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FOR IMMEDIATE RELEASE

24 December 2009

SOVEREIGN OILFIELD GROUP Plc

("Sovereign" or "the Company" or "the Group")

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2009

Sovereign Oilfield Group Plc ("Sovereign" or "the Group"), the Aberdeen-based diversified oilfield services group, has announced its unaudited financial results for the six month period to 

30 September 2009.

Financial Highlights

	2009	2008
Turnover	£28.2m	£30.8m
EBITDA*	£0.5m	£1.0m
Operating (loss)/profit**	£(0.1)m	£0.8m
(Loss) before tax#	£(1.6)m	£(2.3)m
Loss per share	(9.52)p	(6.91)p

• * excluding exceptional items of £(0.4)m (2008: £(0.4)m)

• ** excluding exceptional items of £(1.7)m (2008: £0.5m)

• # excluding exceptional items of £(1.7)m (2008: £0.5m)

Chief Executive's Statement

The period to 30 September 2009 was a difficult trading period for the Group.  

Sovereign continued with it refinancing negotiations during the period and on 3 July 2009 the Group agreed to an amendment of terms in respect of credit facilities in place at 31 March 2009. The new terms agreed for a standstill of all outstanding defaults until 31 May 2010, a reduction in margin payable on both senior and mezzanine facilities and a revised covenant package.  

Sovereign continued with its strategy to refocus the Group as a fabrication business.  In line with this strategy Sovereign has disposed of Diamant Drilling Services SA, Vertec Engineering Limited and the cabin rental business of Labtech Services Limited, Prodrill Engineering Limited, four properties, and some of the assets of Sovereign Fishing and Remedial Services.  In September 2009, the Board resolved to discontinue the activities of Fingolden Limited and its trading subsidiary RDT precision Engineers Limited, Maxwell Downhole Technology Limited and Sovereign Fishing and Remedial Services, as a result of these companies being consistently loss making. Additionally, the Board has committed to a plan to sell Serco S.A, with proceeds of such disposal being used to repay the Company's existing debt.  The contribution of these companies to the results for the six months ended 30 September 2009 have been classified as discontinued operations.

The remaining trading subsidiary companies are focussed on providing fabrication services and include Caledonian Petroleum Services Limited, OIL Engineering Limited, Forfab Limited, Labtech Services Limited, Cooltime Engineering Services Limited, Sovereign Dimensional Survey Limited and OIL Engineering Middle East LLC in Abu Dhabi.

Financial Review

Revenue from continuing operations was £28.2 million (2008: £30.8 million) and gross profit was £6.8 million (2008: £7.4 million). Gross margins remained stable at 24.1% (2008: 24.0%). Earnings before interest, depreciation, amortisation and exceptional items was £0.5 million (2008: £1.0 million). Group operating Group operating loss before exceptional items was £0.1 million (2008: profit £0.8 million). Exceptional items of £1.7 million relating were incurred in the period, which comprised £1.8 million relating to impairment of leasehold improvements of OIL Middle East LLC, £0.4 million relating to refinancing and restructuring costs, £0.1 million relating to severance arrangements and a profit of £0.6 million on the sale and leaseback of property.

Finance costs of £1.5 million were incurred in the period (2008: £2.6 million) and the loss before taxation for the period was £3.3 million (2008: Loss £1.8 million).

The basic and diluted loss per share was 9.52 pence per share (2008: 6.91 pence per share).

Refinancing update

On 3 July 2009 the Group agreed to an amendment of terms in respect of credit facilities in place at 

31 March 2009. The new terms agreed for a standstill of all outstanding defaults until 31 May 2010, a reduction in margin payable on both senior and mezzanine facilities and a revised covenant package.  

Under the new terms, for the period 1 June 2009 to 31 March 2010 the senior facilities will bear interest at LIBOR plus 4%, whilst the mezzanine facilities will bear interest at a payment in kind of 6.5%. For the period 1 April 2010 to 31 March 2011 the senior facilities will bear interest at LIBOR plus 5%, whilst the mezzanine facilities will bear interest at LIBOR plus 6.5%, plus a payment in kind of 3.5%.

