Source - RNS
RNS Number : 0633A
Victoria Oil & Gas PLC
24 May 2019
 

 

24 May 2019

Victoria Oil & Gas Plc

("VOG", "Company" or the "Group")

Preliminary Results for the year ended 31 December 2018

 

The Company is pleased to announce the financial information for the year ended 31 December 2018. 

 

Year in Review

·       Grid Power customer, ENEO, ceased consumption in January 2018

·       62% decrease in annual gas sold - Gross 1,410 mmscf /Net 804 mmscf (2017: Gross 3,684 mmscf /Net 2,163 mmscf)

·       66% decrease in average daily gas production 3.75mmscfd (2017: 10.98mmscfd)

·       Attributable revenue of $10.8 million (2017: 23.5 million), EBITDA a loss of $0.53 million, (2017: $4.59 million), Loss before tax $8.3 million, (2017: $10.7 million)

·       Cost cutting programme commenced - 24% reduction year-on-year

·       8 additional customers consuming gas with 39 customers at year end

·       On 21 December 2018, ENEO entered into a three-year binding term sheet with GDC for gas to power supply to 30MW Logbaba Power Station

o   peak delivery of 6.1mmscfd on an 80% minimum Take or Pay basis - a minimum gas supply of 4.88mmscfd

o   initial gas sale price of $6.75/MMBtu to increase over the three-year term of the agreement by $0.10/MMBtu annually

 

Post period-end Highlights

·    Board strengthened:

Roger Kennedy appointed Executive Chairman following the retirement of Kevin Foo

John Knight and John Daniel appointed Independent Non-Executive Directors

·    $17.7 million (gross) raised through the issuance of 104,357,488 new Ordinary Shares at 13 pence per share

·    Board reviewing CHL Logbaba royalty and has suspended payments until review is completed

·    Operating cost reduction programme continued to improve operating margins

·    Q1 2019 average gas production rate increased by 127% during the period to 10.10mmscfd (Q4 2018: 4.45mmscfd)

·    ENEO gas consumption consistently over 5.5mmscfd during the Quarter having recommenced on 22 December 2018

 

Roger Kennedy, Chairman, said:

"The Company is for the first time in many years on the right track with lower costs, a better defined strategy, and the leadership to deliver value to shareholders.  2018 was a difficult year accentuated by past mistakes; however, the events since the year end, with the injection of new capital by significant shareholders backing our business model, Board and Management changes, production levels increasing, and a strengthened financial position, ensures that the future looks brighter for shareholders."

 

 

Chairman's Letter

 

Dear Shareholders,

 

This is my first Letter to the Shareholders as Executive Chairman.  I will begin by reiterating that the recent changes in significant shareholders and the Board, along with the realignment of management, mark a "a positive, new beginning for Victoria Oil & Gas Plc ("VOG")".  Let me be more precise as we look back at the past year's achievements, challenges and mistakes, and look forward to how we can make VOG into a sustainable growth story in Cameroon and potentially other parts of Africa.

 

What first drew my interest to VOG was the business model and its applicability to the rest of Africa and to developing economies globally.  The supply of energy in Africa is some of the most expensive and unreliable in the world.  Although many countries have seasonal hydro and dirty coal power plants, most are chronically short of power and rely on expensive diesel fuels to help power their communities and businesses between blackouts and brownouts.  There is an abundance of stranded gas deposits throughout Africa.  While many may criticise the environmental impact of natural gas and its exploitation, its usage is cleaner than the burning of coal or oil, emitting far less carbon dioxide.  VOG is one of a handful of companies that has been able to successfully explore, develop and commercialise gas in an environmentally friendly manner, resulting in a reliable, economic power supply and blue skies in Douala.

 

The development and implementation of the VOG business model in Cameroon through its wholly owned subsidiary Gaz du Cameroun S.A. ("GDC") was commendable, and credit has to be given to those who successfully implemented the strategy and built the company.  The story of VOG is not of your typical AIM natural resources company: it has successfully explored for and commercialised gas, has financed and constructed a processing facility and 50 kms of pipeline to provide gas to clients, and is a fully operational business in Africa.  That statement in itself is exceptional, and I have reminded many of you of the unique story of VOG. 

 

The challenge has been and continues to be making the model sustainable.  Historical mistakes at VOG have accentuated this challenge, and the impact on VOG's share price has been considerable.  Let me highlight the larger issues and later in this letter provide you with an explanation of how we will address each of these issues: 

 

1.    :  The Logbaba Project is the only operating field in our Company.  As the gas from each well at Logbaba depletes, to maintain resources and reserves we have to drill new wells periodically.  Drilling for gas in the Douala region is deep, the geology is challenging and the costs per well have proven to be high.  Technical problems during our last drilling programme only served to highlight the risk.

 

2.    :  The Company had 39 customers at the end of 2018; however, one, ENEO Cameroon S.A. ("ENEO"), accounted for the majority of total revenue in the three years during which it consumed gas.

 

3.    : The Cameroon Holdings Limited ("CHL") royalty structure attached to Logbaba is more of a revenue sharing arrangement, not netting out costs of production and has paid out 15% of all revenue produced at Logbaba to third parties.  The operating expenses in both London and Douala have scope for further reductions, which along with ENEO's postponement of the renewal of its contract in 2018, have made the operational results of VOG less than stable.

 

4.    The Government of Cameroon has historically requested the separation of our business to comply with the country's Petroleum and Gas Codes.  This is a major task and management is working with Société Nationale Hydrocarbures ("SNH") to achieve this.  Achieving compliance in this regard will deliver clarity on the downstream fiscal arrangements in Cameroon.

 

5.    :  VOG started off as an oil exploration company in Russia.  Over the years it ventured into Kazakhstan and other countries.  After it successfully developed the Logbaba project in Cameroon, VOG called itself an oil and gas exploration company when in fact it is both a successful upstream gas and a gas utility company.  The vision of how to grow VOG outside of Logbaba and Cameroon, particularly after the setbacks of 2018, is a work in progress by both the new Board and management.

