TIDMCAD
Cadogan Petroleum plc
Annual Results for year ended 31 December 2019
The Board of Cadogan Petroleum plc, ("Cadogan" or "the Company"), is pleased to
announce the Company's annual results for the year ended 31 December 2019.
Key Financial Highlights of 2019:
* Loss for the year: $2.1 million (2018: profit of $1.2 million)
* Average realized price: 47.2$/boe (2018: 51.3$/boe)
* Gross revenues[1]: $5.9 million (2018: $14.7 million)
* G&A[2]: $5.7 million (2018: $4.8 million)
* Loss per share: 0.9 cents (2018: profit of 0.5 cents)
* Cash at year end: $12.8 million (2018: $35.2 million)
Key Operational Highlights of 2019:
* Production: 104,816 boe (2018: 91,085 boe), a 15% increase year-on-year
* Gas trading loss of $2.0 million (2018: profit of $0.7 million)
* Services business loss of $0.01 million (2018: profit of $0.06 million),
net of services provided to the group[3]
* No LTI/TRIs'[4]
* ISO 14001 and ISO 45001 certifications validated by annual audit
* Conversion of the Monastyretska exploration license into the Blazhiv
20-year production license
* Blazhiv-10 successful drilling and consequent stable commercial production
Other
Cadogan entered into a 2-year loan agreement (euros 13.385 million) with Proger
Management & Partners Srl with an option to convert it into an indirect 24 %
equity interest in Proger Spa.
Group overview
The Group has continued to maintain exploration and production assets, to
conduct gas trading operations and to operate an oil services business in
Ukraine. Cadogan's assets are concentrated in the West of the country, far away
from the zone of military confrontation with Russia. Gas trading includes the
import of gas from Slovakia, Hungary and Poland and local purchase and sales
with physical delivery of natural gas. The oil services business focuses on
workover operations, civil works services and other services provided to
Exploration and Production ("E&P") companies in Ukraine.
Our business model
We aim to increase value through:
* Maintaining a robust balance sheet, monetizing the remaining value of our
Ukrainian assets and supplementing E&P cash flow with revenues from gas
trading and oil services
* Pursuing farm-out to progress investments in Ukrainian licenses
* Sourcing additional assets to diversify Cadogan's portfolio, both
geographically and operationally
Both gas trading and the services business optimize the use of existing
available resources, such as cash as working capital for trading and equipment
and competences for the services business and continue to contribute to the
Group's goal of being cash neutral, while actively searching for value
accretive opportunities.
Ukraine
West Ukraine
The Group continued to produce oil and gas from its licenses in the West
Ukraine. The average net production in 2019 was 288 boepd, a 15% increase over
the production of the previous year. The additional oil production from the
Monastyretska license more than off-set the loss of gas production from
Debeslavetska and Cheremkhivska fields, which Cadogan exited in January 2019.
In January 2019, the Group finalized the transfer of its participatory interest
in Debeslavetske JAA and Cheremkhivsko-Strupkivske JAA to NJSC Nadra as part of
the 2018 trilateral agreement with Eni and NJSC Nadra on the exit of Eni from
the shale gas project.
All regulatory approvals required to file the application for a 20-year
production license, for the Monastyretska license, were received and the
application was filed on 2 July 2019, well ahead of the license expiry date of
18 November 2019. The company was forced to shut-down its operations and
production at the field for 30-days due to the absence of license award by the
licensing authority of Ukraine post expiry date. The new Blazhiv 20-year oil
production license (formerly Monastyretska exploration area) was issued on 19
December 2019. The Blazhiv-1 and Blazhiv-10 wells are currently in production.
The production at Blazhiv-3 and Blazhiv-3 Monasterets is suspended waiting for
the renewal of the rental agreements.
In 2019, the Bitlyanska license has been advertised for a farm-out partnership,
but the preliminary discussions have not been satisfactory and were ended. The
state subsoil controlling authority has confirmed, during the license audit,
that the Company has fully fulfilled its license obligations. All regulatory
approvals required to file the application for a 20-year exploration and
production license were received and the application was filed on 29 August
2019, well ahead of the license expiry date of 23 December 2019. Required
intermediary approvals including the one of Lviv's Regional Council and
Environmental Impact Assessment have been obtained. The company has been
waiting the State Licensing Authority's award of the application. The Licensing
Authority has delayed the grant of the new license beyond the regular timeline
provided by the regulatory laws. Accordingly, Cadogan has launched a claim
before the Administrative Court to challenge the non-granting of the 20-year
production license by the Licensing Authority.
East Ukraine
The Pirkovska exploration license expired in October 2015. The Company filed an
application in due time, but the Licensing Authority returned it 6 times for
different reasons, the legal ground of which appears to be doubtful. Despite
the efforts of Cadogan and its reply in due time to each of the comments, the
license was not awarded, and the 3-year period for conversion, given to the
applicant by law, expired in October 2018. Cadogan launched a litigation before
Administrative Court against the Licensing Authority for non-granting the
production license.
Subsidiary businesses
Given the collapse in the gas price, which through the heating season had
dipped below the level of the previous summer, unsold gas was kept in storage
for the following heating season. The company has purchased 7.5 million m3 of
gas in the declining price environment towards the end of 2019 to be sold
during the upcoming 2020 trading season.
Finally, the Group continued providing oil services through its wholly owned
subsidiary Astroservice LLC. Substantial resources of the company have been
engaged to support Monastyretska license wells' operations.
Italy
The Group owns a 90% interest in Exploenergy s.r.l., an Italian company, which
has filed applications for two exploration licenses (Reno Centese and Corzano),
located in the Po Valley region (Northern Italy). The leads identified on these
licenses have combined unrisked prospective resources estimated to be in excess
of 60 bcf of gas.
Activity through the year was focused on maintaining the liaison with the
central and regional authorities and on updating the Environmental Impact
studies by implementing the suggestions received from the authorities. Attempts
to meet the relevant Minister, in order to understand what else, if anything,
is required to move forward the application, were unsuccessful.
In February 2019, the Italian Parliament approved a moratorium of 18 months in
the award of new licenses and a 25-fold increase of license fees. Exploenergy
has subsequently reduced its activity to the minimum required to fulfil its
statutory obligations. It has also identified areas which can be voluntarily
released in order to mitigate the impact of higher fees, when licenses are
awarded, with a minimum impact on their exploration potential.
In February 2019, the Group entered in a 2-year loan agreement with Proger
Management & Partners Srl with an option to convert it into an indirect 24%
equity interest in Proger Spa. Proger is an Italian engineering company
providing services in Italy and in different international areas.
Strategic Report
The Strategic Report has been prepared in accordance with Section 414A of the
Companies Act 2006 (the "Act") and presented hereunder. Its purpose is to
inform stakeholders and help them assess how the Directors have performed their
legal duty under Section 172 of the Act to promote the success of the Company.
Section 172 Statement
The Company's section 172 statement is presented on page 34 and 35 and forms
part of this strategic report.
Principal activity and status of the Company
The Company is registered as a public limited company (registration number
05718406) in England and Wales. Its principal activity is oil and gas
exploration, development and production; the Company also conducts gas trading
and provides services to other E&P operators.
The Company's shares have a standard listing on the Official List of the UK
Listing Authority and are traded on the Main Market of the London Stock
Exchange.
Key performance indicators
The Group monitors its performance through five key performance indicators
("KPIs"):
* to increase oil, gas and condensate production measured on the number of
barrels of oil equivalent produced per day ("boepd");
* to decrease administrative expenses;
* to increase the Group's basic earnings per share;
* to maintain no lost time incidents; and
* to grow and geographically diversify the portfolio.
The Group's performance in 2019 against these KPI's is set out in the table
below, together with the prior year performance data.
Unit 2019 2018 2019 vs
2018
Average production (working boepd 288 250 38
interest basis) 1
Overhead (G&A) $ million 5.7 4.8 0.9
Basic (loss)/profit per share 2 cents (0.9) 0.5 (1.4)
Lost time incidents 3 incidents 0 0
Geographic diversification new assets 14
1. Average production is calculated as the average daily production during
the year
2. Basic (loss)/profit per ordinary share is calculated by dividing the net
(loss)/profit for the year attributable to equity holders of the parent company
by the weighted average number of ordinary shares during the year
3. Lost time incidents relate to the number of injuries where an employee/
contractor is injured and has time off work (IOGP classification)
4. Loan to Proger Managers & Partners Srl with an option to convert it into
an indirect 24 % equity interest in Proger Spa.
Chairman's Statement
Despite the changes that have occurred, Ukraine is still in the middle of its
journey towards a developed and stable economy. The efforts to reform the
country made limited progress and the key issues of reforms and transparency
continued to be the main concerns of investors and international financial
institutions. The political and economic outlook remains uncertain.
For Cadogan, 2019 has been a mixed year. The successful drilling of Blazhiv-10
has increased the oil production whilst the trading activities have not
delivered the expected results. The Company maintained its operational
activities but failed to build a sustainable business model leading to profits
and positive operating cashflow. Importantly, the decision to commit part of
its cash to a 2-year loan to Proger Managers & Partners Srl has not been
addressing the main issues in developing a successful strategy for the Company.
Given this situation, a majority of the shareholders expressed, at the
Extraordinary Shareholders Meeting in November 2019, their will to change the
governance of the Company by replacing some of the directors with newly
appointed ones.
The current world economic crisis that is resulting from the pandemic corona
virus and the oil & gas market turmoil is severely affecting Ukraine and thus
our activities. These are uncertain times, but we are reassured that Cadogan
has a competent and strong management to weather this storm.
Michel Meeùs
Non-Independent non-executive Chairman
1 May 2020
Chief Executive's Review
2019 was a challenging year for Cadogan during which the Company has not been
able to record a profit. Production grew for the 4th consecutive year with a
positive contribution from the E&P segment of $0.4 million. The Company
recorded $4 million of non-recurring income associated with the sale of LLC
Astroinvest Ukraine and LLC Gazvydobuvannya, which held previously impaired VAT
receivables and tax losses. Among the Company's achievements can be
highlighted:
* E&P operations revenue growth driven by a 15% increase in production;
* effective efforts to recover past receivables as well as the sale of legacy
assets.
Unfortunately, these achievements have not allowed the Company to overcome
negative aspects leading to the recorded losses:
* gas prices collapsing and its negative impact on Cadogan trading business
results and also an impairment on the inventory value in storage;
* oil average realized price decreasing by 13% in 2019, in line with
international markets;
* Blazhiv field production shut down for 30 days due to a delay in the
license award during the year.
2019 also witnessed three important events for Cadogan, namely:
* award of the Blazhiv production license (formerly Monastyretska exploration
license) for a 20-year period;
* successful drilling and completion of the Blazhiv-10 well and start of
commercial production;
* appointment of new Directors to the Board and a new CEO of the Company.
For Ukraine, 2019 was another difficult year, as the Country remained embroiled
in its confrontation with Russia with significant challenges for its economy.
The presidential vote in Ukraine resulted in the election of Volodymyr
Zelenskyy as the new President of Ukraine, with 73% of the valid votes. The
newly elected President dissolved the Verkhovna Rada shortly after his election
and called for parliamentary elections where pro-President's party took the
majority of seats in the Parliament and formed its Cabinet of Ministers. The
new government continued making some progress towards modernization of its oil
& gas legislative framework but has been unable to create a favourable
environment for the significant investments needed to increase the Country's
domestic production. In this uncertain context, Cadogan remained one of the few
truly foreign investors operating in Ukraine's E&P sector.
Against this challenging background, Cadogan's operational activities performed
as following:
* the average production rate through the year increased up to 288 boepd;
* the operational income of E&P business segment in 2019 was 4% higher than
the prior year, outperforming the 13% decrease in the realized average oil
price over the same period.
Highlights of 2019 are:
* a 15% increase in production, from 91,085 boe in 2018 to 104,816 boe in
2019;
* a 20% increase of overhead (G&A), from $4.8 million in 2018 to $5.7 million
in 2019;
* a difficult year for trading which generated a negative margin;
* a robust balance sheet, with $12.8 million of net cash, kept mostly in UK
banks;
* another year without LTIs'; and
* a EUR13.385 million loan to Proger Managers & Partners Srl, with an option to
convert it into an indirect 24 % equity interest in Proger SpA. The
maturity of the loan is February 2021.
Core operations
Cadogan has continued to safely and efficiently produce from its field in the
West of Ukraine. Oil production has increased by 15% over the previous year.
The Company has completed its commitment work programme by drilling Blazhiv-10
well, which confirmed geological understanding of the area and reservoir
potential. Securing of the license for 20 years will allow to build-up
strategic future field development.
For the Bitlyanska license, Cadogan has fully complied with legislative
requirement and submitted application for a 20-year exploration and production
license 5 months before its expiry on 23 December 2019. Decision on the award
was expected to be provided by State Geological Service of Ukraine before 19
January 2020, since all other intermediary approvals have been secured in line
with the applicable legislation requirements. Given the delay in awarding the
new license beyond the regular timeline provided by legislation, Cadogan has
launched a claim before the Administrative Court to challenge the non-granting
of the 20-year production license by the Licensing Authority.
In 2019, Cadogan tried also to identify a partner for the Bitlyanska license to
fund the necessary investments to confirm the upside of the high-pressure gas
condensate deep target. The preliminary discussions have not been satisfactory
and were ended. For the future, the Company intends to adjust its farm-out
strategy to the new context in which it operates.
The rental agreements with Ukrnafta for Blazhiv-3 and Blazhiv-3 Monasterets
wells ended in November 2019 and the operations were stopped. Cadogan fulfilled
all its duties for the renewal of the contracts but due to internal process
within Ukrnafta, these contracts are not signed yet. Cadogan's subsidiary,
Usenco, has been informed that Ukrnafta's Board approved the rental agreements
and that their signature will be shortly executed.
In the past, Cadogan had not been successful in converting the exploration
license of Pirkovska into a new production license. The exploration license
expired in October 2015. The Company filed an application in due time, but the
Licensing Authority returned it 6 times for different reasons, the legal ground
of which appears to be doubtful. Despite the efforts of Cadogan and its reply
in due time to each of the comments, the license was not awarded, and the
3-year period for conversion, given to the applicant by law, expired in October
2018. Historically, Cadogan impaired the value of the asset on its balance
sheet and launched litigation before the Administrative Court against the
Licensing Authority for non-granting of the production license.
The activity in Italy has been limited to routine housekeeping as the
uncertainty before the general election and then the program of the current
government coalition has left no room to progress the applications at present.
Non E&P operations
Trading had a complicated year due to substantial drop in prices on the EU and
Ukrainian markets driven by a mild winter, subsequent low demand, and excess
gas in storage. This excess gas in the Ukrainian market was prepared, as the
back-up, in case the gas transit contract between the Russian Federation and
Ukraine was not extended for the new period after 31 December 2019. All these
factors created challenging trading conditions. This led to the situation where
Cadogan had to impair its stored gas value to reflect the weak pricing
environment.
The oil services activities were used primarily to serve the Group's wells'
operations.
In February 2019, Cadogan used part of its cash (euros 13.385 million) to enter
into a 2-year loan agreement with Proger Managers & Partners Srl, with an
option to convert it into an indirect 24 % equity interest in Proger Spa.
According to IFRS, the option has to be represented in our balance sheet at
fair value.
The Group's original investment decision involved assessment of Proger Spa
business plans and analysis with professional advisers including valuations
performed using the income method (discounted cash flows) and market approach
using both the precedent transactions and trading multiples methods.
Unfortunately, Proger has refused to provide Cadogan information regarding its
2019 financial performance or updated forecasts to undertake a detailed fair
value assessment using the income method or market approach at 31 December
2019. As a consequence, we have assessed the fair value of the instrument
based on the terms of the agreement, including the pledge over shares, together
with financial information in respect of prior periods and determined that
$15.7 million represented the best estimate of fair value, being equal to
anticipated receipts discounted at a market rate of interest of 5.5% with no
value attributed to the option. However, the absence of information regarding
Proger's 2019 financial performance and prospects represents a significant
limitation on the fair value exercise and, as a result, once received, the fair
value could be materially higher or lower than this value.
After the resignation of Mr Guido Michelotti as director of Proger Ingegneria
Srl and Proger Spa, Cadogan notified, in February 2020, the Proger counterparts
for the replacement of Mr Michelotti on the board of Proger Ingegneria Srl and
Proger Spa. Cadogan is monitoring carefully the effective nominations and will
proceed to further updates and actions when and if necessary.
Outlook
With the pandemic corona virus COVID-19 and its negative effects that are
spreading globally, Ukraine, as with other countries, is facing a severe impact
on its economy as well as to the oil & gas market. In this context, 2020 will
be a very difficult year for our business.
In order to keep safe its personnel, the Company has put in place special
measures such as administrative personnel remote work, strict sanitary and
hygienic procedures and personal protection, rotation of field personnel by
company cars, constant medical supervision during the work shift, regular
sanitation of cars, offices and facilities.
The Company intends to adapt its strategy to the situation and to face the very
challenging market environment. Prices for oil and gas have been shrinking with
an incredible speed. The company, as with many of its peers, is not able to
give any outlook on its performance for 2020.
Gas trading, which had become unprofitable, cannot be a major activity for
Cadogan. The Company will focus on its oil operations and a more value
accretive and comprehensive diversification of its activities.
The Company will also stick to a strict cost discipline and will seek to
recover cash from previously impaired assets. As part of its cost discipline,
the Company will continue to streamline its complex corporate architecture by
liquidating companies which represent a legacy of its past with no benefit.
In respect of the Loan Agreement with Proger, Cadogan will develop all
necessary actions to ensure the proper fulfilment of the counterparts'
obligations under this agreement.
Last but not least, I wish, with the other Board Directors, to thank the women
and men of Cadogan for their efforts and their dedication to the Company.
Fady Khallouf
Chief Executive Officer
1 May 2020
Operations Review
Overview
At 31 December 2019, in the west of Ukraine, the Group held working interests
in one conventional gas, condensate and oil exploration and production license
and was expecting the award of the new license for another one. All these
assets are operated by the Group and are located in the Carpathian basin in
close proximity to the Ukrainian gas distribution infrastructures.
Summary of the Group's licenses (as at 31 December 2019)
Working License Expiry License type(1)
interest (%)
99.8 Blazhiv November 2039 Production
99.8 Bitlyanska(2) December 2019 E&D
(1) E&D = Exploration and Development
(2) The Bitlyanska license expired on December 23, 2019 and its renewal had
not been granted by year end
East Ukraine
The Pirkivska production license expired in 2015. The Company applied for a new
license. After several years and the end of the 3-year period allowed for
conversion of the previous license, the Company initiated court proceedings to
defend its rights and to challenge the Licensing Authority's actions.
West Ukraine
The Bitlyanska license covers an area of 390 square kilometres. Bitlyanska,
Borynya and Vovchenska are three hydrocarbon discoveries in this license area.
The Borynya and Bitlya fields hold 3P reserves, contingent recoverable
resources and prospective resources. Vovchenska field holds contingent
recoverable resources.
Borynya 3 well, was kept on hold, monitored and routinely bled-off for an
eventual re-entry and stimulation.
The Vovche 2 well was successfully drilled and produced water with uncommercial
quantities of oil when tested. The well is being monitored and periodically
lifted as a part of pilot production scheme. The company has fully met its
license commitments and had no breaches throughout the exploration period. This
has been confirmed by the Control Department of the State Geological Services
of Ukraine during the respective license audit.
The company has filed to the State Geological Service an application for a
20-year production license 5 months ahead the license expiry date of 23
December 2019. Through the reporting period, the Company secured approval of
the Environmental Impact Assessment study by the Ministry of Ecology, the
approval of the Reserves Report by the State Commission of Reserves and the
approval of the license award by the Lviv Regional Council. Given the delay to
award the new license beyond the regular timeline provided by legislation,
Cadogan launched a claim before the Administrative Court to challenge the
non-granting of the 20-year production license by the Licensing Authority.
The Monastyretska license continued to produce oil from four wells until 19
November 2019 waiting for the award of the new license. The average production
rate of 284 bpd (2018: 187 bpd) was achieved with a successful incident free
drilling of Blazhiv-10 well and stable production from the three producing
wells notwithstanding 30-days production shut-down.
The Blazhiv-10 well reached TD, at 3394m, with a benchmark drilling time,
notwithstanding severe hole instability issues which were experienced while
drilling. The perforated interval covered the entire Yamna formation, which
proved to be all oil bearing with a net pay of 156 meters. The well was put on
production in natural flow. Further a sucker rod pump was installed to ensure
stable production and mitigate paraffin deposition problems.
Importantly, the Blazhiv 20-year production license (formerly Monastyretska
license) was awarded in December 2019. The Blazhiv-1 and Blazhiv-10 wells are
currently in production. The production of Blazhiv-3 and Blazhiv-3 Monastyrets
is suspended waiting for the renewal of the rental agreements. The
Debeslavetska and the Cheremkhivska production licenses were transferred to WGI
in January 2019 as part of the trilateral agreement with Eni and Nadra Ukrayny
stipulating terms and conditions of Eni's exit from WGI and the shale gas
project.
Gas trading
Volumes of gas trading during 2019 were substantially lower than normal. The
Company only sold a limited volume of gas, given the collapse in the gas price,
which through the heating season had dipped below the level of the previous
summer. Unsold gas was kept in storage for the next season.
Cadogan's gas trading operations continued to take minimum credit risk and
recover its receivables. The company has purchased 7.5 million m3 of gas during
the declining curve price at the end of 2019 to be sold in the upcoming 2020
trading season. Gas prices have further reduced in 2020 and the inventory gas
remains unsold.
Service
The Group continued providing services through its wholly owned subsidiary
Astroservice LLC. The provided services were primarily related to support
drilling of Blazhiv-10 well and serving other intra-group operational needs. A
multi-well contract was secured in the second half of the year and the rig has
remained contracted ever since. The multi-well work-over contract awarded by a
third party in 2018 remained in force till the end of the year and Astroservice
was requested to execute two workovers.
Other events
In 2019, the Group sold its subsidiaries LLC Astroinvest Ukraine and LLC
Gazvydobuvannya for the consideration of $4 million. At the date of sale, the
subsidiaries had $1.8 million of VAT recoverable balance which were previously
impaired in the Group's accounts and $136 million accumulated tax losses which
were not recognized due to the lack of sufficient certainty regarding future
profits to utilize the carried losses.
After an inspection conducted by Ukraine's tax authorities in September 2019,
Astroinvest Energy LLC was notified of a tax claim related to the historic
costs for the liquidation of wells on the Zagoryanska license. The tax
authorities notified Astroinvest Energy LLC that they consider recoverable VAT
that has subsequently been used to offset output VAT to be non-deductible and
additionally that the subsidiary's tax losses carry forward should be reduced
(note 28). Astroinvest Energy LLC has launched a claim against the tax
authority's decision on the basis of the current tax legislation and related
court decisions.
Financial Review
Overview
In 2019, the Group increased production and E&P revenues further, while
continuing gas trading activity. The performance of the Group's operating
divisions delivered a loss of $1.7 million (2018: contribution of $1.2 million)
(note 5) and the Group recorded a loss of $2.1 million (2018: profit of $1.2
million) after the positive impact of the sale of non-core and historically
impaired assets totaling $4.3 million (2018: $1.7 million). The Group also
resumed drilling operations after a long pause.
The E&P business positively contributed to the financial results of the Group,
due to the increase in oil production. Average realized oil price decreased by
13% from $54.0 to $47.2 per barrel. The services business focused on providing
drilling and workover services to the subsidiaries of the Group. The trading
business was affected by the rapid decline of gas prices and therefore made a
negative contribution to the Group's performance. These results have been
supplemented by further monetization of the Group's assets as noted above.
Net cash decreased to $12.8 million at 31 December 2019 compared to $35.2
million at 31 December 2018. This was mostly due to a EUR13.4 million loan
provided to Proger Managers & Partners Srl, the capex program for the
Blazhiv-10 well drilling together with an increased inventory of gas at the end
of the year.
Income statement
Revenues from production increased from $4.7 million in 2018 to $4.9 million in
2019, mainly due to increase of the production volume from 91,085 boe in 2018
to 104,816 boe in 2019 but was restrained by decrease in average realized
prices by 13%. E&P costs of sales increased from $3.7 million in 2018 to $3.8
million in 2019. These include production royalties and taxes, fees paid for
the rented wells, depreciations, depletion of producing wells, direct staff
costs and other costs for exploration and development. Overall, in 2019, E&P
made a positive contribution of $1.1 million (2018: $1.0 million) to gross
profit, representing a positive[5] $0.4 million (2018: profit of $0.4 million)
business segment profit.
The oil services business in 2019 focused on internal activities providing its
services, including drilling and workover, to the Group's subsidiaries. In
addition, two external tenders were secured and started delivery during 2019,
which brought a loss of $13 thousand (2018: profit of $63 thousand).
The gas trading business showed losses in 2019. Although revenues decreased
from $9.9 million in 2018 to $0.9 million in 2019, cost of sales also
decreased, from $9.1 million in 2018 to $1.0 million in 2019, resulting in an
overall gross margin loss contribution of $0.1 million (2018: profit $0.7
million). In addition, staff costs (G&A) were reduced, and trading receivables
were recovered together with interest.
Administrative expenses ("G&A") continued to be controlled. Ukrainian G&A
remained flat and the overall G&A increased by 20% from $4.8 million in 2018 to
$5.7 million in 2019 as shown in note 7.
The reversal of impairment of other assets of $0.3 million (2018: reversal of
impairment of $1.8 million) primarily includes the reversal of impairment of
two gas treatment plants to the level of consideration received on the sale of
these assets (2018: VAT refund and offsets of VAT recoverable against trading
margin earned).
Impairment of other assets totalled $2.1 million (2018: $0.7 million) and
included $1.9 million natural gas value impairment due to revaluation to market
price at the year end and $0.2 million of VAT impairment.
The Group recorded a $0.6m increase in the fair value of the Proger loan, which
is held at fair value through profit and loss under IFRS. Refer to note 4(d)
and 27 for details.
Other income of $3.9 million (2018: $2.4 million) included $4.0 million
realized on the disposal of two non-trading entities which held historically
impaired VAT and tax losses. In 2018, the income included $1.7 million realized
from the exit of the WGI joint venture.
Net finance income of $25 thousand (2018: net finance income of $0.6 million)
reflects interest income on cash deposits used for trading of $49 thousand
(2018: $0.3 million); ii) investment revenue of $104 thousand (2018: $0.4
million); iii) interest income on receivables $45 thousand (2018: $nil); less
iv) Unwinding of discount on decommissioning provision of $164 thousand.
Balance sheet
Intangible Exploration and Evaluation ("E&E") assets of $2.9 million (2018:
$2.4 million) represent the carrying value of the Bitlyanska license. The
Property Plant & Equipment (PP&E) balance was $12.3 million at 31 December 2019
(2018: $3.3 million), increased primarily due to the Blazhiv-10 well drilled at
Monastyretska license.