The Board estimates that the revised terms which cover the period to 31 March 2011, will result in net savings in finance costs of £3.4 million.

The revised covenant package incorporates financial covenants with regard to quarterly revenue and EBITDA which the Board believed were acceptable. The Group met its covenants for the quarter 30 June 2009 but breached its banking covenants for the quarter to 30 September 2009 as a result of the continued poor trading performance of the Drilling Division.  As a result of the covenant breach at 30 September 2009 the Group has reclassified repayments of the principal from non-current to current liabilities on the basis that the Company's lenders were in a position at the period end to serve the Company with a notice to repay the bank loans on demand. No such notices were served during the period or subsequent to the period end. The loans were due for repayment in January 2012.

The Company is in dialogue with the Lenders regarding the covenant breaches and the Board provided revised financial forecasts which are presently being reviewed by our Lender Group.

One of the options being considered by the Lender Group and the Board is a debt for equity swap, which would be dilutive to current shareholders but would reduce debt and increase the capital base of the Group.  Whilst these negotiations are not complete, the lending syndicate provided additional short-term funding of £0.8 million on 27 November 2009. 

Board Changes

There have been several recent changes to the Board of Sovereign. 

On 1 December 2009 Graham Burgess resigned as Chairman and Chief Executive and Julie Cowie resigned as Group Finance Director. 

On 17 December 2009 Stuart Pearson resigned as a Non-Executive Director and John Strachan and Gary Robinson joined the Board on that date.  John Strachan has been appointed the Group Chief Executive. 

Chris McGeehan, formally the Fabrication Division Operations Director has agreed to remain a Non-Executive Director alongside the Groups other Non-Executive Director, Sheikh Sabah Ali Fahed Al Salem Al Sabah.

Outlook

The Board is continuing to pursue further strategic disposals to focus the Group as a fabrication business and have resolved to discontinue or dispose of all companies within the Drilling Division.  

The Board are also continuing its cost reduction plan, particularly with regard to corporate overhead, with a view to a reduction in overall borrowing to a level that can be satisfactorily serviced by a smaller Group. The economic climate has resulted in slower progress being made than anticipated but the Board are confident that they can complete this disposal and cost reduction programme before the financial year end. 

Despite continuing difficult market conditions, the fabrication division has maintained revenues and continues to trade profitability and generate positive cashflow. We are encouraged by the level of enquiries generated from our customer base.

The Board will up date shareholders on its current negotiations with its bankers in due course.

John Strachan

Chief Executive

24 December 2009

             Condensed Group Income Statement

           For the six months ended 30 September 2009

	Unaudited Interim September 2009				Unaudited Interim September 2008	Audited Full Year March 2009
		Continued Operations	Exceptional Items	Total
	Note	£m	£m	£m	£m	£m
Revenue	2	28.2	-	28.2	30.8	59.6
Cost of sales		(21.4)	-	(21.4)	(23.4)	(46.2)
Gross profit		6.8	-	6.8	7.4	13.4
Administrative expenses		(6.9)	(2.3)	(9.2)	(7.1)	(15.2)
Other expenses		-	-	-	(0.4)	(0.1)
Other operating income		-	-	-	-	-
Group trading loss		(0.1)	(2.3)	(2.4)	(0.1)	(1.9)
Gain on disposal on sale of property, plant and equipment		-	0.6	0.6	0.9	0.9
Group operating profit / (loss)	2	(0.1)	(1.7)	(1.8)	0.8	(1.0)
Finance revenue		-	-	-	-	-
Finance costs		(1.5)	-	(1.5)	(2.6)	(6.1)
		(1.5)	-	(1.5)	(2.6)	(6.1)
Loss  before taxation		(1.6)	(1.7)	(3.3)	(1.8)	(7.1)
Tax credit	5	-	0.2	0.2	0.3	0.6
Loss for the financial period attributable to equity holders of the parent		(1.6)	(1.5)	(3.1)	(1.5)	(6.5)
Loss for the year from discontinued operations		-	-	(2.6)	(1.3)	(6.6)
		(1.6)	(1.5)	(5.7)	(2.8)	(13.1)
Loss per share (pence)
Basic, for loss for the period attributable to ordinary equity holders of the parent	6			(9.52)	(6.91)	(71.60)
Diluted, for loss for the period attributable to ordinary equity holders of the parent	6			(9.52)	(6.91)	(71.60)

