Premier Oil plc (the "Company")
Annual Report and Financial Statements 2014
and Notice of Annual General Meeting 2015
7 April 2015
Further to the release of the Company's Annual Results on 26 February 2015, the Company announces that it has today published its Annual Report and Financial Statements 2014. In addition, the Company has posted to shareholders the Notice of Annual General Meeting ("AGM") 2015. The AGM will be held at the Institute of Directors, 116 Pall Mall, London SW1Y 5ED, at 11.00am on Wednesday 13 May 2015.
In accordance with Listing Rule 9.6.1., copies of the Annual Report and Financial Statements 2014, the Notice of AGM and related form of proxy have been submitted to the UK Listing Authority and will shortly be available for inspection from the National Storage Mechanism at www.morningstar.co.uk/uk/nsm. The documents (except for the form of proxy) are also available to view on the Company's website at www.premier-oil.com
A condensed set of financial statements and information on important events that have occurred during the year ended 31 December 2014 and their impact on the financial statements were included in the Company's 2014 Annual Results announcement on 26 February 2015. That information together with the information set out below in Appendix 1, which is extracted from the Annual Report and Financial Statements 2014, fulfil the requirements of DTR 6.3.5. This announcement is not a substitute for reading the full Annual Report and Financial Statements 2014. Page and note references in the text in Appendix 1 are made in reference to the Annual Report and Financial Statements 2014. To view the 2014 Annual Results announcement, visit the Company website: www.premier-oil.com/premieroil/investors
Further enquiries:
Company Secretariat:
Rachel Benjamin Tel: +44 (0)20 7730 1111
Investor Relations:
Elizabeth Brooks Tel: +44 (0)20 7730 1111
Disclaimer
This announcement contains certain forward-looking statements that are subject to the usual risk factors and uncertainties associated with the oil and gas exploration and production business. Whilst the group believes the expectations reflected herein to be reasonable in light of the information available to it at this time, the actual outcome may be materially different owing to factors beyond the group's control or otherwise within the group's control but where, for example, the group decides on a change of plan or strategy. Accordingly, no reliance may be placed on the figures contained in such forward-looking statements.
APPENDIX 1
Company Risk Factors (required under DTR 4.1.8)
Premier's business may be impacted by various risks leading to failure to achieve strategic targets for growth, loss of financial standing, cash and earnings, and reputation. Not all of these risks are wholly within the company's control and the company may be affected by risks which are not yet manifest or reasonably foreseeable.
Effective risk management is critical to achieving our strategic objectives and protecting our personnel, assets, the communities where we operate and with whom we interact and our reputation. Premier therefore has a comprehensive approach to risk management as set out in more detail in the Corporate Governance Report.
A critical part of the risk management process is to assess the impact and likelihood of risks occurring so that appropriate mitigation plans can be developed and implemented. Risk severity matrices are developed across Premier's business to facilitate assessment of risk. The specific risks identified by project and asset teams, business units and corporate functions are consolidated and amalgamated to provide an oversight of key risk factors at each level from operations through business unit management to Executive Committee and Board level.
For all the known risks facing the business, Premier attempts to minimise the likelihood and mitigate the impact. According to the nature of the risk, Premier may elect to take or tolerate risk, treat risk with controls and mitigating actions, transfer risk to third parties or terminate risk by ceasing particular activities or operations. Premier has a zero tolerance to financial fraud or ethics non-compliance, and ensures that health, safety, environment and security (HSES) risks are managed to levels that are as low as reasonably practicable, whilst managing exploration and development risks on a portfolio basis.
Significant risk factors during 2014:
• Oil price weakness at year-end (weak share price and North Sea impairments);
• Project delivery challenges (schedule and cost);
• Negative market sentiment.
Significant risk factors for 2015:
• Continued oil price weakness
• Cash flow and ability to fund existing and planned projects, thereby deliver business strategy
• Ability to maintain core competencies
• Political and security instability in countries of current and planned activity
• 'Alignment' with JV partners (in particular their ability to fulfil commitments)
• Negative market sentiment
• Potentially accelerated decommissioning liabilities
• Reputational impact if we defer projects
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Key risk factor
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Risk detail
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How is it managed?
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Key steps to mitigate in 2014/15
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Health, safety, environment and security (HSES)
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Major process safety incident or operational accident, natural disasters, pandemics, social unrest, civil war.
