Desire Petroleum PLC
04 April 2011
For Immediate Release 4 April 2011
Desire Petroleum
('Desire' or 'The Company')
Preliminary Results
Desire Petroleum plc (AIM: DES) the exploration company focusing on the North Falkland Basin, is pleased to announce its Preliminary Results for the year ended 31 December 2010.
Operational Highlights
-- Drilled five exploration wells in the North Falkland Basin
-- Majority of efforts have been concentrated on the East Flank Play Fairway where a significant discovery (Sea Lion) has been made by Rockhopper Exploration
-- Commissioned the Polarcus Nadia to shoot 3D seismic over previously uncovered acreage in the North Falklands Basin, particularly on the East Flank Play Fairway
-- Eddie Wisniewski appointed as Finance Director (formerly a Non-Executive Director)
-- Ken Black (formerly Exploration Manager) appointed Exploration Director since the year end
Financial Highlights
-- Loss for the period was $3,499,000 (2009: loss $3,768,000)
-- Group raised $70.9 million, net of costs, to fund its exploration drilling and 3D seismic programmes
-- Resources available to the Group at the year end were in excess of $100 million, sufficient to complete our committed exploration and 3D seismic programmes.
Stephen Phipps, Chairman of Desire Petroleum commented:
"The past twelve months have been extremely energetic for Desire Petroleum. We have drilled five wells on prospects and have commissioned 3D seismic over previously uncovered acreage. The geological information gathered from these wells combined with the new seismic data is expected to have a significant impact on the prospect portfolio. It is our belief that the East Flank Play Fairway has a great deal of potential, and it is with this in mind that we are currently drilling the Ninky exploration well."
-- The Desire 2010 Annual Report will be available on the Desire website, www.desireplc.co.uk, from 4 April 2011 and printed copies will be posted shortly to those shareholders who have elected to receive a hard copy report.
-- The prospect inventory on the Desire website has been updated and includes details of the Elaine prospect.
For further information please contact:
Desire Petroleum plc 020 7436 0423
Stephen Phipps, Chairman
Dr Ian Duncan, Chief Executive
Officer
Seymour Pierce Limited 020 7107 8000
Jonathan Wright
Buchanan Communications 020 7466 5000
Tim Thompson
Ben Romney
Chris McMahon
Chairman's Statement
Dear Shareholder,
The twelve months since my last annual report statement have been particularly active ones for Desire. Since drilling the Liz well in April we have drilled a further four wells on our prospects, at Rachel, Rachel sidetrack, Rachel North and on the Dawn/Jacinta prospect. The first three of these wells were drilled on the East Flank Play Fairway following the success of Rockhopper Exploration's Sea Lion discovery on the same play type. The fourth well, Dawn/Jacinta, was drilled on Tranche I in our southern acreage. In addition we have commissioned, in conjunction with Rockhopper Exploration, the Polarcus Nadia to shoot 3D seismic over previously uncovered acreage.
When our drilling campaign was initially planned, apart from the knowledge that we would begin by drilling the Liz well, the remainder of the campaign was planned with flexibility in mind. The successful Sea Lion discovery moved us to focus the majority of our efforts on to what we now call the East Flank Play Fairway. The Sea Lion discovery is particularly significant as this has demonstrated that oil has been trapped in potentially significant quantities in a good quality reservoir. The oil at Sea Lion is trapped in a fan sandstone and we believe that this is one of a number of such fan sandstones on the eastern flank. Accordingly we concentrated our geoscience resources on these fan play types and subsequently drilled Rachel, Rachel sidetrack and Rachel North. Despite good oil shows and good quality sands being present at the Rachel Sidetrack and Rachel North wells, both proved ultimately to be unsuccessful. The Dawn/Jacinta well was drilled in our southern acreage on a different play type but also proved unsuccessful.
However, post the successful Sea Lion appraisal well, it is still very much our belief that further discoveries will be made on the East Flank Play Fairway. With this in mind we are currently drilling the Ninky well. The Ninky prospect is a combined structural dip and stratigraphic pinch-out trap with multiple reservoir targets within the Barremian source rock interval.
The full nature of these fans on the eastern flank can only be identified on 3D data and currently Desire has 3D seismic coverage on less than 50% of the relevant acreage. Desire has chartered the Polarcus Nadia to acquire 3D seismic data over the remainder of our acreage on the East Flank Play Fairway plus the area on the Ann prospect that is not already covered by 3D. Seismic acquisition began in December and is expected to be completed in April. Subsequent processing and interpretation should be complete during the third quarter and enable us to add new prospects to our inventory for future drilling.
