TIDMCAD
RNS Number : 6490R
Cadogan Petroleum PLC
26 August 2010
CADOGAN PETROLEUM PLC
Half Yearly Report for the Six Months ended
30 June 2010
(Unaudited and Unreviewed)
_______________________________________________________________________________
_______
Highlights
Cadogan Petroleum plc, an independent oil and gas exploration, development and
production company with onshore gas, condensate and oil assets in Ukraine,
announces its unaudited results for the six months ended 30 June 2010.
· Profit before tax of GBP0.4 million for first half of year (30 June 2009:
loss before tax GBP17.1 million)
· Commenced commercial production in August from Zagoryanska 3 well at about
50 mcm/day
· Prepared programme for deepening of Pokrovska 1 well by 800 metres
· Commenced development project to increase gas production from
Debeslavetska field
· Total capital expenditure of GBP1 million during the first half of 2010
(30 June 2009: GBP20.8 million)
· SAE Capital Holdings S.A. became a substantial shareholder
· Alessandro Benedetti and Bertrand des Pallieres of SAE Capital Holdings
S.A., appointed to the Board
· Net cash and cash equivalents at 30 June 2010 of GBP27.1 million
Commenting on the results, Ian Baron Chief Executive Officer said "The work
undertaken over the past 12 months has significantly strengthened the Group's
technical and commercial position in Ukraine, although Cadogan still needs to
demonstrate its full potential. The Group is poised to further develop its
assets in Ukraine and to take full advantage of the attractive growth
opportunities available to it."
Enquiries
+-----------------------------------+------------------+
| | |
+-----------------------------------+------------------+
| | |
+-----------------------------------+------------------+
| Cadogan Petroleum plc | +44 20 7245 0801 |
+-----------------------------------+------------------+
| Ian Baron,Chief Executive Officer | |
+-----------------------------------+------------------+
| | |
+-----------------------------------+------------------+
| Stefan Bort, Company Secretary | |
+-----------------------------------+------------------+
+-----------------------------------+------------------+
| Bankside | +44 20 7367 8888 |
+-----------------------------------+------------------+
| Simon Rothschild | |
+-----------------------------------+------------------+
| Rose Oddy | |
+-----------------------------------+------------------+
Introduction
Following the recommendation of the Board, the decision taken by shareholders at
the Company's Annual General Meeting on 30 June 2010 not to return capital but
to build on the work undertaken by the new management team, has allowed the
Company to move ahead in developing its assets in Ukraine. As a consequence of
this decision, the Board approved several initiatives that are already proving
beneficial to the Company. The first of these was the hook up of the Zagoryanska
3 well to the Ukraine gas pipeline network allowing production of gas and
condensate to commence on 1 August 2010. The revenue from this well, together
with existing production revenue elsewhere, should allow the Group to cover
ongoing general and administrative costs (excluding litigation costs) during the
latter part of 2010. The Board believes that, as a consequence of the actions
taken by the new management team, there remains a significant opportunity for
value to be created from the Group's sub-surface assets in Ukraine.
In June 2010, the 29.12% shareholding built up by a US institutional shareholder
was purchased by SAE Capital Holdings S.A. ("SAE"). The Board has had
discussions with the representatives of SAE and is pleased to announce the
appointment of Alessandro Benedetti and Bertrand des Pallieres as directors of
the Company with immediate effect. As SAE is the Company's largest shareholder,
the Board does not consider them independent in accordance with The UK Corporate
Governance Code ("the Code"). However, as a Smaller Company as defined under the
Code, the membership of the Board continues to comply with the Code, as the
Board will continue to have three independent non-executive Directors. Both
appointees have declined to receive fees.
Operations
The re-structuring of the Group's in-house technical team during 2009 has
resulted in a much improved understanding of the sub-surface within our
licences. The re-analysis of existing and new data, and the consolidation of the
Group's data resources in Kiev, has enabled improved analysis, design and
planning of commercially viable development projects.
Following extensive testing on Zagoryanska 3, the well was tied in by pipeline
to a sales point in the Ukraine gas transportation system. This project cost
$216,000, was completed on time and to budget, and initial production from this
well is currently around 50 mcm/day (1.75 million scf/day) of gas and 15 cubic
metres/day (120 bb/day) of condensate.
The Pokrovska 1 well which was suspended in March 2009 to conserve cash and
enable further seismic analysis, will be deepened by 800 metres to test a target
identified on the 3D seismic data. Drilling is planned for September and is
budgeted to cost in the region of $2 million plus a further $2 million for
testing, if warranted. In the event of commercial success, a further $3.5
million ($1.5 million of which comes from inventory) will be required for
facilities and to tie the well in to a production sales point. This project has
very attractive economics and if successful the investment should be recovered
within 12 months.
Three new production wells will be drilled on the Debeslavetska field over the
next three months at a total cost of $1.08 million using the Group's drilling
rig. Gas production continues from the Group's Cheremkhivska field at the rate
of 7 mcm / day.
The Group is preparing for the acquisition of a 2D seismic programme on the
Bitylanskya licence, where in 2009 the Bornyna 3 well was drilled. In a limited
duration drill stem test Borynya 3 tested gas from a secondary reservoir at a
maximum flow rate of 128 mcm/day. This $1.25 million programme, which is
expected to be completed by November 2010 seeks to identify suitable targets for
further drilling, and fulfils a licence obligation.
The Group continues to discuss the possibility of farming out some of its major
assets. These discussions were hampered by the uncertainty over the Company's
future ownership. This issue has now been resolved. In the interim, there have
been material changes to the business, which have encouraged the Board to review
the farm-out programme to ensure that it is appropriate. For example, in August
2010 the Zagoryanska 3 discovery was put on commercial production; the Pokrovska
1 well is to be deepened; the Group is now in a position to manage its drilling
obligations until the end of 2011 and, has sufficient financial resources to
support expenditure on existing fields that will enhance value or generate
production revenues. The Board will continue to seek farm out arrangements in
order to manage risk on any major drilling obligations.
Political and licence issues
There have been no further developments in the Group's licence disputes (refer
to note 2c on page 18). As reported in October 2009 Cadogan has been advised by
the Ministry for the Protection of the Environment in Ukraine that there are no
grounds for invalidation or annulment, or any doubts as to the validity of the
Group's special permits or licences for any of its assets. The Company continues
to wait for a further hearing in the Higher Administrative court of Ukraine to
reconsider their previous ruling, with no further evidence being taken into
account, as instructed by the Supreme Court in June 2009 with regard to the
indirect challenge to the Pirkovskoe licence.
The temporary suspension of the Debeslavetska licence remains in place. Earlier
in the year minor non-compliance issues were identified and resolved, however,
the local authorities did not report this to the State authorities and, as a
consequence, the field was shut-in in early June 2010. The Group has received a
letter from the Ministry for the Protection of the Environment in Ukraine
confirming that the alleged non-compliance had been resolved and that as soon as
an inter-departmental committee had been formed, the lifting of the suspension
order would be submitted for approval. Prior to shut-in net revenues from the
field averaged $137,000 per month. The Board currently believes that the lost
production from this well can be recovered during the year.
Amendments to the Pokrovskoe work programme, the Slobodo - Rungurska work
programme, extension of the Pirkovskoe licence which expired in June 2010 (refer
to Operations Review on page 6) and extension of the Monastyretska licence are
also held up by the delay in appointing the inter-departmental committee.
Litigation
Progress continues to be made in the Company's litigation against its former
officers and various related parties and the Company has been advised that it
has excellent prospects of success. To date the litigation against third parties
has secured $16 million of value. The Board expects the Group to recover a
further $36.5 million in connection with the resale of gas plants manufactured
by Global Processing Systems in accordance with the payment schedule agreed with
them.
