Annual Report & Accounts 2013

 

Chairman’s Statement

“We invested over $160m in capital expenditure during 2013, over 85% of which was on Petroceltic operated projects.”




Dear Shareholder,

When we executed the merger between Petroceltic and Melrose in October 2012, we saw a great opportunity to build a balanced exploration and production business, with a clear regional focus and a good blend of operating, financial and technical skills. During 2013, we worked hard to make this vision a reality through integrating our team, undertaking a successful refinancing, negotiating our second farm-out of Ain Tsila and making important new appointments to help the business continue to grow. Looking ahead, 2014 will see a number of our most material exploration prospects drilled and the commencement of detailed development work in relation to our largest asset, the Ain Tsila gas condensate field in Algeria.

2013 was also a year of transition and occasional uncertainty for some of the regions where we operate. In Egypt, a period of political change resulted in the creation of a new interim government and, more recently, a new constitution. Parliamentary and Presidential elections are also scheduled for later in 2014 and it is hoped that these will enable a return to economic and social stability. In Algeria, the tragic terrorist attack on the In Amenas facility reinforced the need for continual vigilance and review of safety and security arrangements, while in Kurdistan there continues to be uncertainty regarding the timing of oil and gas exports and related payments. While these matters are a timely reminder of some of the potential risks of operating in emerging markets, they had limited impact on our operations and we continue to believe that Petroceltic can operate safely and effectively in these countries and generate material value for our shareholders.

Operational excellence+-

We invested over $160m in capital expenditure during 2013, over 85% of which was on Petroceltic operated projects. In Algeria, the formation of the Isarene joint operating organisation was a major step on the road to the development of the world class Ain Tsila field with senior Petroceltic staff seconded to a number of critical positions in the new organisation. The successful delivery of this project will be central to the success of the Group over the coming years. In Egypt, our major facilities upgrade projects were completed and an active rig programme undertaken through a period of political and social upheaval. In the Black Sea, we undertook a variety of offshore exploration, development and production operations. Through these operations, we have demonstrated our team’s ability to successfully plan, execute and safely deliver multiple work programmes across a variety of jurisdictions in both onshore and offshore settings. These skills also supported our successful acquisition of a number of new licences during the year and enabled us to actively support and, where appropriate, challenge operators where we do not fulfil that role.

Integration and organisation+-

Following the merger between Petroceltic and Melrose, a substantial portion of 2013 was devoted to integrating the new Group’s management structure, and our various teams, work activities, policies, procedures and systems to ensure they were incorporated within the enlarged organisation. This process is now complete. In addition, in recognition of the wide range of activities and regions in which the Group is currently active, a number of important new Senior Management appointments were made during 2013. These included new Heads of Business Development, Health Safety Environmental and Social (‘HSES’), Drilling and Legal Services.

Successful refinancing and portfolio management+-

The availability of adequate funding, supported by high quality assets, is a vital component of Petroceltic’s long term growth strategy. In particular, the Group is committed to maintaining its remaining stake in the Ain Tsila development in Algeria through to first gas. In parallel, we are also seeking to maintain active exploration, development and production programmes within our areas of geographic focus. During 2013, we took two major steps towards securing the financing required to meet these critical objectives. These were:

  • The farm-out of an 18.375% interest in the Ain Tsila project to Sonatrach, the National Oil Company of Algeria; upon completion, this will provide a minimum of $160m of direct support for Petroceltic’s development spend over the coming years. The transaction also represents an encouraging endorsement of the asset quality and our team’s technical capability and experience.
  • The conclusion in April 2013 of a financing package of up to $500m, led by HSBC and the IFC, which supports our plans for both existing and potential new assets and will also provide important funding for the Ain Tsila development. This facility was concluded in less than ideal market conditions and clearly demonstrates the credit quality of our portfolio.

In addition, since year end we have also announced a proposed placing of new equity to raise $100m incorporating a $50m investment by a long term strategic investor, Dovenby Capital, a vehicle associated with Dato Fuad, a prominent industry executive and investor. The proceeds of this placing, once approved by shareholders (to the extent required), will enable Petroceltic to commit to increased or accelerated programmes on existing assets while selectively evaluating growth opportunities within our areas of focus.

Enhanced board and governance framework+-

After 13 years of service as a non-executive director, Con Casey retired in July 2013. We thank him for his valuable input over the years and wish him well. We were delighted to be able to announce the appointment of Ian Craig as a non-executive director in November. Ian has over 30 years of international experience in the planning, design and execution of major development projects worldwide mainly with Shell and Enterprise Oil. This expertise is of particular benefit to the Ain Tsila project where Ian acts as Chairman of the Project Advisory Committee, which comprises both internal and independent external appointees. Finally, we anticipate adding a further non-executive director to our Board over the coming months pursuant to arrangements agreed as part of the equity placing with our new strategic investor Dovenby Capital.

We are also looking forward to completing the move to the Main Markets of the London and Irish Stock Exchanges. This process has recently commenced and admission is expected to become effective in Q3 2014.

Industry environment and business performance+-

While the Group has made great progress during 2013 and met its production guidance under challenging circumstances, there have also been some areas of disappointment. Most notably these were on the exploration front, with three wells failing to encounter commercial hydrocarbons in Bulgaria, Romania and Egypt. Despite this, I firmly believe that our recently expanded exploration portfolio, with 5 new licences secured in Egypt, Italy and Greece, has the potential to deliver material resource additions. In 2014, our exploration drilling programme will continue in Kurdistan, Romania and Egypt.

2013 was also a challenging year for the oil and gas sector as a whole. Of 71 UK listed exploration and production companies over 61% suffered share price declines, while AIM fared even worse with over 69% of oil and gas stocks finishing the year lower than they started. However, a number of recent merger and acquisition announcements suggest that a more positive investor sentiment is beginning to return to the sector. The oil and gas industry has always operated in cycles and I believe Petroceltic’s strategy, portfolio and team are well equipped to persist and succeed.

During 2013, I was fortunate to meet retail and institutional shareholders on a number of occasions, either alone or with executive management. On each occasion, I have conveyed my enthusiasm and belief in the potential of our business and my excitement about the opportunities that exist for the Group. Our new business made a good start in 2013, and I look forward to seeing further progress in 2014.

Robert Adair
Chairman