TIDMPHAR
RNS Number : 5953U
Pharos Energy PLC
07 April 2021
7 April 2021
Pharos Energy plc
("Pharos" or the "Company" or, together with its subsidiaries,
the "Group")
2020 Preliminary Results
Pharos Energy plc, an independent oil and gas exploration and
production company, announces its preliminary results for the year
ended 31 December 2020. A conference call will take place at 0900
BST today.
Ed Story, President and Chief Executive Officer, commented:
"Despite the challenges of the past year there have been
positives; group production was in line with guidance, we were
granted an extension to our TGT and CNV licences in Vietnam; and
the TGT Full Field Development Plan, where drilling will commence
in Q3 2021, received final approvals. In order to preserve
liquidity and the opportunities in our current portfolio during a
turbulent 2020, we deferred discretionary capex, reduced our cost
base, and took the difficult decision to suspend the dividend.
Vietnam provides the lowest breakeven in our portfolio, investments
here have quick paybacks, and the drilling programme is fully
self-funded from the operating cash flows in country. We expect to
reach post capex free cash flow in H1 2022. In Egypt, reserves have
been significantly upgraded and the waterflood programme has
commenced, supported by the equity placing completed in January
2021. We are well advanced in a process to select the right
farm-out partner to make the investment needed to fast-track
material production growth and, an agreement has been reached with
EGPC on a change to the El Fayum licence terms which, once approved
by the Egyptian Government, will enhance operating cash flows and
profitability. Finally I want to thank our colleagues for all of
the commitment and energy that has seen us through what has been a
hugely difficult year."
2020 Corporate Summary
The health, safety and welfare of our staff, suppliers and host
communities across our business has been our highest priority
-- Pharos has continued to manage its operations carefully, with
the Group adhering to the COVID-19 procedures and restrictions put
in place by its host countries, with negligible disruption to
business in the period
-- Continuation of ESG enhancements across the business,
including new independent Board appointments and adoption of a new
Climate Change policy
-- Ongoing discussions through a formal farm-out process with
potential industry partner(s) for the Company's assets in Egypt to
fast-track activity and increase production
-- Intense focus on cutting cash costs across the Group, including:
- Cash cost savings on total group expenditure for the year of
c.23% against the budget. Group reduction of G&A costs 35%
- 25% reduction on fees for all Non-Executive Directors from 1 May 2020
- 25% reduction on remuneration for Executive Directors
effective 1 May 2020, a further 10% (total 35%) from 1 August 2020-
31 March 2021
- Closure of London office
-- Further developments in 2021:
- Successful completion of an oversubscribed equity Placing,
Subscription and Retail Offering in January 2021 which raised gross
proceeds of approximately $11.7m; proceeds are being used to fund
Phase 1B of the waterflood programme in Egypt, which is now
underway
- Remuneration of Executive Directors reduced by 50% from 1 April 2021
- Head office reorganisation and reduction in headcount to be completed by end 2021
2020 Financial Summary
-- Group revenue of $118.3m plus $23.7m from hedging (2019:
$189. 9m less hedging loss of $0.2m) *
-- Loss for the year of $215.8m (2019: loss $24.5m), following
oil price related post tax impairments of $198.1m
-- Cash operating costs of $11.60/bbl (2019: $10.45/bbl)(1)
-- Cash generated from operations $85.5m (2019: $113.0m)
-- Group Net Debt $32.6m as at 31 December 2020 (2019: Net Debt $41.5m)(1)
-- Cash balances as at 31 December 2020 of $24.6m (2019: $58.5m)
-- No dividend payment for the year (2019: $27.4m paid 31 May 2019)
-- Net Debt to EBITDAX of 0.48 (2019: 0.37)(1)
* Egyptian revenues are stated post government take including
corporate taxes.
1 See Non-IFRS measures at page 39
2020 Operational Summary
-- Total Group working interest 2020 production 11,373 boepd net (2019: 12,136 boepd)
- Egypt production 5,270 bopd (2019: 5,055 bopd*)
- Vietnam production 6,103 boepd (2019: 7,081 boepd)
-- In Egypt
- Technical work on the asset resulted in an upgrade of 53% in
proven and probable (2P) reserves in the El Fayum concession as
concluded by McDaniel & Associates
- Technical progress including reprocessing of 3D seismic data;
waterflood evaluation and a pilot test project in the Silah field
for phased implementation of a secondary recovery programme
- Updated sub-surface static model to optimise the location of future wells
- Optimised a 57 well investment case for the field developments
designed to take the Recovery factor to 18%
- Identified a number of low-risk prospects as well as potential
producing field extensions from third-party Development Leases into
the North Beni Suef Exploration Concession
- Benefited from improved commercial terms with EGPC regarding
the Western Desert discount and negotiated a six-month reduction on
the El Fayum discount and fees
-- In Vietnam
- Granted two-year extensions to both the TGT and CNV field
licences from the Ministry of Industry and Trade
- Completed upgrade work on the Gas Turbine compressors for the
Leased FPSO in the TGT Field in April 2020 ahead of schedule and
under budget
- Extended a successful well intervention campaign
- TGT-15X spudded on 28 February 2020 and is producing from both the upper and deep sections
- Received approval from the Prime Minister of Vietnam for the
TGT Full Field Development Plan (FFDP)
* Egypt 2019 production from 2 April to 31 December 2019.
Outlook for 2021
-- Received provisional approval from EGPC to an amendment of
the fiscal terms on the El Fayum Concession. Under the revised
terms, the cost recovery percentage will be increased from 30% to
40% allowing Pharos a significantly faster recovery of all its past
and future investments
-- Approximately 42% of the Group's 2021 forecast production
from April 2021 to December 2021 hedged at an average price of
$50.6/bbl
-- Total Group working interest 2021 forecast production range of 9,200 to 10,600
-- In Egypt
- Production guidance for 2021 is 4,000-4,400 bopd, before any
investment from a farm in partner
- Phase 1B of the Waterflood programme in the field has
commenced following the successful equity placing in January
2021
- The outcome of the ongoing formal farm-out process for the
Company's assets in Egypt, is expected to be announced Q2 2021 with
completion planned for H2 2021
-- In Vietnam
- Production guidance for 2021 is 5,200-6,200 boepd
- The drilling of four development wells will commence in Q3 2021 in the TGT Field
- Preparation underway for the 3D seismic survey planned over
certain high graded leads in the northern part of Block 125.
Enquiries
Pharos Energy plc Tel: 020 7747 2000
Ed Story, President and Chief Executive Officer
Jann Brown, Managing Director and Chief Financial Officer
Mike Watts, Managing Director
Sharan Dhami, Group Head of Investor Relations
Camarco Tel: 020 3757 4980
Billy Clegg | Owen Roberts | Monique Perks
Notes to editors
Pharos Energy plc is an independent oil and gas exploration and
production company with a focus on sustainable growth and returns
to stakeholders, which is listed on the London Stock Exchange.
Pharos has production, development and/or exploration interests
in Egypt, Vietnam and Israel.
In Egypt, Pharos holds a 100% working interest in the El Fayum
oil Concession in the Western Desert. The Concession produces from
10 fields and is located 80 km southwest of Cairo. It is operated
by Petrosilah, a 50/50 JV between Pharos and the Egyptian General
Petroleum Corporation (EGPC). Pharos is also an operator with a
100% working interest in the North Beni Suef (NBS) Concession,
which is located immediately south of the El Fayum Concession.
In Vietnam, Pharos has a 30.5% working interest in Block 16-1
which contains 97% of the Te Giac Trang (TGT) field and is operated
by the Hoang Long Joint Operating Company. Pharos' unitised
interest in the TGT field is 29.7%. Pharos also has a 25% working
interest in the Ca Ngu Vang (CVN) field located in Block 9-2, which
is operated by the Hoan Vu Joint Operating Company. Blocks 16-1 and
9-2 are located in the shallow water Cuu Long Basin, offshore
southern Vietnam. Pharos also holds a 70% interest in and is
designated operator of Blocks 125 & 126, located in the
moderate to deep water Phu Khanh Basin, north east of the Cuu Long
Basin, offshore central Vietnam.
In Israel, Pharos together with Cairn Energy plc and Israel's
Ratio Oil Exploration, have eight licences offshore Israel. Each
party has an equal working interest and Cairn is the operator.
Chair's statement
A year of unprecedented change
The global COVID-19 pandemic, US presidential elections and the
completion of the UK's formal separation from the European Union
are some of the events that impacted the global economy and made
2020 a year of unprecedented change, but there is hope for the
future. The global roll-out of a number of vaccines supports the
view that we might be nearing the beginning of the end of the
severe lockdowns which have impacted economic activity across the
globe.
Actions taken in the year
During 2020, the COVID-19 pandemic resulted in a sustained
period of reduced economic activity affecting energy demand, which
was reflected in severe downward pressure on the oil price. In
addition, geopolitics in 2020 put further downward pressure on the
industry resulting in a significant oil price drop. The Company
responded quickly and decisively to defer all discretionary
expenditure and reduce G&A costs across the Group to preserve
balance sheet strength.
Pharos was agile in reacting to the rapidly changing oil price
environment and took advantage of the flexibility that our onshore
Egyptian operations offered by deferring drilling activity in
Egypt. Our business in Vietnam is well positioned with its low
breakeven price. In Egypt, the Company benefited from improved
commercial terms with EGPC on the discounts and handling fees in
2020 and has now received provisional approval to amend the fiscal
terms on its El Fayum Concession which, once approved by the
Egyptian government, will accelerate cost recovery, reduce
breakeven prices, and enhance cash flow generation. The business in
Egypt is now well placed to secure the right industry partner to
fund the investment programme and develop the fields and
discussions are ongoing.
The reduction of the longer-term commodity prices impacted on
the Group's exploration and producing assets with a non-cash after
tax impairment charge against our Vietnam and Egyptian assets of
$198.1m which, together with reduced revenues due to the oil price
fall, were the key drivers for our overall loss for the year of
$215.8m.
Cost reductions and Dividend
There has been a strong focus on cutting cash costs across the
Group and a reduction in 2020 forecast expenditure of approx. 23%
has been achieved. All Directors took a voluntary reduction in
salary and fees of 25% from 1 May 2020 and then the three Executive
Directors went further and agreed an additional 10% reduction which
began on 1 August 2020, giving a total reduction of 35%. These
reductions continued until 31 March 2021. The Board also agreed
that no bonuses will be paid in 2020. The Executive Directors have
volunteered a 50% reduction in salary from 1 April 2021.
As announced in May 2020, the Board believed it was appropriate
to suspend dividend payments during 2020, given the continued
uncertainty in the macro environment. The decision to re-instate
the dividend will be kept under review and the Board will continue
to use its well-documented capital allocation criteria to assess
where and how to spend any free cash flow generated.
Farm-out of Egyptian assets and successful equity raise
There are multiple investment opportunities in Egypt, and now is
the right time to bring in an industry partner to support the
funding required to develop and explore El Fayum and North Beni
Suef, both of which have transformative potential. The Company
launched a formal farm-out process in the latter part of 2020 and
the results are expected to be announced in Q2 2021. A successful
farm-out will de-risk our current 100% participating interest
holding, reduce our capital exposure and accelerate the first phase
of the full-scale development drilling programme at El Fayum,
targeting material increases in production.
In January 2021, the Company announced the successful completion
of an oversubscribed equity Placing, Subscription and Retail
Offering in January 2021 which raised gross proceeds of
approximately $11.7m. The proceeds are being used to fund Phase 1B
of the waterflood programme in Egypt, which is now underway as we
progress our farm out process.
We were delighted to have such strong support in this equity
raising from the market, underpinned by our existing shareholders,
management team and board.
Health & Safety and wellbeing of staff and host
communities
The health, safety and welfare of our staff, suppliers and host
communities across our business remains the highest priority on the
Board agenda, especially at during this global pandemic. Pharos
managed its operations carefully in light of COVID-19 and the Group
adhered to the requisite procedures and restrictions, in line with
the government directives in Egypt, Vietnam and the UK. At our
onshore operations in Egypt, field staff continue to engage with
the community adjacent to the El Fayum Concession and have carried
out disinfection of community areas such as schools, post offices,
ambulance units and police stations.
We are pleased to report that our Joint Operations in Vietnam
continue to an exceptional record of safety, reporting zero LTIs
since operational inception, representing nine production years on
TGT and 12 production years on CNV. In Egypt, we are sad to report
the loss of one of our sub-contractor assistant crane operators in
Q4 2020, following an accident during a rig move operation where
the crane ran off the road. Following the accident there was
immediate reinforcement of safe working practices with all
sub-contractors, such as safe driving and manoeuvring practices,
increased supervision of rig moves, and awareness of potentially
unsafe road conditions. The safety of our workforce remains our
number one priority and Pharos has reinforced the use of stop cards
and safety training across all operations.
The 'S' in ESG encompasses not only social projects that we
invest in but extended during 2020 to focus on our employees,
contractors, suppliers, and wider stakeholder groups during global
lockdowns. The CEO's statement details of the social projects the
Joint Operating Companies (JOCs) invested in and I would like to
address how Pharos has worked and engaged with our employees.
Remote working for head office staff
The Board has been focused on the welfare of staff who have been
working remotely throughout the pandemic and the Company has
actively engaged and consulted with staff on new remote working
practices. Office staff in Vietnam and Egypt have been following
governmental guidelines, which has meant a combination of working
remotely and/or in the office with negligible disruption to the
business. The London head office staff have been working remotely
since March 2020 and this is likely to continue for the foreseeable
future. Given this new pattern of working, the London head office
was closed.
Workforce engagement in a remote working environment
The Board remains passionate about workforce engagement and
fostering a genuine dialogue between the Company and staff. As
such, I will continue in my role as the designated Non-Executive
Director for workforce engagement. This year I spoke to staff in
Egypt, Vietnam and London via video conference, giving them a
platform where they could share their feedback and views about the
Company. Following feedback from the previous year's session, one
of the significant changes made was the hiring of a dedicated Head
of HR. Monthly focus groups held with staff to hear their views on
any issues arising from new working environments have been
especially important. A Group wide Employee Engagement Survey, the
first in the Company's history, was also launched in 2020, with a
92% response rate, the outcomes of which will allow us to improve
our understanding of cultural differences and employee
experience.
Culture and our Guiding Principles
One of Pharos' Guiding Principles is Openness and Integrity, and
we know the value of open and transparent communication and
listening. Monthly focus groups have been critical in developing
and adapting ways of communicating across the Group and increasing
the frequency of business updates and engagement with staff. Less
formal virtual gatherings have also been organised to offer some of
the interaction that naturally gets lost when people are not
physically in the same office.