 

None of these matters have proven fatal.  Thanks to you our shareholders, who have believed in our company's business model and have supported us, we have a chance to immediately address and remedy them.  The new injection of capital and realignment of the Board and management completed on 3 April 2019 allows us to take decisive actions to develop VOG into a long-term, profitable and sustainable business.  Let me outline how.

 

First, GDC received on 17 December 2018 the Presidential Decree confirming the transfer of the interest in the Matanda Production Sharing Contract ("Matanda PSC") assigned from Glencore, securing GDC's 75% ownership and operatorship.  Matanda is a large block adjacent to Logbaba, which at 1,235km2 ("Matanda"), is over 60 times the area of the Logbaba licence with significant prospectivity.  Management has commenced planning to meet our obligations under the PSC, including reappraisal of historic seismic completed by Glencore and others and drilling of at least one well by end 2020.

 

At Logbaba, the planning for the remediation work on well La-108 has commenced, specifically the extraction of the perforating gun stuck in the production tubing, the remaining perforation and subsequent well testing.  This work is projected to be completed in Q4 2019.  Based on the successful completion of well La-108, we will seek to obtain an independent third party reserve and resource report.  Simultaneously, management has initiated engineering works to commercially optimise the Logbaba processing facility.

 

The combined field work at Matanda and Logbaba will move VOG away from single asset risk and is expected to significantly increase our reserves and resources and position VOG to not only supply gas to existing industrial and grid power demand, but also to prospective Independent Power Producers ("IPPs") that have expressed interest in developing new, demand intensive power projects in the Douala area. 

 

The Government of Cameroon ("Government") has stated that it requires additional grid power to meet the growing power demand in the Douala region.  Several IPPs have contacted GDC for the purpose of supplying gas for power generation equipment.  The Company has and will continue to actively engage with these IPPs to achieve gas sale agreements.

 

On existing and new clients, let me clarify one point and explain our strategy to mitigate our customer concentration risk.  First, for the initial contract which ended 31 December 2017, ENEO has paid all of its invoices to GDC.  It was clear to us, and power users in Douala throughout 2018, that the Government needed to add more grid power.  After months of negotiations between the Government and ENEO, a new 10-year extension of its concession was signed by ENEO on 11 November 2018.  Subsequently, ENEO recommenced acquiring gas from GDC on 22 December 2018 based on a binding term sheet executed between the parties, the terms of which we announced to the market.  We are now in the process of completing a fully termed gas supply agreement with ENEO.  Many of you have voiced doubts on ENEO paying us, particularly as they have yet to pay us for gas consumed in the first quarter of 2019.  Let us remember that ENEO only had their concession extended at the end of 2018.  They have in the past paid in full for the gas that was supplied to them by GDC.   VOG and GDC have a firm expectation that ENEO will honour their contractual commitment and pay their invoices. 

 

Second, apart from increased demand from ENEO and prospective demand from IPPs entering the market, we have another 38 paying industrial customers and we are confident that we can secure additional customers, particularly customers using gas for industrial power as we concurrently work to establish additional long-term reserves and production from Logbaba and Matanda. 

 

As promised to you in our announcement of the last capital raise, management has been and continues to be focused on substantially cutting operating costs and improving operating margins.  The programme commenced in 2018 will continue throughout 2019, reducing headcount, salaries and non-necessary cost items in both London and Douala, while actively working to increase production and revenue, thus enhancing productivity.  As of the writing of this letter, management has successfully extinguished the major trade payables relating to our last drilling programme, with the exception of Weatherford Services and Rental Limited ("Weatherford"), with whom we have a recently reached agreement in principle to settle their outstanding debt.  This settlement brings all GDC creditors to within agreed trading terms.

 

VOG today is in a much improved financial and operational position.  Q1 2019 results showed a strong set of production figures and we look to emulate and better those figures in the remaining quarters of 2019.  Our goal is to make VOG profitable for full year 2019 and in the years to come.  To assist in meeting this objective, as noted in our Q1 2019 operations update, the VOG Board has taken steps to review the CHL royalty and has suspended payments until such review is completed.  The validity of this suspension is disputed by CHL.

 

The newly constituted VOG Board has further agreed that:

 

1.  We cannot work under the historical assumption or expectation that the insurance claim relating the La-108 well incident will be paid.  The insurance claim has been declined by the insurer based on their opinion that there was insufficient evidence of an underground blow-out as defined in the insurance policy.  Expert technical advisors to the Company have produced information contrary to what the insurer has put forward and the Board proposes to pursue the claim through litigation in Cameroon; and

 

2.  All costs relating to non-core assets, namely the West Medvezhye project in Russia, will be reduced solely to maintain the licenses and work towards achieving a sale or exit.  A new realistic, focused sales process will be commenced and concluded as soon as practicable. 

 

The Company is in ongoing negotiations with SNH regarding the mechanism for splitting the Logbaba activities into the upstream and downstream components to determine, amongst other items: the potential participation of SNH in the downstream activities; the allocation of assets, liabilities, revenues and costs; the associated transfer pricing mechanisms; and the net settlement required by SNH to take ownership of their entitlement. 

 

In terms of Strategy, we first have to get VOG right in Cameroon.  We believe that the Government, ENEO, prospective IPPs, and industrial clients will establish for us the natural ceiling of the gas market in Cameroon.  GDC is a gas production and gas utility company.  As I stated earlier, all other assets that do not fit this strategy will be disposed.  VOG has built a company in Cameroon that is recognised as an outstanding entrepreneurial example of creating a cash generating business from stranded gas deposits. It is a model that under the right conditions can be replicated across Africa's many stranded gas deposits.  The Board will explore strategic opportunities, development of profitable downstream operations, and farm-ins to other potential blocks in Cameroon and other parts of Africa.

 

While we are restructuring our finances and refocusing our operations and strategy, we will look to strengthen our technical abilities and management. 