Consequences may include accidents resulting in loss of life, injury and/or significant pollution of the local environment, destruction of facilities and disruption to business activities.
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Comprehensive HSES and operations management systems including emergency response and oil spill response capability and asset integrity.
Active security monitoring and management and regular testing of business continuity plans.
Learning from company and third-party incidents.
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Improved reporting and response through implementation across the group of new electronic incident-recording and action-tracking system.
Improved asset integrity maintenance through implementation of new scorecard methodology (covering people, plant and process lead indicators) at all operated production assets.
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Production and development delivery
(Of particular significance during 2014 - Solan, Huntington - and into 2015)
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Uncertain geology and reservoir performance leading to lower production and reserves recovery.
Availability of services including FPSOs and rigs, availability of technology and engineering capacity, availability of skilled resources, maintaining project schedules and costs as well as fiscal, regulatory, political and other conditions leading to operational problems and production loss or development delay.
Consequences may include, lower production, lower recovery of reserves, production delays, cost overruns and/or failure to fulfil contractual commitments.
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Geoscience and reservoir engineering management systems, including rigorous production forecasting and independent reserves auditing processes.
Operations, development and project execution management systems and cost controls together with capable project teams.
Long-term development planning to ensure timely access to FPSOs, rigs and other essential services.
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Improved production forecasting, enhanced reporting and monitoring through in-house development and introduction of near-real-time production analytics platform.
Improved project planning and delivery through better co-ordination and execution of cross-functional review prior to decision gates.
Independent 'lessons learned' review of Solan project planned for early 2015.
Increased ExCo engagement on contractor selection/ management.
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Exploration success and reserves addition
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Failure to identify and capture acreage and resource opportunities to provide a portfolio of drillable exploration prospects and sufficient development projects to achieve reserves addition targets.
Specific exploration programmes may fail to add reserves and hence value. Failure to negotiate access rights or close transactions could slow growth of reserves and production and lead to loss of competitive advantage.
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Strong portfolio management and alignment with strategic growth targets. Appropriate balance between growth by exploration and acquisition.
Exploration management systems including comprehensive peer review with focus on geologies in core areas we know well and in which we can build a competitive advantage.
M&A effort focusing on geographical and technical areas aligned with our strategy. Diligence in acquisition process and post- acquisition integration to ensure targeted returns.
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Re-organised Exploration team to improve delivery from existing portfolio and new ventures.
Corporate Exploration team strengthened to ensure greater focus on prospective resource and risk assessment (with associated enhancement of Exploration management system content).
Near-field exploration moved to business unit management but with Exploration function endorsement retained.
Majority of low-impact, high-risk North Sea opportunities removed from portfolio.
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Host government - political and fiscal risks
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Premier operates in some countries where political, economic and social transition is taking place or there are current sovereignty disputes. Developments in politics, laws and regulations can affect our operations and earnings.
Consequences may include forced divestment of assets; limits on production or cost recovery; import and export restrictions; international conflicts, including war, civil unrest and local security concerns that threaten the safe operation of company facilities; price controls, tax increases and other retroactive tax claims; expropriation of property; cancellation of contract rights; and increase in regulatory burden. It is difficult to predict the timing or severity of these occurrences or their potential impact.
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Premier's portfolio includes operations in both low and higher risk environments. Premier actively monitors the local situation and has business continuity plans in each area which can be activated depending on predefined levels of alert.
Premier strives to be a good corporate citizen globally, and fosters reputation by strong and positive relationships with government and communities where we do business. Premier engages in respectful industry-wide lobby and sustainable corporate responsibility and community investment programmes. Rigorous adherence to Premier's business ethics policy and code of conduct.
Continuous monitoring of the external environment for emerging risks to the business.
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Improved provision of politico-economic/ security/societal risk assessment informing investment decisions.
Strengthened Corporate Responsibility management system and improved Corporate Responsibility reporting.
Assessing cost/ benefit of political risk insurance.
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Commodity price volatility
(Of particular significance in late 2014 and into 2015)
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Oil and gas prices are affected by global supply and demand and price can be subject to significant fluctuations. Factors that influence these include operational issues, natural disasters, weather, political instability, or conflicts and economic conditions or actions by major oil-exporting countries. Price fluctuations can affect our business assumptions and can effect investment decisions and financial capability.