  Condensed Group Statement of Recognised Income and Expense

For the six months ended 30 September 2009

	Unaudited Interim September 2009	Unaudited Interim  September 2008	Audited Full Year March  2009
	£m	£m	£m
Income and expense recognised directly in equity
Exchange differences on retranslation of foreign operations	(0.6)	1.2	1.5
Net income and expense recognised directly in equity	(0.6)	1.2	1.5
Loss for the period	(5.7)	(2.8)	(13.1)
Total recognised income and expense for the period	(6.3)	(1.6)	(11.6)
Attributable to:
Equity holders of the parent	(6.3)	(1.6)	(11.6)
	(6.3)	(1.6)	(11.6)

 

 

Condensed Group Balance Sheet

As at 30 September 2009

		Unaudited Interim September 2009	Unaudited Interim September 2008	Audited Full Year March 2009
	Note	£m	£m	£m
Assets
Non-current assets
Property, plant and equipment	7	2.4	11.3	8.1
Intangible assets		8.2	13.9	9.4
Financial assets		-	0.1	-
		10.6	25.3	17.5
Current assets
Trade and other receivables		14.3	23.7	20.5
Inventories		1.9	5.6	4.1
Cash and short-term deposits		1.8	0.7	1.1
		18.0	30.0	25.7
Assets of discontinued operations and held for sale		3.2	5.5	5.2
Total assets		31.8	60.8	48.4
Current liabilities
Trade and other payables		12.6	21.4	17.9
Interest-bearing loans and other borrowings	8	28.6	30.7	33.5
Income tax payable		-	-	0.2
Liabilities directly associated with assets classified as held for sale		2.6	3.6	1.6
		43.8	55.7	53.2
Non-current liabilities
Interest-bearing loans and other borrowings	8	0.1	0.3	0.1
Deferred tax liabilities		-	1.6	1.4
Provisions		0.6	0.1	0.1
		0.7	2.0	1.6
Liabilities of discontinued operations		-	-	-
Total liabilities		44.5	57.7	54.8
Net assets / (liabilities)		(12.7)	3.1	(6.4)
Capital and Reserves
Equity share capital		11.7	11.7	11.7
Treasury shares		(0.3)	(0.3)	(0.3)
Currency translation		1.6	1.2	2.2
Other reserves		-	0.2	-
Retained earnings		(25.7)	(9.7)	(20.0)
Total Equity		(12.7)	3.1	(6.4)