Diversity and Inclusion
We have a workforce with a diversity of experience,
nationalities, cultural backgrounds, and gender, which supports our
business strategy of long-term sustainable growth. It is crucial to
the success of our business that we retain and develop the
diversity of our workforce and have diversity and inclusion at the
heart of our recruitment, development and promotion processes. We
are very proud of the number of women we have in the London office,
which in 2020 accounted for some 58% of the team and three out of
four Group Heads of Function posts were managed by women. Our Code
of Business Conduct and Ethics and Policies and our Guiding
Principles commit us to providing a workplace free of
discrimination where all employees can fulfil their potential based
on merit and ability. They also commit us to providing a fully
inclusive workplace, while providing the right development
opportunities to ensure existing staff have rewarding careers.
Training and development
Providing training and development opportunities to ensure
existing staff have rewarding careers has continued at Pharos. We
maintained a training budget to support the ongoing development of
all our staff, providing them with external training and 'lunch and
learn' sessions run by the staff.
Pharos remains committed to creating value for host countries
and local communities as well as for staff. In Vietnam, commitment
to local sourcing, employment, training, and industry capacity
building has continued with a training levy of $300,000 per year in
a ring-fenced fund to support developing future Vietnamese
expertise in the industry. In Egypt, under the El Fayum and North
Beni Suef Concession Agreements, the Company contributes a total of
$200,000 per year split equally between the two Concessions to
support training and development within the industry.
Environmental, Social and Governance (ESG) committee
Last year, the Board established an ESG Committee, with
delegated authority to oversee and direct work towards our goal of
establishing and maintaining the highest operating standards across
ESG matters. The ESG committee has dialogue with employees and
external advisors. In 2020, the ESG working group, which sits
within the ESG Committee and includes Pharos' Country Managers,
Head of Operations, Head of Investor Relations and Risk Manager,
met quarterly to discuss various social projects and material ways
to reduce greenhouse gas ("GHG") emissions in our operations.
Reduction in GHG emissions across our business is important to
Pharos and we recognise that our assets are operated by JOCs over
which we have influence but not control. At the beginning of 2020,
the Group launched an internal initiative with senior management
and asset managers called Project GOO (Greening Our Operations)
focusing on identifying key sources of GHG emissions and processes
and methods which could be changed to reduce GHG emissions. In 2019
in Egypt, the JOC initiated Phase one utilisation of associated
gas-powered electricity generators, which reduced flared gas at one
site by 30% in 2019. The implementation of a second phase of this
project, which was anticipated to further reduce GHG emissions, has
been paused. Both these initiatives have been interrupted by the
impact of the pandemic and we will look to resume them at the
appropriate time.
Climate Change
We recognise and actively consider the impact of climate change
and energy transition as immediate challenges facing Pharos. In our
view, oil and gas will continue to be an important component of the
global energy mix for many decades to come, although there is a
risk that there could be less demand for oil and gas. This could
lead to downward pressure and volatility in the oil price.
According to a recent World Bank report, the Vietnamese economy
is one of the few in the world likely to avoid a recession
following the COVID-19 pandemic, giving confidence that demand for
energy there will be maintained. Pharos will continue to develop
its oil and gas resources responsibly to aid global economic
development and deliver value for all our stakeholders. We believe
that countries such as Egypt and Vietnam can continue to have
economic and social benefits from the responsible development of
their natural resources and we are committed to doing this in a
sustainable way. We will also continue to support our host
governments as they seek to use oil revenues to promote sustainable
and inclusive economic development, and we will support the actions
that they take to manage climate change.
In December 2020, we published our Climate Change Policy
addressing our principal climate change risks through the
development and implementation of an appropriate mitigation
response that recognises energy transition away from fossil fuels
towards renewable sources of energy, whilst supporting the
long-term resilience of the Company's strategy and business
operations. This response includes integrating climate change
considerations into key business decisions in the short-term,
particularly in relation to new business opportunities and using
our relationships and influence as a JV partner and our role in the
JOCs to identify key performance indicators ("KPIs") to help
measure, monitor and, where possible, reduce the energy consumption
and greenhouse gas intensity of our operations, ensuring our
business strategy responds to evolving climate-related risks. Our
Climate Change Policy is available on our corporate website
https://www.pharos.energy/responsibility/policy-statements/. Over
the past four years, we have also participated in the CDP (Climate
Disclosure Project) Climate Change Questionnaire and have
maintained our score (C) and amongst all UK listed oil and gas
companies that participated in the CDP we ranked fourth.
We recognise the requirements for increased transparency
concerning the impact on the environment from our business
decisions and we continue to provide full disclosure of our
emissions, discharges and water usage. We are always looking at
actions that will minimise our impacts on the environment. From a
financial perspective, we support the requirements of the Task
Force on Climate-related Financial Disclosures ("TCFD") and are
looking to bring our disclosures in line with these
recommendations. The Project consists of two phases. Phase 1, which
is now complete, consisted of a thorough peer benchmarking,
internal document review and gap analysis which culminated in the
development and approval by the Board of Pharos' Climate Change
Policy in December 2020. Phase 2 will aim to assess the Company's
climate impact, define its 2020 baseline and develop a set of KPIs
to better manage and monitor its GHG emissions. These efforts have
been interrupted by the impact of the pandemic and we will look to
resume them at the appropriate time.
Board changes
Amid unprecedented turmoil and a rapidly changing 'new normal',
good corporate governance has become even more important. During
2020, as part of our planned Board refreshment, I was pleased to
welcome Lisa Mitchell and Geoffrey Green to the Board. Lisa is an
experienced CFO with over 25 years' international experience across
the oil and gas, mining, and pharmaceutical industries and she has
served as Chair of the Audit and Risk Committee and as a member of
the Nominations Committee and ESG committee from 1 April 2020.
Geoffrey has many years of legal and commercial experience in
advising major UK listed companies on corporate and governance
issues, mergers and acquisitions and corporate finance. Geoffrey
was appointed as the Chair of the Remuneration Committee and as a
member of the Audit and Risk Committee and ESG Committee, with
effect from 20 May 2020. Geoffrey's wealth of legal experience and
corporate governance expertise along with Lisa's strategic,
financial, taxation and treasury expertise have already proven to
be invaluable to the Board, adding to its strength and diversity.
In addition, Ettore Contini (Non-Executive Director) stepped down
from the Board following the AGM in May 2020, after eighteen years
of service. I would like to thank Ettore for his service and
support to the Company over the years, and we wish him all the very
best for the future. In March 2021, we announced the appointment of
Sue Rivett to the Board as Chief Financial Officer ("CFO")
effective 1 July 2021. Jann Brown, who is currently Managing
Director ("MD") and CFO, will remain as MD, focused on delivering
the next phase of the Group's strategic plan.
Brexit
The Board had previously considered the uncertainties which
exist around Brexit when it was first announced and has continued
to conclude that the potential impact on Pharos is likely to be
low, since our principal operations are conducted in territories
outside the EU, our cash flows are linked to the US Dollar, and we
do not rely on large numbers of EU staff members being able to work
in the UK.
Outlook
Our current focus is to allocate capital to the near-term
development drilling in Vietnam and Egypt, both of which have
potential to generate free cash flow. In Vietnam, the development
is self-funding and in Egypt funds for the development were raised
from the equity placing with further funds expected to come through
securing a farm-in partner.
Our principal strategy is the delivery of sustainable long-term
returns to shareholders through a combination of regular cash
returns and growth in our asset base. 2020 was a difficult year as
the drop in oil price not only significantly reduced our operating
cash flows but also led to a reduction in the oil price used by our
lending banks, which increased the scheduled mid-year repayment to
an amount significantly in excess of our previous forecasts. We
have done what was required, including deferring discretionary
capex, reducing our cost base and agreeing improved terms with host
governments. We also took the decision to suspend the dividend
which would have been paid in 2020. We are not complacent about the
situation, but we are confident that we can continue to deliver
value to our shareholders and a commitment to cash returns to
shareholders remains a core element of or overall allocation
framework. The re-instatement of the dividend will be kept under
regular review by the Board.
One of the most difficult decisions has been to announce a staff
redundancy programme in the UK and this will be completed during
2021. In addition, the executive team has offered to take a 50%
reduction in salary effective 1 April 2021 bringing our overall
cost base into line with the current scale of the business.
In Egypt, we have started Phase 1B of the waterflood programme
following the equity placing and are working steadily towards
securing a new farm-in partner to make the investment needed to
accelerate the first phase of the full-scale development drilling
programme at El Fayum and increase production to take advantage of
the excellent growth potential in the El Fayum concession.
In Vietnam, infill production drilling on the TGT field to
enhance production levels will begin in Q3 2021. On Blocks 125
& 126, numerous prospects and leads have been identified using
the acquired 2D seismic, gravity and magnetic data and preparation
work is ongoing for a 3D seismic survey over certain high graded
leads on the northern part of Block 125.
Sustainability informs our actions and decisions. Our aim is to
add value in everything we do through responsible, efficient, and
safe energy production.
I would also like to thank all of our employees and contractors
for their continued hard work and commitment. This has been an
extraordinarily challenging year for most of our employees and
everyone has risen to the challenges, compounded by what have been
at times highly unusual working situations as a result of the
pandemic.
John Martin
Chair
Chief Executive Officer's statement
The health, safety and wellbeing of our employees, contractors
and other stakeholders is always a priority at Pharos and in line
with the government directives in Egypt, Vietnam and the UK,
measures were put in place to minimise the risk of any COVID-19
outbreak occurring. The JOCs in both Egypt and Vietnam implemented
stringent offshore and onshore procedures such that mitigation
measures were in place to ensure the impact of any outbreak could
be quickly contained, and operations would be maintained. Our
office staff in Egypt, Vietnam and UK also followed governmental
guidelines. Our UK head office staff began remote working in
advance of the Government directive to do so and have continued to
work remotely throughout with negligible disruption to the
business.
Operating a sustainable business remains key to Pharos. During
2020, our focus was on being agile to the changing global pandemic
environment and its impact on the oil and gas industry. Our
relentless focus on capital discipline and looking for
opportunities to reduce costs across the organisation resulted in
us being able to defer discretionary capex, negotiate improved
commercial terms in Egypt, and reduce costs across the
organisation. Our focus on cost saving has not finished and we
recently announced that all three executive directors have
volunteered to take a reduction in pay of 50%. In addition, and
with regret, we have decided to downsize our staff numbers in the
UK and this programme of redundancies will be completed in
2021.
Cash balances as at 31 December 2020 were $24.6m (2019: $58.5m),
which includes $57.2m drawn from the RBL, giving a net debt figure
of $32.6m (2019: $41.5m). Revenues for January-December 2020
were$118.3m (2019: $189.9m ) plus $23.7m gain (2019: $0.2m loss)
from hedging. The hedging positions in place at balance sheet date
and additional hedging taken out since then continue to provide
solid protection with approximately 42% of the Group's forecast
production from April to December 2021 hedged at an average price
of $50.6 /bbl.
The strength of our business lies in our low-cost commitments
and operational flexibility, particularly in Egypt where we were
able to defer the discretionary drilling programme to preserve
capital. In the meantime, we worked with EGPC to negotiate better
commercial terms resulting in an improvement in the break-even
price per barrel; reductions in the Western desert discount reduced
in stages, from a high of $2.90/bbl in April to $0.60/bbl by
October. In addition, we agreed reductions with EGPC on both the
price discount applied specifically to the El Fayum crude ($1/bbl
reduction) and on the crude handling fees paid at the refinery
($0.80/bbl reduction). Both of these reductions were in place for
an initial period of six months from August 2020 to January 2021
while the Company continued its joint review with EGPC on the
specification of the crude oil, on which the discount and fees are
applied. Additional negotiations with EGPC on changes to the
Concession Agreement have now concluded successfully and, once
these have been approved by the Egyptian Government, will
significantly improve our breakeven price in Egypt.
Group working interest 2020 production was 11,373 boepd net, in
line with production guidance. Egypt production for 2020 was 5,270
bopd. Operations focussed on maintenance interventions and water
flood intervention. We conducted a waterflood evaluation for the
phased implementation of a secondary recovery programme, updated
the sub-surface static model and created field dynamic models to
optimise the location of future oil producer and water injector
wells, ready for when the drilling programme resumes. Our ongoing
technical work on the asset resulted in an upgrade of 53% in proven
and probable (2P) reserves in the El Fayum concession as concluded
by a third-party reserves auditing company McDaniel &
Associates. We also started the formal process of looking for a new
industry partner in Egypt to make the investment needed to
accelerate production growth with a view to doubling Egypt gross
production to 12,000 bopd through implementation of multi-rig drill
programme. This farm-out process is progressing well, and we expect
the result to be announced in Q2 2021 with completion in H2 2021.
In January 2021, Pharos announced the successful completion of an
equity Placing. The funds raised have allowed us to restart our
investment in the water flood programme in the El Fayum oil fields
in Egypt.
Vietnam is a self-funding asset; the produced crude commands a
premium to Brent and the producing properties are cash flow
generative even at low oil prices. Vietnam 2020 production was
6,103 boepd net. The Vietnam producing fields, TGT and CNV, have
been part of Pharos's portfolio for almost two decades. This year
one well on the TGT Field in Block 16-1, TGT-15X, spudded in early
2020 and is modestly producing from deeper tighter reservoirs.
Operations on TGT focussed on proactively managing the existing
reservoirs and optimising production from the existing wells. The
upgrade work to the Gas Turbine compressors for the Leased FPSO was
completed in April 2020 ahead of schedule and under budget. In
September 2020, the JOC received approval from the Prime Minister
of Vietnam for the TGT Full Field Development Plan (FFDP). The FFDP
includes drilling six new producer wells. The JOC has approved the
drilling of four development wells in the 2021 budget cycle to
start drilling in Q3 2021. The remaining two wells shall be
proposed in the next budget cycle for drilling in 2022.
We were also delighted with the two-year extensions to both the
TGT and CNV field licences that were formally granted by the
Ministry of Industry and Trade in Vietnam. The TGT licence now runs
to 7 December 2026 and the CNV licence now runs to 15 December 2027
and a further licence extension for both TGT and CNV will be
pursued in due course in accordance with the licence terms. On
Blocks 125 & 126 numerous prospect and leads have been
identified using the acquired 2D seismic, gravity and magnetic data
and preparation work is ongoing for a 3D seismic survey) over
certain high-graded leads on Block 125.
Social investment with host communities
Our goal is to have a responsible and positive presence in the
regions in which we operate.
In Egypt, Petrosilah has been engaging with the local
communities during the pandemic to offer support. Field staff
continue dialogue and social engagement with the villages adjacent
to the El Fayum fields and assisted with COVID-19 measures. In
April 2020, Petrosilah provided disinfection and sterilisation
services for all public and service buildings such as schools, post
offices, ambulance units and police stations, along with homes of
the villages adjacent to the company's sites. Medical equipment
such as 100 sets of face masks, face shields and protection suits
were donated and delivered to the Nabawi General Hospital in Fayum,
a Ministry of Health hospital which operates as an isolation
hospital during the pandemic.
