Half Yearly Accounts
Brisbane, Mar 15, 2012 AEST (ABN Newswire) - Linc Energy Limited (
ASX:LNC) Directors present their report on the consolidated entity (referred to hereafter as the Group) for the six months ended 31 December 2011.
Directors
Unless otherwise stated, the following persons were Directors of Linc Energy Ltd during the whole of the reporting period and up to the date of this report:
- Mr Peter Bond (Managing Director) - appointed October 2004.
- Mr Ken Dark (Non-Executive Director) - appointed October 2004 and appointed Acting Chairman September 2011.
- Mr Jon Mathews (Non-Executive Director) - appointed December 2009.
- Mr Craig Ricato (Executive Director) - appointed October 2010.
Mr Oliver Yates was a Non-Executive Director and Acting Chairman during the year until his resignation on 28 November 2011 and 6 September 2011 respectively.
Review of operations
Oil & Gas
Upon initial acquisition of the assets, production was reduced marginally until a full review of the assets and resources was complete. A drilling program was developed with the goal of significantly increasing production over the remainder of the financial year. At 31 December 2011 daily oil production capacity was approximately 2,350 (Net) / 3,175 (Gross).
Gulf Coast
An initial production deficiency following acquisition of the fields from ERG Resources LLC is attributable to a decline across older production wells within the portfolio and a temporary short-term loss of approximately 250 Barrels of Oil Per Day (BOPD) (Gross) as a result of the loss of a natural gas pipeline in the Port Neches Field in Orange County, Texas. The Port Neches Field has now resumed production.
Wyoming
The 'CO2 Huff and Puff' operation, designed to test the CO2 Enhanced Oil Recovery (EOR) properties of the geological structure, began on 23 November 2011. This operation involved injecting 500 tonnes of liquid CO2 into the South Glenrock B #34 well, which was then allowed to 'soak' for 21 days to stimulate production from this well. On 13 December 2011 the well was flowed back to tanks on location until the CO2 pressure was bled off, followed by the removal of standing fluid in the wellbore. Approximately 30 barrels of oil was recovered in the 36 hours.
Since the initial flow back, operations have been focused on putting the well on production using a conventional rod pump. The pumping unit was started on 6 January 2012 and on 12 January 2012; 77 barrels of 'new' oil were sold from the South Glenrock B#34. Current daily average production for the well is approximately 35 barrels of oil per day. Prior to the CO2 EOR treatment, the well was producing 1 barrel of oil per day (a significant increase in percentage due to the CO2 injection).
During the period, the Group and ExxonMobil entered into an agreement whereby Linc Energy will purchase CO2 from ExxonMobil on an interruptible basis, allowing for the continued development of EOR at Linc Energy's Glenrock assets. The two companies will be working over the next few months to develop a CO2 delivery point near Jeffery City, Wyoming, with the intent of initially trucking CO2 and beginning a CO2 flooding pattern at the South Glenrock B Unit in 2012, with the aim of taking this field from a gross production of 200 BOPD to over 2,000 to 4,000 BOPD.
Exploration and development
Gulf Coast (Texas & Louisiana)
The Group has successfully completed three new wells and re-completions on an additional two wells. Two of the new wells are now in production, producing approximately 300 BOPD (Gross) combined, with the remaining new well and re-completed wells scheduled to come online following upgrades to production surface infrastructure.
Additional re-completions, drilling operations and production planning continued across the Gulf Coast asset portfolio, with the immediate focus being upon the Barbers Hill and Black Bayou fields. These works are expected to deliver significant increases in total production over 2012.
Alaska
The Umiat asset development continues to be the focus for Linc Energy in this region, despite the 2011-2012 winter drilling program being postponed due to logistical and weather (low snow levels which affected snow road development) issues. The Group plans to commence a comprehensive delineation drilling, well testing and deep exploration program in the 2012-2013 winter season on the Umiat site and has contracted a drill rig to undertake this work.
In the meantime, the Group is actively engaged in all permitting activities, community and agency consultation, and development of the Project Description and Plan of Development in anticipation of the 2012-2013 drilling season with the goal of having Umiat in production in a timely manner.
South Australia - Arckaringa Basin
Exploration in the Arckaringa Basin included the processing and interpretation of the 2011 seismic data and the evaluation of the results of the drilling programs conducted during the period. On 27 September 2011 Linc Energy announced the discovery of an oil shale deposit within the Stuart Range Formation located in Linc Energy's Petroleum Exploration Licence (PEL) 122.