  Condensed Group Cashflow Statement

For the six months ended 30 September 2009

		Unaudited  Interim  September  2009	Unaudited Interim September 2008	Audited Full Year March 2009
		£m	£m	£m
Operating activities
Loss for the period		(5.7)	(2.8)	(13.1)
Adjustments to reconcile loss for the period to net cashflow from operating activities
Tax on continuing operations		(0.2)	(0.4)	(0.5)
Net finance costs		1.5	2.7	6.1
Gain/ (loss) on disposal of discontinued operations		(2.8)	-	1.4
Gain on disposal of property, plant and equipment		(0.4)	(1.0)	(1.1)
Depreciation and impairment of property, plant and equipment		4.3	0.8	1.9
Amortisation and impairment of intangible assets		0.5	0.3	4.0
Share-based payments		-	-	0.1
Exchange differences on interest-bearing loans		(0.1)	-	0.5
(Increase) / decrease in inventories		1.2	(1.0)	0.3
(Increase) / decrease in trade and other receivables		2.6	(1.4)	0.2
Increase / (decrease) in trade and other payables		(1.1)	4.4	4.5
Cash generated from operations		(0.2)	1.6	4.3
Income taxes paid		(0.1)	-	(0.2)
Net cashflow from operating activities		(0.3)	1.6	4.1
Investing activities
Sale of property, plant and equipment		2.7	4.7	4.8
Outflow on acquisition of subsidiary undertakings		5.1	-	-
Payments to acquire property, plant and equipment		(0.1)	(2.1)	(2.3)
Payments to acquire intangible assets		-	(0.1)	(0.1)
Net cashflow from investing activities		7.7	2.5	2.4
Financing activities
Purchase of own shares		-	-	-
Interest paid		(1.4)	(2.0)	(4.8)
Refinancing costs		-	-	(0.7)
New borrowings		-	-	2.0
Repayments of borrowings		(5.3)	(2.9)	(2.9)
Repayment of capital element of finance leases and hire purchase contracts		(0.1)	(0.2)	(0.4)
Net cashflow from financing activities		(6.8)	(5.1)	(6.8)
Increase /(decrease) in cash and cash equivalents		0.6	(1.0)	(0.3)
Effect of exchange rates on cash and cash equivalents		0.1	0.3	-
Opening cash and cash equivalents		1.1	1.4	1.4
Closing cash and cash equivalents		1.8	0.7	1.1

  Notes to the Financial Statements

 

1.   Accounting policies for the six months ended 30 September 2009

Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union as they apply to the financial statements of the Group for the period ended 30 September 2009.

The Directors have prepared the financial statements on the going concern basis which assumes that the Company will continue in operational existence for the foreseeable future. 

The Company and the Group meet their day to day working capital requirements and medium-term funding requirements through banking facilities.  At 30 September 2009 the Group owed £28.6m to its Lenders and was in breach of its banking covenants. 

The failure of these covenant tests renders the entire facilities repayable on demand at the option of the Lenders. 

The Directors have prepared trading and cashflow forecasts for a period in excess of one year from the date of approval of these financial statements.  The forecasts prepared make assumptions about the Group's ability to sustain its business model and the Directors have been actively monitoring the trading position in relation to the continued volatility in the financial markets.  The forecasts also assume disposal of non-profit generating business units in the Drilling segment and an element of cost reduction, particularly with regard to corporate overhead.  

The Company is in dialogue with the Lenders regarding the covenant breach and what actions they will take, and whilst these discussions have not yet concluded the Directors are confident of achieving a positive outcome. 

In the view of the Directors, the combination of the circumstances described above represents a material uncertainty that may cast doubt upon the Company and the Group's ability to continue as a going concern. However, having considered this uncertainty, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and have therefore concluded that it is appropriate to adopt the going concern basis in preparing these financial statements. The financial statements do not include the adjustments that would result if the Company were unable to continue as a going concern.

The Group has chosen not to adopt IAS 34 Interim Financial Statements, and therefore this information is not wholly compliant with IFRS. The accounting policies are consistent with those of the annual financial statements for the year ended 31 March 2009.

New standards, amendments to standards and interpretations, which are applicable for the financial year ending 31 March 2010, have had no impact on the accounting policies. 

 

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

The comparative figures for the year ended 31 March 2009 do not constitute statutory financial statements for the purpose of section 240 of the Companies Act 1985. They have been extracted from the Company's published accounts.  The Report of the Auditors on those accounts was unqualified and did not contain a statement under either section 237(2) or (3) of the Companies Act 1985.  These financial statements should be read in conjunction with the 2009 financial statements.

Net current liabilities

At 30 September 2009 the Company had net current liabilities, excluding discontinued operations, of £12.1m. This was due to the reclassification of the entire amount of interest-bearing loans and other borrowings of £28.6m being classified as current on the basis that the Company's Lenders were in a position to serve the Company notice to repay the bank loans on demand at 30 September 2009.  Had it not been for such classification, the Company would have had net current assets, excluding discontinued operations of £15.9m.