Financial position
At the date of this report, the Group had cash and cash equivalents of
approximately GBP26.4 million. The Directors believe that the capital available
at the date of this report is sufficient for the Group to continue operations
for the foreseeable future (refer to note 2b on page 19).
Outlook
The Board strongly believes that there remains a significant opportunity for
value to be created from the Group's assets in Ukraine. Going forward it will
review and develop plans to build value from its existing assets in 2011 by
developing projects that will enhance reserves and generate production revenue.
As part of this review the Board will consider the level of farm-out of major
obligations that is appropriate for the Group to carry in order to reduce the
risk profile.
Simon Duffy
Non-executive Chairman
Reserves and resources
Following the management changes in March 2009, the capital intensive drilling
operations of the Group were safely curtailed in a manner that would maintain
the licences legally and leave maximum flexibility in the event further studies
revealed scope for additional work on the wells. Greater effort was applied to
developing and understanding the hydrocarbon potential and the risks on the
Group's licences through work carried out by the Group's new subsurface team
based in Kiev. Additionally the team focused on building the technical database
and developing a farm-out programme designed to balance the risk profile of the
asset base through finding partners to fund future work programmes, in return
for part of Cadogan's equity in the licences.
At the beginning of 2010 the Group held working interests in eight (2009:
eleven) gas, condensate and oil exploration and production licences in the east
and west of Ukraine. All these assets are operated by the Group and are located
in either the Carpathian basin or the Dnieper-Donets basin, proximal to the
Ukrainian gas distribution infrastructure. The Group's primary focus is on the
Bitlyanska licence, (Carpathian Basin, west Ukraine), Pokrovskoe, Zagoryanska
and Pirkovskoe licences (Dnieper-Donets basin, east Ukraine) where the Group's
main reserve and resource potential is located.
+-----------+-------------------+----------------+--------------+
| |
+---------------------------------------------------------------+
| Working | Licence | Expiry | Licence |
| interest | | | type(1) |
| (%) | | | |
+-----------+-------------------+----------------+--------------+
| Major | | | |
| licences | | | |
+-----------+-------------------+----------------+--------------+
| 96.5 | Bitlyanksa(2) | December 2014 | E&D |
+-----------+-------------------+----------------+--------------+
| 100.0 | Pokrovskoe | August 2011 | E&D |
+-----------+-------------------+----------------+--------------+
| 90.0 | Zagoryanska | April 2014 | E&D |
+-----------+-------------------+----------------+--------------+
| 97.0 | Pirkovskoe(3) | June 2010 | E&D |
+-----------+-------------------+----------------+--------------+
| Minor | | | |
| licences | | | |
+-----------+-------------------+----------------+--------------+
| 98.3 | Debeslavetska | October 2026 | Production |
+-----------+-------------------+----------------+--------------+
| 49.8 | Cheremkhivska | May 2018 | Production |
+-----------+-------------------+----------------+--------------+
| 100.0 |Slobodo-Rungurska | April 2011 | E&D |
+-----------+-------------------+----------------+--------------+
(1) E&D = Exploration and Development.
(2) The working interest on the Bitlyanska licence declines on a stepped basis,
every five years after the commencement of production on each well. The Joint
Activity Agreement ("JAA") also distinguishes working interests on new wells and
work over wells with the former offering a higher share to the Group. Effective
working interests are shown above.
(3) The Pirkovskoe licence expired in June 2010 and all the necessary paperwork
for its extension has been submitted to the State authorities.
The following are updates to the full Operations Review contained in the Annual
Financial Report for 2009:
Bitlyanska licence area
A 2D seismic acquisition programme will commence on this licence area in
September 2010. The outcome of this seismic survey will assist with our
understanding of the potential of this highly attractive, but geologically
complex asset. The programme is budgeted to cost $1.25 million and is planned to
be completed by November 2010.
Pokrosvkoe licence area
The Pokrovska 1 well, which was suspended in March 2009 for 3D seismic
evaluation and to conserve cash, will be deepened by 800 metres and deviated so
that a target identified on the seismic can be reached. The rig is on site and
is being upgraded and it is planned to start drilling in September and reach
total depth within 60 days.
Zagoryanska licence
Following the successful testing of the Visean V-18 interval in the Zagoryanska
3 well, the Group has invested $216,000 to tie the well into a production sales
point. The project was completed on time and to budget and commenced commercial
production on 1 August 2010. Production from this well is currently averaging 50
mcm/day (1.75 million scf/day) of gas and 15 t/day (120 bb/day) of condensate.
It is expected that production will stabilise over time to about 35 mcm/day of
gas. The extent of the V-18 reservoir in the Zagoryanska 3 area has still to be
fully mapped and confirmed, but it is anticipated that additional wells will be
required to exploit fully this discovery.
Although the current focus is on the V-18 discovery, a report from the
Ukrainian State GeologicalExploration Institute also points out that, despite
the previously announced unsuccessful tests on the Tournasian and Lower Visean
intervals of the Zagoryanska 3 well, there could also be commercial production
from those intervals. This would require utilising proper test procedures, an
appropriate completion string and a series of stimulation treatments. Management
continues to review this opportunity as well as evaluating the potential for the
possible work-over of two previously drilled wells on the Zagoryanska field.
Pirkovskoe licence area
The Pirkovskoe licence expired in June 2010 and all the necessary paperwork for
its extension has been submitted to the State authorities. Like many other
licences in Ukraine, the recommendation to approve the Pirkovskoe licence
extension has been delayed pending the appointment of the ministries
Inter-Departmental Work group. This was established in late July after a series
of delays due to changes in appointments in the Ministry of Environmental
Protection and the first meeting is to be held shortly.
The Board is confident that this licence will be extended and as a result do not
consider there to be any impairment to the carrying value of the assets
connected with this licence as at the period end.
The amount capitalised within property, plant and equipment ("PP&E") in respect
of this licence at period end was GBP21.9 million. In the event that the
extension is not permitted these costs would be impaired.
Minor fields
Three new shallow production wells will be drilled on the Debeslavetska field
over the next three months at a cost of $1.08 million using the Group's drilling
rig. The Debeslavestska field in western Ukraine currently has 9 producing wells
and current production is about 27 mcm/ day. Re-analysis of the seismic and
geophysical data already available to the Company indicated further potential in
this field and accordingly three wells to around 400metres will be drilled
between September and December 2010 to increase production. Production also
continues from the Cheremkhivska field at about 7 mcm/day.
The Company previously reported that it had allowed the Monaststreytska licence
to expire. However following discussions with the Ministry for the Protection of
the Environment in Ukraine the licence will be re-acquired on favourable terms
and studies are underway to bring one well back to oil production as soon as
possible.
There is no production from the Slobodo-Rungurska licence area where six old
wells the Group took over are being plugged and abandoned.
Income statement
The income statement of the Group for the six months to 30 June 2010 shows a
small profit before tax for the period of GBP0.4 million, largely deriving from
income from out of court settlements and other non-trading income offset by
administrative expenses (30 June 2009: loss of GBP17.1 million; 31 December
2009: loss of GBP107.2 million).
During the period, the activities of the Group largely remained on stand-by as
most exploration and development activities were suspended, and the staff
reduction programme was completed. Revenue in the period of GBP0.8 million (30
June 2009: GBP1.1 million; 31 December 2009: GBP2.3 million) comprised sale of
gas from the producing wells in the Debeslavetska and Cheremkhivskoe minor
fields only. The reduction of revenue on the previous periods arose because
these periods also included revenue from the minor fields at Blazhiv and
Slobodo, and additionally test production of oil from the field at Pirkovskoe.
These sales produced a gross profit of GBP0.1 million (30 June 2009: GBP0.1
million; 31 December 2009: GBP0.3 million).