When the Ninky well is complete Desire will have drilled the six wells for which funds were raised in late 2009 and early 2010. It will also mark the end of the 10 well drilling campaign that Desire undertook with the Ocean Guardian drilling rig. The Ocean Guardian rig has been contracted for a further three wells after the completion of the Ninky well, and these further wells will be drilled by Rockhopper. Post the Ninky well it is estimated that Desire will have funds of circa $37 million which, whilst more than adequate for our share of rig and vessel demobilisation, completion of our 3D seismic acquisition, processing and interpretation plus general working capital needs, is insufficient to drill further wells. Given our continuing confidence that oil will be discovered on Desire's acreage, further wells will need to be drilled and, therefore, once your Board has digested both the results of the Ninky well plus the 3D seismic survey, we will review all financing options available with the intention of rejoining the drilling campaign later in the year if possible.
The results for the year ended 31 December 2010 have been prepared under International Financial Reporting Standards (IFRS). The loss for the period was $3,499,000 (2009: loss $3,768,000). During the year the Group raised $70.9 million, net of costs, to fund its exploration drilling and 3D seismic programmes. This was done through a combination of an open offer to shareholders in January 2010, raising $32.7 million, and a share placing to institutions in September 2010, raising $34.6 million, with the balance coming from the exercise of share options.
During the year the Group incurred a total of $104 million of expenditure on its oil and gas interests, leading to an increase in the year of its intangible assets from $26 million to $130 million at the end of the year. Resources available to the Group at the yearend were in excess of $100 million, comprising $57.8 million in cash and cash equivalents, and $43.0 million of restricted cash held in escrow accounts.
Administrative expenses at $892,000 were lower than last year's figure of $1,103,000. Increased operational activity meant that professional fees and employment costs were higher then the previous period, but this was more than offset by the level of costs reallocated to exploration licences. The majority of administrative expenses continue to be incurred in sterling, and exchange rate movements will influence the dollar presentation.The translated sterling equivalent charge for the year of GBP598,000 compares with GBP708,000 in 2009.
The non-cash charge for share-based payment at $68,000 is lower than the 2009 figure of $82,000, as the economic cost of share-based compensation plans is largely expensed, and in the absence of any further awards this charge will continue to decline.
The Group's funds are held in a combination of US dollars and sterling, to match expected expenditure on exploration and 3D seismic programmes. As a US dollar reporting entity, the Group is therefore exposed to sterling-dollar exchange rate fluctuations, both during the year and at period ends, on its sterling balances held either as cash and cash equivalents or as restricted cash.
The exchange loss for the period of $2,757,000 is similar to the 2009 exchange loss of $2,731,000 and shows an improvement from the $5,954,000 exchange loss reported at the half year. The exchange loss arises on these sterling balances, and follows a weakening of sterling against the US dollar between the beginning and the end of the year, and between the open offer date and the year-end.
Investment income of $218,000 is higher than the corresponding period figure of $148,000, reflecting the increased cash balances following the fund raising exercises during the year, with interest rates continuing at their historic lows.
I am pleased to report that Ken Black, having joined us initially as Exploration Manager in October 2010, has recently accepted the position of Exploration Director and that Eddie Wisniewski has been appointed as Finance Director - he was previously a Non-Executive director. Finally it remains for me to thank my colleagues for their hard work during the year and especially to our three main contractors, AGR Petroleum Services, who run our drilling operations, Senergy (GB) Limited who provide us with our geosciences support and Diamond Offshore Drilling (UK) Limited who operate the Ocean Guardian rig. I am also delighted to confirm that all the wells we have drilled have been completed with an excellent safety record.
Yours sincerely,
Stephen L Phipps
Report of the Directors
The Directors present their report and audited financial statements of the Group for the year ended 31 December 2010.
Principal activity
The principal activity of the Group for the year continued to be that of oil and gas exploration.
Business review
The Company is required by the Companies Act to set out in this report a fair review of the business of the Group during the financial year ended 31 December 2010 and the position of the Group at the end of the year, and a description of the principal risks and uncertainties facing the Group. The information that fulfils the requirements of the business review can be found within the Chairman's Statement above and Technical Review shown on the Desire website. These include details of the expected future developments in the business of the Group. The Directors do not believe that there are any significant key performance indicators that are relevant to the Group at present.
Dividends
The Directors do not recommend payment of a dividend (2009-$nil)
Share capital
On 12 January 2010, the Company issued 28,971,544 shares under an open offer at a subscription price of 70 pence per share, raising $32.7 million, net of costs.
On 2 February 2010, options were exercised over 7,203,583 shares, and these were subsequently allotted raising $3.6 million.