2. Segmental reporting 

Primary segment - business segments

Drilling Services - selling or renting drilling equipment and contracting personnel for the oil and gas industry.

Fabrication Services - selling fabrication and manufacturing services for the oil and gas industry.

Corporate and other - Sovereign head office and other non-trading company costs.

Segment results

	Drilling £m	Fabrication £m	Corporate / other £m	Total £m	Discontinued Operations £m	Total £m
At 30 September 2009
Revenue	-	28.2	-	28.2	7.4	35.6
Operating (loss)	-	(0.3)	(1.5)	(1.8)	(5.8)	(7.6)
At 30 September 2008
Revenue	-	30.8	-	30.8	16.9	47.7
Operating profit / (loss)	-	3.0	(2.2)	0.8	(1.3)	(0.5)
At 31 March 2009
Revenue	-	59.6	-	59.6	36.9	96.5
Operating profit / (loss)	-	2.9	(7.6)	(4.7)	(1.8)	(6.5)

  3.   Exceptional Items 

	Unaudited  Interim September 2009 £m
Severance of employment arrangement	0.1
Refinancing and restructuring costs	0.4
Profit on sale and leaseback of property	(0.6)
Impairment of leasehold improvements of OIL Middle East	1.8
	1.7

The tax effect of the exceptional items is calculated at a rate of 28% on the capital gain on the property. No tax credit arises on abortive deal costs. Deferred tax credits arise on sale of property, impairment of goodwill and impairment of other intangible assets. 

4. Discontinued operations

Vertec Engineering Limited

On 11 May 2009, the Group entered into a conditional sale agreement to dispose of Vertec Engineering Limited, and the cabin rental fleet of Labtech Services Limited. The disposal was effected in order to generate cashflow to repay existing debt. The disposals which was effective 31 March 2009, was completed on 4 June 2009, on which date control of Vertec Engineering Limted passed to the acquirer. 

Prodrill Engineering Limited

On 14 September 2009, the Group entered into a sale agreement to dispose of Prodrill Engineering Limited. The disposal was effected in order to generate cashflow to repay existing debt. The disposal which was effective 31 July 2009, was completed on 15 September 2009, on which date control of Prodrill Engineering Limited passed to the acquirer.

Fingolden Limited

In September 2009, the Board resolved to discontinue the activities of Findgolden Limited and its trading subsidiary RDT Precision Engineers Limited. The decision was effected due to the companies being consistently loss-making.

Maxwell Downhole Technology Limited

The Board resolved to discontinue the activities of Maxwell Downhole Technology Limited. The decision was effected  due to the company being consistently loss-making.

Sovereign Fishing and Remedial Services

The Board resolved to discontinue the activities of Sovereign Fishing and Remedial Services. The decision was effected  due to the companies being consistently loss-making.

 Serco

The Board has committed to a plan to sell Serco and has initiated actions to locate a buyer. The disposal is being effected in order to generate cashflow to repay existing debt. 

The results of the discontinued operations which have been included in the Group Income Statement were as follows:

	Unaudited Interim September 2009 £m	Unaudited Interim September 2008 £m	Audited  Full Year March  2009 £m
Revenue	7.4	16.9	36.9
Expenses	(13.2)	(18.2)	(42.1)
Loss before tax	(5.8)	(1.3)	(5.2)
Attributable tax expenses	-	-	-
	(5.8)	(1.3)	(5.2)
Profit / (loss) on disposal of discontinued operations	2.8	-	(1.4)
Attributable tax expense	0.4	-	-
Net loss attributable to discontinued activities	(2.6)	(1.3)	(6.6)

The major classes of assets and liabilities comprising the operations classified as held for sale are as follows:

	Unaudited  Interim September  2009
	£m
Property, plant and equipment	1.1
Intangible assets	-
Trade and other receivables	1.2
Inventories	0.9
Total assets classified as held for sale	3.2
Trade and other payables	2.1
Interest-bearing loans and borrowings	0.1
Income tax payable	0.4
Total liabilities associated with assets classified as held for sale	2.6
Net assets of disposal groups	0.6

 

 5. Income tax expense 

The current income tax credit is £0.2m (2008: £nil). There is a tax charge of £0.1m relating to capital gains on the property disposals and a subsequent release of provision for deferred tax liabilities of £0.3m. No provision has been made for tax losses incurred in the period. 

