2018 preliminary results
SOCO International plc, an international oil and gas exploration and production company, announces its preliminary results for the year ended 31 December 2018.
Ed Story, President and Chief Executive Officer of SOCO, commented,
In 2018 SOCO set out its vision to become a full cycle and growth orientated E&P company of scale. We made some significant steps towards achieving this in 2018, including the announcement and shareholder approval of the Merlon Petroleum El Fayum Company acquisition, putting in place SOCO’s new debt facility and portfolio optimisation through the divestment of our West African position. A year of opportunities and achievements, but 2018 has also had its challenges, including operational issues and delays which impacted on production from Vietnam. Upon completion, the Merlon acquisition will mark a significant turning point for SOCO, as we double our production, open up a whole new region of potential future opportunities and welcome key members of the Merlon team with a track record and proven ability to create value in Egypt. We look to deliver on increased production in Egypt and on our exploration plans in both Egypt and Vietnam. We remain committed to creating value for our shareholders through a combination of capital growth and capital returns. I am pleased that the Board has decided to recommend a 2018 final dividend of 5.5p per share, a 5% increase on 2017. In addition, we have repositioned SOCO to support further growth in the wider Middle East and North Africa region, both organically and through additional mergers and acquisitions.
2018 STRATEGIC HIGHLIGHTS
- Shareholder approval of the Merlon transaction in Egypt with completion on track for 1H 2019 – the acquisition will;
- Add proven and probable (2P) reserves of 24 million barrels and contingent (2C) resources of 37 million barrels
- Complement and diversify SOCO’s existing Vietnam-focused portfolio and create a new hub for our business in Egypt
- Increase SOCO’s through-cycle financial resilience through Merlon’s low cost resource base
- Reserve Base Lending Facility (“RBL”) of $125m in place
- Portfolio optimisation through divestment of non-core interests in Congo (Brazzaville) and Angola completed in line with the Company’s strategy
2018 FINANCIAL HIGHLIGHTS
- Strong and efficient balance sheet, RBL in place, solid cash flow and low cash operating costs:
- Revenue of $175.1m (2017: $156.2m), an average realised crude oil price of $74/bbl (2017: $56/bbl), representing a premium to Brent of over $3/bbl
- Low cash operating expenditure of $13.63/boe (2017: $13.73/boe) *
- $55.9m of cash generated from continuing operations (2017: $45.0m)
- Profit before tax (“PBT”) of $80.1m (2017: $22.7m)
- Recommended 2018 final dividend of 5.5 pence per Ordinary share (approx. $28.9m), an increase of 5%
- Dividends paid to shareholders during 2018 of $23.3m (2017: $21.0m)
- 2018 cash capital expenditure of $22.4m from continuing activities (2017: $25.2m from continuing activities and $4.1m from discontinued activities), fully funded from existing cash resources
- Year-end cash and liquid investment balance of $240.1m (2017: $137.7m), including the $100m draw down from the RBL, giving net cash of $140.1m
*See Non-IFRS measures in page 27 of the download
2018 OPERATIONAL HIGHLIGHTS
- Net production average of 7,274 boepd (2017: 8,276 boepd) in line with revised guidance - TGT production averaged 5,686 boepd (2017: 6,724 boepd) and CNV production averaged 1,588 boepd (2017: 1,552 boepd)
- On Blocks 125 & 126 in Vietnam, bid packages for a 2D seismic acquisition programme have been agreed and issued targeting commencement in mid-2019
- Successful extension of two key operational contracts, resulting in significant cost savings for the TGT Field: the FPSO Operations and Maintenance Agreement and the Bare Boat Charter for the FPSO Armada TGT 1
OUTLOOK FOR 2019
- Production guidance, maintained at 6,500 to 7,500 boepd net
- Completion of the acquisition of Merlon El Fayum is expected in H1 2019
- 2019 Vietnam capex guidance of approx. $34m fully funded from existing cash resources, to cover the development drilling and infrastructure upgrade on TGT and 2D seismic acquisition and processing for Blocks 125 & 126
- Optimise capital allocation providing shareholder return through dividends or acquisitions that can support value accretion and underpin a longer-term dividend stream.