On 29 September 2010, the Company issued 16,294,600 shares under a placing at 140 pence per share raising $34.6 million, net of costs.
On 4 October 2010, options were exercised over 100,000 shares, and these were subsequently allotted raising $0.06 million.
Directors and their interests
The Directors, all of whom, with the exception of Mr K Black, served throughout the year are shown on page 3. Mr K Black was appointed on 30 March 2011.
The interests of the Directors who served during the year in the ordinary shares of the Company are shown in the Report of the Remuneration and Nomination Committees.
Mr R Lyons and Mrs A R Neve will retire by rotation at the Annual General Meeting and, being eligible, offer themselves for re-election. In addition, Mr K Black, who was appointed since the last Annual General Meeting, retires and offers himself for election.
Details of the Directors' interests in contracts with the Group are set out in note 25 to the accounts.
Special business - Annual General Meeting resolutions
Items 6 and 7 of the Notice of the forthcoming Annual General Meeting contain resolutions which renew and extend existing authorisations for a further year. The Directors believe that they should have the authorities proposed under items 6 and 7 in order to take advantage of business opportunities as they arise, thus maintaining a desirable degree of flexibility.
6 Under the Companies Act 2006, the Directors are prohibited from allotting securities of the Company without prior authorisation from shareholders to do so. The effect of this resolution is to give the Directors authority until the 2012 Annual General Meeting to allot relevant securities up to an aggregate nominal amount of GBP342,285.
7 The Companies Act 2006 also provides that, unless shareholders otherwise consent, all new equity securities to be offered for cash must first be offered to existing shareholders in proportion to their individual holdings. The effect of this resolution is to give the Directors authority, until the 2012 Annual General Meeting, to allot equity securities for cash, other than to existing shareholders, up to a limited aggregate nominal amount of GBP171,142.
Substantial shareholdings
As at 23 March 2011 the Company had been notified of the following holdings of 3% or more of its issued share capital:
Number of ordinary
shares %
TD Waterhouse Nominees (Europe)
Limited 34,284,484 10.02
Phipps & Company Limited 33,532,633 9.80
Barclayshare Nominees Limited 27,585,446 8.06
HSDL Nominees Limited 16,480,823 4.81
James Capel (Nominees) Limited 14,955,358 4.37
LR Nominees Limited 13,108,406 3.83
HSDL Nominees Limited IWEB-ACCT 12,588,978 3.68
Corporate governance
The Combined Code Principles of Good Governance and Code of Best Practice is not mandatory for companies traded on the Alternative Investment Market of the London Stock Exchange. However, the Directors are committed to applying the requirements of the Code where they are considered appropriate. This statement explains how the Group has applied the principles of the Code throughout the year. The Board meets regularly throughout the year and is responsible for the overall Group strategy, acquisition and divestment policy, approval of major capital expenditure and consideration of significant financing matters. It reviews the strategic direction of individual trading subsidiaries, their annual budgets, their progress toward achievement of these budgets and their capital expenditure programmes.
Status of non-executive directors
None of the non-executive directors would be deemed independent under the Combined Code. However, the non-executive directors have considerable experience in the Oil and Gas sector which the Company draws upon on a regular basis. In addition, the non-executive directors are sufficiently independent of management so as to be able to exercise independent judgement and bring an objective viewpoint and, thereby, protect and promote the interests of shareholders.
Going concern
It is the opinion of the Board that both the Group and the Company have adequate resources to continue in operational existence for the foreseeable future, being twelve months from the date of the approval of the financial statements. For this reason, the Board has adopted the going concern basis in the preparation of the financial statements.
Qualifying third party indemnity provisions
The Company's articles of association contain qualifying indemnity provisions under which each Director shall be entitled to be indemnified by the Company in respect of certain liabilities which may attach to him or her in their capacity as a Director of the Company. These provisions were in force throughout the year and remain in force at the date of this report.
Audit Committee
The Audit Committee was chaired by Mr E Wisniewski and included Mr A G Windham and Mr R Lyons as members throughout the year. The Committee convenes twice a year and its terms of reference include the review of the Annual and Interim Accounts, accounting policies of the Company and its subsidiaries, internal management and financial controls, and the planning, scope and results of the Auditor's programme. UHY Hacker Young Manchester LLP attend the meetings at the request of the Committee. Following the year end Mr E Wisniewski was appointed as an Executive Director and his place as Chairman was taken by Mr S L Phipps. Mr E Wisniewski will continue to attend the Audit Committee meetings by invitation.
