Eland Oil & Gas : Interim Results for the six months to 30 June 2019

RNS Number : 8914L

Eland Oil & Gas PLC

11 September 2019

11 September 2019

Eland Oil & Gas PLC

("Eland" or the "Company" and, together with its subsidiaries, the "Group")

Interim Results for the six months to 30 June 2019

Eland Oil & Gas PLC (AIM: ELA), an oil & gas development and exploration company operating in West Africa with an initial focus on Nigeria, today announces its unaudited financial results for the six-month period to 30 June 2019 (the "Period").

George Maxwell, CEO of Eland, commented:

"The diversification of production from our second oil field, Gbetiokun, represents a significant moment for the Company as we generate material production and operational cash-flow. In the second half, we are excited to drill the high-impact, 78 million barrel, near-field Amobe prospect. The Amobe prospect represents the first pure exploration well in the company's history and the first on OML40 since 1991. We look forward to updating all stakeholders on these developments in the remainder of the year."

H1 2019 HIGHLIGHTS

Sustained operational delivery

• Net production from OML 40 achieved an average 9,948 bopd (22,106 gross) during the six-month period to 30 June 2019 in comparison to 7,716 bopd in H1 2018 (17,146 gross), an increase of 29%, with Opuama average uptime of 90% for the Period
• Liftings in Period of 1,599,000 bbls (H1 2018: 976,000bbls)
• The first two Gbetiokun development wells were successfully flow tested with cumulative rates up to 5,400 bopd net (12,000 gross). The Gbetiokun Field Development Plan ("FDP"), which was updated following the drilling of the Gbetiokun-3 appraisal/development well has been approved by the Department for Petroleum Resources (DPR)
• Dredging activities to allow rig access for Eland's first Exploration well on the Amobe prospect continued during H1 2019. The high-impact,near-field prospect is planned to be drilled in the second half of 2019
• Updated Competent Person's Report ("CPR") for OML 40 in March 2019 increased gross Proved ("1P") reserves by 8% and decreased Proved plus Probably ("2P") reserves by 1%, despite record production of approximately 6.5 million barrels ("mmbbls") of oil (gross) in 2018
• Performance of the OES Teamwork drilling unit continues to be the key operational issue during 2019. Production capacity growth has been adversely affected by the OES Teamwork drilling unit performance.
• Following success of the Ubima-1re-entry operations in 2018, updated CPR for the Ubima Field in March 2019 increased gross 1P reserves over sevenfold to 6.2 mmbbls and increased 2P reserves almost fourfold to 9.3 mmbbls
• Medical outreach programme undertaken within OML40 as part of the Group's ongoing environmental, social and governance ("ESG") effort

Record financial performance

• Record revenues of $106.0 million (H1 2018: $67.4 million) with an average realised price of $66/bbl (H1 2018: $69/bbl)
• Operating cash flow before movements in working capital risen to $59.1 million (H1 2018: $50.6 million)
• Operating profit sustained at $40.0million (H1 2018 $39.1 million)
• Net capital investment of $79m includes an accrual for capital expenditure for Elcrest share in a new 36km 16" Export Pipeline between Opuama and Otumara, with a capacity of over 100,000 bbls per day. The investment in the line demonstrates the joint venture's long-term commitment following the 20-year extension

to the OML40 licence in 2018.

• Non diluted Earnings per share ("EPS") rose to $0.12 per share (H1 2018: $0.08)
• Net debt at period-end $30.9 million (H1 2018 $4.3 million net cash) with $60 million headroom available from Reserve Based Lending ("RBL") Facility
• RBL borrowing base expanded to $135 million following re-determination

Shareholder returns

• Maiden interim dividend declared of 1 pence per share representing an approximately $2.6 million return to shareholders. The dividend will be payable on 31 October 2019 to shareholders on the register at the close of business on 18 October 2019
• Ongoing share buyback programme increased by a further £3.0 million on 20 March 2019 to a maximum of £6.0 million. Since commencing the Programme in November 2018 Eland has purchased 4,363,573 shares at a cost of £5.3 million, representing an average price of approximately 120 pence per share

