SOCO International plc ("SOCO" or "the Company")

SOCO is an international oil and gas exploration and production company, headquartered in
London, traded on the London Stock Exchange and a constituent of the FTSE 250 Index. The
Company has interests in Vietnam, Yemen, Thailand, the Republic of Congo (Brazzaville), the Democratic Republic of Congo (Kinshasa) and Angola with production operations in Yemen.

The Company today announces its Interim Results for the six months ended 30 June 2007.

Key Highlights


Continued Value Creation Through Exploration

  • Early indications on TGD-1X well in Vietnam indicate largest discovery in SOCO’s history
    • Testing to be carried out in second half of 2007

    • 30 metres of net pay to be tested; further 300 metres of sediment to be drilled


  • West Africa exploration portfolio expanded with addition of interest in Cabinda North Block, Angola

  • Extremely active exploration and development campaigns continue, with three rigs in Yemen and two rigs in Vietnam drilling back to back wells for the remainder of 2007

  • Production Profile Set To Be Transformed
  • CNV development on Block 9-2, Vietnam, on track to come on stream in first half of 2008 at rate of 20,000 barrels of oil per day (SOCO Vietnam interest: 25%)

  • Three successful field extension wells on Kharir field in Yemen point to additional reserve growth

  • Yemen production capabilities being expanded to allow production to reach record levels

  • Strong Financial Results
  • After tax profits increase to $17.0 million (H1 2006: $15.1 million)

  • Basic Earnings Per Share of 24.1 cents (H1 2006: 21.5 cents)

  • Revenue increased by 30% to $50.4 million (H1 2006: $38.8 million)



Ed Story, Chief Executive Officer, commented:

"SOCO’s strategy has always been to create shareholder value and build its reserve base through exploration. The initial results from the TGD-1X well support this approach as it appears the discovery could be the largest in the Company’s history. Testing will be carried out in the second half of 2007 to quantify the size and nature of the discovery.

"In addition the Company has a number of other exploration prospects to drill before the end of the year on Block 16-1, whilst the CNV development on Block 9-2 remains on track to start production in the first half of 2008 and transform SOCO’s production profile. This demonstrates the Company’s ability to drive projects from discovery to production."


4 September 2007



Enquiries:


SOCO International plc
Roger Cagle
Executive VP, Deputy CEO and Chief Financial Officer
Tel : 020 7747 2000

Pelham PR
James Henderson
Alisdair Haythornthwaite
Tel: 020 7743 6676

 

To download the full version of the Press Release in PDF format please click here.

 

CHAIRMAN’S AND CHIEF EXECUTIVE’S STATEMENT


The first half of 2007 was highlighted by what may be the largest discovery in the Company’s history; although unforeseen operating challenges due to the size and nature of the discovery have deferred confirmation of the significance of the discovery. SOCO moves toward the development phase on both Blocks in Vietnam and enters the very active conclusion to the exploration drilling phase on Block 16-1. The Company continues to progress its portfolio in the high potential Congo Basin and to build in this core area with the addition of an interest in the Cabinda North Block, onshore Angola. In addition the Kharir field looks set for further reserve upgrades, capping off a successful first half of the year.

The manifestation of recent drilling success in Vietnam has the potential to exceed that at any time in the Company’s history and the early indication of success on the Te Giac Den 1X (TGD-1X) well, even without the additional potential, is hugely promising.

The Kharir field in Yemen, which has already had several reserve upgrades, appears to be on the verge of additional growth with the successful completion of three field extension wells in the first half of 2007. Production attributable to the Group’s working interest in Yemen was down slightly for the period at 6,341 barrels of oil per day (BOPD) as compared to the equivalent period last year (6,407 BOPD) due to scheduled downtime required to expand the production capability to anticipated record production levels. Even with realised average crude oil prices and production marginally lower, after tax profits for the period increased to $17.0 million from $15.1 million in the first half of 2006.

In summary, SOCO is in the midst of a very active five year drilling campaign of exploration and appraisal wells, across Vietnam, West Africa and Yemen, with two new field developments expected on-stream within the next 36 months, transforming the Company’s production profile. This year is shaping up to be another milestone for the Company as it targets significant further reserves expansion and prepares for first production from Vietnam next year.

OPERATIONS

 

Exploration/Development

 

Vietnam


SOCO holds its interests in Vietnam, all in the Cuu Long Basin offshore, through its 80% owned subsidiary SOCO Vietnam Ltd (SOCO Vietnam) and through its 100% ownership of OPECO, Inc. SOCO Vietnam holds a 25% working interest in Block 9-2, which is operated by the Hoan Vu Joint Operating Company and holds a 28.5% working interest in Block 16-1, which is operated by the Hoang Long Joint Operating Company. OPECO, Inc. holds a 2% working interest in Block 16-1.