Analysis of samples from Wirrangula Hill 1/1A and Arck 1 indicated the presence of a shale with high Total Organic Content which is considered to be a prospective oil shale resource. An oil shale deposit approximately 124 metres thick was intersected at a depth of over 854 metres and covers an area of approximately 93.5 kilometres by 12.3 kilometres. The most prospective black shale/siltstone within the deposit is around 70 metres thick with preliminary analysis indicating potential oil yields of 25 litres to 45 litres per tonne. Further work will be undertaken to continue evaluating this potential resource.
Raw processing and depth time migration was completed on the 1,152 line kilometres of two dimensional (2D) seismic and the interpretation of the lines are due to be completed in early 2012. This data has already assisted geological team members to identify a significant number of new conventional oil target locations and is expected to to add value to the Arckaringa Basin assets whilst providing a solid platform for the next extensive exploration program in the Arckaringa Basin. At this stage, no further drilling will occur in the Arckaringa Basin before the end of the financial year.
Coal
Teresa
Discussions concerning the sale of the Teresa coal asset, near Emerald in Queensland, are continuing with several potential new buyers emerging in late 2011. A number of offers were reviewed by the Group during 2011; however, they were declined for a number of reasons including suitability of the value of the proposed transactions and post-transaction ownership structures. To ensure the best outcome for the Group and shareholders, Linc Energy is continuing to explore a number of options, including full divestment and partial divestment/joint venture opportunities with interested parties.
At the same time, the development of the Teresa mine is proceeding to plan. Development of the project in parallel with the sale process makes the asset more appealing to potential purchasers and increases the value of the asset to all parties.
Drilling continued on the Emerald resource upgrade program, with an emphasis on collecting additional coal quality and geotechnical data. Drilling and field work at Emerald/Teresa will continue into 2012.
The collection of base line environmental data for the Environmental Impact Statement (EIS) also continued. The Group expects the EIS to be completed during 2012 with the document to be submitted in late 2012 for government review and approval.
The Group has also made significant progress in developing a complete infrastructure package for the Teresa mine, including investigating accommodation options, negotiating port and rail access and securing water and power supplies. Based on current development progress, the Group considers that mine construction could commence in late 2013 after all necessary approvals have been granted.
Great Northern Leases
Exploration recommenced on EPC1526 within the Great Northern Leases during the period. One chip hole was drilled to basement (794m). Further drilling is planned based on the findings to date, and will be reviewed on completion of the separate Emerald / Teresa drilling program.
Adani Royalty
Linc Energy notes the progress made by India's Adani Group in developing the Carmichael Coal tenement (formerly Galilee) for which Linc Energy is entitled to a $2 per tonne royalty (indexed to CPI) for the first 20 years of coal production.
Adani has conducted an extensive drilling campaign, progressed with mine planning studies and started work on the EIS for both the mine and the rail. Adani has also commenced an extensive exploration programme on the asset in order to finalise the mine plan ahead of development and construction work in 2013. Adani has made significant progress on the infrastructure (port and rail access) to support the development.
Clean Energy
Chinchilla
Operation of multiple gasifiers into the downstream processing facility at Chinchilla was achieved on 17 November 2011.
Synthesis gas from Fourth Generation Gasifier (G4) and Fifth Generation Gasifier (G5) was simultaneously used to produce Syncrude in Linc Energy's Gas to Liquids (GTL) facility in South East Queensland.
This provided valuable design confirmation and operational experience and is one of the last steps towards commercialisation of the value chain. The operation of multiple simultaneous gasifiers to supply syngas for downstream beneficiation is a key element in the commercialisation of Linc Energy's Underground Coal Gasification (UCG) technology and a number of patent applications have been lodged.
This follows the successful start-up of G5 on 22 October 2011. Exceptionally stable operation has been achieved with G5 consistently producing good quality synthesis gas. G5 showed improved temperature and pressure control with gas delivered within the hydrogen (H2) to carbon monoxide (CO) ratio (H2/CO) target of around 2, which is ideal for the downstream liquids manufacture in the GTL demonstration plant. Especially encouraging has been the high concentration of CO above the 10 per cent, by volume, levels achieved with air injection. The latest campaign of liquids production in the GTL plant commenced on 31 October 2011 with a progressive start-up of the gas and liquid separation and clean-up processes, followed by the Fischer Tropsch (FT) synthesis reactor start-up on 2 November 2011.
Since the start-up, Syncrude production rates have been consistently two to three times higher than previously achieved. The synthesis gas conversions were at the levels expected with the new catalyst that was loaded. Contributing to these good results has been the improved preparation of the FT synthesis catalyst where a substantially higher catalyst reduction level has been achieved. The stability of the plant has been good with an online availability of higher than 98 per cent to date (not accounting for the planned shutdown for external power network construction activities).