SOCO International plc Tel: 020 7747 2000
Ed Story, President and Chief Executive Officer
Jann Brown, Managing Director and Chief Financial Officer
Mike Watts, Managing Director
Sharan Dhami, Group Investor Relations Manager
Camarco Tel: 020 3757 4980
Billy Clegg/ Owen Roberts
NOTES TO EDITORS
SOCO is an international oil and gas exploration and production company, headquartered in London and traded on the London Stock Exchange. The Company has a vision and strategy to become a full cycle and growth orientated E&P company of scale.
SOCO has production, development and exploration interests in Vietnam. SOCO holds a 30.5% working interest in the Te Giac Trang Field of Block 16-1, which is operated by the Hoang Long Joint Operating Company. Block 16-1 is located in the shallow water Cuu Long Basin, offshore southern Vietnam. SOCO holds a 25% working interest in the Ca Ngu Vang field of Block 9-2, which is operated by the Hoan Vu Joint Operating Company. Block 9-2 is located in the shallow water Cuu Long Basin, offshore southern Vietnam. SOCO holds a 70% interest in and is designated operator of Blocks 125 & 126, located in the moderate to deep water Phu Khanh Basin, offshore central Vietnam.
Upon completion of the Merlon acquisition, the SOCO Group will acquire a 100% working interest in the onshore El Fayum concession in the Western Desert, Egypt, around 80km south west of Cairo. The concession includes ten development leases for oil fields operated by Petrosilah, an Egyptian joint stock company to be held 50 / 50 between the SOCO Group and the Egyptian General Petroleum Corporation. The acquisition will add proven and probable (2P) reserves of 24 million barrels and contingent (2C) resources of 37 million barrels.
Repositioned for growth
Last year I reported that the Company had renewed its focus and commitment to the pursuit of growth opportunities, supported by the establishment of an experienced business development team. In September 2018, SOCO announced that it had signed a sale and purchase agreement for the acquisition of Merlon Petroleum El Fayum Company, which has onshore oil assets in Egypt. The transaction was approved by shareholders in December 2018 and is on track for completion in H1 2019. The proposed acquisition of Merlon complements and diversifies SOCO’s existing Vietnam-focused portfolio, builds scale through doubling of our reserves and resources, increases SOCO’s financial resilience through the low cost resource base and provides tangible production growth, re-setting SOCO’s growth trajectory. This acquisition is a significant step forward for SOCO in our vision to become a full-cycle, growth orientated E&P company of scale.
Safety remains the highest priority within the business and on the Board agenda. We are proud to report that SOCO’s Joint Operations continue to achieve a high record of safety and have maintained commitment to local sourcing, employment, training and industry upskilling. In Vietnam, we are pleased by HLHVJOCs’ high level of safe operations, with zero LTIs in over 24 million man-hours worked since project inception, representing seven production years on TGT and ten production years on CNV. SOCO aims to have a positive presence in the countries where it operates. Our purpose is the responsible development of energy from natural resources for global economic prosperity and to deliver value for all our stakeholders.
SOCO is also committed to responsible and sustainable development, resulting in value for the host countries and local communities as well as for our staff and shareholders. In Vietnam, community projects are selected by HLHVJOC and during 2018, the HLHVJOC Charitable Donation programme focused on long term goals to assist in the development of poor rural areas especially in healthcare, education and assistance to flood victims.
Capital discipline and financial stability have been SOCO hallmarks from inception and continue to underpin the business. Capital investment and divestment decisions are taken to allocate capital where it will provide the best risk adjusted returns. It is this approach that has allowed us to return significant amounts of capital to shareholders. SOCO continues to have a stable financial base. The balance sheet remained strong throughout 2018 and the Company had solid cash flows and low cash operating costs. To improve the efficiency of the balance sheet and provide financial flexibility, SOCO signed a $125m Reserved Base Lending facility (“RBL”) secured against the Group’s producing assets in Vietnam with a further $125m available on an uncommitted accordion basis. In December 2018 SOCO drew down $100m from the RBL facility.