Administrative expenses of GBP4.4 million (30 June 2009: GBP4.1 million; 31
December 2009: GBP20.7 million) comprised staff costs, Directors' remuneration,
legal and professional fees, depreciation charges for the Group's property,
plant, equipment and intangible assets, and other operational or administrative
costs. In the six months to 30 June 2010, they also included realised losses of
GBP0.9 million on sales of surplus inventories. Expenditure in the period on
legal items related to the litigation process was GBP2.2 million, of which
GBP1.9 million had been accrued as at 31 December 2009 (litigation costs to 30
June 2009: GBP0.8 million; 31 December 2009: GBP6.1 million). Professional and
consultancy fees of GBP0.4 million charged in the period mainly related to the
farm-out campaign and ongoing corporate costs, while in 2009 the costs charged
under this category (30 June 2009: GBP0.8 million: 31 December GBP0.8 million)
mainly related to fees incurred to defend the legal challenges indirectly
associated with the Pirkovskoe and Zagoryanska licences and to extend the
Zagoryanska licence. No reversal of equity-settled share-based payment
transactions previously expensed took place in the period (30 June 2009: GBP0.8
million; 31 December 2009: GBP0.8 million). These reversals had resulted from
certain options being forfeited and a change in the estimated period of vesting
for the remaining options.
Other income comprised income from out of court settlements, exchange gains on
long-term receivables and movement on the provision against Ukrainian VAT
receivable. The income of GBP2.9 million from out of court settlements
represented the income of $4.5 million which was received under the settlement
with Smith Eurasia.. The movement in the VAT provision represented Ukrainian VAT
of GBP1.1 million recovered during the period, less write-off of new VAT of
GBP0.7 million. The recoveries mostly related to sales of inventories. In 2009
the full impairment of Ukrainian VAT receivable resulted in charges of GBP13.5
million for the period to 30 June 2009, and GBP13.2 million for the year.
Investment revenue decreased during the six months ended 30 June 2010 to GBP0.1
million (30 June 2009: GBP0.3 million; 31 December 2009: GBP0.4 million) due
mainly to a reduction in interest rates.
Cash flow statement
The Consolidated Cash Flow Statement on page 15 shows net cash outflow from
operating activities of GBP3.2 million (30 June 2009: GBP3.9 million; 31
December 2009: GBP19.0 million), expenditure of GBP0.8 million (30 June 2009:
GBP12.0 million; 31 December 2009: GBP15.9 million) on intangible exploration
and evaluation assets and GBP0.2 million (30 June 2009: GBP8.7 million; 31
December 2009: GBP7.6 million) on property, plant and equipment. No asset
acquisitions were made in the six months ended 30 June 2010 (30 June 2009:
GBPnil; 31 December 2009: GBPnil million).
Balance sheet
As at 30 June 2010, the balance of the unrestricted cash and cash equivalents of
the Group was GBP27.1 million (31 December 2009: GBP30.5 million). No external
borrowings were held by the Group at either date. Intangible exploration and
evaluation assets of GBP1.0 million (31 December 2009: GBPnil) represent the
investment in such assets made in the six months to 30 June 2010 only, due to
the full impairment of the net book value as at 31 December 2009. Property,
plant and equipment of GBP32.6 million at 30 June 2010 (31 December 2009:
GBP32.0 million) represents principally the cost of developing fields with
commercial reserves to bring them into production. The total receivable of $36.5
million from the settlement with GPS (GBP24.2 million as at 30 June 2010,
GBP22.9 million as at 31 December 2009) is apportioned between non-current and
current assets in accordance with the relevant periods in which the amounts fall
due at each balance sheet date. During the six month period a substantial
portion of this amount became receivable within one year. Trade and other
payables have reduced from GBP7.2 million as at 31 December 2009 to GBP2.1
million as at 30 June 2010 as accrued legal costs and amounts previously
disputed, which were taken up as at 31 December 2009 were discharged during the
period. Net assets have increased by GBP3.0 million to GBP86.6 million at 30
June 2010 from GBP83.6 million at 31 December 2009 largely as a result
favourable exchange movements and from reductions to outgoings and liabilities.
Related party transactions
No material transactions have taken place with related parties during the six
months to 30 June 2010. The Board continues to undertake legal actions
previously reported against the former Chief Executive Officer, Chief Operating
Officer and certain third parties in order to obtain redress for the Company
arising from potential irregularities surrounding the procurement of and payment
for certain assets and services contracted for by the Group, some of which may
have given rise to related party transactions not disclosed in the Financial
Statements for the year to 31 December 2009.
Commitments
The Group has not entered into any material commitments during the six months
ended 30 June 2010.
Treasury
The Group continually monitors its exposure to currency risk. It maintains a
portfolio of cash and cash equivalents in both $ and GBPheld primarily in the UK
and holds these mostly in term deposits depending on the Group's operational
requirements. Production revenues from the sale of hydrocarbons are received in
the local currency in Ukraine ('UAH') and to date funds from such revenues have
been held in Ukraine for further use in operations rather than being remitted to
the UK. Funds are primarily converted to $ and transferred to the Company's
subsidiaries to fund operations at which time the funds are converted to UAH.
Some payments are made on behalf of the subsidiaries from the UK.
Key performance indicators
In the six months to 30 June 2010, the main objectives of the Group were to
complete the programme of scaling back activities as previously reported and to
improve income from the producing fields such that activities could become
self-financing. For this reason, reference was not made to such key performance
indicators ('KPIs) as are normally associated with oil and gas activities, but
rather to those related to cash flow, cost reduction and numbers employed.
During the six months to 30 June 2010, the average monthly cash outflow from
operating and investing activities was GBP0.6 million (30 June 2009: GBP3.1
million; 31 December 2009: GBP3.5 million). The number of staff as at 30 June
2010 was 119 (30 June 2009: 480: 31 December 2009: 153).
There are a number of potential risks and uncertainties which could have a
material impact on the long-term performance of the Group and which could cause
the actual results to differ materially from expected and historical results.
Full details are disclosed on pages 13 to 16 of the 2009 Annual Financial
Report. There have been no changes to the risk profile during the first half of
the year. These are summarised below:
Financial risks
· Validity of the Group's licences
· Recoverability of the Group's assets
· Liquidity risk, management and going concern assumption
· Regulatory and tax compliance risk
· Fraud risk
· Litigation risk
· Budgeting risk
· Procurement and commitment risk
· Foreign exchange risk management
· Inflation risk management
· Credit risk management
· Validity and appropriateness of accounting policies
Non-financial risks
· Operating environment
· Regulatory and licence issues
· Political risk
· Economic environment
· Drilling and work-over activities
· Reserves and resources
· Information system, integrity, access and availability risk
· Health, safety and environment
· Social responsibilities
Directors' Responsibility Statement
_______________________________________________________________________________
_______
We confirm that to the best of our knowledge:
(a) the Condensed set of Financial Statements has been prepared in
accordance with IAS 34 'Interim Financial Reporting';
(b) the interim management report includes a fair review of the
information required by DTR 4.2.7R (indication of important events during the
first six months and description of principal risks and uncertainties for the
remaining six months of the year); and
(c) the interim management report includes a fair review of the
information required by DTR 4.2.8R (disclosure of related parties' transactions
and changes therein).
