EMBARGOED FOR RELEASE AT 0700 19 March 2013
CAIRN ENERGY PLC ("Cairn")
Preliminary Results Announcement
"Delivering value through exploration led growth"
HIGHLIGHTS
Simon Thomson, Chief Executive, Cairn Energy PLC said:
"Cairn delivered on its 2012 strategic objectives: cash was returned to shareholders re-gearing the Company to the drill bit; acquisitions created a balanced portfolio with growth potential; and the Group's frontier exploration position was expanded.
With a strong cash position and a disciplined approach to capital expenditure, we look forward to the start of our multi-well, multi-year operated exploration programme commencing in Q4 2013 targeting more than 3.5 billion boe of resource.
I believe the Company is well positioned to create significant value through our exploration led growth strategy in 2013 and 2014."
Atlantic Margin - Frontier exploration
Ø Planned multi-well frontier exploration drilling programme, subject to necessary approvals, over forthcoming 18 months targeting > 3.5 billion (bn) barrels of oil equivalent (boe) of mean un-risked gross prospective resource;
Ø Two to four operated exploration wells offshore Morocco (2013/2014)
Ø One or more operated exploration well(s) offshore Senegal (2013/2014)*
Ø Drilling decision for offshore Greenland in 2013 targeting an exploration well in 2014, subject to necessary approvals
Ø Farm-in as Operator (Cairn 65%) to the contiguous Sangomar, Sangomar Deep and Rufisque blocks offshore Senegal, subject to necessary regulatory approvals
UK and Norway - Mature basin exploration and appraisal
Ø Four non-operated scheduled exploration and appraisal wells - two of which are underway (2013)
Ø New interests in 10 licences acquired in bid rounds (2012/13)
Funding strength and flexibility
Ø Group net cash at 31 December 2012 of US$1.6bn
Ø ~10% residual shareholding in Cairn India Limited (CIL) valued at US$1.1bn at 31 December 2012
Pre-Development Projects
Ø Catcher and Kraken Field Development Plans (FDP) will be submitted H2 and H1 2013 respectively
* = A separate announcement on this transaction is available on www.cairnenergy.com
Enquiries:
Analysts/Investors
David Nisbet, Corporate Affairs |
Tel: 0131 475 3000
|
Media
Patrick Handley, David Litterick Brunswick Group LLP |
Tel: 0207 404 5959 |
Webcast
There will be a live audio webcast of the results presentation available to view on the website (www.cairnenergy.com) at 9am. This can be viewed on PC, Mac, iPad, iPhone and Android mobile devices.
An 'on demand' version of the webcast will be available on the website as soon as possible after the event. This can be viewed on PC, Mac, iPad, iPhone and Android mobile devices.
Presentation
The results presentation slides will be available on the website from 8:45am.
Conference call
You can listen to the results presentation by dialling in to a listen only conference call at 9am using the below dial-in details.
Dial-in details:
UK: 0800 368 0649
020 3059 8125
International: +44 20 3059 8125
A recording of the conference call will be available from 11am, Tuesday 19 March 2013 until Tuesday 26 March 2013.
Recording dial-in details:
UK: 0121 260 4861
International: +44 121 260 4861
Passcode: 1508151#
Transcript
A transcript of the results presentation will be available on the website on Wednesday 20 March 2013.
Chairman & CEO Statement
Corporate Overview
During 2012 Cairn delivered on its main strategic goal of positioning the Company for future growth.
The distribution of ~US$3.5bn to shareholders early in the year marked the culmination of a ~US$4.5bn capital return to shareholders over the past five years. The distribution also reduced the Company's equity base, re-gearing it to frontier exploration success. Additional proceeds were realised from subsequent share sales of our residual CIL shareholding throughout the year. These additional proceeds were retained as working capital to further strengthen the Company's cash position, fund the two corporate acquisitions made during the year and to build then take forward the frontier exploration portfolio. The demonstration of market liquidity of the CIL shareholding as a financial asset is relevant when it is considered that our remaining ~10% interest had a year-end market value of US$1.1bn.
The Company has remained focused on its vision to create an exploration led and sustainable cash generative oil and gas business offering shareholders exposure to material capital growth potential. By constructing a balanced portfolio of growth opportunities, whilst retaining a strong balance sheet, we are well placed to repeat the cycle of creating, adding and realising shareholder value.
The profit after tax for the year of $73 million (m) reflects foreign exchange gains and other finance income, offset against the costs of unsuccessful exploration activities.
The Company is in a strong position with Group net cash at 31 December 2012 of US$1.6bn and an ~10% residual shareholding in CIL valued at US$1.1bn.
The areas we have chosen for our exploration focus include the frontier basins along the Atlantic Margin and in the Mediterranean, as well as targeting new plays within the more mature UK North Sea and Norwegian continental shelf.
The corporate acquisitions during 2012 have provided non-operated interests in the pre-development Kraken, Catcher and Mariner oil fields located in the UK North Sea and have secured future long term cash flows.
Our clear focus is to operate exploration positions and opportunities which we believe have the most organic growth potential and where we have the experience, ability and knowledge to add most value. As a consequence, we are planning an extendable programme to drill multiple frontier exploration wells over the coming 18 months which will target > 3.5 bn boe of mean un-risked gross prospective resource within a total of "Yet to Find" potential in excess of 8.5 bn boe.
Atlantic Margin
Morocco
We operate two exploration permits in frontier acreage offshore Morocco - the primary exploration plays are the turbidite fan systems of Lower Cretaceous age in the Foum Draa permits and the Middle and Lower Jurassic shelf edge carbonates in the Juby Maritime permits.