The Syncrude liquids will be used for product testing and promotional campaigns Linc Energy has scheduled for 2012, the first of which is the planned flight from Chinchilla to Perth on a Linc Energy powered jet to demonstrate the continued improvement of its GTL product.
Wyoming
Work is progressing on the development of a UCG demonstration plant in the area of Wyoming's Powder River Basin (PRB) coal reserves. As announced in October last year, the approval process with the Wyoming Department of Environmental Quality (WDEQ) has commenced and builds on 16 months of work and collection of baseline data around the demonstration site. The application approval process by the WEDQ, after submission of the R&D License Application, takes approximately 180 days.
Exploration and development
Alaska
The Company has started drilling the first core well in its Alaska UCG exploration drilling program. The goal of the exploration program is to acquire quality resource data that will help identify locations suitable for further evaluation and commercial UCG development.
Seismic work planned for 2012 will include approximately 40 line miles (64km) of 2D profiles collected over the Interior and Cook Inlet UCG license areas. Additionally, 43 line miles of modern full-coverage 2D seismic data which the Company has purchased will be processed and interpreted along with the new profile data.
Wyoming
Concurrent with the Sixth Generation Gasifier (G6) permitting work, the Wyoming Clean Energy UCG team is actively drilling exploration wells throughout the Company's PRB leases in northeast Wyoming. The team has successfully drilled a total of 17,612 feet (5,368 metres) and subsequently installed 12 wells within seven (7) key areas of the PRB. Wells are completed into the target coal to provide Linc Energy's UCG Technical team valuable information concerning the coal's hydrogeologic characteristics and allowing for the collection of water quality samples. Of these 12 wells, two (2) of the wells were also cored for the purpose of rock strength analysis of the overburden and underburden, along with analysis of the target coal. Results from rock strength analysis and coal analysis are used to evaluate whether a commercial scale UCG project is feasible within the PRB.
Linc Energy will continue to evaluate its PRB leases during 2012. As part of this program, Linc Energy geologists are utilising well logs from the approximately 50,000+ wells previously drilled in the PRB by coal bed methane and conventional oil and gas operators.
Linc Energy has also completed 2D seismic surveys on two areas being considered for commercial development in the PRB. A high resolution output will allow the Company to "map" the subsurface without multiple borings which can be costly and time consuming.
International
Linc Energy continued to work with UK Coal to assess the potential for UCG at three of UK Coal's sites in Warwickshire, Yorkshire and Leicestershire.
Europe also presents significant opportunities for Linc Energy with a unique combination of high gas prices, significant volumes of stranded coal (particularly in Eastern Europe), growing demand for natural gas and decreasing local gas supply. These factors are strong drivers in choosing Poland as a key early region for the potential commercialisation of UCG. During the period, the Group acquired an exploration concession in Poland which in the Directors opinion may contain approx. 1.2 billion tonne coal deposit. Exploration activities and a pre-feasibility assessment is scheduled for the current year.
Financial Performance
Sales
Total Group revenues increased significantly, from $674,000 to $18,928,000, reflecting the inclusion of six months of Wyoming and three months of Gulf Coast oil sales revenues. The corresponding period in the prior year was limited to syngas sales at Yerostigaz in Uzbekistan. The average oil sales price achieved for the period was US$97.28 per barrel, excluding oil price hedges. Under the terms of its Reserve Based Lending facility, Linc Energy is required to hedge a certain portion of its oil production to ensure that interest and field operating costs are fully covered. Further details of these oil hedges are included in note 11 of the Interim Financial Report.
Gross Profit
Gross profit for the Group increased from a loss of $28,000 to a profit of $9,762,000. Cost of sales relates predominantly to the US oil business and includes oilfield lease operating expenses, workover costs, production taxes and royalties. Cost of sales for the period were higher than would normally be expected due to the preparation of the Big Muddy field in Wyoming for the first CO2 EOR injection trial that was carried out in December. This necessitated repairs and maintenance to field infrastructure as well as oil processing facilities. Overall cash production costs (including production taxes) for the Group for the reporting period were US$28.98 per barrel. This average cost is expected to decline over time as more oil is produced from the Gulf Coast relative to Wyoming and higher production flows offset relatively stable field infrastructure and labour costs.
Operating Expenses
Administration and corporate costs for the period increased from $19,402,000 to $35,091,000 reflecting the significant increase in staff numbers and administrative costs as a result of the continued global expansion of the business, particularly in the United States with the acquisition of the ERG Gulf Coast oil business and the expansion of the Alaskan office to commence development of the Umiat project.