(d) the condensed set of financial statements, which has been prepared
in accordance with the applicable set of accounting standards, gives a true and
fair view of the assets, liabilities, financial position and profit or loss of
the issuer, or the undertakings included in the consolidation as a whole as
required by DTR 4.2.4R
This Half Yearly Report consisting of pages 1 to 24 has been approved by the
Board and signed on its behalf by:
Stefan Bort
Company Secretary
26 August 2010
_______________________________________________________________________________
_______
Cautionary Statement
The business review and certain other sections of this Half Yearly Report
contain forward looking statements that have been made by the directors in good
faith based on the information available to them up to the time of their
approval of this report. However they should be treated with caution due to
inherent uncertainties, including both economic and business risk factors,
underlying any such forward-looking information and no statement should be
construed as a profit forecast.
Condensed Consolidated Income Statement
For the six months ended 30 June 2010
_______________________________________________________________________________
_______
+----------------------------------------+-------+-----------+-----------------+-----------+
| | | | |
+----------------------------------------+-------+-----------+-----------------------------+
| |Notes | | | |
| | | Unaudited | Unaudited | Year |
| | | 30 June | 30 June | December |
| | | 2010 | 2009 | 2009 |
| | | | GBP'000 | GBP'000 |
| | | GBP'000 | | |
+----------------------------------------+-------+-----------+-----------------+-----------+
| | | | | |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Revenue | | 820 | 1,064 | 2,342 |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Cost of sales | | (704) | (936) | (2,022) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Gross profit | | 116 | 128 | 320 |
+----------------------------------------+-------+-----------+-----------------+-----------+
| | | | | |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Administrative expenses - other | | (4,387) | (7,840) | (25,299) |
| expenses | | | | |
+----------------------------------------+-------+-----------+-----------------+-----------+
| - impairment of oil and gas assets | | - | - | (63,499) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| - impairment of other assets | | - | (13,498) | (23,752) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| | | (4,387) | (21,338) | (112,550) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Other operating income | 4 | 4,621 | 3,748 | 4,641 |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Operating profit / (loss) | | 350 | (17,462) | (107,589) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| | | | | |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Investment revenue | | 63 | 335 | 407 |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Finance costs | | (11) | (5) | (8) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Profit / (loss) before tax | | 402 | (17,132) | (107,190) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| | | | | |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Tax | | 162 | (269) | (113) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Profit / (loss) for the period/year | 5 | 564 | (17,401) | (107,303) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| | | | | |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Attributable to: | | | | |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Equity holders of the parent | | 564 | (16,868) | (107,303) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Minority interest | | - | (533) | - |
+----------------------------------------+-------+-----------+-----------------+-----------+
| | | 564 | (17,401) | (107,303) |
+----------------------------------------+-------+-----------+-----------------+-----------+
| | | | | |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Profit / (loss) per ordinary share | | GBP | GBP | GBP |
+----------------------------------------+-------+-----------+-----------------+-----------+
| Basic and diluted | 6 | 0.0024 | (0.07) | (0.46) |
+----------------------------------------+-------+-----------+-----------------+-----------+
Condensed Consolidated Statement of Comprehensive Income
For the six months ended 30 June 2010
_______________________________________________________________________________
_______
+-----------------------------------------+----+-----------+-----------+-----------+
| | | | |
+-----------------------------------------+----+-----------+-----------------------+
| | | | | |
| | | Unaudited | Unaudited | Year |
| | | 30 June | 30 June | December |
| | | 2010 | 2009 | 2009 |
| | | GBP'000 | GBP'000 | GBP'000 |
+-----------------------------------------+----+-----------+-----------+-----------+
| | | | | |
+-----------------------------------------+----+-----------+-----------+-----------+
| Profit / (loss) for the period/year | | 564 | (17,401) | (107,303) |
+-----------------------------------------+----+-----------+-----------+-----------+
| | | | | |
+-----------------------------------------+----+-----------+-----------+-----------+
| Unrealised currency translation | | 2,465 | (11,585) | (11,377) |
| differences | | | | |
+-----------------------------------------+----+-----------+-----------+-----------+
| | | | | |
+-----------------------------------------+----+-----------+-----------+-----------+
| Total comprehensive profit / (loss) for | | 3,029 | (28,986) | (118,680) |
| the period/year | | | | |
+-----------------------------------------+----+-----------+-----------+-----------+
Condensed Consolidated Balance Sheet
As at 30 June 2010
_______________________________________________________________________________
_______
+----------------------------------------+-------+--------+----------+----------+----------+
| | | | Unaudited |
+----------------------------------------+-------+--------+--------------------------------+
| |Notes | | 30 June | 31 |
| | | | 2010 | December |
| | | | GBP'000 | 2009 |
| | | | | GBP'000 |
+----------------------------------------+-------+-------------------+----------+----------+
| ASSETS | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Non-current assets | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Intangible exploration and evaluation | | | 1,040 | - |
| assets | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Property, plant and equipment | | | 32,638 | 32,009 |
+----------------------------------------+-------+-------------------+----------+----------+
| Other non-current receivables | 8 | | 6,635 | 18,835 |
+----------------------------------------+-------+-------------------+----------+----------+
| Restricted cash | 9 | | 405 | 450 |
+----------------------------------------+-------+-------------------+----------+----------+
| | | | 40,718 | 51,294 |
+----------------------------------------+-------+-------------------+----------+----------+
| Current assets | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Inventories | 7 | | 3,175 | 5,522 |
+----------------------------------------+-------+-------------------+----------+----------+
| Trade and other receivables | 8 | | 19,333 | 5,390 |
+----------------------------------------+-------+-------------------+----------+----------+
| Current tax receivables | | | 16 | - |
+----------------------------------------+-------+-------------------+----------+----------+
| Cash and cash equivalents | | | 27,091 | 30,505 |
+----------------------------------------+-------+-------------------+----------+----------+
| | | | 49,615 | 41,417 |
+----------------------------------------+-------+-------------------+----------+----------+
| Total assets | | | 90,333 | 92,711 |
+----------------------------------------+-------+-------------------+----------+----------+
| | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| LIABILITIES | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Non-current liabilities | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Deferred tax liabilities | | | (839) | (973) |
+----------------------------------------+-------+-------------------+----------+----------+
| Long-term provisions | | | (232) | (176) |
+----------------------------------------+-------+-------------------+----------+----------+
| | | | (1,071) | (1,149) |
+----------------------------------------+-------+-------------------+----------+----------+
| Current liabilities | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Trade and other payables | 10 | | (2,061) | (7,237) |
+----------------------------------------+-------+-------------------+----------+----------+
| Current tax liabilities | | | - | (16) |
+----------------------------------------+-------+-------------------+----------+----------+
| Current provisions | | | (561) | (698) |
+----------------------------------------+-------+-------------------+----------+----------+
| | | | (2,622) | (7,951) |
+----------------------------------------+-------+-------------------+----------+----------+
| Total liabilities | | | (3,693) | (9,100) |
+----------------------------------------+-------+-------------------+----------+----------+
| | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Net assets | | | 86,640 | 83,611 |
+----------------------------------------+-------+-------------------+----------+----------+
| | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| EQUITY | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Share capital | | | 6,933 | 6,933 |
+----------------------------------------+-------+-------------------+----------+----------+
| Retained earnings / (accumulated | | | 94,157 | 93,593 |
| deficit) | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Cumulative translation reserves | | | (18,909) | (21,374) |
+----------------------------------------+-------+-------------------+----------+----------+
| Other reserves | | | 5,093 | 5,093 |
+----------------------------------------+-------+-------------------+----------+----------+
| Equity attributable to equity holders | | | 87,274 | 84,245 |
| of the parent | | | | |
+----------------------------------------+-------+-------------------+----------+----------+
| Non-controlling interest | | | (634) | (634) |
+----------------------------------------+-------+-------------------+----------+----------+
| Total equity | | | 86,640 | 83,611 |
+----------------------------------------+-------+-------------------+----------+----------+
| | | | | | |
+----------------------------------------+-------+--------+----------+----------+----------+