The JOCs have invested over $1 billion into its oil and gas
projects located offshore southern Vietnam, making Pharos one of
the largest UK investors in the country. Pharos' current producing
interests in the TGT and CNV fields together place Pharos amongst
Vietnam's largest oil producers. In 2020 Pharos' joint operations
continued to achieve an outstanding record of safety and have
contributed to national economic growth through, employment,
training, and industry upskilling.
I am also pleased to say our social investment in Vietnam
through the HLHVJOC Charitable Donation programme continued. During
2020, a total of nine projects in Vietnam were approved. These
donations have been used to assist the overall development of
underprivileged rural areas in Vietnam, and were specifically
designated for healthcare, education, environmental development,
and the assistance of flood victims in the Central Highlands
region. For example, this year, donations were made to Tran Hung
Dao Commune's Medical Clinic in Ly Nhan district, Ha Nam province
to buy medical equipment such as endoscope and ultrasound machines.
The programme continued its annual support to the Ha Noi Private
School for the Hearing Impaired for the project aimed at improving
integration ability for underprivileged disabled students. The
school is currently offering education to 100 students with autism
and hearing-impairment. Additionally, the programme provided
financial support to Tho Hai Commune's People Committee, Thanh Hoa
province to renovate buildings built before the year 2000, with 10
classrooms that had serious degradation, and for the construction
of new secondary school classrooms.
Our people
It is now over a year into the progression of the global
pandemic, and the lives of individuals across the globe have
changed in unprecedented ways. Lockdowns across the world meant
that our colleagues had to adapt their working environment to
working from home in a matter of days. I wish to add my own thanks
to staff for all of the commitment and energy that has seen us
through what has been a hugely difficult year.
Outlook
We are focusing on near term value-adding activities in Vietnam
and Egypt, both of which have potential to generate free cash flow,
and on the longer-term prospects in Israel. Key events for 2021
will include:
In Vietnam
-- The commencement of sequential infill drilling of four
development wells in Q3 2021 in TGT Field
-- Preparing for the 3D seismic survey in certain high graded
leads in Block 125, following the identification of numerous
prospect and leads using the acquired 2D seismic, gravity and
magnetic data
In Egypt
-- Phase 1B of the Waterflood programme in Q1 2021, following
the successful equity placing in January 2021
-- The ongoing formal farm-out process for the Company's assets
in Egypt, result expected to be announced Q2 2021 with completion
in H2 2021
-- Continued interpretation of the large pre-existing 3D seismic
survey on the North Beni Suef Concession
Ed Story
President and Chief Executive Officer
Review of Operations
Egypt
Egypt Production
Production for 2020 from the El Fayum Concession averaged 5,270
bopd. This is in line with the Egypt 2020 production guidance given
on 12 May 2020 of 5,000-6,000 bopd.
Production guidance for 2021 is 4,000-4,400 bopd before any
investment from a farm-in partner.
Egypt Development and Operations
El Fayum
Prior to the COVID-19 pandemic and the oil price shock, three
drilling rigs and three workover rigs were operating through Q1
2020. Seven wells (five producers and two injectors) were drilled,
through to April 2020.
Due to the uncertain macro-economic environment resulting from
the global impact of COVID-19 and the oil price shock, the
discretionary drilling programme in Egypt was scaled back to
preserve capital with termination notices issued on five of the six
rigs retaining just one workover rig, on a call out contract, for
ongoing maintenance. Production operations in the field since, have
been centred on well maintenance interventions, pilot water flood
tests in the Silah Field and evaluation of a phased water-flood
programme. During the hiatus in drilling operations, Pharos
has:
-- Benefited from improved commercial terms with EGPC regarding
the Western Desert discount and negotiated a reduction on the El
Fayum discount. The Western Desert discount reduced in stages, from
a high of $2.90/bbl in April to $0.60/bbl by October. In addition,
we have agreed reductions with EGPC, effective 1 August 2020, on
both the price discount applied specifically to the El Fayum crude
($1/bbl reduction) and on the crude handling fees paid at the
refinery ($0.80/bbl reduction). Both of these reductions are in
place for an initial period of six months while the Company
continues its joint review with EGPC on the specification of the
crude oil, on which the discount and fees are applied
-- Received provisional approval from EGPC to an amendment of
the fiscal terms of its El Fayum Concession
-- Updated the sub-surface static model and created field
dynamic models to optimise the location of future wells, both oil
producers and water injectors, as the development programme is
implemented
-- Optimised the field development plan, with ERCE our external
consultants, to create a 57 well Investment Case designed to take
the Recovery Factor from 8% on primary depletion alone to 18% with
secondary recovery. A further 40 well development programme would
increase the Recovery Factor to 30% which is more in line with
analogous fields in Egypt
-- Reprocessed the 3D seismic data across El Fayum, for improved subsurface definition
-- Conducted a full waterflood evaluation study for the phased
implementation of a secondary recovery programme
2021 Work Programme
Following the successful equity placing in January 2021, the
Phase 1B of the waterflood programme, has commenced. It is designed
to increase reservoir pressure support and increase production. The
waterflood programme is progressing across four main areas:
-- Surface facilities injection capability upgrade and
optimisation: Procurement process of long-lead items (LLIs)
-- Existing well conversions from producers to injectors: workover rig in-place
-- Complete outstanding new wells as injectors: engagement with
service companies to optimise the completion programmes is
ongoing
-- Recompletion of existing wells to add new zones under
waterflood to production: recompletion targets have been
identified
The subsurface static and dynamic models continue to be updated
to allow further understanding and optimisation of waterflood
patterns and well spacing which will in turn improve sweep
efficiency and increase well deliverability.
El Fayum Exploration
Exploration drilling activity, apart from the Batran well, is
currently on hold while the Company focuses on development,
production, and cash flow. The Batran exploration well in the NE
Tersa Development Lease is a commitment well that is planned to be
drilled around May 2021.
North Beni Suef Exploration
During 2020, work focused on technical and investigative work on
wells previously drilled on the concession. Interpretation of the
large pre-existing 3D seismic survey on the NBS concession
continues and a number of low-risk prospects and potential
producing field extensions from third party Development Leases to
the NBS Exploration Concession have been identified.
Egypt Operational Outlook
-- 2021 production guidance is 4,000-4,400 bopd, before the
allocation of any investments from a farm-in partner is
considered
-- Phase 1B Waterflood programme in the El Fayum Concession has commenced
-- Ongoing formal farm-out process for the Company's assets in
Egypt, result expected to be announced Q2 2021 with completion in
H2 2021
-- Continued interpretation of the large pre-existing 3D seismic
survey on the North Beni Suef Concession
Vietnam
Vietnam Production
Production in 2020 from the TGT and CNV fields net to the
Group's working interest averaged 6,103 boepd. This is in line with
the 2020 production guidance of 5,500 to 6,500 boepd.
TGT 2020 production averaged 15,296 boepd gross and 4,547 boepd
net to Pharos (2019: 17,847 boepd gross and 5,382 boepd net to
Pharos). CNV 2020 production averaged 6,223 boepd gross and 1,556
boepd net to Pharos (2019: 6,793 boepd gross and 1,699 boepd net to
Pharos).
The Group's Vietnam production guidance for 2021 of 5,200 -
6,200 boepd.
Vietnam Development and Operations
2020 Activity on CNV
As planned, no drilling activities took place on CNV for 2020.
Operations on CNV focused on routine well maintenance.
2020 Activity on TGT
Production wells
The last well from the 2019 drilling campaign, TGT-15X, spudded
on 28 February 2020 and is producing from both the upper and deep
sections. The well was drilled within budget. No further drilling
activity occurred during 2020. Operations on TGT focussed on
proactively managing the existing reservoirs and optimising
production from the existing wells, principally through well
interventions and gas lift optimisation.
TGT Compressors and FPSO Tie-In Agreement (TIA)
The upgrade work to the Gas Turbine compressors for the Leased
FPSO was completed in April 2020 ahead of schedule and under
budget. This allowed the gas injection pressure to be raised in the
well intervention operations for optimised gas lift and new
perforations.
The third-party Tie In Agreement ("TIA") between the HLJOC and
the current counterparty, Thang Long Joint Operating Company
(TLJOC) terminated in 2018. The cost sharing elements have been
finalised, but negotiations continue regarding TLJOC'S rights of
access to the HLJOC's production facilities and FPSO.
TGT Full Field Development Plan
As announced in September 2020 the Joint Operating Company
(JOC), received approval from the Prime Minister of Vietnam for the
TGT Full Field Development Plan (FFDP), the last stage in the
approval process. The FFDP includes drilling six new producer
wells. This sequential infill-drilling programme is targeted to
increase gross production at TGT from the present 15,000 boepd to
around 20,000 boepd in 2022.
Vietnam License Extension
As previously announced, two-year extensions to both the TGT and
CNV field licences were formally granted by the Ministry of
Industry and Trade in Vietnam. The TGT licence now runs to 7
December 2026 and the CNV licence now runs to 15 December 2027. A
further licence extension for both TGT and CNV will be pursued in
due course in accordance with the licence terms.
2021 Work Programme
Following the approval for the TGT FFDP, the JOC has approved
the drilling of four development wells in the 2021 budget cycle and
ordering of long-lead items has begun to enable the commencement of
drilling in Q3 2021, a quarter earlier than previously announced.
The remaining two wells shall be proposed in the next budget cycle
for drilling in 2022.
Vietnam Exploration
Blocks 125 & 126
Preparation work on 3D seismic survey over certain high graded
leads in the northern part of Block 125 is ongoing.
Vietnam Outlook
-- 2021 production guidance 5,200 - 6,200 boepd net
-- Proactively manage the existing producing reservoirs
-- Commencement of in-fill drilling programme of four wells in the FFDP in Q3 2021
Israel
During 2020, as part of the minimum work commitment, a contract
for seismic processing was awarded and seismic processing is
ongoing. The project aims to improve the imaging of existing
seismic in order to identify and mature any prospectivity. This
asset offers low-cost option for potential material gas and
provides geographical as well as hydrocarbon diversification.
Group Reserves and Contingent Resources
The Group Reserves Statistics table below summarises our
reserves and contingent resources based on the company's unitised
working interest in each field. Gross reserves and contingent
resources have been independently audited by RISC Advisory Pty Ltd
(RISC) for Vietnam and McDaniel & Associates Consultants Ltd.
(McDaniel) for Egypt.
Group Reserves Statistics
Net Working Interest (mmboe) TGT CNV Vietnam(3) Egypt(4) Group
Oil & Gas 2P Commercial Reserves (1,2)
As of 1 January, 2020 15.4 6.0 21.4 28.5 49.9
------ ------ ----------- --------- ------
Production (1.7) (0.6) (2.3) (1.9) (4.2)
------ ------ ----------- --------- ------
Revision (0.7) (0.5) (1.2) 14.2 13.0
------ ------ ----------- --------- ------
2P Commercial Reserves as
of 31 December 2020 13.0 4.9 17.9 40.8 58.7
------ ------ ----------- --------- ------
Oil & Gas 2C Contingent Resource (1,2)
As of 1 January, 2020 8.5 4.6 13.1 23.5 36.6
------ ------ ----------- --------- ------
Revision (0.2) (0.7) (0.9) (4.5) (5.4)
------ ------ ----------- --------- ------
2C Contingent Resources as
of 31 December 2020 8.3 3.9 12.2 19.0 31.2
------ ------ ----------- --------- ------
Total Group 2P Reserves &
2C Contingent Resources (3,4)
As of 31 December 2020 21.3 8.8 30.1 59.8 89.9
------ ------ ----------- --------- ------
(1) Reserves and contingent resources are categorised in line
with 2018 SPE standards.
(2) Assumes an oil equivalent conversion factor of 6,000
standard cubic feet per barrel of oil equivalent.
(3) Reserves and Contingent Resources have been independently
audited by RISC
(4) Reserves and Contingent Resources have been independently
audited by McDaniel.
Vietnam Reserves and Contingent Resources
In accordance with the requirements of its Reserve Base Lending
Facility, the company commissioned RISC to provide an independent
audit of gross (100% field) reserves and contingent resources for
TGT and CNV as of 31 December 2020.
Vietnam Reserves Statistics
Net Working Interest (mmboe) TGT CNV Total
Vietnam
Oil & Gas 2P Commercial Reserves (1,2)
As of 1 January, 2020 15.4 6.0 21.4
------ ------ ---------
Production (1.7) (0.6) (2.3)
------ ------ ---------
Revision (0.7) (0.5) (1.2)
------ ------ ---------
2P Commercial Reserves as of
31 December 2020 13.0 4.9 17.9
------ ------ ---------
Oil & Gas 2C Contingent Resource (1,2)
As of 1 January, 2020 8.5 4.6 13.1
------ ------ ---------
Revision (0.3) (0.7) (0.9)
------ ------ ---------
2C Contingent Resources as
of 31 December 2020 8.3 3.9 12.2
------ ------ ---------
Total Vietnam 2P Reserves &
2C Contingent Resources (3)
As of 31 December 2020 21.3 8.8 30.1
------ ------ ---------
(1) Reserves and contingent resources are categorised in line
with 2018 SPE standards.
(2) Assumes an oil equivalent conversion factor of 6,000
standard cubic feet per barrel of oil equivalent.
(3) Reserves and contingent resources have been independently
audited by RISC.
On TGT, 2P reserves and 2C contingent resources were revised
slightly downwards due to lower-than-expected performance of a
recent infill well, a small reduction to the unitised field net
working interest and delayed drilling as a result of the global
pandemic.
On CNV, the 2P reserves and 2C contingent resources were revised
downwards as one of the wells drilled in late 2018 has been
cleaning-up at a slower rate than previously anticipated.
Additionally, the COVID-19 pandemic resulted in delayed well
interventions and facilities work required to arrest the field's
natural decline. This work is now planned to be completed in the
first half of 2021.
Egypt Reserves and Contingent Resources
Egypt Reserves Statistics
Net Working Interest (mmboe) Egypt
Oil 2P Commercial Reserves (1)
As of 1 January, 2020 28.5
------
Production (1.9)
------
Revision 14.2
------
2P Commercial Reserves as
of 31 December 2020 40.8
------
Oil 2C Contingent Resource (1)
As of 1 January, 2020 23.5
------
Revision (4.5)
------
2C Contingent Resources as
of 31 December 2020 19.0
------
Total Egypt 2P Reserves &
2C Contingent Resources (2)
As of 31 December 2020 59.8
------
(1) Reserves and contingent resources are categorised in line
with 2018 SPE standards.