 

The Company has restructured and strengthened our Board, with the appointment of two Independent Non-Executive Directors: John Knight, appointed Senior Independent Director, and John Daniel, both bringing with them a wealth of experience and expertise to VOG.  Apart from the Audit Committee, now led by John Knight, and the Remuneration Committee under the continued leadership of John Bryant, a new Technical Committee has been established under the oversight of John Daniel, which will assist management in the planning of all future exploration and field development. 

 

The changes implemented at VOG on 3 April 2019 and the steps taken since the end of 2018 are meant to stabilize and grow the company and restore investor confidence in VOG.  We are confident that we have identified all the substantive issues that need to be tackled by the Board and will work methodically to resolve each of them.  This process will take time and I will make a personal commitment to you our shareholders that we will remain transparent in our reporting as we progress.  In our opinion VOG's share price is massively undervalued.  We understand that to rebuild the trust of investors and the value of the company we will have to not only clear operational milestones in Cameroon, but successfully execute a strategic plan for growing the company outside of Cameroon in the long term.  We thank our shareholders for their continued support and patience.  Thanks are also given to the management and employees for their continued dedication, our independent Non-Executive Directors for their ongoing guidance, and our partners; RSM Productions Corporation ("RSM"), AFEX Global Ltd ("AFEX") and SNH. 

 

Roger Kennedy

Executive Chairman

23 May 2019

 

 



 

Chief Executive Officer's Review of Operations

 

2018 in Overview

·    Grid Power Customer, ENEO ceasing consumption

·    Resulting year of consolidation and cost reduction

·    Customer diversification strategy 

·    Non-essential capital projects put on hold to preserve cash

·    8 additional customers consuming gas during the year

 

Key Statistics/Events

·    62% decrease in annual gas sold

Gross 1,410 mmscf /Net 804 mmscf

(2017     Gross 3,684 mmscf /Net 2,163 mmscf)

·    66% decrease average daily gas production 3.75mmscfd (YE 2017: 10.98mmscfd)

·    La-108 wireline cutting

 

Operations Review

 

2018 was a challenging year with the non-renewal of the Gas Sales Agreement with Eneo Cameroon S.A ("ENEO") in January forcing a change in plans.  Management responded rapidly to readjust the Company and its costs to do all that it could to remain a going concern through 2018.  A number of positive things have come out of the situation including management's focus being shifted to increase the diversification of customers and its revenue base for the Company by seeking higher value for its gas from industrial power customers. The focus on industrial power customers has generated a lot of interest and GDC has secured a number of signed gas sales agreements.

 

Alongside seeking higher value gas and additional revenue, given the reduced revenues for 2018, cost cutting became a major focus for GDC and the Company.  This was achieved successfully and is more likely to see a larger impact in the financials for 2019. I am pleased to report a reduction of operating costs by 24% year on year.

 

With ENEO resuming gas consumption, the company anticipates much better results in 2019. 

 

I want to thank shareholders for their patience and support throughout 2018.  Further detail on some of the specific topics are noted below.

 

Grid Power

Due to circumstances beyond the control of GDC, ENEO did not renew their gas sales agreement in January 2018.  Whilst the situation that ensued was challenging for all involved, the management team remained confident that a resolution would be reached and worked tirelessly in trying to achieve it. Once ENEO was awarded its 10-year concession extension, GDC and Altaaqa were awarded contracts for gas to power supply which resumed on 22 December 2018. 

 

During 2018 all outstanding payments due on invoices issued to ENEO under the previous Gas Sales Agreement were settled in full.

 

GDC remains an integral part of the power solution for Douala; made evident by the increased power black outs that the city experienced during 2018 when the gas was not being consumed for generation of power by ENEO.

 

GDC entered into a binding term sheet with ENEO on the 21 December 2018 to resume gas supply to the 30MW Logbaba Power Station. Gas supply and power distribution commenced on 22 December 2018. The term sheet with ENEO sets out 3-year contract term with peak delivery of 6.1mmscfd to be made available to the Logbaba station on an 80% minimum Take or Pay basis throughout the year, which equates to a minimum gas supply of 4.88mmscfd.  This differs from the previous contract, which contained a seasonal minimum take or pay element of 90% during the January to June dry season and 30% during the wet season July to December. The initial gas sale price of $6.75/MMBtu will increase over the three-year term of the agreement by $0.10/MMBtu on each anniversary of the effective date of the agreement. 

 

ENEO has consistently consumed gas from GDC in excess of 5.5mmscfd since resuming consumption, which is above the minimum contracted consumption volume.

 

Whilst the expectation was to have Fully Termed Agreements completed in Q1 2019, the parties are working closely to have these finalised shortly and ensure the provision of appropriate security for payment guarantees.  The invoices for gas consumed in 2019, totalling approximately $3.6 million (net), remain outstanding. Management expect payment shortly and is actively engaging with ENEO to resolve this. 

 

We wish to thank the Government of Cameroon, Ministry of Water & Energy, ENEO, SNH and His Excellency the President for entrusting GDC and Altaaqa with such an important project for the Republic of Cameroon and its people.

 

Further Grid Power Demand

There is no doubt about the current deficit in grid power supply which is only increasing as a result of the growing demand for power by Cameroonians and Cameroon businesses.  Hydro power projects are being implemented nationally at a grand scale, but these will take a number of years to be commissioned.  We are aware that the government roadmap for power generation includes at least 30% of its power to be from thermal sources to ensure consistency at times of reduced rainfall. As the only onshore gas supplier, GDC is well positioned to deliver gas for power projects.

 

A number of internationally reputable power generation companies have expressed their interest to supply 100MW - 150MW each and are in advanced discussions with the Government of Cameroon and ENEO to further these projects.  GDC is engaging in discussions on these projects with the aim of progressing to gas sales agreements with these parties to secure gas offtake for grid power projects.