 

6. (Loss) per ordinary share

Basic (loss) per share amounts are calculated by dividing (loss) for the period attributable to ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the year.

Diluted (loss) per share amounts are calculated by dividing the (loss) for the period attributable to ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the year plus the weighted average number of Ordinary Shares that would be issued on the conversion of all the dilutive potential Ordinary Shares into Ordinary Shares.  

The following reflects income and share data used in the basic and diluted (loss) per share computations:

	Six months ended 30 September 2009 Unaudited £m	Six months ended 30 September 2008  Unaudited £m	Year ended 31 March 2009 Audited £m
Loss for the period from continuing operations	(3.1)	(1.5)	(6.5)
Loss for the year from discontinued operations	(2.6)	(1.3)	(6.6)
Basic and diluted profit attributable to equity holders of the parent	(5.7)	(2.8)	(13.1)

	Six months ended 30 September 2009 Unaudited £m	Six months ended 30 September 2008  Unaudited £m	Year ended  31 March 2009 Audited £m
Basic weighted average number of Shares	16.9	16.9	16.9
Diluted weighted average number of Shares	16.9	16.9	16.9

There have been no other transactions involving Ordinary Shares or potential Ordinary Shares between the reporting date and the date of completion of these financial statements.  

Capital expenditure during the period amounted to £0.1m (2008: £2.1m) and property sold on a leaseback arrangement netted a gain of £1.5m (2008: £1.0m).

 

The bank loans are secured by a floating charge over certain of the Group's assets and pledges over the shares of the parent company and its subsidiaries. 

On 3 July 2009 the Group agreed to an amendment of terms in respect of credit facilities in place at 

31 March 2009. The new terms agreed for a standstill of all outstanding defaults until 31 May 2010, a reduction in margin payable on both senior and mezzanine facilities and a revised covenant package. No restructuring or arrangement fees were payable with regard to the negotiation of new commercial terms.

Under the new terms, for the period 1 June 2009 to 31 March 2010 the senior facilities will bear interest at LIBOR plus 4%, whilst the mezzanine facilities will bear interest at a payment in kind of 6.5%. For the period 1 April 2010 to 31 March 2011 the senior facilities will bear interest at LIBOR plus 5%, whilst the mezzanine facilities will bear interest at LIBOR plus 6.5%, plus a payment in kind of 3.5%.

We estimate that the revised terms which cover the period to 31 March 2011, will result in net savings in finance costs of £3.4m.

The revised covenant package incorporates financial covenants with regard to quarterly revenue and EBITDA which the Board believed were acceptable. 

The Group met its covenants for the quarter 30 June 2009 but breached its banking covenants for the quarter to 30 September 2009. The disclosures and classification of the Company's bank loans are based on the contractual position at 30 September 2009. Post this date the Company continued in dialogue with its Lenders. 

The Group has reclassified repayments of the principal from Non-current to Current on the basis that the Company's Lenders were in a position at the period end to serve the Company with a notice to repay the bank loans on demand. No such notices were served during the period or subsequent to the period end. The loans were due for repayment in January 2012.

During the period the Group repaid £5.3m of senior facilities from the proceeds of the sale of Vertec Engineering Limited and Prodrill Engineering Limited and the sale of property. 

9. This interim statement will be available on the Company's website www.sovereign-oil.eu.

Further information:

Sovereign Oilfield Group Plc                                        Tel: 01224 261900

John Robert Strachan, Group CEO

Buchanan Communications                                        Tel: 0207 466 5000

Tim Thompson/Catherine Breen

Charles Stanley Securities - Nominated Advisor            Tel: 0207 149 6000

Mark Taylor/Freddy Crossley

ENDIR FEMFMDSUSEDE