Trade and other receivables of $2.6 million (2018: $2.5 million) includes $2.4
million of recoverable VAT (2018: $1.9 million), which is expected to be
recovered through production, trading and services activities, and $0.2 million
(2018: $0.3 million) of other receivables.
The $1.3 million of trade and other payables as of 31 December 2019 (2018: $1.2
million) consists of $0.6 million (2018: $0.6 million) of accrued expenses and
$0.7 million (2018: $0.5 million) of other creditors.
Provisions include $0.3 million (2018: $0.3 million) of long-term provision for
decommissioning costs which represents the present value of costs that are
expected to be incurred in 2039 for producing assets, when the licenses will
expire.
The cash position of $12.8 million at 31 December 2019 has decreased from $35.2
million at 31 December 2018. This was mostly due to the EUR13.4 million loan
provided to Proger Managers & Partners Srl., realized capex program of
Blazhiv-10 well drilling together with an increased inventory of gas at the end
of the year.
Cash flow statement
The Consolidated Cash Flow Statement on page 78 shows operating cash outflow
before movements in working capital of $4.4 million (2018: outflow of $1.9
million), which represents mostly cash used by the E&P and Trading business
segment net of corporate expenses.
Cash inflows from investing activities represents proceeds from the sale of LLC
Astroinvest Energy and LLC Gazvydobuvannya for the consideration of $4 million
and proceeds from the sale of non-current assets of $0.4 million. Investing
activities outflow represents cash used for drilling of Blazhiv-10 well and
loan provided to Proger Management & Partners Srl.
Related party transactions
Related party transactions are set out in note 29 to the Consolidated Financial
Statements.
Treasury
The Group continually monitors its exposure to currency risk. It maintains a
portfolio of cash and cash equivalent balances mainly in US dollars ("USD")
held primarily in the UK. Production revenues from the sale of hydrocarbons are
received in the local currency in Ukraine, however, the hydrocarbon prices are
linked to the USD denominated gas and oil prices. To date, funds from such
revenues have been used in Ukraine in operations rather than being remitted to
the UK.
Risks and uncertainties
There are several potential risks and uncertainties that could have a material
impact on the Group's long-term performance and could cause the results to
differ materially from expected and historical results. Executive management
review the potential risks and then classify them as having a high impact,
above $5 million, medium impact, above $1 million but below $5 million, and low
impact, below $1 million. They also assess the likelihood of these risks
occurring. Risk mitigation factors are reviewed and documented based on the
level and likelihood of occurrence. The Audit Committee reviews the risk
register and monitors the implementation of risk mitigation procedures via
Executive management, who are carrying out a robust assessment of the principal
risks facing the Group, including those potentially threatening its business
model, future performance, solvency and liquidity.
The Group has analyzed the following categories as key risks:
Risk Mitigation
Operational risks
Health, Safety and Environment
("HSE")
The oil and gas industry by its The Group maintains a HSE management system
nature conducts activities, which in place and demands that management, staff
can cause health, safety and and contractors adhere to it. The system
environmental incidents. Serious ensures that the Group meets Ukrainian
incidents can have not only a legislative standards in full and achieves
financial impact but can also damage international standards to the maximum
the Group's reputation and the extent possible.
opportunity to undertake further Management systems and processes have been
projects. certified as ISO 14001 and ISO 45001
compliant.
Covid-19
The Group's operations are in To manage and where possible mitigate the
Ukraine with a Parent Company risk of personnel infection with the virus
located in the United Kingdom. These for our employees, special measures have
locations are suffering from been applied. These include administrative
increasing levels of Covid-19 personnel remote working, strict sanitary
infection and in due course there and hygienic procedures and personal
may be increasing disruption. This protection, rotation of field personnel by
may include potential impacts company cars, constant medical supervision
through illness amongst our during the work shift, regular sanitation of
workforce, supply chain and sales cars, offices and facilities. We continue to
channel disruption and the wider monitor the situation closely and will
impact of economic disruption on respond accordingly as the position
commodity prices. The national and develops.
local governments in each of our
operating locations are recommending
or implementing increasingly severe
restrictions in order to manage the
situation.
Climate change
Countries may impose moratorium on E A moratorium on domestic production is
&P activities or enact tight limits deemed highly unlikely in Ukraine given the
to emissions level, which may country's need for affordable energy. Such
curtail production. Shareholders may risks exist in Italy, but the Company's
also request that the Company adopt exposure there is limited.
stringent targets in terms of Management strives to reduce emissions in
emissions reduction. everything the Company does and has started
implementing alternatives to offset and/or
mitigate emissions.
Drilling and Work-Over operations
The technical difficulty of drilling The incorporation of detailed sub-surface
or re-entering wells in the Group's analysis into a robustly engineered well
locations and equipment limitations design and work programme, with appropriate
can result in the unsuccessful procurement procedures and competent on-site
completion of the well. management, aims to minimise risk. Only
certified personnel are hired to operate on
the rig floor.
Production and maintenance
There is a risk that production or All plants are operated and maintained at
transportation facilities could fail standards above the Ukrainian minimum legal
due to non-adequate maintenance, requirements. Operative staff are
control or poor performance of the experienced and receive supplemental
Group's suppliers. training to ensure that facilities are
properly operated and maintained. When not
in use the facilities are properly kept
under conservation and routinely monitored.
Service providers are rigorously reviewed at
the tender stage and are monitored during
the contract period.
Sub-surface risks
The success of the business relies All externally provided and historic data is
on accurate and detailed analysis of rigorously examined and discarded when
the sub-surface. This can be appropriate. New data acquisition is
impacted by poor quality data, considered, and appropriate programmes
either historic or recently implemented, but historic data can be
gathered, and limited coverage. reviewed and reprocessed to improve the
Certain information provided by overall knowledge base. Agreements with
external sources may not be qualified local and international
accurate. contractors have been entered into to
supplement and broaden the pool of expertise
available to the Company.
Data can be misinterpreted leading All analytical outcomes are challenged
to the construction of inaccurate internally and peer reviewed. Analysis is
models and subsequent plans. performed using modern geological software.
The area available for drilling Bottom hole locations are always checked for
operations is limited due to their operational feasibility, well
logistics, infrastructures and trajectory, rig type, and verified on
moratorium. This increases the risk updated sub-surface models. They are
for setting optimum well rejected if deemed to be too risky.
coordinates.
The Group may not be successful in The Group performs, on an annual basis, a
proving commercial production from review of its oil and gas assets, impairs if
its Bitlyanska licence and necessary, and considers whether to
consequently the carrying values of commission a review from a third party or a
the Group's oil and gas assets may Competent Person's Report ("CPR") from an
have to be impaired. independent qualified contractor depending
on the circumstances.
Financial risks
The Group is at risk from changes in Revenues in Ukraine are received in UAH and
the economic environment both in expenditure is made in UAH, however the
Ukraine and globally, which can prices for hydrocarbons are implicitly
cause foreign exchange movements, linked to USD prices.
changes in the rate of inflation and
interest rates and lead to credit The Group continues to hold most of its cash
risk in relation to the Group's key reserves in the UK mostly in USD. Cash
counterparties. reserves are placed with leading financial
Cadogan entered into a 2-year loan institutions, which are approved by the
agreement (euros 13.385 million) Audit Committee. The Group is predominantly
with Proger Management & Partners a USD denominated business. Foreign exchange
Srl with an option to convert it risk is considered a normal and acceptable
into an indirect 24 % equity business exposure and the Group does not
interest in Proger Spa which hedge against this risk for its E&P
represented a key transaction and operations.
element of the Group balance sheet.
As security for the reimbursement of the
loan, Cadogan benefits from a pledge over
the shares held by Proger Managers &
Partners Srl in Proger Ingegneria Srl. In
addition to that, details of the steps being
taken by the Group to manage risks
associated with the Proger loan are set out
in the CEO's Statement and financial
statements (note 4(d)).
For trading operations, the Group matches
the revenues and the source of financing.
Refer to note 27 to the Consolidated
Financial Statements for detail on financial
risks.
The Group is at risk that Procedures are in place to scrutinize new
counterparties will default on their counterparties via a Know Your Customer
contractual obligations resulting in ("KYC") process, which covers their
a financial loss to the Group. solvency. In addition, when trading gas, the
Group seeks to reduce the risk of customer
non-performance by limiting the title
transfer to product until the payment is
received, prepaying only to known credible
suppliers.
The Group is at risk that The Group mostly enters back-to-back
fluctuations in gas prices will have transactions where the price is known at the
a negative result for the trading time of committing to purchase and sell the
operations resulting in a financial product. Sometimes the Group takes exposure
loss to the Group. to open inventory positions when justified
by the market conditions in Ukraine, which
is supported by analysis of the specific
transactions, market trends and models of
the gas prices and foreign exchange rate
trends.
Country risks
Legislative changes may bring Compliance procedures, monitoring and
unexpected risk and create delays in appropriate dialogue with the relevant
securing licenses or ultimately authorities are maintained to minimize the
prevent licenses and license risk. In all cases, deployment of capital in
renewals /conversions from being Ukraine is limited and investments are kept
secured. at the level required to fulfil license
obligations.
Ukraine has not progressed as far as The Group minimizes this risk by maintaining
expected towards integration with funds in international banks outside
Europe, the economic challenges in Ukraine, by limiting the deployment of
the country are not yet over and the capital in the Country and by continuously
confrontation with Russia has maintaining a working dialogue with the
remained open. This can impact the regulatory authorities.
political agenda, negatively impacts Commitments are fulfilled and routinely
the creation of a transparent market verified by the relevant Authorities,
and introduces an element of supported by competent and qualified legal
unpredictability in the development contractors.
of the legislative framework. The assets of the Group are located far from
the area of confrontation with Russia.
Other risks
The Group's success depends upon The Group periodically reviews the
skilled management as well as compensation and contract terms of its staff
technical and administrative staff. in order to remain a competitive employer in
The loss of service of critical the markets where it operates.
members from the Group's team could
have an adverse effect on the
business.
The Group is at risk of The Group applies rigorous screening
underestimating the risk and criteria in order to evaluate potential
complexity associated with the entry investment opportunities. It also seeks
into new countries. input from independent and qualified experts
when deemed necessary. Additionally, the
required rate of return is adjusted to the
perceived level of risk.
Local communities and stakeholders The Group maintains a transparent and open
may cause delays to the project dialogue with authorities and stakeholders
execution and postpone activities. (i) to identify their needs and propose
solutions which address them as well as (ii)
to illustrate the activities which it
intends to conduct and the measures to
mitigate their impact. Local needs and
protection of the environment are always
taken into consideration when designing
mitigation measures, which may go beyond the
legislative minimum requirement.
The Group devotes the highest level of
attention and engage qualified consultants
to prepare the Environmental Impact
Assessment studies and to attend public
hearings, both of them introduced in Ukraine
in the course of 2019.
Statement of Reserves and Resources
In 2019, the company successfully drilled Blazhiv-10 well and conducted routine
rig-less production support activities at the Blazhiv-1, Blazhiv-3 and
Blazhiv-3 Monastyrets to maintain sustainable production.
Summary of Reserves1
at 31 December 2019
Mmboe
Proved, Probable and Possible Reserves at 1 January 2019 7.59
Production 0,1
Revisions (sale of Debeslavetska and 0
Cheremkhivsko-Strupkhivska licences)
Proved, Probable and Possible Reserves at 31 December 7.49
2019
1 The study was conducted in 2016 by Brend Vik and since then Cadogan has
entered into a Technical Service Agreement with them.
Reserves are assigned to the Bitlyanska and Blazhiv fields.
In addition to the tabled reserves, Cadogan has 15.4 million boe of contingent
resources associated with the Bitlyanska and Blazhiv licences.
Corporate Responsibility
Under Section 414C of the Companies Act 2006 (the "Act"), the Board is required
to disclose information about environmental matters, employees, human rights
and community issues, including information about any policies it has in
relation to these matters and the effectiveness of these policies.
Being sustainable in our activities means conducting our business with respect
for the environment and for the communities hosting us, with the aim of
increasing the benefit and value to our stakeholders. We recognize that this is
a key element to be competitive and to maintain our license to operate.
The Board recognizes that the protection of the health and safety of its
employees, communities and the environment in which it operates is not just an
obligation but is part of the personal ethics and beliefs of management and
staff. These are the key drivers for a sustainable development of the Company's
activity. Cadogan Petroleum, its management and employees are committed to
continuously improve Health, Safety and Environment (HSE) performance; follow
our Code of Ethics and apply, in conducting our operations, internationally
recognized best practices and standards.
Our activities are carried out in accordance with a policy manual, endorsed by
the Board, which has been disseminated to all staff. The manual includes a
Working with Integrity policy and policies on business conduct and ethics,
anti-bribery, the acceptance of gifts and hospitality and whistleblowing.
In August 2018, Cadogan Ukraine LLC obtained ISO 14001 and ISO 45001
certifications for the following scope: "Supervision, coordination, management
support, control in the field of oil and gas on-shore exploration and
production." This provides formal recognition of the process embedded in the
Company and demonstrates the commitment and efforts delivered by our employees
and management. It is considered a baseline to continue with the efforts to
improve the way we conduct the business.
The Board believes that health and safety procedures and training across the
Group should be in line with best practice in the oil and gas sector.
Accordingly, it has set up a Committee to review and agree on the health and
safety initiatives for the Company and to report back to the Board on the
progress of these initiatives. Management regularly reports to the Board on HSE
and key safety and environmental issues, which are discussed at the Executive
Management level. The report of the Health, Safety and Environment Committee
can be found on page 39 to 40.
The former Chief Operating Officer was the Chairman of the HSE Committee until
15 November 2019 and is supported in his role by Cadogan Ukraine's HSE Manager.
In accordance with the ISO 14001 and ISO 45001, his role is to ensure that the
Group continuously develops suitable procedures, that operational management
and their teams incorporate them into daily operations and that the HSE
management has the necessary level of autonomy and authority to discharge their
duties effectively and efficiently.
Health, safety and environment
The Group has implemented an integrated HSE management system in accordance
with the ISO requirements. The system aims to ensure that a safe and
environmentally friendly/protection culture is embedded in the organization
with a focus on the local community involvement. The HSE management system
ensures that both Ukrainian and international standards are met, with the
Ukrainian HSE legislation requirements taken as an absolute minimum. All the
Group's local operating companies actively participate in the process.
A proactive approach based on a detailed induction process and near miss
reporting has been in place throughout 2019 to prevent incidents. Staff
training on HSE matters and discussions on near miss reporting are recognized
as the key factors to continuously improve. In-house training is provided to
help staff meet international standards and follow best practice. The process
enacted by the certification, enhances attention to training on risk
assessments, emergency response, incident prevention, reporting and
investigation, as well as emergency drills regularly run on operations' sites
and offices. This process is essential to ensure that international best
practices and standards are maintained to comply with, or exceed, those
required by Ukrainian legislation, and to promote continuous improvement.
The Board monitors the main Key Performance Indicators (lost time incidents,
mileage driven, training received, CO2 emissions) as business parameters. The
Board has benchmarked safety performance against the HSE performance index
measured and published annually by the International Association of Oil and Gas
Producers. In 2019, the Group recorded over 279,980 man-hours worked with no
incidents and close to 1,098,027 hours have been worked since the last injury
in February 2016.
During 2019 the Group continued to monitor its greenhouse gas emissions and
collect statistical data relating to the consumption of electricity, industrial
water and fuel consumption by cars, plants and other work sites, recording a
continuous improvement in the efficient use of resources.
Employees
Wellness and professional development are part of the Company's sustainable
development policy and wherever possible, local staff are recruited. The
Group's activity in Ukraine is entirely managed by local staff. Qualified local
contractors are engaged to supplement the required expertise when and to the
extent it is necessary.
Procedures are in place to ensure that recruitment is undertaken on an open,
transparent and fair basis with no discrimination against applicants. Each
operating company has its own Human Resources function to ensure that the
Group's employment policies are properly implemented and followed. The Group's
Human Resources policy covers key areas such as equal opportunities, wages,
overtime and non-discrimination. As required by Ukrainian legislation,
Collective Agreements are in place with the Group's Ukrainian subsidiary
companies, which outline agreed level of staff benefits and other safeguards
for employees.
All staff are aware of the Group's grievance procedures. All employees have
access to health insurance provided by the Group to ensure that all employees
have access to adequate medical facilities.
Each employee's training needs are assessed on an individual basis to ensure
that their skills are adequate to support the Group's operations, and to help
them to develop.
Diversity
The Board recognizes the benefits and importance of diversity (gender, ethnic,
age, sex, disability, educational and professional backgrounds, etc.) and
strives to apply diversity values across the business. We endeavour to employ
a skilled workforce that reflects the demographic of the jurisdictions in which
we operate. The board will review the existing policies and intends to develop
a diversity.
Gender diversity
The Board of Directors of the Company comprised five Directors as of 31
December 2019. The appointment of any new Director is made based on merit. See
pages 22 and 23 for more information on the composition of the Board.
As at 31 December 2019, the Company comprised a total of 80 persons, as
follows:
Male Female
Non-executive directors 3 1
Executive directors 1 -
Management, other than Executive directors 7 2
Other employees 45 21
Total 56 24
Human rights
Cadogan's commitment to the fundamental principles of human rights is embedded
in our HSE policies and throughout our business processes. We promote the core
principles of human rights pronounced in the UN Universal Declaration of Human
Rights and our support for these principles is embedded throughout our Code of
Conduct, our employment practices and our relationships with suppliers and
partners wherever we do business.
Community
The Group's activities are carried out in rural areas of Ukraine and the Board
is aware of its responsibilities to the local communities in which it operates
and from which some of the employees are recruited. In our operational sites,
management works with the local councils to ensure that the impact of
operations is as low as practicable by putting in place measures to mitigate
their effect. Projects undertaken include improvement of the road
infrastructure in the area, which provides easier access to the operational
sites while at the same time minimizing inconvenience for the local population
and allowing improved road communications in the local communities, especially
during winter season or harsh weather conditions. Specific community activities
are undertaken for the direct benefit of local communities. All activities are
followed and supervised by managers who are given specific responsibility for
such tasks.
The Group's companies in the Ukraine see themselves as part of the community
and are involved and offer practical help and support. All these activities are
run in accordance with our Working with Integrity policy and procedures. The
recruitment of local staff generates additional income for areas that otherwise
are predominantly dependent on the agricultural sector.
The enactment in 2018 of new legislation which introduces Environmental Impact
Assessment studies and public hearings as part of the license's award/renewal
processes was anticipated effectively by the Group. The Group is complying with
these requirements, building on the recognized competence of its people and
advisors as well as on the good communication and relations established with
local communities.
Approval
The Strategic Report was approved by the Board of Directors on 1 May 2020 and
signed by order of the Board by:
Ben Harber
Company Secretary
1 May 2020
Board of Directors
Current directors
Michel Meeùs, 67, Belgian
Non-Independent non-executive Chairman
Mr Meeùs was appointed as a Non-executive Director on 23 June 2014. Mr. Meeùs
was former Chairman of the Board of Directors of Theolia, an independent
international developer and operator of wind energy projects. Since 2007, he
has been a director within the Alcogroup SA Company (which gathers the ethanol
production units of the Group), as well as within some of its subsidiaries.
Before joining Alcogroup, Mr Meeùs carved out a career in the financial sector,
at Chase Manhattan Bank in Brussels and London, then at Security Pacific Bank
in London, then finally at Electra Kingsway Private Equity in London.
Mr Meeus is currently Chairman of the Remuneration and Nomination Committees.
Fady Khallouf, 59, French
Chief Executive Officer
Fady Khallouf was appointed as Director and CEO on 15 November 2019. He has a
35-year experience in the energy, the environment, the engineering and the
infrastructure sectors.
He has previously held the position of CEO and CFO of FUTUREN (Renewable
Energy, listed on Euronext Paris) where he achieved the restructuring and the
turnaround of the group.
Prior to that, he was the CEO of Tecnimont group (Petrochemicals and Oil &
Gas), the Vice-President Strategy and Development of EDISON group (Electricity
and Gas, E&P), the Head of M&A of EDF group (Energy). Fady Khallouf had
beforehand held various management positions at ENGIE (Energy), Suez
(Environmental Services), and DUMEZ (Construction and Infrastructures).
Lilia Jolibois, 55, American
Independent non-Executive Director
Lilia Jolibois was appointed as Director on 15 November 2019. She is currently
a member of four Boards: Futuren S.A., INSEAD, CARA (UK and Wales), and Aster
Fab. Her career spans Merrill Lynch Investment Banking, Sara Lee, and Lafarge
in the USA and Europe. At Lafarge Group, Ms. Jolibois served in numerous
positions in finance, strategy, business development, CEO and Chair of the
Board for Lafarge Cement and Gypsum in Ukraine, and SVP and Chief
Marketing-Sales-Supply Chain Officer for Lafarge Aggregates, Asphalt & Paving.
Lilia is currently Chairman of the Company's Audit Committee and a member of
the Remuneration and Nomination Committees.
Jacques Mahaux, 68, Belgian
Non-Executive Director
Jacques Mahaux was appointed as Director on 15 November 2019. He has held
various executive and directorship positions in Group Crédit Agricole in
Luxembourg, CA Indosuez, Indosuez Bank and various Luxembourg and Swiss Holding
companies active in industrial sectors. Previously he acted as an Attorney at
Law at the Brussels Bar. He is currently a Supervisory Board member of ETAM
SCA.
Mr Mahaux is currently a member of the Audit, Remuneration and Nomination
Committees.
Gilbert Lehmann, 74, French
Senior Independent Non-Executive Director
Mr Lehmann was appointed to the Board on 18 November 2011. He was an adviser to
the Executive Board of Areva, the French nuclear energy business, having
previously been its Deputy Chief Executive Officer responsible for finance. He
is also a former Chief Financial Officer and deputy CEO of Framatone, the
predecessor to Areva, and was CFO of Sogee, part of the Rothschild Group. Mr
Lehmann is also Deputy Chairman and Chairman of the Audit Committee of Eramet,
the French minerals and alloy business. He is Deputy Chairman and Audit
Committee Chairman of Assystem SA, the French engineering and innovation
consultancy. He was Chairman of ST Microelectronics NV, one of the world's
largest semiconductor companies, from 2007 to 2009, and stepped down as Vice
Chairman in 2011.
Mr Lehmann is currently a member of the Remuneration and Nomination Committees.
Directors during part of the period but not at the date of this report
Zev Furst, 71, American
Non-Executive Chairman until 15 November 2019
Appointed to the Board on 2 August 2011.
Mr Furst was Chairman of the Company's Nomination Committee and a member of the
Remuneration Committee until 15 November 2019
Guido Michelotti, 65, Swiss
Chief Executive Officer until 15 November 2019
Mr Michelotti was appointed to the Board of Directors as Chief Executive
Officer on 25 June 2015.
Adelmo Schenato, 67, Italian
Non-Executive Director until 15 November 2019
Mr Schenato was appointed to the Board as Chief Operating Officer on 25 January
2012.
In January 2017, Mr Schenato stepped down as Chief Operating Officer to take up
the role of Advisor to the CEO and Chairman and CEO of Exploenergy Srl, the
Italian company which is 90% owned by the Group.
Mr Schenato was the Chairman of the Health, Safety and Environment Committee.
Enrico Testa, 67, Italian
Independent Non-Executive Director until 15 November 2019
Appointed to the Board on 1 October 2011
Mr Testa was Chairman of the Company's Remuneration Committee and a member of
the Audit and Nomination Committees until 15 November 2019.
Report of the Directors
Directors
Following a general meeting on 15 November 2019 requisitioned by Mr Michel
Meeus (who is also a current Director of the Company) and SPF Devola SA, a
number of resolutions were put forward and subsequently passed changing the
composition of the Board and resulted in the appointment of a new CEO. The
resolutions put to the requisitioned general meeting resulted in the removal of
Messrs Schenato and Testa as Directors of the Company and the appointment of
three new Board members: Messers Mahaux, Jolibois and Khallouf as Directors of
the Company.
Prior to the requisitioned general meeting in November 2019, the Board
requested that the incumbent CEO Guido Michelotti extend his term to November
2019 to facilitate the orderly succession with the new CEO. Following the
general meeting, Mr Khallouf succeeded Guido Michelotti as CEO of the Company
and Michel Meeus, a non-executive Director of the Company was appointed as
Chairman of the Company with immediate effect. Mr Michelotti resigned from the
Company on 15 November 2019 whilst Zev Furst tendered his resignation as a
Director of the Company with effect from 13th December 2019.
The Directors in office during the year and to the date of this report are as
shown below:
Non-Executive Directors Executive Director
Michel Meeùs (Chairman) (appointed 15 November Fady Khallouf (appointed 15
2019) November 2019)
Zev Furst (Chairman) (resigned 13 December Guido Michelotti (resigned 15
2019) November 2019)
Gilbert Lehmann
Lilia Jolibois (appointed 15 November 2019)
Jacques Mahaux (appointed 15 November 2019)
Enrico Testa (resigned 15 November 2019)
Adelmo Schenato (resigned 15 November 2019)
Directors' re-election
Following the General Meeting of the Company held on 15 November 2019 which
resulted in the appointment of new Directors and changes to the composition of
the Board, the Board has agreed that the Directors will not be seeking annual
re-election at this year's annual general meeting as the members of the Board
were appointed by the shareholders of the Company less than one year ago. Going
forward, all Directors will be subject to annual election by shareholders.
The biographies of the Directors in office at the date of this report are shown
on pages 23 and 24.
Appointment and replacement of Directors
The Company's Articles of Association allow the Board to appoint any individual
willing to act as a Director either to fill a vacancy or act as an additional
Director. The appointee may hold office only until the next annual general
meeting of the Company whereupon his or her election will be proposed to the
shareholders.
The Company's Articles of Association prescribe that there shall be no fewer
than three Directors and no more than fifteen.
Directors' interests in shares
The beneficial interests of the Directors in office as at 31 December 2019 and
their connected persons in the Ordinary shares of the Company at 31 December
2019 are set out below.
Director Number of
Shares
Michel Meeùs 26,000,000
Fady Khallouf -
Gilbert Lehmann -
Lilia Jolibois -
Jacques Mahaux -
Conflicts of Interest
The Company has procedures in place for managing conflicts of interest. Should
a director become aware that they, or any of their connected parties, have an
interest in an existing or proposed transaction with the Company, its
subsidiaries or any matters to be discussed at meetings, they are required to
formally notify the Board in writing or at the next Board meeting. In
accordance with the Companies Act 2006 and the Company's Articles of
Association, the Board may authorize any potential or actual conflict of
interest that may otherwise involve any of the directors breaching his or her
duty to avoid conflicts of interest. All potential and actual conflicts
approved by the Board are recorded in register of conflicts, which is reviewed
by the Board at each Board meeting.