Multiple leads and prospects have been identified in Foum Draa on pre-existing 3D seismic. One prospect is planned to be drilled in 2013 and the next prospect may be scheduled for drilling in 2014, subject to necessary approvals.
An Esso 1968/69 well discovered and tested 2,377 bopd of heavy oil in Upper Jurassic carbonates at Cap Juby on the Juby Maritime I permit. We believe significant exploration potential exists in the Middle Jurassic carbonates where a previously sub-optimally located well encountered 38° API oil shows. The 3D seismic over the Cap Juby structure is currently being reprocessed and an exploration well, subject to necessary approvals, is planned in 2013. Elsewhere, Cairn acquired a 680km² 3D seismic survey over a carbonate edge prospect in the Juby Maritime II permit in late 2012 which will be a candidate for an exploration well in 2013/2014.
Senegal
We are pleased to announce a farm-in as Operator (65%) to the Sangomar, Sangomar Deep and Rufisque frontier exploration blocks offshore Senegal held by FAR Limited (FAR), with Petrosen (the Senegal National Oil Company) as a Joint Venture (JV) partner, subject to regulatory approval. These blocks straddle the Mesozoic carbonate shelf edge and contain multiple play types and have an estimated gross mean un-risked "Yet to Find" prospective resource of > 1.5 bn boe.
It is the intention, subject to necessary approvals, to drill an exploration well on the 'L' prospect which has an estimated gross mean un-risked prospective resource of more than 250mmbbls in 2013/2014. Depending on the well results, further drilling can be anticipated. Cairn is to acquire its working interest operatorship by funding 100% of the costs of one exploration well to an investment cap. Thereafter exploration costs will be apportioned Cairn 72.2% (WI 65%), FAR 27.8% (WI 25%) and Petrosen 0.0% (WI 10%). As part of the transaction, Cairn will also pay 72.2% of costs incurred by FAR to date on the blocks, a total of ~US$10m.
Greenland
The Shell operated industry consortium shallow borehole programme undertaken in the summer of 2012 has for the first time established a stratigraphy for the Baffin Bay Basin. The boreholes additionally encountered good oil prone source rocks and reservoir quality sands in the Cretaceous section. Cairn also repeated and extended its 2011 geochemical survey in 2012 to give statistically more meaningful results. Evaluation of this work confirms the Melville Basin as having an active petroleum system, whilst recognising that the basin is undrilled. This conclusion also underpins the increased industry activity and interest in the region with a number of other operators acquiring seismic data during 2012.
It is estimated that the aggregate gross mean "Yet to Find" unrisked prospective resource of Cairn's licences offshore Greenland is > 6 bn boe.
Cairn's current focus in the region is on the Pitu block. Cairn (56.825%) with its joint venture partners Nunaoil (12.5%) and Statoil ASA (30.625%), the latter having farmed into Pitu in 2012. A drilling decision will be taken in 2013 targeting an exploration well in 2014, subject to necessary approvals.
As with all our operations, we ensure that we act responsibly, taking a high level of care and respect towards the people and environments where we work. For example, during the summer of 2012, a team undertook public consultations with the local communities located near the Pitu area. The information gathered during these meetings will inform our approach as we develop our plans for 2014.
Elsewhere in Greenland, we continue to evaluate the data acquired over the last few field seasons and will seek to farm-out certain areas and rationalise the portfolio.
The Greenland Government has now opened the blocks off the north east coast of Greenland for licencing. This area is the conjugate margin to northern Norway, where many major new finds have been made. Bid round 1 was exclusive to the oil majors of the Kanamas group (Shell, Chevron, ExxonMobil, Statoil, BP and Japan National Oil Corporation (JNOC)). Bid Round 2 will be open to any qualifying industry player.
UK and Norwegian North Sea & Norwegian Continental Shelf
The corporate acquisitions made in 2012 provide us with the platform to deliver solid and sustainable cash flow, as well as mature basin exploration opportunities in the Norwegian and UK North Sea. Furthermore, they bring a team with a wealth of exploration experience in the region that greatly widens our technical capability and ability to evaluate new opportunities.
The Skarfjell (Cairn 20%) oil discovery (well 35/9-7) made by Wintershall (UK North Sea) Ltd in April 2012 was immediately followed by a 3D seismic survey and appraisal continues with the down-dip 35/9-8 well currently operating (spudded February 2013). The operator's estimated gross 2C resource range for Skarfjell post discovery was between 60mmbbls and 160mmbbls. The current appraisal well is designed to test reservoir extent, thickness and quality down-dip as well as establish fluid content below the known "oil down to" in the discovery well. Resource estimates will be updated following the field appraisal.
The FDP was approved for the Mariner field in February 2013. The FDPs for the Kraken and Catcher Fields, operated by EnQuest and Premier Oil will be submitted H1 and H2 2013 respectively.
People
We would like to recognise and thank all the creative effort, hard work and commitment the management, employees and contractor teams working for Cairn have put in during our work in the last year.
We are delighted to report that Paul Mayland has been appointed Chief Operating Officer for Cairn, reporting directly to Simon Thomson.
We believe that to ensure we deliver our goals and provide shareholder value we must employ the right people in the right roles. We seek to ensure a diverse workforce and encourage women to pursue careers in our industry. At present, women comprise 22% of our board, 33% of our management and 49% of our staff across our whole organisation.
Outlook
Following the cash return to shareholders and the creation of a balanced portfolio of frontier exploration prospects, Cairn is well placed to deliver on its strategy to pursue exploration led growth.
We anticipate that the development of the Catcher and Kraken fields will lead to first oil and cash flow in 2016/17. Cairn will also participate in a number of non-operated exploration wells in the UK and Norway on an annual basis.