(2) Reserves and Contingent Resources have been independently
audited by McDaniel.
On El Fayum, better than expected field performance, improved
understanding of the subsurface, demonstration of the successful
impact on production of the pilot water flood projects in the Silah
Field and the adoption of an optimised field development plan (57
well Investment Case) have resulted in an upward revision of the 2P
reserves. El Fayum contingent resources have been revised downwards
as some volumes have been re-categorised from 2C to 2P.
Group's Working Interest Reserves and Contingent Resources
El Fayum Fields at 31 December 2020 (mmboe)
--------------------------------------------------------------------------
Reserves 1P 2P 3P
----------------------------------------------- ------- ------- -------
Oil 18.5 40.8 54.7
----------------------------------------------- ------- ------- -------
Contingent Resources 1C 2C 3C
----------------------------------------------- ------- ------- -------
Oil 9.4 19.0 39.0
----------------------------------------------- ------- ------- -------
Sum of Reserves and Contingent Resources (1,2) 1P & 1C 2P & 2C 3P & 3C
----------------------------------------------- ------- ------- -------
Total 27.9 59.8 93.7
----------------------------------------------- ------- ------- -------
(1) Reserves and Contingent Resources have been audited independently by McDaniel.
(2) The summation of Reserves and Contingent Resources has been prepared by the Company.
TGT Field at 31 December 2020 (mmboe)
-----------------------------------------------------------------------
Reserves(3) 1P 2P 3P
-------------------------------------------- ------- ------- -------
Oil 9.7 11.8 14.8
-------------------------------------------- ------- ------- -------
Gas(1) 0.8 1.2 1.7
-------------------------------------------- ------- ------- -------
Total 10.5 13.0 16.5
-------------------------------------------- ------- ------- -------
Contingent Resources(3) 1C 2C 3C
-------------------------------------------- ------- ------- -------
Oil 4.9 7.9 10.9
-------------------------------------------- ------- ------- -------
Gas(1) 0.1 0.4 0.8
-------------------------------------------- ------- ------- -------
Total 5.0 8.3 11.8
-------------------------------------------- ------- ------- -------
Sum of Reserves and Contingent Resources(2) 1P & 1C 2P & 2C 3P & 3C
-------------------------------------------- ------- ------- -------
Oil 14.6 19.7 25.7
-------------------------------------------- ------- ------- -------
Gas(1) 0.9 1.6 2.5
-------------------------------------------- ------- ------- -------
Total 15.6 21.3 28.3
-------------------------------------------- ------- ------- -------
(1) Assumes oil equivalent conversion factor of 6,000 standard
cubic feet per barrel of oil equivalent.
(2) The summation of Reserves and Contingent Resources has been
prepared by the Company.
(3) Reserves and Contingent Resources have been audited
independently by RISC.
CNV Field at 31 December 2020 (mmboe)
-----------------------------------------------------------------------
Reserves(3) 1P 2P 3P
-------------------------------------------- ------- ------- -------
Oil 2.6 3.2 3.7
-------------------------------------------- ------- ------- -------
Gas(1) 1.4 1.7 2.0
-------------------------------------------- ------- ------- -------
Total 4.0 4.9 5.7
-------------------------------------------- ------- ------- -------
Contingent Resources(3) 1C 2C 3C
-------------------------------------------- ------- ------- -------
Oil 1.7 2.6 3.4
-------------------------------------------- ------- ------- -------
Gas(1) 0.9 1.4 1.8
-------------------------------------------- ------- ------- -------
Total 2.6 3.9 5.2
-------------------------------------------- ------- ------- -------
Sum of Reserves and Contingent Resources(2) 1P & 1C 2P & 2C 3P & 3C
-------------------------------------------- ------- ------- -------
Oil 4.3 5.7 7.2
-------------------------------------------- ------- ------- -------
Gas(1) 2.3 3.1 3.8
-------------------------------------------- ------- ------- -------
Total 6.6 8.8 11.0
-------------------------------------------- ------- ------- -------
(1) Assumes oil equivalent conversion factor of 6,000 standard
cubic feet per barrel of oil equivalent.
(2) The summation of Reserves and Contingent Resources has been
prepared by the Company.
(3) Reserves and Contingent Resources have been audited
independently by RISC.
Financial Review
Finance strategy
Our finance strategy continues to underpin the Group's business
model and goes hand in hand with our commitment to building
shareholder value through capital growth and sustainable
dividends.
The finance strategy is founded on three core areas - capital
discipline, capital allocation and capital return.
In this current period of turmoil, with oil prices at a
multi-year low, these three core areas come into sharp focus and
are guiding the business firstly, to preserve capital and balance
sheet strength at this time, then moving on to access the capital
needed to invest to deliver near term returns.
We have created a range of opportunities in the portfolio, some
of which are self-funding and others need that additional capital
to accelerate access to their inherent value. Throughout 2020 and
beyond we have taken steps not only to preserve our balance sheet
strength but introduce much needed capital.
Operating performance
Revenues
Group revenues for the year totalled to $118.3m plus $23.7m from
hedging gain, representing a 38% decrease over the prior year
(2019: $189.9m less hedging loss of $0.2m).
The revenue for Vietnam of $87.7m (2019: $155.5m) reduced year
on year. The average realised crude oil price was $44.70/bbl (2019:
$68.48/bbl), and the premium to Brent was just over $3/bbl (2019:
$4/bbl), a 35% reduction year on year. Production also declined
from 7,081 boepd to 6,103 boepd.
The revenue for Egypt of $30.6m (2019: $34.4m) also reduced
largely as a result of the lower average realised crude oil price,
down 38% to $37.08/bbl (2019: $59.33/bbl), offset by an additional
3 months production and a slight increase in average production
levels, from 5,055 boepd to 5,270 boepd. There are two discounts
applied to the El Fayum crude production - a general Western Desert
Discount and one related specifically to El Fayum. Both are set by
EGPC, the in country regulator and combined reduced from $5/bbl at
the start of the year to $4/bbl.
The Western Desert discount reduced in stages, from a high of
$2.90/bbl in April to $0.60/bbl by October. In addition, we agreed
with EGPC, that the price discount applied specifically to the El
Fayum crude would reduce by $1/bbl for a period of six months from
1 August 2020, and we are in discussions with EGPC to have that
extended.
Operating costs
Group cash operating costs were $48.3m (2019: $41.5m). Vietnam
decreased by 4% from $27.6m to $26.5m mainly as a result of ongoing
cost reduction programmes. The cash operating costs of the Egyptian
assets increased from $13.9m to $21.8m mainly due to an additional
3 months reported in 202 0 and an increased number of workovers on
existing wells to sustain current production levels. The Group
operating cost per barrel was $11.60/boe (2019: $10.45/boe), an
increase of 11%. In Vietnam, the per barrel cost was $11.86/boe
(2019: $10.69/boe), an increase of 11% due to fixed costs such as
the FPSO and other facilities being spread over fewer produced
barrels. In Egypt the operating cost per barrel was $11.30/boe
(2019: $10.01/boe), an increase of 13% as a result of increased
workovers on existing wells to sustain the current production
levels.
DD&A
Group DD&A associated with producing assets decreased to
$63.3m (2019: $74.4m) due to the lower depreciating cost base
following the oil price related impairments taken on both Vietnam
and Egyptian assets at June 2020, plus the lower production.
DD&A per bbl is currently $21.40/boe for Vietnam (2019:
$23.29/boe) and $8.04/boe in Egypt (2019: $10.25/boe).
Administrative Expenses
Administrative expenses for the year totalled $14.7m (2019:
$23.1m). After adjusting for the non-cash items under IFRS 2 Share
Based Payment of $2.8m (2019: $3.7m) and IFRS 16 Leases of $0.7m
(2019: $0.6m), the administrative expense is $11.2m (2019: $18.8m),
which included $1.3m (2019: $1.8m) on new venture third party
costs, reflecting continued effort on portfolio rationalisation and
capturing new business particularly in the earlier part of the
year.
Operating Profit
Operating profit from continuing operations for the year was
$3.5m (2019: $38.0m) excluding the impairment charge of $234.8m
(2019: $0m), reflecting the low commodity price environment
throughout the year.
Other/Exceptional Expenses
Other/exceptional expenses for the year totalled $5.8m (2019:
$16.7m), $4.9m relates to a royalty arrangement in Egypt put in
place prior to our acquisition of El Fayum, where the likelihood of
payments was previously considered remote but now is accepted as
probable. The royalty over production post acquisition has been
charged to operating cost. The lease on the London office was
transferred resulting in a charge of $1.0m. The overall expense was
offset by a $0.1m tax refund relating to prior year
redundancies.
Finance Costs
Finance costs decreased to $4.2m (2019: $11.5m) following
accelerated repayments of principal resulting in lower RBL interest
of $4.5m (2019: $7.0m). This included a one-off gain relating to
amortisation of the capitalised borrowing cost of $1.5m (2019:
$2.7m charge), following a change in estimated future cash flows
after the June and December 2020 redeterminations and the
accelerated repayment of principal.
Cash operating cost per 2020 2019**
barrel*
$m $m
------------------------ ------ ------
Cost of sales 123.8 128.6
------------------------ ------ ------
Less
------------------------ ------ ------
Depreciation, depletion
and amortisation (63.3) (74.4)
------------------------ ------ ------
Production based taxes (7.0) (12.3)
------------------------ ------ ------
Inventories (2.3) 3.5
------------------------ ------ ------
Other cost of sales (2.9) (3.9)
------------------------ ------ ------
Cash operating costs 48.3 41.5
------------------------ ------ ------
Production (BOEPD) 11,373 12,136
------------------------ ------ ------
Cash operating cost per
BOE ($) 11.60 10.45
------------------------ ------ ------
DD&A per barrel* 2020 2019**
$m $m
------------------------ ------ ------
Depreciation, depletion
and amortisation (63.3) (74.4)
------------------------ ------ ------
Production (BOEPD) 11,373 12,136
------------------------ ------ ------
DD&A per BOE ($) 15.21 18.74
------------------------ ------ ------
Cash operating cost Vietnam Egypt Total
per barrel by Segment $m $m $m
------------------------ ------- ------ ------
Cost of sales 84.7 39.1 123.8
------------------------ ------- ------ ------
Less
------------------------ ------- ------ ------
Depreciation, depletion
and amortisation (47.8) (15.5) (63.3)
------------------------ ------- ------ ------
Production based taxes (6.5) (0.5) (7.0)
------------------------ ------- ------ ------
Inventories (2.3) - (2.3)
------------------------ ------- ------ ------
Other cost of sales (1.6) (1.3) (2.9)
------------------------ ------- ------ ------
Cash operating costs 26.5 21.8 48.3
------------------------ ------- ------ ------
Production (BOEPD) 6,103 5,270 11,373
------------------------ ------- ------ ------
Cash operating cost
per BOE ($) 11.86 11.30 11.60
------------------------ ------- ------ ------
DD&A per barrel by Segment Vietnam Egypt Total
$m $m $m
--------------------------- ------- ------ ------
Depreciation, depletion
and amortisation (47.8) (15.5) (63.3)
--------------------------- ------- ------ ------
Production (BOEPD) 6,103 5,270 11,373
--------------------------- ------- ------ ------
DD&A per BOE ($) 21.40 8.04 15.21
--------------------------- ------- ------ ------
*Cash operating cost per barrel and DD&A per barrel are
alternative performance measures. See page 39.
** Egypt from the date of acquisition
Movements in Property, Plant 2020 2019
and Equipment
$m $m
------------------------------- ------- ------
As at 1 Jan 676.9 507.2
------------------------------- ------- ------
Egypt assets acquired - 184.7
------------------------------- ------- ------
Capital spend 33.5 53.3
------------------------------- ------- ------
Revision in decommissioning
assets 6.6 7.2
------------------------------- ------- ------
Disposal of other assets (0.5) -
------------------------------- ------- ------
Derecognition of right-of-use
asset (5.7) -
------------------------------- ------- ------
DD&A- Oil and gas properties (63.3) (74.4)
------------------------------- ------- ------
DD&A - Other assets (1.2) (1.1)
------------------------------- ------- ------
Impairment - PP&E (210.5) -
------------------------------- ------- ------
As at 31 Dec 435.8 676.9
------------------------------- ------- ------
Property, Plant and
Equipment 435.7 669.6
------------------------------- ------- ------
Right-to-use-Asset
(IFRS 16 Impact) 0.1 7.3
------------------------------- ------- ------
As at 31 Dec 435.8 676.9
------------------------------- ------- ------
Taxation
The net tax credit of $25.6m (2019: $38.2m charge) relates to a
reversal of deferred tax on impairment of $36.7m offset by a
current tax charge of $26.7m and deferred tax credit of $15.6m on
operations totalling to $11.1m both in Vietnam.
The Group's effective tax rate approximates to the statutory tax
rate in Vietnam of 50%, after adjusting for non-deductible
expenditure and tax losses not recognised.
The Egypt concessions are subject to corporate income tax at the
standard rate of 40.55%, however responsibility for payment of
corporate income taxes falls upon EGPC on behalf of Pharos El Fayum
(PEF). The Group records a tax charge, with a corresponding
increase in revenue, for the tax paid by EGPC on its behalf. Due to
accumulated tax-deductible balances, there is no tax due on PEF
this period.
Work on simplifying the group structure continues but progress
has been slower than anticipated due to the restrictions of the
pandemic.
Loss post tax
The post tax loss for the year from continuing operations and
prior to the impairment charge of $234.8m, impairment tax credit of
$36.7m and exceptional costs of $5.8m was $11.7m (2019: loss $9.8m,
prior to exceptional items). The overall loss for the year was
$215.8m (2019: $24.5m).
Cash flow
Net cash flow from continuing operations amounted to $56.4m
(2019: $72.3m), a decrease of 22% compared to the drop in revenue
of 38%. Careful cost control and liquidity management both served
to protect cash flows despite the drop in revenues.
Net operating cash flow for the year (before working capital
movements) was $70.8m (2019: $117.2m).
Capital expenditure on continuing operations for the year was
$41.3m (2019: $63.4m). All discretionary capex was deferred
following the oil price crash to preserve balance sheet strength
and liquidity.
Net cash outflows from financing activities of $48.5m (2019:
$36.2m) included repayment of the RBL totalling to $42.8m (2019:
$0) plus $4.6m interest payments (2019: $7.7m). The significant
decrease in the oil price in H1 2020 led to a reduction in the
borrowing base and principal repayments during the year totalling
$42.8m, well in excess of the $26.4m repayments forecast in line
with the oil price deck used at 31 December 2019 and classified as
current liabilities at that balance sheet date.
No final dividend was paid for the year (2019: $27.4m).
Tax strategy and total tax contribution
Tax is managed proactively and responsibly with the goal of
ensuring that the Group is compliant in all countries in which it
holds interests. Any tax planning undertaken is commercially driven
and within the spirit as well as the letter of the law.