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Oil and gas price hedging programmes to underpin our financial strength and to protect our capacity to fund our future developments and operations.
Premier investment guidelines ensure that our development programmes are robust to downside sensitivity price scenarios.
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Hedging programme (continued into 2015).
Economics of development programmes re-worked to reflect low oil price environment.
Discretionary spend curtailed.
Contingency planning for accelerated decommissioning of identified production assets.
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Organisational capability
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Risk that the capability of the organisation is not adequate to deliver plans for strategic growth. The capability of the organisation is a function of both the strength of its human resources and its business management systems. Inadequate systems or lack of compliance may lead to loss of value and failure to achieve growth targets. Loss of personnel to competitors, inability to attract and retain quality human resources and competency gaps could affect our operational performance and delivery of growth strategy.
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Premier has created a competitive remuneration and retention package including bonus and long-term incentive plans to incentivise loyalty and good performance from the existing, highly skilled workforce.
Premier is continuing to strengthen its organisational capability to achieve strategic objectives. This includes resource planning, competency development, training and development programmes, succession planning including leadership development.
Continuous strengthening of business management systems and controls as appropriate to the size and market position of the company.
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Continuous improvement of human resources management systems and controls.
Review of long-term incentive package.
Phased function roll-out of competency management system commenced.
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Joint venture partner alignment
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Global operations in the oil and gas industry are conducted in a joint venture environment. There is a risk that joint venture partners are not aligned in their objectives and drivers and this may lead to inefficiencies and/or delays. Several of our major projects are operated by our joint venture partners and our ability to influence our partners is sometimes limited due to our small interest in such ventures.
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Due diligence and continuous and regular engagement with partners in joint ventures in both operated and non-operated projects. Premier takes strategic acquisition opportunities where appropriate to gain a greater degree of influence and control.
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Heightened engagement with joint venture partners with regard to their ability to fulfil commitments.
Implementation of new non-operated ventures management system.
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Financial discipline and Governance
(Of particular significance in late 2014 into 2015)
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Risk that sufficient funds are not available to finance the business. Risk of financial fraud.
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Strong financial discipline and balance sheet. Premier has an established financial management system to ensure that it is able to maintain an appropriate level of liquidity and financial capacity and to manage the level of assessed risk associated with the financial instruments. Premier maintains access to capital markets through the cycle. The management system includes policies and a delegation of authority manual to reasonably protect against risk of financial fraud in the group.
An insurance programme is put in place to reduce the potential impact of the physical risks associated with exploration and production activities. In addition, business interruption cover is purchased for a proportion of the cash flow from producing fields. Cash balances are invested in short-term deposits with minimum A credit rating banks, AAA managed liquidity funds and A1/P1 commercial paper, subject to Board approved limits.
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Economics of investment decisions and development projects re-worked to reflect low oil price environment.
Deferred discretionary exploration spend.
Contingency planning if development projects deferred (Vette, Sea Lion).
Reduction of contractor spend.
Contingency planning for right-sizing and re-structuring of group to deliver business goals.
Careful management of covenant headroom on the group's debt facilities.
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Key Performance Indicators (required under DTR 4.1.9)
Premier measures its performance in line with its strategic objectives of growing the value of the underlying assets of the business and creating significant returns for shareholders in a safe and responsible manner. Despite the challenging conditions faced in the sector in 2014 Premier continued to deliver on a number of its key metrics.
Operating safely
Premier believes that all accidents are preventable. Premier recognises that its operations by their very nature have the potential to cause major accidents and is committed to managing them in order to provide a high level of protection to its employees, contractors, visitors, neighbours and the environment.
In 2014 Premier completed its new health, safety and environment (HSE) management system, bringing it in line with the ten elements system under the revised International Association of Oil & Gas Producers (IOGP) framework. A new accident and incident reporting system was also introduced across the company which, once fully implemented, will provide an improved centralised reporting function.
Health and safety performance is measured using a number of metrics including total recordable injury rate (TRIR) per million man-hours. Safety performance data includes both Premier employees and contractors. In 2014, Premier achieved a TRIR performance of 1.5 per million man-hours (2013: 3.4), a 57 per cent decrease on 2013. Despite a period of intense construction activity, the UK Business Unit's TRIR fell to a historical low of 2.0 and both the global production operations and drilling functions achieved a TRIR in line with the 2013 IOGP average (2013 IOGP Safety Performance Indicators Report).
