Directors' Report
The Directors submit their Annual Report on the affairs of the Group together with the financial statements and audit report of Afren plc for the year ended 31 December 2009.
PRINCIPAL ACTIVITIES
The principal activities of the Group are oil and gas exploration, development and production in Africa. The subsidiary undertakings principally affecting the Group’s financial statements are listed in note 14 to the consolidated financial statements.
BUSINESS REVIEW AND CORPORATE GOVERNANCE STATEMENT
The Company is required by the Companies Act to set out in this report a fair review of the business of the Group during the financial year ended 31 December 2009 and of the position of the Group at the end of the year and a description of the principal risks and uncertainties facing the Group (‘business review’). The information that fulfils the requirements can be found within the Chairman and Chief Executive’s Statement, the Review of Operations and the Financial Review, which are incorporated into this report by reference. These sections also include details of expected future developments in the business of the Group and details of Key Performance Indicators that management use.
The Corporate Governance Statement forms part of this Directors’ Report.
PRINCIPLE RISKS AND UNCERTAINTIES
The effective management of risk is essential to the success of Afren. The specific risks to Afren include those associated with the nature of the upstream oil and gas industry, those arising from political, social and infrastructure issues in the countries in which the Group operates and those which are internal to the organisation of the Company and its strategy. The Group’s overall strategy to risk management is to employ suitably skilled personnel, implement appropriate policies and procedures and maintain a balanced portfolio of assets.
During 2009 considerable focus was placed on reinforcing and formalising the system of business risk management which underpins Afren’s assurance of high standards of corporate governance. This effort has culminated in the development of a business risk management system, a corporate framework for identifying, assessing, managing and reporting risks that threaten the delivery of corporate objectives. The Afren business risk management system has been structured so that it adheres to best practice as set out in international standard ISO 31000 and the UK government’s Orange book. As part of the business risk management system the Company has drawn up a corporate risk register. Overseeing the process is the Audit Committee of the Board which is responsible for reviewing the corporate risk register and providing assurance that the required controls are in place and effective.
During 2009 the Group also introduced a Code of Business Conduct which all employees and contractors are obliged to follow. Adhering to the Code reduces the risk to the Group from the activities of employees which may fail to meet the Group’s standards.
The following are the principal operational risks which the Company has identified as presenting the most serious challenge to achieving its business objectives:
POLITICAL AND SOCIAL RISKS
The Group’s operations are based in countries where there are uncertainties arising from political instability, corruption, civil strife, poor infrastructure, inconsistent application of law and uncertain fiscal regimes.
The executive and senior management have extensive experience in the oil and gas industry in West Africa amongst other regions. Combined with strong local management teams the Company maintains positive relationships with communities and governments. Combined with adherence to the Group’s Code of Business Conduct this allows the Group to navigate these difficulties without sacrificing its ethical principles.
The Group has a corporate responsibility programme, details of which are set out on page 46 of this report. This programme seeks to ensure that Afren meets it obligations to the local communities where it operates.
OPERATIONAL RISKS
Development of oil and gas assets
Inherent in oil exploration and production are risks associated with estimating the extent of the resource base and with the production profile of a field. In addition the cost of development may often vary significantly from expectation due to unexpected technical, engineering or regulatory considerations or cost escalation. The Group manages such risks by employing a suitably qualified staff with extensive experience in developments similar to those being undertaken. Independent reviews are carried out as required to support the Company’s technical assessment. Projects are subject to rigorous budgetary control and a regular review of KPIs and project milestones.
Oil price movements
The revenue of the Group is subject to fluctuations in the oil and gas price. The Group has entered into hedging contracts for a portion of its future sales which will mitigate the effect of fluctuations for that portion. To the extent that the remainder is not hedged the Group is satisfied that the cost of such hedging outweighs the benefit to be obtained.
Unexpected events
The nature of the Group’s business is such that there is a risk from unexpected events such as an environmental incident, accident or security problem which may disrupt operations. By ensuring there are robust environmental and health and safety policies and procedures in place, including crisis management plans, the Group can minimise the probability of occurrence and impact of such events. In addition the Group has comprehensive insurance cover which is reviewed annually to ensure it continues to meet the requirements of the Company.
STRATEGY RISKS
Staffing
The Group is reliant on the skills and experience of its senior management to execute its strategy. The loss of key staff would pose a serious risk to the ability of the Company to operate profitably and grow. The Company seeks to recruit and retain suitably qualified staff with suitable remuneration, appraisal and development policies.
Liquidity
The Group uses a mix of operational cash flow, debt and equity financing to fund its developments. By managing the correct balance between these sources and with regular reviews of cash flow forecasts the Group seeks to ensure that it has the necessary funding to meet its requirements.
Rate of growth
The Company continues to grow rapidly. The Company regularly reviews its staffing levels, business processes and policies to ensure that they continue to be appropriate for the scale of business and its speed of growth as it evolves.
GOING CONCERN
The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out above. The financial position of the Group at the year end, its cash flows, liquidity position and borrowing facilities are described in the Financial Review. In addition note 21 to the financial statements includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives and details of its financial instruments and hedging activities; and note 3 describes its exposures to credit risk and liquidity risk.
The Group typically uses its cash resources to fund its exploration and appraisal programme and administrative expenses. Expenditure on developing a field to production is typically also funded by debt facilities. At present the Group is funding the initial development of the Ebok field from its own resources and the Company’s assessment is that this can be continued until Ebok produces first initial oil, after which it will contribute cash to the Group. Additional development of the Ebok field will be funded by cash contributed by the initial development and additional debt from the loan facility announced on 25 March 2010.
The Directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
RESULTS AND DIVIDENDS
The Group’s loss for the year was US$16.8 million (2008: US$56.1 million). The Directors have not recommended the payment of a dividend (2008: US$nil).
