syria. Until recently, the Syrian Government’s General Petroleum Corporation (“GPC”) continued to produce oil from our fields via the Block 26 joint venture operating company, Dijla Petroleum Company (“DPC”), but at a significantly reduced rate compared to pre-crisis levels. The personal and professional toll on our Syrian staff has been very significant and we remain committed to ensure that they are adequately cared for from both a humanitarian and safety perspective. As a result we intend to retain substantially all local staff throughout this difficult period. We believe the situation in Syria will be resolved in due course at which time the Company will be able to resume operations. In the interim, it is our intention to maintain our presence in Syria in full compliance with the European Union sanctions.
Despite the well publicised troubles in certain areas of the country during the year, there have been no incidents, disruptions to our activities or employees injured in Syria, either in the field or in our Damascus office. A detailed emergency response plan to evacuate expatriate employees was put in place early in the year, but has not been activated to date. We are pleased to report that our excellent operational health and safety record remains intact with no significant incidents reported.
Notwithstanding the difficult operating environment in Syria, the results of the Group have been favourable. Net profit increased by 23%, cash flow from operating activities was up by 34% and a $43.6 million increase was achieved in our year-end net cash balance to $124.2 million. All the increase in net profit and cash flow was derived from Syria. Working interest production in Syria was 8,133 bopd compared with 9,165 bopd in 2010, but this reduction was as a result of the government-imposed shut-in of production from our fields following the first round of sanctions against the Syrian oil trade on 2 September. Gross production from the Khurbet East and Yousefieh fields had reached an average of just over 24,000 bopd in August, which was our year-end target. Had production been allowed to continue at this rate, our working interest production would have exceeded 2010 by a significant margin. Both fields continued to perform extremely well with minimal pressure decline and minimal water production. Four development wells, three of which were designed as delineation wells, have provided improved confidence in the extent and quality of the reservoirs with positive implications for reserves.
Indeed, our investment programmes have continued to significantly expand our reserves and resources base. Oil and gas proved and probable (“2P”) working interest reserves increased by an underlying 40% to 76.3 mmboe and, in addition, for the first time, proved and probable working interest risked contingent resources (“2C”) of 13.0 mmboe have also been booked. All reserve additions were derived in Syria from reservoirs at Khurbet East and Yousefieh fields, with the vast majority from the producing Massive Formation. Our ability to crystallise value from the Syrian portion of our 2P reserves (74.5 mmboe) is dependent on the Syrian situation, as discussed elsewhere in this report.
Oil and gas discovered in 2011 at Khurbet East in the deeper Triassic Butmah and Kurrachine Dolomite Formations has also been booked as reserves (2P working interest of 9.3 mmboe). This oil is lighter (34o API) than the oil being produced from the Massive Formation reservoirs and is interpreted to be an oil-leg of the gas accumulation previously discovered in the original Khurbet East-1 discovery well. Government approval to commercialise the oil and gas in the Butmah Formation was received in December. As a result of obtaining this approval, the Company is able for the first time to book oil and gas reserves for the Khurbet East Triassic Kurrachine Dolomite Formation (also originally discovered by the Khurbet East-1 well). A strong demand for gas exists within Syria and indications are that commercialisation of the Triassic Formations can be progressed with favourable terms consistent with those defined within the Block 26 Production Sharing Contract.
Seven exploration wells were drilled during the year resulting in four oil discoveries, three of which were in Syria and one in Tunisia. In addition to the Butmah discovery discussed above, the two other oil discoveries in Syria were located adjacent to and east of the Yousefieh field. The most notable of these was the Al Khairat discovery which is assessed to hold net proved and probable working interest contingent resources of 12 mmbbl. A number of attractive ready-to-drill prospects have been identified in Block 26 within the 3D seismic area with estimated risked mean resources of 76 mmboe. Our exploration success rate to date in Block 26 is a robust one in three. In Tunisia, oil was recovered in fluid samples at Sidi Dhaher-1, an onshore exploration well drilled in September. Although an oil column has been interpreted from wireline logs, the commercial significance of oil discovered has yet to be established, with a production test planned later this month.
In the US, a second package of assets was divested during the year realising cash of some $11 million after release of restricted cash balances. Preparations are underway to sell substantially all of the remaining US assets in the first half of 2012.
Our objectives for 2012 are to consolidate our position in Tunisia and build a viable non-Syrian leg to the business within the capacity of the Group’s financial resources. The foundations of success are already in place: significant financial resources, highly competent human and technical resources and the credibility of having built a successful exploration and production operation in a relatively short period of time. We are aware of numerous opportunities to acquire both exploration acreage and prospective production at an attractive cost of entry. Several such opportunities are currently being evaluated. In all cases, the emphasis is upon cash preservation, the ability to fast-track production and the opportunity to maximise the Company’s operational strengths and experience. This promises to be an exciting period for the Group, as we utilise and apply our proven strengths to establish a stronger base from which to build future value for shareholders.
Chief Executive Officer
2 April 2012