 

Thermal and Industrial Power Customers

By the end of 2018 eight additional customers were consuming gas; five for thermal use (three being new customers and two reconnections) and three for power use (two being new customers and one a reconnection).  This brings the total number of consuming customers (excluding ENEO) at the year end to 38.  Gas for Thermal use sales increased by 5% to 1,311mmscf (YE 2017: 1,249mmscf) and Industrial Power sales by 12% to 74mmscf (YE 2017: 66mmscf).

 

In particular, the sales team focused on the power requirements of existing and new customers.  GDC explored a number of financing solutions for the capital expenditure required for the gas fired generators (gensets).  With the completion of the recent fundraising and strengthening of the Company's Balance Sheet, GDC is reviewing these financing options to progress the industrial power project further.  During the year, 3 customers that were on or close to existing pipeline purchased their own generators and were consuming gas by the year end.  There are two further customers who have signed GSA's for industrial power, one of which is expected to be online in Q4 2019.

 

The Sales team is actively pursuing customers who are based in potential pipeline extension areas for both thermal and industrial power uses for our gas. Non-essential capital expenditure projects were put on hold during 2018, which delayed some of the decisions for industrial power projects.  However, given the recent fundraising and consumption of gas by ENEO, the economics for these projects are being reviewed and may form part of the capital expenditure programme for 2019.

 

 

 

Compressed Natural Gas ("CNG")

 

The Company announced in June 2018 that GDC had entered into an exclusive agreement to partner with Naturelgaz Sanayi ve Ticaret A.S. ("Naturelgaz"), Europe's largest CNG supplier and distributor. The purpose of this long-term partnership was to:

 

·    Design, build and operate CNG infrastructure and solutions for customers who need mobile energy, initially in GDC's home market of Cameroon with the intention of rolling this out into other African countries

·    Market CNG products, including bulk CNG and gas-to-power to industry and businesses which require reliable off-grid / off-pipeline energy solutions, as well as Auto CNG for alternative mobility solutions

·    Phase 1 agreed between the parties is a 2mmscfd CNG plant and customer distribution project currently in the design stage. 

 

Marketing studies by GDC and Naturelgaz concluded that five types of customers would use CNG in Cameroon: thermal, off-grid power generation, commercial trucking, public transportation, and domestic transportation. The studies indicated the near-term potential of the CNG market, within a 60 km radius of the Logbaba facilities, is 2mmscfd thermal and 2mmscfd industrial power. To date, more than 10 customers have expressed interest in CNG within a 60 km radius of Douala.

 

Design, engineering and cost estimation was completed, which demonstrates feasibility for an initial project to build a 2mmscfd CNG plant in Douala for CNG distribution. The Board believes that CNG will compete strongly against diesel and heavy fuel oil which are currently priced in Cameroon at an equivalent of approx. $25/MMBtu and $15/MMBtu respectively.

 

The project will be able to progress following completion of remediation works of La-108, plant optimisations at Logbaba and the conclusion of GSA's with sufficient customers, thereby establishing a viable business operation.

 

Energy Wells

There are a number of additional gas sales opportunities for GDC.  Whilst some time was spent on the Energy Well concept during 2018, management has decided to focus on the industrial and grid power opportunities which could potentially include CNG in the future.  This project may be revisited in the future but no resources have been allocated to it for 2019.

 

Delivery and Infrastructure

 

Pipeline

During the current year, as mentioned previously, non-essential capital expenditure was put on hold.  No extensions to the 50km pipeline network were made during the year.

 

Facilities Enhancement Project

In December 2018, the VOG Board approved engineering and execution planning to upgrade the Logbaba Gas Plant to enable production at a lower wellhead pressure than it is currently designed, maximising the value of the gas deliverability from the wells. Once the project is complete, it will result in significant increase in hydrocarbon recovery from existing and future wells.  A further benefit of the project is that it will enhance the reliability of the Logbaba Gas Plant as GDC production increases during 2019 and 2020. The project will be delivered as a two-stage project. The Front-End Engineering Design (FEED) will be delivered in Stage 1; and once accurate costing and scheduling have been determined and approved by the Board, the procurement of materials, fabrication and installation (Stage 2) will commence.  Stage 1 is expected to be completed in 2019.

 

 

 

 

Upstream

 

La-108

At the end of the La-108 the well testing operations in December 2017, a spent perforating gun was stuck in the production tubing at a depth of 895m, with a wireline cable extended from the stuck gun to surface. The only material capital project that was carried out during the financial year for GDC was in relation to La-108.  In April 2018, the cable was cut downhole at a depth of about 700 m. The cut wire was recovered from the hole, leaving the perforating gun and about 200 m of cable in the hole to be retrieved at a later date.

 

As a result of increased production, planning has commenced for works to recover the perforating gun and conduct further perforating and flow testing to complete well La-108.

 

Logbaba La-108 Insurance Claim

The insurance claim to recover the costs associated with the La-108 well control event has been declined by the insurer based on their opinion that there was insufficient evidence of an underground blow-out as defined in the insurance policy.  Expert technical advisors to the Company have produced information contrary to what the insurer has put forward and the Board believes it has reasonable prospects of success in pursuing the claim through litigation in Cameroon.  The parties relating to the Logbaba Project are evaluating their options.

 

 

Trade Indebtedness

In Q1 2019, GDC received a statutory demand in the BVI from Weatherford Services and Rental Ltd ("Weatherford") for payment of invoices relating to various services provided by Weatherford for the La-107 and La-108 drill program for a gross amount of approximately $2.9m.  The Company contends that this matter was in dispute prior to service of the statutory demand and has made an application to have the statutory demand set aside.  The Company has also formally disputed that the full funds demanded were due.  The Company and Weatherford now have an agreement in principle to extinguish the outstanding debt and to withdraw the statutory demand which is expected to be formalised in the near term.  The Company has, since year end, settled the remaining creditors from the drilling program and now trades with its remaining creditors within trading terms.

 

ISO Certification

GDC has worked on International Organization for Standardization Compliance ("ISO") 9001, 14001 & 45001 ISO since 2017. It has developed and implemented its Integrated Management System (IMS) based upon the requirements of these international standards.

