Northern Petroleum Plc – Annual Report and Accounts 2016

24 Aprile, 2017


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2016 proved to be a pivotal year for the Group despite the continuing poor industry climate. The year started with a production acquisition in Canada requiring very low capital outlay and ended with a new strategic investor, a joint venture partner across the portfolio and a strengthened balance sheet that will enable growth from the existing asset base.

Early in 2016 the oil price dipped to a low of $27 for West Texas Intermediate before recovering later in the year and finishing 2016 at over $53. The low prices early in the year caused an extreme reaction within the industry with companies being forced into insolvency and further job losses both on the operator side and in the service sector. This downturn, which started in 2014, has become the most prolonged in industry history and has caused fundamental changes throughout the sector. As a result, opportunities have become available to those companies that have survived and have the balance sheet and strategic relationships to grow both through acquisition and development of existing acreage.

For the last two years the Group has been concentrating on establishing a platform that will enable growth when the business environment improves. Our strategy of production led growth has provided the framework to focus on acquiring low cost production with room for both production and reserves growth in the short and medium term.

In line with this strategy and after careful consideration of different opportunities, the Group completed the acquisition of a producing asset with strong synergies to the existing acreage in northern Alberta in January 2016. The acquisition enhanced our strategy of profitable production, effective cost management and growth in reserves. We remain committed to this strategy which we firmly believe provides the right foundation for continued growth.

The acquired assets are in the Rainbow area of northern Alberta, approximately 15 miles from the Group’s existing assets in the Virgo area. At the time of acquisition, the Rainbow Assets were producing

approximately 150 boepd. During the asset evaluation stage the Group’s technical team identified a number of well recovery opportunities, that when implemented through a successful well intervention campaign, increased production to more than 400 boepd by the end of March 2016.

Following the investment programme in 2016, production for the year averaged 290 boepd. At this production level a large proportion of operating costs relate to the fixed costs of the facilities. The planned increase in production in 2017 will not lead to an increase in fixed costs

and therefore operating cost per barrel will reduce, allowing the Group to invest the additional net income in Canada as well as support continuing efforts in Italy.

Following the acquisition of the Rainbow Assets, the technical work and capital investment in the assets allowed the Group’s reserve auditors to recognise additional potential with certified Proven and Probable reserves increasing by more than 30 per cent. At the end of September 2016, 2P reserves were 1.9 mmboe, before the 25 per cent. working interest sale to H2P. These existing reserves provide the inventory that will sustain profitable production growth in the years ahead.

In Italy, the political environment was very active in 2016 with two national referenda; the second, in December 2016, leading to defeat for the Government and the resignation of the Prime Minister. As a result, progress for the Italian oil and gas industry has been slow, but the Group has advanced, with Shell Italia, the operator of our interest in Cascina Alberto onshore northern Italy, planning a 2D seismic acquisition programme which is now expected to occur in 2018.

Additionally, the appeals made against the approval of the Group’s Environment Impact Assessments offshore in the southern Adriatic, were heard and rejected, leaving the path clear to acquire 3D seismic in the F.R39 and F.R40 permits. This allowed the Ministry of Economic Development to progress the award of the application areas, also in the southern Adriatic, which are expected to be awarded this year.

Despite the political upheaval in Italy we remain focused on creating value from our Italian portfolio and we expect to be able to report firm activity before the end of 2017.

In conjunction with the work on the Group assets, ensuring that operational and administrative costs were managed and maintained at a low level was a key goal for the year. Administrative expenses were again reduced in 2016 with a total of $2.3 million for the whole Group, versus $4.0 million in 2015. This has been achieved while maintaining the ability to effectively manage the existing assets and pursue further opportunities for growth. Operating expenses have been constantly under review throughout the year and a number of initiatives have been started that should lead to a reduction in costs in 2017.

Throughout the year we recognised that both the Canadian and Italian assets would need more investment to be able to reach their potential. As a result, discussions were held with a number of potential investors with a view to bringing in a strategic investor along with existing shareholders. The discussions focused on the production potential and cashflow generation of the Canadian assets and proved attractive to investors with a strong industry background.

In November 2016, having pursued a number of different potential financing initiatives, the Group agreed a broad based strategic investment by H2P, both at the asset and corporate level.

A 25 per cent. interest in the Canadian assets was sold to H2P for a $2.0 million cash consideration and the provision of $0.25 million worth of stimulation services, by Blue Spark Energy Inc, a sister company of H2P.

A 10 per cent. and a 25 per cent. interest in the southern Adriatic permits and the Australian permit respectively were also sold for $0.5 million, with completion subject to regulatory approval.

In conjunction with these asset investments, H2P subscribed for ordinary shares raising gross proceeds of $4.1 million. Existing and new institutional shareholders also subscribed for ordinary shares contributing proceeds of $2.2 million. An oversubscribed open offer to existing shareholders, on the same terms as the direct subscription, raised a further $0.9 million which resulted in a total equity funds raised of $7.2 million, of which $1.8 million was received post year end.

The introduction of H2P as a strategic investor at both the asset level and as a major shareholder marks a step change for the Group. The continued support from other key shareholders, Cavendish Asset Management and City Financial, alongside our retail shareholders gives the Group a solid financial foundation from which to grow our production in Canada and develop our Italian portfolio.

At the end of 2016, the Board was enhanced with the appointment of Campbell Airlie as a Nonexecutive Director. Campbell provides a wealth of industry experience to the Board, particularly from an engineering perspective and bolsters the technical rigour given to the executive management and staff.

The work performed in 2016 has positioned the Group to be able to grow from the existing asset base. The capital from new and existing shareholders along with the funds from the disposal of certain assets has provided the Group with a strong balance sheet and will allow the potential of the assets to be realised. Despite the difficult economic environment, Northern Petroleum is well placed to increase production and reserves which coupled with effective cost management should deliver real growth in the short and medium term.


(Introduzione del Presidente Jon Murphy e dell’Amministratore Delegato Keith Bush)