Directors' indemnities and insurance
The Company's Articles of Association provide that, subject to the provisions
of the Companies Act 2006, all Directors of the Company are indemnified by the
Company in respect of any liability incurred in connection with their duties,
powers or office. Save for such indemnity provisions, there are no qualifying
third-party indemnity provisions. In addition, the Company continues to
maintain Directors' and Officers' Liability Insurance for all Directors who
served during the year.
Powers of Directors
The Directors are responsible for the management of the business and may
exercise all powers of the Company subject to UK legislation and the Company's
Articles of Association, which includes powers to issue or buy back the
Company's shares given by special resolution. The authorities to issue and buy
back shares, granted at the 2019 Annual General Meeting, remains unused.
Dividends
The Directors do not recommend payment of a dividend for the year ended 31
December 2019 (2018: nil).
Principal activity and status
The Company is registered as a public limited company (registration number
05718406) in England and Wales. The principal activity and business of the
Company is oil and gas exploration, development and production.
Subsequent events
Refer to note 30 in the financial statements.
Structure of share capital
The authorized share capital of the Company is currently GBP30,000,000 divided
into 1,000,000,000 Ordinary shares of 3 pence each. The number of shares in
issue as at 31 December 2019 was 235,729,322 Ordinary shares (each with one
vote) with a nominal value of GBP7,071,880. The total number of voting rights in
the Company is 235,729,256. The Companies (Acquisition of Own Shares) (Treasury
Shares) Regulations 2003 allow companies to hold shares in treasury rather than
cancel them. Following the consolidation of the issued capital of the Company
on 10 June 2008, there were 66 residual Ordinary shares, which were transferred
to treasury. No dividends may be paid on shares whilst held in treasury and no
voting rights attached to shares held in treasury.
Rights and obligations of Ordinary shares
In accordance with applicable laws and the Company's Articles of Association,
holders of Ordinary shares are entitled to:
* receive shareholder documentation including the notice of any general
meeting;
* attend, speak and exercise voting rights at general meetings, either in
person or by proxy; and
* a dividend where declared and paid out of profits available for such
purposes. On a return of capital on a winding up, holders of Ordinary
shares are entitled to participate in such a return.
Exercise of rights of shares in employee share schemes
None of the share awards under the Company's incentive arrangements are held in
trust on behalf of the beneficiaries.
Agreements between shareholders
The Board is unaware of any agreements between shareholders, which may restrict
the transfer of securities or voting rights.
Restrictions on voting deadlines
The notice of any general meeting of the Company shall specify the deadline for
exercising voting rights and appointing a proxy or proxies to vote at a general
meeting. In order to accurately reflect the views of shareholders, where
applicable it is the Company's policy at present to take all resolutions at any
general meeting on a poll. Following the meeting, the results of the poll
released to the market via a regulatory news service and be published on the
Company's website.
Substantial shareholdings
As at 31 December 2019 and 17 April 2020, being the last practicable date, the
Company had been notified of the following interests in voting rights attached
to the Company's shares:
31 December 2019 17 April 2020
Major shareholder Number of % of total Number of % of
shares held voting shares total
rights held voting
rights
SPQR Capital Holdings SA 67,298,498 28.55 67,298,498 28.55
Mr Michel Meeùs 26,000,000 11.03 26,000,000 11.03
Ms Veronique Salik 17,959,000 7.62 17,959,000 7.62
Ms Jessica Friedender 17,409,000 7.39 17,409,000 7.39
Kellet Overseas Inc. 14,002,696 5.94 14,002,696 5.94
Credit Agricole Luxembourg 8,676,336 3.68 - -
Mr Pierre Salik 7,950,000 3.37 7,950,000 3.37
Cynderella International Luxembourg 7,657,886 3.25 7,657,886 3.25
Julius Baer 7,270,000 3.08 7,270,000 3.08
CA Indosuez Wealth Mgt Luxembourg 6,000,000 2.55 14,676,336 6.23
Amendment of the Company's Articles of Association
The Company's Articles of Association may only be amended by way of a special
resolution of shareholders.
Disclosure of information to auditor
As required by section 418 of the Companies Act 2006, each of the Directors as
at 1 May 2020 confirms that:
(a) so far as the Director is aware, there is no relevant audit information of
which the Company's auditor is unaware; and
(b) the Director has taken all the steps that he ought to have taken as a
Director in order to make himself aware of any relevant audit information and
to establish that the Company's auditor is aware of that information.
Going concern
The Group's business activities, together with the factors likely to affect its
future development, performance and position, are set out on pages 15 to 18.
Having considered the Company's financial position and its principal risks and
uncertainties, including the assessment of potential risks associated with
Covid-19 including a) restrictions applied by governments, illness amongst our
workforce and disruption to supply chain and sales channels; and b) market
volatility in respect of commodity prices associated with Covid-19 in addition
to geopolitical factors, the Directors have a reasonable expectation that the
Company and the Group have adequate resources to continue in operational
existence for the foreseeable future. Accordingly, they continue to adopt the
going concern basis in preparing the Consolidated and Company Financial
Statements. For further detail please refer to the detailed discussion of the
assumptions outlined in note 3 (b) to the Consolidated Financial Statements.
Reporting year
The reporting year coincides with the Company's fiscal year, which is 1 January
2019 to 31 December 2019.
Financial risk management objectives and policies
The Company's financial risk management objectives and policies including its
policy for managing its exposure of the Company to price risk, credit risk,
liquidity risk and cash flow risk are described on page 106 to 107 in note 27
to the Consolidated Financial Statements.
Outlook
Future developments in the business of the Company are presented on page 7 to
10.
Change of control - significant agreements
The Company has no significant agreements containing provisions, which allow a
counterparty to alter and amend the terms of the agreement following a change
of control of the Company.
Should a change in control occur then certain Executive directors are entitled
to a payment of salary and benefits for a period of two years.
Global greenhouse gas emissions
This section contains information on greenhouse gas ("GHG") emissions required
by the Companies Act 2006 (Strategic Report and Directors' Report) Regulations
2013 (the "Regulations").
Methodology
The principal methodology used to calculate the emissions is drawn from the
'Environmental Reporting Guidelines: including mandatory greenhouse gas
emissions reporting guidance (June 2013)', issued by the Department for
Environment, Food and Rural Affairs ("DEFRA") and DEFRA GHG conversion factors
for company reporting were utilised to calculate the CO2 equivalent of
emissions from various sources (2018 update).
The Company has reported on all of the emission sources required under the
Regulations.
The Company does not have responsibility for any emission sources that are not
included in its consolidated statement.
As the solution for reducing immediately the Company's emissions, a system for
gas disposal was installed at Blazhiv-10 well. An integrated solution for the
whole Blazhiv operations for the future periods is presently designed and
expected to be commissioned in 2020.
Consolidation approach and organisation boundary
An operational control approach was used to define the Company's organisational
boundary and responsibility for GHG emissions. All material emission sources
within this boundary have been reported upon, in line with the requirements of
the Regulations.
Scope of reported emissions
Emissions data from the sources within Scope 1 and Scope 2 of the Company's
operational boundaries is detailed below. This includes direct emissions from
assets that fall within the Company's organisational boundaries (Scope 1
emissions), as well as indirect emissions from energy consumption, such as
purchased electricity and heating (Scope 2 emissions).
Scope 1 emissions in 2019 increased compared to the previous year (8,799 tons
in 2019 vs 4,810 tons in 2018), due to drilling of Blazhiv-10 well and increase
in oil production from Monastyretska field.
Conversely, Scope 2 emissions decreased in 2019 (184 tons in 2019 vs 504 tons
in 2018), as a result of the processes started in 2016 to improve the
efficiency of the structure, logistic and facilities. This reduction
contributed to mitigate the increase in the Scope 1 and, consequently, total
emissions in 2019 were 8,983 tons versus the 5,314 tons of 2018.
Intensity ratio
In order to express the GHG emissions in relation to a quantifiable factor
associated with the Company's activities, wellhead production of crude oil, -
and natural gas has been chosen as the normalisation factor for calculating the
intensity ratio. This will allow comparison of the Company's performance over
time, as well as with other companies in the Company's peer group.
The intensity ratio for E&P operations (same reporting perimeter) increased by
47 %, from 58,3 tons CO2e/Kboe in 2018 to 85,7 tons CO2e/Kboe in 2019.
Total greenhouse gas emissions data for the year from 1 January to 31 December
Greenhouse gas emissions E&P
source
2019 2018
Scope 1
Direct emissions, including 8,799 4,809
combustion of fuel and
operation of facilities
(tonnes of CO2 equivalent)
Scope 2
Indirect emissions from energy 184 504
consumption, such as
electricity and heating
purchased for own use (tonnes
of CO2 equivalent)
Total (Scope 1 & 2) 8,983 5,314
Normalisation factor
Barrels of oil equivalent, net 104,816 91,080
Intensity ratio
Emissions reported above 85,7 58.3
normalised to tonnes of CO2e per
total wellhead production of
crude oil, condensates and
natural gas, in thousands of
Barrel of Oil Equivalent, net
2020 Annual General Meeting
The 2020 Annual General Meeting ("AGM") of the Company provides an opportunity
to communicate with shareholders and the Board welcomes their participation.
Board members constantly strive to engage with shareholders on strategy,
governance and a number of other issues.
The Board looks forward to welcoming shareholders to the AGM. The AGM notice
will be issued to shareholders well in advance of the meeting with notes to
provide an explanation of all resolutions to be put to the AGM. In addition,
shareholder information will be enclosed as usual with the AGM notice to
facilitate voting and feedback in the usual way.
The Chairman of the Board and the members of its committees will be available
to answer shareholder questions at the AGM. All relevant shareholder
information including the annual report for 2019 and any other announcements
will be published on our website - www.cadoganpetroleum.com
This Report of Directors comprising pages 23 to 31 has been approved by the
Board and signed by the order of the Board by:
Ben Harber
Company Secretary
1 May 2020
Board Committee Reports
As a Company listed on the standard segment of the London Stock Exchange it is
not required to apply a specific corporate governance code and, given its size
has elected not to do so. However, the Board of the Company is committed to the
highest standards of corporate governance.
Board
The Board provides leadership and oversight. The Board comprises a
Non-Independent non-executive Chairman, Chief Executive Officer, two
Independent Non-Executive Directors and a non-executive Director. The Board has
appointed Mr Lehmann as the Senior Independent Director.
The biographical details for each of the Directors and their membership of
Committees are incorporated into this report by reference and appear on page 23
and 24.
As at the date of this report, the Chairman had no significant commitments that
would affect his ability to allocate sufficient time to the Company to
discharge his responsibilities effectively.
Board independence
The roles and responsibilities of the Chairman and Chief Executive Officer are
separate with a clear and formal division of each individual's
responsibilities, which has been agreed and documented by the Board.
The Non-Executive Directors bring an independent view to the Board's
discussions and the development of its strategy. Their range of experience
ensures that management's performance in achieving the business goals are
challenged appropriately. Two Non-Executive Directors, Ms Lilia Jolibois, and
Mr Gilbert Lehmann are considered by the Board to be independent. Mr Michel
Meeùs, who is a significant shareholder and Mr Jacques Mahaux are not
considered independent as defined within the UK Corporate Governance Code 2018,
however the Board believes they are independent in character and judgement and
free from relationships or circumstances that could affect their judgement. All
Directors continue to be effective and have sufficient time available to
perform their duties. The letters of appointment for the Non-Executive
Directors are available for review at the Registered Office and prior to the
Annual General Meeting.
As at the date of this report, the Chairman had no significant commitments that
would affect his ability to allocate sufficient time to the Company to
discharge his responsibilities effectively.
Under the Company's Articles of Association, all Directors must seek
re-election by members at least once every three years. All directors have
either been elected or re-elected in the past 12 months.
The Board has a formal schedule of matters specifically reserved for its
decision, including approval of acquisitions and disposals, major capital
projects, financial results, Board appointments, dividend recommendations,
material contracts and Group strategy. Other responsibilities are delegated to
its Committees.
The Chairman, in conjunction with the Company Secretary, plans the programme
for the Board during the year. The agenda for Board and Committee meetings are
considered by the relevant Chairman and issued with supporting papers during
the week preceding the meeting. For each Board meeting, the Directors receive a
Board pack including management accounts, briefing papers on commercial and
operational matters and major capital projects including acquisitions. The
Board also receives briefings from key management on specific issues.
Eleven Board meetings took place during 2019. The attendance of those Directors
in place at the year end at Board and Committee meetings during the year was as
follows:
Board Audit Nomination Remuneration
Committee Committee Committee
No. Held 11 2 3 4
No. Attended:
Z Furst 10 N/A 3 3
F Khallouf* 1* N/A N/A N/A
G Michelotti 11 N/A N/A N/A
G Lehmann 11 2 3 3
M Meeùs 10 N/A N/A 1**
A Schenato 10 N/A N/A N/A
E Testa 10 2 3 3
L Jolibois** 1* N/A N/A 1
J Mahaux** 1* N/A N/A N/A
*Appointed 15 November 2019
**Appointed to Remuneration and Nomination Committees 15 November 2019
Note: A Schenato, E Testa removed as Directors of the Company on 15 November
2019, G Michellotti resigned as a Director of the Company on 15 November 2019,
Z Furst resigned as a Director of the Company on 13 December 2019.
A procedure exists for the Directors, in the furtherance of their duties, to
take independent professional advice if necessary, under the guidance of the
Company Secretary and at the Company's expense. All Directors have access to
the advice and services of the Company Secretary, who is responsible to the
Chairman for ensuring that Board procedures are complied with and that
applicable rules and regulations are followed.
Responsibilities and membership of Board Committees
The Board has agreed written terms of reference for the Nomination Committee,
Remuneration Committee, Audit Committee and HSE committee. The terms of
reference for the Board Committees are published on the Company's website,
www.cadoganpetroleum.com, and are also available from the Company Secretary at
the Registered Office. A review of the Committees including their membership
and activities of all Board Committees is provided on pages 33 to 43.
Internal control
The Directors are responsible for the Group's system of internal control and
for maintaining and reviewing its effectiveness. The Group's systems and
controls are designed to safeguard the Group's assets and to ensure the
reliability of information used both within the business and for publication.
The Board has delegated responsibility for the monitoring and review of the
Group's internal controls to the Audit Committee.
Systems are designed to manage, rather than eliminate the risk of failure to
achieve business objectives and can provide only reasonable, and not absolute
assurance against material misstatement or loss.
The key features of the Group's internal control and risk management systems
that ensure the accuracy and reliability of financial reporting include clearly
defined lines of accountability and delegation of authority, policies and
procedures that cover financial planning and reporting, preparing consolidated
financial statements, capital expenditure, project governance and information
security.
The key features of the internal control systems, which operated during 2019
and up to the date of signing the Financial Statements are documented in the
Group's Corporate Governance Policy Manual and Finance Manual. These manuals
and policies have been circulated and adopted throughout the Group throughout
the period.
Day-to-day responsibility for the management and operations of the business has
been delegated to the Chief Executive Officer and senior management. Certain
specific administrative functions are controlled centrally. Taxation and
treasury functions report to the Group Director of Finance who reports directly
to the Chief Executive Officer.
The legal function for Ukraine's related assets and activities is managed by
the General Counsel, who reports to the General Director of Cadogan Ukraine.
The Health, Safety and Environment functions report to the Chairman of the HSE
Committee. The Group does not have an internal audit function. Due to the small
scale of the Group's operations at present, the Board does not feel that it is
appropriate or economically viable to have an internal audit function in place,
however this will be kept under review by the Audit Committee on an annual
basis. Management though has appointed a Compliance Officer for its Ukrainian
subsidiaries.
The Board has reviewed internal controls and risk management processes, in
place from the start of the year to the date of approval of this report. During
the course of its review the Board did not identify nor were advised of any
failings or weaknesses which it has deemed to be significant.
Relations with shareholders
The Chairman and Executive Directors of the Company have a regular dialogue
with analysts and substantial shareholders. The outcome of these discussions is
reported to the Board at quarterly meetings and discussed in detail. Mr
Lehmann, as the Senior Independent Director, is available to meet with
shareholders who have questions that they feel would be inappropriate to raise
via the Chairman or Executive Directors.
The Annual General Meeting is used as an opportunity to communicate with all
shareholders. In addition, financial results are posted on the Company's
website, www.cadoganpetroleum.com, as soon as they are announced. The Notice of
the Annual General Meeting is also contained on the Company's website,
www.cadoganpetroleum.com. It is intended that the Chairmen of the Nomination,
Audit and Remuneration Committees will be present at the Annual General
Meeting. The results of all resolutions will be published on the Company's
website, www.cadoganpetroleum.com.
Extraordinary Shareholders Meeting on 15 November 2019
As mentioned above, members of the Company requisitioned a general meeting on
November 15th, 2019 with the aim of terminating the mandate of two Board
directors and the election of three new directors. The Extraordinary
Shareholders Meeting took place on 15 November 2019. The majority of
shareholders voted in favour of these resolutions.
Directors' section 172 statement
The majority of the current Board of Directors were appointed on 15 November
2019 and as such this section 172 statement is made based on the activity of
the Board as a whole starting from that date.
The disclosure describes how the Directors have regard to the matters set out
in section 172(1)(a) to (f) and forms the Directors' statement required under
section 414CZA of The Companies Act 2006. This new reporting requirement is
made in accordance with the new corporate governance requirements identified in
The Companies (Miscellaneous Reporting) Regulations 2018, which apply to
company reporting on financial years starting on or after 1 January 2019.
The matters set out in section 172(1) (a) to (f) are that a Director must act
in the way they consider, in good faith, would be most likely to promote the
success of the Company for the benefit of its members as a whole, and in doing
so have regard (amongst other matters) to:
(a) the likely consequences of any decision in the long term;
(b) the interests of the Company's employees;
(c) the need to foster the Company's business relationships with suppliers,
customers and others;
(d) the impact of the Company's operations on the community and the
environment;
(e) the desirability of the Company maintaining a reputation for high standards
of business conduct; and
(f) the need to act fairly between members of the Company.
Being sustainable in our activities means conducting our business with respect
for the environment and for the communities hosting us, with the aim of
increasing the benefit and value to our stakeholders. We recognize that this is
a key element to be competitive and to maintain our licence to operate.
Further details of how the Directors have regard to the issues, factors and
stakeholders considered relevant in complying with S 172 (1) (a)-(f), the
methods used to engage with stakeholders and the effect on the Group's decision
making can be found throughout the annual report and in particular pages 20
(which outlines how the Company engages with its stakeholders), pages 21 to 22
(which contains Cadogan's corporate responsibility statement) pages 28 to 30
(which contains the Company's report on greenhouse gas emissions) and page 33
(which outlines the ways in which the Company engages with its shareholders).
The Board has a formal schedule of matters specifically reserved for its
decision, including approval of acquisitions and disposals, major capital
projects, financial results, Board appointments, dividend recommendations,
material contracts and Group strategy. For each Board meeting, the Directors
receive a Board pack including management accounts, briefing papers on
commercial and operational matters and major capital projects including
acquisitions. The Board also receives briefings from key management on specific
issues.
As set out on page 25, on 24 September 2019 the Company received a notice to
requisition a General Meeting which was held on 15 November 2019. As a result
of the General Meeting two directors departed the Board, one director resigned
and it was also announced that the CEO would resign which subsequently took
place on 15 November 2019. Significant activities and decisions of the Board
arising prior to the General Meeting included the execution of the loan
agreement with Proger together with other matters detailed in Operations Review
and note 18.
Audit Committee Report
The Audit Committee is appointed by the Board, on the recommendation of the
Nomination Committee, from the Non-Executive Directors of the Group. The Audit
Committee's terms of reference are reviewed annually by the Audit Committee and
any changes are then referred to the Board for approval. The terms of reference
of the Committee are published on the Company's website,
www.cadoganpetroleum.com, and are also available from the Company Secretary at
the Registered Office. Two members constitute a quorum.
Responsibilities
* To monitor the integrity of the annual and interim financial statements,
the accompanying reports to shareholders, and announcements regarding the
Group's results;
* To review and monitor the effectiveness and integrity of the Group's
financial reporting and internal financial controls;
* To review the effectiveness of the process for identifying, assessing and
reporting all significant business risks and the management of those risks
by the Group;
* To oversee the Group's relations with the external auditor and to make
recommendations to the Board, for approval by shareholders, on the
appointment and removal of the external auditor;
* To consider whether an internal audit function is appropriate to enable the
Audit Committee to meet its objectives; and
* To review the Group's arrangements by which staff of the Group may, in
confidence, raise concerns about possible improprieties in matters of
financial reporting or other matters.
Governance
Ms Jolibois and Mr Mahaux are both members of the Audit Committee. The Audit
Committee is chaired by Ms Jolibois who had relevant financial experience
within a major European company as well as holding several non-executive roles
in major international entities.
At the invitation of the Audit Committee, the Group Director of Finance and
external auditor regularly attend meetings. The Company Secretary attends all
meetings of the Audit Committee.
The Audit Committee also meets the external auditor without management being
present.
Activities of the Audit Committee
During the year, the Audit Committee discharged its responsibilities as
follows:
Assessment of the effectiveness of the external auditor
The Committee has assessed the effectiveness of the external audit process.
They did this by:
* Reviewing the 2019 external audit plan;
* Discussing the results of the audit including the auditor's views on
material accounting issues and key judgements and estimates, and their
audit report;
* Considering the robustness of the audit process;
* Reviewing the quality of the service and people provided to undertake the
audit; and
* Considering their independence and objectivity.
Financial statements
The Audit Committee examined the Group's consolidated and Company's financial
statements and, prior to recommending them to the Board, considered:
* the appropriateness of the accounting policies adopted;
* reviewed critical judgements, estimates and underlying assumptions; and
* assessed whether the financial statements are fair, balanced and
understandable.
Going concern
After making enquiries and considering the uncertainties described on pages 15
to 18, the Committee has a reasonable expectation that the Company and the
Group has adequate resources to continue in operational existence for the
foreseeable future and consider the going concern basis of accounting to be
appropriate. For further detail including the assessment of the impact of
Covid-19 and the basis for the conclusion, please refer to the detailed
discussion of the assumptions outlined in note 3 (b) to the Consolidated
Financial Statements.
Internal controls and risk management
The Audit Committee reviews and monitors financial and control issues
throughout the Group including the Group's key risks and the approach for
dealing with them. Further information on the risks and uncertainties facing
the Group are detailed on pages 98 to 100 and in note 27 to the financial
statements.
External auditor
The Audit Committee is responsible for recommending to the Board, for approval
by the shareholders, the appointment of the external auditor.
The Audit Committee considers the scope and materiality for the audit work,
approves the audit fee, and reviews the results of the external auditor's work.
Following the conclusion of each year's audit, it considers the effectiveness
of the external auditor during the process. An assessment of the effectiveness
of the audit process was made, considering reports from the auditor on its
internal quality procedures. The Committee reviewed and approved the terms and
scope of the audit engagement, the audit plan and the results of the audit with
the external auditor, including the scope of services associated with
audit-related regulatory reporting services. Additionally, auditor independence
and objectivity were assessed, considering the auditor's confirmation that its
independence is not impaired, the overall extent of non-audit services provided
by the external auditor and the past service of the auditor.
There is an agreed policy on the engagement of the external auditor for
non-audit services to ensure that its independence and objectivity are
safeguarded. Audit related services can be awarded to the external auditor by
the executive Directors provided the work does not exceed GBP50,000 in fees per
item. Work exceeding GBP50,000 requires approval by the Audit Committee. All
other non-audit work either requires Audit Committee approval or forms part of
a list of prohibited services, where it is felt the external auditor's
independence or objectivity may be compromised.
A breakdown of the non-audit fees is disclosed in note 10 to the Consolidated
Financial Statements. The Audit Committee has reviewed the nature, level and
timing of these services in the course of the year and is confident that the
objectivity and independence of the auditor are not impaired by the reason of
such non-audit work.
Internal audit
The Audit Committee considers annually the need for an internal audit function
and believes that, due to the size of the Group and its current stage of
development, an internal audit function will be of little benefit to the Group.
Whistleblowing
The Group's whistleblowing policy encourages employees to report suspected
wrongdoing and sets out the procedures employees must follow when raising
concerns. The policy, which was implemented during 2008, was updated in 2013
and recirculated to staff as part of a manual that includes the Group's
policies on anti-bribery, the acceptance of gifts and hospitality, and business
conduct and ethics.
Overview
As a result of its work during the year, the Audit Committee has concluded that
it has acted in accordance with its terms of reference and has ensured the
independence and objectivity of the external auditor.
The Chairman of the Audit Committee will be available at the Annual General
Meeting to answer any questions about the work of the Audit Committee.
Lilia Jolibois
Chairman of the Audit Committee
1 May 2020
Health, Safety and Environment Committee Report
The Health, Safety and Environment Committee (the "HSE Committee") is appointed
by the Board, on the recommendation of the Nomination Committee. The HSE
Committee's terms of reference are reviewed annually by the Committee and any
changes are then referred to the Board for approval. The terms of reference of
the Committee are published on the Company's website, www.cadoganpetroleum.com,
and are also available from the Company Secretary at the Registered Office. Two
members constitute a quorum, one of whom must be a Director.
Governance
The Committee was chaired by Mr Adelmo Schenato until 15 November 2019 and its
other members are Ms Snizhana Buryak (HSE Manager) and Mr Andriy Bilyi (Cadogan
Ukraine General Director). The CEO attends meetings of the HSE Committee as
required. During 2019, the HSE Committee held five meetings to monitor the HSE
risks and activities across the business, following which actions were
identified for the continuous improvement of the various processes and the
mitigation of risk.
Responsibilities
* To regularly maintain and implement the continuous improvement of the HSE
Management System with the aim of improving the Company's performances;
* Assessments of the risks to employees, contractors, customers, partners,
and any other people who could be affected by the Company's activities with
the aim of reducing the global risk of the Company and increasing its level
of acceptability;
* Evaluate the effectiveness of the Group's policies and systems for
identifying and managing health, safety and environmental risks within the
Group's operation;
* Assess the policies and systems within the Group for ensuring compliance
with health, safety and environmental regulatory requirements;
* Assess the performance of the Group with regard to the impact of health,
safety, environmental and community relations decisions and actions upon
employees, communities and other third parties and also assess the impact
of such decisions and actions on the reputation of the Group and make
recommendations to the Board on areas for improvement;
* On behalf of the Board, receive reports from management concerning any
fatalities and serious accidents within the Group and actions taken by
management as a result of such fatalities or serious accidents;
* Evaluate and oversee, on behalf of the Board, the quality and integrity of
any reporting to external stakeholders concerning health, safety,
environmental and community relations issues; and
* Where it deems it appropriate to do so, appoint an independent auditor to
review performance with regard to health, safety, environmental and
community relations matters and review any strategies and action plans
developed by management in response to issues raised and, where
appropriate, make recommendations to the Board concerning the same.