Condensed Consolidated Cash Flow Statement
For the six months ended 30 June 2010
_______________________________________________________________________________
_______
+----------------------------------------+----+-+-----------+-----------+----------+
| | | | |
+----------------------------------------+----+-------------+----------------------+
| |Note | | | |
| | | Unaudited | Unaudited | Year |
| | | 30 June | 30 June | December |
| | | 2010 | 2009 | 2009 |
| | | GBP'000 | GBP'000 | GBP'000 |
+----------------------------------------+------+-----------+-----------+----------+
| Net cash outflow from operating | 11 | (3,174) | (3,924) | (18,952) |
| activities | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| Investing activities | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| Purchases of property, plant and | | (162) | (8,743) | (7,569) |
| equipment | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| Purchases of intangible exploration | | (832) | (12,011) | (15,896) |
| and evaluation assets | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| Proceeds from sale of property, plant | | 615 | 75 | 432 |
| and equipment | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| Interest received | | 52 | 424 | 501 |
+----------------------------------------+----+-------------+-----------+----------+
| Net cash used in investing activities | | (327) | (20,255) | (22,532) |
+----------------------------------------+----+-------------+-----------+----------+
| | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| Net cash from financing activities | | - | - | - |
+----------------------------------------+----+-------------+-----------+----------+
| | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| Net decrease in cash and cash | | (3,501) | (24,179) | (41,484) |
| equivalents | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| Effect of foreign exchange rate | | 87 | (1,920) | (37) |
| changes | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| Cash and cash equivalents at beginning | | 30,505 | 72,026 | 72,026 |
| of period /year | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| Cash and cash equivalents at end of | | 27,091 | 45,927 | 30,505 |
| period /year | | | | |
+----------------------------------------+----+-------------+-----------+----------+
| | | | | | |
+----------------------------------------+----+-+-----------+-----------+----------+
Condensed Consolidated Statement of Changes in Equity
For the six months ended 30 June 2010
_______________________________________________________________________________
_______
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| | | | | | | | | |
| | | | | | | | | |
| | | | (Accumulated | | | | | |
| | | Share | deficit)/ | Cumulative | Share- | | | |
| | Share | premium | retained | translation | based |Reorganis-ation |Non-controlling | |
| |capital | account | earnings | reserves |payment | GBP'000 | interest | Total |
| |GBP'000 | GBP'000 | GBP'000 | GBP'000 |GBP'000 | | GBP'000 | GBP'000 |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| As at 1 | 6,933 | 250,373 | (49,477) | (9,997) | 5,357 | 890 | (634) | 203,445 |
| January 2009 | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| Share-based | - | - | - | - | (1,154) | - | - | (1,154) |
| payments | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| Net loss for | - | - | (16,868) | - | - | - | (533) | (17,401) |
| the period | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| Exchange | - | - | - | (11,585) | - | - | - | |
| translation | | | | | | | | (11,585) |
| differences on | | | | | | | | |
| foreign | | | | | | | | |
| operations | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| As at 30 June | 6,933 | 250,373 | (66,345) | | 4,203 | 890 | (1,167) | 173,305 |
| 2009 | | | | (21,582) | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| Net loss for | - | - | (90,435) | - | - | - | 533 | (89,902) |
| the period | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| Capital | - | (250,373) | 250,373 | - | - | - | - | - |
| reorganisation | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| Exchange | - | - | - | 208 | - | - | - | |
| translation | | | | | | | | 208 |
| differences on | | | | | | | | |
| foreign | | | | | | | | |
| operations | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| As at 31 | 6,933 | - | 93,593 | | 4,203 | 890 | (634) | 83,611 |
| December 2009 | | | | (21,374) | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| Share-based | - | - | - | - | - | - | - | - |
| payments | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| Net profit for | - | - | 564 | - | - | - | - | 564 |
| the period | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| Exchange | - | - | - | | - | - | | 2,465 |
| translation | | | | | | | | |
| differences on | | | | 2,465 | | | - | |
| foreign | | | | | | | | |
| operations | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
| As at 30 June | 6,933 | - | 94,157 | (18,909) | 4,203 | 890 | (634) | 86,640 |
| 2010 | | | | | | | | |
+----------------+---------+-----------+--------------+--------------+---------+-----------------+-----------------+----------+
Notes to the Condensed Financial Statements
For the six months ended 30 June 2010
_______________________________________________________________________________
_______
1. General information
Cadogan Petroleum plc (the 'Company', together with its subsidiaries the 'Group'
or 'Cadogan'), is incorporated in England and Wales under the Companies Act. The
address of the registered office is 5th floor, 4/5 Grosvenor Place, London SW1X
7HJ. The nature of the Group's operations and its principal activities are set
out in the Operations Review on pages 5 to 7 and the Financial Review on pages 9
to 10.
The financial information for the year ended 31 December 2009 and the period to
30 June 2010 does not constitute Statutory accounts as defined in section 435 of
the Companies Act 2006, but is derived from those accounts. Statutory accounts
for the year ended 31 December 2009 have been delivered to the Registrar of
Companies. The auditors reported on those accounts; their report on the 2009
accounts was qualified in respect of the limitation to obtain sufficient
appropriate audit evidence regarding the carrying values of assets as at 31
December 2008 and regarding the completeness and accuracy of the disclosures of
related party transactions and directors' remuneration (refer to note 2(a) to
those accounts). This qualification extends to the Consolidated Income
Statement, Consolidated Statement of Comprehensive Income, Consolidated and
Parent Company Cash Flow Statements, Consolidated and Parent Company Statement
of Changes in Equity and related notes for the year ended 31 December 2009. The
report contained a statement under sections 498(2) (accounting records
inadequate) and (3) (failure to obtain necessary information and explanations or
equivalent preceding legislation) and an emphasis of matter in relation to the
current status of legal proceedings surrounding the validity of certain of the
Group's licences in Ukraine (refer to note 2(c) to those accounts).
This Half Yearly Report has not been audited or reviewed in accordance with the
Auditing Practices Board guidance on 'Review of Interim Financial Information'.
A copy of this Half Yearly Report has been published and may be found on the
Company's website.
2. Basis of preparation
The annual financial statements of the Group are prepared in accordance with
International Financial Reporting Standards ('IFRS') as issued by the
International Accounting Standards Board ('IASB') and as adopted by the European
Union ('EU'). These Condensed Financial Statements have been prepared in
accordance with IAS 34 Interim Financial Reporting, as issued by the IASB.
The same accounting policies and methods of computation are followed in the
condensed financial statements as were followed in the most recent annual
financial statements of the Group, which were included in the Annual Report
issued on 27 April 2010, subject to the matter discussed at point (a) below
concerning comparative amounts.
(a) Comparative amounts
As reported in the Annual Report issued on 27 April 2010, because of the events
and circumstances which occurred in Cadogan during 2009, as set out in the
Chairman's Statement on pages 4 to 7 of the Annual Report, the Board took the
following actions in the second half of 2009:
· Commissioned a Reserves and Resources Evaluation to support the carrying
value of Exploration and Evaluation ('E&E'), Property, Plant and Equipment
('PP&E') and Goodwill assets as at 31 December 2009. This evaluation resulted in
significant impairment charges to these categories of assets in the
Consolidated Income Statement for the year to that date;
· Evaluated, long-term receivables, inventories and other assets of the
Group for impairment, giving rise to further significant impairment charges in
the same Consolidated Income Statement;
· Initiated and continued litigation against certain former officials and
suppliers of the Group;
Basis of preparation (continued)
(a) Comparative amounts (continued)
· Performed internal investigations into procurement irregularities and
adjusted all known payments inappropriately capitalised in the Consolidated
Financial Statements of the Group for the years ended 31 December 2006, 2007 and
2008;
As a result of the above actions, significant impairments were made to the
carrying values of assets as at 31 December 2009 in the consolidated balance
sheet as at that date, which, in accordance with IAS 34 is shown as the
comparative to the Condensed Consolidated Balance Sheet as at 30 June 2010. The
comparative Condensed Consolidated Statement of Changes in Equity also reflects
the above impairments. Under IAS 34, the comparative statements to the Condensed
Consolidated Income Statement, the Condensed Consolidated Statement of
Comprehensive Income and the Condensed Consolidated Cash Flow Statement, would
normally be the respective statements to 30 June 2009 which were issued on 27
August 2009. However, these statements did not reflect the above impairments
(apart from an impairment to VAT recoverable) as they had not been taken up as
that time. The statements for the full year to 31 December 2009 are therefore
given as comparatives. The Board does not consider that an exercise to restate
the statements for the six months to 30 June 2009 to take up the appropriate
portions of impairment as at that date would be an effective use of the Group's
resources and so such an exercise has not been performed.