 

We were pleased to announce in May 2019 that following an audit by an external certifying authority, GDC has successfully completed the audit process for ISO 9001:2015, ISO 14001:2015 and ISO 45001:2018 with certifications expected to be issued by end of Q2 2019. This achievement is evidence that Gaz du Cameroun has established management systems for Quality, Environmental and Occupational Safety and Health, which conform to international ISO standards. This accomplishment demonstrates our continued commitment to providing a high-quality product and delivering a consistent service in a safe and environmentally conscience manner to all our clients, alongside the investment of time and money into new technology, staff, processes and procedures by the Company.

 

OECD Instance

Following a complaint to the Organisation for Economic Co-operation and Development ("OECD") in 2018 and various communications with the UK National Contact Point ("NCP") for promotion of the OECD Guidelines for Multinational Enterprises (the "Guidelines"), the NCP has decided, on an "Initial Assessment" that issues raised merit further examination (based on initial information from both parties). The complaint was made by the association of residents of Ndogpassi I, II and II and the Good Neighbours circle of Logmayangui in relation to the establishment and operation of the Logbaba Project in Cameroon. We are engaging with the NCP in relation to progressing to mediation with the aim of addressing the concerns of the residents involved.

 

Logbaba Reserves and Resources Update

The Group had previously reported the reserves and resources on the entire Logbaba Field contained within the original 64km2 PH79 Exploration licence. Discussions with SNH and the Government of Cameroon are continuing regarding the terms on which the relinquished portion of the PH79 Exploration licence (the 44km2) will be made available to the Logbaba Concession partners.  The reserves and resources have been updated to reflect only the reserves and resources contained within the C38 Exploitation licence, which has an area of 20km2. A further update will be provided once negotiations are concluded on the PH79 Exploration Licence.

 

Matanda Update

Regarding Matanda Block, GDC received the Decree signed by H.E. President Paul Biya on December 17, 2018, authorising the transfer of interest in the Matanda Production Sharing Contract ("Matanda PSC") license assigned from Glencore in early 2016. This secured GDC 75% ownership and operatorship of the Matanda PSC, adjacent to its Logbaba concession, which at 1,235km2, is over 60 times the area of the Logbaba concession.  The proposed minimum work program obligation of one exploration well, plus seismic reinterpretation is ongoing and expected to be completed in the first two years following the date of the Presidential Decree. 

 

I want to extend my thanks gratitude to our teams in London, Cameroon and Russian and thank them for their hard work, loyalty and support throughout the years and look forward to achieving success in 2019 and beyond.

 

Ahmet Dik

Chief Executive Officer

23 May 2019



 

Financial Review

 

The year ended 31 December 2018 ("current year") was a challenging year for VOG.  The non-renewal of the ENEO contract on 1 January 2018, in conjunction with an overhang of outstanding partner receivables and supplier payables relating to the Logbaba drilling programme, set the tone for a year of rationalisation and stringent capital management.

 

Despite rigorous cash management, a restructuring of the BGFI debt facility, a reduction in total operating and G&A costs, and efforts to expand sales of thermal and industrial power applications, the Board felt that the Group's balance sheet required an injection of funding and looked to raise capital.  On 5 April 2019 the Group completed an equity placing and subscription, raising gross proceeds of $17.7 million.  The net proceeds of the fundraising will enable the Group to:

 

·        maintain and expand its existing operations in Cameroon, with a focus on securing new customers and increasing revenue;

·        complete well La-108 and certain process plant enhancements at Logbaba and fund the ongoing development of the Matanda project, a key focus for the Group;

·        continue to implement its cost reduction programme in both the London and Cameroon operations;

·        restructure and reduce the Group's existing bank and trade indebtedness; and

·        fund its working capital requirements.

 

On 12 June 2017, the Group formalised a participation agreement entitling The National Hydrocarbons Corporation of Cameroon ("SNH") to a 5% participating interest in the upstream operations of the Logbaba Project with an effective date on the commencement of exploitation activities at the Logbaba Project in early 2011.  As a result, the Group's participating interest in the upstream activities of the Logbaba Block has reduced from 60% to 57% to accommodate SNH's interest.  The Company is in ongoing negotiations with SNH regarding the mechanism for splitting the Logbaba activities into the upstream and downstream components to determine, amongst others: the potential participation of SNH in the downstream activities; the allocation of assets, liabilities, revenues and costs, and the associated transfer pricing mechanisms; and the net settlement required by SNH in taking ownership of their 5% participating interest.  The Company discloses that it has a contingent liability regarding the payment of state royalty on the Logbaba Block.  The resolution of the state royalty matter is included in these negotiations.  The presentation of the consolidated financial statements has required management's judgement with regard to the outcome of these negotiations to ensure that the financial statements present a fair and reasonable view of the financial position and results of the Company.

 

31 December

31 December

 

2018

2017

 

$'000

$'000

Gas sales (mmscf) - Gross

1,410

3,684

Gas sales (mmscf) - Attributable

804

2,163

Condensate sales (bbls) - Attributable

8,309

18,892

Revenue ($m) - Gross

18,596

40,613

Revenue ($m) - Attributable

10,796

23,471

Net royalties ($m)

1,145

2,609

EBITDA ($m)

(529)

4,593

Loss before tax ($m)

(8,302)

(10,724)

Loss after tax ($m)

(8,521)

(10,134)

Basic loss per share (cents)

(5.79)

(8.86)

Operating cash flow before working capital ($m)

(1,487)

5,683

Cash working capital movement ($m)

1,367

(1,999)

Capital invested ($m)

3,363

39,752

Net debt ($m)

(17,440)

(13,061)

 

Statement of Comprehensive Income

 

In the year ended 31 December 2017 ("prior year"), grid power sales accounted for 64% of gas sales in the year.  Having ceased taking gas on 1 January 2018, the binding term sheet with ENEO was signed on 21 December 2018 and the Logbaba power plant resumed consumption on 22 December 2018, resulting in grid power gas sales accounting for only 2% of gas sales in the current year, and accounting for the $12.7 million decline in attributable revenue.  Revenue in the current year was $10.8 million (2017: $23.5 million).

