Drillsearch's profits Dive

Australia's Drillsearch Energy saw profits slump in the first half of the current financial year as lower oil prices led to write-downs and lower revenues.

Drillsearch Managing Director Brad Lingo said, “Drillsearch ended the first half in a solid financial position, however the decline in the oil price and the subsequent lowering of forward oil curve expectations have given us cause to review our priorities, and how we allocate our cash.

“Since the market turned, we have been proactive in seeking opportunities to protect the financial strength of the business, including implementing additional hedging. This review has confirmed our strategy and emphasised the importance of focusing our investment to ensure that we live within our means and right size the business to meet the market environment.

Review
As a result of the review, Drillsearch will reprioritise investment to focus on near-term production and cash flow, and on reserves replacement, as well as on conventional Oil and Wet Gas. This is expected to result in a significant reduction in capital expenditure in FY2016 and FY2017, in line with the change in external market conditions.

Exploration will be reduced to focus on high impact, low cost opportunities that offer a clear path to near-term cash flow. Drillsearch will also continue to seek to maximise the benefit it receives from free carries in three key joint ventures: Western Wet Gas and Northern Wet Gas (PEL 570) with Santos, and ATP 924 in the Inland-Cook Oil Fairway with Beach Energy.

Following the start of the testing program in ATP 940, Drillsearch, as Operator, plans to use the technical data acquired to plan for the next stage of activity. As such, no additional material spending is anticipated in ATP 940 in the near term. Elsewhere in the portfolio, certain other activity previously planned for the second half has also now been deferred.

As part of this reprioritisation, Drillsearch will seek opportunities to rationalise its portfolio to focus on lower risk, higher returning assets, as well as seeking to ensure that ownership of individual permits and fields is maintained at between 40% and 60%. This will include the divestiture of certain non-core permits to allow resources to be allocated elsewhere.

In parallel with initiatives to manage capital expenditure, Drillsearch will target annualised cost savings of between $10 million and $15 million per year across the corporate and operating cost base.

Mr Lingo said, “The priorities we have set will inform our planning and budgeting processes in the coming months and our engagement with our joint venture partners.

“We have gone through a deliberate and measured process, and one in which we have been conscious not to over-react and sacrifice opportunities for the future. The business remains profitable, continues to deliver operational success, and our vision remains the same. The actions we are taking now will ensure that we continue to maintain a strong financial position in the near-term and that we will be well positioned for future success once external market conditions improve.”

FY2015 Work Program
Drillsearch’s capital expenditure during the first half of FY2015 was $95.6 million, reflecting a work program that was weighted towards the first six months. As of 19 February 2015, this program had delivered 30 wells, with a success rate of 67%1 , and seven2 new discoveries.

For the remainder of FY2015, the work program includes up to 11 wells in Oil and Wet Gas. None of these wells are operated, and five will be paid for in full by joint venture partners. Of the six to be part-funded by Drillsearch, four are new development wells in the Bauer oil field that are expected to be brought online either in late FY2015 or early FY2016, consistent with
our strategy of prioritising near-term production.