Post-Period End - continued delivery

• Successful start-up of Gbetiokun EPF on 31st July, initially with two wells, Gbetiokun-1 and -3, with production rates between 11,000 and 12,000 bopd achieved.
• Third Gbetiokun development well, Gbetiokun-4, successfully completed the drilling phase in September, with the well significantly exceeding pre-drill expectations. A 60ft core was successfully obtained in the E5000 reservoir. The E5000 and E7000 reservoirs had total net pay thicknesses of approximately 63 feet and 49 feet TVD respectively. The secondary target reservoir, E3000, encountered 48 feet TVD of net pay. See separate announcement for further details

Outlook

• Performance of the OES Teamwork drilling unit continues to be the key operational issue during 2019. Production capacity growth has been adversely affected by the OES Teamwork drilling unit performance. Resultant delays in our drilling sequence have pushed back on-stream dates for Gbetiokun-4 and -5. The Company has a number of Opuama workover activities in progress to offset the delay in bringing Gbetiokun production on stream.
• Drilling will continue at Gbetiokun during H2 2019 with Gbetiokun-5 being drilled following completion of Gbetiokun-4. Following completion of Gbetiokun-5 net average production from Gbetiokun is expected to be between 9,000 to 9,900 (20,000 - 22,000 bopd gross). We maintain our production guidance.
• Outstanding rig upgrade activities are planned to be completed ahead of drilling Gbetiokun-5
• The high-impact,near-field Amobe prospect is planned to be drilled in H2 2019. Amobe carries Unrisked best estimate Gross Prospective Oil Resources of 78.4 million barrels
• Completion of the Gbetiokun-4 well is expected at the end of September with production commencing through the recently commissioned EPF immediately thereafter.
• Excluding the impact of the non-cash accrual for the export pipeline the Company maintains its capex guidance at $80-$90 million.
• Options for an additional rig are currently being matured
• Ubima extended well test ("EWT") operations expected to commence in H2 2019. Flow testing for reservoir characterisation will focus on the E1000/E2000

For further information:

Eland Oil & Gas PLC ([phone])

www.elandoilandgas.com

George Maxwell, CEO

Ronald Bain, CFO

Finlay Thomson, IR

Peel Hunt LLP, Nominated Adviser & Joint Broker ([phone])

Richard Crichton / David McKeown

Stifel Nicolaus Europe Limited, Joint Broker ([phone])

Callum Stewart / Nicholas Rhodes / Ashton Clanfield

Camarco ([phone])

Billy Clegg / Tom Huddart / Monique Perks

Notes to editors:

Eland Oil & Gas is an AIM-listed independent oil and gas company focused on production and development in West Africa, particularly the highly prolific Niger Delta region of Nigeria.

Through its joint venture company Elcrest, Eland's core asset is OML 40 which is located in the Northwest Niger Delta approximately 75km northwest of Warri and has an area of 498km². In addition, the Company has a 40% interest in the Ubima Field, onshore Niger Delta, in the northern part of Rivers State.

The entire OML 40 licence holds gross 2P reserves of 82.2 million barrels ("mmbbls"), gross 2C contingent resources of 50.7 mmbbls and a best estimate of 252.1 mmbbls of gross unrisked prospective resources (NSAI Competent Person's Report of 31 December 2018). The Ubima field holds gross 2P reserves of 9.3 mmbbls and gross 2C resource estimates of 4.2 mmbbls (NSAI Competent Person's Report of 31 December 2018)

• Elcrest Exploration & Production Nigeria Ltd has a 45% interest in OML 40. Eland has a 45% equity shareholding in Elcrest. OML 40 net position reflects Elcrest ownership.

Cautionary statement regarding forward-looking statements

This Results Statement may contain forward-looking statements which are made in good faith and are based on current expectations or beliefs, as well as assumptions about future events. You can sometimes, but not always, identify these statements by the use of a date in the future or such words as 'will', 'anticipate', 'estimate', 'expect', 'project', 'forecast', 'intend', 'plan', 'should', 'may', 'assume' and other similar words. By their nature, forward-looking statements are inherently predictive and speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. You should not place undue reliance on these forward-looking statements, which are not a guarantee of future performance and are subject to factors that could cause actual results to differ materially from those expressed or implied by these statements. The Company undertakes no obligation to update any forward-looking statements contained in this Results Statement, whether as a result of new information, future events or otherwise.