 

The binding term sheet to supply gas to the Logbaba 30MW Power Station contained the following provisions:

·        3-year contract term;

·        Peak quantity delivery of 6.1mmscfd to be made available to the Logbaba Power Station site

·        Minimum base load 80% (4.9mmscfd) of peak quantity "Take or Pay" throughout the year

·        Gas price range from $6.75 to $6.95 per MMBtu over contract term, an annual increase of $0.10 per MMBtu

 

The parties agreed to execute a fully termed agreement, including the provision of an appropriate payment guarantee.  The Company is working with ENEO to have the agreement and guarantee in place as soon as possible.  Whilst the Company is experiencing payment delays from this customer, with net receivables of $3.6 million at the time of publishing this report, it is noted that ENEO has in the past paid all amounts owing and management believe that the current delays will be rectified in the near term.

 

Net royalties, being the royalties paid less the Group's share of profit from associate (which represents the Group's 35% interest in Cameroon Holdings Limited ("CHL"), which in turn earns a royalty from GDC), was 10.6% of attributable revenue for the current year (2017: 11.1%).  Since January 2019 the Company has ceased to make any payments under the CHL royalty agreement.  The Board is in the process of reviewing the governing documents regarding the payment of royalties to CHL and until the process is completed the Company will not be making any further payments under the CHL royalty agreement.  CHL disputes the validity of suspension of the royalty payments.

 

Operating costs (being Other cost of sales plus Administrative expenses excluding depreciation and amortisation) decreased by $3.5 million to $11.0 million in the current year (2017: $14.5 million) demonstrating the Company's efforts to reduce costs in an environment of reduced revenues.  The Company will continue to reduce operating costs at both the operating and corporate levels in 2019.

 

 

31 December

31 December

 

2018

2017

 

$'000

$'000

Operating loss

(6,336)

(10,158)

Depreciation

5,807

14,751

EBITDA

(529)

4,593

 

Depreciation for the current year was $5.8 million (2017: $14.8 million), which is both variable and associated with the volumes of gas produced and related to the increase in reserves used to determine the unit-of -production depreciation charges.

 

Despite efforts to reduce operating costs, EBITDA, which removes depreciation from the reported operating loss, was a loss of $0.5 million (2017: gain of $4.6 million) reflecting the impact of the reduction in revenues.

 

The Group produced a loss before tax of $8.3 million (2017: $10.7 million), and a loss after tax of

$8.5 million (2017: $10.1 million). The basic and diluted loss per share was 5.79 cents (2017: 8.86 cents).

Statement of Financial Position

Intangible assets of $30.4 million (2017: $54.2 million) represent the costs incurred on well La-108.  Works to recover the perforating gun lost down-hole and to conduct further perforating and flow testing to complete well La-108 will be performed in 2019.  When feasible these costs will be transferred to oil and gas assets within property, plant and equipment.

 

Well La-107 was transferred to oil and gas assets within property, plant and equipment during the year.  On 4 June 2018, following the completion of the 2017 drilling campaign on wells La-107 and La-108, the Group announced a significant increase in the proved developed reserves for the Logbaba Field in Cameroon.  Following the announcement, the proved developed reserves used in the calculation of unit-of-production depreciation increased from 21.1 billion cubic feet ("bcf") to 69bcf (2017: 21.1bcf) in the Logbaba Field.

 

The decrease in trade receivables to $8.7 million (2017: $13.5 million) is due to a $3.5 million reduction in attributable trade receivables (reflecting the lower revenue levels and full collection of outstanding ENEO debt) and a $2.5 million reduction in partner receivables being RSM's share of drilling costs and SNH's receivable following their participation.

 

Trade and other payables of $10.8 million (2017: $14.3 million) reduced as a number of residual drilling contractor obligations were settled during the year.  Drilling related trade payables at 31 December 2018 amounted to $3.9 million, all of which has been settled post year end. In Q1 2019, GDC received a statutory demand in the BVI from Weatherford Services and Rental Ltd ("Weatherford") for payment of invoices relating to various services provided by Weatherford for the La-107 and La-108 drill program for a gross amount of approximately $2.9m.  The Company contends that this matter was in dispute prior to service of the statutory demand and has made an application to have the statutory demand set aside.  The Company has also formally disputed that the full funds demanded were due.  The Company and Weatherford now have an agreement in principle to extinguish the outstanding debt and to withdraw the statutory demand which is expected to be formalised in the near term.  The Company has, since year end, settled the remaining creditors from the drilling program and now trades with its remaining creditors within trading terms.

 

 

Cash and cash equivalents of $3.5 million (2016: $11.5 million). Borrowings reduced to $20.9 million (2017: $24.5 million). During the year the Company successfully restructured the BGFI debt facility.  At 31 December 2018, the loan has a 6-month interest only period, followed by 48 monthly repayments of principle and interest.  Interest is payable at 7.15% p.a.  The loan is secured by a pledge over the revenue stream of certain customers, a pledge over attributable gas production volumes equivalent to the monthly instalments and the ceding of GDC's right to future insurance claims for the tenor of the loan.  The Company has provided a letter of support to BGFI to support the facility.

 

Net debt and liquidity

 

 

31 December

31 December

 

2018

2017

 

$'000

$'000

Cash and cash equivalents

3,467

11,476

Borrowings: Current liabilities

(4,109)

(3,174)

Borrowings: Non-current liabilities

(16,798)

(21,363)

Net debt

(17,440)

(13,061)

 

Net debt of $17.4 million (2017: $13.1 million) reflects the liquidity position of the Group.  The Group has no further available credit facilities.

 

The Company raised $17.7 million gross proceeds in an equity placement in April 2019.

Cash Flow Statement

Operating cash utilised, prior to the effects of working capital movements, was $1.5 million (2017: cash generated $5.7 million), reflecting the reduced revenues and EBITDA.