Building a strong production base
Premier aims to maximise production from its existing asset base and, over time, to deliver production growth. This is measured using daily average production and the number of development projects being brought through to sanction. Average daily production in 2014 was 63.6 kboepd, up 9.3 per cent on 2013 and a record for the group.
Premier's production growth is underpinned by a pipeline of development projects being progressed through the portfolio, and the ability to commercialise and bring on-stream these projects is key to the company's success. In 2014, Premier achieved first oil from the UK North Sea field Kyle, following the completion of the reinstatement project, from the Dua oil field in Vietnam and from the Naga gas field in Indonesia. We also sold gas for the first time into Indonesia under the new Domestic Swap Agreement. In addition, the Solan and Pelikan projects were progressed towards first oil and gas in 2015 while the Catcher project received government approval and is now in the execution phase. Decisions on the development of the next phase of growth projects, including the Vette and Sea Lion fields, are expected to be taken over the next 12 months.
Shareholder returns
A key metric by which Premier's growth performance is measured is the compound annual growth rate in NAV per share. Premier targets a 10 per cent growth in NAV per share per year. Average NAV per share growth since 2005 fell in 2014, the first recorded reduction since the target has been introduced. This was primarily driven by opting for a lower capex solution for the Sea Lion project. The new concept will aim to develop over half of the original reserves for less than half the cost. Despite improving the internal rate of return of the project the consequence of a smaller development (and indeed the effect of phasing a second stage of development) is a natural reduction in the NAV of the Sea Lion project.
Premier, however, recognises that its share price does not always reflect the value of the underlying assets of the business. In these instances, and after balancing the capital needs of the business, Premier will look to return surplus cash flows to shareholders via distributions. In 2014 Premier paid a dividend of 5 pence per share and completed a US$93 million share buyback programme.
Delivering growth
Premier looks to access projects that will create future growth through successful exploration and selective acquisitions. This ambition is measured by reserve replacement, risked prospective resource added and finding costs.
Reserves and resources at the end of 2014 were 794 mmboe (2013: 794 mmboe). The impact of production and the 2014 disposal programme (the Scott area assets in the UK North Sea and the Luno II discovery offshore Norway) on Premier's reserve and resource base was offset by the booking of the Vette field as 2P reserves and the Kuda/Singa Laut discovery in Indonesia. The sale of Block A Aceh in Indonesia was completed in 2015 and the adjustment will therefore be made in the current year.
2014 was a successful year for Premier's exploration teams with two discoveries adding more than 100 mmboe of resource at a pre-tax finding cost of less than US$2/boe.
Maintaining financial strength
A key strategic objective of the group is to maintain financial strength in order to invest in the future of the business and deliver significant returns to shareholders. Despite the difficult macro environment and declining oil price the company registered a strong operating cash flow in 2014 of US$924.3 million (2013: US$802.5 million).
Premier's portfolio of crudes was sold at an average of US$98.2/bbl (2013: US$109.0/bbl). Realised average gas prices, a significant portion of which tracks oil price movement, achieved US$8.4 per thousand standard cubic feet (mscf) in 2014 (2013: US$8.3/mscf). Operating costs per barrel of oil equivalent (boe) reduced to US$18.8 in 2014 (2013: US$19.7/boe). This reflects higher operating efficiency as well as one-off credits in Vietnam and Indonesia totalling US$20 million.
Premier's cash flows, which are protected by a rolling forward hedging programme, together with the refinancing of the company's principal credit facility in 2014, ensure that the group has significant liquidity to fund its capital investment programme going forward.
Directors' responsibility statements (required under DTR 4.1.12)
The directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.
Group financial statements
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and Article 4 of the International Accounting Standards (IAS) Regulation and have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period.
In preparing the parent company financial statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
In preparing the group financial statements, International Accounting Standard 1 - 'Presentation of Financial Statements' - requires that directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and
• make an assessment of the company's and group's ability to continue as a going concern.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website (www.premier-oil.com). Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors' responsibility statement
We confirm to the best of our knowledge:
1. the group financial statements, prepared in accordance with International Financial Reporting Standards, as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole;
2. the Strategic Report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
3. the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.
Tony Durrant
Chief Executive Officer
Richard Rose
Finance Director