Activities of the Health, Safety and Environment Committee
The HSE Committee in discharging its duties reviewed and considered the
following:
* Company activities execution and control over contractors services
execution in line with company policies and HSE procedures
* Monthly statistics and reports on the activity were regularly distributed
to the CEO, Management and to the members of the committee;
* Ensured that the implementation of new legislation and requirements were
punctually followed-up and promptly updated;
* Compliance with HSE regulatory requirements was ensured through discussion
of the results of inspections, both internal inspections and those carried
out by the Authorities. The results of the inspections and drills were
analysed and commented to assess the need for corrective actions and/or
training initiatives;
* A standing item was included on the agenda at every meeting to monitor
monthly HSE performance, key indicators and statistics allowing the HSE
Committee to assess the Company's performance by analysing any lost-time
incidents, near misses, HSE training and other indicators;
* Interaction with contractors, Authorities, local communities and other
stakeholders were discussed among other HSE activities;
* Compliance to ISO 14001 and ISO 45001 has been proved by the authorized
third party auditor. Also the Company had its entire data calculation
process as well as emissions measurement system re-validated by a different
independent third party.
* Ensuring all the Observation and Actions requested by the Certification
Body have been implemented
Overview
The Company's HSE Management System and the Guidelines and Procedures have been
updated to fit with the ISO requirements and are adequate for the proper
execution of the Company's operations.
As a result of its work during the year, the HSE Committee has concluded that
it has acted in accordance with its terms of reference.
Nomination Committee Report
The Board delegates some of its duties to the Nomination Committee and appoints
the members of the Nomination Committee which are non-executive Directors of
the Group. The membership of the Committee is reviewed annually and any changes
to its composition are referred to the Board for approval. The terms of
reference of the Nomination Committee are published on the Company's website,
www.cadoganpetroleum.com, and are available from the Company Secretary at the
Registered Office. Two members constitute a quorum.
Governance
Mr Michel Meeùs (Remuneration and Nomination Committee Chairman), Ms Lilia
Jolibois, Mr Jacques Mahaux and Mr Gilbert Lehmann (Non-Executive Directors)
are the members of the Nomination Committee. The Company Secretary attends all
meetings of the Nomination Committee.
Responsibilities
* To regularly review the structure, size and composition (including the
skills, knowledge and experience) required of the Board compared to its
current position and make recommendations to the Board with regard to any
changes;
* Be responsible for identifying and nominating candidates to fill Board
vacancies as and when they arise, for the Board's approval;
* Before appointments are made by the Board, evaluate the balance of skills,
knowledge, experience and diversity (gender, ethnic, age, sex, disability,
educational and professional backgrounds, etc.) on the Board and, in the
light of this evaluation, prepare a description of the role and
capabilities required for a particular appointment; and
* In identifying suitable candidates, the Nomination Committee shall use open
advertising or the services of external advisers to facilitate the search
and consider candidates from a wide range of backgrounds on merit, ensuring
that appointees have enough time available to devote to the position.
The Nomination Committee shall also make recommendations to the Board
concerning:
* Formulating plans for succession for both executive and non-executive
Directors and in particular for the key roles of Chairman and Chief
Executive Officer;
* Membership of the Audit and Remuneration Committees, in consultation with
the Chairmen of those committees;
* The reappointment of any non-executive Director at the conclusion of their
specified term of office, having given due regard to their performance and
ability to continue to contribute to the Board in the light of the
knowledge, skills and experience required; and
* The re-election by shareholders of any Director having due regard to their
performance and ability to continue to contribute to the Board in the light
of the knowledge, skills and experience required.
Any matters relating to the continuation in office of any Director at any time
including the suspension or termination of service of an executive Director as
an employee of the Company subject to the provisions of the law and their
service contract.
Activities of the Nomination Committee
During the financial year under review, the Committee reviewed and considered
the following:
* The size, structure and composition of the Board in the light of the
current business environment, the Company's anticipated future activities
and particularly the independence of the Non-Executive Directors;
* Its internal governance documents and the Policy;
* Oversaw succession of the CEO prior to the requisitioned General meeting;
* The letters of appointment of the Directors and the CEO's Service
Agreement.
The Committee recommends the re-election of the five incumbent Directors at the
AGM.
Overview
As a result of its work during the year, the Committee has concluded that it
has acted in accordance with its terms of reference. The Chairman of the
Nomination Committee will be available at the Annual General Meeting to answer
any questions about the work of the Committee.
Michel Meeùs
Nomination Committee Chairman
1 May 2020
Remuneration Committee
Statement from the Chairman
I am pleased to present the Annual Report on Remuneration for the year ended 31
December 2019.
Cadogan's Remuneration Policy was approved as proposed by the shareholders at
the Annual General Meeting of June 19, 2018 and is attached at the end of the
Annual Report on Remuneration.
The key elements of the Remuneration Policy are:
* A better long-term alignment of the executives' remuneration with the
interests of shareholders;
* A material reduction in the maximum remuneration level for the Executive
Directors, both in terms of annual bonus and of long-term incentive
(performance share plan);
* The payment of at least 50% of the Annual Bonus in shares with the
remaining 50% to be paid in cash or shares at the discretion of the
Remuneration Committee. Shares will be priced for this award based on their
market value at closing on the Business Day prior to the Subscription Date;
* The introduction of claw-back and malus provisions on both bonuses and
share awards; and
* The expectation that the Executive Directors build a substantial
shareholding position in the company through their mandate.
In 2019 the Remuneration Committee enrolled again the CEO (Guido Michelotti) in
a performance-related, bonus scheme built around a scorecard with a set of
challenging KPI's aligned with the company strategy of preserving cash and
operating safely and efficiently while actively pursuing opportunities to
re-load and geographically diversify the portfolio. Based on the results
achieved, the Remuneration Committee agreed to award the CEO a bonus of EUR
100,000 ($112,410), or 10% of the maximum allowable bonus under the current
Remuneration Policy, and to split the post-tax amount in 50 % cash and 50%
shares.
At the beginning of 2020, the Committee agreed that all there would be a 20 per
cent decrease to the non-executive directors' salary and fees in base currency.
There were no further changes made to the composition of directors'
remuneration. A summary of the fees paid to directors is outlined on page 45.
Michel Meeùs
Chairman of the Remuneration Committee
1 May 2020
ANNUAL REPORT ON REMUNERATION 2019
Remuneration Committee Report
The Remuneration Committee is committed to principles of accountability and
transparency to ensure that remuneration arrangements demonstrate a clear link
between reward and performance.
Governance
The Remuneration Committee is appointed by the Board from the non-executive
Directors of the Company. The Remuneration Committee's terms of reference are
reviewed annually by the Remuneration Committee and any changes are then
referred to the Board for approval. The terms of reference of the Remuneration
Committee are published on the Company's website, www.cadoganpetroleum.com, and
are also available from the Company Secretary at the Registered Office.
The Remuneration Committee consists of Mr Michel Meeùs, Ms Lilia Jolibois, Mr
Jacques Mahaux and Mr Gilbert Lehmann. At the discretion of the Remuneration
Committee, the Chief Executive Officer is invited to attend meetings when
appropriate but is not present when his own remuneration is being discussed.
None of the directors are involved in deciding their own remuneration. The
Company Secretary attends the meetings of the Remuneration Committee.
Responsibilities
In summary, the Remuneration Committee's responsibilities, as set out in its
terms of reference, are as follows:
* To determine and agree with the Board the policy for the remuneration of
the executive Directors, the Company Secretary and other members of
executive management as appropriate;
* To consider the design, award levels, performance measures and targets for
any annual or long-term incentives and approve any payments made and awards
vesting under such schemes;
* Within the terms of the agreed remuneration policy, to determine the total
individual remuneration package of each executive Director and other senior
executives including bonuses, incentive payments and share options or other
share awards; and
* To ensure that contractual terms on termination, and any payments made, are
fair to the individual and the Company, that failure is not rewarded and
that the duty to mitigate loss is fully recognised.
Overview
The Chairman and Executive Directors of the Company have a regular dialogue
with analysts and substantial shareholders, which includes the subject of
Directors' Remuneration. The outcome of these discussions is reported to the
Board and discussed in detail both there and during meetings of the
Remuneration Committee.
As a result of its work during the year, the Remuneration Committee has
concluded that it has acted in accordance with its terms of reference. The
chairman of the Remuneration Committee will be available at the Annual General
Meeting to answer any questions about the work of the Committee. Alternatively,
Mr Lehmann, as the Senior Independent Director, is available to shareholders
who have concerns that they feel would be inappropriate to raise via the
Chairman or Executive Directors.
Remuneration consultants
The Remuneration Committee did not take any advice from external remuneration
consultants, with the exception of the review undertaken of the Remuneration
Report.
Single total figure of remuneration for executive and non-executive directors
(audited)
Salary and fees Taxable Annual bonus Total
benefit[6]
$ $ $ $
Executive Director
2019 2018 2019 2018 2019 2018 2019 2018
F Khallouf 61,496 - - - 382,969 - 444,465 -
[7]
G Michelotti 431,085 521,664 45,453 39,838 112,140 201,872 588,678 763,374
Non-executive Directors
M Meeùs 49,608 46,953 - - - - 49,608 46,953
Z Furst 103,699 114,028 - - - - 103,699 114,028
L Jolibois 5,918 - - - - - 5,918 -
J Mahaux 5,301 - - - - - 5,301 -
G Lehmann 54,707 60,368 - - - - 54,707 60,368
E Testa 39,146 46,953 - - - - 39,146 46,953
A Schenato 138,351 147,428 - - - - 138,351 147,428
Notes to the table
Long-term incentives were not paid in 2018 and 2019.
Mr Fady Khallouf
Mr Khallouf was appointed as Chief Executive Officer on 15 November 2019. Mr
Khallouf's salary is EUR440,000 $492,668 per annum. As part of Mr Khallouf's
employment agreement, a welcome bonus equivalent in value to 5,500,000 ordinary
shares (using the market value of the shares on the business day prior to the
date of issue) is payable to Mr Khallouf and a holding period of two years is
applicable to the shares acquired. Pursuant to the terms of the bonus, the
amount must be subscribed for ordinary shares in the Company at such time as
the executive agrees. The welcome bonus is yet to be paid to Mr Khallouf and
will be paid during 2020.
Mr Guido Michelotti
Mr Michelotti was Chief Executive Officer until his resignation on 15th
November 2019. Mr Michelotti's salary was EUR440,000 ($492,668) per annum.
Following shareholders' approval of the new Remuneration Policy, Mr Michelotti
received in 2019 the Performance Bonus of EUR100,000 awarded to him based on the
achievement vis a vis his 2019 scorecard and without a discretionary element.
In assessing the performance related element, the Remuneration Committee
determined that the Company's stretch targets for production, net profit/(loss)
and change in net cash had been met or exceeded, and that the minimum target
for the loading of the portfolio had been achieved. The Remuneration Committee
also decided that the leadership target had also been achieved. Under the
performance scorecard considered by the Remuneration Committee, the production
and profit/(loss) targets together represent 45% of the weightings of the bonus
(for target level performance) with change in net cash contributing 25% and
portfolio management 20% (see following table).
KPI Weighting Target1 Achievement % of KPI
% related bonus
achieved
Net profit/(loss), 25 Approved budget Stretch target 32.5
$ million (stretch target achieved
+20%)
Change in free 25 Approved budget Stretch target 25
cash, $ million (stretch target achieved
+20%)
Average production, 20 Approved budget Budget target 14
bpd (stretch target exceeded
+20%)
Portfolio 20 Min - Minimum target 20
management max 1/2 achieved
Emissions (tons of 10 5 per cent less Minimum target 10
CO2) net of than production achieved
credits, % change increase
y-o-y
Total 100 101.5
1 The company does not disclose its budget as it considers the information to
be commercially sensitive
The Remuneration Committee decided to award in shares 50% of the awarded bonus
less taxes and social contribution and therefore the EUR100,000 bonus was split
in EUR72,500 cash (inclusive of income tax and social contributions to be paid by
Mr Michelotti on the entire awarded amount) and EUR27,500 in shares priced at
their market value at closing on the Business Day prior to the Subscription
Date. The cash element was paid in November 2019.
Based on the Company's Remuneration Policy the shares are subject to a 3-year
holding period in addition to malus and claw back provisions. The amount that
may be clawed back from Mr Michelotti is limited to the value of an equivalent
number of shares that Mr Michelotti subscribed for using the proceeds of his
bonuses, taking the value of the shares at the time of the clawback, less any
income tax that Mr Michelotti paid on his bonuses.
Benefits
Benefits may be provided to the executive directors, in the form of private
medical insurance and life assurance.
The Chairman and Non-Executive Directors
As mentioned above, fees for non-Executive Directors were reduced by 20 percent
in November 2019. The new fees are as follows: the Chairman's fee at GBP69,255
($89,000) and the fee for acting as a non-executive Director at GBP29,557
($38,000) with an additional GBP7,778 ($10,000) for acting as Chairman of the
Audit Committee and an additional GBP3,889 ($5,000) for a committee membership.
Adelmo Schenato received the same fees as in 2017, namely GBP20,600 ($23,430) as
a non-executive Director and EUR101,040 ($114,921) per annum under a consultancy
agreement as Advisor to the CEO of the Company and Chairman and CEO of
Exploenergy.
Scheme interests awarded during the financial year (audited)
There were no scheme interests awarded during the year.
Payments to past directors (audited)
In 2019 there were no payments to past directors. However, Mr G Michelotti
ceased to be a director as detailed above and received remuneration for his
period in office.
Payments for loss of office (audited)
In 2019 there were no payments to past directors. No notice period was either
worked or paid.
Directors' interests in shares (audited)
The beneficial interests of the Directors in office as at 31 December 2019 and
their connected persons in the Ordinary shares of the Company at 31 December
2019 are set out below.
Shares as at 31 December 2019 2018
Michel Meeùs 26,000,000 26,000,000
Fady Khallouf - -
Gilbert Lehmann - -
Lilia Jolibois - -
Jacques Mahaux - -
Zev Furst - -
Guido Michelotti 4,637,588 4,637,588
Enrico Testa - -
Adelmo Schenato - -
There were no changes in the Directors shareholding as at 31 December 2019
compared to 27 April 2020.
The Company does not currently operate formal shareholding guidelines. Whilst
there is no specified level, the Company expects that under the new
Remuneration Policy, the Executive Directors will build up a significant
shareholding position in the Company during their mandate.
The Company's performance
The graph below highlights the Company's total shareholder return ("TSR")
performance for the last eight years compared to the FTSE All Share Oil & Gas
Producers index. This index has been selected on the basis that it represents a
sector specific group, which is an appropriate group for the Company to compare
itself against, and has been retained ever since, primarily for continuity
purposes TSR is the return from a share or index based on share price movements
and notional reinvestment of declared dividends.
Historic Remuneration of Chief Executive
Salary Taxable Annual bonus Long-term Pension Loss of Total
benefits incentives office
$ $ $ $ $ $ $
2009 422,533 - 284,552 - - - 707,085
2010 547,067 - - - - - 547,067
2011 669,185 - - - - - 669,185
2012 511,459 - - - 31,966 126,808 670,233
2013 384,941 - - - - - 384,941
2014 405,433 20,734 - - - - 426,167
2015 432,409 15,987 243,132 - - - 691,528
[8]
2016 487,080 15,353 210,504[9] - - - 712,937
2017 497,288 27,273 126,992 - - - 651,553
2018 521,664 39,838 201,872 - - - 763,374
2019 492,581 45,453 495,109[10] - - - 1,033,143
In 2019 the annual bonus awarded to the CEO was 10% (2018: 32%) of the maximum
bonus as per the approved Remuneration Policy[11].
The annual bonus received by the CEO as a percentage of the maximum opportunity
is presented in the following table.
Year CEO CEO single figure Annual bonus pay-out
of total against maximum
remuneration $ opportunity %
2019 Mr. Khallouf 444,465 -
[12]
Mr. Michelotti 588,678 10
2018 Mr. Michelotti 763,374 32
2017 Mr. Michelotti 651,553 12
2016 Mr. Michelotti 712,937 22[13]
2015 Mr. Michelotti 502,021 273, [14]
Mr. des 189,507 -
Pallieres
2014 Mr. des 426,167 -
Pallieres
2013 Mr. des 384,941 -
Pallieres
2012 Mr. des 389,935 -
Pallieres
Mr. Barron 280,298[15] -
2011 Mr. des 273,201 -
Pallieres[16]
Mr. Barron 395,984 -
2010 Mr. Barron 547,067 -
2009 Mr. Barron[17] 707,085 67
Percentage change in the remuneration of the Chief Executive
The following table shows the percentage change in the remuneration of the
Chief Executive in 2019 and 2018 compared to that of all employees within the
Group.
2019 2018
Average
$'000 $'000 change, %
Base salary CEO[18] 493 522 -6%
All employees[19] 2,237 2,004 12%
Taxable benefits CEO 45 40 13%
All employees 65 60 8%
Annual Bonus CEO[20] 495 202 145%
All employees 495 381 30%
Total CEO 1,033 764 35%
All employees 2,797 2,445 14%
In 2019 none of the directors participated in long-term incentives.
In 2019 there was no increase in executive and non-executive directors' salary
in base currency. The difference in pay represents the change in exchange rate
between the base currency and USD as a reporting currency.
Relative importance of spend on pay
The table below compares shareholder distributions (i.e. dividends and share
buybacks) and total employee pay expenditure of the Group for the financial
years ended 31 December 2018 and 31 December 2019.
2019 2018 Year-on-year
$'000 $'000 change, %
All-employee remuneration 2,797 2,445 14%
Distributions to shareholders - - N/A
Shareholder voting at the Annual General Meeting
The Directors' Remuneration Policy was approved by shareholders at the Annual
General Meeting held on 20 June 2018 and remains unchanged. The Remuneration
Policy can be found on the Group's website and at pages 44 to 64 of this Annual
Report on Remuneration. The votes cast by proxy were as follows:
Directors' Remuneration Number of votes % of votes cast
Policy
For 62,011,302 99.74
Against 164,370 0.26
Total votes cast 62,175,672 100.00
Number of votes withheld 17,071
The Directors' Annual Report on Remuneration is approved by shareholders at
each Annual General Meeting. A summary of the votes cast by proxy in 2018 and
2019 were as follows:
2019 2018
Director's Annual Report Number of votes % of votes cast Number of % of votes
on Remuneration votes cast
For 61,111,463 99.99 62, 192,743 100.00
Against 14,370 0.01 0 0.00
Total votes cast 61,125,833 62,192,743 100.00
Number of votes withheld 0 0
Implementation of Remuneration Policy in 2020
The performance related elements of remuneration remain unchanged and will be
built around a scorecard with a set of KPI's aligned with the Group strategy.
The Remuneration Policy can be found on the Group's website and at pages 44 to
64 of this Annual Report on Remuneration.
Approval
The Directors' Annual Report on Remuneration was approved by the Board on 1 May
2020 and signed on its behalf by:
Michel Meeùs
Chairman
1 May 2020
Directors' Remuneration Policy
* Introduction
This Directors' Remuneration Policy (the "Policy") contains the information
required to be set out as the directors' remuneration policy for the purposes
of The Large and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013.
The Policy was approved by shareholders at the 2018 AGM of the Company. The
effective date of this Policy is the date on which the Policy is approved by
shareholders.
The Policy applies in respect of all executive officers appointed to the Board
of Directors ("executive directors") and non-executive directors. Other senior
executives may be subject to the Policy, including in relation to annual bonus
and shares incentive arrangements in particular, if and to the extent that the
Remuneration Committee determines it is appropriate.
The Remuneration Committee will keep the Policy under review to ensure that it
continues to promote the long-term success of the Company by giving the Company
its best opportunity of delivering on the business strategy. It is the
Remuneration Committee's intention that the Policy be put to shareholders for
approval every three years, unless there is a need for the Policy to be
approved at an earlier date.
The Company aims to provide sufficient flexibility in the Policy for
unanticipated changes in compensation practices and business conditions to
ensure the Remuneration Committee has appropriate discretion to retain its top
executives who perform. The Remuneration Committee reserves the right to
approve any payments that may be outside the terms of this Policy, where the
terms of that payment were agreed before the Policy came into effect, or before
the individual became a director of the Company.
Maximum caps are provided to comply with the required legislation and should
not be taken to indicate an intent to make payments at that level. The maximum
caps are valid at the time that the relevant employment agreement or
appointment letter is entered into and the caps may be adjusted to take into
account fluctuations in exchange rates.
* Remuneration policy table: executive directors
Component Purpose and link Maximum opportunity Operation and performance
to strategy measures
Salary and To provide fixed The maximum annual Salary is paid on a monthly
Fees remuneration at base combined basis.
an appropriate salary and fees for The Remuneration Committee takes
level, to executive directors into account a number of factors
attract and is EUR450,000[21]. when setting salaries including:
retain directors The Remuneration - scope and difficulty
as part of the Committee will of the role;
overall consider the - skills and
compensation factors set out experience of the individual;
package. under the - salary levels for
"Operation" column similar roles within the
when determining international industry; and
the appropriate - pay and conditions
level of base elsewhere in the Group.
salary within the Salaries are reviewed on an
formal Policy annual basis, but are not
maximum. necessarily increased at each
review.
No performance measures.
Annual Bonus To incentivise The maximum award The payment of any bonus is at
and reward the is 125% of combined the discretion of the Board with
achievement of base salary and reference to the performance
individual and fees. year.
business - The Remuneration
objectives which Committee sets, in advance, a
are key to the scorecard with a set of Key
delivery of the Performance Indicators ("KPIs")
Company's aligned with the Company's
business strategy. The measures and the
strategy. relative weightings are
substantiated by the
Remuneration Committee and aim
to be stretching and to support
the Company's business
strategy. Measures are related
to Company financial
performance, operational
performance and the Company's
health and safety record. In
general relative weightings of
each KPI are expected not to
exceed 50% and not to be less
than 10%.
- The Remuneration
Committee retains the
flexibility to determine and, if
it considers appropriate, change
the KPIs and weightings of the
KPIs based on the outcome of its
annual review. The Remuneration
Committee may also adjust KPIs
during the year to take account
of material events, such as
(without limitation) material
corporate events, changes in
responsibilities of an
individual and/ or currency
exchange rates. Any such changes
will be within the overall
target and maximum payouts
approved in the policy.
- The KPI targets and
specific weightings in the
scorecard are defined annually
early in the year, once the
budget has been approved. A
summary of the KPI targets,
weightings for the KPIs and how
far the KPIs are met will be
included retrospectively each
year in the Implementation
Report for the year.
- All bonuses that may
become payable are subject to
malus and clawback provisions in
the event of material financial
misstatement of the Company or
fraud or material misconduct on
the part of the executive, as
explained further below.
- 50% of the bonuses
that may become payable must be
applied to subscribe for or
acquire shares in the Company
(after the deduction of any
income tax and/ or employee
social security contributions
payable). The Company is
proposing to adopt and operate a
Deferred Bonus Plan as a
framework plan for the delivery
of shares to executives, which
may be satisfied by the issue of
new shares or transfer of
existing or treasury shares.
- The Remuneration
Committee will determine whether
the remainder of the bonus shall
be paid in cash or must be
applied to subscribe for or
acquire shares (after the
deduction of any income tax and/
or employee social security
contributions payable). In
making its determination as to
how the remainder of the bonus
shall be paid, the Remuneration
Committee may take into account:
profitability of the Company;
the executive's shareholding as
measured against any Company
shareholding guidelines;
potential liabilities of the
recipients to income tax and
social security contributions,
among other things. Additional
shares representing the value of
dividends payable on the
deferred shares may be paid.
- The Remuneration
Committee may impose holding
periods of up to three years on
any of the shares delivered
pursuant to the annual bonus
plan.
- There are no
prescribed minimum levels of
performance in the annual bonus
structure and so it is possible
that no bonus award would be
made.
Share To incentivise, Awards can be made The Company has adopted and
Incentive retain and under the PSP with operates the 2018 Performance
Arrangements reward eligible a value of up to a Share Plan ("PSP") to replace
employees and maximum of 200% of the 2008 Performance Share Plan.
align their base salary and The PSP offers the opportunity
interests with fees or 300% in to earn shares in the Company
those of the exceptional subject to the achievement of
shareholders of circumstances. stretching but realistic
the Company. performance conditions.
Performance conditions will be a
main feature of the PSP.
The PSP will be administered by
the Remuneration Committee.
- Awards can be made
under the PSP at the direction
of the Remuneration Committee
within the policy maximum in the
form of contingent share awards.
- PSP awards will have
a minimum vesting period of 3
years and, for directors, the
PSP awards have a further
holding period of 2 years
following the end of the vesting
period (subject to any number of
shares that may need to be sold
to meet any income tax and
employee social security
contributions due on vesting).
- The Remuneration
Committee will develop clear
KPIs that aim to align directors
with Company strategy over time
periods in excess of one
financial year. Any performance
measures and targets used for
share incentive awards during
2019 will be relevant and
stretching in line with the
overall strategy of the Company.
- The Remuneration
Committee may adjust or change
the PSP measures, targets and
weightings for new awards under
the PSP to ensure continued
alignment with Company strategy.
- PSP awards are
subject to malus and clawback in
the event of material financial
misstatement of the Company or
fraud or material misconduct on
the part of the executive.
- Upon vesting of an
award, the award holder must pay
the nominal value in respect of
each share that vests.
- PSP Awards will
normally lapse where the award
holder ceases employment with
the Company before vesting. PSP
Awards will not lapse and will
vest immediately if the award
holder is considered to be a
Good Leaver (leaves due to death
or disability) subject to the
Remuneration Committee being
satisfied that performance
conditions have been satisfied
or are likely to be satisfied as
at the end of the relevant
performance period. In other
circumstances, the Remuneration
Committee may determine that
awards will not lapse and will
continue to vest at their normal
vesting date, subject to
pro-ration to reflect the period
of service during the
performance period and
performance conditions. The
Remuneration Committee has
residuary discretions to
disapply pro ration and bring
forward the date of vesting.
- In the event of a
change of control of the
Company, if the acquiring
company agrees, awards will be
exchanged for equivalent awards
over shares in the acquiring
company and continue to vest
according to the original
vesting schedule. If the
acquiring company does not agree
to exchange the awards, the
awards will vest at the
Committee's absolute discretion.
Awards that vest will be subject
to time pro-ration and
performance conditions.
- Benefits under the
PSP will not be pensionable.
- The PSP Plan Limits
are set out at Note 2.4 below.
Pension To provide a Any pension No pension benefits are
retirement benefits will be currently provided to
benefit that set at an executives. However, the
will foster appropriate level Remuneration Committee may in
loyalty and in line with market the future decide to provide
retain practice, and in no pension benefits commensurate
experienced event will the with the market.
executive contributions paid
directors. by the Company No performance measures.
exceed 15% of
combined base
salary and fees.