Development drilling is imminent on the Ca Nu Vang field on Block 9-2 with first oil expected in the second quarter of 2008. Exploration drilling continues on Block 16-1 where the declaration of commerciality by Petrovietnam on the Te Giac Trang field discovery is expected in the second half of 2007.

Block 16-1


Operational issues experienced in drilling the first two wells in the multi-well drilling programme along with mixed results meant drilling got off to a slow start in 2007. In May, the Te Giac Cam 1X (TGC-1X) well on Prospect "S" was plugged and abandoned after reaching a total depth of 4,196 metres. While the reservoir in the primary target, the Lower Bach Ho 5.2 (LBH 5.2) interval, was not developed, the well had encountered oil shows in the Oligocene and the well was deepened to further evaluate this section.

While drilling in the Oligocene, the well encountered unexpected high pressure, with associated oil and gas shows, and had to be cased using a seven inch liner prior to drilling to total depth. Examination of the well and logging data indicated that, despite the hydrocarbon influx, it was not sufficiently encouraging for the well to be tested. The high pressures did, however, support the concept of porosity preservation at depth due to early migration of hydrocarbons, the basis for the deep play on the Block, confirming the Company’s exploration strategy.

After the drilling of the TGC-1X well, the Trident 9 rig completed its contract and was released. The Petrovietnam Drilling and Well Services (PDWS) newly commissioned drilling rig, the PVD-1 began its two year contract by spudding the TGD-1X well on Prospect "E" on 5 April 2007 to test the deep potential in the basin. This was the first well for the new rig retained primarily to drill development wells on the Ca Ngu Vang field on Block 9-2.

The well encountered the first high pressure zone higher than prognosis and had to be plugged back to sidetrack and case the hole. After setting casing, the PVD-1 rig, was taken off line due to a series of control system failures, which potentially could have compromised safe continuation of drilling operations. Following advice from PDWS and the control system supplier, drilling operations were suspended for approximately 18 days while the control system problems were diagnosed. The problems were corrected and the control system amended leading to re-commissioning of the rig.

The TGD-1X well was then drilled ahead before being temporarily suspended at 4,625 metres after penetrating a gas and oil zone with pressure in excess of 12,000 pounds per square inch, which was beyond the safe operating capacity of the drilling rig.

The well encountered hydrocarbons in two Oligocene clastic sequences, which were separated by a volcanic layer. Well logs over the upper sequence indicated approximately 30 metres of net pay. After drilling through the volcanics, the well encountered a lower clastic sequence with oil and gas shows. However, the mud weight required to control the pressure and gas indicated downhole pressures at the upper limit of the safe operating capability of the drilling rig. Consequently, drilling had to be halted after only 22 metres of the sequence had been penetrated. High pressure and temperature also meant that the section could not be logged. The current seismic interpretation shows another 300 metres of sediment remain to be drilled above Basement.

The well was plugged back to isolate the lower high pressure zone from the upper sequence. The Upper Oligocene clastic sequence, which is also overpressured, requires specialised testing equipment and a higher capacity blow out preventer (BOP) for the rig. This equipment is currently being sourced and the Company is confident testing will be carried out in the second half of 2007. The higher capacity BOP will also be required to drill deeper on TGD and to test an adjacent prospect. The Adriatic XI rig, which is currently drilling shallow prospects, will be refitted for testing and deep drilling as soon as the equipment is available.

The Adriatic XI drilling rig began its two year contract in July when it was mobilised to drill the Te Giac Hong exploration well to evaluate the "L" North prospect. The well was drilled to evaluate the Miocene and Upper Oligocene sections that are productive in the Te Giac Trang discoveries. The well was plugged and abandoned after reaching a total depth of 3,685 metres. The well evaluated the LBH 5.2 and the Oligocene "C" formations. The LBH 5.2 sands were poorly developed and had no oil shows. There were sands with oil shows in the Oligocene "C"; however, log evaluation showed the sands to have poor permeability and they were not tested.

The Adriatic XI rig was then moved to drill the Te Giac Lam 1X well to test the Miocene and Upper Oligocene at the "O" prospect. This well spudded on 13 August, had approximately 70 metres of good oil shows as indicated by mud logs in the Upper Oligocene and was deviated to intersect a deeper Oligocene stratigraphic trap, a new play in the basin, formed by the pinch out of the Oligocene against a Basement high. We are preparing to test and the final results of the well are expected later in September.

