Venture Production: hedging their bets

What stands out in your 2005 performance?
The most important thing for me has been the strength of our cashflow.
Cashflow’s gone up from £37m in 2004 to £124m in 2005, at the EBITDA level. That
is a major improvement in our cashflow generation, and we are at the peak of our
debt requirements at this point in time, so we expect to be free cashflow
generative during the course of 2006.

You still hedge far more than your peers, and you’ve recently lost
out. So what policy can we expect now that the existing hedges are

I don’t think we have lost out. We have a policy that’s been in place now for
three years, which is to hedge up to 50% of our existing production at any one
point in time.

That policy is intended to give us protection against the vagaries of the
commodity price market and to allow us a level of certainty in our cashflow,
debt projections and capital programme, which is why we do continue to hedge,
and shall continue to hedge going forward, regardless of what our peers do.

Certainly, the hedges that you refer to that were taken out at the back end
of 2003, at what was then a very attractive dollar price ($25 a barrel), have
now substantially unwound. We see the last of them falling out during the course
of 2006 and they are being replaced effectively by new hedges that are taken out
in the current commodity market, which are therefore at much higher levels.

And, in addition, we’ve mixed our policy now so that we take a mixture of
collars, swaps, forward sales, which gives us, I think, more flexibility to
ensure that we continue to take advantage of the volatility in the commodity
price forward curve, which is historically unprecedented.

You’ll continue to see us hedge up to 50% of our production from an existing
well basis, which of course is less than the full production basis.

And, yes, we’re moving much more into the money now, and that will have a
massive impact on the feed through into cash and profit, given that IFRS has an
impact on our profit number.

So to what extent will the 2006 results be impacted by

The 2006 results should improve substantially, from a cash and a revenue
perspective, as we see the benefit of the newer and higher commodity price
hedges coming through.

The average realised price for 2005 is $17.35 per boe. We would expect that
to be higher during the course of 2006. Obviously, the actual outturn of that
depends on one’s prediction of the commodity price but, for the first quarter,
we’re seeing a healthy improvement.

The performance was heavily weighted in the second half of the year.
Can we expect a more even spread this year?

Absolutely, the projections that we’ve put forward of 40,000 boepd [Barrels of
Oil Equivalent Per Day] to 42,000 boepd accumulate gradually over the year. It’s
a far less stressful year to be finance director, because we’re not relying on a
number of major projects to come in at the end of the year to deliver the

We do have a number of major projects during the course of this year, but
they’re primarily building up to production for 2007/2008. In 2006, we’re
reaping the rewards of the investments made over the previous two years. So it
should be a much steadier accumulation of production during this year and,
therefore, profit numbers.

How are you financing your development programme going

Primarily through our free cashflow. Our projections for free cashflow during
the course of 2006 is that we will more than cover the cost of our capital
investment programme for this year, which is in the region of £150m.

In addition to that, we anticipate paying off some of our debt – obviously my
comments exclude the impact of potential acquisitions – but we expect to finance
it from internally generated funds.

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