Ithaca's Robust Performance FY 2014
Ithaca Energy Inc. announces its financial results for the twelve months ended 31 December 2014, together with the results of its independently assessed year-end reserves assessment and an operations update.
Highlights
* Solid underlying cashflow generation despite sharp decline in oil price in the second half of 2014
* Increasing production trend from improved portfolio of fields
* Brent breakeven price reduced to under $10/bbl until Stella start-up with additional hedging executed in Q1-2015
* Strong 2014 reserves growth – 400% reserves replacement ratio
* Substantial progress made on advancing and de-risking the Greater Stella Area (“GSA”) development in 2014 – production start-up scheduled for Q2-2016
Finance & Operations Summary
* $182 million1 underlying cashflow from operations – $0.55 cashflow per share
* Production of 10,947 barrels of oil equivalent per day (“boepd”) in 2014 increasing to over 12,500 boepd in the first quarter of 2015 (“Q1-2015”), in line with 2015 full year guidance of 12,000 boepd
* 70 million barrels of oil equivalent (“MMboe”) proved and probable (“2P”) reserves at 31 December 2014, a 22% year on year increase – $1,744 million net asset value discounted at 10% (independently assessed by Sproule International Limited)
* Loss after tax of $25 million reflecting non-cash post-tax impairments of $173 million due to lower near term oil price assumptions
* Hedging gains of $175 million in 2014 – additional hedging taken out post year end to further strengthen future cashflows
* Operating costs reduced to under $40/boe in Q1-2015, with scope for further reductions
* Diversified debt capital structure established in 2014 through the issuance of $300 million five year unsecured senior notes
* Full funding to Stella first hydrocarbons forecast within existing $1,010 million finance facilities - in the process of extending the bank debt facilities to the third quarter 2018
* Peak net drawn debt prior to Stella start-up anticipated to be $850 million in Q2-2015 – $780 million forecast net drawn debt at 31 March 2015
* Stella development drilling programme close to completion, with encouraging data obtained from the final Ekofisk well ahead of the clean-up flow test in April 2015
* Strong alignment between all parties for delivery of Stella first hydrocarbons in Q2-2016
Les Thomas, Chief Executive Officer, commented, “In 2014 we took significant steps to build and strengthen our business, growing production and reserves, while diversifying our debt structure. Going forward we are clearly focused on delivering the transformational Stella development, with first production expected in Q2-2016. The revised schedule reflects the significant progress made to date and is based on a plan for delivery of the FPF-1 vessel that all partners and contractors are committed to achieving and one which is underpinned by an incentive arrangement agreed between Petrofac (POFCF) and the Remontowa shipyard.”
Production & Operations
Average production in 2014 was 10,947 boepd, reflecting the contribution from the assets acquired from Sumitomo Corporation (SSUMF) (the “Summit Assets”) in July 2014.
Production in 2015 is forecast to average approximately 12,000 boepd (95% oil) from a broad portfolio of fields, with no individual field accounting for over 25% of total production. In Q1-2015 production is forecast to average over 12,500 boepd, in line with the 2015 full year guidance of 12,000 boepd.
The Company made good operational progress in Q1-2015 and a number of this year’s key activities have been completed. Water injection on the Causeway field has commenced, the electrical submersible pump on the Fionn field is in service and production from the Pierce field is ramping up following completion of the FPSO modification works required to tie-in the third party Brynhild field. Good progress continues to be made on the Wytch Farm well workover campaign and completion operations on the Ythan production well are advancing, with start-up of the well anticipated in Q2-2015. In addition, the planned re-transfer of the Beatrice facilities to Talisman has been completed.
Greater Stella Area Development Update
Significant progress was made on execution of the GSA development in 2014.
The four well Stella Andrew reservoir drilling campaign was completed in the fourth quarter of the year, with the results of the clean-up flow tests performed on all the wells demonstrating a productive capacity of over 45,000 boepd (100%) and significantly de-risking the initial annualised production forecast for the field of 30,000 boepd (100%), 16,000 boepd net to Ithaca.
Completion operations are currently on-going on the fifth and final development well on the Stella field, in the Ekofisk chalk reservoir. A 2,137 foot gross horizontal reservoir section has been drilled and completed, with the well intersecting a net reservoir interval of 2,073 feet, (97% net pay) and extensive natural fractures along the entire length. The planned clean-up flow test on the well is expected to commence in early April 2015 and once completed, the ENSCO 100 drilling rig will be demobilised from the field, marking the end of the Stella field development drilling campaign.
Good progress was made during 2014 on the execution of various subsea infrastructure installation activities. The overall subsea installation programme is more than 80% complete. Technip is scheduled to recommence installation operations in April 2015 and over a number of planned offshore campaigns, is set to close out the remaining installation activities in the third quarter of this year.