These foundations will help support a multi-year drilling campaign involving multiple and material exploration wells. The lower capital base achieved by the redistribution of cash following the realisation of value from past successes ideally positions shareholders to benefit from the enhanced gearing to future exploration success.
Operational Review
Operational Overview
Cairn has created a balanced portfolio of assets focused on operated exploration in the frontier basins along the Atlantic Margin and in the Mediterranean, complimented by mainly non-operated interests in the UK/Norway. We continually evaluate the asset base to ensure that we are realising value at appropriate times and retain the flexibility and agility to pursue additional new opportunities which fit our rigorous selection criteria and where we believe the opportunity exists to use our expertise to unlock value.
Atlantic Margin
Cairn has an exploration strategy along the Atlantic Margin focused on the multiple play types established following the breakup of a supercontinent. We currently have interests in the following:
Morocco
Cairn has established a position in both the Jurassic carbonate shelf and the emerging deep-water Mesozoic clastic exploration plays. The latter play is attracting industry interest, with other operators taking licences on both conjugate passive margins of this Atlantic Rift system (Morocco and offshore Nova Scotia). The frontier play Lower Cretaceous deep-water turbidites have not yet been drilled on either side of the Atlantic in these areas and the Jurassic carbonates are yet to benefit from state of the art seismic data.
Cairn farmed-in as Operator (50%) to Foum Draa permit offshore Morocco in August 2012. The permit is located 120km offshore southern Morocco in water depths of 500-2,000m and covers an area of ~3,300km2. Two key prospects have been identified on the permit, with significant follow-on potential in the event of drilling success. Commencement of the first exploration well is targeted for 2013 subject to necessary approvals. This will test the deep-water Cretaceous clastic plays and will target stratigraphically deeper objectives than have been previously penetrated along this margin. The gross mean prospective resource of the two prospects in the Foum Draa blocks is 142 mmbbls and 126 mmbbls.
The Nautical acquisition included the Juby Maritime permit which Cairn operates (37.5%), with joint venture partner Genel Energy plc. This licence includes the discovered Cap Juby heavy oil accumulation and a number of carbonate prospects. Light oil shows encountered in down-dip Cap Juby wells point to exploration upside. The blocks are located 60km offshore the Atlantic coastline of Morocco in water depths of 100-1,500m covering an area of 5,600km2. Plans are under way to drill an exploration well to the Middle and Lower Jurassic in this permit subject to the necessary approvals in 2013/2014. Reprocessing of existing 3D data and processing of a new 680km2 3D seismic survey is under way. The resulting data is scheduled to be ready for interpretation later this year. The Cap Juby Middle Jurassic prospect gross mean prospective resource exceeds 70 mmbbls.
As with all its operations, Cairn is working responsibly with the Moroccan authorities and other stakeholders to ensure that it understands the environment and communities where it operates and to provide assurance that it will operate safely and efficiently. To this end Cairn initiated its Environmental Impact Assessment (EIA) for the planned drilling programme at the end of 2012.
Senegal
Cairn has agreed a farm-in (65% interest) as operator with JV partners FAR and Petrosen, to the Sangomar, Sangomar Deep and the Rufisque blocks, offshore Senegal. The planned exploration drilling on the block is targeted, subject to necessary approvals, for late 2013/2014.
The three blocks cover an area of ~7,490km2 near shore to deep water exploration over the shelf, slope and basin floor of the Senegalese portion of the productive Mauritania-Senegal-Guinea-Bissau Basin. The acreage is covered by a 2,050km2 3D seismic survey and a number of play types, leads and prospects have been identified. The dual objective 'L' prospect in moderate water depth which is targeted for drilling late 2013/2014 has an estimated consolidated gross mean un-risked prospective resource of >250mmbbls.
Greenland
Cairn is encouraged with its acreage offshore Greenland. We are confident that all the elements for success are in place and will ultimately support the views of the US Geological Survey (USGS) that the region is home to one of the top ten yet-to-find hydrocarbon resources in the world. Cairn currently holds licences across 11 blocks offshore Greenland with a combined area of 102,000km2. The focus of its current activity in the region is in the Pitu licence block. Elsewhere in the region, Cairn may seek to pre-qualify for the second East Greenland Bid Round later this year.
Last year, the level of other operator activity in Baffin Bay considerably increased with the acquisition of both 2D and 3D seismic. The industry group, GOIA (Greenland Oil Industry Association), of which Cairn is a founding member, continues to work to develop and improve industry collaborations offshore Greenland.
In Baffin Bay, Cairn participated in a joint shallow borehole programme operated by Shell on behalf of an industry consortium which includes Conoco Phillips, GdF, Nunaoil, Maersk, Tullow and Statoil. The 11 boreholes completed provide valuable information to help stratigraphic correlations across the undrilled Melville Basin.
Cairn and its joint venture partners, Nunaoil and Statoil are encouraged by the opportunity in the Pitu exploration block, with combined prospects within the 3D area confirming a potential multi-billion boe prospective resource. The mapping and evaluation of the 3D seismic has identified a number of prospects. The main PY complex is a composite of three stratigraphical objectives and has a consolidated gross un-risked mean prospective resource estimate of >3 bn boe. The current combined gross un-risked mean prospective resource estimate for the Pitu Block as a whole is >5 bn boe. A drilling decision will be taken in 2013 targeting an exploration well in 2014, to test this prospectivity with a well on the main structural high, subject to necessary approvals and rig availability. The Pitu block is located ~100km offshore north west Greenland in water depths ranging from 400m to 800m.
During 2012, Cairn visited local communities near Pitu to better understand any concerns and their hopes for future activities. This study is also helping us to develop social plans which effectively manage the potential impacts and concerns from the local communities.