Benefits To provide a Any benefits will - The executive
market be set at an directors are entitled to
competitive appropriate level private medical insurance and
level of in line with market life assurance cover (of four
benefits to practice, and in no times the combined salary and
executive event will the fee) and directors' and
directors. value of the officers' liability insurance.
benefits exceed 15% - The Remuneration
of combined base Committee may decide to provide
salary and fees. other benefits commensurate with
the market. Such benefits may
include (for instance) company
car or allowance, physical
examinations and medical
support, professional advice,
assistance with filling out tax
returns and occasional minor
benefits. A tax equalisation
payment may be paid to an
executive director if any part
of the remuneration of the
executive director becomes
subject to double taxation. Tax
gross ups may be paid, where
appropriate. The Company does
not, at present, provide other
taxable benefits to the
executive directors.
- Executive directors
are reimbursed for reasonable
business expenses incurred in
the course of carrying out their
duties.
- No performance
measures.
Notes to the executive directors' remuneration policy table
The Remuneration Committee's philosophy is that remuneration arrangements
should be appropriately positioned to support the Group's business strategy
over the longer term and the creation of value for shareholders. In this
context the following key principles are considered to be important:
* remuneration arrangements should align executive and employee interests
with those of shareholders;
* remuneration arrangements should help retain key executives and employees;
and
* remuneration arrangements should incentivise executives to achieve short,
medium and long-term business targets which represent value creation for
shareholders. Targets should relate to the Group's performance in terms of
overall revenue and profit and the executive's own performance. Exceptional
rewards should only be delivered if there are exceptional returns.
The Remuneration Committee reserves the right to make any remuneration payments
(including satisfying awards of variable remuneration) and payments for loss of
office notwithstanding that they are not in line with the Policy set out above,
where the terms of that payment were agreed before the Policy came into effect,
or before the individual became a director of the Company (provided the payment
was not in consideration for the individual becoming a director).
* Performance measures and targets
(a) Annual Bonus
The performance measures for executive directors comprise of financial measures
and business goals linked to the Company's strategy, which could include
financial and non-financial measures. The business goals are tailored to
reflect each executive director's role and responsibilities during the year.
The performance measures are chosen to enable the Remuneration Committee to
review the Company's and the individual's performance against the Company's
business strategy and appropriately incentivise and reward the executive
directors.
Annual bonus targets are set by the Remuneration Committee each year. They are
stretching but realistic targets which reflect the most important areas of
strategic focus for the Company. The factors taken into consideration when
setting targets include the Company's Key Performance Indicators (which are
determined annually by the Remuneration Committee), and the extent to which
they are under the control or influence of the executive whose remuneration is
being determined.
Performance is measured over the financial year against the measures and
targets set according to the scorecard. The Remuneration Committee retains the
right to exercise its judgement to adjust the bonus outcome for an individual
to ensure the outcome reflects any other aspects of the Company's performance
that become relevant during the financial year.
The Remuneration Committee used Company operational and financial performances
and safety as performance measures for the 2019 scorecard. For years following
2019, the structure of the annual bonus scorecard will be reviewed by the
Remuneration Committee.
2019 Annual bonus scorecard measures for executive directors
40% weighting 50% weighting
Company financial performance, including cash
Operational performance, such as targets and profit targets.
production, sales, geographical
diversification, and starting new
projects.
10% weighting
Indicators of health and safety
to promote the effective risk
management of the Company.
(b) Share Plans
The Remuneration Committee will make the vesting of a Plan award conditional
upon the satisfaction of stretching but realistic performance conditions. These
conditions are meant to achieve a long-term alignment of the executives'
remuneration with the interest of the shareholders.
EBITDA growth increase of P1 reserves (in millions boe), and changes to the
free cash-flow are the key KPIs to be used by the Remuneration Committee and
will be measured over time periods of three financial years. The performance
measures are chosen to align the performance of participants with the
attainment of financial performance targets over the vesting period of the
award. The targets are set by the Remuneration Committee by reference to the
Company's strategy and business plan and the results achieved at the time of
the vest are determined by the Remuneration Committee.
Under the PSP plan rules, the Board may vary a performance target where it
considers that any performance target to which an award is subject is no longer
a true or fair measure of the participant's performance, provided that the
Board must act fairly and reasonably and that the new performance target is
materially no more difficult and no less difficult to satisfy than the original
performance target.
* Malus and clawback (applicable to bonuses and share awards)
The Remuneration Committee has the discretion to reduce the bonus before
payment or require the executive director to pay back shares or a cash amount
in the event of material financial misstatement of the Company or fraud or
material misconduct on the part of the executive. The amount that may be clawed
back on any such event is limited to the value of the bonus, taking into
account the cash paid and the shares delivered to the executive, taking the
value of the shares at the time of the clawback, less any income tax or
employee social security contributions paid on the bonuses.
* Share ownership guidelines for executives
The Remuneration Committee is planning to implement share ownership guidelines
for executive directors to further align the interests of the executive
directors with those of shareholders. The share ownership guidelines will
include an expectation that executive directors build up their shareholding to
200% of base salary over a period of five years from the later of: the date of
adoption of this policy and the date of appointment. Once the shareholding
guideline is reached, executive directors would be expected to maintain it. The
intention would be for the shareholding guideline to be reached through the
retention of vested shares from share plans (e.g. the deferred share element of
the annual bonus and shares vested under the PSP). As such, the Remuneration
Committee's discretion may be used to increase the proportion of an annual
bonus to be delivered in shares to assist the executive director in meeting
this guideline. The deferred share mechanism in the annual bonus and the design
of the PSP will assist executive directors in reaching the guidelines.
Executive directors will not be expected to top up their shareholding with
personal acquisitions of Company shares outside the usual share plans described
in the Policy. The Remuneration Committee will monitor the executive directors'
shareholdings and may adjust the guideline in special individual and Company
circumstances, for example in the case of a share price fall.
§ PSP Plan Limits
The PSP may operate over new issue shares, treasury shares or shares purchased
in the market. In any ten-calendar year period, the Company may not issue (or
grant rights to issue) more than:
(a) 10% of the issued ordinary share capital of the Company under the
Plan and any other employee share plan adopted by the Company; and
(b) 5% of the issued ordinary share capital of the Company under the
Plan and any other executive share plan adopted by the Company.
Treasury shares will count as new issue shares for the purposes of these limits
unless institutional investors decide that they need not count. These limits do
not include rights to shares which have been renounced, released, lapsed or
otherwise become incapable of vesting, awards that the Remuneration Committee
determines after grant to be satisfied by the transfer of existing shares and
shares allocated to satisfy bonuses (including pursuant to the Deferred Bonus
Plan).
* Remuneration throughout the Group
Differences in the Company's pay policy for executive directors from that
applying to employees within the Group generally reflect the appropriate market
rate for the individual executive roles.
* Remuneration policy table: non-executive directors
Component Purpose and link Maximum opportunity Operation and performance
to strategy measures
Fees To provide an - The maximum Non-executive directors receive a
appropriate annual fees paid to standard annual fee, which is
reward to non-executive directors is GBP paid on a quarterly basis in
attract and 50,000 for a non-executive arrears.
retain director role, and GBP100,000 Additional fees may also be paid
high-calibre for the role of Chairman. An to recognise the additional work
individuals with additional GBP10,000 will be performed by members of any
the relevant paid to the individual committees set up by the Board,
skills, acting as Chairman of the and for the role of chair of a
knowledge and Audit Committee. committee.
experience to Fees are reviewed on an annual
progress the basis, but are not necessarily
Company increased at each review. Fees
strategy. are set at a rate that takes into
account:
- market practice for
comparative roles;
- the financial results
of the Company;
- the time commitment
and duties involved; and
- the requirement to
attract and retain the quality of
individuals required by the
Company.
The remuneration of the
non-executive directors is a
matter for the Board to consider
and decide upon.
There are no performance measures
related to non-executive
directors' fees.
Notes to the Policy Table
The payment policy for non-executive directors is to pay a rate which will
secure persons of a suitable calibre. The remuneration of the non-executive
directors is determined by the Board. External benchmarking data and specialist
advisers are used when setting fees, which will be reviewed at appropriate
intervals. The maximum caps are valid at the time that the relevant appointment
letter is entered into and the caps may be adjusted to take into account
fluctuations in exchange rates.
Expenses reasonably and wholly incurred in the performance of the role of
non-executive director of the Company may be reimbursed or paid for directly by
the Company, as appropriate, and may include any tax due on the expense.
The non-executive directors' fees are non-pensionable. The non-executive
directors have not to date been eligible to participate in any incentive plans
(such as bonuses or share plans); however, the Board considers that it may be
appropriate in the future to enable such participation, subject to suitably
stretching performance thresholds.
Non-executive directors may receive professional advice in respect of their
duties with the Company which will be paid for by the Company. They will be
covered by the Company's insurance policy for directors.
* Recruitment
The Company's policy on the recruitment of directors is to pay a fair
remuneration package for the role being undertaken and the experience of the
individual being recruited. The Remuneration Committee will consider all
relevant factors, which include the abilities of the individual, their existing
remuneration package, market practice, and the existing arrangements for the
Company's current directors.
The Remuneration Committee will determine that any arrangements offered are in
the best interests of the Company and shareholders and will endeavour to pay no
more than is necessary.
The Remuneration Committee intends that the components of remuneration set out
in the policy tables, and the approach to the components as set out in the
policy tables, will be equally applicable to new recruits, i.e. salary, annual
bonus, share plan awards, pension and benefits for executive directors, and
fees for non-executive directors. However, the Company acknowledges that
additional flexibility may be required to ensure the Company is in the best
position to recruit the best candidate for any vacant roles and, as such, a
buy-out arrangement may be required.
* Flexibility
The salary and compensation package designed for a new recruit may be higher or
lower than that applying for existing directors. The Remuneration Committee may
decide to appoint a new executive director to the Board at a lower than typical
salary, such that larger and more frequent salary increases may then be awarded
over a period of time to reflect the individual's growth in experience within
the role.
Remuneration will normally not exceed those set out in the policy table above.
However, to ensure that the Company can sufficiently compete with its
competitors, the Remuneration Committee considers it important that the
recruitment policy has sufficient flexibility in order to attract and
appropriately remunerate the high-performing individuals that the Company
requires to achieve its strategy. As such, the Remuneration Committee reserves
discretion to provide a buy-out arrangement and benefits (such as a sign-on
bonus and additional share awards) in addition to those set out in the policy
table (or mentioned in this section) where the Remuneration Committee considers
it reasonable and necessary to do so in order to secure an external appointment
(see below for more detail in relation to buy-out arrangements).
* Buy-out arrangements
The Remuneration Committee retains the discretion to enter into buy-out
arrangements to compensate new hires for incentive awards forfeited in joining
the Company. The Remuneration Committee will use its discretion in awarding and
setting any such compensation, which will be decided on a case-by-case basis
and likely on an estimated like-for-like basis. In deciding the appropriate
type and quantum of compensation to replace existing awards, the Remuneration
Committee will take into account all relevant factors, including the type of
award being forfeited, the likelihood of any performance measures attached to
the forfeited award being met, and the proportion of the vesting period
remaining. The Remuneration Committee will appropriately discount the
compensation payable to take account of any uncertainties over the likely
vesting of the forfeited award to ensure that the Company does not, in the view
of the Remuneration Committee, pay in excess of what is reasonable or
necessary.
Compensation for awards forfeited may take the form of a bonus payment or a
share award. For the avoidance of doubt, the maximum amounts of compensation
contained in the policy table will not apply to such buy-out arrangements. The
Company has not placed a maximum value on the compensation that can be paid
under this section, as it does not believe it would be in shareholders'
interests to set any expectations for prospective candidates regarding such
awards.
* Payments for loss of office
Any compensation payable in the event that the employment of an executive
director is terminated will be determined in accordance the terms of the
employment contract between the Company and the executive, as well as the
relevant rules of any share plan and this Policy, and in accordance with the
prevailing best practice.
The Remuneration Committee will consider a variety of factors when considering
leaving arrangements for an executive director and exercising any discretions
it has in this regard, including (but not limited to) individual and business
performance during office, the reason for leaving, and any other relevant
circumstances (for example, ill health).
In addition to any payment that the Remuneration Committee may decide to make,
the Remuneration Committee reserves discretion as it considers appropriate to:
(a) pay an annual bonus for the year of departure;
(b) continue providing any benefits for a period of time; and
(c) provide outplacement services.
Non-executive directors are subject to one month notice periods prior to
termination of service and are not entitled to any compensation on termination
save for accrued fees as at the date of termination and reimbursement of any
expenses properly incurred prior to that date.
* Share plan awards
The treatment of any share award on termination will be governed by the PSP
rules.
Under the PSP, outstanding share awards held by an individual who ceases to be
a director or employee of the Company will lapse, unless the cessation is due
to death, illness, injury or disability, redundancy, retirement, the Company
ceasing to be a member of the Group or the transfer of an undertaking or part
of an undertaking to a person who is not a member of the Group, or the Board
exercises its discretion otherwise.
Under the PSP, the Board has discretion to decide the period of time for which
the award will continue, and whether any unvested award shall be treated as
vesting on the date of cessation of employment or in accordance with the
original vesting schedule, in both cases have regard to the extent to which the
performance targets have been satisfied prior to the date of cessation.
For executive directors, the vesting period will be set by the Remuneration
Committee with a minimum three-year period. The Remuneration Committee will
(unless the vesting period is set as a period equal to or longer than five
years) impose a holding period on shares (or awards) so that the executive is
not able to sell the shares that the executive director acquires through the
PSP until the fifth anniversary of the date of the award. The holding period
will not apply to the number of shares equivalent in value to the amount
required by the Company or the executive director to fund any income tax and
employee social security contributions due on the vesting of the awards or
otherwise in connection with the awards.
* Executive director employment agreements
This section contains the key employment terms and conditions of the executive
directors that could impact on their remuneration or loss of office payments.
The Company's policy on employment agreements is that executive directors'
agreements should be terminable by either the Company or the director on not
more than six months' notice. The employment agreements contain provision for
early termination, among other things, in the event of a breach by the
executive but make no provision for any termination benefits except in the
event of a change of control of the Company, where the executive becomes
entitled to a lump sum equal to 24 months' base salary plus benefits plus (if
any), bonus received on termination by the Company. The employment agreements
contain restrictive covenants for a period of 12 months following termination
of the agreement. Details of employment agreements in place as at the date of
this report are set out below:
Director Current agreement start Notice period
date
F Khallouf 15 November 2019 Six months
Directors' employment agreements are available for inspection at the Company's
registered office in London and at Zhylyanska street 48/50, 01033 Kyiv,
Ukraine.
* Non-executive directors' letters of appointment
This section contains the key terms of the appointments of non-executive
directors that could impact on their remuneration.
Typically, the non-executive directors are appointed by letter of appointment
for an initial term of three years which may be extended. All non-executive
directors are subject to annual re-election by the Company's shareholders and
their appointments may be terminated earlier with one month's prior written
notice (or with immediate effect, in the case of specific serious circumstances
such as fraud or dishonesty). On termination of appointment, non-executive
directors are usually only entitled to accrued fees as at the date of
termination together with reimbursement of any expenses properly incurred prior
to that date and the company has no obligation to pay further compensation when
the appointment terminates. Non-executive directors' letters of appointment are
available for inspection at the Company's registered office in London and at
Zhylyanska street 48/50, 01033 Kyiv, Ukraine.
Non-executive Director Current agreement start Term
date
Michel Meeùs 31 July 2018 Three years
Lilia Jolibois 15 November 2019 Three years
Jacques Mahaux 15 November 2019 Three years
Gilbert Lehmann 31 July 2018 Three years
* Illustration of the Remuneration Policy
The bar charts below show the levels of remuneration that the CEO could earn
over the coming year under the Policy.
CEO: minimum and maximum remuneration
The bar chart shows future possible maximum remuneration.
No pension entitlements were provided in 2019. However, the Remuneration
Committee may in the future decide to provide pension benefits commensurate
with the market.
* Consideration of shareholder views
The Chairman and executive directors of the Company have a regular dialogue
with analysts and substantial shareholders, which includes the subject of
directors' remuneration. The outcome of these discussions is reported to the
Board and discussed in detail both there and during meetings of the
Remuneration Committee.
The Remuneration Committee will take into account the results of the
shareholder vote on remuneration matters when making future remuneration
decisions. The Remuneration Committee remains mindful of shareholder views when
evaluating and setting ongoing remuneration strategy.
* Consideration of employment conditions within the Group
When determining remuneration levels for its executive directors, the Board
considers the pay and employment conditions of employees across the Group. The
Remuneration Committee will be mindful of average salary increases awarded
across the Group when reviewing the remuneration packages of the executive
directors.
* Minor changes
The Remuneration Committee may make, without the need for shareholder approval,
minor amendments to the Policy for regulatory, exchange control, tax or
administrative purposes or to take account of changes in legislation.
Statement of Directors' Responsibilities in respect of the Annual Report and
the Financial Statements
The Directors are responsible for preparing the Annual Report and the financial
statements in accordance with applicable law and regulations. Company law
requires the Directors to prepare financial statements for each financial year.
The Directors are required by law to prepare the Group financial statements in
accordance with International Financial Reporting Standards ("IFRSs") as
adopted by the European Union and Article 4 of the International Accounting
Standards ("IAS") regulation and have also elected to prepare the Parent
Company financial statements under IFRSs as adopted by the European Union.
Under Company law, the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and Group and of the profit or loss for that period. In
preparing the Company and Group's financial statements, IAS Regulation requires
that Directors:
* properly select and apply accounting policies;
* make judgements and accounting estimates that are reasonable and prudent;
* present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
* state whether they have been prepared in accordance with IFRSs as adopted
by the European Union, subject to any material departures disclosed and
explained in the financial statements;
* provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the
Company's and Group's financial position and financial performance; and
* make an assessment of the Company's and Group's ability to continue as a
going concern, prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company and Group will
continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company and Group's transactions and
disclose with reasonable accuracy at any time the financial position of the
Company and Group and enable them to ensure that the financial statements
comply with the Companies Act 2006, as regards the Group financial statements,
Article 4 of the IAS Regulation. They are also responsible for safeguarding the
assets of the Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities. Under applicable law and
regulations, the Directors are also responsible for preparing a Strategic
Report, Directors' Report, Annual Report on Remuneration, Directors'
Remuneration Policy and Corporate Governance Statement that comply with that
law and those regulations. The Directors are responsible for the maintenance
and integrity of the corporate and financial information and statements
included on the Company's website, www.cadoganpetroleum.com. Legislation in the
United Kingdom governing the preparation and dissemination of the financial
statements may differ from legislation in other jurisdictions. The directors'
responsibility also extends to the ongoing integrity of the financial
statements contained therein.
Responsibility Statement of the Directors in respect of the Annual Report
We confirm to the best of our knowledge:
(1) the financial statements, prepared in accordance with International
Financial Reporting Standards as adopted by the European Union and Article 4 of
the IAS Regulation, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and the undertakings
included in the consolidation as a whole; and
(2) the Annual Report, includes a fair review of the development and
performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face; and
(3) the annual report and the financial statements, taken as a whole, are fair,
balanced and understandable and provides the information necessary for the
shareholders to assess the Group's position, performance, business model and
strategy.
On behalf of the Board
Michel Meeùs
Chairman
1 May 2020
Independent auditor's report to the members of Cadogan Petroleum plc
Qualified Opinion
We have audited the financial statements of Cadogan Petroleum Plc (the 'Parent
Company') and its subsidiaries (the 'Group') for the year ended 31 December
2019 which comprise the consolidated income statement, the consolidated
statement of comprehensive income, the consolidated balance sheet, the
consolidated cash flow statement, the consolidated statement of changes in
equity, the company balance sheet, the company cash flow statement, the company
statement of changes in equity and notes to the financial statements, including
a summary of significant accounting policies. The financial reporting framework
that has been applied in their preparation is applicable law and International
Financial Reporting Standards (IFRSs) as adopted by the European Union and, as
regards the Parent Company financial statements, as applied in accordance with
the provisions of the Companies Act 2006.
In our opinion, except for the effects of the matters described in the Basis
for qualified opinion paragraph below, the financial statements:
* give a true and fair view of the state of the Group's and of the Parent
Company's affairs as at 31 December 2019 and of the Group's loss for the
year then ended;
* the Group financial statements have been properly prepared in accordance
with IFRSs as adopted by the European Union;
* the Parent Company financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union and as applied in
accordance with the provisions of the Companies Act 2006; and
* the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006; and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
Basis for qualified opinion
The Group advanced a loan which is recorded at fair value through profit and
loss in accordance with the Group's accounting policy set out in note 3(n) with
the fair value at 31 December 2019 determined to be $15.7 million and a fair
value gain recorded in the period of $0.7 million. As discussed in note 4(d)
and note 27 to the financial statements, management have been unable to obtain
relevant information in respect of the investee which the Directors consider is
necessary to enable the fair value to be assessed applying recognised valuation
methods for an instrument of this nature. As discussed in note 4(d) and 27, if
and when such information is made available the Directors consider that the
fair value may be materially higher or lower than $15.7 million.
In respect of this matter we:
* made inquiries of management and the Audit Committee regarding the
structure of the transaction, reviewed the accounting entries and verified
the payment to bank.
* reviewed valuation analysis performed on origination of the loan by third
party advisors. We met with management to obtain an understanding of the
requests made to Proger for the provision of information to support an
assessment of fair value at 31 December 2019 and obtained confirmation from
management that relevant information was unavailable. We considered, in
conjunction with our internal specialists, whether recognised valuation
methods could reasonably be applied by management that had not been
considered. We considered whether sufficient and appropriate audit
evidence could be obtained in respect of the fair value of the instrument
given the information available.
* considered the accounting treatment and valuation adopted by management,
given the absence of information considered necessary to perform a
valuation using a recognised valuation method.
* reviewed the disclosures in relation to financial instruments including the
accounting policy, critical judgments and estimates and financial
instrument disclosures.
Given the above we have not been able to obtain sufficient, appropriate audit
evidence, and accordingly are not able to conclude whether the fair value of
the loan note instrument is materially accurate. As a result, our audit opinion
is qualified in respect of this limitation on the scope of our audit.
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards
are further described in the Auditor's responsibilities for the audit of the
financial statements section of our report. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our
qualified opinion.
Independence
We are independent of the Group and the Parent Company in accordance with the
ethical requirements that are relevant to our audit of the financial statements
in the UK, including the FRC's Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to
which the ISAs (UK) require us to report to you where:
* the Directors' use of the going concern basis of accounting in the
preparation of the financial statements is not appropriate; or
* the Directors have not disclosed in the financial statements any identified
material uncertainties that may cast significant doubt about the Group's or
the Parent Company's ability to continue to adopt the going concern basis
of accounting for a period of at least twelve months from the date when the
financial statements are authorised for issue.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of
most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified, including those which had the
greatest effect on: the overall audit strategy, the allocation of resources in
the audit; and directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do not provide a separate opinion on
these matters. In addition to the matter referred to in the Basis for qualified
opinion section we have determined the matters described below to be the key
audit matters to be communicated in our report.
Key Audit Matter How the matter was addressed in our audit
Carrying value of oil and gas We evaluated management's impairment indicator
exploration and production review paper, together with the underlying
assets discounted cash flow forecasts which formed
part of their impairment review. We
At 31 December 2019 the Group critically challenged the key judgments and
held exploration and evaluation assumptions made by management, including
assets of $2.9m and $11.8m of forecast oil and gas prices, production
development and production levels, royalties and costs. This included
assets as detailed in note 15 assessment compared to empirical data, the
and 16. independent Competent Person's Report on the
oil and gas reserves and external evidence
Management is required to where available. We recalculated the discount
assess these assets for rates in conjunction with our valuation
indicators of impairment at specialists and benchmarked the discount rates
each reporting date. Management against peer companies in the Ukraine.
has performed an impairment
review which included We performed sensitivity analysis on the
assessment of the Bitlyanska impairment models to establish the impact of
and Blazhivska licences' value reasonably possible changes in key variables
in use based on the underlying such as pricing, production and the discount
discounted cash flow forecasts rates.
and concluded that no
impairment is necessary. We reviewed budgets, forecasts and strategic
plans to consider the extent to which
The impairment reviews require management's judgment regarding future planned
judgment and estimate in exploration activity is supported by those
determining whether indicators plans.
of impairment exist and, in
respect of the discounted cash We reviewed the licence agreements and
flow models significant confirmed that the Group holds a valid licence
estimates in selecting inputs. for Blazhivska which was renewed / converted
to a production licence in December 2019. We
In addition, as detailed in gained an understanding of the licence
note 4 and 15 significant conditions and remaining term. In respect of
judgment was required regarding management's judgment that the rental well
the likelihood of the agreements would be renewed, we obtained
Bitlyanska licence being representations from the Board regarding the
renewed / converted to a assurances received from the counterparty as
production licence following to the status of the renewal, reviewed copies
its expiry in December 2019 and of the proposed agreements and discussed the
subsequent delays in the matter with management and the Audit
licence being awarded. Committee.
Additionally, as detailed in
note 4 and 15, significant In respect of the Bitlyanska licence, we met
judgment was applied by with operational management and considered the
management in concluding that appropriateness of management's judgment that
the well rental agreements for the Bitlyanska licence would be extended or
2 operating wells will be converted to production licences following its
renewed following their expiry expiry in December 2019, particularly noting
in November 2019 so that the subsequent delays. In doing so we obtained
production can recommence. documents demonstrating the submissions for
Management's conclusions that the licence conversions, confirmations from
no impairments are applicable the relevant authorities that the Group is in
are critically dependent on the compliance with licence obligations and
renewal of the licence and well considered factors such as the exploration
rental agreements. results to date. We specifically considered
the extent to which the delays and failure to
As a result of these factors secure equivalent licence conversions in the
this represented a key focus East of Ukraine may occur on these licences
area for our audit and a key located in the Western region.
audit matter. Additionally, we inspected claims submitted to
the Ukrainian Courts to challenge the delay in
granting a renewal, together with associated
legal advice regarding the Group's right of
renewal.
Key observations
We found management's conclusion that no indication of impairment exists on
the exploration and production assets at Bitlyanska and Monastyretska to be
appropriate. The disclosures in the notes, including the critical judgments
regarding renewal of licences and well rental agreements are in line with
accounting standards.
Our application of materiality
We apply the concept of materiality both in planning and performing our audit,
and in evaluating the effect of misstatements. We consider materiality to be
the magnitude by which misstatements, including omissions, could influence the
economic decisions of reasonable users that are taken on the basis of the
financial statements. Importantly, misstatements below these levels will not
necessarily be evaluated as immaterial as we also take account of the nature of
identified misstatements, and the particular circumstances of their occurrence,
when evaluating their effect on the financial statements as a whole.