The Group finished the year with $240.1m in cash, after returning $23.3m to shareholders through a 5.25 pence per share final dividend for the 2017 financial year and bringing the total return to shareholders since 2006 to $0.5 bn.
Prudent planning and risk management
Risk Management has always been a primary focus of the Board but, in these highly volatile commodity markets, we are giving the matter even more attention. Effective risk management is integral to SOCO achieving its corporate strategy to further strengthen the business through growth. In the 2018 Annual Report and Accounts, we set out our assessment of the principal risks facing the business and the mitigation measures we have adopted, whilst focusing on maintaining a business that remains robust and competitive.
Board engagement and changes
Olivier Barbaroux, a long standing non-executive director, retired from the Board of SOCO following conclusion of last year’s AGM on 7 June 2018. SOCO would like to thank Olivier for his contribution to the Company and to wish him all the best for the future. On the same date, John Martin was appointed as an Independent non-executive director, Chair of the Audit and Risk Committee and a member of the Remuneration Committee and the Nominations Committee. John has more than 30 years’ experience in international banking in the oil and gas industry. Ambassador António Monteiro, non-executive director, will retire from the Board of SOCO at the conclusion of the Company’s forthcoming AGM. SOCO would like to thank António for his service to the Company and wish him all the very best in his retirement. Marianne Daryabegui has been appointed as an Independent non-executive director with effect from 15 March 2019 and will also serve as a member of the Audit and Risk Committee, the Remuneration Committee and the Nominations Committee. Marianne has extensive experience in oil and gas corporate transactions and capital markets. Both John and Marianne bring a wealth of oil and gas experience and expertise which will complement and enhance the experience of the Board. Each of them will offer themselves for election by shareholders for the first time at the forthcoming AGM.
The Board looks to foster a genuine two-way dialogue between the Company and its stakeholders and welcomes the requirements of the 2018 Corporate Governance Code on engaging with the workforce and other stakeholders. In line with this John Martin has been appointed as the designated non-executive director for workforce engagement and we are hugely committed to this engagement and look forward to hearing the views of our employees.
Outlook and future opportunities
There is much for SOCO to look forward to in 2019 as the Company returns to growth. In Egypt, upon completion of the Merlon acquisition, we will seek to implement an increased drilling programme as we further develop the discovered resource base and test new exploration play concepts. In Vietnam we will look to pro-actively manage the production decline of TGT and CNV. On Blocks 125 & 126 2D seismic acquisition will commence mid-2019 in a new and exciting exploration basin. Upon completion of the Merlon acquisition and the implementation of the drilling programme in Egypt, our portfolio of Egyptian and Vietnam assets has the potential to offer one of the most competitive low operating cost production bases.
Since inception SOCO has been committed to shareholder value creation through the growth of the business and cash returns to shareholders. In line with this, the Board proposes a final dividend for 2018 of 5.5 pence per share.
We would like to thank our shareholders for their continued support. It is the firm belief of your Board, that with our competitive low-cost development projects, our strong financial stability, our culture of financial discipline and our talented and committed staff, SOCO is well placed to grow the business. The Board remains committed to delivering total shareholder returns through both dividends and capital growth. We continue to pursue new business opportunities where they are determined by the Board to be in the best interest of our shareholders.
Rui de Sousa
Chief Executive Officer's statement
A key step forward for SOCO this year was the proposed acquisition of Merlon Petroleum El Fayum Company, which has low-cost oil production assets in the prolific Western Desert region of Egypt, close to local energy infrastructure. The consideration will be satisfied through the payment of approximately US$136 million in cash and the issue of c.66 million new SOCO shares. The acquisition will add proven and probable (2P) reserves of 24 million barrels and contingent (2C) resources of 37 million barrels. In addition to providing a high quality oil concession with significant development upside and exploration optionality, Merlon creates a new hub for our business in Egypt. We plan to utilise this platform to support further growth not only in Egypt but also the wider Middle East and North Africa region, both organically and through additional mergers and acquisitions. We have a high regard for the business that Merlon has established in Egypt and look forward to working with our new colleagues.