Block 9-2


Development
The first half of 2007 was primarily focused on the letting of all major contracts associated with the Pilot Development Plan on the Ca Ngu Vang field (CNV), which was officially approved in December 2006 by Petrovietnam. Subsequent to this approval, Petrovietnam became a full paying participant in its 50% interest in Block 9-2.

At this time work has begun on the fabrication of both the unmanned offshore platform and the pipeline that will transport gas and liquids to Bach Ho for processing and transportation to market. The PVD-1 has moved from Block 16-1, where it drilled the TGD-1X exploration well as its shakedown project to commence drilling the development and injector wells on CNV. First oil is on track to commence in the second quarter of 2008.

Since becoming a participant in the World Trade Organisation, Vietnam has accelerated the privatisation of much of the previously state owned enterprises, including divisions of Petrovietnam. Consequently, certain aspects of the development programme, particularly a gas sales agreement, are as yet not finalised. However, discussions on the sales agreement for the associated gas produced from the CNV field have continued.

The PVD-1 drilling rig moved on location to begin the development drilling programme on the CNV field on 21 August, after experiencing some weather delays. As this report was published the CNV-1P well had not yet spudded due to further analysis and repairs on the rig’s control system.

Exploration
The exploration phase of work on Block 9-2 was concluded in 2007 when the Ca Ong Doi 2X (COD-2X) well was drilled during the first quarter on the COD structure to evaluate the possibility that the clastics play on Block 16-1 extended into this Block. This well encountered Lower Miocene sands however they were not charged with hydrocarbons possibly indicating that the structure was developed after migration.

Sands were also encountered in both the Oligocene "C" and "E" sequences. Although the Oligocene "C" had good shows, the sands were thinner than expected and, following evaluation of the electric logs, it was decided not to flow test this horizon. In the Oligocene "E" the shows encountered were of residual oil indicating that the reservoir had been breached.

Yemen


Drilling activity with three rigs continued throughout the first half of 2007 as the East Shabwa Block 10 Consortium continued the programme of appraisal and development of the Kharir Basement.

Appraisal work was focused on testing the areal extents of the Basement interval in the Kharir field. Two Basement producers, KHA-1-25 and KHA-1-27, aimed at appraising and developing the southern to south-western flank area of the field, have been drilled. The results to date of these two wells are very encouraging, indicating greater fracturing and hence greater performance in this area of the field. The KHA-1-25 well has been tested and produced at over 5,500 BOPD from an area of the field generally expected to have low productivity. The KHA-1-27 well also encountered hydrocarbons in sandstones overlying the Basement and tested at 500 BOPD. The results of this well are being evaluated ahead of potential selection of appraisal locations.

Further development has centered around drilling wells into the overlying Biyad horizon to provide water for the Basement injection schemes and drilling Basement water injectors. Injection wells include the KHA-2-18 well in the northern part of the field, the KHA-1-23 and KHA-1-19 wells in the east and the KHA-1-24 well in the west. The KHA-1-22, KHA-1-26 and KHA-2-19 wells have been drilled to source the water. Albeit drilled as an injection well, the KHA-2-18 well came in some 300 metres higher than predicted and indicates additional potential in the northern area of the field. Evaluation of the impact of this well is ongoing.

An additional Biyad producer, the KHA-1-20, has been drilled to improve sweep efficiency and recovery from this horizon.

At the time of publication, the three rigs are active on the Kharir Basement structure drilling the water injector wells KHA-1-28 in the south of the field and KHA-1-29 in the east, and the KHA-1-30 oil producer well in the centre of the field.

Production from the field has been purposely limited below the average level experienced in 2006. This limitation is a direct result of delays in installing water injection equipment associated with the reservoir pressure maintenance project and issues with water filtration equipment. Although the operator is maximizing efforts to accelerate all elements of the equipment purchase, delivery and installation cycle, delays are common issues for the oil industry at this time.

Both water injection and gas reinjection into Basement is at current capacity with average injection rates at 13,000 barrels of water per day and 4 million cubic feet per day respectively over the last two months. These will increase as the injection capacity is increased. Gas reinjection is but a part of the consortium’s efforts to reduce gas flaring. Detailed reviews of other gas utilisation projects, in conjunction with the Yemeni authorities, are ongoing.

In addition, there is significant activity ongoing in increasing the production handling capacity of the process equipment. Alongside the addition of new process equipment, the existing equipment is undergoing debottlenecking to maximise throughput.

Later this year the consortium expects to initiate an exploration programme in the southeastern part of the Block.