Group Parent company
Materiality $800,000 $600,000
Basis for determining 1.5% of total assets 1.5% of total assets,
materiality capped at 75% of Group
materiality
We determined that an asset based measure is appropriate as the Group holds
significant cash balances and its principal activity is the exploration &
development of oil and gas assets, such that the asset base is considered to be
a key financial metric for users of the financial statements.
Whilst materiality for the financial statements as a whole was $800,000 (FY
2018: $730,000), each significant component of the Group was audited to a lower
performance materiality ranging from $100,000 to $300,000 (FY 2018: $97,500 to
$412,500).
Performance materiality for the Parent Company was set at $300,000 (FY 2018:
$412,500).
Performance materiality is used to determine the financial statement areas that
are included within the scope of our audit and the extent of sample sizes
during the audit. Performance materiality is applied at the individual account
or balance level set at an amount to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality for the financial statements as a whole.
We agreed with the Audit Committee that we would report to them all individual
audit differences identified during the course of our audit in excess of
$40,000 (FY 2018: $36,000). We also agreed to report differences below that
threshold that, in our view, warranted reporting on qualitative grounds.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its
environment and assessing the risks of material misstatement in the financial
statements at the Group level.
Whilst Cadogan Petroleum Plc is a company listed on the Standard Segment of the
London Stock Exchange, the Group's operations principally comprise an
exploration & development of oil and gas assets located in Ukraine, together
with gas trading and oil services activities. We assessed there to be five
significant components within the Ukrainian sub-group, comprising components
holding exploration & development assets and gas trading activities which were
subject to a full scope audit. Together with the parent company, Cadogan
Petroleum Holdings Ltd, Cadogan Petroleum Holdings B.V. and the Group
consolidation, which was also subject to a full scope audit, these represent
the significant components of the Group.
These locations represent the principal business units and account for 98% of
the Group's revenue and 95% of the Group's total assets.
The audits of each of the Ukrainian components were principally performed in
the Ukraine. The audits of the parent company, Cadogan Petroleum Holdings Ltd,
Cadogan Petroleum Holdings B.V. and the Group consolidation were performed in
the United Kingdom by BDO LLP.
A BDO member firm performed a full scope audit of the components in Ukraine,
under our direction and supervision as Group auditors.
In setting the audit strategy we considered our approach in respect of the
ability of the audit to detect irregularities, including fraud. We designed
audit procedures to respond to the risk, recognising that the risk of not
detecting a material misstatement due to fraud is higher than the risk of not
detecting one resulting from error, as a fraud may involve deliberate
concealment by, for example, forgery or intentional misrepresentations or
through collusion.
We considered the laws and regulations of the Ukraine and the UK to be of
significance in the context of the Group audit. As part of our Group audit
strategy direction was provided to the auditor of the significant components to
ensure an assessment was performed on the extent of the components compliance
with the relevant local and regulatory framework. As part of our Group audit
work we reviewed this work and held meetings with relevant internal Management
to form our own opinion on the extent of Group wide compliance. In addition our
tests included, but were not limited to agreement of the Financial Statement
disclosures to underlying supporting documentation, performing substantive
testing on accounts balances which were considered to be at a greater risk of
susceptibility to fraud and reviewed correspondence with regulators in so far
as the correspondence related to the Financial Statements.
As part of our audit strategy, as Group auditors:
* Detailed Group reporting instructions were sent to the component auditor,
which included the significant areas to be covered by the audit (including
areas that were considered to be key audit matters as detailed above), and
set out the information required to be reported to the Group audit team.
* As a result of travel restrictions resulting from the Covid-19 pandemic,
the Group audit partner and senior members of the Group audit team were
unable to visit the Ukraine to meet with component management and the
component auditors during the audit as we have done historically.
Accordingly, we performed a remote review of the component audit files in
the Ukraine using our online audit software platform, held regular calls
and videoconferences with the component audit team during the audit.
* The Group audit team was actively involved in the direction of the audits
performed by the component auditors for Group reporting purposes, along
with the consideration of findings and determination of conclusions drawn.
We performed our own additional procedures in respect of certain of the
significant risk areas that represented Key Audit Matters in addition to
the procedures performed by the component auditor.
The remaining components of the Group were considered non-significant and these
components were principally subject to analytical review procedures.
Other information
The directors are responsible for the other information. The other information
comprises the information included in the annual financial report, other than
the financial statements and our auditor's report thereon. Our opinion on the
financial statements does not cover the other information and, except to the
extent otherwise explicitly stated in our report, we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is
to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our
knowledge obtained in the audit or otherwise appears to be materially
misstated. If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of the
other information. If, based on the work we have performed, we conclude that
there is a material misstatement of the other information, we are required to
report that fact.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the directors' remuneration report to be audited
has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
* the information given in the strategic report and the directors' report for
the financial year for which the financial statements are prepared is
consistent with the financial statements; and
* the strategic report and the directors' report have been prepared in
accordance with applicable legal requirements.
Matters on which we are required to report by exception
Except for any amendments that we may have considered necessary had we been
able to obtain sufficient appropriate audit evidence in relation to the fair
value of the loan receivable as described in the basis for qualified opinion
section of our report, in the light of the knowledge and understanding of the
Group and Parent Company and its environment obtained in the course of the
audit, we have not identified material misstatements in the strategic report or
the directors' report.
Arising solely from the limitation on our work relating to the loan receivable
described above we have not obtained all the information and explanations that
we considered necessary for the purpose of our audit.
We have nothing to report in respect of the following matters in relation to
which the Companies Act 2006 requires us to report to you if, in our opinion:
* adequate accounting records have not been kept by the Parent Company, or
returns adequate for our audit have not been received from branches not
visited by us; or
* the Parent Company financial statements and the part of the directors'
remuneration report to be audited are not in agreement with the accounting
records and returns; or
* certain disclosures of directors' remuneration specified by law are not
made.
Responsibilities of directors
As explained more fully in the Statement of directors' responsibilities set out
on page 65, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for
such internal control as the directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the Group's and the Parent Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either intend to
liquidate the Group or the Parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor's report.
Other matters which we are required to address
Following the recommendation of the audit committee, we were appointed by the
Board of directors on 27 April 2017 to audit the financial statements for the
year ending 31 December 2017 and subsequent years. In respect of the year
ended 31 December 2019 we were appointed as auditor by the members of the
company at the annual general meeting held on 19 June 2019. This is the third
year of our engagement as auditor.
The non-audit services prohibited by the FRC's Ethical Standard were not
provided to the company and we remain independent of the company and the Group
in conducting our audit.
Our audit opinion is consistent with the additional report to the audit
committee.
Use of our report
This report is made solely to the Parent Company's members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work
has been undertaken so that we might state to the Parent Company's members
those matters we are required to state to them in an auditor's report and for
no other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Parent Company and the Parent
Company's members as a body, for our audit work, for this report, or for the
opinions we have formed.
Ryan Ferguson (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London,
United Kingdom
1 May 2020
BDO LLP is a limited liability partnership registered in England and Wales
(with registered number
C305127).
Consolidated Income Statement for the year ended 31 December 2019
Notes
2019 2018
$'000 $'000
CONTINUING OPERATIONS
Revenue 6 5,876 14,730
Cost of sales (4,872) (12,849)
Provision against unsold gas inventory 8 (1,946) -
Gross loss (942) 1,881
Administrative expenses 7 (5,652) (4,762)
Impairment of oil and gas assets - (56)
Reversal of impairment of other assets 8 345 1,730
Impairment of other assets 8 (162) (751)
Fair value gain on convertible loan 27 697 -
Other operating income, net 9 3,972 2,419
Net foreign exchange losses (385) (58)
Operating (loss)/profit (2,127) 403
Finance income, net 12 25 636
(Loss)/Profit before tax (2,102) 1,039
Tax benefit 13 - 178
(Loss)/Profit for the year (2,102) 1,217
Attributable to:
Owners of the Company (2,103) 1,220
Non-controlling interest 1 (3)
(2,102) 1,217
(Loss)/Profit per Ordinary share Cents cents
Basic and diluted 14 (0.9) 0.5
Consolidated Statement of Comprehensive Income for the year ended 31 December
2029
2019 2018
$'000 $'000
(Loss)/Profit for the year (2,102) 1,217
Other comprehensive profit
Items that may be reclassified subsequently to profit or
loss:
Unrealised currency translation differences 3,541 354
Other comprehensive profit 3,541 354
Total comprehensive profit for the year 1,439 1,571
Attributable to:
Owners of the Company 1,438 1,574
Non-controlling interest 1 (3)
1,439 1,571
Consolidated Balance Sheet as at 31 December 2019
Notes
2019 2018
$'000 $'000
ASSETS
Non-current assets
Intangible exploration and evaluation 15 2,971 2,386
assets
Property, plant and equipment 16 12,338 3,297
Prepayments for non-current assets - 1,318
Loan classified at fair value through 27 15,707 -
profit and loss
Deferred tax asset 22 501 501
31,517 7,502
Current assets
Inventories 19 4,453 4,487
Trade and other receivables 20 2,639 2,472
Assets held for sale - 165
Cash and cash equivalents 21 12,834 35,136
19,926 42,260
Total assets 51,443 49,762
LIABILITIES
Non-current liabilities
Provisions 25 (289) (39)
(289) (39)
Current liabilities
Trade and other payables 24 (1,266) (1,271)
Liabilities held for sale - (140)
Provisions 25 - (276)
(1,266) (1,687)
Total liabilities (1,555) (1,726)
NET ASSETS 49,888 48,036
EQUITY
Share capital 26 13,525 13,525
Share premium 329 329
Retained earnings 191,959 194,062
Cumulative translation reserves (158,275) (161,816)
Other reserves 2,081 1,668
Equity attributable to owners of the 49,619 47,768
Company
Non-controlling interest 269 268
TOTAL EQUITY 49,888 48,036
The consolidated financial statements of Cadogan Petroleum plc, registered in
England and Wales no. 05718406, were approved by the Board of Directors and
authorised for issue on 1 May 2020. They were signed on its behalf by:
Fady Khallouf
Chief Executive Officer
1 May 2020
The notes on pages 80 to 108 form an integral part of these financial
statements.
Consolidated Cash Flow Statement for the year ended 31 December 2019
Note 2019 2018
$'000 $'000
Operating profit / (loss) (2,127) 403
Adjustments for:
Depreciation of property, plant and equipment 16 653 425
Impairment of oil and gas assets - 56
Impairment of property, plant and equipment 8 - 751
Termination fee on exit from WGI 18 - (1,700)
Gain on disposal of subsidiaries 17 (4,000) -
Impairment/(Reversal of impairment) of inventories 8 1,946 -
Impairment/(Reversal of impairment) of VAT recoverable 8 162 (1,730)
Movement in fair value of convertible loan 27 (697) -
Interest received (431) -
Reversal of impairment of other assets (345) (152)
Effect of foreign exchange rate changes 385 58
Operating cash flows before movements in working capital (4,454) (1,889)
Increase in inventories (971) (2,100)
Decrease in receivables 664 3,651
Increase in payables and provisions 78 84
Cash used in operations (4,683) (254)
Interest paid - (130)
Interest received 480 230
Income taxes paid - -
Net cash outflow from operating activities (4,203) (154)
Investing activities
Proceeds from disposal of subsidiaries 4,000 -
Proceeds on exit from WGI - 1,700
Purchases of property, plant and equipment (6,952) (3,944)
Purchases of intangible exploration and evaluation assets (241) (857)
Proceeds from sale of property, plant and equipment 345 58
Loan provided (15,246) -
Interest received 140 553
Net cash used in investing activities (17,954) (2,490)
Financing activities
Proceeds from short-term borrowings - 3,965
Repayments of short-term borrowings - (3,887)
Net cash from/(used in) financing activities - 78
Net decrease in cash and cash equivalents (22,157) (2,566)
Effect of foreign exchange rate changes (145) 102
Cash and cash equivalents held for sale at end of year - (40)
Cash and cash equivalents at beginning of year 35,136 37,640
Cash and cash equivalents at end of year 12,834 35,136
Consolidated Statement of Changes in Equity for the year ended 31 December 2019
Share Cumulative Non-controlling Total
capital Retained translation interest $'000
$'000 earnings reserves $'000
$'000 $'000
Share Other Equity
premium reserves attributable
account $'000 to owners of
$'000 the Company
As at 1 January 13,525 329 192,842 (162,170) 1,589 46,115 271 46,386
2018
Net profit for the - - 1,220 - - 1,220 (3) 1,217
year
Other comprehensive - - - 354 - 354 - 354
profit
Total comprehensive - - 1,220 354 (3) 1,571
profit for the year - 1,574
Share based award - - - - 79 79 - 79
As at 1 January 13,525 329 194,062 (161,816) 1,668 47,768 268 48,036
2019
Net loss for the - - (2,103) - - (2,103) 1 (2,102)
year
Other comprehensive - - - 3,541 - 3,541 - 3,541
profit
Total comprehensive - - (2,103) 3,541 1 1,439
profit for the year - 1,438
Share based award - - - 413 413 - 413
As at 31 December 13,525 329 191,959 (158,275) 2,081 49,619 269 49,888
2019
Notes to the Consolidated Financial Statements for the year ended 31 December
2019
1. General information
Cadogan Petroleum plc (the "Company", together with its subsidiaries the
"Group"), is registered in England and Wales under the Companies Act 2006. The
address of the registered office is 6th Floor, 60 Gracechurch Street, London
EC3V 0HR. The nature of the Group's operations and its principal activities are
set out in the Operations Review on pages 10 to 11 and the Financial Review on
pages 12 to 14.
2. Adoption of new and revised Standards
New IFRS accounting standards, amendments and interpretations effective from 1
January 2019
The disclosed policies have been applied consistently by the Group for both the
current and previous financial year with the exception of the new standards
adopted:
(a) IFRS 16 'Leases'
(b) IFRIC 23 'Uncertainty over Income Tax Positions'
(c) Prepayment Features with Negative Compensation - Amendments to IFRS 9
(d) Long-term Interests in Associates and Joint Ventures - Amendments to IAS 28
(e) Annual Improvements to IFRS Standards 2015 - 2017 Cycle
(f) Plan Amendment, Curtailment or Settlement - Amendments to IAS 19
The application of (a) to (f) has had no significant impact on the disclosures
or the amounts recognized in the Group's consolidated financial statements.
In respect of IFRS 16 the Group amended accounting policies applied from 1
January 2019 are disclosed in Note 3 under 'Significant accounting policies.
IFRS 16 specifies how to recognize, measure, present and disclose leases. The
standard provides a single lessee accounting model, requiring lessees to
recognize right-of-use assets and lease liabilities for all material leases. It
results in almost all leases being recognized on the balance sheet by lessees,
as the distinction between operating and finance leases was removed. Under the
new standard, an asset (the right to use the leased item) and a financial
liability to pay rentals are recognised. The only exceptions are short-term and
low-value leases.
On adoption of IFRS 16 'Leases' the Group applied the modified retrospective
approach to transition. The Group elected to apply the practical expedient not
to recognize right-of-use assets and lease liabilities for short-term leases
that have a lease term of 12 months or less and leases of low-value assets. The
Group also made use of the practical expedient to not recognise a right-of-use
asset or a lease liability for leases for which the lease term ends within 12
months of the date of initial application. The lease payments associated with
these leases are recognized as an expense on a straight-line basis over the
lease term. On initial application, the Group elected to record right-of-use
assets based on the corresponding lease liability where applicable. Based on
the analysis, the impact of IFRS 16 was immaterial. The weighted-average rate
incremental borrowing rate applied in the assessment was 13%.
The Group's well rental arrangements in Ukraine for oil and gas extraction
activities are outside of the scope of IFRS 16.
Effective as of 1 January 2019, IFRIC 23 explains how to recognize and measure
deferred and current income tax assets and liabilities where there is
uncertainty over a tax treatment. An uncertain tax treatment is any tax
treatment applied by the Group where there is uncertainty over whether that
treatment will be accepted by the tax authority. IFRIC 23 applies to all
aspects of income tax accounting where there is an uncertainty regarding the
treatment of an item, including taxable profit or loss, the tax bases of assets
and liabilities, tax losses and credits and tax rates. Refer to note 28 for
details of tax contingencies subject to this assessment.
As for other IFRS Standards the directors do not expect that the adoption of
the Standards listed above will have a material impact on the financial
statements of the Group in future periods.
2. Adoption of new and revised Standards (continued)
New IFRS accounting standards, amendments and interpretations not yet effective
Below is a list of new and revised IFRSs that are not yet mandatorily effective
(but allow early application) for the year ending 31 December 2019 and have not
been early adopted by the Group. These standards are not expected to have a
material impact on the Group in the future reporting periods and on foreseeable
future transactions.
* Amendments to IFRS 3, 'Business combinations'
* Amendments to IAS 1 and IAS 8: Definition of Material
* Amendments to References to the Conceptual Framework in IFRS Standards
* IFRS 17, 'Insurance contracts'
3. Significant accounting policies
(a) Basis of accounting
The financial statements have been 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"), and therefore the Group financial statements comply with Article 4 of
the EU IAS Regulation, and in accordance with the Companies Act 2006 as
applicable to companies reporting under IFRS.
The financial statements have been prepared on the historical cost convention
basis.
The principal accounting policies adopted are set out below:
(b) Going concern
The Group's business activities, together with the factors likely to affect
future development, performance and position are set out in the Strategic
Report on pages 5 to 14. The financial position of the Group, its cash flow and
liquidity position are described in the Financial Review on pages 12 to 14.
The Group's cash balance at 31 December 2019 was $12.8 million (2018: $35.2
million). The Directors believe that the funds available at the date of the
issue of these financial statements are sufficient for the Group to manage its
business risks and planned investments successfully.
The directors' confirmation that they have carried out a robust assessment of
the principal risks facing the Group, including those that could potentially
threaten its business model, future performance, solvency or liquidity is on
page 15.
The Group's forecasts and projections, taking into account reasonably possible
changes in trading activities, 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.
The Group continues to pursue its farm-out campaign, which, if successful, will
enable it to farm-out a portion of its interests in its oil and gas licences to
spread the risks associated with further exploration and development.
Notwithstanding the Group's current financial performance and position, the
Board are cognisant of the potential impacts of COVID-19 on the Group. Whilst
there has been little impact of COVID-19 on the Group's operations at present
there may be significant impacts on the business going forward which are
currently unknown. The Board has considered possible reverse stress case
scenarios for the impact on the Group's operations, financial position and
forecasts. Whilst the potential future impacts of Covid-19 are unknown the
Board has considered operational disruption that may be caused by the factors
such as a) restrictions applied by governments, illness amongst our workforce
and disruption to supply chain and sales channels; b) market volatility in
respect of commodity prices associated with Covid-19 in addition to
geopolitical factors.
In addition to sensitivities that reflect future expectations regarding
country, commodity price and currency
3. Significant accounting policies (continued)
(b) Going concern (continued)
risks that the Group may encounter, in March 2020 and to date, reverse stress
tests have been run to reflect possible negative effects of COVID-19. The
Group's forecasts demonstrate that owing to its cash resources the Group is
able to meet its operating cash flow requirements and commitments whilst
maintaining significant liquidity for a period of at least the next 12 months
allowing for sustained reductions in commodity prices and extended and severe
disruption to operations should such a scenario occur.
After making enquiries and considering the uncertainties described above, 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 consider the going concern basis of accounting to be appropriate
and, thus, they continue to adopt the going concern basis of accounting in
preparing the annual financial statements.
(c) Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and entities controlled by the Company (its subsidiaries) made up
to 31 December each year. IFRS 10 defines control to be investor control over
an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to control those returns
through its power over the investee.
The results of subsidiaries acquired or disposed of during the year are
included in the consolidated income statement from the effective date of
acquisition or up to the effective date of disposal, as appropriate. Where
necessary, adjustments are made to the financial statements of subsidiaries to
bring accounting policies used into line with those used by the Group. All
intra-group transactions, balances, income and expenses are eliminated on
consolidation.
Non-controlling interests in subsidiaries are identified separately from the
Group's equity therein. Those interests of non-controlling shareholders that
are present ownership interests entitling their holders to a proportionate
share of net assets upon liquidation may be initially measured at fair value or
at the non-controlling interests' proportionate share of the fair value of the
acquiree's identifiable net assets. The choice of measurement is made on an
acquisition-by-acquisition basis. Other non-controlling interests are initially
measured at fair value.
Subsequent to acquisition, the carrying amount of non-controlling interests is
the amount of those interests at initial recognition plus the non-controlling
interests' share of subsequent changes in equity. Total comprehensive income is
attributed to non-controlling interests even if this results in the
non-controlling interests having a deficit balance.
Changes in the Group's interests in subsidiaries that do not result in a loss
of control are accounted for as equity transactions. The carrying amount of the
Group's interests and the non-controlling interests are adjusted to reflect the
changes in their relative interests in the subsidiaries. Any difference between
the amount by which the non-controlling interests are adjusted and the fair
value of the consideration paid or received is recognised directly in equity
and attributed to the owners of the Company.
(d) Business combinations
The acquisition of subsidiaries is accounted for using the acquisition method.
The cost of the acquisition is measured at the aggregate of the fair values, at
the date of exchange, of assets given, liabilities incurred or assumed, and
equity instruments issued in exchange for control of the acquiree.
Acquisition-related costs are recognised in profit or loss as incurred. The
acquiree's identifiable assets, liabilities and contingent liabilities that
meet the conditions for recognition under IFRS 3 Business Combinations are
recognized at their fair value at the acquisition date, except for non-current
assets (or disposal groups) that are classified as held for resale in
accordance with IFRS 5 Non-Current Assets held for sale and Discontinued
Operations. These are recognised and measured at fair value less costs to sell.
3. Significant accounting policies (continued)
(e) Investments in joint ventures
A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement. A
joint venture firm recognises its interest in a joint venture as an investment
and shall account for that investment using the equity method in accordance
with IAS 28 Investments in Associates and Joint Ventures.
Under the equity method, the investment is carried on the balance sheet at cost
plus changes in the Group's share of net assets of the entity, less
distributions received and less any impairment in value of the investment. The
Group Consolidated Income Statement reflects the Group's share of the results
after tax of the equity-accounted entity, adjusted to account for depreciation,
amortization and any impairment of the equity accounted entity's assets. The
Group Statement of Comprehensive Income includes the Group's share of the
equity-accounted entity's other comprehensive income.
Financial statements of equity-accounted entities are prepared for the same
reporting year as the Group. The Group assesses investments in equity-accounted
entities for impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. In doing so, the Group applies
the criteria of IFRS 6 'Exploration for and evaluation of mineral resources' as
the joint venture holds exploration phase assets. If any such indication of
impairment exists, the carrying amount of the investment is compared with its
recoverable amount, being the higher of its fair value less costs of disposal
and value in use. If the carrying amount exceeds the recoverable amount, the
investment is written down to its recoverable amount.
The Group ceases to use the equity method of accounting from the date on which
it no longer has joint control over the joint venture or significant influence
over the associate, or when the interest becomes classified as an asset held
for sale.
(f) Revenue recognition
Revenue from contracts with customers is recognized when or as the Group
satisfies a performance obligation by transferring a promised good or service
to a customer. A good or service is transferred when the customer obtains
control of that good or service. Revenue is measured based on measurement
principles of IFRS 15 and represents amounts receivable for hydrocarbon
products and services provided in the normal course of business, net of value
added tax ('VAT') and other sales-related taxes, excluding royalties on
production. Royalties on production are recorded within cost of sales.
E&P and Trading business segments
The transfer of control of hydrocarbons usually coincides with title passing to
the customer and the customer taking physical possession as the product passes
a physical point such as a designated point in the pipeline for the sale of gas
or loading point in the case of oil. The Group principally satisfies its
performance obligations at a point in time.
To the extent that revenue arises from test production during an evaluation
programme, an amount is credited to evaluation costs and charged to cost of
sales, so as to reflect a zero net margin.
Service business segment
Revenue from services is recognized in the accounting period in which services
are rendered. The main types of services provided by the Group are drilling and
civil works services. Revenue is recorded as the service is provided over time
such as through day rates for supply of drill rigs, civil works and manpower.
Interest income is accrued on a time basis, by reference to the principal
outstanding and at the effective interest rate applicable, which is the rate
that exactly discounts estimated future cash receipts through the expected life
of the financial asset to that asset's net carrying amount on initial
recognition.
3. Significant accounting policies (continued)
(g) Foreign currencies
The functional currency of the Group's Ukrainian operations is Ukrainian
Hryvnia. The functional currency of the Group's UK subsidiaries and the parent
company is US Dollar.
In preparing the financial statements of the individual companies, transactions
in currencies other than the functional currency of each Group company
('foreign currencies') are recorded in the functional currency at the rates of
exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign
currencies are retranslated into the functional currency at the rates
prevailing on the balance sheet date. Non-monetary assets and liabilities
carried at fair value that are denominated in foreign currencies are translated
at the rates prevailing at the date when the fair value was determined.
Non-monetary items that are measured in terms of historical cost in a foreign
currency are not retranslated. Foreign exchange differences on cash and cash
equivalents are recognised in operating profit or loss in the period in which
they arise.
Exchange differences are recognized in the profit or loss in the period in
which they arise except for exchange differences on monetary items receivable
from or payable to a foreign operation for which settlement is neither planned
nor likely to occur. This forms part of the net investment in a foreign
operation, which is recognized in the foreign currency translation reserve and
in profit or loss on disposal of the net investment.
For the purpose of presenting consolidated financial statements, the results
and financial position of each entity of the Group, where the functional
currency is not the US dollar, are translated into US dollars as follows:
i. assets and liabilities of the Group's foreign operations are
translated at the closing rate on the balance sheet date;
ii. income and expenses are translated at the average exchange rates
for the period, where it approximates to actual rates. In other cases, if
exchange rates fluctuate significantly during that period, the exchange rates
at the date of the transactions are used; and
iii. all resulting exchange differences arising, if any, are
recognized in other comprehensive income and accumulated equity (attributed to
non-controlling interests as appropriate), transferred to the Group's
translation reserve. Such translation differences are recognized as income or
as expenses in the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
The relevant exchange rates used were as follows:
Year ended 31 December 2019 Year ended 31 December 2018
GBP/USD USD/UAH GBP/USD USD/UAH
Closing rate 1.3263 23.7100 1.2768 27.7477
Average rate 1.2773 25.9003 1.3415 27.2324
3. Significant accounting policies (continued)
(h) Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the consolidated income statement
because it excludes items of income or expense that are taxable or deductible
in other years and it further excludes items that are never taxable or
deductible. The Group's liability for current tax is calculated using tax rates
that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit. This is accounted for using the balance sheet liability method.