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Net production figures relate to Elcrest Exploration and Production Nigeria Ltd ("Elcrest"), Eland's joint venture company. Production rates, when oil is exported, are as measured at the Opuama PD meter, are subject to reconciliation and will differ from sales volumes.

REVIEW OF H1 ACTIVITIES

Development of the OML 40 licence continues to progress with the Opuama oil field maintaining reliable operations, production has been diversified in 2019 with the ongoing development of the Gbetiokun field and final preparations for the Amobe exploration well later this year which will be the first exploration well on the licence since 1991.

Production

OML 40 production, previously only from Opuama field, saw H1 2019 contributions from the Gbetiokun field, with well testing on Gbetiokun-1 and -3 wells where the produced crude was captured and transported to Opuama for injection into the 16" export line.

Gross production from OML 40 achieved an average 22,106 bopd (9,948 net) during the six-month period to 30 June 2019, compared to 17,146 bopd in H1 2018 (7,716 net): an increase of 29%. With the exception of 18 days of planned maintenance flowstation shutdown in Feb/Mar only 3.75 hrs of down time have been recorded in H1 2019. Overall this represents a 90% uptime compared to 87% for the same period in 2018.

With the OES Teamwork drill rig focussed on the Gbetiokun development, no additional wells have been drilled in the Opuama field since the Opuama-11 which started production in Q4 2018. Whilst additional rig opportunities are being matured, the focus at Opuama during H1 2019 has been on maintaining stable, reliable production and execution of simple interventions that do not require a rig. To that end, the lower D2000 perforations on Opuama-7, which had watered out, were successfully plugged off to improve recovery from remaining D2000 perforations.

The new LACT Unit at Otumara, installed during H1 2018, was successfully commissioned during Q4 2018 and has been fully operational during H1 2019. As a direct consequence, average monthly allocation losses were 7% for H1 2019 compared to 11% for the same period last year.

OML 40: Opuama Reservoir Management

Following the completion of the Opuama-11 well in Q3 2018, OML 40 drilling operations have been focussed on the Gbetiokun development. On Opuama, this has provided an opportunity to fully assess the new well and production data acquired over the last 18 months. The subsurface team, which was significantly expanded during H2 2018, has successfully remodelled the multiple reservoirs at Opuama to support ongoing reservoir management operations and identify additional opportunities and confirms through history matching that the production performance remains within expectation. These new opportunities will be further matured during H2 2019 with an expectation to commence drilling during 2020.

OML 40: Gbetiokun Development

Following the drilling of Opuama-11, the OES Teamwork rig moved to the Gbetiokun field in H2 2018. Initially it re-entered and completed the Gbetiokun discovery well (Gbetiokun-1) followed by the drilling of Gbetiokun-3 which is part of the initial phase of the field development plan. Drilling & completion operations on Gbetiokun-3, which had a number of appraisal objectives including obtaining fluid samples for a number of key reservoir zones, were completed in Q1 2019 after which the drill rig stood down for a period of planned maintenance and upgrade.

The OES Teamwork drilling unit continues to be upgraded as activities were delayed, primarily due to contractor supply chain challenges leading to substantial delays and work carry-over. During the rig shutdown period the Gbetiokun-1 and -3 wells were successfully flow tested with flow rates in line with pre-drill expectations.

Gbetiokun-1 was completed as a dual string producer on the E2000 (short string) and E6000 (long string). The short string flowed 4,000 bopd of oil on a 32/64th choke. When the long string was flow tested it confirmed expectations of limited fluid flow behind casing due to poor cementing during the initial drilling in 1987. As a consequence, whilst the string has good deliverability, it produces some early water on higher choke settings. However, flow testing demonstrated this string will produce 2,800 bopd oil on a 36/64th choke.

Gbetiokun-3 is also completed as a dual string producer; the short string is open to the D9000 whilst the long string is open to the E4000. Following the initial completion operations in Q1 2019 a small pressure leak in the completion meant the short string could not be produced. During Q2 2019, intervention logging successfully located the leak point which was repaired by installing a tubing patch. The short string subsequently flowed dry oil at 3,880 bopd on a 36/64th choke whilst the long string flowed dry oil at 3,000 bopd on a 36/64th choke.