The East Shabwa Block 10 Consortium comprises Comeco Petroleum, Inc. (28.57% interest), in which SOCO holds a 58.75% interest, TOTAL Yemen, S.A. (28.57% interest and operator), Occidental Yemen Ltd. (28.57% interest) and Kuwait Foreign Petroleum Exploration Co. (14.29% interest).

Republic of Congo (Brazzaville)


SOCO Exploration and Production Congo (SOCO EPC), the Company’s 85% owned subsidiary holds a 37.5% interest in, and is the designated operator of, the Marine XI Block, offshore the Republic of Congo (Brazzaville).

A 1,200 square kilometre 3D seismic acquisition programme was completed over the shallow water Block located in the Lower Congo Basin, in the fourth quarter of 2006. Initial processing has been completed and Pre Stack Depth Migration of the data is underway to allow better imaging of the pre-salt structure. Interpretation is on schedule and SOCO EPC expects to tender for a multi-well drilling programme later this year.

Democratic Republic of Congo (Kinshasa)


In August 2007 the Company’s 85% owned subsidiary, SOCO DRC Limited (SOCO DRC), received Cabinet approval of its Production Sharing Contract on the 800 square kilometre Nganzi Block, onshore the Democratic Republic of Congo (Kinshasa). Final approval is pending a Presidential Decree.

A geochemical survey was conducted in August to evaluate the potential of several leads previously identified by an aeromagnetic and gravity survey conducted by the Company. The results will be used to help lay out a 2D seismic grid. Seismic acquisition is scheduled to begin later this year.

SOCO DRC is the designated operator with an 85% working interest in the Block. Cohydro, the state owned oil company, holds the remaining interest.

Angola


The Company was notified In August 2007 that the Executive Decree outlining SOCO Cabinda Limited’s (SOCO Cabinda) 17% participating interest in the Production Sharing Agreement (PSA) for the Onshore Cabinda North Block (Block A) became effective in July. SOCO holds 80% of the interest in SOCO Cabinda. SONANGOL, the Angolan state owned oil company, holds a 51% interest in the PSA and is operator, with Teikoku Oil Co. Limited (17%) and Angola E&P Company (15%) holding the remaining interests.

An airborne gravity and magnetic survey was conducted over the Block in June and processing completed in August. Interpretation of the survey has begun. A contract for the acquisition of a 1,200 kilometre 2D seismic survey, based on the results of the gravity and magnetic survey, has been awarded to Grant Geophysical and acquisition is expected to begin in September 2007.

Thailand


The farm-in party, GFI Oil and Gas Thailand, Inc. (GFI), to the Bualuang field whose rights were previously held by SOCO Exploration (Thailand) Co. Ltd. (SOCO Thai), acquired the interests of the minority farm-in party early in the year making them the sole Farmee. GFI subsequently concluded a high resolution 100 kilometre 2D seismic programme during the second quarter of 2007. Construction has begun on a 12 slot wellhead platform for the field and is scheduled to be completed in the fourth quarter of this year, with first production expected in the first half of 2008.

With the seismic acquisition GFI needs only to complete the drilling of a single well in the Bualuang field to earn its initial 20% interest as provided in the agreement signed by the parties. The Farmee has expressed its intent to enter Phase II and earn a further 40% working interest by installing a platform, drilling up to eight additional wells and taking the project to first oil. During Phase II, SOCO Thai would fund 8% of the cost. If the earn-in terms of the agreement are fulfilled, SOCO Thai would retain a 40% working interest in the field.

After the end of the Phase II Period, the Farmee shall be designated the operator of the project, subject to approval of the appropriate regulatory authorities of the Government of Thailand, and shall engage an independent reservoir engineer to perform an analysis of the proven reserves contained in the Bualuang field. The Farmee shall pay SOCO Thai an amount equal to one dollar ($1.00) for each barrel of proven reserves over ten million four hundred thousand barrels.

RESULTS


With average crude oil prices remaining at a consistently high level and production from the Group’s Yemen project steady, after tax profits for the period increased to $17.0 million from $15.1 million in the first half of 2006. This translates into basic and diluted earnings per share from continuing operations of 24.1 cents and 21.5 cents, respectively, as compared to 21.5 cents and 19.2 cents in the equivalent period last year.

Income statement

 

Operating results


Despite marginally lower production attributable to the Group’s working interest, 6,341 BOPD for the first half of 2007 as compared to 6,407 BOPD for the same period last year, and slightly lower average realised crude oil prices, $62.38 per barrel for the first six months of this year compared to $63.15 per barrel for the first half of last year, Group oil and gas revenues were up. Revenue in the first half of 2007 increased by 30% to $50.4 million from $38.8 million in the first half of 2006. Most of this increase was due to higher entitlement volumes in the first six months of 2007 owing to increased cost recovery primarily arising from capital expenditure associated with development of the Basement reserves in Yemen ($8.9 million) and adjustments of lifting imbalances arising in prior periods ($3.5 million).