Remuneration Committee and Nomination Committee
The Committees both comprise of at least two non-executive directors and meet as required during the year.
The Remuneration Committee is chaired by Mr A G Windham and included Mr E Wisniewski and Mr R Lyons as members throughout the year. Following the year end Mr E Wisniewski resigned from the Remuneration Committee.
The Nomination Committee is chaired by Mr R Lyons and included Mr E Wisniewski and Mr A G Windham as members throughout the year. Following the year end Mr E Wisniewski resigned from the Nomination Committee.
The Committees' responsibilities include the consideration and approval of the terms of service, nomination, remuneration and benefits of the Company's Directors.
The Board, as a whole, determines the remuneration of the non-executive directors (with Directors absenting themselves from discussions regarding their own remuneration as appropriate).
Internal control
The Board, which presently comprises the Chairman, the Chief Executive Officer, the Finance Director, the Exploration Director and non-executive directors, meets formally on a regular basis. The Directors are responsible for ensuring that the Group maintains adequate internal control over the business and its assets. There is an agreed schedule of matters requiring referral to the Board. These matters include the Group's corporate strategy, acquisitions and disposals, approval of major capital expenditure, treasury policy and risk management policies. Procedures have been formalised where the Directors may need to take independent professional advice. The Audit Committee has reviewed the necessity for the establishment of an internal audit function, but considers that, due to the nature and size of the Group at present, it would not be appropriate for the Group to have its own internal audit department.
On the wider aspects of internal control, relating to operational and compliance controls and risk management, as included in provision D.2.1 of the Code, the Board, in setting the control environment, identifies, reviews, and reports on the key areas of business risk facing the Group. These procedures have been in place throughout the current financial year.
There is close day-to-day involvement by the Directors in all of the Group's activities. This includes the comprehensive review of both management and technical reports, the monitoring of foreign exchange and interest-rate fluctuations, commitment to the Health, Safety and the Environment Management System, government and fiscal-policy issues, employment and information technology requirements and cash control procedures. Attendance at joint venture meetings and site visits are made whenever appropriate. In this way, the key risk areas can be monitored effectively and specialist expertise applied in a timely and productive manner.
Any system of internal control can provide only reasonable, and not absolute assurance that the risk of failure to achieve business objectives is eliminated. The Directors having reviewed the effectiveness of the system of internal controls and risk management, consider that the system of internal control operated effectively throughout the financial year and up to the date the financial statements were signed.
Performance evaluation
A formal performance evaluation of the Board, its Committees and its Directors was not undertaken during the year due to the nature and size of the Group at present.
The Board is satisfied that the Board and its Committees are operating in an effective and constructive manner.
Relations with shareholders
The Group is active in communicating with both its institutional and private investors. The Annual General Meeting, at which Directors are introduced and available for questions, provides further opportunities for dialogue.
Creditor-payment policy
It is the policy of the Group to ensure that all of its suppliers of goods and services are paid promptly and in accordance with contractual and legal obligations. At 31 December 2010 there were 55 days (2009 - 35 days) purchases remaining unpaid.
Political contributions and charitable donations
The Group made no charitable donations during the year (2009 - $7,961 for Falklands Conservation).
Auditors
Each of the persons who is a Director at the date of approval of this annual report confirms that:
A so far as the Director is aware, there is no relevant audit information
of which the Company's Auditors are unaware, and
B the Director has taken all steps that they ought to have taken as a
Director in order to make themselves aware of any relevant audit
information and to establish that the Company's auditors are aware
of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006.
UHY Hacker Young Manchester LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.
This report was approved by the Board on 4 April 2011 and signed on its behalf by
Mrs A R Neve BA Secretary
Report of the Remuneration and Nomination Committees
Remuneration Committee and Nomination Committee
The Committees met as required during the year.
The Chairman and other Directors may also attend meetings but are not involved in any matter relating to themselves.
The Group considers that it has, to the extent appropriate given the Company's particular circumstances, applied the Combined Code throughout the year regarding remuneration committees. In formulating remuneration policy the Committees gives due consideration to the best practice provisions section of the Code.
Remuneration policy
The remit of the Committees is to advise on all aspects of the remuneration packages of Directors.
The policy of the Committees is to ensure that the remuneration packages offered are competitive and designed to attract, retain and motivate Directors of a high calibre, with a significant proportion of the remuneration package linked to performance.
The Directors' emoluments are not pensionable.
Details of Directors' emoluments are set out in note 5 to the financial statements.
Directors' contracts
The Directors' Service contracts are for an indefinite period but can be terminated with six months notice by either party.
Details of the Directors' contracts are summarized as follows:- |
