Chairman
CHIEF EXECUTIVE’S REVIEW
2009 Review
I believe that 2009 has again been important in demonstrating delivery of our long stated strategy of realising value for our assets at the appropriate time in their life cycle. The sale of Breagh and of Amstel, both of which generated very healthy returns on invested capital are of particular note. In addition our exploration strategy bore fruit in the discovery of light oil in the Cladhan well. We are excited at the potential of this discovery, although until we have drilled the next appraisal well it is difficult to accurately estimate the size of the accumulation and hence its commerciality with any degree of certainty.
Our Gas Storage project suffered a set back with the withdrawal of Star Energy from the project following the drilling of the Esmond test well. We have now acquired full 100% control of the project and are currently redesigning the development plan for the Esmond field to account for the partial repressurisation of the lower reservoir. We have contracted a third party specialist consultancy to peer review and where necessary refine our scheme. Following a detailed reservoir simulation study of the field which we hope to implement over the summer, and assuming the results support our planned development scheme we will examine how we might achieve best value for our shareholders. Unless and until a commercial deal is signed, there will undoubtedly remain significant uncertainty on its potential value, particularly given the current state of the capital and debt markets.
We have been very fortunate in being able to reduce our drilling activity and associated major capital expenditures in 2009, a period in which costs still lagged the precipitous fall in commodity prices. We expect that 2010 will see a better balance between costs and commodity prices and we expect a cautious return to exploration and appraisal activity in the UKCS, when we hope to drill both the Cladhan and Catcher prospects in the first half of the year.
2010 Outlook
We recognise that both Cladhan and Catcher together with the Esmond Gas Storage project are the three key currently identified elements of our portfolio that have the potential to make a material difference to our valuation, whilst requiring only very modest further capital investment and we hope to gain better knowledge of what the actual impact each of these will be in the first half of 2010.
The remainder of our portfolio is the subject of our current focus. We recognise that the market gives us little value recognition for our onshore portfolio, which includes the Kirkleatham gas production and gas storage development project, and we are currently examining how we might achieve better recognition of this in the near term.
Our Irish assets at Old Head and Schull are currently stalled, pending further clarification of the operator’s plans to either progress or monetise these discoveries. We believe that these assets are only likely to be developed in the near term with the involvement of the owners of the Celtic Sea gas infrastructure at Kinsale and we are in ongoing discussions in this regard.
At Cobra we have completed our evaluation of the project following the results of the last appraisal well and have now designed a number of potentially suitable well and fracture programmes that would test the commercial viability of the field. We are currently examining the economics of the project and will make a decision on whether these meet our criteria for further investment later in the year, with a view to drilling later in 2010.
We expect the Ceres gas field in which we have a small equity position to commence production in the 4th quarter, representing our maiden, albeit modest, cashflows. In the context of our overall strategy, expected cash resources and remaining capital expenditure profiles this asset may be of more value to someone else, and we are currently discussing this with potentially interested parties.
Share buyback programme
We fully recognise that the current environment for value creation in the UKCS is, at best, challenging for smaller companies. Our ongoing plans are to rationalise our portfolio into a small number of potentially material assets that require only modest further capital investment with a near term timeframe whist attempting to achieve value recognition for the remainder. This strategy will leave us with a significant proportion of our market capitalisation as uncommitted cash or cash in escrow. The board has considered the best use for these funds in the light of our long stated strategy and the current business environment outlined above, and has concluded that initially the most effective course of action will be to seek shareholder approval for a share buy back programme at the forthcoming AGM. We would expect through this programme to increase the per share leverage in the success case at the key near term projects at Cladhan, Catcher and Esmond Gas Storage. Subject to shareholder approval of the programme we will closely monitor and review the efficacy of the buy back programme and if necessary seek to implement additional value enhancement programmes or capital restructuring as may be appropriate.
We will continue to take a pragmatic and opportunistic approach to both new opportunities and consolidation within the sector.
Alan Booth
Chief Executive Officer
OPERATIONAL REVIEW
Drilling programme
We began the year with success at Ceres in July 2008 (EnCore 10 per cent.; UK North Sea block 47/9c) when the horizontal appraisal well tested gas at a maximum rate of 40 mmscfd through a 96/64' choke, exceeding our expectations. The discovery received Field Development Plan (FDP) approval from the Government in September 2009 and is now being developed as a single well sub-sea tie back to the nearby Mercury field. First production is expected in Q4 2009.
In October 2008, we had the second of three successful appraisal wells at Breagh (EnCore 15 per cent.; UK southern North Sea block 42/13a). Well 42/13-4 tested gas at a rate of 10.2mmscfd through a 32/64 inch choke at a flowing wellhead pressure of circa 1,630 psi. This well demonstrated productivity from the main and lower Breagh reservoirs on the east of the Breagh structure.
November 2008 saw an oil discovery at Cladhan (EnCore 16.6 per cent.; UK Northern North Sea block 210/29a) which confirmed the presence of a stratigraphically trapped 110 ft light oil column with no oil-water contact.