 

Working capital decreased $1.4 million (2017: increased $2.0 million) owing to cash collections from customers and partners, set off against payments made to drilling suppliers.

 

Capital investment in 2018 was reduced to only the essential spending and committed costs.  The Company's capital investment was reduced to $3.4 million (2017: $39.8 million).  In 2019 the Company will complete well La-108 and perform certain process plant enhancements and optimisation at Logbaba.

 

There were no funds raised during the current year, with capital investments and cash utilised in operations being funded from existing cash reserves (2017: $23.7 million net proceeds from the equity placement and $15.2 million proceeds from borrowings).  Repayment of capital on borrowings was $2.8 million (2017: $7.8 million).

 

Commitments

The Logbaba Concession does not contain any work programme obligations.

 

The Presidential Decree conferring title to its 75% participating interest in the Matanda Block was signed on 17 December 2018.  GDC's share of the Matanda work programme, which the Company will have two years to execute from the date of the Presidential Decree, is $11.3 million.

 

Insurance claim

The insurance claim to recover the costs associated with the La-108 well control event has been declined by the insurer based on their opinion that there was insufficient evidence of an underground blow-out as defined in the insurance policy.  Expert technical advisors to the Company have produced information contrary to what the insurer has put forward and the Board believes it has reasonable prospects of success in pursuing the claim through litigation in Cameroon.  The parties relating to the Logbaba Project are evaluating their options.  It was not considered appropriate to continue reflecting the insurance claim as a contingent asset as disclosed in 2017.

 

Subsequent Events

On 3 April 2019, Kevin Foo resigned as Executive Chairman of the Company and Roger Kennedy assumed the role of Executive Chairman in his stead.

 

On 3 April 2019, John Knight and John Daniel were appointed as Independent Non-Executive Directors' of the Company.

 

On 5 April 2019, the Company issued 104,627,488 new Ordinary Shares at a subscription price of 13 pence per share which generated gross proceeds of $17.7 million and net proceeds of $16.1 million.  We thank our new and existing shareholders for the confidence that they have shown in the Company.

 



 

Going Concern

The Directors have given careful consideration to the appropriateness of the going concern basis in the preparation of the Financial Statements.  There are a number of uncertainties which may affect the Group's ability to continue operating as a going concern, these are disclosed in note 3 of the Financial Statements of the full Annual Report and Accounts.

 

The Company successful raised $16.1 million net proceeds in an equity placement in April 2019.  The Directors have reviewed operating and cash forecasts in respect of the operating activities and planned work programmes of the Group's assets and believe that the available funds are sufficient to enable the Company to continue meeting it's obligations and develop operations for a period of at least twelve months from the date of approval of these Financial Statements.

 

On this basis, the Directors have concluded that it is appropriate to prepare the Financial Statements on a going concern basis.  Accordingly, these Financial Statements do not include any adjustments to the carrying amount or classifications of assets and liabilities that may arise if the Group was unable to continue as a going concern.

 

 

 

Andrew Diamond

Finance Director

23 May 2019

 



 

Consolidated Income Statement

For the year ended 31 December 2018

 



2018

2017



$'000

$'000

Continuing operations




Revenue


10,796

23,471

Cost of sales


(12,021)

(22,200)

Production royalties


(1,675)

(3,699)

Other cost of sales


(10,346)

(18,501)

Gross (loss)/profit


(1,225)

1,271

Sales and marketing expenses


(1)

(79)

Administrative expenses


(6,461)

(10,708)

Other gain/(losses)


821

(1,732)

Share of profit of associate


530

1,090

Operating loss


(6,336)

(10,158)

Finance costs


(1,966)

(566)

Loss before tax


(8,302)

(10,724)

Tax (charge)/credit


(219)

590

Loss for the year - attributable to shareholders of the parent


(8,521)

(10,134)











Cents

Cents

Loss per share - basic & diluted


(5.79)

(8.86)

 

 

 

 

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2018

 



2018

2017



$'000

$'000

Loss for the year


(8,521)

(10,134)

Items that may be reclassified subsequently to profit or loss




Exchange differences on translation of foreign operations


78

(27)

Total comprehensive loss for the year - attributable to shareholders of the parent


(8,443)

(10,161)

 

 



 

 

 

Consolidated Statement of Financial Position

At 31 December 2018

 



31 December

 31 December



2018

2017



$'000

$'000

Assets:




Non-current assets




Intangible assets


30,445

 54,223

Property, plant and equipment


91,087

 70,911

Investment in associate


5,556

5,429

Deferred tax assets


-

 916



127,088

 131,479

Current assets




Inventories


18

 24

Trade and other receivables


8,666

 13,545

Cash and cash equivalents


3,467

 11,476



12,151

 25,045

Total assets


139,239

 156,524









Liabilities:




Current liabilities




Trade and other payables


10,800

 14,330

Provisions


199

 1,855

Borrowings


4,109

 3,174



15,108

 19,359

Net current (liabilities)/assets


(2,957)

 5,686





Non-current liabilities




Borrowings


16,798

 21,363

Deferred tax liabilities


2,030

 2,846

Provisions


 1,597

 3,106



20,479

 27,315

Net assets


103,652

 109,850









Equity:




Called-up share capital


 1,130

 1,095

Share premium


 26,254

 24,218

ESOP Trust reserve


(4)

(4)

Translation reserve


(17,634)

(17,712)

Other reserves


 401

 248

Retained earnings 


93,505

102,005

Total equity


103,652

 109,850

 

The financial statements of Victoria Oil & Gas Plc, registered number 5139892, were approved by the Board of Directors on 23 May 2019.