Included within this figure was a non-cash share based payment expense of $7,317,000 (2010: $6,508,000) reflecting the cost of options and performance rights recognised over their vesting period.
Financial income and expenses
Finance income of $3,023,000 was significantly lower than the corresponding period in the prior year ($11,707,000) which benefited from both the interest earned on coal sale funds $9,747,000 and a net gain of $1,954,000 recognised on settlement of the Springtree Convertible Loan Agreement.
Finance expenses of $13,450,000 (2010: $199,000) increased as a result of interest payable on borrowings and the recognition of an accounting loss of $12,222,000 on the net change in the fair value of derivative financial instruments. This loss reflects both the realised ($783,000) and unrealised ($11,439,000) fair value of oil hedges taken out by Linc Gulf Coast as a requirement of its Reserve Based Lending Facility. The unrealised amount will fluctuate over time as the hedges are "marked to market" against the prevailing oil price at each reporting date.
Tax
The Group recognised a tax benefit of $14,204,000 (2010: tax expense of $142,166,000). No amount has been included in income tax expense in respect of the material contingent tax liability related to the Adani Galilee coal production royalty. For further details on this contingency please refer below.
Other Comprehensive Income/(Loss)
The Group recognised an accounting loss of $4,060,000 (2010: gain of $9,171,000) for the decrease in the value of its listed equity investments. This unrealised accounting loss was recognised in reserves.
Net Profit/(Loss)
The Group recorded a net loss after tax of $44,574,000 (2010: profit of $327,648,000). The Group recorded its first material oil sales revenues in this reporting period and expects these revenues to continue to increase over the next twelve months. The Group expects to be generating operating profits on a monthly basis by the second half of calendar 2012.
Note the result in the prior period reflected the sale of the Galilee non-core coal tenement, with a net gain of $495,001,000 recognised on disposal of that asset.
Financial Position
The Group's balance sheet is in a strong position following the sale of the Galilee coal tenement in August 2010. Net assets at 31 December 2011 totalled $471,885,000 (30 June 2011: $513,721,000), including $32,476,000 (30 June 2011: $310,343,000) of cash and cash equivalents. Oil & Gas assets increased significantly to $357,793,000 (30 June 2011: $25,288,000) reflecting the acquisition of the ERG Gulf Coast oil business and Umiat asset.
Total liabilities amounted to $221,857,000 (30 June 2011: $87,232,000) including $127,530,000 (30 June 2011: $1,866,000) of non-current borrowings and $11,604,000 (30 June 2011: Nil) of unrealised hedge liabilities relating to derivative instruments such as swap agreements used to manage exposure to commodity price risk as required by the Linc Gulf Coast Reserve Based Lending Facility which was used to partially fund the acquisition of the ERG business.
Cash Flows
The Group had a total of $32,476,000 (30 June 2011: $310,343,000) of cash and cash equivalents on hand at the end of the reporting period. Net cash outflows from operating activities were $32,580,000 (2010: outflow of $22,025,000). This included $13,939,000 (2010: $1,095,000) of receipts from customers predominantly related to US oil sales, offset by $33,664,000 (2010: $15,488,000) of payments to suppliers and employees and the final 2011 tax instalment of $9,860,000 relating to tax on the coal sale in 2010.
Material cash inflows and outflows during the half year were as follows:
- $254,701,000 was paid during the period for the acquisition of the ERG Gulf Coast assets (note: deposit of $9,438,000 was paid prior to 30 June 2011).
- $44,660,000 was paid (net of cash acquired) during the period to complete the acquisition of the Umiat assets (note: deposit of $4,719,000 was paid prior to 30 June 2011).
- $20,701,000 payments for exploration and evaluation, including drilling and seismic acquisition in South Australia ($14,118,000), exploration drilling at Teresa ($2,883,000) and the Great Northern Leases ($759,000)
- $40,075,000 payments for development activities, predominantly technology development costs including Gasifier 5 at Chinchilla ($12,659,000), Gasifier 6 in Wyoming ($3,130,000), Gulf Cost oil and gas ($2,446,000), Wyoming oil and gas ($2,363,000) and costs associated with the technology development team.
- $131,433,000 (US$130,000,000) received from the Reserve Based Lending facility.
- $11,812,000 paid for shares purchased under the Company's on-market share buy-back.
To view the complete Linc Energy Half Yearly Financial Report including all data, please refer to the following link below:
http://media.abnnewswire.net/media/en/docs/ASX-LNC-240526.pdf
Contact
Linc Energy Limited
T: +61-7-3229-0800
F: +61-7-3229-6800
WWW: www.lincenergy.com.au
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