Cairn's other operational work in the area included conducting a number of marine activities including a geochemical sea bed survey, installing a buoy to record met-ocean data and collecting satellite positioning data.
Mediterranean
Cairn holds licences of approximately 3,175km² in the Valencia Basin, offshore Spain and is in the early stages of its exploration programme. The authorisation for acquiring 3D seismic is under way. Applications for further acreage offshore Spain (in the Gulf of Lion off the Catalonian coast) have been submitted.
In December 2012, Cairn entered into an Exploration Study Agreement (ESA) with the Government of Malta. The ESA covers an initial two year period with geological studies, reprocessing of existing and acquisition of new 2D seismic data and limited capital works, with the right to negotiate a production sharing contract on an exclusive basis thereafter. The agreement can be extended to a third year to acquire 3D seismic. The blocks, which are in the Sicily channel, cover an area of ~6,000km² and contain a number of existing leads.
UK and Norwegian North Sea & Norwegian Continental Shelf
Cairn has built a strong exploration position in the UK and Norway during 2012, through a combination of acquisitions, farm-ins and licence rounds. The North Sea team were involved in nine of the top 15 discoveries in the Norwegian North Sea over the past seven years, and four of the top 11 discoveries in the UK North Sea over the past five years.
We now have interests in exploration and appraisal blocks in the UK and Norwegian North Sea that include the pre-development oil fields Catcher (greater Catcher area), Kraken and Mariner.
The Greater Catcher area (Cairn 30%) comprises excellent quality injectite reservoir sands. We continue to work closely with the operator (Premier Oil Plc) and joint venture partner (Wintershall (UK North Sea) Ltd) on the sub-surface interpretation and front end engineering of the development concept, ahead of submitting a FDP expected H2 2013.
Cairn holds a 25% interest in the Kraken oil field. The Kraken oil sands are very high quality reservoirs. Further appraisal drilling is planned in Q2 to better define the field size and we anticipate submitting a FDP for approval in H1 2013.
To the immediate west of Kraken, Cairn operates (100%) the 9/1a block where the "Yet to Find" potential is estimated to be in the 50 to 250 mmbbls range.
Mariner (Cairn 6%) is one of the largest undeveloped fields in the UK North Sea. The FDP was approved by the Department of Energy and Climate Change (DECC) in February 2013. Consequently, Cairn has booked 16 mmbbls of 2P reserves. Cairn has also an 80% operated interest in block 9/11c to the south into which the Mariner field may well extend.
During the remainder of H1 2013, the following exploration and appraisal wells will be drilled: Frode (Cairn 28.5%), Skarfjell (Cairn 20%), Kraken (Cairn 25%) and Bonneville (Cairn 30%).
In Q4 2012, Cairn was successful in being awarded additional interests in eight licences in the UK 27th licence round and more recently was awarded interests in two further licences in the Norwegian North Sea in the APA (Awards in Predefined Areas) licence round. In January 2013 Cairn farmed-in (30%) to the P1763 Aragon prospect in the UK North Sea.
Cairn currently holds interests in a total of 36 North Sea licences and has an active exploration and appraisal programme planned for 2013, targeting potential net mean resources of 26mmboe (risked) and 62mmboe (un-risked).
Group Booked 2P Reserves
The Group's proven plus probable (2P) reserves as at 31 December 2012 on a net working interest basis have increased to 16.0mmboe primarily due to interests in the Mariner offshore field (15.9mmboe) and one further onshore field (0.1mmboe) due to the acquisition of Nautical Petroleum.
It is expected that further reserves additions will be made during 2013 as the Catcher and Kraken fields achieve FDP approval.
Financial Review
The successful completion of the disposal of Cairn's majority interest in Cairn India Limited (CIL) in December 2011 saw the realisation of value from the business built in India over a 15 year period. The subsequent return to shareholders of a significant proportion of that value, ~US$3.5bn, represented the completion of one full cycle of the Group's financial strategy of invest to create value, realise that value, then return it to shareholders. The retention of $1.1bn of the value realised, marked the beginning of a fresh cycle of that same strategy.
Throughout 2012, we have had a clear goal of establishing a balanced portfolio of assets, which was the model for our success in South Asia. We started by focusing on assets which would provide financial underpinning, downside protection and sustainability. These were secured through the two corporate transactions completed during the year. We will continue to review that part of the portfolio, screening opportunities which offer the right risk/reward profile, with the goal of securing ongoing operating cash flow to fund our core activity of exploration. The equity returns on developments will be enhanced through the introduction of the right level of debt at the appropriate time, optimising the funds available to invest in exploration led growth.
We have also moved quickly to introduce attractive exploration opportunities. Our focus on the Atlantic Margin is now served both through our farm-in to the Foum Draa block in Morocco and in the Juby Maritime block acquired with the Nautical portfolio. In addition Cairn has agreed a proposed farm-in (65% interest) as operator with JV partners FAR and Petrosen, to the Sangomar, Sangomar Deep and the Rufisque blocks, offshore Senegal.
Oil and Gas Assets
Atlantic Margin - Morocco
Cairn announced the farm-in to the Foum Draa licence offshore Morocco during 2012 which is adjacent to the Juby Maritime licence. The total acreage held by Cairn offshore Morocco is ~8,900km2. Exploration drilling is targeted for 2013.
Atlantic Margin - Greenland
During 2012, Cairn completed the farm-out of a 30.625% working interest in the Pitu Baffin Bay Block, offshore North West Greenland to Statoil. The cash proceeds received of $33m were offset against the carrying value of this block.