Deferred tax liabilities are generally recognized for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible
temporary differences can be utilised. Such assets and liabilities are not
recognized if the temporary difference arises from the initial recognition of
goodwill or from the initial recognition (other than in a business combination)
of other assets and liabilities in a transaction that affects neither the
taxable profit nor the accounting profit. Deferred tax liabilities are
recognized for taxable temporary differences arising on investments in
subsidiaries and associates, and interests in joint ventures, except where the
Group is able to control the reversal of the temporary difference and it is
probable that the temporary difference will not reverse in the foreseeable
future.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered. Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is realized.
Deferred tax is charged or credited in the income statement, except when it
relates to items charged or credited in other comprehensive income, in which
case the deferred tax is also dealt with in other comprehensive income.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same taxation authority and
the Group intends to settle its current tax assets and liabilities on a net
basis.
In case of the uncertainty of the tax treatment, the Group assess, whether it
is probable or not, that the tax treatment will be accepted, and to determine
the value, the Group use the most likely amount or the expected value in
determining taxable profit (tax loss), tax bases, unused tax losses, unused tax
credits and tax rates.
(i) Other property, plant and equipment
Property, plant and equipment ('PP&E') are carried at cost less accumulated
depreciation and any recognized impairment loss. Depreciation and amortization
is charged so as to write-off the cost or valuation of assets, other than land,
over their estimated useful lives, using the straight-line method, on the
following bases:
Other PP&E 10% to 30%
The gain or loss arising on the disposal or retirement of an asset is
determined as the difference between the sales proceeds and the carrying amount
of the asset and is recognized in income.
3. Significant accounting policies (continued)
(j) Intangible exploration and evaluation assets
The Group applies the modified full cost method of accounting for intangible
exploration and evaluation ('E&E') expenditure, which complies with
requirements set out in IFRS 6 Exploration for and Evaluation of Mineral
Resources. Under the modified full cost method of accounting, expenditure made
on exploring for and evaluating oil and gas properties is accumulated and
initially capitalized as an intangible asset, by reference to appropriate cost
centres being the appropriate oil or gas property. E&E assets are then assessed
for impairment on a geographical cost pool basis, which are assessed at the
level of individual licences.
E&E assets comprise costs of (i) E&E activities which are in progress at the
balance sheet date, but where the existence of commercial reserves has yet to
be determined (ii) E&E expenditure which, whilst 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 incurred.
Exploration and Evaluation costs
E&E expenditure is initially capitalized as an E&E asset. Payments to acquire
the legal right to explore, costs of technical services and studies, seismic
acquisition, exploratory drilling and testing are also capitalized as
intangible E&E assets.
Tangible assets used in E&E activities (such as the Group's vehicles, drilling
rigs, seismic equipment and other property, plant and equipment) are normally
classified as PP&E. However, to the extent that such assets are consumed in
developing an intangible E&E asset, the amount reflecting that consumption is
recorded as part of the cost of the intangible asset. Such intangible costs
include directly attributable overheads, including the depreciation of PP&E
items utilised in E&E activities, together with the cost of other materials
consumed during the exploration and evaluation phases.
E&E assets are not amortized prior to the conclusion of appraisal activities.
Treatment of E&E assets at conclusion of appraisal activities
Intangible E&E assets related to each exploration property 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 individual assets basis as set out below and any
impairment loss is recognized in the income statement. Upon approval of a
development programme, the carrying value, after any impairment loss, of the
relevant E&E assets is reclassified to the development and production assets
within PP&E.
Intangible E&E assets that relate to E&E activities that are determined not to
have resulted in the discovery of commercial reserves remain capitalized as
intangible E&E assets at cost less accumulated amortization, subject to meeting
a pool-wide impairment test in accordance with the accounting policy for
impairment of E&E assets set out below.
Impairment of E&E assets
E&E assets are assessed for impairment when facts and circumstances suggest
that the carrying amount may exceed its recoverable amount. Such indicators
include, but are not limited to those situations outlined in paragraph 20 of
IFRS 6 Exploration for and Evaluation of Mineral Resources such as, a) license
expiry during year or in the near future and will not likely to be renewed; b)
expenditure on E&E activity neither budgeted nor planned; c) commercial
quantities of mineral resources have been discovered; and d) sufficient data
exist to indicate that carrying amount of E&E asset is unlikely to be recovered
in full from successful development or sale.
3. Significant accounting policies (continued)
(j) Intangible exploration and evaluation assets (continued)
Where there are indications of impairment, the E&E assets concerned are tested
for impairment. Where the E&E assets concerned fall within the scope of an
established full cost pool, which are not larger than an operating segment,
they are tested for impairment together with all development and production
assets associated with that cost pool, as a single cash generating unit.
The aggregate carrying value of the relevant assets is compared against the
expected recoverable amount of the pool, generally by reference to the present
value of the future net cash flows expected to be derived from production of
commercial reserves from that pool. Where the assets fall into an area that
does not have an established pool or if there are no producing assets to cover
the unsuccessful exploration and evaluation costs, those assets would fail the
impairment test and be written off to the income statement in full.
Impairment losses are recognized in the income statement as additional
depreciation and amortization and are separately disclosed.
(k) Development and production assets
Development and production assets are accumulated on a field-by-field basis and
represent the cost of developing the commercial Reserves discovered and
bringing them into production, together with E&E expenditures incurred in
finding commercial Reserves transferred from intangible E&E assets.
The cost of development and production assets comprises the cost of
acquisitions and purchases of such assets, directly attributable overheads,
finance costs capitalized, and the cost of recognizing provisions for future
restoration and decommissioning.
Depreciation of producing assets
Depreciation is calculated on the net book values of producing assets on a
field-by-field basis using the unit of production method. The unit of
production method refers to the ratio of production in the reporting year as a
proportion of the Proved and Probable Reserves of the relevant field, taking
into account future development expenditures necessary to bring those Reserves
into production.
Producing assets are generally grouped with other assets that are dedicated to
serving the same Reserves for depreciation purposes, but are depreciated
separately from producing assets that serve other Reserves.
(l) Impairment of development and production assets and other property, plant
and equipment
At each balance sheet date, the Group reviews the carrying amounts of its PP&E
to determine whether there is any indication that those assets have suffered an
impairment loss. If any such indication exists, the recoverable amount of the
asset is estimated in order to determine the extent of the impairment loss (if
any). Where the asset does not generate cash flows that are independent from
other assets, the Group estimates the recoverable amount of the cash-generating
unit to which the asset belongs. The recoverable amount is the higher of fair
value less costs to sell and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset for which the estimates of
future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment loss
is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the
asset (cash-generating unit) is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not exceed
the carrying amount that would have been determined had no impairment loss been
recognised for the asset (cash-generating unit) in prior years. A reversal of
an impairment loss is recognized as income immediately.
3. Significant accounting policies (continued)
(m) Inventories
Oil and gas stock and spare parts are stated at the lower of cost and net
realisable value. Costs comprise direct materials and, where applicable, direct
labour costs and those overheads that have been incurred in bringing the
inventories to their present location and condition. Cost is allocated using
the weighted average method. Net realisable value represents the estimated
selling price less all estimated costs of completion and costs to be incurred
in marketing, selling and distribution.
(n) Financial instruments
Financial assets and financial liabilities are recognized in the consolidated
statement of financial position when the Group becomes party to the contractual
provisions of the instrument.
Loan classified at fair value through profit and loss
Loan instruments which include options to convert the instrument into equity
are classified as fair value through profit and loss instruments because they
do not meet the criteria for amortized cost measurement as they are not held
for the collection of contractual cash flows representing solely payments of
principal and interest. Such loan instruments are initially recorded at fair
value which is typically the cash advanced under the instrument and
subsequently recorded at fair value with changes in fair value recorded in the
income statement. Transaction costs for loans classified at fair value through
profit or loss are expensed in the income statement.
Trade and other payables
Payables are initially measured at fair value, net of transaction costs and are
subsequently measured at amortized cost using the effective interest method.
Trade and other receivables
Trade and other receivables are recognized initially at their transaction price
in accordance with IFRS 9 and are subsequently measured at amortised cost. The
Group applies the simplified approach to providing for expected credit losses
(ECL) prescribed by IFRS 9, which permits the use of the lifetime expected loss
provision for all trade receivables. Expected credit losses are assessed on a
forward looking basis. The loss allowance is measured at initial recognition
and throughout its life at an amount equal to lifetime ECL. Any impairment is
recognized in the income statement.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, on-demand deposits, and other
short-term highly liquid investments that are readily convertible to a known
amount of cash with three months or less remaining to maturity and are subject
to an insignificant risk of changes in value.
(o) Provisions
Provisions are recognized when the Group has a present obligation (legal or
constructive) as a result of a past event, it is probable that the Group will
be required to settle that obligation and a reliable estimate can be made of
the amount of the obligation. The amount recognized as a provision is the best
estimate of the consideration required to settle the present obligation at the
balance sheet date, taking into account the risks and uncertainties surrounding
the obligation. When a provision is measured using the cash flows estimated to
settle the present obligation, its carrying amount is the present value of
those cash flows.
3. Significant accounting policies (continued)
(p) Decommissioning
A provision for decommissioning is recognized in full when the related
facilities are installed. The decommissioning provision is calculated as the
net present value of the Group's share of the expenditure expected to be
incurred at the end of the producing life of each field in the removal and
decommissioning of the production, storage and transportation facilities
currently in place. The cost of recognizing the decommissioning provision is
included as part of the cost of the relevant asset and is thus charged to the
income statement on a unit of production basis in accordance with the Group's
policy for depletion and depreciation of tangible non-current assets. Period
charges for changes in the net present value of the decommissioning provision
arising from discounting are included within finance costs.
(q) Leases
Applicable for 2019 only.
At inception of a contract, the Group assesses whether a contract is, or
contains, a lease based on whether the contract conveys the right to control
the use of an identified asset for a period of time in exchange for
consideration. Service agreements for equipment on the working sites are not
considered leases as, based upon an assessment of the terms and nature of their
contractual arrangements, the contracts do not convey the right to control the
use of an identified asset
The right-of-use asset is initially measured based on the initial amount of the
lease liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct costs incurred and an estimate of
costs to dismantle and remove the underlying asset or to restore the underlying
asset or the site on which it is located, less any lease incentives received.
The asset is depreciated to the earlier of the end of the useful life of the
right-of-use asset or the lease term using the straight-line method as this
most closely reflects the expected pattern of consumption of the future
economic benefits. The lease term includes periods covered by an option to
extend if the Group is reasonably certain to exercise that option. In addition,
the right-of-use asset is periodically reduced by impairment losses, if any,
and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease
payments that are not paid at the commencement date, discounted using the
interest rate implicit in the lease or, if that rate cannot be readily
determined, the incremental borrowing rate. The lease liability is measured at
amortized cost using the effective interest method. It is remeasured when there
is a change in future lease payments arising from a change in an index or rate,
if there is a change in the Group's estimate of the amount expected to be
payable under a residual value guarantee, or if the Group changes its
assessment of whether it will exercise a purchase, extension or termination
option. When the lease liability is remeasured in this way, a corresponding
adjustment is made to the carrying amount of the right-of-use asset, or the
effect is recorded in profit or loss if the carrying amount of the right-of-use
asset has been reduced to zero.
The Group elected to apply the practical expedient not to recognise
right-of-use assets and lease liabilities for short-term leases that have a
lease term of 12 months or less and leases of low-value assets. The Group also
made use of the practical expedient to not recognize a right-of-use asset or a
lease liability for leases for which the lease term ends within 12 months of
the date of initial application.
The lease payments associated with these leases are recognized as an expense on
a straight-line basis over the lease term.
4. Critical accounting judgements and key sources of estimation
uncertainty
In the application of the Group's accounting policies, which are described in
note 3, the Directors are required to make judgements, estimates and
assumptions about the carrying amounts of the assets and liabilities that are
not readily apparent from other sources. The estimates and associated
assumptions are based on historical experience and other factors that are
considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognized in the period in which the
estimate is revised if the revision affects only that period or in the period
of the revision and future periods if the revision affects both the current and
future periods.
The following are the critical judgements and estimates that the Directors have
made in the process of applying the Group's accounting policies and that have
the most significant effect on the amounts recognized in the financial
statements.
Critical judgements and estimates
(a) Impairment indicator assessment for E&E assets
The outcome of ongoing exploration, and therefore the recoverability of the
carrying value of intangible exploration and evaluation assets, is inherently
uncertain. Management assesses its E&E assets for impairment indicators and if
indicators of impairment are identified performs an impairment test. In
assessing potential indicators of impairment judgment was required and
management considered factors such as the remaining term of the license and
plans for renewal and conversion to a production licence, reserves reports and
the net present value of economic models, the results of drilling and
exploration in the year and the future plans including farm out proposals. In
respect of the renewal and conversion of the license which remains outstanding
and overdue management considered the status of license commitments, the status
of submissions necessary for the renewal, trends in the relevant region of the
Ukraine with respect to license application approval together with legal advice
in respect of the standing of the license in the event of delays by the
authorities (note 15).
(b) Impairment of PP&E
Management assess its development and production assets for impairment
indicators and if indicators of impairment are identified performs an
impairment test. Management performed an impairment assessment using a value in
use discounted cash flow model which required estimates including forecast oil
prices, reserves and production, costs and discount rates. Where renewal of
rental agreements for existing wells remains ongoing management consider the
status of the renewal negotiations and discussions with the counterparties in
assessing the likelihood of renewal (note 16).
(c) Recoverability and measurement of VAT
Judgment is required in assessing the recoverability of VAT assets and the
extent to which historical impairment provisions remain appropriate,
particularly noting the recent recoveries against historically impaired VAT. In
forming this assessment, the Group considers the nature and age of the VAT, the
likelihood of eligible future supplies to VAT, the pattern of recoveries and
risks and uncertainties associated with the operating environment.
(d) Loan classified at fair value through profit and loss
In February 2019, the Group advanced a Euro 13,385,000 loan to Proger Managers
& Partners Srl ("PMP"), a privately owned Italian company whose only interest
is a 59.6% participation in Proger Ingegneria Srl ("Proger Ingegneria"), a
privately owned company which has a 72.93% participating interest in Proger Spa
("Proger"). The loan carries an entitlement to interest at a rate of 5.5% per
year, payable at maturity (which is 24 months after the execution date
(February 2019) and assuming that the call option described below is not
exercised). The principal of the loan is secured by a pledge over PMP's current
participating interest in Proger Ingegneria Srl, up to a maximum guaranteed
amount of Euro 13,385,000.
4. Critical accounting judgements and key sources of estimation
uncertainty (continued)
(d) Loan classified at fair value through profit and loss (continued)
As part of the instrument, the Group was granted a call option to acquire, at
its sole discretion, 33% of the participating interest that PMP will be holding
in Proger Ingegneria; the exercise of the option would give Cadogan, through
CPHBV, an indirect 24% interest in Proger. The call option was granted at no
additional cost and can be exercised at any time between the 6th (sixth) and
24th (twenty-fourth) months following the execution date of the loan agreement
and subject to Cadogan shareholders having approved the exercise of the call
option as explained further below. Should CPHBV exercise the call option, the
price for the purchase of the 33% participating interest in Proger Ingegneria
shall be paid by setting off the corresponding amount due by PMP to CPHBV, by
way of reimbursement of the principal, pursuant to the loan agreement. If the
call option is exercised, then the obligation on PMP to pay interest is
extinguished.
Under the Group's accounting policies the instrument is held at fair value
through profit and loss and determination of fair value requires assessment of
both key investee specific information regarding financial performance and
prospects and market information.
The Group's original investment decision involved assessment of Proger Spa
business plans and analysis with professional advisers including valuations
performed using the income method (discounted cash flows) and market approach
using both the precedent transactions and trading multiples methods.
Unfortunately, Proger has refused to provide Cadogan information regarding its
2019 financial performance or updated forecasts to undertake a detailed fair
value assessment using the income method or market approach at 31 December
2019. As a consequence, management assessed the fair value of the instrument
based on the terms of the agreement, including the pledge over shares, together
with financial information in respect of prior periods and determined that
$15.7 million represented the best estimate of fair value, being equal to
anticipated receipts discounted at a market rate of interest of 5.5%. However,
the absence of information regarding Proger's 2019 financial performance and
prospects represents a significant limitation on the fair value exercise and,
as a result, once received, the fair value could be materially higher or lower
than this value. (Note 27).
(e) Well services and rental agreements
The Group's well rental arrangements in Ukraine for oil and gas extraction
activities are outside of the scope of IFRS 16. Judgment was required in
forming this assessment, based on analysis of the scope of IFRS 16 and the
nature of the well rental arrangements. This assessment focused on the extent
to which the rental agreements provided access to sub-surface well structures
to extract hydrocarbons versus surface level infrastructure for the transport
and processing of extracted hydrocarbons.
5. Segment information
Segment information is presented on the basis of management's perspective and
relates to the parts of the Group that are defined as operating segments.
Operating segments are identified on the basis of internal reports provided to
the Group's chief operating decision maker ("CODM"). The Group has identified
its senior management team as its CODM and the internal reports used by the
senior management team to oversee operations and make decisions on allocating
resources serve as the basis of information presented. These internal reports
are prepared on the same basis as these consolidated financial statements.
Segment information is analysed on the basis of the type of activity, products
sold, or services provided. The majority of the Group's operations and all
Group's revenues are located within Ukraine. Segment information is analysed on
the basis of the types of goods supplied by the Group's operating divisions.
The Group's reportable segments under IFRS 8 are therefore as follows:
Exploration and Production
* E&P activities on the exploration and production licences for natural gas,
oil and condensate.
Service
* Drilling services to exploration and production companies; and
* Civil works services to exploration and production companies.
Trading
* Import of natural gas from European countries; and
* Local purchase and sales of natural gas operations with physical delivery
of natural gas.
The accounting policies of the reportable segments are the same as the Group's
accounting policies described in note 3. Sales between segments are carried out
at rates considered to approximate market prices. The segment result represents
operating profit under IFRS before unallocated corporate expenses. Unallocated
corporate expenses include management remuneration, representative expenses and
expenses incurred in respect of the maintenance of office premises. This is the
measure reported to the CODM for the purposes of resource allocation and
assessment of segment performance. The Group does not present information on
segment assets and liabilities as the CODM does not review such information for
decision-making purposes.
As of 31 December 2019 and for the year then ended the Group's segmental
information was as follows:
Exploration Service(2) Trading Consolidated
and
Production
$'000 $'000 $'000 $'000
Sales of hydrocarbons 4,861 - 956 5,817
Other revenue - 59 - 59
Sales between segments - - - -
Total revenue 4,861 59 956 5,876
Cost of sales (3,807) (30) (1,035) (4,872)
Administrative expenses (633) (42) (128) (803)
Impairment (30) - (1,916) (1,946)
Finance income, net (Note 12) - - 85 85
(1)
Segment results 391 (13) (2,038) (1,660)
Unallocated administrative (4,849)
expenses
Other income, net 4,954
Impairment (162)
Net foreign exchange loss (385)
Loss before tax (2,102)
(1) Net finance income includes $49 thousand of interest on cash
deposits used for trading, $36 thousand of interest received on trading
receivables.
(2) The services business segment in 2019 primarily provided well
workovers and other works to other Group companies as tenders secured with
third parties had been deferred by customers.
5. Segment information (continued)
As of 31 December 2018 and for the year then ended the Group's segmental
information was as follows:
Exploration Service Trading Consolidated
and
Production
$'000 $'000 $'000 $'000
Sales of hydrocarbons 4,570 - 10,037 14,607
Other revenue - 123 - 123
Sales between segments 129 - (129) -
Total revenue 4,699 123 9,908 14,730
Cost of sales (3,739) (24) (9,086) (12,849)
Administrative expenses (535) (36) (74) (645)
Finance income, net (Note 12) - - (57) (57)
(3)
Segment results 425 63 691 1.179
Unallocated administrative (4,117)
expenses
Other income, net 4,091
Reversal of impairment of oil
and gas assets (56)
Net foreign exchange loss (58)
Profit before tax 1,039
(3) Net finance income includes $135 thousand of interest on
short-term borrowings and $78 thousand of interest on cash deposits used for
trading.
6. Revenue
2019 2018
$'000 $'000
Sale of hydrocarbons (exploration and production) - point in 4,861 4,699
time
Sale of hydrocarbons (trading) - point in time 956 9,908
Service revenues - over time 59 123
5,876 14,730
Revenue is generated in the Ukraine. Refer to note 3(f) for details of the
performance obligations. Service revenue and associated contract assets and
liabilities are immaterial.
Information about major customers
Included in revenues arising from the Trading segment for the year ended 31
December 2019 are revenues of $0.9 million (2018: $6.9 million), which arose
from sales to the Group's three largest customers. No other single customers
contributed 10 per cent or more to the Group's revenue in either 2019 or 2018.
7. Administrative expenses
2019 2018
$'000 $'000
Staff 2,797 2,570
Professional fees 1,776 1,247
Office costs including utilities 204 181
and maintenance
Travel 144 176
IT and communication 134 133
Insurance 103 88
Bank charges 81 63
Other 413 304
5,652 4,762
8. Reversal of impairment/(impairment) of other assets
2019 2018
$'000 $'000
VAT recoverable - 1,730
Other Property, Plant and Equipment 345 -
Reversal of impairment of other assets 345 1,730
Reversal of impairment of other PPE includes the recoverable value of two gas
treatment plants on the Pirkivska and Zagoryanska licenses based on sale
consideration received in 2019. In 2018, $1.7 million of provision against VAT
has been released following receipts in cash and offsets against output VAT of
VAT refund balances that has been impaired in previous years due to
collectability issues.
$2.4 million of VAT refunds remains impaired. Refer to Note 4.
2019 2018
$'000 $'000
VAT recoverable (162) -
Inventories (1,946) -
Other Property, Plant and Equipment - (751)
Impairment of other assets (2,108) (751)
Impairment of other assets totalled $2.1 million (2018: $0.7 million) and
includes $1.9 million natural gas value impairment due to revaluation to market
price at the year end and $0.2 million VAT impairment. In 2018, impairment of
other PPE includes $0.8 million of impairment of assets at Pirkivska licence
which were abandoned.
9. Other operating income, net
2019 2018
$'000 $'000
Profit on disposal of subsidiaries 4,000 -
Termination fee on exit from WGI - 1,715
Other (28) 704
3,972 2,419
For the details on disposal of subsidiaries please refer to Note 17.
For the details on termination fee on exit from WGI please refer to Note 18.
10. Auditor's remuneration
The analysis of auditor's remuneration is as follows:
2019 2018
$'000 $'000
Audit fees
Fees payable to the Company's auditor and their associates for 143 114
the audit of the Company's annual accounts
Fees payable to the Company's auditor and their associates for
other services to the Group:
- The audit of the Company's subsidiaries 13 12
Total audit fees 156 126
Non-audit fees
- Audit-related assurance services - -
- Taxation compliance services - -
Non-audit fees - -
Audit fees for 2019 refer to BDO LLP of $156 thousand for the audit of group
accounts and subsidiaries as of and for the year ended 31 December 2019.
11. Staff costs
The average monthly number of employees (including Executive Directors) was:
2019 2018
Number Number
Executive Director 1 1
Other employees 79 64
80 65
Total number of employees at 31 December 80 82
$'000 $'000
Their aggregate remuneration comprised:
Wages and salaries 1,901 2,038
Share based award for bonus granted in shares 413 79
Annual bonus 82 301
Social security costs 401 399
2,797 2,817
12. Finance income/(costs), net
2019 2018
$'000 $'000
Interest expense on short-term borrowings - (135)
Total interest expense on financial liabilities - (135)
Investment revenue 104 553
Interest income on cash deposits in Ukraine 49 230
Interest income on receivables 36 -
Total interest income on financial assets 189 783
Unwinding of discount on decommissioning provision (note 25) (164) (12)
25 636
13. Tax
2019 2018
$'000 $'000
Current tax - -
Deferred tax - -
Recognition of previously unrecognised deferred tax assets - (178)
- (178)
The Group's operations are conducted primarily outside the UK, namely in
Ukraine. The most appropriate tax rate for the Group is therefore considered to
be 18% (2018: 18%), the rate of profit tax in Ukraine, which is the primary
source of revenue for the Group. Taxation for other jurisdictions is calculated
at the rates prevailing in the respective jurisdictions.
13. Tax (continued)
The taxation charge for the year can be reconciled to the profit/(loss) per the
income statement as follows:
2019 2019 2018 2018
$'000 % $'000 %
(Loss)/profit before tax (2,102) 100 1,039 100
Tax credit at Ukraine corporation tax rate of (378) 18 187 18
18% (2018: 18%)
Permanent differences (944) 45 (1,652) (159)
Unrecognized tax losses generated in the year 1,448 (69) 972 94
Recognition of previously unrecognized deferred - - (178) (17)
tax assets
Effect of different tax rates (126) 6 493 47
- - (178) (17)
Adjustments recognized in the current year in -
relation - - -
to the current tax of prior years
Income tax (benefit)/expense recognized in - - (178) -
profit or loss
Permanent differences mostly represent differences on profit/(loss) items,
including provisions, accruals, impairments, related to taxation in Ukraine,
where it is probable that such differences will not reverse.
14. (Loss)/profit per Ordinary share
(Loss)/profit attributable to owners of the Company 2019 2018
$'000 $'000
(Loss)/profit for the purposes of basic (loss)/profit per share (2,103) 1,220
being net (loss)/profit) attributable to owners of the Company
Number Number
Number of shares '000 '000
Weighted average number of Ordinary shares for the purposes of 235,729 235,729
basic (loss)/profit per share
Cent cent
(Loss)/Profit per Ordinary share
Basic and diluted 0.5
(0.9)
Basic (loss)/profit per Ordinary share is calculated by dividing the net (loss)
/profit for the year attributable to owners of the Company by the weighted
average number of Ordinary shares outstanding during the year. The calculation
of the basic (loss)/profit per share is based on the following data:
In 2019 the Group generated a loss and therefore there is no difference between
basic and diluted EPS.
15. Intangible exploration and evaluation assets
$'000
Cost
At 1 January 2018 21,068
Additions 857
Disposals -
Change in estimate of decommissioning assets (note (274)
25)
Exchange differences 533
At 1 January 2019 22,184
Additions 241
Disposals (6,062)
Change in estimate of decommissioning assets (note (63)
25)
Exchange differences 3,218
At 31 December 2019 19,518
Impairment
At 1 January 2018 19,353
Exchange differences 445
At 1 January 2019 19,798
Disposals (6,062)
Exchange differences 2,811
At 31 December 2019 16,547
Carrying amount
At 31 December 2019 2,971
At 31 December 2018 2,386
The carrying amount of E&E assets as at 31 December 2019 of $2.9 million (2018:
$2.4 million) relates to Bitlyanska license. Disposals of cost and impairment
of $6.1 million represents liquidation of Pirkivska-1 well which had been fully
impaired previously.
Management has performed an impairment indicator review. Refer to note 4 (a).
