OilVoice - Cadogan Petroleum Reviews Financial and Operating Performance

Cadogan Petroleum Reviews Financial and Operating Performance

Thursday, April 30, 2009

Cadogan Petroleum plc an independent oil and gas exploration, development and production company with onshore gas, condensate and oil assets in Ukraine, announces its preliminary results for the year ended 31 December 2008.

Principal Developments Developments in 2008

• Raised £145.0 million net proceeds from initial public offering in June 2008 and £26.4 million of private funds from January to May 2008
• Net cash and cash equivalents at year end of £72.0 million (2007: £14.0 million)
• Total capital expenditure of £74.6 million during 2008 (2007: £40.5 million)
• Carried out intensive development programme focused on the Group’s major fields and reached target depth on two wells in the east and now testing and evaluating data
• Total proved, plus probable reserves base of 83.0 mmboe (2007: 80.4 mmboe)
• Continued vigorous defence of Pirkovskoe and Zagoryanska licences and signed significant cooperation agreement with the Ministry for Environmental Protection of Ukraine Post year end events
• Appointed Ian Baron as Interim Chief Executive Officer and launched full strategic and operational review
• Currently testing and evaluating data across all fields with revised programme and recommendations expected by the end of the second quarter or early in the third quarter of 2009
• Maintained cost controls to sustain liquidity position
• Extended Zagoryanska licence area to 2014 and will continue to seek satisfactory resolution to licence issues

The second quarter of 2008 closed with the Company’s initial public offering (‘IPO’) which was intended to allow the Group to develop the licence areas it had previously acquired in Ukraine. Unfortunately this aim was significantly impacted by the well documented challenges to two of the Group’s licences and certain operational difficulties. The latter, in particular, required the Group to modify its work programmes and to defer bringing key fields on stream, causing delays to revenues originally anticipated at the time of the IPO.

In March 2009 the Board appointed Ian Baron as Interim Chief Executive Officer to undertake both a detailed review of the operations and an evaluation of the exploration potential and commercial viability of the Group’s assets. The Board anticipates that this review will take approximately three months, during which time both capital expenditure and operating expenses will be limited to certain testing and evaluation activities.

Ian Baron, who is a former non-executive Director of the Company, has over 30 years international upstream oil and gas experience. He has worked in several countries in the former Soviet Union and the Board considers him to be well qualified to evaluate the options available to the Group.

Operations summary
The Group’s asset portfolio consists of acquired interests in 11 licence areas covering 14 fields in Ukraine. Testing of the wells in the Poltava region in eastern Ukraine has provided a significant volume of data and operations on several wells are now at a stage where they can be temporarily suspended to allow evaluation of this information. Contingent on results from this analysis, a decision will be taken as to both the commercial viability of the oil and gas zones tested and the possible development alternatives. While this evaluation is underway, drilling operations will continue only on Borynya #3 in western Ukraine, where we recently saw encouraging test results in a secondary target above the main objective. Drilling of Borynya #3 will require the use of only one rig and will significantly reduce the Group’s capital commitments.

Political and licence issues
During 2008 the Group was faced with indirect challenges to the Zagoryanska and Pirkovskoe licences. The Group immediately embarked on an extensive programme of court hearings and political lobbying to protect its interests. Despite a number of successful court hearings, in February 2009 the High Administrative Court of Ukraine ruled in favour of the original challenge to the Pirkovskoe licence. The Group has lodged a further appeal in the Supreme Court of Ukraine, the highest judicial body in the Country.

In support of Cadogan’s position, on 30 March 2009, the General Prosecutor’s Office of Ukraine submitted a case to the Supreme Court of Ukraine arguing that the High Administrative Court had been mistaken in reaching its decision and that the ruling should be declared invalid. The Directors believe that, notwithstanding the uncertainties described above, the validity of the Group’s licences are expected to be reconfirmed.

On 7 October 2008 Cadogan entered into a co-operation agreement with the Ministry for Environmental Protection of Ukraine, under which the Ministry agreed to support Cadogan in the conversion of exploration licences to production licences and to protect Cadogan’s rights to its existing licences. On 15 January 2009 the Group successfully extended its licence for the Zagoryanska area. The exploration and development licence was extended by five years to April 2014.

Overview of financial position
At the date of this report, the Group has current cash and cash equivalents of approximately £53.9 million, of which £7.6 million is committed to the construction of two gas treatment plants. As part of its strategic review, the Board is exploring the possibility to augment its funds by selling surplus assets including one or both of the gas treatment plants as well as other inventory that has been acquired.

The Directors believe that the capital available at the date of the issue of this preliminary announcement, together with income to be generated from future operations are sufficient for the Group to continue in operational existence for the foreseeable future.

Outlook
Having reduced operations from five active rigs to one, management will undertake an analysis of the operational data gathered and incorporate the results of the analysis into a revised programme of operations. In parallel, the Board will review its strategic alternatives in respect to its assets in Ukraine. This review will allow the Board to assess all options open to the Company, which it plans to have completed by the end of the second quarter or early in the third quarter of 2009. In the meantime, we will continue to exert tight controls over costs and cash flows.