SOCO’s balance sheet remained strong throughout 2018 and the Company had solid cash flows and low cash operating costs. In September we announced that we had put in place a new RBL facility and we were pleased to have received such strong interest in the bank market and firm support from our new lenders. The facility provides balance sheet efficiency and financial flexibility.
The Group finished the year with cash balances of $240.1m, which includes the $100m drawn down from the RBL, after fully funding its operating and capital expenditure programmes and returning $23.3m to shareholders through a 5.25 pence per share dividend. Revenues were $175.1m. The average realised oil price per barrel achieved for the same period was approximately $74/bbl, representing a premium of over $3/bbl to Brent.
Operations in Vietnam were not without challenges in 2018 and production was affected by the late arrival of a drilling rig and equipment, operational issues and further weather related rig delays. In addition, gas compressor inefficiencies and the third-party production through the FPSO also had an impact on TGT’s 2018 production performance. Actions are being taken to help mitigate the impact of these issues and delays, including acceleration of key workovers, upgrade of the gas compressors and optimised management of the third party FPSO throughput. Group production was 7,274 boepd (2017: 8,276 boepd) net to SOCO’s working interest. Group 2018 year-end Vietnam commercial (2P) reserves are 23.0 mmboe (2017: 28.1 mmboe). TGT and CNV reserves were re-evaluated in February 2019 and revised following 2018 production from 25.4 mmboe to 23.0 mmboe. TGT reserves were revised downwards due to operational delays causing recovery of some production volumes to slip beyond the licence expiry date. CNV reserves were revised upwards following successful execution of the 2018 work programme, the impact of which had not been reflected in year end 2017 reported volumes. Production guidance for 2019 remains at 6,500-7,500 boepd.
Significant cost savings for the TGT field were secured in 2018, through the extension of two key operational contracts; the Bare Boat Charter for the FPSO Armada TGT 1, which applies to the period 27 August 2018 to 14 November 2024, and the revised FPSO Operations and Maintenance Agreement. Overall, these two contract extensions have resulted in significant operating cost savings of over US$40 million (gross and pre-tax) over the extension period relative to extension of the original contract with no changes.
In line with our strategy to optimise the SOCO portfolio, and our announced plans to exit from our West African positions, SOCO completed the sale of its former interests in Congo (Brazzaville) and in the Cabinda North Block, Angola in 2018. The combination of existing cash, the new credit facility and the cash flow from our producing assets in Vietnam ensures that we are funded to take advantage of acquisition opportunities in line with our strategy of creating a full-cycle exploration and production company with a diversified portfolio.
During 2018, SOCO’s focus has been to further strengthen the business through growth opportunities and to build scale, all the while underpinned by our relentless focus on financial discipline and shareholder return. These strong foundations have been built as a result of a great deal of hard work and I would like to thank all our staff for their effort and contribution to our achievements this year.
Upon completion, the Merlon acquisition will mark a significant turning point for SOCO, doubling its production and opening up a whole new region of potential future opportunities. We look to deliver on increased production in Egypt and on our exploration plans in both Egypt and Vietnam. Activity in 2019 is expected to include implementing an increased drilling programme in Egypt as we further develop the discovered resource base and test new exploration play concepts. Our portfolio of Egyptian and Vietnam assets has the potential to offer one of the most competitive low operating cost production bases. In Vietnam we will look to pro-actively manage the production decline of TGT and CNV. On Blocks 125 & 126 2D seismic acquisition will commence mid 2019 in a new and exciting exploration basin.
We aim to build a business fostering and developing good relationships with host countries so that we are partner of choice. Safety will always be of the highest priority within the business and, just as SOCO’s Joint Operations have achieved an outstanding record of safety in Vietnam, we will work to continue this success in Egypt. Our goal is to have a responsible and positive presence in the regions in which we operate, resulting in value for the host countries, local communities, employees, contractors and shareholders.
SOCO has always been committed to capital discipline and differentiates itself amongst its peers by having a consistently strong and efficient balance sheet, a portfolio of assets with a competitive low operating cost, steady cash flows, recurring cash dividends and a highly experienced management team with a demonstrable track record of creating and delivering value to shareholders. This year has sown the seeds of an important return to growth for the business and I am confident in the outlook for the Company.
President and Chief Executive Officer