(b) Going concern
The Directors have continued to use the going concern basis in preparing these
condensed financial statements. The Group's business activities, together with
the factors likely to affect future development, performance and position are
set out in the Operations Review on pages 5 to 7. The financial position of the
Group, its cash flow and liquidity position are described in the Financial
Review on pages 8 to 10.
The Group's unrestricted cash balance as at 30 June 2010 was GBP27.1 million (31
December 2009: GBP30.5 million) with no external debt financing to date and the
Directors believe that the capital available at the date of issue of these
financial statements is sufficient for the Group to manage its business risks
successfully despite the current uncertain economic outlook.
The Group's forecasts and projections, taking into account reasonably possible
changes in operational performance, start dates and flow rates for commercial
production and the price of hydrocarbons sold to Ukrainian customers, show that
there are reasonable expectations that the Group will be able to operate on
funds currently held and those generated internally, for the foreseeable future,
without the requirement to seek external financing.
The uncertainties referred to in the Chairman's Statement on pages 5 to 7 of the
Annual Report for the year to 31 December 2009, and again in the Notes to the
Financial Statements on page 45 of the same report, concerning proposals by the
Company's then largest shareholder to return almost all of the available cash to
shareholders were resolved in June by the purchase of the shares of that
shareholder by a new investor, as set out in the Chairman's Statement on page 2
of this report.
(c) Legal proceedings surrounding the validity of the Pirkovskoe and
Zagoryanska licences
As reported as at 31 December 2009 and in prior years, the Group has been
involved in legal proceedings surrounding the validity of the Pirkovskoe and
Zagoryanska licences since 12 June 2008, when the Poltava Regional Commercial
Court ('Poltava Court') made a ruling in favour of Poltavanaftogazgeology
('PNGG'), a subsidiary of the Group's joint venture partner, the State-owned
company NJSC Nadra Ukraine, ('Nadra'), in relation to the licences held formerly
by PNGG relating to the Pirkovskoe and Zagoryanska fields. These licences had
been re-registered from PNGG to Nadra prior to re-registration to the Group. The
court: (a) declared as invalid the re-registration of the licences from PNGG to
Nadra; and (b) recognised as valid the earlier licences held by PNGG.
On 28 July 2008, the Ministry of Environmental Protection of Ukraine (the
'Ministry') then issued an order, making reference to the decisions of the
Poltava Court on 17 June 2008, in favour of PNGG, invalidating the Group's
licences for its Pirkovskoe and Zagoryanska fields.
The above decision and order were overturned on appeal by the Group to the
Kharkiv Appeal Court (the 'Appeal Court') on 29 September 2008 and the licences
were confirmed by the Ministry on 7 October 2008. Then in January 2009, the
Group received from the Ministry a five year extension for the Zagoryanska
licence to April 2014.
However PNGG and Nadra both appealed separately against the decision of the
Appeal Court to the High Administrative Court of Ukraine (the 'High Court').
This appeal was heard on 25 February 2009, when the High Court found in favour
of PNGG in relation to the transfer of the Pirkovskoe licence to Nadra in June
2007. Cadogan has yet to receive a date for the hearing of the appeal as regards
the Zagoryanska licence.
On 23 March 2009, LLC Astro Gas, which is the group company which holds the
Pirkovskoe licence, appealed against the High Court decision to the Supreme
Court of Ukraine ('the Supreme Court') supported by a claim dated 30 March 2009
by the Prosecutor General Office of Ukraine (the 'Prosecutor General Office),
arguing that the High Court had been mistaken in reaching this decision and that
the ruling was therefore invalid.
On 16 June 2009, the Supreme Court upheld the claim made by the Prosecutor
General Office and partially upheld the claim of LLC Astro Gas. The resolution
of the High Court dated 25 February 2009 was cancelled and the case was returned
to the High Court, for further consideration. On 11 December 2009, the High
Court commenced the process of reconsidering its earlier ruling regarding the
Pirkovskoe licence. An initial hearing is scheduled to take place shortly.
No further developments have occurred in the case concerning the Zagoryanska
licence.
The Group's licences remain valid and effective despite the above. The Board
remains firmly of the view that the challenges to the licences previously held
by PNGG, are wholly unwarranted and, if successful, would result in a
curtailment of a significant part of the Group's operations.
As at the date of this financial information, the above outcomes remain subject
to court decision.
The Directors have considered the implications of IAS 36 Impairment of Assets
and IFRS 6 Exploration for and Evaluation of Mineral Resources, and have
concluded that recognition of impairment in respect of these matters is not
appropriate on the basis that the Directors believe that, notwithstanding the
uncertainties described above, the validity of the Group's licences is expected
to be reconfirmed. However, the ultimate outcome is uncertain and should the
Courts in Ukraine ultimately rule that the licences were improperly awarded, and
further annul the existing licences, the Group would be required to further
impair the value of these assets in Ukraine. The amounts capitalised within
intangible exploration and evaluation assets and property, plant and equipment
in respect of these licences at 30 June 2010 was GBP21.9 million (31 December
2009: GBP22.7 million).
(d) Impairment of E&E, PP&E and Goodwill
Intangible Exploration and Evaluation costs
The Group applies the full cost method of accounting for E&E costs, having
regard to the requirements of IFRS 6 Exploration for and Evaluation of Mineral
Resources. Under the full cost method of accounting, costs of exploring for and
evaluating oil and gas properties are accumulated by reference to appropriate
cost centres, being the oil or gas property, but are tested for impairment on a
cost pool basis as described below.
E&E assets comprise costs of (i) E&E activities which are ongoing at the balance
sheet date, pending determination of whether or not commercial reserves exist
and (ii) costs of E&E which, while representing part of the E&E activities
associated with adding to the commercial reserves of an established cost pool,
did not result in the discovery of commercial reserves.
Costs incurred prior to having obtained the legal rights to explore an area are
expensed directly to the income statement as they are incurred.
E&E costs include directly attributable overheads including the depreciation of
PP&E assets utilised in E&E activities. E&E costs are not amortised prior to the
conclusion of appraisal activities.
E&E assets related to each exploration licence/prospect are carried forward,
until the existence or otherwise of commercial reserves has been determined. If
commercial reserves have been discovered, the related E&E assets are assessed
for impairment on a cost pool basis as set out below and any impairment loss is
recognised in the income statement. The carrying value, after any impairment
loss, of the relevant E&E assets is then reclassified as development and
production assets.
Development and production assets
Development and production assets are accumulated generally on a field by field
basis and represent the cost of developing the commercial reserves and bringing
them into production, together with E&E expenditures incurred in finding
commercial reserves transferred from intangible E&E assets. The net book values
of producing assets are depreciated generally on a field-by-field basis on a
unit of production method in proportion to the ratio of production in the year
and the related proved and probable reserves of the field, taking into account
future development expenditures necessary to bring those reserves into
production.