Planned operations for 2013 include the well abandonment on Greenland wells relating to the 2010 and 2011 drilling campaigns and US$25m is provided for this work, which is expected to commence in July.
UK and Norwegian North Sea & Norwegian Continental Shelf
The acquisition of Agora in May for US$453m, funded through a mixture of cash and shares, followed by that of Nautical in August for US$648m in cash, has brought both exploration and pre-development assets into the Cairn portfolio. Cash acquired on the acquisitions of US$124m reduced the net purchase price to US$977m, of which $721m was in cash.
The combined acquisition cost of the two transactions was broadly in line with the fair values attributed to the underlying assets acquired. However, acquisition accounting for a business combination under IFRS requires the deferred tax provision to be based on these revised carrying values of the assets. For accounting purposes, the deferred tax liability created reduced the value of the net assets acquired by US$485m and resulted in the recognition of goodwill on acquisition. Following these accounting adjustments, Cairn's Balance Sheet additions include US$474m of goodwill from the transactions.
Goodwill is allocated to the North Sea operating segment and was tested for impairment at the Balance Sheet date. Though no impairment was identified, the recoverable amount of the underlying assets was not significantly above their carrying value. A key assumption in the impairment test was the fair value attributed to the Skarfjell discovery, where an appraisal well is currently operating. The results of this well are due shortly and a review of the carrying value of goodwill will be carried out at that stage. Any impairment arising would be reflected in our interim results for the six months to June 2013.
Of the assets acquired, the Catcher and Kraken discoveries are now at a late pre-development stage while the approval of the FID in December 2012 by JV partners and by DECC in February 2013 for the Mariner field has resulted in a re-classification of this asset to 'development' and reserves being booked. The Skarfjell discovery, which occurred after the acquisition of Agora had been agreed but before it completed, added further successful exploration to Cairn's Balance Sheet. At 31 December, US$849m was held in intangible exploration/appraisal assets and US$71m in property plant and equipment relating to North Sea properties.
Since the acquisitions completed, seven exploration wells have been drilled in the North Sea without commercial success and a charge of US$159m has been made to the Income Statement. During the first half of 2013 it is anticipated that a further four exploration and appraisal wells will be drilled in this region.
Financial Assets and Working Capital
Cairn's Balance Sheet strength is underpinned by its cash and listed investment assets which are available to fund planned and future exploration, appraisal and development opportunities.
At the year end the Group's remaining ~10% holding in CIL was valued at US$1.1bn. During 2012 Cairn disposed of an aggregate ~11.5% of its shareholding in two separate on market transactions in June and September. These sales generated US$1.3bn of net cash inflows.
As a result of the return of ~US$3.5bn in cash to shareholders in the first half of 2012, the Group's net cash balance of $1.6bn at 31 December 2012 is significantly lower than the equivalent 2011 figure.
The Group has bank borrowings of US$30m. These short term loans are drawn against future tax refunds receivable in Norway on qualifying exploration expenditure incurred in the year.
Group capital expenditure for the year on exploration, appraisal and pre-development activities was US$139m.
Results for the Year
The profit after tax for the year of US$73m reflects foreign exchange gains and other finance income and the net profit after tax on disposal of financial assets. This is offset by the costs of unsuccessful exploration activities and administration costs.
Unsuccessful exploration costs of US$159m predominantly relate to North Sea drilling activity. Wells drilled include Kakelborg and Geite in the Norwegian North Sea and Tybalt and Spaniards in the UK North Sea. The costs written off include the fair value allocated to these wells at the time of the Agora and Nautical acquisitions.
One-off expenses of US$11m were incurred on the corporate acquisitions. Administration costs of US$15m incurred in London and Stavanger offices in the year also includes non-recurring reorganisation costs and termination payments. The remaining head office cost of US$38m, up from US$33m in 2011, reflects the corporate focus of activities during 2012.
The sale of an aggregate ~11.5% of the Group's holding in CIL in two separate transactions during the year resulted in an accounting loss of US$82m, reflecting the movement in the price realised from that recognised at the date of completion of the transaction with Vedanta Resources. As both sales took place on-market, no tax liability arose and therefore a release of US$145m has been made from the related deferred taxation provision.
Finance income of US$136m includes exchange gains of US$112m: US$62m of these gains were due to the conversion of proceeds received in USD from the sale of a majority interest in CIL to Vedanta and held in GBP until the cash return to shareholders in February and April 2012. A further US$50m of exchange gains arose largely on inter-company positions within the Group. Other finance income includes the interim dividend of US$18m received from CIL in November.
Taxation credits for the year of US$267m include US$145m from the CIL sales noted above. In addition, US$83m was released from the deferred tax provision primarily as a result of the write off of unsuccessful exploration costs. A further US$39m of current tax credits relate to Cairn's Norwegian operations. At the year end, the closing deferred tax provisions total US$531m and include US$119m relating to the residual shareholding in CIL and US$412m on oil and gas assets acquired through acquisitions.