Cost of sales during the first half of 2007 were $17.0 million against $11.0 million in the first half of 2006 with the $3.5 million variance on lifting imbalances increasing cost of sales in the current period compared to the first half of 2006. Ignoring lifting imbalances, the underlying increase in cost of sales has arisen mainly due to higher depreciation, depletion and decommissioning costs (DD&A).

On a per barrel basis, excluding lifting imbalances and inventory effects, operating costs attributable to the Group’s sole producing asset in Yemen were flat at approximately $6.50 per barrel in the periods to 30 June 2006 and 2007.

DD&A increased by $1.8 million compared to the same period last year due primarily to higher development costs associated with extracting additional Basement reserves and higher entitlement production. On a working interest per barrel basis DD&A increased to approximately $5.00 per barrel during the period to 30 June 2007 from approximately $3.60 per barrel during the equivalent period last year.

Administrative costs for the first six months increased from $3.5 million in 2006 to $4.0 million in 2007. This increase is primarily associated with the weakening of the US dollar versus the GB pound.

Other operating expenses, which comprise pre-licence exploration expenses, decreased by $0.2 million in the reporting period compared to the equivalent prior period.

The aforementioned effects led to a 23% increase in operating profit. Operating profit was $29.5 million in the period ending 30 June 2007 rising from $24.0 million in the first six months of 2006.

Non-operating results


Following the issue of convertible bonds in May 2006, the Group had a significantly higher average cash and cash equivalents balance during the current six month reporting period, leading to investment income increasing from $2.8 million in the period to 30 June 2006 to $3.9 million in the current reporting period.

The decrease in other gains and losses from $0.3 million in the first half of 2006 to $0.1 million in the first half of 2007 is primarily due to a lower gain in the period on the change in fair value of the financial asset (associated with the subsequent payment amount tied to future oil production from the Group’s divested Mongolia interest) mainly due to revision of the risk free interest rate.

Finance costs increased from $2.0 million in the first half of 2006 to $4.6 million for the current reporting period due to interest expense on the liability component of the convertible bonds issued in May 2006 being charged for a full six months in 2007.

The tax charge increased from $10.0 million during the six months to 30 June 2006 to $11.8 million in the current period consistent with the increase in operating profit.

Cash


SOCO’s cash and cash equivalents decreased from the 30 June 2006 position of $251.5 million, not long after the issue of the convertible bonds in May 2006, to $140.6 million as at 30 June 2007. This decrease is associated with the continuing investment in capital projects.

Capital expenditure


Capital expenditure of $78.9 million in the first half of 2007 compared to $50.4 million for the first half of 2006 (which included $22.0 million paid by the Group to acquire an additional 2% working interest in Block 16-1 offshore Vietnam) mainly reflects the Group’s continued increased drilling activity in Vietnam.

Production


The Group’s production was sourced entirely from its interest in the East Shabwa Development Area, Yemen. Production net to the Group’s working interest at 6,341 BOPD was marginally lower to production in the equivalent period last year (6,407 BOPD) despite planned curtailment of production for safety and production management reasons.

Outlook


There is still a lot of work to be done in following up on apparent drilling successes earlier this year, but SOCO is very well placed for continued future growth following operational success during the last year and a very active drilling programme going forward on an extremely high potential project portfolio.

However, success brings a new set of challenges. SOCO must evolve from primarily focusing on exploration to grow shareholder value to managing relatively large development projects. As the Company derisks exploration drilling in Vietnam, it also enters into exploration drilling in the Congo Basin of Africa, which may have a higher risk profile than previous exploration areas but has the potential to be hugely rewarding. Being in the midst of a multi-year, highly active drilling programme means that the capital budget will continue to be relatively robust and financial capability a priority.

We believe that the disciplined managerial approach and technical diligence that has been the hallmark of our past successes allows us to be well prepared for the future challenges. Furthermore, we think that SOCO has continued to build a balanced portfolio with assets in all stages of the E&P value chain creating more improved near term opportunities to build for future success.

We appreciate our stakeholders' continued confidence in the SOCO team and look forward to rewarding your future trust in us.

 

Rui de Sousa    
Chairman


Ed Story
President and Chief Executive

3 September 2007


To download the full version of the Press Release in PDF format please click here.

 
 
 
 
 
 
 
 

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