Niko Resources Ltd. reports results for the three and nine months ended December 31, 2005.
• D6 Block development activities are progressing - major tenders issued, two successful development wells drilled and gas plant site is substantially complete
• Year to date gas production has increased 62 percent from the prior period
• Year to date operating expenses per boe decreased 27 percent from the prior period
The Company's activities are carried out primarily in U.S. dollars as well as the currencies of each country in which the Company operates. The Company reports financial results in Canadian dollars.
The fiscal period for the Company is the 12 month period ending on March 31st of each year. The term 'fiscal 2006' is used throughout this report and refers to the period from April 1, 2005 through March 31, 2006.
Financial
During the three months ended December 31, 2005, funds from operations increased to $18.6 million or $0.47 per share compared to $16.8 million or $0.46 per share in the comparative period. This increase is due to increased production and the resulting increase in revenue partially offset by increased profit petroleum and royalties expense. The Company earned $4.4 million or $0.11 per share in the quarter compared to $14.7 million or $0.40 per share in the comparative period. Although revenue net of royalties and profit petroleum increased, net income was reduced due to an increase in depletion expense, the recognition of insurance proceeds and a future income tax recovery in the comparative period, a reduced foreign exchange gain and increased general and administrative expenses. For the quarter ending December 31, 2005 revenues were $32.7 million compared to $27.8 million in the comparative period. The increase in revenue is due to increased production in India, higher U.S. dollar gas sales prices in India and a full three months of production in Bangladesh as compared to approximately one and one half months in the comparative period. This increase was partially offset by the decrease in the selling price of natural gas due to the strengthening of the Canadian dollar versus the U.S. dollar resulting in a lower price received by the Company and the Company recognizing all Bangladesh revenue at a price of US$2.10 per Mcf versus the previously recorded revenue at a price of US$2.20 per Mcf. Depletion expense increased $6.2 million as a result of increased production in India, a full three months production in Bangladesh and the previous technical revision in the Hazira proved reserves in the March 31, 2005 reserve report. During the three months ended December 31, 2004, the Company recorded a $3.3 million gain relating to insurance proceeds. During the quarter ended December 31, 2004, the Company recognized a future income tax recovery of $4.4 million. There was a foreign exchange gain during the quarter of $0.8 million compared to a gain of $1.8 million in the same quarter in the prior year resulting in a reduction in net income of $1.0 million. In both periods, the Company's foreign exchange was impacted by the strengthening of the Canadian dollar versus the U.S. dollar resulting in foreign exchange gains on long term U.S. dollar denominated debt which were partially offset by foreign exchange losses on U.S. dollar held cash and U.S. dollar receivables in excess of payables. General and administrative expenses increased due to increased professional fees, lower overhead recoveries, a reclassification of branch office costs and a write-down to the account receivable relating to Bangladesh revenue.
For the nine month period ending December 31, 2005, funds from operations increased to $57.8 million or $1.47 per share compared to $44.8 million or $1.23 per share in the comparative period due to increased revenue partially offset by the associated overall increase in expenses. Net income for the nine month period was $13.1 million or $0.34 per share compared to $27.0 million or $0.74 per share in the prior year's nine months. Although production and corresponding revenue increased year over year, net income decreased primarily due to an increase in depletion expense, the recognition of insurance proceeds and a future income tax recovery in the comparative period and a decrease in the selling price of natural gas due to the strengthening of the Canadian dollar versus the U.S. dollar.
Operations review and update
India
In India, the seventh new well, OS-7, was completed and the eighth and ninth new wells, OS-8 and OS-9, were drilled and completed as oil producers from the Hazira offshore platform. Subsequent to December 31, 2005, a fourth oil well has been drilled into a new pool and is currently being tested. Based on log analysis, a fifth oil well is planned subject to the test results of the fourth well. Construction of oil production and handling facilities has continued with initial production scheduled for the end of the fourth quarter of fiscal 2006. Production from Hazira during the quarter averaged 49 million cubic feet per day (net). Production in Surat averaged 10 million cubic feet per day.
In the D6 Block, the drilling of the two planned development wells, A-10A and B-7, was completed during the quarter. Both wells were extensively cored to further assess the production capability and hydrocarbon volumes of the gas field. Detailed core studies are underway. Preliminary results reveal there is more hydrocarbons than was previously estimated using log analysis. Based on these results the production facilities are being redesigned to initially accommodate 2.8 bcf per day and ramping up to 4.2 bcf per day. This is double the original planned capacity and indicates the new view of the reserve and production potential of the gas field.
Progress on the design and installation of the production facilities is well underway. Major tender packages have been issued and the civil construction of the gas plant site is substantially complete.