Principal Risks & Uncertainties
Following the completion of the disposal of a majority shareholding in CIL and the return of cash to shareholders in H1 2012, the Company entered a new phase; the building of a balanced portfolio with exploration opportunities in frontier and mature basins plus development assets which, when onstream, will provide the cash flow to fund future exploration. During 2012, this included the acquisition of two companies and the integration of their assets and staff, and the evaluation of a number of other new investment opportunities. As the Company continues its strategy of targeting and realising value from exploration success, the principal risks and uncertainties facing the Group at the end of 2012 in relation to the Group's financial and operational performance are as follows:
Ø Lack of near-term 'drillable' frontier exploration opportunities
Ø Lack of exploration success
Ø Monetisation of Cairn India shares at the right price and the right time
Ø Negative stakeholder reaction to operations
Country, Currency and Liquidity Risks
Cairn's core business is conducted and funded in US Dollars, the functional currency of the majority of companies within the Cairn Group. The Group's remaining investment in CIL, though denominated in Indian Rupees, is underpinned by US Dollar valued assets. The acquisition of Agora and Nautical introduced subsidiaries with Norwegian NOK and UK Sterling functional currencies though neither bring any significant currency nor country exposure to the Group, with the only additional balance sheet exposure resulting from the retranslation of the functional currency into presentational US Dollar. Cairn's balance sheet strength and significant cash reserves ensure that the Group is liquid. Liquidity risk is closely monitored through detailed cash forecasting and scenario planning and policies are in place to restrict the concentration risk of funds placed on deposit. The Group's financial and non-financial assets have been assessed for impairment at the reporting date with no material impairment being identified.
Change of Auditors
During 2012, Cairn competitively tendered the external audit service contract. As a result of the tender, PwC has been selected by the Board as the Company's auditors. Ernst & Young will consequently resign their position as auditors on completion of their work for this year and PwC will be appointed by the Board to commence their engagement from this time. The Board would like to thank Ernst & Young for the excellent services provided to the Company over many years up to and including the 2012 year end audit. Shareholder approval will be sought at the AGM to formally appoint PwC as the Company's external auditor.
Financial Outlook
With net cash plus our investment in Cairn India totalling US$2.7bn at the year end, the Group remains well funded.
We firmly believe that our reduced equity base, following the return of cash to shareholders, means that we can generate significant returns for our shareholders with exploration success. We remain highly focused on investing in the right assets at the right cost to deliver that success.
Operating Segments
For management purposes, the operations of the Cairn Group are organised based on geographical regions. The Cairn Group's operations currently focus on new exploration activities in four key operating segments: North West Europe - North Sea, Atlantic Margin - Greenland, Atlantic Margin - Morocco and the Mediterranean.
Geographical regions may be combined into regional business units. Each business unit is headed by its own regional director and management monitors the results of each separately for the purposes of making decisions about resource allocation and performance assessment.
North West Europe - North Sea
The corporate acquisitions in the year, with primary interests in the UK and Norwegian North Sea, provide Cairn with a core platform for growth from organic, near-term exploration, appraisal and development activities, ultimately leading to sustainable cash flow.
Atlantic Margin - Greenland
Cairn's Greenland assets have been the focus of much of the Groups exploration activity in recent years. Further exploration drilling is planned in 2014 subject to the necessary approvals being received.
Other
The Atlantic Margin - Morocco and Mediterranean operating segments results have been combined into the "Other Cairn Energy" reportable segment together with the Group's remain exploration and corporate assets.
New exploration opportunities in Morocco have been added through corporate acquisitions and farm-in agreements during the year. Cairn's presence in the Atlantic Margin has increased post year end with the Senegal farm-in.
The discontinued operations of the Cairn India Group were a separate business unit up to the point of disposal in 2011.
Geographical information: Non-current assets
|
|
31 December 2012 |
31 December 2011 |
|
|
$m |
$m |
|
|
|
|
Atlantic Margin - Greenland |
|
44.7 |
79.7 |
North West Europe - North Sea |
|
1,407.3 |
- |
Mediterranean |
|
3.8 |
1.6 |
Atlantic Margin - Morocco |
|
2.4 |
- |
UK Corporate assets |
|
4.7 |
2.2 |
|
|
|
|
|
|
1,462.9 |
83.5 |
Non-current assets for this purpose consist of intangible exploration/appraisal assets; property, plant & equipment - development/producing assets; property, plant & equipment - other; and, intangible assets - other.