This approach forms an integral part of Pharos' sustainable
business model.
The Group's Code of Business Conduct & Ethics seeks to build
open, cooperative and constructive relationships with tax
authorities and governmental bodies in all territories in which it
operates. The Group supports greater transparency in tax reporting
to build and maintain stakeholder trust. We have a number of
overseas subsidiaries which were set up some time ago and the Group
is now proactively planning to bring these into the UK tax net to
ensure greater transparency and comparability. No additional taxes
are expected to be due as a result of this exercise.
During 2020, the total payments to governments for the Group
amounted to $150.9m (2019: $232.7m), of which $104.9m or 70% (2019:
$165.5m or 71%) was related to the Vietnam producing licence areas,
of which $72.5m (2019: $113.5m) was for indirect taxes based on
production entitlement. Egypt was paid a total of $42.2m (2019:
$63.1m) of which $41.3m (2019: $46.4m) relates to indirect taxes
based on production entitlement.
Balance sheet
Intangible assets decreased during the period to $1.5m (2019:
$20.4m) due mainly to impairments taken on exploration assets due
to a lack of clarity on timing of further investment. Additions for
the year related to Blocks 125 & 126 in Vietnam $2.0m
(2019:$10.1m), Egypt $1.1m (2019: $4.2m) of which $0.3m
(2019:$2.4m) relates to North Beni Suef and $1.2m (2019: $0.3m) for
the Israeli bid round licence fee. At June 2020 and December 2020
an impairment indicator of IFRS 6 was triggered following the
Group's decision to defer all non-essential investment at this
point. No significant work programme for its explorations areas in
Vietnam and Egypt is either budgeted or planned in the near future.
Exploration costs including costs associated with Blocks 125 &
126 in Vietnam of $17.9m and costs associated with Egyptian
projects of $5.3m were written off in the income statement in
accordance with the Group's accounting policy on oil and gas
exploration and evaluation expenditure. An additional $1.1m of tax
receivables in relation to Blocks 125 & 126 was also written
off as it was dependent on the related E&E being developed.
The movements in the Property, Plant and Equipment asset class
are shown above.
Impairment
As a result of changes in reserves profiles and reduction in the
oil price from 2025 from $72/bbl to $62/bbl, we have tested each of
our oil and gas producing properties for impairment. The results of
these impairment tests are summarised below.
For CNV, a pre-tax impairment charge of $23.3m has been
reflected in the income statement with an associated deferred tax
credit of $8.7m. As at 31 December 2020, the carrying amount of the
CNV oil and gas producing property, after additions ($1.9m),
DD&A ($11.5m) and the impairment charge, is $91.2m.
For TGT, a pre-tax impairment charge of $81.8m has been
reflected in the income statement with an associated deferred tax
credit of $28.0m. As at 31 December 2020, the carrying amount of
the TGT oil and gas producing property, after additions ($14.8m),
DD&A ($36.3m) and the impairment charge, is $239.3m.
For Egypt, an impairment charge (pre and post-tax) in the amount
of $105.4m has been reflected in the income statement. As at 31
December 2020, the carrying amount of the Egypt oil and gas
producing property, after additions ($22.7m), DD&A ($15.2m) and
after the impairment charge, is $104.1m.
The total non-cash, post tax impairment charge amounts to
$173.8m and the balance sheet carrying values of the oil and gas
producing properties stands at $434.6m. Further details of these
impairment charges, including key assumptions in relation to oil
price, discount rate and 2P reserves in Vietnam are provided in
Note 10 of the financial statements.
Right of use asset
On 4 December 2020 Pharos signed the transfer of the London
office lease to a third party. Accordingly we derecognised the
right of use asset of $5.7m and the associated lease liability of
$6.0m. The assets held for office furniture and fixture and
fittings were also fully depreciated, with a resulting charge of
$0.4m. Pharos also paid a premium to the new tenant of $0.9m as an
incentive for them to take on the lease. The overall income
statement charge of $1.0m has been recorded within
Other/exceptional expense. An additional $1.2m has been transferred
to an escrow account held by a third party (recorded within
prepayments) and will be paid to the new tenant (and expensed to
the income statement) over the next 21 months on the condition the
new tenant pays the rent to the landlord.
Balance sheet continued
Cash is set aside into abandonment funds for both TGT and CNV.
These abandonment funds are operated by PetroVietnam and, as the
Group retains the legal rights to the funds pending commencement of
abandonment operations, they are treated as other non-current
assets in our financial statements.
Oil inventory was $5.6m at 31 December 2020 (2019: $8.2m), of
which $5.4m related to Vietnam and $0.2m to Egypt. Trade and other
receivables decreased to $22.9m (2019: $41.2m) of which $11.2m
(2019: $19.3m) relates to Vietnam and $10.0m (2019: $21.3m) to
Egypt, mainly due to lower oil price and timing of crude oil
cargos.
Cash and cash equivalents at the end of the year were $24.6m
(2019: $58.5m) mainly due to lower revenue and repayment of $42.8m
of the RBL.
Trade and other payables are almost flat at $35.6m (2019:
$35.5m), of which $23.3m (2019: $18.8m) relates to the Egypt
payables, $1.7m (2019: $8.3m) Vietnam payables and $6.8m (2019:
$3.0m) net hedging liability. Tax payable decreased to $6.7m (2019:
$8.8m) following lower revenue.
Borrowings decreased to $53.7m (2019: $98.1m) mainly due to a
repayment of $42.8m (2019: $0), which was significantly higher than
previously forecast due to the lower oil price deck used by the
lending banks to calculate the Borrowing Base Amount. Net debt was
therefore $32.6m (2019: ($41.5m).
Long-term provisions comprise the Group's decommissioning
obligations and the royalty over the El Fayum asset. In Vietnam the
decommissioning provision increased from $60.5m at 2019 year-end to
$68.0m at 2020 mainly due to new provisions and changes in
estimates of $6.7m primarily due to reduction in discount rate from
1.9% to 0.9% as a result of falls in prevailing risk-free market
rates and the unwinding of the discount of $0.8m. The amounts set
aside into the abandonment funds total $45.9m (2019: $43.6m). No
decommissioning obligation exists in Egypt under the terms of the
Concession Agreement. The royalty provision relates to a historical
arrangement granting a 3% royalty on Pharos's share of profit oil
and excess cost recovery from El Fayum in Egypt. At both the date
of acquisition of the Egypt assets (April 2019) and 31 December
2019 the risk of a material outflow in relation to this arrangement
was, based on legal advice, considered remote and therefore no
provision was recorded. As a result of additional legal advice
obtained during 2020, it is now considered probable that amounts
are due under this arrangement and accordingly a provision of $5.4m
has been recognised, which is anticipated to be settled in 1 to 3
years. Of this amount, $4.9m relates to the period up to the
acquisition date and has been recorded within Other/exceptional
expense, with the balance arising since acquisition recorded within
cost of sales.
Own shares
The Pharos EBT holds ordinary shares of the Company for the
purposes of satisfying long-term incentive awards for senior
management. At the end of 2020, the trust held 2,181,655 (2019:
2,897,094), representing 0.54% (2019: 0.71%) of the issued share
capital.
In addition, as at 31 December 2020, the Company held 9,122,268
(2019: 9,122,268) treasury shares, representing 2.24% (2019: 2.24%)
of the issued share capital.
Going concern
Pharos regularly monitors its business activities, financial
position, cash flows and liquidity through detailed forecasts.
Scenarios and sensitivities are also regularly presented to the
Board, including changes in commodity prices and in production
levels from the existing assets, plus other factors which could
affect the Group's future performance and position.
A base case forecast has been considered which uses an oil price
of $54.8/bbl in 2021 and $57/bbl in 2022.The key assumptions and
related sensitivities include a "Reasonable Worst Case" (RWC)
sensitivity, where the Board has considered the risk of an oil
price crash broadly similar to 2020 as a result of the global
outbreak of the COVID-19 virus. This assumes the Brent oil price
drops to $35/bbl in March 2021 rising by $5/bbl every two months
until in line with the base case price, concurrent with reductions
in Vietnam and Egypt production compared to our base case of 5%.
Both the base case and RWC take into consideration the hedging that
has already been put in place for 2021 which covers 42% of the
Group's forecast Q2 2021 to Q4 2021 entitlement volumes securing a
minimum price for this hedged volume of $50.6 per barrel. Under the
RWC scenario, we have identified appropriate mitigating actions,
including the deferral of additional uncommitted capital
expenditure for 2 TGT wells, which would be available and enable us
to maintain sufficient financial headroom for the following 12
months.
We have also developed a reverse stress test sensitivity, which
shows the extent to which oil prices would need to fall before our
financial headroom is breached, keeping all other variables
unchanged.
There is a process underway to farm out our assets in Egypt,
with a view to providing fresh capital to invest, with the
consideration structured to minimise our own outlays over the peak
investment period. Although the process is progressing well, for
the purposes of the going concern assessment it has not been
assumed that it concludes successfully.
Our business in Vietnam remains robust with a breakeven price of
less than $26/bbl. We have limited capital expenditure outside of
the 4 TGT wells in Vietnam over the rest of the business with most
falling outside 2021. All of our debt is secured against the
Vietnam assets. Finally, our business in Egypt provides a high
degree of flexibility through the use of short-term drilling
contracts, which can be terminated with 60 days notice.
The forecasts outlined above show that the Group will have
sufficient financial headroom for the 12 months from the date of
approval of the 2020 Accounts. Based on this analysis, the
Directors have a reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable
future. Therefore, they continue to use the going concern basis of
accounting in preparing the annual Financial Statements.
Annual dividend and Company distributable reserves
As announced in May, the Board decided to withdraw dividend
payments during 2020 (2019: $27.4m), given the continued
uncertainty in the macro environment. The decision to re-instate
the dividend will be kept under review and the Board will continue
to use the well documented capital allocation criteria to assess
where and how to spend any free cash flow generated. The key goals
are to balance the preservation of balance sheet strength with
investing in growth opportunities where returns exceed the risked
cost of capital, in order to generate sustainable returns for
shareholders.
Financial outlook
Pharos' financial strength is founded on our long-term approach
to managing capital to provide risk adjusted full cycle returns,
which has allowed us to return significant amounts of capital to
shareholders.
Over the past few years we have focused on extending the range
of growth opportunities in the portfolio and the oil price downturn
occurred at a point where we were poised to invest and start to
monetise these. The updated Full Field Development Plan for TGT in
Vietnam, described in more detail in the Operational Review, is
fully funded from the operating cash flows in country and is
expected to reach post capex free cash flow point in H1 2022. The
increase in this high value, low breakeven production will provide
a strong foundation for the business. In Egypt, the updated
reserves and development drilling plan have been supported in the
short term by the equity placing, completed in January, and we are
well advanced in a process, led by Jefferies Investment Bank, to
select the right farm-out partner to support the long term capital
investment programme there. The agreement of enhanced Concession
terms, set to be ratified by Parliament later this year, provide an
additional impetus to make these investments quickly.
We continue to have the support of our core RBL banks and hope
to expand our facility with them this year. In addition, we have
recently signed a working capital facility with National Bank of
Egypt, which will deliver a modest amount of additional
liquidity.
Finally, on top of the cost reduction measures secured in 2020,
we have recently announced both a pay cut for executives and a
redundancy round which will reduce the headcount and the cost base
of the UK business. It is sad to be losing colleagues who have
worked so tirelessly and with such commitment to support all of the
measures set out in this Annual Report and we wish them all well in
the future.
These measures have set us up to weather the current storm and
to preserve our capital. We remain protected for further downside
by our oil price hedges in H1 2021 and we will continue to focus on
preserving financial flexibility while the global situation remains
uncertain.
Placing
In January 2021 the company raised $10.9m (net of fees and
expenses) in an equity placing to support the ongoing reservoir
pressure and production levels in the El Fayum field(s) through a
small scale waterflood programme. The issuance was oversubscribed
with strong support from the board and from existing shareholders,
both institutional and individuals, and from new institutional
investors. Work on the waterflood programme is underway and
additional information on the waterflood programme on can be found
in the Operations Review.
Egypt El Fayum farm-out
In Q4, 2020, the Company appointed Jefferies Investment Bank to
run a farm out process for the El Fayum asset, to de risk the
current 100% holding and introduce support for the investment
required to develop the fields. The company has been encouraged by
the level of interest and is currently reviewing a number of
bids.
Concession agreement amendment
In March 2021, the Company has received provisional approval for
an amendment of the fiscal terms from EGPC on the El Fayum
Concession. Under the terms, the cost recovery percentage will be
increased from 30% to 40% allowing Pharos a significantly faster
recovery of all its past and future investments. In return, Pharos
has agreed to (i) waive its rights to recover a portion of the past
costs pool ($115 million) and (ii) reduce its share of Excess Cost
Recovery Petroleum from 15% to 7.5%. This amendment is now subject
to the approval of the Egyptian Government.
Jann Brown
Managing Director and Chief Financial Officer
INDEPENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF PHAROS ENERGY
PLC ON THE PRELIMINARY ANNOUNCEMENT OF PHAROS ENERGY PLC
As the independent auditor of Pharos Energy plc we are required
by UK Listing Rule LR 9.7A.1(2)R to agree to the publication of
Pharos Energy plc's preliminary statement of annual results for the
year ended 31 December 2020 (the "preliminary announcement").
The preliminary announcement includes the preliminary results,
chair's statement, chief executive officer's statement, review of
operations, financial review, the condensed consolidated income
statement, the condensed consolidated statement of comprehensive
income, the group and parent company condensed consolidated balance
sheets, the group and parent company condensed consolidated
statements of changes in equity, the group and parent company
condensed consolidated cash flow statements, the related notes 1 to
15 and the non-IFRS measures. We are not required to agree to the
publication of the preliminary results presentation.
The directors of Pharos Energy plc are responsible for the
preparation, presentation and publication of the preliminary
announcement in accordance with the UK Listing Rules.
We are responsible for agreeing to the publication of the
preliminary announcement, having regard to the Financial Reporting
Council's Bulletin "The Auditor's Association with Preliminary
Announcements made in accordance with UK Listing Rules".
Status of our audit of the financial statements
Our audit of the annual financial statements of Pharos Energy
plc is complete and we signed our auditor's report on 6 April 2021.
Our auditor's report is not modified and contains no emphasis of
matter paragraph.
Our audit report on the full financial statements sets out the
following key audit matters which had the greatest effect on our
overall audit strategy; the allocation of resources in our audit;
and directing the efforts of the engagement team, together with how
our audit responded to those key audit matters and the key
observations arising from our work:
1.1. Impairment of producing oil & gas assets
Key audit matter The value of property, plant and equipment relating
description to the group's producing oil and gas assets as at
31 December 2020 was $434.6 million (2019: $668.2
million). This is considered as a key audit matter
due to the significant judgements and estimates involved
in assessing whether any impairment has arisen at
year-end, and in quantifying any such impairments.