Impairment
Both E&E and development and production assets are assessed for impairment when
facts and circumstances suggest that their carrying amounts may exceed their
recoverable amounts. In the case of E&E assets, where the assets fall within the
scope of an established full cost pool, they are tested for impairment together
with all development and production assets associated with that cost pool, as a
single cash generating unit. For E&E assets, the Group considers the whole of
Ukraine to be one cost pool and therefore aggregates all E&E assets for the
purposes of determining whether they have incurred impairment. For development
and production assets, the cash generating unit is generally the relevant field,
except that a number of the field interests may be grouped as a single cash
generating unit where the cash flow of each field is interdependent.
Impairment in 2009
Arising from the events of 2009, including poor test results on wells drilled to
that time, and the Group's strategy of suspending operations on major licences,
the Board commissioned an independent Reserves and Resources Evaluation (the
'Report') to assess the carrying value of the Group's E&E, production and
development assets and goodwill. The Report was then used in order to assess
impairment as at 31 December 2009. For the purposes of the impairment test,
commercial reserves were defined as the Proved and Probable ('2P') reserves
identified by the Report. The Report made significant downward revisions to the
Group's 2P reserves.
No 2P reserves were assigned by the report to the oil and gas licences included
within E&E assets, as the reserves for these areas were reclassified as either
prospective ('3P') or contingent. Consequently, E&E assets were impaired in full
as at 31 December 2009. The charge for this impairment was GBP56.3 million.
For Development and Production assets included in PP&E, the aggregate carrying
value of each cash generating unit was compared with the expected recoverable
amount of the related asset, by reference to the net present value of the future
cash flows expected to be derived from the production of 2P reserves from that
unit. On that basis, an impairment of GBP4.9 million was charged against PP&E
assets reducing their carrying value to GBP32 million as at 31 December 2009.
The goodwill of the Group, which had been allocated to the cost of Ukraine, and
which had a carrying value of GBP2.3 million was also impaired in full.
The total impairment charge to the income statement in 2009 was thus GBP63.5
million. The Board do not consider that any further amounts have become impaired
in the six months to 30 June 2010.
(e) Other impairments
In addition to the impairment charges made against goodwill, E&E and PP&E
assets, the Group made further impairments in the income statement for the year
to 31 December 2009. These were GBP6.6 million to reduce the carrying value of
the inventory of the Group to its net realisable value, GBP3.9 million to reduce
the carrying value of non-current and other receivables relating to the
settlement with GPS to recoverable amount, and GBP13.2 million against the
carrying value of Ukrainian VAT receivable. The total charge for other
impairments in the income statement for the year to 31 December 2009 was GBP23.7
million, giving a total charge of GBP87.2 million for all impairments. The Board
does not consider it necessary to make further impairment charges in respect of
these or any other items as at 30 June 2010.
(f) Dividend
The Directors do not recommend the payment of a dividend for the period (30 June
2009: GBPnil; 31 December 2009: GBPnil).
3. Business and geographical segments
Following the adoption of IFRS 8 Operating Segments with effect from 1 January
2009, the Directors continue to consider there to be only one business segment,
the exploration and development of oil and gas revenues and only one
geographical segment, being Ukraine.
4. Other operating income
+-----------------------------------------+-------+---------+-+-----------+----------+
| | | | |
+-----------------------------------------+-------+---------+------------------------+
| | | Unaudited | Unaudited | Year |
| | | 30 June | 30 June | December |
| | | 2010 | 2009 | 2009 |
| | | GBP'000 | GBP'000 | GBP'000 |
+-----------------------------------------+-------+-----------+-----------+----------+
| Out of court settlements | 2,892 | - | - |
+-------------------------------------------------+-----------+-----------+----------+
| Net foreign exchange gains | 1,374 | 3,748 | 4,641 |
+-------------------------------------------------+-----------+-----------+----------+
| Net movement on VAT provision | 425 | - | - |
+-------------------------------------------------+-----------+-----------+----------+
| | 4,691 | 3,748 | 4,641 |
+-------------------------------------------------+-----------+-----------+----------+
| | | | | | |
+-----------------------------------------+-------+---------+-+-----------+----------+
Out of court settlements represent income of $ 4.5 million received in respect
of the settlement with Smith Eurasia Ltd. The net movement on the VAT provision
comprises Ukrainian VAT of GBP1.1 million of VAT recovered on the sale of
inventories less new provisions of GBP0.7 million.
5. Profit / (loss) for the period / year
The profit / (loss) for the period/ year is stated after charging/(crediting):
+-----------------------------------------+-------+--------+--+-----------+----------+
| | | | |
+-----------------------------------------+-------+--------+-------------------------+
| | | Unaudited | Unaudited | Year |
| | | 30 June | 30 June | December |
| | | 2010 | 2009 | 2009 |
| | | GBP'000 | GBP'000 | GBP'000 |
+-----------------------------------------+-------+-----------+-----------+----------+
| Depreciation of property, plant and equipment | 520 | 524 | 1,135 |
+-------------------------------------------------+-----------+-----------+----------+
| Loss on disposal of property, plant and | 151 | 45 | 5,000 |
| equipment | | | |
+-------------------------------------------------+-----------+-----------+----------+
| Loss on disposal of surplus inventories | 890 | - | - |
+-------------------------------------------------+-----------+-----------+----------+
| Impairment | - | 13,498 | 87,251 |
+-------------------------------------------------+-----------+-----------+----------+
| Professional and consultancy fees | 414 | 780 | 785 |
+-------------------------------------------------+-----------+-----------+----------+
| Staff costs | 1,284 | 1,312 | 2,748 |
+-------------------------------------------------+-----------+-----------+----------+
| | | | | | |
+-----------------------------------------+-------+--------+--+-----------+----------+
Included within staff costs is income of GBPnil (30 June 2009: GBP0.8 million
expense; 31 December 2009: GBP0.8 million expense) relating to the reversal of
equity-settled share-based payment transactions previously expensed due to the
forfeiture of options previously recognised and a change in the estimated period
of vesting for the remaining options.
6. Profit / (loss) per ordinary share
Profit/(loss) per ordinary share is calculated by dividing the net profit/(loss)
for the period/year attributable to Ordinary equity holders of the parent by the
weighted average number of Ordinary shares outstanding during the period/year.
The calculation of the basic and diluted loss per share is based on the
following data:
+-----------------------------------------+-----+-----------+-----------+-----------+
| | | | |
+-----------------------------------------+-----+-----------+-----------------------+
| Profit / (loss) | | Unaudited | Unaudited | Year |
| | | 30 June | 30 June | December |
| | | 2010 | 2009 | 2009 |
| | | GBP'000 | GBP'000 | GBP'000 |
+-----------------------------------------+-----+-----------+-----------+-----------+
| Profit / (loss) for the purposes of basic | | | |
| profit / (loss) per share being net profit or | 564 | (16,868) | (107,303) |
| loss attributable to equity holders of the | | | |
| parent | | | |
+-----------------------------------------------+-----------+-----------+-----------+
| | | | |
+-----------------------------------------------+-----------+-----------+-----------+
| | Number | Number | Number |
| Number of shares | '000 | '000 | '000 |
+-----------------------------------------------+-----------+-----------+-----------+
| Weighted average number of Ordinary shares | | | |
| for the purposes of basic loss per share | 231,092 | 231,092 | 231,092 |
+-----------------------------------------------+-----------+-----------+-----------+
| Weighted average number of Ordinary shares | | | |
| for the purposes of diluted loss per share | 236,979 | 231,092 | 231,092 |
+-----------------------------------------------+-----------+-----------+-----------+
| | | | |
+-----------------------------------------------+-----------+-----------+-----------+
| | GBP | GBP | GBP |
+-----------------------------------------------+-----------+-----------+-----------+
| Profit/(loss) per Ordinary share | | | |
+-----------------------------------------------+-----------+-----------+-----------+
| Basic and diluted | 0.0024 | (0.07) | (0.46) |
+-----------------------------------------+-----+-----------+-----------+-----------+
7. Inventories
+---------------------------------------+------+-------+-----------+----------+
| | | | |
+---------------------------------------+------+-------+----------------------+
| | | | Unaudited | Year |
| | | | 30 June | December |
| | | | 2010 | 2009 |
| | | | GBP'000 | GBP'000 |
+---------------------------------------+------+-------+-----------+----------+
| Cost | | 5,447 | 12,108 |
+----------------------------------------------+-------+-----------+----------+
| Less: impairment provision | | (2,272) | (6,586) |
+----------------------------------------------+-------+-----------+----------+
| | | 3,175 | 5,522 |
+---------------------------------------+------+-------+-----------+----------+
The impairment provision is made so as to reduce the carrying value of
inventories to net realisable value.