An exploration well, MA-1, commenced drilling and reached target depth subsequent to the end of the quarter. MA-1 is the first well drilled in the D6 Block where the older rocks of the Cretaceous section are the primary targets. The Cretaceous section has the potential for both oil and gas. Drilling, mud logging, wire-line logging and testing have yielded encouraging results. Niko and Reliance Industries Limited ("Reliance") have approved the engagement of Gaffney Cline and Associates ("GCA") to carry out an estimation of hydrocarbon in place volumes within the Cretaceous sequences based on the results obtained from the drilling and testing of well MA-1 and integrating these results with the acquired 2D/3D seismic in the block. Reliance has indicated to Niko that hydrocarbons have been found at MA-1 in the Cretaceous section which could open a significant new play in the D6 block, including an oil bearing zone in particular, which could have a material impact on the future exploration potential of the D6 Block. MA-1 is the sixteenth consecutive successful exploration well drilled in D6 and the first Cretaceous discovery. The drilling rig will move from D6 after completion of operations at the MA-1 well.
Further drilling to evaluate prospects in deeper water depths identified by the 2004 3D seismic will commence with the arrival of two recently contracted rigs, which are scheduled to arrive September 2006 and November 2006. A 2,550 square kilometre 3D seismic program is scheduled to be acquired in the fourth quarter of fiscal 2006 in the area to the south of the existing 3D seismic area. The Company is looking forward to continued drilling success on this block.
In the recently signed Cauvery Production Sharing Contract ("PSC"), in which the Company holds a 100 percent interest, a 550 square kilometre 3D program is scheduled to commence in early April 2006 with the multiple well drilling program planned to commence in 2006. It is expected that multiple prospects could emerge from the seismic program in this oil prone block.
In the deep water block MN-DWN-2003/1 (D4) located in the Mahanadi basin, in which Niko holds a 15 percent interest, a 2,100 kilometre 2D seismic acquisition program is planned to commence in the fourth quarter of fiscal 2006. The east coast of India is rapidly becoming a highly prospective exploration area following the many successes in the KG basin.
Bangladesh
Combined gas production from the three wells in the Feni Field averaged 26 million cubic feet per day during the quarter. A gas compressor will be installed by the end of fiscal 2006, which will assist in improving the ultimate recovery from the field.
At Chattak, the relief well, which intersected the original Chattak-2 well in the reservoir section of the blowout sand enabled communication with the original blowout well and after pumping sufficient kill fluids, the blowout well was successfully cemented on October 9, 2005. Clean up, leveling and restoration of the site and residual gas venting has also been substantially completed.
Three drilling locations have been identified on the western part of the Chattak structure and one location on east Chattak. The drilling of Chattak-3 as the first gas producer is expected to commence in fiscal 2007 followed by the drilling of Chattak-4.
Chattak gas plant and pipeline facilities are expected to be completed and ready for production by the end of fiscal 2006. Production in Chattak is scheduled to commence in fiscal 2007.
In Block 9, the 620 square kilometre 3D seismic program over the Lalmai/Bangora anticline is approximately fifty percent completed. Tie-in of the Bangora-1 well is in progress. The installation and commissioning of gas production and processing facilities located at the Bangora-1 wellsite and the commencement of production are both expected in April 2006. The drilling of the first of up to 4 appraisal wells on the Bangora and Lalmai discoveries is also expected to commence in April 2006. The first well, Bangora-2 will be directionally drilled from the Bangora-1 site to test for reservoir extension of the highly productive sands encountered in the Bangora-1 well. Drilling from the Bangora-1 site will allow for this well to be connected for production immediately after the expected successful completion. Production rates are expected to be initially in the range of 40 to 50 million cubic feet per day and will increase with the completion and tie-in of the Bangora-2 well and the drilling of additional appraisal wells.
Production Forecast
For fiscal 2006, gas production from Hazira and Surat is expected to average between 55 and 60 million cubic feet per day (net) and gas production from Feni is expected to average between 20 and 25 million cubic feet per day.
Hazira oil production is scheduled to commence in the fourth quarter of fiscal 2006 at rates between 500 and 1,000 barrels of oil per day (net).
The Company's total production outlook for fiscal 2006 is expected to average 75 to 80 million cubic feet per day (net) of gas with a fiscal year-end exit rate of approximately 55 to 60 million cubic feet per day (net) of gas and 1,000 barrels of oil per day (net).
Operating Expense Outlook
During the three and nine months ended December 31, 2005, operating costs were $2.03 and $1.75 per boe, respectively, and are anticipated to average $2.00 to $2.20 per boe in fiscal 2006.