Approximately 300,000 barrels were produced by these two wells during the flow test period. All the oil from the Gbetiokun-1 and -3 flow tests was captured and shipped to the Opuama flowstation to be injected into the OML 40 16" export line.

During H1 2019 the additional information gathered from the Gbetiokun-3 well was incorporated into an updated Field Development Plan (FDP) which was approved by the Department of Petroleum Resources (DPR).

In parallel with the flow testing operations the installation of the Gbetiokun Early Production Facility (EPF) was being finalised. At the end of the period the production facilities were onsite and being hooked up ready for an early Q3 start up. Initial start-up rates in Q3 2019 have been approximately 12,000 bopd gross (5,400 bopd net).

The approved FDP outlines that oil export will initially be by ship to the Benin River Valve Station where the oil will be injected into the OML 40 export pipeline to the Forcados oil terminal. In the medium term, oil export will be by a planned new pipeline to the Adagbassa Manifold, from where the oil will be injected into the Forcados system.

During H2 2019, two further development wells including Gbetiokun-4 and -5, will be completed allowing production rates to reach between 20-22,000 bopd gross (9,000 - 9,500 net) from the field.

OML 40: Exploration

During H1 2019, Eland has been undertaking planned dredging activities to allow rig access for the drilling of the Amobe exploration prospect. These activities will be completed in H2 2019. The Amobe prospect represents the first pure exploration well in the company's history and the first on OML40 since 1991. The prospect is a large, relatively low-risk opportunity located only 6km from the Opuama Flow-Station allowing for an accelerated development tied back to existing facilities. The Amobe structure is similar to Opuama and on an adjoining fault terrace. NSAI currently carries estimates for the Amobe prospect of 15 -78-340 million stock tank barrels ("MMstb") on a low/best/high estimate basis with a probability of success of 42%.

OML 40: Medical Outreach Programme

As part of Eland's ongoing environmental, social and governance ("ESG") efforts in-country, the Company initiated a medical outreach programme for Opuama town. This involved over 50 medical staff spending 5 days in Opuama town, treating over 5,000 adults and children. Eland remains committed to the wellbeing of our employees and communities.

CPR

Despite producing approximately 6.5 mmbbls of oil (gross) in 2018, an updated Competent Person's Report ("CPR") for OML 40 in March 2019 increased gross Proved ("1P") reserves by 8% to 42.9 mmbbls. Additionally, the CPR only decreased OML 40 gross 2P reserves by 1% to 82.2 million barrels.

This OML 40 revision was principally as a result of the 2018 drilling campaign on Opuama which confirmed and accessed additional oil reserves in the field.

Ubima

Following the 2018 re-entry of the Ubima-1 well and the flow testing on a number of different reservoir levels the Ubima partnership has obtained permission from the DPR to conduct an Extended Well Test ("EWT") on the target E1000/E2000 reservoir for the proposed development to confirm fluid flow characteristics. This will allow the reservoir model to be fine-tuned and the resulting development design to be optimised. During H1 2019 works to install the facilities to undertake this EWT, including the ability to store, transport and inject the produced hydrocarbons, have been undertaken.

A CPR published in March 2019 by NSAI increased gross 1P reserves over sevenfold to 6.2 mmbbls and increased 2P reserves almost fourfold to 9.3 million barrels. Those reserves sit principally in the E1000 and E2000 reservoirs which will be the focus of the H2 2019 EWT.

Financial Review

The financial performance was underpinned by a continued increase in production combined with a stable operating environment and excellent infrastructure uptime of over 90% between the OML40 workstation and the export terminal at Forcados. The liftings net to Elcrest of 1,598,000 bbls in the Period (H1 2018: 976,000bbls) generated revenue of $106.0 million (H1 2018: $67.4 million). The commodity environment remained stable with the average realised price of over $66/bbl

achieved in the Period, a marginal reduction from the $69/bbl in H1 2018.