8. Trade and other receivables
Other non-current receivables
+---------------------------------------+------+-------+-----------+----------+
| | | | |
+---------------------------------------+------+-------+----------------------+
| | | | Unaudited | Year |
| | | | 30 June | December |
| | | | 2010 | 2009 |
| | | | GBP'000 | GBP'000 |
+---------------------------------------+------+-------+-----------+----------+
| Receivable from GPS settlement - portion | | 6,635 | 18,835 |
| over one year | | | |
+----------------------------------------------+-------+-----------+----------+
| | | 6,635 | 18,835 |
+---------------------------------------+------+-------+-----------+----------+
8. Trade and other receivables (continued)
Trade and other receivables
+----------------------------------------------------------------------------+
| Unaudited Year |
| 30 June December |
| 2010 2009 |
| GBP'000 GBP'000 |
| Receivable from GPS settlement - portion less 17,583 4,123 |
| than one year |
| VAT recoverable 246 336 |
| Prepayments and other receivables 1,504 931 |
| 19,333 5,390 |
| |
+----------------------------------------------------------------------------+
All sales of hydrocarbons are made on a prepayment basis, so there are no trade
debtors.
The amounts shown as receivable from the settlement agreement with GPS are
stated after impairment of GBP3.9 million representing the difference between
the original prepayment to this company and the amount receivable from it in
accordance with the settlement.
VAT recoverable represents UK VAT only. VAT recoverable in Ukraine is impaired
in full as the Board considers that such VAT is only recoverable on commencement
of significant production, while cash recovery is not considered likely due to
Ukrainian budgetary problems. The amount of the impairment provision as at 30
June 2010 is GBP14.1 million (31 December 2009:GBP14.5 million).
Prepayments and other receivables as at 30 June 2010 include GBP1.1 million
receivable in respect of sales of surplus inventories. This amount has been
received in the period since that date.
The Directors consider that the carrying amount of the remaining other
receivables approximates to their fair value.
9. Restricted cash
Restricted cash of GBP0.4 million represents an amount of Euro 0.5 million held
in escrow by the Group's lawyers in Cyprus to support a bank guarantee provided
to the Cypriot court in relation to obtaining a freezing order in Cyprus
associated with the litigation against one of the former executive Directors.
The movement during the period represents the movement in the foreign exchange
rate only.
10. Trade and other payables
Trade and other payables as at 31 December 2009 included payables of GBP1.8
million to LLC Smith Ukraine which were discharged during the six months to 30
June 2010 in accordance with the settlement made with Smith Eurasia, and accrued
legal costs of GBP2.1 million which were also materially discharged during the
period.
11. Notes to the cash flow statement
+-----------------------------------------+---+----------+----------+--+----------+-----------+
| | | | |
+-----------------------------------------+---+----------+------------------------------------+
| | | Unaudited | Unaudited | Year |
| | | 30 June | 30 June | December |
| | | 2010 | 2009 | 2009 |
| | | GBP'000 | GBP'000 | GBP'000 |
+-----------------------------------------+---+---------------------+-------------+-----------+
| Operating profit / (loss) | 350 | (17,462) | (107,589) |
+---------------------------------------------+------------------------+----------+-----------+
| Adjustments for: | | | |
+---------------------------------------------+------------------------+----------+-----------+
| Depreciation of property, plant and | 520 | 524 | 1,112 |
| equipment | | | |
+---------------------------------------------+------------------------+----------+-----------+
| Impairment of other receivables | - | - | 3,925 |
+---------------------------------------------+------------------------+----------+-----------+
| Impairment of E&E and PP&E assets | - | - | 61,241 |
+---------------------------------------------+------------------------+----------+-----------+
| Impairment of goodwill | - | - | 2,258 |
+---------------------------------------------+------------------------+----------+-----------+
| Movement on provision for impairment of | - | - | 6,586 |
| inventories | | | |
+---------------------------------------------+------------------------+----------+-----------+
| Movement on provision for impairment of VAT | (424) | - | 13,241 |
| recoverable | | | |
+---------------------------------------------+------------------------+----------+-----------+
| Loss on disposal of property, plant and | 151 | 45 | 5,000 |
| equipment | | | |
+---------------------------------------------+------------------------+----------+-----------+
| Loss on disposal of inventories | 890 | - | - |
+---------------------------------------------+------------------------+----------+-----------+
| Share-based payments | - | (814) | (814) |
+---------------------------------------------+------------------------+----------+-----------+
| Effect of foreign exchange rate changes | 498 | (599) | (1,693) |
+---------------------------------------------+------------------------+----------+-----------+
| Operating cash flows before movements in | 1,985 | (18,306) | (16,733) |
| working capital | | | |
+---------------------------------------------+------------------------+----------+-----------+
| Decrease / (increase) in inventories | 1,457 | 617 | (2,065) |
+---------------------------------------------+------------------------+----------+-----------+
| (Increase) /decrease in receivables | (1,400) | 10,406 | (2,316) |
+---------------------------------------------+------------------------+----------+-----------+
| (Decrease) / Increase in payables | (5,176) | 3,484 | 2,882 |
+---------------------------------------------+------------------------+----------+-----------+
| Increase in restricted cash | - | - | (450) |
+---------------------------------------------+------------------------+----------+-----------+
| Cash used in operations | (3,134) | (3,799) | (18,682) |
+---------------------------------------------+------------------------+----------+-----------+
| Income taxes paid | (40) | (125) | (270) |
+---------------------------------------------+------------------------+----------+-----------+
| Net cash outflows from continuing | (3,174) | (3,924) | (18,952) |
| operations | | | |
+---------------------------------------------+------------------------+----------+-----------+
| | | | | | | |
+-----------------------------------------+---+----------+----------+--+----------+-----------+
12. Related party transactions
No related party transactions have taken place in the six months ended 30 June
2010 that have materially affected the financial position or the performance of
the Group during the period. The Directors believe that all material related
party transactions involving the former Chief Executive Officer, Chief Operating
Officer and certain third parties against whom litigation is still in progress
in order to obtain redress for the Company arising from potential irregularities
surrounding the procurement of and payment for certain assets and services
contracted for by the Group in 2009, have now been identified.
13. Post balance sheet events
Commercial production from the well at Zagoryanska 3 commenced on 1 August 2010.
The related assets which have been included in Exploration and Evaluation costs
as at 30 June 2010 will be transferred to PP&E as from that date.
14. Commitments and contingencies
There has not been any change to the commitments and contingencies reported on
page 68 of the Annual Report.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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