 

 

Roger Kennedy                          Andrew Diamond

Executive Chairman                   Finance Director



 

 

 

Consolidated Statement of Changes in Equity

For the year ended 31 December 2018

 

 










Share

Share

ESOP Trust

Translation

Other

Retained



capital

premium

reserve

reserve

reserves

earnings

Total


$'000

$'000

$'000

$'000

$'000

$'000

$'000

For the year ended 31 December 2017

At 31 December 2016

 34,251

 230,436

(843)

(17,685)

 66

(151,258)

 94,967

Shares issued

 228

 24,417

-

-

-

-

 24,645

Vesting of share options

 -

 -

-

-

228

-

 228

Shares granted to ESOP members

-

-

2

-

-

249

251

Warrants expired

-

-

-

-

(46)

 46

-

Effects of movement in foreign exchange

-

-

 (80)

-

 -

-

 (80)

Cancellation of Share Capital

(33,384)

(230,635)

917

-

 -

263,102

 _

Total comprehensive loss for the year

-

-

-

(27)

-

(10,134)

(10,161)

At 31 December 2017

1,095

24,218

(4)

(17,712)

 248

102,005

109,850









For the year ended 31 December 2018

At 31 December 2017

1,095

24,218

(4)

(17,712)

 248

102,005

109,850

Shares issued

 35

 2,036

-

-

-

-

 2,071

Vesting of share options

 -

 -

-

-

174

-

 174

Warrants expired

-

-

-

-

(21)

 21

-

Total comprehensive loss for the year

-

-

-

78

-

(8,521)

(8,443)

At 31 December 2018

1,130

26,254

(4)

(17,634)

 401

93,505

103,652

 



 

 

 

Consolidated Cash Flow Statement

For the year ended 31 December 2018


2018

2017


$'000

$'000

Cash flows from operating activities



Loss for the year

(8,521)

(10,134)

Adjustments for non-cash and other items:



Tax

 219

 (590)

Share of profit in associate

(530)

(1,090)

Finance costs

1,966

 566

Depreciation and amortisation

 5,807

 14,751

Other (gains)/losses

(821)

1,732

Shares vested by ESOP Trust

-

249

Share-based payments

393

199


(1,487)

 5,683

Movements in working capital



Decrease/(Increase) in trade and other receivables

4,998

 (4,263)

Decrease/(Increase) in inventories

6

(14)

(Decrease)/Increase in trade and other payables and provisions

(3,637)

 2,278

Net movements in working capital

 1,367

 (1,999)

Tax paid

(119)

(258)

Interest paid

(1,920)

(1,668)

Net cash (used)/generated from operating activities

(2,159)

 1,758




Cash flows from investing activities



Payments for intangible assets

(1,889)

(34,710)

Payments for property, plant and equipment

(1,467)

(5,042)

Proceeds from disposal of property, plant and equipment

-

882

Loan repayments received

-

 94

Dividends received from associate

 403

 1,047

Net cash used in investing activities

(2,960)

(37,729)




Cash flows from financing activities



Proceeds from borrowings

-

 15,153

Repayment of borrowings

(2,809)

(7,763)

Finance costs paid

-

(606)

Net cash generated from equity raise

-

23,728

Net cash (used)/generated by financing activities

(2,809)

 30,512

Net decrease in cash and cash equivalents

 (7,928)

 (5,459)




Cash and cash equivalents - beginning of year

11,476

16,261

Effects of exchange rate changes on the balance of cash held in foreign currencies

(81)

674

Cash and cash equivalents - end of year

 3,467

 11,476



 

 

Notes

 

1.   Publication of non-statutory accounts

 

The financial information, for the year ended 31 December 2018, set out in this preliminary announcement does not constitute statutory accounts. This information has been extracted from the Group's 31 December 2018 statutory financial statements upon which the auditors' opinion is unqualified. However, the auditors' report highlights material uncertainty relating to going concern and includes the following additional key audit matters:

·   Recoverability of exploration and evaluation assets;

·   Recoverability of property, plant and equipment and other assets, Group and Parent.

 

2.   Basis of preparation

 

The financial information, for the year ended 31 December 2018, set out in this preliminary announcement, has been:

·   presented in accordance with International Financial Reporting Standards ("IFRSs"), however this preliminary announcement does not contain sufficient information to comply with IFRSs. The IFRS compliant Consolidated Financial Statements will be published in the Report and Accounts for the year ended 31 December 2018;

·   prepared on the going concern basis, however the Directors have highlighted a number of uncertainties which may affect the Company's ability to continue operating as a going concern; and

·   prepared on the basis of the accounting policies as stated in the Report and Accounts for the year ended 31 December 2018, with the exception of those changes required in the application of new and revised IFRSs, none of which has a material impact on the Group.

 

3.   Annual General Meeting and Report and Accounts

 

The Annual General Meeting of the Company will be held on 27 June 2019 at Kerman & Co LLP. 200 Strand, London WC2R 1DJ at 3.00p.m.  The Annual Report and Accounts and the Notice of a General Meeting to consider these accounts, together with an explanation of the resolutions to be proposed at this meeting, will be available on the Company's website www.victoriaoilandgas.com in due course. These documents will also be posted to those shareholders that requested it.

 

Sam Metcalfe, the Company's Subsurface Manager has reviewed and approved the technical information contained in this announcement.

 

This announcement contains inside information.

 



 

 

 

For further information, please visit www.victoriaoilandgas.com or contact:

 

Victoria Oil & Gas Plc

Ahmet Dik / Kate Baldwin                                                                            Tel: +44 (0) 20 7921 8820

 

Strand Hanson Limited (Nominated and Financial Adviser)

Rory Murphy / James Dance / Jack Botros                                            Tel: +44 (0) 20 7409 3494

 

Shore Capital Stockbrokers Limited (Joint Broker)

Mark Percy / Toby Gibbs (corporate finance)                                      Tel: +44 (0) 207 408 4090

Jerry Keen (corporate broking)

 

FirstEnergy Capital LLP (Joint Broker)

Jonathan Wright / Hugh Sanderson                                                         Tel: +44 (0) 207 448 0200

 

Camarco (Financial PR)

Billy Clegg                                                                                                            Tel: +44 (0) 203 757 4983

Nick Hennis                                                                                                        Tel: +44 (0) 203 781 8330

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.
 
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