In the same month, the third appraisal well on Breagh spud and was completed in early January 2009. The horizontal well tested gas at a maximum rate of 26 mmscfd through an 80/64 inch choke at a flowing wellhead pressure of circa 890psi and helped define the characteristics and continuity of the accumulation.
Breagh
Following the drilling of the three successful appraisal wells on Breagh, we made the decision, along with our five co-venturers, to market the field for sale. After an active sale process we and our co-venturers entered into exclusive negotiations with one party, RWE Dea in April 2009 and a sale and purchase agreement was signed on 23 July 2009, post year end. In exchange for our 15 per cent equity in the field, we will receive US$68.8 million in cash upon completion, 20 per cent of which will be held in an interest bearing escrow account for 12 months as security against any potential warranty or indemnity claims by the purchaser. Completion of the sale is expected in September 2009.
Other portfolio activity
Aside from our disposal of Breagh, we made one other disposal during the year. In September 2008, we disposed of our wholly owned subsidiary EnCore Oil Nederland B.V., whose only asset was a 10 per cent. interest in the Amstel field offshore of the Netherlands. TAQA Energy B.V. paid US$5.5 million cash in a deal which realised a net gain of £1.2 million for EnCore.
During the same month, we farmed out percentages of our equity in two licences.
Firstly, we farmed out 10 per cent. of our interest in blocks 210/29a and 210/30a in the Northern North Sea, on which the Cladhan well was drilled in November. Dyas UK Limited contributed to the well on a promote basis as part of the farm out agreement, which left EnCore with a 16.6 per cent. interest.
Secondly, 20 per cent. of our equity in central North Sea blocks 28/9 and 28/10c was farmed out to Revus Energy (now part of Wintershall) in exchange for contribution to drilling the Catcher well on a promote basis. Following the acquisition of a well site survey in September, the Catcher well was expected to be drilled towards the end of the year, but due to the former Operator, Oilexco, being placed into administration in early 2009, this schedule slipped. In May 2009, we took over Operatorship of the licence and now expect the Catcher well to be drilled in 2010.
November 2008 saw the award of four offshore licences covering five blocks in the UK 25th offshore licensing round: 15/21g, 48/1d, 9/27c, 14/29d and 14/30c.
Block 15/21g (EnCore 40 per cent.; Operator) is a traditional licence. The work programme comprises seismic reprocessing and a drill-or-drop well decision within two years of the award. Block 48/1d (EnCore 25 per cent.; Operator) is also a traditional licence. The block contains interpreted extensions of the Cobra discovery and the Python prospect in the adjacent blocks and the work programme comprises a drill-or-drop well decision within two years of the award. Block 9/27c (EnCore 100 per cent.; Operator) is a promote licence. The work programme comprises seismic reprocessing and a drill-or-drop well decision to be made within two years of the award. Blocks 14/29d and 14/30c (EnCore 100 per cent.; Operator) are also promote licences requiring a drill-or-drop well decision within two years of the award.
Onshore
In March 2009, the access track and site build began on the Markwells Wood prospect on licence PEDL 126 (EnCore 10 per cent.). It is expected that the well will be drilled in 2010 depending upon rig availability.
In June 2009, we assigned our share of two onshore UK licences, PEDL 089 and 1153, to Wessex Exploration in return for Wessex settling outstanding cash calls on the licences. Following seismic studies we concluded that we did not wish to progress any further with a work programme on these licences.
3D seismic reprocessing work on our Biscathorpe licence on PEDL 253 (EnCore 60 per cent.; Operator) was completed in June and we are now seeking farm-in partners with a view to drilling a well to appraise the Biscathorpe structure in 2010 or 2011. Biscathorpe represents one of the larger remaining unappraised onshore structures, with significant stratigraphic upside potential.
We are hopeful that, now that outline gas sales terms have been agreed, the Kirkleatham gas discovery on licence PEDL068 will move quickly to first gas in 2010.
Gas storage
November 2008 saw the results of the pressure test well on the potential gas storage project at Esmond (EnCore 100 per cent.; UK North Sea blocks 43/13a, 43/15a & 43/20a). The results showed the reservoir behaviour to be more complex than initially modelled but still technically viable with a different engineering solution.
Following the well result, the Operator, Star Energy notified us that they no longer wished to proceed with the Front End Engineering and Design (FEED) phase of the project as, while still technically viable, the project no longer met with their economic and strategic investment criteria.
As a result of the FEED phase being a requirement of Star Energy’s farm in agreement with EnCore, Star Energy’s 50 per cent. equity in the Esmond and Gordon licences reverted back to EnCore in June 2009.
We have reworked possible development options on the project and have recently commissioned Helix RDS to provide an independent assessment of the technical viability of the project, which could then lead to further studies.
In the meantime, given the uncertainty surrounding the project, we wrote off all gas storage project costs to date at the half year, amounting to £0.5 million.
The year ahead
In a similar vein to last year, this year will see limited drilling activity. We expect to drill two key wells: an appraisal well on Cladhan and an exploration well on Catcher.
We are also looking forward to first production from Ceres before the end of 2009 and we expect to do further pre-drill work on Cobra and Bennett.