EVENTS SINCE THE BALANCE SHEET DATE
On 28 January 2010 the Company announced that it had entered into a joint venture agreement with Oriental Energy Resources Limited and Energy Equity Resources Limited to acquire a 32.5% interest in OML 115 offshore Nigeria. The agreement requires the Company to pay approximately US$6 million in signature bonuses and other costs and to drill one exploration well at an estimated cost of US$30 million.
On 28 January 2010 the Company announced that it had entered into an agreement with Mercator Offshore (Nigeria) Pte Limited to lease a Mobile Offshore Production Unit and a Floating Storage and Offtake vessel for the Ebok field. Under the agreement the Group will pay a rate of US$98,750 per day plus VAT and withholding tax for the seven-year term of the lease.
On 1 March 2010 the operators of the La Noumbi exploration licence in Congo Brazzaville, Maurel et Prom, announced that the Tie-Tie-Ne-1 well had been plugged and abandoned after reaching its target depth. The well had shown hydrocarbon indications but these were not commercial. The cost of the well at 31 December 2009 of US$2.0 million has been expensed in these financial statements.
On 17 March 2010 the Group announced that it had entered into a contract with Sedco Forex International Inc to rent the drilling rig GSF High Island VII for a minimum period of 180 days at a cost of US$84,000 per day.
On 25 March 2010, Afren announced that it had finalised arrangements for an up to US$450 million reserves based lending (“RBL”) debt facility. The up to US$450 million of debt, secured against the Ebok field reserves, has a maturity of a maximum of five years, is repayable semi-annually and has a margin of between 4% to 5.5% over LIBOR.
THE DIRECTORS AND THEIR INTERESTS
The Directors who served the Company during the year and subsequently, together with their and their families’ beneficial interests in shares in the Company, were as follows:
Details of the Directors’ share options are provided in the Directors’ Remuneration Report.
SUPPLIER PAYMENT POLICY
The Company’s policy, which is also applied by the Group, is to settle terms of payment with suppliers when agreeing the terms of each transaction, to ensure that the supplier is aware of the terms of the payment and to abide by the terms of the payment. Trade creditors of the Group at 31 December 2009 were equivalent to 34 days’ purchases (2008: 59 days), based on the actual year end balance.
CHARITABLE AND POLITICAL DONATIONS
During the year the Group made charitable donations of US$133,863, the majority of which related to African-focused charities and institutions (2008: US$156,159).
No political donations were made in either 2009 or 2008.
CAPITAL STRUCTURE
Details of the authorised and issued share capital, together with details of the movements in the Company’s issued share capital during the year are shown in note 27. The Company has one class of ordinary shares which carry no right to fixed income. Each share carries the right to one vote at general meetings of the Company. The ordinary shares reflect 100% of the total issued nominal value of all share capital.
There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights.
Details of employee share schemes are set out in note 30.
No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. Details of significant shareholdings are set out below.
With regard to the appointment and replacement of Directors, the Company is governed by its Articles of Association, the Combined Code, the Companies Acts and related legislation. The Articles themselves may be amended by special resolution of the shareholders. The powers of Directors are described in the Main Board Terms of Reference, copies of which are available on request, and the Corporate Governance Statement.
Under its Articles of Association, the Company has authority to issue 467,054,905 ordinary shares.
SUBSTANTIAL INTERESTS
As of 29 March 2010 (being the latest practicable date prior to publication of the Annual Report), interests notified to the Company in accordance with Chapter 5 of the Disclosure and Transparency Rules comprised:
| % | |
| Vidacos Nominees | 9.058 |
| BlackRock Inc | 5.040 |
| AXA SA | 5.000 |
| JPMorgan Asset Management Holdings Inc | 4.997 |
| HSBC Client Holdings UK Limited | 4.930 |
| GLG Partners LP | 4.880 |
| Investec Asset Management Limited | 4.498 |
| Deutsche Bank AG | 3.010 |
Percentages are based on the issued share capital at the date of notification.
DIRECTORS’ REMUNERATION
Details of the Directors’ remuneration are set out in the Directors’ Remuneration Report.
SERVICE CONTRACTS
No Director has a service contract, consultancy agreement or other such arrangement with a notice period in excess of one year.
AUDITORS
Each of the persons who is a Director at the date of approval of this Annual Report confirms that:
- so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and
- the Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
The auditors for the year ended 31 December 2009 were Deloitte LLP. Deloitte LLP have expressed their willingness to continue in office as auditors and a resolution to reappointment them will be proposed at the forthcoming Annual General Meeting.
ANNUAL GENERAL MEETING
At the Annual General Meeting of the Company, resolutions will be proposed to receive these accounts and the Directors’ and auditors’ reports and to re-elect the Directors who are retiring at the Annual General Meeting, in accordance with the Company’s Articles of Association. Resolutions to reappoint Deloitte LLP as the Company’s auditors, to authorise the Directors to fix Deloitte LLP’s remuneration as auditors, to authorise the Directors to make political donations and to incur political expenditure, to grant the Directors authority to allot ordinary shares, to buy back the Company’s ordinary shares and to allow a general meeting to be held on not less than 14 days’ notice will also be proposed.
For a more detailed explanation of these and other amendments, please refer to the Notes on Resolutions set out in the Notice of Annual General Meeting. A copy of the current Articles of Association and the proposed new Articles of Association that reflect these amendments will be available for inspection during normal business hours (Saturdays, Sundays and public holidays excepted) at the registered office of the Company (Kinnaird House, 1 Pall Mall East, London SW1Y 5AU) and the offices of White & Case, 5 Old Broad Street, London EC2N 1DW up until the close of the meeting.
On behalf of the Board
Osman Shahenshah
Chief Executive
29 March 2010