As previously announced, while substantial progress was made during 2014 on the FPF-1 modification programme, the sail-away of the vessel from the Remontowa yard in Poland is now planned for late in the first quarter of 2016, with first hydrocarbons from the Stella field forecast in the second quarter of the year. This revised FPF-1 sail-away schedule reflects the fact that over 75% of the construction works have been finished, productivity in the yard is understood and the rate of progress has been established. The process for handover of vessel sub-systems for pre-commissioning has commenced and this progress, along with Petrofac’s agreement with the Remontowa yard of an incentivised mechanical completion schedule, provides added confidence in the timeline for completion of the remaining modification works.
Financials
Operating Expenditure
In 2014 underlying unit operating costs were $49/boe2. This rate has fallen to under $40/boe in Q1-2015 and is expected to fall further prior to the start-up of production from the Stella field. The reduction in unit costs is being driven by the removal from the portfolio of the Beatrice field, the implementation of a revised Athena FPSO contract in June 2015 and other savings being realised through supply chain cost reductions, contract renegotiations and the removal of overheads. Looking further ahead, the addition of low cost Stella production is forecast to push unit operating expenditure below $30/boe in 2016.
Hedging
The Company has increased its oil hedging protection since the start of the year in order to mitigate against the impact of further Brent price weakness.
At the start of 2015 the Company had in place oil price hedges of approximately 6,300 barrels of oil per day for the period from January 2015 to June 2016 at an average price of $102/bbl. In Q1-2015 the Company increased this position to 8,300 barrels of oil per day (“bopd”) at an average price of $91/bbl. Additionally, 4,000 bopd has been hedged at an average price of $69/bbl from July 2016 to June 2017.
The Company took the opportunity to accelerate the receipt of the cash benefits of a portion of the accumulated hedging gains in Q1-2015, increasing the realised gain in Q1-2015 by $60 million to approximately $80 million.
Ithaca’s updated oil hedge position post Q1-2015 after taking account of the price impact of the value acceleration is summarised as follows: 9,000 bopd hedged at an average $76/bbl from April 2015 to June 2016, with the volumes and prices for the period July 2016 to June 2017 unchanged (4,000 bopd at an average price of $69/bbl).
With the benefit of the additional hedges that have been executed since the start of the year, the Company now has a Brent breakeven price for the existing producing asset base of under $10/bbl until Stella start-up, in addition to having received an $80 million cash gain in Q1-2015.
Capital Expenditure
As previously announced, 2015 capital expenditure is forecast to total approximately $150 million, a near 60% reduction compared to the previous year. The investment programme is heavily weighted towards the early part of the year, with approximately $75 million of capital expenditure planned for Q1-2015, driven by the on-going Stella Ekofisk and Ythan drilling operations. Once these wells are completed, the majority of the remaining expenditure will be incurred over the summer as the subsea infrastructure installation programme is completed.
The 2015 capital expenditure programme is forecast to be fully funded on an annual basis by operating cashflows generated from the Company’s producing asset portfolio, based on current Brent oil prices and reflecting the benefit of the oil price hedges that have been executed and anticipated operating costs for the year.
Tax
The Company had a UK tax allowances pool of $1,496 million at 31 December 2014. At current commodity prices, the pool is forecast to shelter the Company from the payment of corporation tax until after 2020. Following utilisation of the tax allowances, the Company will benefit from the reduction in the North Sea Supplementary Corporation Tax rate recently announced by the UK government. More immediately the Company will benefit from the announced reduction in the Petroleum Revenue Tax rate from 50% to 35%, applicable from the start of 2016, on its interest in the Wytch Farm field.
Peak Debt & Funding
During 2014 the Company established a more diversified debt capital structure for the business with the issuance of $300 million of five year senior unsecured notes (“Senior Notes”). The Company has total debt facilities of $1,010 million in place (excluding the Norwegian tax rebate facility), comprised of a $610 million reserves based lending (“RBL”) facility, $100 million corporate facility and the Senior Notes.
Peak net drawn debt prior to the start-up of production from the Stella field is anticipated to be around $850 million, occurring in Q2-2015. Net drawn debt at the end of Q1-2015 is forecast to be approximately $780 million (excluding the Norwegian tax rebate facility), up from $763 million at the end of 2014.
The Company is in the process of extending its RBL facility to a standard tenor that will better synchronise its duration with the revised Stella start-up schedule. The extension is expected to be closed out along with the scheduled semi-annual borrowing base review in Q2-2015.
Year-End Reserves
Total proved and probable (“2P”) reserves at 31 December 2014 were 70 MMboe, as independently assessed by Sproule International Limited, a 22% increase on the previous year. The Company’s change in year-end reserves was driven higher by the addition of the Summit Assets and the positive impact of portfolio changes outweighing negative revisions associated with lower future oil and gas price assumptions. The corresponding post-tax net asset value discounted at 10% was $1,744 million, 5% higher than the previous year as the addition of the Summit Assets and portfolio changes more than offset the value realised from production in 2014 and the impact of the reduction in value associated with lower oil and gas price assumptions.