5.1 Segmental Analysis (continued)
The segment results for the year ended 31 December 2012 are as follows:
|
North West Europe - North Sea |
Atlantic Margin - Greenland |
Other Cairn Energy Group |
Total 2012 |
|
$m |
$m |
$m |
$m |
|
|
|
|
|
Pre-award costs |
(5.4) |
(3.4) |
(9.3) |
(18.1) |
Unsuccessful exploration costs |
(159.0) |
6.1 |
(5.8) |
(158.7) |
Depreciation |
(0.6) |
(0.1) |
(0.8) |
(1.5) |
Amortisation |
- |
- |
(2.0) |
(2.0) |
Other expenses and administrative expenses |
(14.8) |
(0.2) |
(46.0) |
(61.0) |
Impairment |
- |
(5.8) |
(0.2) |
(6.0) |
|
|
|
|
|
Operating loss |
(179.8) |
(3.4) |
(64.1) |
(247.3) |
|
|
|
|
|
Loss on sale of available-for-sale asset |
- |
- |
(81.5) |
(81.5) |
Interest income |
1.2 |
- |
4.9 |
6.1 |
Interest expense |
(0.8) |
- |
- |
(0.8) |
Other finance income and costs |
(0.9) |
(0.2) |
130.4 |
129.3 |
|
|
|
|
|
Loss before taxation |
(180.3) |
(3.6) |
(10.3) |
(194.2) |
|
|
|
|
|
Taxation credit |
122.3 |
- |
144.5 |
266.8 |
|
|
|
|
|
|
|
|
|
|
(Loss)/profit after taxation |
(58.0) |
(3.6) |
134.2 |
72.6 |
|
|
|
|
|
Capital expenditure |
1,546.9 |
(2.1) |
16.0 |
1,560.8 |
5.1 Segmental Analysis (continued)
The segment results for the year ended 31 December 2011 are as follows:
|
Atlantic Margin - Greenland |
Other Cairn Energy Group |
Total Continuing Cairn Energy Group |
Cairn India Group |
Total |
|
$m |
$m |
$m |
$m |
$m |
|
|
|
|
|
|
Revenue from external customers |
- |
- |
- |
2,307.8 |
2,307.8 |
Reversal of revenue provision |
- |
- |
- |
64.0 |
64.0 |
Other expenses and production costs |
- |
2.7 |
2.7 |
(351.7) |
(349.0) |
Pre-award costs |
(1.6) |
(15.1) |
(16.7) |
(3.2) |
(19.9) |
Unsuccessful exploration costs |
(941.8) |
- |
(941.8) |
(4.4) |
(946.2) |
Depletion and decommissioning charge |
- |
- |
- |
(377.7) |
(377.7) |
|
|
|
|
|
|
Gross (loss)/profit |
(943.4) |
(12.4) |
(955.8) |
1,634.8 |
679.0 |
|
|
|
|
|
|
Depreciation |
(0.1) |
(0.9) |
(1.0) |
(3.5) |
(4.5) |
Amortisation |
- |
(2.7) |
(2.7) |
(3.4) |
(6.1) |
Other income and administrative expenses |
(0.4) |
(35.4) |
(35.8) |
(39.5) |
(75.3) |
Impairment |
(137.7) |
(3.3) |
(141.0) |
- |
(141.0) |
|
|
|
|
|
|
Operating (loss)/profit |
(1,081.6) |
(54.7) |
(1,136.3) |
1,588.4 |
452.1 |
|
|
|
|
|
|
Interest income |
- |
2.2 |
2.2 |
54.6 |
56.8 |
Interest expense |
- |
(1.1) |
(1.1) |
(20.9) |
(22.0) |
Other finance income and costs |
0.9 |
(55.0) |
(54.1) |
(62.7) |
(116.8) |
|
|
|
|
|
|
(Loss)/profit before taxation |
(1,080.7) |
(108.6) |
(1,189.3) |
1,559.4 |
370.1 |
|
|
|
|
|
|
Taxation (charge)/credit |
- |
(0.1) |
(0.1) |
(330.7) |
(330.8) |
|
|
|
|
|
|
(Loss)/profit after taxation |
(1,080.7) |
(108.7) |
(1,189.4) |
1,228.7 |
39.3 |
|
|
|
|
|
|
Adjustments to reconcile to the financial statements |
|
|
|
|
|
Inventory |
- |
- |
- |
7.2 |
7.2 |
Depletion, depreciation and amortisation |
- |
- |
- |
384.6 |
384.6 |
Deferred taxation |
- |
- |
- |
(258.1) |
(258.1) |
|
|
|
|
|
|
(Loss)/profit after taxation |
(1,080.7) |
(108.7) |
(1,189.4) |
1,362.4 |
173.0 |
|
|
|
|
|
|
Gain on sale of subsidiary |
- |
- |
- |
5,487.7 |
5,487.7 |
Tax on gain on sale of subsidiary |
- |
- |
- |
(1,095.5) |
(1,095.5) |
Reported (loss)/profit for the year |
(1,080.7) |
(108.7) |
(1,189.4) |
5,754.6 |
4,565.2 |
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
Equity holders of the parent |
(1,080.7) |
(108.7) |
(1,189.4) |
5,290.5 |
4,101.1 |
Non-controlling interests |
- |
- |
- |
464.1 |
464.1 |
|
|
|
|
|
|
Capital expenditure |
836.2 |
4.9 |
841.1 |
563.4 |
1,404.5 |
5.2 Finance Income
|
|
2012 |
2011 |
|
|
$m |
$m |
|
|
|
|
|
|
|
|
Bank interest receivable |
|
6.1 |
2.2 |
Dividends receivable |
|
18.0 |
- |
Exchange gain |
|
111.8 |
- |
|
|
135.9 |
2.2 |
5.3 Finance Costs
|
|
2012 |
2011 |
|
|
$m |
$m |
|
|
|
|
Bank loan and overdraft interest |
|
(0.8) |
(1.1) |
Other finance charges |
|
(0.5) |
(12.8) |
Exchange loss |
|
- |
(41.3) |
|
|
(1.3) |
(55.2) |
5.4 Taxation on Loss
a) Analysis of tax (credit)/charge in year
Current tax: |
|
2012 $m |
2011 $m |
|
|
|
|
UK corporation tax |
|
|
|
Tax on profits at 24.5% (2011: 26.49%) |
|
- |
2.1 |
|
|
|
|
Foreign Tax |
|
|
|
Refund of Norwegian exploration expenses |
|
(39.4) |
- |
Withholding taxes deducted at source |
|
0.1 |
- |
Indian Corporate Income Tax on profits for the year (2011: 42.08%) |
|
- |
10.9 |
Indian Regular Tax on profits for the year (2011: 32.65%) |
|
- |
2.5 |
Indian Minimum Alternate Tax on profits for the year (2011: 19.32%) |
|
- |
279.9 |
Indian tax on capital gains (2011: 21.01%) |
|
- |
590.3 |
|
|
(39.3) |
883.6 |
Total current tax (credit)/charge |
|
(39.3) |
885.7 |
Deferred tax: |
|
|
|
United Kingdom |
|
|
|
Temporary differences in respect of non-current assets |
|
(64.4) |
- |
Losses |
|
(10.6) |
- |
Other temporary differences |
|
0.2 |
- |
|
|
|
|
|
|
(74.8) |
- |
India |
|
|
|
Temporary differences in respect of non-current assets |
|
(144.6) |
798.7 |
|
|
|
|
Norway |
|
|
|
Temporary differences in respect of non-current assets |
|
(6.7) |
- |
Losses |
|
(1.0) |
- |
Other temporary differences |
|
(0.4) |
- |
|
|
|
|
|
|
(8.1) |
- |
|
|
|
|
Total deferred tax (credit)/charge |
|
(227.5) |
798.7 |
Tax (credit)/charge on profit/(loss) |