In addition, we considered that there was a risk
of impairment due to the potential impact of climate
change on long term oil prices. Given the importance
of producing assets to the group and the judgemental
nature of the inputs used in determining the recoverable
amounts, we also considered there to be a potential
for fraud in this area. We have assessed an increased
risk in 2020 as compared to 2019 as a result of significant
oil price volatility.
Management reviewed its two producing assets in Vietnam,
being Te Giac Trang ('TGT') and Ca Ngu Vang ('CNV'),
and its one producing asset in Egypt, being El Fayum,
for indicators of impairment. As a result of the
significant falls in the oil price which occurred
in 2020 and ongoing oil price volatility, Management
revised their oil price assumption downwards during
2020 compared to the prior year assumptions, as set
out in Note 10. Given the significance of the revision,
together with changes to estimates of oil & gas reserves,
Management concluded that there was an indicator
of impairment for all three of those fields. Management
have estimated the recoverable amount of each field,
being its fair value less costs to sell, and compared
this to its balance sheet carrying amount.
Management recorded pre-tax impairment charges of
$23.3 million on CNV, $81.8 million on TGT and $105.4
million on El Fayum. No impairment charges were recorded
in 2019.
Management's fair value estimates were based on key
assumptions which included:
* oil price forecasts, being $54/bbl in 2021, $57/bbl
in 2022, $59/bbl in 2023, $61/bbl in 2024 plus
inflation of 2% thereafter;
* reserves estimates and production profiles;
* post-tax nominal discount rates of 11% for TGT and
CNV, and 14% for El Fayum, being 1% and 2% higher
respectively than the previous year; and
* operating and capital expenditure.
In relation to reserves estimates, Management have
engaged third party reservoir engineering experts
to provide an independent report on the group's reserves
estimates using standard industry reserve estimation
methods and definitions for each of the CNV, TGT
and El Fayum fields. Management have explained the
scope of work of the third party experts and their
findings in the operations review, as well as highlighting
oil and gas reserves as a key source of estimation
uncertainty.
The impairment of producing oil & gas assets is considered
by management as a key source of estimation uncertainty.
Further details of the key assumptions used by management
in their impairment evaluation are provided in note
10 of the financial statements. The disclosures in
note 10 include the sensitivity of the impairment
charges to changes in key assumptions, including
the impact of adopting oil prices consistent with
the average of a number of third party forecasts
described as being compliant with achieving the Paris
agreement goal to limit temperature rises to well
below 2 deg C ("Paris 2 deg C Goal").
----------------------- ------------------------------------------------------------------
How the scope For the TGT, CNV and El Fayum impairment assessments,
of our audit responded we obtained an understanding of management's key
to the key audit internal controls over the estimation of oil and
matter gas prices, discount rates and reserve estimates,
as well as the overall process by which management
has derived its estimates of fair value less cost
to sell. In addition, we conducted the following
substantive procedures:
Oil and gas prices:
* We independently developed a reasonable range of
forecasts based on external data obtained, against
which we compared management's oil and gas price
assumptions in order to challenge whether they are
reasonable.
* In developing this range, we obtained a variety of
reputable and reliable third party forecasts, peer
information and other relevant market data.
* In challenging management's price assumptions, we
considered the extent to which they reflect the
impact of lower oil and gas demand due to climate
change, the energy transition and COVID-19. This
included consideration of third party forecasts
stated as being consistent with achieving the Paris
2degC Goal.
Discount rates:
* We involved our internal valuation specialists to
independently develop a reasonable range of discount
rates for TGT, CNV and El-Fayum and compared those to
the rates used by management.
Reserves estimates:
* We understood the process used by management to
derive their reserves estimates and associated
production profiles and how they provide information
to, and interact with, the third party experts.
* We reviewed the third party experts' reports on
Pharos' reserves estimates as summarised in the
operations review and evaluated whether these
estimates were used consistently throughout the
accounting calculations reflected in the financial
statements.
* We communicated directly with the third party
reserves experts to discuss and assess their scope of
work, and evaluate their competence, capabilities and
objectivity.
* We compared the production forecasts used in the
impairment tests with management's approved reserves
and resources estimates.
Other procedures:
* We assessed management's other assumptions by
reference to third party information, our knowledge
of the group and industry and also budgeted and
forecast performance.
* We assessed that Pharos' impairment methodology was
acceptable under IFRS and tested the integrity and
mechanical accuracy of the impairment models.
* We assessed whether management's presentation and
disclosures relating to impairment and associated
estimation uncertainty were adequate.
----------------------- ------------------------------------------------------------------
Key observations We are satisfied that the impairment charges recorded
by management are appropriate. We are also satisfied
that appropriate disclosures relating to Management's
impairment assessment and sensitivities have been
provided in Note 10.
----------------------- ------------------------------------------------------------------
1.2. Going concern basis of accounting
Key audit matter As a result of the significant fall in the oil price
description which occurred in 2020 and ongoing oil price volatility,
we consider the appropriateness of the going concern
basis of accounting and the appropriateness of Management's
disclosure in this area to be a key audit matter.
Management have prepared a base case cash flow forecast
for a period of at least 12 months from the date
of approval of the financial statements and also
considered a number of downside scenarios.
The key assumptions used by management in their base
case include:
* oil price forecasts, being $54.8/bbl in 2021 and
$57/bbl in 2022;
* production and expenditure forecasts for TGT and CNV
consistent with management's latest life of field
production models; and
* production and expenditure forecasts for El Fayum
based on an assumption of no further drilling, in
contrast to the full field development plan (FFDP)
case used for the (fair value based) impairment test,
as the proposed farm-out process to provide funding
for the FFDP has not yet completed.
Management's downside scenarios include individual
sensitivities relating to oil price and production.
They have also considered an aggregated downside
scenario, with key assumptions including:
* oil price forecast of $35/bbl in March 2021,
increasing by $5/bbl every 2 months until the oil
price forecast is back in line with the base case by
October 2021; and
* 5% reduction in production for its Vietnam and Egypt
producing assets.
The aggregated downside scenario also includes a
number of mitigating actions, of which the most significant
is the deferral of uncommitted capital expenditure
at TGT.
Management's base case forecasts that the group will
remain cash positive and in compliance with the financial
covenants in its reserve based lending (RBL) facility
for at least 12 months from the date of approval
of the financial statements. In the downside scenario,
the group is forecast to remain cash positive but
there is a risk that liquidity falls below a minimum
threshold specified under the terms of the RBL facility.
However, management have identified additional mitigations,
including the impact of recently agreed improvements
in the fiscal terms of the concession agreement in
Egypt and further expenditure reductions, which result
in them forecasting to remain in compliance with
the RBL liquidity threshold for the 12 month period.
A reverse stress test has also been performed to
show the extent to which oil prices would need to
fall before the group breached its RBL liquidity
covenant. Based on the analysis outlined above, management
have concluded that the going concern basis of accounting
is appropriate.
Further details of the key assumptions used by management
are provided in the going concern section of the
Financial Review.
----------------------- ------------------------------------------------------------------
How the scope We obtained an understanding of management's key
of our audit responded internal controls over the going concern basis of
to the key audit accounting process. In addition, we conducted the
matter following substantive procedures:
* assessed that the forecasts incorporated in the base
case model are consistent with the budget approved by
the Board;
* compared the key assumptions in the base case
forecast to those used in the impairment models for
oil & gas producing assets and understood the basis
for any differences;
* assessed the historical accuracy of budgets prepared
by Management;
* compared the oil prices in the aggregated downside
scenario with both the spot oil price and publically
available forward curves as of the date of approval
of the financial statements;
* assessed and recalculated the impact of the
aggregated downside scenario on the financial
covenants included in the RBL during the going
concern period;
* assessed the ability of management to execute the
mitigating actions in its aggregated downside
scenario, including the extent to which the
adjustments made to capital expenditure are
uncommitted as of the date of this report;
* assessed the results of the oil price reverse stress
test, by comparing to currently prevailing prices;
* tested the going concern model for mechanical
accuracy; and
* assessed whether the disclosures relating to going
concern are appropriate.
----------------------- ------------------------------------------------------------------
Key observations Based on the cash flow forecasts prepared by Management,
we are satisfied that it is appropriate to adopt
the going concern basis of accounting in preparing
the financial statements.
----------------------- ------------------------------------------------------------------
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we did not provide a separate opinion on these
matters.
Procedures performed to agree to the preliminary announcement of
annual results
In order to agree to the publication of the preliminary
announcement of Pharos Energy plc, we carried out the following
procedures:
(a) checked that the figures in the preliminary announcement
covering the full year have been accurately extracted from the
audited financial statements and reflect the presentation to be
adopted in the audited financial statements;
(b) considered whether the information (including the management
commentary) is consistent with other expected contents of the
annual report;
(c) considered whether the financial information in the
preliminary announcement is misstated;
(d) considered whether the preliminary announcement includes a
statement by directors as required by section 435 of CA 2006 and
whether the preliminary announcement includes the minimum
information required by UKLA Listing Rule 9.7A.1;
(e) where the preliminary announcement includes alternative
performance measures ("APMs"), considered whether appropriate
prominence is given to statutory financial information and
whether:
-- the use, relevance and reliability of APMs has been explained;
-- the APMs used have been clearly defined, and have been given
meaningful labels reflecting their content and basis of
calculation;
-- the APMs have been reconciled to the most directly
reconcilable line item, subtotal or total presented in the
financial statements of the corresponding period; and
-- comparatives have been included, and where the basis of
calculation has changed over time this is explained.
(f) read the management commentary, any other narrative
disclosures and any final interim period figures and considered
whether they are fair, balanced and understandable.
Use of our report
Our liability for this report, and for our full audit report on
the financial statements, is to the company's members as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for our audit report or this report, or for the
opinions we have formed.
David Paterson ACA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
06 April 2021
Condensed consolidated income statement
for the year to 31 December 2020
2020 2019
Notes $ million $ million
---------- ----------
Continuing operations
Revenue 3 142.0 189.7
Cost of sales 4 (123.8) (128.6)
---------- ----------
Gross profit 18.2 61.1
Administrative expenses (14.7) (23.1)
Impairment charge
- Intangibles 3, 9 (24.3) -
Impairment charge
- PP&E 3, 10 (210.5) -
---------- ----------
Operating (loss)/profit (231.3) 38.0
Other/Exceptional
expense 5 (5.8) (16.7)
Investment revenue 0.1 1.9
Finance costs 6 (4.2) (11.5)
---------- ----------
(Loss)/Profit before
tax 3 (241.2) 11.7
Tax 3,7 25.6 (38.2)
---------- ----------
Loss for the year from continuing operations (215.6) (26.5)
---------- ----------
Discontinued operations 3
(Loss)/Profit post-tax for the year from
discontinued operations (0.2) 2.0
Loss for the year (215.8) (24.5)
---------- ----------
Loss per share from continuing operations
(cents) 8
Basic (54.6) (7.0)
Diluted (54.6) (7.0)
Loss per share from continuing and discontinued
operations (cents)
Basic (54.6) (6.5)
Diluted (54.6) (6.5)
Condensed consolidated statements of comprehensive income
for the year to 31 December
2020
2020 2019
$ million $ million
---------- ----------
Loss for the year (215.8) (24.5)
Items that may be subsequently reclassified to
profit or loss:
Fair value gain/(loss) arising on hedging instruments
during the year 20.0 (2.8)
Less: Cumulative (gain)/loss arising on hedging
Instruments reclassified to profit or loss (23.7) 0.2
Total comprehensive loss for the year (219.5) (27.1)
---------- ----------
The above condensed consolidated income statement and condensed
consolidated statements of comprehensive income should be read in
conjunction with the accompanying notes.
CONDENSED CONSOLIDATED Balance sheet
Group Company
---------- ---------- ---------- ----------
2020 2019 2020 2019
Notes $ million $ million $ million $ million
---------- ---------- ---------- ----------
Non-current assets
Intangible assets 9 1.5 20.4 - 0.3
Property, plant and
equipment 10 435.7 669.6 - 0.6
Right-of-use assets 0.1 7.3 - 6.3
Investments - - 268.1 539.2
Loan to subsidiaries - - 21.1 16.8
Other assets 45.9 43.6 - -
---------- ----------
483.2 740.9 289.2 563.2
---------- ---------- ---------- ----------
Current assets
Inventories 17.7 16.2 - -
Trade and other receivables 22.9 41.2 1.6 0.5
Tax receivables 0.6 1.2 0.6 0.3
Cash and cash equivalents 24.6 58.5 3.5 4.5
---------- ---------- ----------
65.8 117.1 5.7 5.3
---------- ---------- ---------- ----------
Total assets 549.0 858.0 294.9 568.5
Current liabilities
Trade and other payables (35.6) (35.5) (2.7) (5.5)
Borrowings (12.7) (26.4) - -
Lease Liabilities (0.4) (0.8) - (0.3)
Tax payables (6.7) (8.8) (0.4) (1.7)
---------- ---------- ---------- ----------
(55.4) (71.5) (3.1) (7.5)
---------- ---------- ----------
Net current assets
(liabilities) 10.4 45.6 2.6 (2.2)
----------
Non-current liabilities
Deferred tax liabilities (85.5) (137.8) - -
Borrowings (41.0) (71.7) - -
Lease Liabilities - (6.4) - (6.0)
Long term provisions (73.4) (60.5) - -
---------- ---------- ---------- ----------
(199.9) (276.4) - (6.0)
Total liabilities (255.3) (347.9) (3.1) (13.5)
---------- ---------- ---------- ----------
Net assets 293.7 510.1 291.8 555.0
---------- ---------- ---------- ----------
Equity
Share capital 31.9 31.9 31.9 31.9
Share Premium 55.4 55.4 55.4 554
Other reserves 243.0 246.6 197.6 199.3
Retained (deficit)
/ earnings (36.6) 176.2 6.9 268.4
---------- ---------- ---------- ----------
Total equity 293.7 510.1 291.8 555.0
---------- ---------- ---------- ----------
The above condensed consolidated balance sheet should be read in
conjunction with the accompanying notes.