Excluding the impact of non-cash items, underlift and depreciation, operating expenses were $42.8 million in the Period (1H 2018: $32.7 million). The increase resulted from the addition of Gbetiokun pre-production operating costs during the extended well test.

H1 2019 net Capex at $79m includes an accrual for capital expenditure for Elcrest share in a new 36km 16" Export Pipeline between Opuama and Otuamara. Outside of the accrual for the Pipeline capital expenditure is as per guidance.

The new 16" Pipeline has capacity of over 100,000 bbls per day and replaces the aged and smaller previous 12" line. The investment in the line demonstrates the joint venture's long-term commitment following the 20-year extension to the OML40 licence in 2018. With the switch to this line in H2 2018 and the inclusion of the LACT at Otuamara we have seen a reduction in losses recorded between the Flowstation and the LACT which for H1 2019 amounted to less than 3%.

Exploration and Evaluation spend totalled $13.7 million; including $9.1 million on OML 40 principally in relation to access and clearing required to enable rig access to the Amobe drilling location planned for the second half of 2019. A further $4.6 million was invested in Ubima with facilities now in place to commence first production in the second half of 2019.

Development and Production expenses totalled $65.6 million; this included the pipeline accrual as mentioned above. Further development drilling expenditure was incurred with the completion of the Gbetiokun-1 and Gbetiokun-3 wells in the Period. Together with the Early Production Facility ("EPF") and other facilities infrastructure enabled first production to be achieved at Gbetiokun in the Period.

Administrative expenses fell to $1.8 million (H1 2018: $3.6 million). The reduction reflects an increased allocation of costs to capital and operational support projects.

Net finance costs rose to $7.8 million (H1 2018: $2.6 million). Excluding the non-cashmark-to-market hedging adjustment recorded in the Period net finance costs were $4.0 million (this adjustment reversed a non-cash gain recorded in 2018). The higher finance costs compared to the prior year reflected higher loan balances in the Period compared to the corresponding period in 2018.

Taxation was a credit of $0.5 million primarily reflecting the timing difference between the depreciation charges and the usage of capital allowances partially offset by current taxes and the utilisation of tax losses following Elcrest exiting Pioneer status with effect from 1 May 2019.

Balance Sheet

The group maintained a working capital surplus of $0.3 million at Period end despite the record capital investment, compared to a deficit of $17.1 million in the corresponding period in 2018. Working capital includes a net receivable balance of $24.4 million with NPDC with the reduction in the balance comprising the capital contribution for the 36km pipeline together with a cash call receipt of $19.3 million received in the Period. This was partially offset by the receivables due on the ongoing Gbetiokun drilling and facility capital programme.

Eland has continued with the share buyback programme announced in November 2018. During the Period it purchased shares equating to $4.0 million (£3.1 million). As at the reporting date, the group had completed £4.2 million ($5.4 million) of its £6 million buyback programme.

Cash flow

Operating cash flow in the Period before movements in working capital was $59.1 million (H1 2018: $50.6 million), equating to a cash flow margin of approximately $37/bbl on every barrel sold in the Period.

The cash flow generated was principally used for investment activities totalling $47.5 million (2018: $18.5 million) as detailed above. The difference between the accrued capital expenditure of $79.3 million quoted above and the cash investment is largely due to the fact the pipeline expenditure originally incurred by our partner, NPDC, has been accrued with no cash outlay.

In addition, settlement of working capital balances totalled $30.1 million in the Period (H1 2018 $38.1 million).

A hedging programme was executed for 645,000 bbls with a blended strike price of $53/bbl in H2 2019.

The group entered a 5-year Reserve Based Lending Facility ("RBL") secured against the Group's producing assets in November 2018. The facility has an initial borrowing base of $125 million from existing OML40 producing wells and includes an accordion to allow for expansion of the facility up to $200 million. $15 million was drawn against this facility in the reporting Period taking total borrowings to $65 million, and therefore $60 million headroom available at Period end.

Outlook

In the second half of 2019, the Company looks forward to continuing our near-term development and monetisation strategy through continued delivery from Opuama and Gbetiokun supplemented by the exploration of the Amobe prospect. The Company intends to deliver shareholder value growth through operational performance, our exciting near field expoloration and our capital returns and dividend policy.