|
(266.8) |
1,684.4 |
5.4 Taxation on Loss (continued)
The tax (credit)/charge to the income statement is disclosed as follows:
|
|
2012 $m |
2011 $m |
|
|
|
|
Tax (credit)/charge on continuing operations |
|
(266.8) |
0.1 |
Tax charge on discontinued operations |
|
- |
1,684.3 |
|
|
(266.8) |
1,684.4 |
b) Factors affecting tax (credit)/charge for year
A reconciliation of income tax expense applicable to loss before income tax at the applicable tax rate to income tax expense at the Group's effective income tax rate is as follows:
|
2012 $m |
2011 $m |
|
|
|
Loss from continuing operations before tax |
(194.2) |
(1,189.3) |
Profit from discontinued operations before tax |
- |
7,438.8 |
|
|
|
(Loss)/profit before taxation |
(194.2) |
6,249.5 |
|
|
|
Tax at the average UK rate of corporation tax of 24.50% (2011: 26.49%) |
(47.6) |
1,655.5 |
|
|
|
Effects of: |
|
|
Temporary differences not recognised |
(16.7) |
308.0 |
Overseas deferred tax in respect of available for sale financial asset |
(144.6) |
- |
Non-deductible loss on disposal of available for sale financial asset |
20.0 |
- |
Special tax rates and reliefs applying to oil and gas activities |
(81.1) |
- |
Share-based payments |
1.9 |
(10.1) |
Foreign exchange movements |
(0.6) |
0.2 |
Non-deductible expenses |
8.5 |
101.6 |
Non-taxable income |
(4.4) |
(102.4) |
Impact of overseas tax rates |
(2.3) |
127.2 |
Withholding tax |
0.1 |
- |
Disposal of subsidiary charged at Capital Gains Tax rate |
- |
(159.0) |
Indian tax holiday |
- |
(354.4) |
Minimum Alternate Tax payable |
- |
117.8 |
|
|
|
Total tax charge/(credit) |
(266.8) |
1,684.4 |
The reconciliation shown above has been based on the UK standard rate of corporation tax for 2012 of 24.5% (2011: 26.49%). In previous years, the reconciliation was based on the weighted average rate of corporate taxation applying to the group based on its worldwide activities for the year concerned. The change has been adopted to facilitate comparison between the tax expenses or credits applying to different years. The 2011 reconciliation shown above has been restated as a result of this change.
The UK main rate of corporation tax was 26% prior to 1 April 2012, and 24% from that date onwards. The reduction in the tax rate from 26% to 24% has resulted in an average rate of corporation tax of 24.5% for the year ended 31 December 2012, as shown above. The rate will reduce to 23% on 1 April 2013 and to 21% on 1 April 2014.
5.4 Taxation on Loss (continued)
c) Factors that may affect future corporation tax charges
At 31 December 2012, Cairn had losses of approximately $64.8m (2011: nil) available for offset against future Ring Fence trading profits chargeable to UK Corporation Tax. In addition there are surplus management expenses of $319.6m (2011: $324.1m) and non-trade deficits of $0.7m (2011: $66.5m) available for offset against future investment income. Under UK tax law, tax losses may generally be carried forward indefinitely.
At 31 December 2012, Cairn had Norwegian tax losses carried forward of $7.3m (2011: nil), all of which is relievable at the ordinary Norwegian corporate tax rate of 28%, and $3.2m (2011: nil) is also relievable at the additional special Norwegian tax rate of 50% applicable to certain profits from oil and gas activities. These losses can be carried forward indefinitely for use against future profits.
Note 5.4(d) provides further information in connection with losses recognised for deferred tax purposes.
As at 31 December 2012, it is anticipated that the Group will be eligible for Field Allowances in the UK which will reduce the Ring Fence profits chargeable to Supplementary Charge. Field Allowances will only be granted when DECC approves a field development plan and claimed when production commences.
d) Reconciliation to deferred tax liabilities
|
|
|
Group $m |
|
|
|
|
At 1 January 2011 |
|
|
- |
Initial recognition of deferred tax provision on available-for-sale financial asset |
|
|
(273.9) |
Deferred tax credit on movement in fair value of available-for-sale financial assets recognised in other comprehensive income |
|
|
19.8 |
At 1 January 2012 |
|
|
(254.1) |
|
|
|
|
Deferred tax on fair value arising from business combinations |
|
|
(493.7) |
Credit to the income statement |
|
|
227.5 |
Deferred tax credit on movement in fair value of available-for-sale financial assets recognised in other comprehensive income |
|
|
(9.7) |
Exchange difference arising |
|
|
(0.9) |
At 31 December 2012 |
|
|
(530.9) |
|
|
|
|
|
|
|
|
As at 31 December 2012, the Group had a deferred tax asset of $0.3m (2011: $0.3m) in respect of future UK corporation tax deductions for equity-based remuneration. This asset has not been recognised as it is not considered probable that there will be sufficient profits to utilise these tax deductions.
As at the Balance Sheet date, a deferred tax asset was not recognised in respect of UK tax losses of $320.3 m (2011: $390.6m) (Company: $156.3m; 2011: $217.4m) where it is not probable that they can be utilised in future periods. UK tax losses of $73.4m (2011: nil) (company: nil; 2011: nil) attributable to UK Ring Fence trading activity, and Norwegian tax losses of $7.3m (2011: nil) have been offset against the deferred tax liability arising from business combinations during the year.