CONDENSED consolidated STATEMENTs OF CHANGES IN EQUITY
Group
---------------------------------------------------------------------
Called up Retained
share capital Share premium Other reserves earnings Total
$ million $ million $ million $ million $ million
-------------- ------------- -------------- ---------- ----------
As at 1 January 2019 27.6 - 246.6 226.6 500.8
Loss for the year - - - (24.5) (24.5)
Other comprehensive loss - - (2.6) - (2.6)
Currency exchange translation
differences - - 0.4 - 0.4
Shares issued 4.3 55.4 - - 59.7
Distributions - - - (27.4) (27.4)
Share-based payments - - 3.7 - 3.7
Transfer relating to share-based
payments - - (1.5) 1.5 -
-------------- ------------- -------------- ---------- ----------
As at 1 January 2020 31.9 55.4 246.6 176.2 510.1
Loss for the year - - - (215.8) (215.8)
Other comprehensive loss - - (3.7) - (3.7)
Currency exchange translation
differences - - 0.8 - 0.8
Share-based payments - - 2.3 - 2.3
Transfer relating to share-based
payments - - (3.0) 3.0 -
-------------- ------------- -------------- ---------- ----------
As at 31 December 2020 31.9 55.4 243.0 (36.6) 293.7
-------------- ------------- -------------- ---------- ----------
Company
---------------------------------------------------------------------
Called up Retained
share capital Share premium Other reserves earnings Total
$ million $ million $ million $ million $ million
-------------- ------------- -------------- ---------- ----------
As at 1 January 2019 27.6 - 196.7 269.9 494.2
Profit for the year - - - 24.4 24.4
Currency exchange translation
differences - - 0.4 - 0.4
Shares issued 4.3 55.4 - - 59.7
Distributions - - - (27.4) (27.4)
Share-based payments - - 3.7 - 3.7
Transfer relating to share-based
payments - - (1.5) 1.5 -
-------------- ------------- -------------- ---------- ----------
As at 1 January 2020 31.9 55.4 199.3 268.4 555.0
Loss for the year - - - (264.5) (264.5)
Currency exchange translation
differences - - 0.8 - 0.8
Share-based payments - - 2.3 - 2.3
Transfer relating to share-based
payments - - (4.8) 3.0 (1.8)
-------------- ------------- -------------- ---------- ----------
As at 31 December 2020 31.9 55.4 197.6 6.9 291.8
-------------- ------------- -------------- ---------- ----------
The above condensed statements of changes in equity should be
read in conjunction with the accompanying notes.
CONDENSED CONSOLIDATED cash flows statements
for the year to 31 December 2020
Group Company
---------- ---------- ---------- ----------
2020 2019 2020 2019
Notes $ million $ million $ million $ million
---------- ---------- ---------- ----------
Net cash from (used in) operating
activities 13 56.4 72.3 (16.9) (21.1)
---------- ---------- ---------- ----------
Investing activities
Purchase of intangible assets (3.5) (9.9) - (0.3)
Purchase of property, plant
and equipment (35.5) (50.2) - (0.6)
Payment for acquisition of subsidiary,
net of cash acquired - (153.1) - (155.5)
Payment to abandonment fund (2.3) (3.3) - -
Other investment in subsidiary
undertakings - - (5.4) 16.8
Dividends received from subsidiary
undertakings - - 21.8 87.5
Net cash (used in) from continuing
investing activities (41.3) (216.5) 16.4 (52.1)
Net cash used in discontinued
investing activities - (0.7) - -
---------- ---------- ---------- ----------
Net cash (used in) from investing
activities (41.3) (217.2) 16.4 (52.1)
Financing activities
Repayment of borrowings (42.8) - - -
Interest paid on borrowings (4.6) (7.7) - -
Lease payments (1.1) (1.2) (0.5) (0.9)
Share-based payments - 0.1 - 0.1
Dividends paid to company shareholders - (27.4) - (27.4)
Net cash used in financing activities (48.5) (36.2) (0.5) (28.2)
---------- ---------- ---------- ----------
Net decrease in cash and cash
equivalents (33.4) (181.1) (1.0) (101.4)
Cash and cash equivalents at
beginning of year 58.5 240.1 4.5 105.9
Effect of foreign exchange rate
changes (0.5) (0.5) - -
Cash and cash equivalents at
end of year 24.6 58.5 3.5 4.5
---------- ---------- ---------- ----------
The above condensed consolidated cash flow statements should be
read in conjunction with the accompanying notes.
Notes to the condensed consolidated financial statements
1. General information
The financial information set out above does not constitute the
Company's statutory accounts for the years ended 31 December 2020
or 2019, but is derived from those accounts. A copy of the
statutory accounts for 2019 has been delivered to the Registrar of
Companies and those for 2020 will be delivered following the
Company's annual general meeting. The auditors have reported on
those accounts; their reports were unqualified, did not draw
attention to any matters by way of emphasis without qualifying
their report and did not contain statements under section 498(2) or
(3) of the Companies Act 2006. Whilst the financial information
included in this preliminary announcement has been computed in
accordance with International Financial Reporting Standards (IFRS)
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in
the European Union, this announcement does not itself contain
sufficient information to comply with IFRS. The financial
statements are presented in US dollars which is the functional
currency of each of the Company's subsidiary undertakings.
2. Significant accounting policies
(a) Basis of preparation
The financial information has been prepared in accordance with
the recognition and measurement criteria of international
accounting standards in conformity with the requirements of the
Companies Act 2006 and International Financial Reporting Standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in
the European Union. The financial information has also been
prepared in accordance with the recognition and measurement
criteria of International Financial Reporting Standards as issued
by the IASB.
The financial information has also been prepared on a going
concern basis of accounting.
(b) New and amended standards adopted by Pharos
A number of new or amended standards became applicable for the
current reporting period. The group did not have to change its
accounting policies or make retrospective adjustments as a result
of adopting these standards.
- IAS 1 Presentation of Financial Statements and IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors
(Amendment - Disclosure Initiative - Definition of Material)
- IFRS 3 Business Combinations (Amendment - Definition of Business)
- Conceptual Framework for Financial Reporting (Revised)
- IBOR Reform and its Effects on Financial Reporting - Phase 1
(c) New standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been
published that are not mandatory for 31 December 2020 reporting
periods and have not been early adopted by the Group. These
standards are not expected to have a material impact on the Group
in the current or future reporting periods and on foreseeable
future transactions.
3. Segment information
The Group has one principal business activity being oil and gas
exploration and production. The Group's continuing operations are
located in South East Asia and Egypt (the Group's operating
segments). Africa has been classified as a discontinued operation
for all years shown, as the Group disposed of all of its interests
in that geographical area in previous years. There are no
inter-segment sales. South East Asia and Egypt form the basis on
which the Group reports its segment information.
2020
SE Asia Egypt Africa(2) Unallocated Group
$ million $ million $ million $ million $ million
----------- ---------- ---------- ----------- ---------------
Oil and gas sales 87.7 30.6 - - 118.3
Realised gain on commodity hedges - - - 23.7 23.7
Total revenue 87.7 30.6 - 23.7 142.0
Depreciation, depletion and amortisation
- Oil and gas (47.8) (15.5) - - (63.3)
Depreciation, depletion and amortisation
- Other - (0.5) - (0.7) (1.2)
Impairment charge - Intangibles(3) (19.0) (5.3) - - (24.3)
Impairment charge - PP&E (105.1) (105.4) - - (210.5)
(Loss)/profit before tax from
continuing operations(1) (121.8) (124.6) - 5.2 (241.2)
Loss (post-tax) from discontinued
operations - - (0.2) - (0.2)
Tax charge on operations (11.1) - - - (11.1)
Tax credit on impairment 36.7 - - - 36.7
----------- ---------- ---------- ----------- ---------------
2019
SE Asia Egypt Africa(2) Unallocated Group
$ million $ million $ million $ million $ million
----------- ---------- ---------- ----------- ---------------
Oil and gas sales 155.5 34.4 - - 189.9
Realised loss on commodity hedges - - - (0.2) (0.2)
Total revenue 155.5 34.4 - (0.2) 189.7
Depreciation, depletion and amortisation
- Oil and gas (60.3) (14.1) - - (74.4)
Depreciation, depletion and amortisation
- Other - (0.2) - (0.9) (1.1)
Profit (loss) before tax from
continuing operations(1) 55.2 (10.1) - (33.4) 11.7
Profit (post-tax) from discontinued
operations - - 2.0 - 2.0
Tax charge (38.2) - - - (38.2)
----------- ---------- ---------- ----------- ---------------
1 Unallocated amounts included in profit/(loss) before tax
comprise corporate costs not attributable to an operating segment,
investment revenue, other gains and losses and finance costs.
2 As of December 2018, Africa operations had been disposed.
3 Includes $1.1m write off of Block 125&126 tax receivable
(other receivable - current) which was dependent on the E&E
being developed.
Included in revenues arising from South East Asia and Egypt are
revenues of $61.3m and $30.6m which arose from the Group's two
largest customers, who contributed more than 10% to the Group's oil
and gas revenue (2019: $150.7m and $34.4m in South East Asia from
the Group's two largest customers).
Geographical information
The Group's oil and gas revenue and non-current assets
(excluding other receivables) by geographical location are
separately detailed below where they exceed 10% of total revenue or
non-current assets, respectively:
Revenue
All of the Group's oil and gas revenue is derived from foreign
countries. The Group's oil and gas revenue by geographical location
is determined by reference to the final destination of oil or gas
sold.
2020 2019
$ million $ million
----------- -----------
Vietnam 64.4 153.9
Egypt 30.6 34.4
China 9.4 -
Malaysia 9.2 -
Other 4.7 1.6
----------- -----------
118.3 189.9
----------- -----------
2020 2019
Non-current assets $ million $ million
----------- -----------
Vietnam 330.5 482.7
Egypt 105.3 207.4
Israel 1.5 -
United Kingdom - 7.2
----------- -----------
437.3 697.3
----------- -----------
Excludes other assets.
4. Cost of sales
2020 2019
$ million $ million
---------- ----------
Depreciation, depletion and amortisation 63.3 74.4
Production based
taxes 7.0 12.3
Production operating
costs 51.2 45.4
Inventories 2.3 (3.5)
123.8 128.6
---------- ----------
5. Other/exceptional expense
2020 2019
$ million $ million
---------- ----------
Egypt acquisition cost - assignment fee - 13.6
Egypt acquisition
cost - royalty 4.9 -
Redundancy (gain)/loss (0.1) 3.1
Premium - lease
transfer 1.0 -
5.8 16.7
---------- ----------
In 2019, an assignment fee of $13.6m, payable to EGPC in
relation to the acquisition of Merlon Petroleum El Fayum Company in
Egypt, was settled through a non-cash offset against receivables
due from EGPC.
6. Finance Cost
2020 2019
$ million $ million
----------- -----------
Unwinding of discount on provisions 0.8 1.6
Interest expense payable and similar fees 4.5 7.0
Interest on lease liabilities 0.3 0.3
Amortisation of capitalised borrowing costs (1.5) 2.7
Net foreign exchange losses/(gains) 0.1 (0.1)
----------- -----------
4.2 11.5
----------- -----------
In 2020 $0.8m relates to the unwinding of discount on the
provisions for decommissioning (2019: $1.6m). The provisions are
based on the net present value of the Group's share of the
expenditure which may be incurred at the end of the producing life
of TGT and CNV (currently estimated to be 10-11 years) in the
removal and decommissioning of the facilities currently in
place.
Following the June and December 2020 redeterminations and the
accelerated repayment of principal in relation to the group's
reserve based lending facility, there was a change in estimated
future cash flows, as a result a one off gain of $1.5m has been
recognised in profit or loss.
7. Tax
2020 2019
$ million $ million
----------------- -----------
Current tax charge 26.7 42.2
Deferred tax credit on operations (15.6) (4.0)
Deferred tax credit on impairment (36.7) -
----------------- -----------
Total tax (credit) / charge (25.6) 38.2
----------------- -----------
The Group's corporation tax is calculated at 50% (2019: 50%) of
the estimated assessable profit for the year in Vietnam. In Egypt,
under the terms of the concession any local taxes arising are
settled by EGPC. During 2020 and 2019 both current and deferred
taxation have arisen in overseas jurisdictions only.
The charge for the year can be reconciled to the profit / (loss)
per the income statement as follows:
2020 2019
$ million $ million
----------- -----------
(Loss) / Profit before tax (including discontinued
operations) (241.4) 13.7
(Loss) / Profit before tax at 50% (2019: 50%) (120.7) 6.8
Effects of:
Non-deductible expenses 24.8 14.0
Tax losses not recognised 57.7 17.4
Non-deductible exploration costs written off 9.5 -
Adjustments to tax charge in respect of previous
periods 3.1 -
----------- -----------
Tax (credit) / charge for the year (25.6) 38.2
----------- -----------
The prevailing tax rate in Vietnam, where the Group produces oil
and gas, is 50%. The tax charge in future periods may also be
affected by the factors in the reconciliation above.
The effect of non-deductible exploration costs written off of
$9.5m relates to the impairment of exploration assets in
Vietnam.
Non-deductible expenses, primarily relate to Vietnam DD&A
charges for costs previously capitalised, which are non-deductible
for Vietnamese tax purposes of $6.1m (2019: $8.9m) and Vietnam net
impairment of $15.9m (2019: Nil). A further $2.0m (2019: $5.1m)
relates to non-deductible corporate costs including share scheme
incentives.
The Egypt concessions are subject to corporate income tax at the
standard rate of 40.55%, however responsibility for payment of
corporate income taxes falls upon EGPC on behalf of our local
subsidiary Pharos El Fayum (PEF). The Group records a tax charge,
with a corresponding increase in revenues, for the tax paid by EGPC
on its behalf. However, this is only valid if PEF is in a profit
making position and no such tax has been recorded this year.
The effect from tax losses not recognised relates to costs,
primarily of the Company, deductible for tax in the UK but not
expected to be utilised in the foreseeable future. It also includes
losses arising in Egypt for which no future benefit can be obtained
under the terms of the concession agreement.
8. Earnings per share
The calculation of the basic and diluted earnings per share is
based on the following data:
Group
------------------------
2020 2019
$ million $ million
----------- -----------
Loss from continuing and discontinued operations
for the purposes of basic loss per share (215.8) (24.5)
Effect of dilutive potential ordinary shares -
Cash settled share awards and options - -
----------- -----------
Loss from continuing and discontinued operations
for the purposes of diluted loss per share (215.8) (24.5)
----------- -----------
Group
------------------------
2020 2019
$ million $ million
----------- -----------
Loss from continuing operations for the purposes
of basic loss per share (215.6) (26.5)
Effect of dilutive potential ordinary shares - -
Cash settled share awards and options -
Loss from continuing operations for the purposes
of diluted loss profit per share (215.6) (26.5)
----------- -----------
Number of shares (million)
----------------------------
2020 2019
------------- -------------
Weighted average number of ordinary shares 395.1 378.1
Effect of dilutive potential ordinary shares -
Share awards and options - -
Weighted average number of ordinary shares for
the purpose of diluted loss per share 395.1 378.1
------------- -------------
In accordance with IAS 33 "Earnings per Share", the effects of
1.3m (2019: 1.7m) antidilutive potential shares have not been
included when calculating dilutive earnings per share for the year
ended 31 December 2020 or 2019, as the Group was loss making.
9. Intangible assets
Intangible assets at 2020 year-end comprise the Group's
exploration and evaluation projects which are pending
determination. At June 2020 and December 2020 an impairment
indicator of IFRS 6 was triggered following the Group's decision to
defer all non-essential investment in Vietnam and Egypt at this
point. No substantive expenditure for its exploration areas in
Vietnam and Egypt is either budgeted or planned in the near future.
Exploration costs including costs associated with Blocks 125 &
126 in Vietnam of $17.9m and costs associated with Egypt projects
in the amount of $5.3m were written off in the income statement in
accordance with the Group's accounting policy on oil and gas
exploration and evaluation expenditure. An additional $1.1m of tax
receivables in relation to Blocks 125 & 126 was also written
off as it was dependent on the related E&E being developed.
During 2020, $1.2m was spent in Israel on geoscience and
geophysical studies (2019: $0.3m were held in the Company). We
continue to hold $2.7m (2019: $2.7m) cash in relation to bank
guarantees for the Israeli offshore exploration licenses.
10. Property, plant and equipment
As a result of the oil price volatility and movements in 2P
reserves, we have tested each of our oil and gas producing
properties for impairment. The results of these impairment tests
are summarised below. For each producing property, the recoverable
amount has been determined using the fair value less costs of
disposal method which constitutes a level 3 valuation within the
fair value hierarchy. The recoverable amount is supported by the
fair value derived from a discounted cash flow valuation of the 2P
production profile.
Vietnam
The key assumptions to which the fair value measurement is most
sensitive are oil price, discount rate and 2P reserves (2019: oil
price, discount rate and capital spend). As at 31 December 2020,
the fair value of the assets was estimated based on a post-tax
nominal discount rate of 11% (2019: 10%) and a nominal Brent oil
price of $54.0/bbl in 2021, $57.0/bbl in 2022, $59.0/bbl in 2023,
$61.0/bbl in 2024 plus inflation of 2.0% thereafter (2019: Brent
oil price of $65.0/bbl in 2020, plus inflation of 2.0%
thereafter).
Impairments have arisen on both TGT and CNV as a result of the
above impairment tests.
For CNV, a pre-tax impairment charge of $23.3m has been
reflected in the income statement with an associated deferred tax
credit of $8.7m. As at 31 December 2020, the carrying amount of the
CNV oil and gas producing property, after additions ($1.9m),
DD&A ($11.5m) and the impairment charge, is $91.2m.
For TGT, a pre-tax impairment charge of $81.8m has been
reflected in the income statement with an associated deferred tax
credit of $28.0m. As at 31 December 2020, the carrying amount of
the TGT oil and gas producing property, after additions ($14.8m),
DD&A ($36.3m) and the impairment charge, is $239.3m.
Testing of sensitivity cases indicated that a $5/bbl reduction
in long-term oil price used when determining the fair value less
costs of disposal method would result in additional post-tax
impairments of $30.3m on TGT and $5.7m on CNV. A 1% increase in
discount rate would result in additional post-tax impairments of
$4.9m on TGT and $1.7m on CNV. We have also run sensitivities
utilising the average of a number of third party forecasts
described as being consistent with achieving the 2015 COP 21 Paris
agreement goal to limit temperature rises to well below 2 degrees
Celsius (the "Paris oil price scenario"). The nominal Brent prices
used in this scenario were as follows; 2021: $49/bbl, 2022:$54/bbl,
2023:$56/bbl, 2024:$57/bbl, 2025:$58/bbl, 2026: $61/bbl,
2027:$64/bbl, 2028:$65/bbl, 2029:$66/bbl. Using these prices and an
11% discount rate would result in additional post-tax impairments
of $17.8m on TGT and $3.0m on CNV.
The impairment tests for TGT and CNV assume that production
ceases in 2029 and 2030 respectively,
Egypt
The key assumptions to which the fair value measurement is most
sensitive are oil price, discount rate, capital spend and 2P
reserves. As at 31 December 2020, the fair value of the assets are
estimated based on a post-tax nominal discount rate of 14% (2019:
12%) and a nominal Brent oil price of $54.0/bbl in 2021, $57.0/bbl
in 2022, $59.0/bbl in 2023, $61.0/bbl in 2024 plus inflation of
2.0% thereafter (2019: Brent oil price of $65.0/bbl in 2020, plus
inflation of 2.0% thereafter).
An impairment charge (pre and post-tax) of $105.4m arose on El
Fayum as a result of the above impairment test. As at 31 December
2020, the carrying amount of the Egypt oil and gas producing
property, after additions ($22.7m), DD&A ($15.2m) and the
impairment charge, is $104.1m.
Testing of sensitivity cases indicated that a $5/bbl reduction
in long term oil price used would result in an additional
impairment of $52.3m. A 1% increase in discount rate would result
in an additional impairment charge of $12.7m. We have also run a
sensitivity using a 14% discount rate and the Paris oil price
scenario which would result in an additional impairment of
$30.2m.
It is not considered possible to provide meaningful
sensitivities in relation to 2P reserves for any of the group's oil
and gas producing properties, as the impact of any changes in 2P
reserves on recoverable amount would depend on a variety of
factors, including the timing of changes in production profile and
the consequential effect on the expenditure required to both
develop and extract the reserves.
Other fixed assets comprise office fixtures and fittings and
computer equipment.
11. Hedge transactions
During 2020 Pharos entered into different commodity (swap)
hedges, to protect the Brent component of forecast oil sales and to
ensure future compliance with its obligations under the RBL over
the producing assets in Vietnam. The commodity hedges run until
December 2021 and are settled monthly. The hedging positions in
place at the balance sheet date cover 42% of the Group's forecast
production until December 2021, securing an average price for this
hedged volume of $44.7 per barrel (2019: cover was 57% of the
Group's forecast H1 2020 entitlement volumes securing a minimum
price for this hedged volume of $60.7 per barrel).
Pharos has designated the swaps as cash flow hedges. This means
that the effective portion of unrealised gains or losses on open
positions will be reflected in other comprehensive income. Every
month, the realised gain or loss will be reflected in the revenue
line of the income statement. For the year end 31 December 2020 a
gain of $23.7m was realised (2019: loss of $0.2m). The outstanding
unrealised loss on open position as at 31 December 2020 amounts to
$6.3m (2019: loss of $2.6m).
The carrying amount of the swaps is based on the fair value
determined by a financial institution. As all material inputs are
observable, they are categorised within Level 2 in the fair value
hierarchy. It is presented in "Trade and other receivables" or
"Trade and other payables" in the consolidated statement of
financial position. The liability position as of December 2020 was
$6.8m (2019: liability position $3.0m).
12. Distribution to Shareholders
The Company is focused on preserving balance sheet strength and
has therefore decided to withdraw dividend payments during 2020,
given the continued uncertainty in the macro environment.
In May 2019, the Company paid dividends to shareholders of
$27.4m or 5.50 pence per Ordinary Share. The Pharos EBT, which is
consolidated within the Group, waived its rights to receive a
dividend in 2019.
13. Reconciliation of operating profit to operating cash
flows
Group Company
---------- ---------- ---------- ----------
2020 2019 2020 2019
$ million $ million $ million $ million
---------- ---------- ---------- ----------
Operating (loss)/profit (231.3) 38.0 (14.3) (21.1)
Share-based payments 2.8 3.7 2.8 3.7
Depletion, depreciation and
amortisation 64.5 75.5 0.7 0.9
Impairment Charge 234.8 - - -
---------- ---------- ---------- ----------
Operating cash flows before
movements in working capital 70.8 117.2 (10.8) (16.5)
Increase in inventories (1.5) (0.5) - -
Decrease (Increase) in receivables 19.6 (1.7) (0.1) 0.6
Decrease in payables (3.4) (2.0) (3.3) (3.6)
---------- ---------- ---------- ----------
Cash generated by (used in)
operations 85.5 113.0 (14.2) (19.5)
Interest received 0.1 2.2 - 1.0
Bank fees paid - - - (0.2)
Other/ exceptional expense outflow (2.7) (2.4) (2.7) (2.4)
Income taxes paid (26.5) (40.5) - -
---------- ---------- ---------- ----------
Net cash from (used in) operating
activities 56.4 72.3 (16.9) (21.1)
---------- ---------- ---------- ----------
During the year, a total of $10.2m (2019: $27.5m) of trade
receivables due from EGPC in Egypt were settled by way of non-cash
offset against trade payables.
14. Subsequent events
Placing
In January 2021, the Company announced the successful completion
of the Placing of 44,661,490 new Ordinary Shares, as well as the
concurrent Subscription and Retail Offer.
Through this placing, Pharos raised additional capital of $10.9m
(net of direct issue costs of $0.8m - Placing Price GBP0.1925
converted at the exchange rate as of 21/01/21 of 1.3628). These
funds will allow us to restart our investment in the water flood
programme in the El Fayum oil fields in Egypt imminently as we
progress our farm out process.
El Fayum Farm-out
In Q4, 2020, the Company appointed Jefferies Investment Bank to
run a farm out process for the El Fayum asset, to de risk the
current 100% holding and introduce support for the investment
required to develop the fields. The company has been encouraged by
the level of interest and is currently reviewing a number of
bids.
Concession Agreement Amendment El Fayum area
In March 2021, the Company has received provisional approval for
an amendment of the fiscal terms from EGPC on the El Fayum
Concession. Under the terms, the cost recovery percentage will be
increased from 30% to 40% allowing Pharos a significantly faster
recovery of all its past and future investments. In return, Pharos
has agreed to (i) waive its rights to recover a portion of the past
costs pool ($115 million) and (ii) reduce its share of Excess Cost
Recovery Petroleum from 15% to 7.5%.
This amendment is now subject to the approval of the Egyptian
Government.
15. Preliminary results announced
Copies of the announcement will be available to download from
www.pharos.energy. The Annual Report and Accounts, together with
notice of the 2021 AGM, will be posted to shareholders in due
course.
Non-IFRS measures
The Group uses certain measures of performance that are not
specifically defined under IFRS or other generally accepted
accounting principles. These non-IFRS measures are cash operating
cost per barrel, depreciation, depletion and amortisation costs per
barrel which are defined below. For the RBL covenant compliance,
three Non-IFRS measures are included: Net debt, EBITDAX and Net
debt/EBITDAX.
Cash-operating costs per barrel
Cash operating costs are defined as cost of sales less
depreciation, depletion and amortisation, production based taxes,
movement in inventories and certain other immaterial cost of
sales.
Cash operating costs for the period is then divided by barrels
of oil equivalent produced. This is a useful indicator of cash
operating costs incurred to produce oil and gas from the Group's
producing assets.
2020 2019*
$ million $ million
---------- ----------
Cost of sales 123.8 128.6
Less:
Depreciation, depletion and amortisation (63.3) (74.4)
Production based taxes (7.0) (12.3)
Inventories (2.3) 3.5
Other cost of sales (2.9) (3.9)
Cash Operating Costs 48.3 41.5
---------- ----------
Production (BOEPD) 11,373 12,136
---------- ----------
Cash operating cost
per BOE ($) 11.60 10.45
---------- ----------
Cash-operating costs per barrel by Segment (2020)
Vietnam Egypt Total
$ million $ million $ million
---------- ---------- ----------
Cost of sales 84.7 39.1 123.8
Less:
Depreciation, depletion and
amortisation (47.8) (15.5) (63.3)
Production based taxes (6.5) (0.5) (7.0)
Inventories (2.3) - (2.3)
Other cost of sales (1.6) (1.3) (2.9)
Cash operating cost 26.5 21.8 48.3
---------- ---------- ----------
Production (BOEPD) 6,103 5,270 11,373
---------- ---------- ----------
Cash operating cost
per BOE ($) 11.86 11.30 11.60
---------- ---------- ----------
* Egypt from the date of acquisition to 31 December 2019
Depreciation, depletion and amortisation costs per barrel
DD&A per barrel is calculated as net book value of oil and
gas assets in production, together with estimated future
development costs over the remaining 2P reserves. This is a useful
indicator of ongoing rates of depreciation and amortisation of the
Group's producing assets.
2020 2019*
$ million $ million
---------- ----------
Depreciation, depletion and amortisation (63.3) (74.4)
---------- ----------
Production (BOEPD) 11,373 12,136
---------- ----------
DD&A per BOE ($) 15.21 18.74
---------- ----------
* Egypt from the date of acquisition to 31 December 2019
DD&A per barrel by Segment (2020)
Vietnam Egypt Total
$ million $ million $ million
---------- ---------- ------------
Depreciation, depletion and
amortisation (47.8) (15.5) (63.3)
---------- ---------- ----------
Production (BOEPD) 6,103 5,270 11,373
---------- ---------- ------------
DD&A per BOE ($) 21.40 8.04 15.21
---------- ---------- ------------
Net Debt
Net debt comprises interest-bearing bank loans, less cash and
short-term deposits.
2020 2019
$ million $ million
---------- -------------------------
Cash and cash equivalents 24.6 58.5
Borrowings (57.2) (100.0)
---------- -------------------------
Net Debt (32.6) (41.5)
---------- -------------------------
EBITDAX
EBITDAX is earnings from continuing activities before interest,
tax, depreciation, amortisation, impairment of PP&E and
intangibles, exploration expenditure and other/exceptional items in
the current year.
2020 2019
$ million $ million
---------- ----------------------
Operating (loss)/profit (231.3) 38.0
Depreciation, depletion and amortisation 64.5 75.5
Impairment charge 234.8 -
EBITDAX 68.0 113.5
---------- ----------------------
Net debt/EBITDAX
Net Debt/EBITDAX ratio expresses how many years it would take to
repay the debt, if net debt and EBITDAX stay constant.
2020 2019
$ million $ million
---------- ---------------------
Net Debt (32.6) (41.5)
EBITDAX 68.0 113.5
Net Debt/EBITDAX 0.48 0.37
---------- ---------------------
Gearing
Debt to equity ratio is calculated by dividing interest-bearing
bank loans by stockholder's equity. The debt to equity ratio
expresses the relationship between external equity (liabilities)
and internal equity (stockholder's equity)
2020 2019
$ million $ million
---------- ---------------------
Total Debt 57.2 100.0
Total Equity 293.7 510.1
Debt to Equity 0.20 0.20
---------- ---------------------
Operating cash per share
Operating cash per share is calculated by dividing net cash from
(used in) continuing operations by number of shares in the
year.
2020 2019
$ million $ million
------------ ---------------------
Net cash from operating activities 56.4 72.3
Weighted number of shares in the year 397,515,684 381,170,329
Operating cash per share 0.14 0.19
------------ ---------------------
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