As part of the impairment indicator assessment management considered the
Bitlyanska license's economic model of underlying discounted cash flow
forecasts which demonstrated significant headroom over carrying value and the
absence of an impairment indicator. Accordingly, disclosure of estimation
uncertainty for individual inputs is not included.
A critical judgment in the impairment indicator assessment was the likelihood
of the Bitlyanska license being renewed. Cadogan has fully complied with
legislative requirements and submitted its application for a 20-year
exploration and production license 5 months before its expiry on 23 December
2019. A decision on the award was expected to be provided by State Geological
Service of Ukraine before 19 January 2020, since all other intermediary
approvals have been secured in line with the applicable legislation
requirements. Given the delay to granting of the new license beyond the regular
timeline provided by legislation in the Ukraine, Cadogan has launched a claim
before the Administrative Court to challenge the non-granting of the 20-year
production license by the Licensing Authority. Given the compliance with
license commitments and renewal process and having considered legal advice
received, management have a reasonable expectation of the license being
awarded.
16. Property, plant and equipment
Cost Development Total
and $'000
production Other
assets $'000
$'000
At 1 January 2018 6,372 2,537 8,909
Additions 2,150 447 2,597
Change in estimate of decommissioning (94) - (94)
assets (note 25)
Disposals (25) (192) (217)
Transferred to Assets held for sale - (125) (125)
Exchange differences 129 54 183
At 1 January 2019 8,532 2,721 11,253
Additions 8,213 57 8,270
Change in estimate of decommissioning 135 - 135
assets (note 25)
Disposals (2,372) - (2,372)
Exchange differences 2,004 468 2,472
At 31 December 2019 16,512 3,246 19,758
Accumulated depreciation and impairment
At 1 January 2018 5,401 1,413 6,814
Impairment 56 751 807
Charge for the year 236 189 425
Disposals (4) (200) (204)
Exchange differences 83 32 115
At 1 January 2019 5,772 2,185 7,957
Impairment - - -
Charge for the year 495 158 653
Disposals (2,372) - (2,372)
Exchange differences 810 372 1,182
At 31 December 2019 4,705 2,715 7,420
Carrying amount
At 31 December 2019 11,807 531 12,338
At 31 December 2018 2,760 536 3,297
Other property, plant and equipment include fixtures and fittings for the
development and production activities.
The carrying amount of development and production assets as at 31 December 2019
of $11.8 million relates to the Blazhivska license. Depreciation includes $0.5
million for the Blazhivska license.
Management has performed an impairment review of Development and production
assets. As part of the information considered management carried out the
assessment of the Blazhivska license's value in use based on the underlying
discounted cash flow forecasts. The impairment review supported the conclusion
that no impairment indicator exists and impairment was not applicable. Key
assumptions used in the impairment assessment were: future oil prices which
were assumed at a constant $308, real per tonne; estimated 2P reserves and a
pre-tax discount rate of 15%, nominal.
A key judgment in the impairment assessment was that the Group would
successfully renew the rental contracts with Ukrnafta for Blazhiv-3 and
Blazhiv-3 Monastyrets wells which ended in November 2019, enabling operations
at these wells to resume. Cadogan has fulfilled all its duties for the renewal
of the contracts but due to internal process within Ukrnafta, these contracts
are not yet signed. Cadogan's subsidiary, Usenco, has been informed that
Ukrnafta's Board approved the rental contracts and that their signature will be
shortly executed allowing production to resume.
17. Subsidiaries
The Company had investments in the following subsidiary undertakings as at 31
December 2019:
Name Country of Proportion Activity Registered office
incorporation of voting
and operation interest %
Directly held
Cadogan Petroleum UK 100 Holding 6th Floor 60 Gracechurch
Holdings Ltd company Street, London, United
Kingdom, EC3V 0HR
Ramet Holdings Ltd Cyprus 100 Holding 48 Inomenon Ethnon, Guricon
company House, Floor 2 & 3, 6042,
Larnaca, Cyprus
Indirectly held
Cadogan Petroleum Netherlands 100 Holding Hoogoorddreef 15, 1101 BA
Holdings BV company Amsterdam
Cadogan Bitlyanske BV Netherlands 100 Holding Hoogoorddreef 15, 1101 BA
company Amsterdam
Cadogan Delta BV Netherlands 100 Dormant Hoogoorddreef 15, 1101 BA
Amsterdam
Cadogan Astro Energy BV Netherlands 100 Holding Hoogoorddreef 15, 1101 BA
company Amsterdam
Cadogan Pirkovskoe BV Netherlands 100 Holding Hoogoorddreef 15, 1101 BA
company Amsterdam
Cadogan Zagoryanske Netherlands 100 Dormant Hoogoorddreef 15, 1101 BA
Production BV Amsterdam
Zagoryanska Petroleum Netherlands 100 Holding Hoogoorddreef 15, 1101 BA
BV company Amsterdam
Pokrovskoe Petroleum BV Netherlands 100 Dormant Hoogoorddreef 15, 1101 BA
Amsterdam
Cadogan Ukraine Cyprus 100 Dormant 48 Inomenon Ethnon, Guricon
Holdings Limited House, Floor 2 & 3, 6042,
Larnaca, Cyprus
Momentum Enterprise Cyprus 100 Dormant 48 Inomenon Ethnon, Guricon
(Europe) Ltd House, Floor 2 & 3, 6042,
Larnaca, Cyprus
Rentoul Ltd Isle of Man 100 Liquidated Commerce House, 1 Bowring
February 16, Road, Ramsey, Isle of Man IM8
2020 2LQ
LLC Astro Gas Ukraine 100 Exploration 5a, Pogrebnyak Street, ap. 2,
Zinkiv, Poltava region,
Ukraine, 38100
LLC Astroinvest-Energy Ukraine 100 Trading 5a, Pogrebnyak Street, ap. 2,
Zinkiv, Poltava region,
Ukraine, 38100
DP USENCO Ukraine Ukraine 100 Production 8, Mitskevycha sq.,Lviv,
Ukraine,79000
LLC USENCO Nadra Ukraine 95 Production 9a, Karpenka-Karoho str.,
Sambir, Lviv region, Ukraine
LLC Astro-Service Ukraine 100 Service 3 Petro Kozlaniuk str,
Company Kolomyia, Ukraine
OJSC Ukraine 79.9 Construction Ivan Franko str, Hvizdets,
AgroNaftoGasTechService services Kolomyia district,
Ivano-Frankivsk Region,
Ukraine
Exploenergy s.r.l. Italy 90 Exploration Via Triulziana 16c, San
Donato Milanese Milano, CAP
20097, Italy
In 2019, the Group disposed its subsidiaries LLC Astroinvest Ukraine and LLC
Gazvydobuvannya for the consideration of $4 million. At the date of disposal,
the subsidiaries had $1.8 million of VAT recoverable balance which was
previously impaired in the Group's accounts and $136 million accumulated tax
losses which were not recognised historically due to the lack of sufficient
certainty regarding future profits to utilize the losses.
18. Joint venture
In 2017, Eni informed its partners, NJSC "Nadra Ukrayny" and Cadogan Ukraine,
of its intention to exit the parties WGI joint venture. In 2017, as a result of
the uncertainty as to the future exploration of the licences following the
proposed exit by Eni which provided a carried interest to the Group, management
impaired its 15% participating interest in the project as at 31 December 2017.
During 2018 discussions were on-going on the terms of Eni's exit and,
generally, on the future of the project. As a result, Eni and Cadogan exited
from WestGasInvest LLC. Under the terms of the agreements for which Cadogan
received from Eni at the end of the year project termination fee of $1.7
million from Eni. Cadogan agreed to (i) to transfer its own shares in WGI to
Nadra Ukrayny for a nominal consideration which took place in late 2018 and
(ii) to transfer its shares in the company operating the Debeslavetska and
Cheremkhivsko-Strupkivska gas licenses to WGI. The gas producing assets, were
subject to punitive tax regime of 70% and to Cadogan were sub-economic and
carried no value. The transfer of gas producing assets have occurred in January
2019.
The termination fee has been treated as other operating income rather than as a
gain on disposal as the fee was received from Eni which is not the recipient of
the transfer of equity in the gas assets, being NJSC Nadra Ukrayny.
19. Inventories
2019 2018
$'000 $'000
Natural gas 4,949 3,584
Other inventories 1,627 1,080
Impairment provision (2,123) (177)
Carrying amount 4,453 4,487
The impairment provision as at 31 December 2019 and 2018 is made so as to
reduce the carrying value of the inventories to net realizable value.
20. Trade and other receivables
2019 2018
$'000 $'000
VAT recoverable 2,402 1,874
Trading prepayments - 258
Trading receivables - 39
Receivable from joint venture - 62
Other receivables 237 239
2,639 2,472
The Group considers that the carrying amount of receivables approximates their
fair value.
VAT recoverable is presented net of the cumulative provision of $2.4 million
(2017: $5.0 million) against Ukrainian VAT receivable that has been recognized
as at 31 December 2019. VAT recoverable relates to the oil production and gas
trading operations and is expected to be recovered through the gas and oil
sales VAT.
21. Notes supporting statement of cash flows
Cash and cash equivalents as at 31 December 2019 of $12.8 million (2018: $35.2
million) comprise cash held by the Group. The Directors consider that the
carrying amount of these assets approximates to their fair value. As of 31
December 2019, total amount of pledged cash is nil.
Non-cash transactions from financing activities are shown in the reconciliation
of liabilities from financing transactions:
Short term
borrowings
$'000
At 1 January 2018 -
Cash flows 78
Effects of foreign exchange (78)
At 1 January 2019 -
Cash flows -
Effects of foreign exchange -
At 31 December 2019 -
22. Deferred tax
The following are the major deferred tax liabilities and assets recognised by
the Group and movements thereon during the current and prior reporting period:
Temporary differences
$'000
Liability as at 1 January 2018 323
Deferred tax benefit 178
Exchange differences -
Asset as at 1 January 2019 501
Deferred tax benefit -
Exchange differences -
Asset as at 31 December 2019 501
At 31 December 2019, the Group had the following unused tax losses available
for offset against future taxable profits:
2019 2018
$'000 $'000
UK 30,756 12,634
Ukraine 50,257 180,982
81,013 193,615
Deferred tax assets have been recognized in respect of those tax losses where
there is sufficient certainty that profit will be available in future periods
against which they can be utilized. The Group's unused tax losses of $30.8
million (2018: $12.6 million) relating to losses incurred in the UK are
available to shelter future non-trading profits arising within the Company.
These losses are not subject to a time restriction on expiry. No deferred tax
asset is recorded.
Unused tax losses incurred by Ukraine subsidiaries amount to $50.3 million
(2018: $181.0 million) with the movement primarily due to the company sales in
note 17. Under general tax law provisions, these losses may be carried forward
indefinitely to be offset against any type of taxable income arising from the
same company. Tax losses may not be surrendered from one Ukraine subsidiary to
another. The deferred tax asset recorded is expected to be utilized based on
forecasts and relates to oil production subsidiaries which are generating
taxable profits.
23. Short-term borrowings
In October 2014 the Group started to use short-term borrowings as a financing
facility for its trading activities. Borrowings are represented by credit line
drawn in short-term tranches in UAH at a Ukrainian bank which is a 100%
subsidiary of a UK bank. In March 2019 the Group ceased to use the credit line,
funds of $5 million became unpledged.
24. Trade and other payables
2019 2018
$'000 $'000
Accruals 604 660
Trade creditors 253 437
Trading payables - 51
VAT payable - -
Other payables 409 123
1,266 1,271
Trade creditors and accruals principally comprise amounts outstanding for
ongoing costs. The average credit period taken for trade purchases is 29 days
(2018: 28 days). The Group has financial risk management policies to ensure
that all payables are paid within the credit timeframe.
The Directors consider that the carrying amount of trade and other payables
approximates to their fair value. No interest is generally charged on
outstanding balances.
25. Provisions
The provisions at 31 December 2019 comprise of $0.3 million (2018: $0.3
million) of decommissioning provision.
Decommissioning
$'000
At 1 January 2018 770
Change in estimate (note 15 and 16) (368)
Utilization of provision on impaired oil and gas (131)
assets
Transferred to liability held for sale (16)
Unwinding of discount on decommissioning 12
provision (note 12)
Exchange differences 48
At 1 January 2019 315
Change in estimate (note 15 and 16) (63)
Additional provisions recognized in the period 135
Utilization of provision on impaired oil and gas (335)
assets
Unwinding of discount on decommissioning 164
provision (note 12)
Exchange differences 73
At 31 December 2019 289
$'000
At 1 January 2018 770
Non-current 39
Current 276
At 1 January 2019 315
Non-current 289
Current -
At 31 December 2019 289
25. Provisions (continued)
In accordance with the Group's environmental policy and applicable legal
requirements as of 31st December 2019, the Group intends to restore the sites
it is working on after completing exploration or development activities.
A long-term provision of $0.3 million (2018: $0.3 million) has been made for
decommissioning costs, which are expected to be incurred at the end of the
licenses period as a result of the demobilization of gas and oil facilities and
respective site restoration.
26. Share capital
Authorised and issued equity share capital
2019 2018
Number $'000 Number $'000
('000) ('000)
Authorized 1,000,000 57,713 1,000,000 57,713
Ordinary shares of GBP0.03 each
Issued 235,729 13,525 235,729 13,525
Ordinary shares of GBP0.03 each
Authorized but unissued share capital of GBP30 million has been translated into
US dollars at the historic exchange rate of the issued share capital. The
Company has one class of Ordinary shares, which carry no right to fixed income.
Issued equity share capital
Ordinary shares
of GBP0.03
At 31 December 2017 235,729,322
Issued during year -
At 31 December 2018 235,729,322
Issued during year -
At 31 December 2019 235,729,322
Mr Khallouf was appointed as Chief Executive Officer on 15 November 2019. As
part of Mr Khallouf's employment agreement, a welcome bonus equivalent in value
to 5,500,000 ordinary shares (using the market value of the shares on the
business day prior to the date of issue) is payable to Mr Khallouf and a
holding period of two years is applicable to the shares acquired. Pursuant to
the terms of the bonus, the amount must be subscribed for ordinary shares in
the Company at such time as the executive agrees. The welcome bonus is yet to
be paid to Mr Khallouf and will be paid during 2020.
Following shareholders' approval of the new Remuneration Policy, Mr Michelotti
received in 2019 the Performance Bonus of EUR100,000 awarded to him based on the
achievement versus his 2019 scorecard and without a discretionary element. The
Remuneration Committee decided to award in shares 50% of the awarded bonus less
taxes and social contribution and therefore the EUR100,000 bonus was split in EUR
72,500 cash (inclusive of income tax and social contributions to be paid by Mr
Michelotti on the entire awarded amount) and EUR27,500 in shares priced at their
market value at closing on the Business Day prior to the Subscription Date. The
cash element was paid in November 2019.
The share element of the transactions have been recorded as a charge to the
income statement and a credit to equity (other reserves) based on the market
price.
27. Financial instruments
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able
to continue as a going concern, while maximising the return to shareholders.
The capital resources of the Group consist of cash and cash equivalents arising
from equity attributable to owners of the Company, comprising issued capital,
reserves and retained earnings as disclosed in the Consolidated Statement of
Changes in Equity.
Externally imposed capital requirement
The Group is not subject to externally imposed capital requirements.
Categories of financial instruments
2019 2018
$'000 $'000
Financial assets (includes cash and cash equivalents)
Financial assets at fair value through profit and loss 15,707 -
Cash and cash equivalents - amortised cost 12,834 35,136
Trading receivable- amortized cost - 39
Other receivables- amortized cost 237 239
Receivable from joint venture- amortized cost - 62
28,778 35,476
Financial liabilities - measured at amortized cost
Accruals 604 660
Trade creditors 253 437
Trading payables - 51
Other payables 409 123
1,266 1,271
Refer to note 4(d) for details of the terms of the Proger loan recorded as a
financial assets at fair value through profit and loss. The instrument is
recorded at management's best estimate of fair value as set out in note 4(d)
although management have not been able to undertake a valuation exercise under
the income method or market based method which would incorporate relevant
recent financial information on the investee or its prospects.
Financial assets at fair value through profit and loss
$'000
As at 1 January 2019 -
Long-term loans provided 15,246
Movement in FVPL 4,421
Exchange differences 364
As at 30 June 2019 20,030
Changes in valuation approach (3,724)
Exchange differences (599)
As at 31 December 2019 15,707
The Group has applied a level 3 valuation under IFRS as inputs to the valuation
have included assessment of the cash repayments anticipated under the loan
terms at maturity, historical financial information for the periods prior to
2019 and assessment of the security provided by the pledge over shares.
If the Group had been provided with information to complete a valuation under
the income method or market method the key assumptions would have included: a)
In terms of the income method: forecast revenues, EBITDA and unlevered free
cash flows of the investee including assessment of performance against its
original
27. Financial instruments (continued)
business plan at the time the loan was advanced, growth rates and terminal
values, determination of an appropriate discount rate, adjustments to the
enterprise value for debt and working capital adjustments; b) In terms of the
market method: 2019 EBITDA and information to assess the quality of such
earnings, enterprise value multiples based on a basket of comparable
transactions and companies, adjustments to the enterprise value for debt and
working capital adjustments and other risk adjustment factors.
The Group considers that the carrying amount of financial instruments
approximates their fair value.
At 30 June 2019, the Group recorded a fair value increased based on 2018
financial information provided by Proger at that time and enterprise value
multiples based on a basket of comparable transactions and companies adjusted
to determine an estimate of equity value. The fair value has subsequently been
reduced as explained above.
Financial risk management objectives
Management co-ordinates access to domestic and international financial markets
and monitors and manages the financial risks relating to the operations of the
Group in Ukraine through internal risks reports, which analyse exposures by
degree and magnitude of risks. These risks include commodity price risks,
foreign currency risk, credit risk, liquidity risk and cash flow interest rate
risk. The Group does not enter into or trade financial instruments, including
derivative financial instruments, for speculative purposes.
The Audit Committee of the Board reviews and monitors risks faced by the Group
at meetings held throughout the year.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect the value of the financial instruments. The Group is not exposed to
interest rate risk because entities of the Group borrow funds at fixed interest
rates.
Commodity price risk
The commodity price risk related to Ukrainian gas and condensate prices and
prices for crude oil are the Group's most significant market risk exposures.
World prices for gas and crude oil are characterised by significant
fluctuations that are determined by the global balance of supply and demand and
worldwide political developments, including actions taken by the Organization
of Petroleum Exporting Countries.
These fluctuations may have a significant effect on the Group's revenues and
operating profits going forward. In 2019 the price for Ukrainian gas
significantly decreased and was mainly based on the current price of the
European gas imports. Management continues to expect that the Group's principal
market for gas will be the Ukrainian domestic market.
The Group does not hedge market risk resulting from fluctuations in gas,
condensate and oil prices, and holds no financial instruments, which are
sensitive to commodity price risk.
Foreign exchange risk and foreign currency risk management
The Group undertakes certain transactions denominated in foreign currencies.
Hence, exposures to exchange rate fluctuations arise, the Group considers
exposure to be minimal. The Group to date has elected not to hedge its exposure
to the risk of changes in foreign currency exchange rates.
Inflation risk management
Inflation in Ukraine and in the international market for oil and gas may affect
the Group's cost for equipment and supplies. The Directors will proceed with
the Group's practices of keeping deposits in US dollar accounts until funds are
needed and selling its production in the spot market to enable the Group to
manage the risk of inflation.
27. Financial instruments (continued)
Credit risk management
Credit risk refers to the risk that counterparty will default on its
contractual obligations resulting in financial loss to the Group. The Group's
credit management process includes the assessment, monitoring and reporting of
counterparty exposure on a regular basis. Credit risk with respect to
receivables and advances is mitigated by active and continuous monitoring the
credit quality of its counterparties through internal reviews and assessment.
There was no material past due receivables as at year end.
The Group makes allowances for expected credit losses on receivables in
accordance with its accounting policy.
The credit risk on liquid funds (cash) is considered to be limited because the
counterparties are financial institutions with high and good credit ratings,
assigned by international credit-rating agencies in the UK and Ukraine
respectively.
The carrying amount of financial assets recorded in the financial statements
represents the Group's maximum exposure to credit risk.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of
Directors, which has built an appropriate liquidity risk management framework
for the management of the Group's short, medium and long-term funding and
liquidity management requirements. The Group manages liquidity risk by
maintaining adequate cash reserves and by continuously monitoring forecast and
actual cash flows.
The following tables sets out details of the expected contractual maturity of
financial liabilities.
3 months More than
Within to 1 1 year Total
3 months year
$'000 $'000 $'000 $'000
At 31 December 2018
Trade and other payables 1,271 - - 1,271
At 31 December 2019
Trade and other payables 1,266 - - 1,266
28. Commitments and contingencies
The Group has working interests in four licences to conduct its exploration and
development activities in Ukraine. Each license is held with the obligation to
fulfil a minimum set of exploration activities within its term and is
summarised on an annual basis, including the agreed minimum amount forecasted
expenditure to fulfil those obligations. The activities and proposed
expenditure levels are agreed with the government licensing authority.
The required future financing of exploration and development work on fields
under the license obligations are as follows:
2019 2018
$'000 $'000
Within one year - 1,583
Between two and five years 2,573 -
2,573 1,583
28. Commitments and contingencies (continued)
Tax contingent liabilities
The Group assesses its liabilities and contingencies for all tax years open for
audit by UK and Ukraine tax authorities based upon the latest information
available. Where management concludes that it is not probable that a particular
tax treatment is accepted, a provision is recorded based on the most likely
amount or the expected value of the tax treatment when determining taxable
profit (tax loss), tax bases, unused tax losses, unused tax credits and tax
rates. The decision should be based on which method provides better predictions
of the resolution of the uncertainty. Inherent uncertainties exist in estimates
of tax contingencies due to complexities of interpretation and changes in tax
laws.
Whilst the Group believes it has adequately provided for the outcome of these
matters, certain periods are under audit by the UK and Ukraine tax authorities,
and therefore future results may include favourable or unfavourable adjustments
to these estimated tax liabilities in the period the assessments are made or
resolved. The final outcome of tax examinations may result in a materially
different outcome than assumed in the tax liabilities.
After an inspection conducted by Ukraine's tax authorities in September 2019,
Astroinvest Energy LLC was notified of a tax claim related to the historic
costs for the liquidation of wells on the Zagoryanska license. The tax
authorities notified Astroinvest Energy LLC that they consider recoverable VAT
($3.6 million) that has subsequently been used to offset output VAT to be
non-deductible and additionally that the subsidiary's tax losses carry forward
should be reduced by $19 million (Note 28). Astroinvest Energy LLC has launched
a claim against the tax authority's decision on the basis of the current tax
legislation and related court decisions and considers the potential for a
liability to be less than probable.
If unsuccessful Astroinvest Energy LLC would off-set the amount of notified tax
losses with part of the historical accumulated tax losses. The disputed amount
of VAT would be partially covered with recoverable VAT not recognized as of 31
December 2019 (note 20) such that the eventual impact would be $1.2 million.
29. Related party transactions
All transactions between the Company and its subsidiaries, which are related
parties, have been eliminated on consolidation and are not disclosed in this
note. The application of IFRS 11 resulted in the joint venture LLC
Westgasinvest being accounted for under the equity method and disclosed as a
related party.
In February 2019, the Group entered in a 2-year loan agreement with Proger
Management & Partners Srl with an option to convert it into an indirect 24%
equity interest in Proger Spa. At that time, Mr Michelotti was a non-executive
Director of Proger Ingegneria Srl and Proger Spa, and CEO of Cadogan Petroleum
PLC. Mr Michelotti did not participate to the voting for the approval of the
loan agreement at the Board of Cadogan.
During the period, Group companies entered into the following transactions with
joint ventures who are considered as related parties of the Group:
2019 2018
$'000 $'000
Revenues from services provided and sales of - -
goods
Amounts owed by related parties - 62
Directors' remuneration
The remuneration of the Directors, who are the key management personnel of the
Group, is set out below in aggregate for each of the categories specified in
IAS 24 Related Party Disclosures. Further information about the remuneration of
individual Directors is provided in the audited part of the Annual Report on
Remuneration 2019 on pages 44 to 64.
Purchase of services Amounts owing
2019 2018 2019 2018
$'000 $'000 $'000 $'000
Directors' remuneration 1,454 1,182 594 230
The total remuneration of the highest paid Director was $0.6 million in the
year (2018: $0.8 million).
The amounts outstanding are mostly represented by provision for shares to be
issued in respect of a welcome bonus. No guarantees have been given or received
and no provisions have been made for doubtful debts in respect of the amounts
owed by related parties.
30. Events after the balance sheet date
At the date of approval of these consolidated financial statements, Covid-19
continues to spread internationally, contributing to a sharp decline in global
financial markets and a significant decrease in global economic activity. On 11
March 2020, the Covid-19 outbreak was declared a global pandemic by the World
Health Organization and has since then resulted in numerous governments and
companies, including Cadogan, introducing a variety of measures to contain the
spread of the virus. The outbreak has also created significant volatility in
financial markets and is considered to have negatively impacted commodity
prices, including oil prices, which is relevant to financial performance since
year end and may impact future asset values should they remain depressed. To
date there has been no material adverse effect on the Group's operations,
production continues albeit the reduced price environment has reduced revenues.
Company Balance Sheet as at 31 December 2019
Notes 2019 2018
$'000 $'000
ASSETS
Non-current assets
Receivables from subsidiaries 34 37,324 28,457
37,324 28,457
Current assets
Trade and other receivables 34 - -
Cash and cash equivalents 34 6,971 17,477
6,971 17,477
Total assets 44,295 45,934
LIABILITIES
Current liabilities
Trade and other payables 35 (350) (614)
(350) (614)
Total liabilities (350) (614)
Net assets 43,945 45,320
EQUITY
Share capital 36 13,525 13,525
Share premium 329 329
Retained earnings 1 138,318 140,106
Other reserve 492 79
Cumulative translation reserves 37 (108,719) (108,719)
Total equity 43,945 45,320
The financial statements of Cadogan Petroleum plc, registered in England and
Wales no. 05718406, were approved by the Board of Directors and authorized for
issue on 1 May 2020.
They were signed on its behalf by:
Fady Khallouf
Chief Executive Officer
1 May 2020
The notes on pages 112 to 115 form part of these financial statements.
1 Included in retained earnings, loss for the financial year ended 31 December
2019 was $1.8 million (2018: $1.1 million).
Company Cash Flow Statement for the year ended 31
December 2019
2019 2018
$'000 $'000
Operating activities
Loss for the year (1,788) (1,148)
Adjustments for:
Interest received (50) (468)
Effect of foreign exchange rate changes 143 (74)
Other payables to subsidiaries written off (382) -
Reversal of receivables from subsidiaries - (78)
Operating cash flows before movements in working capital (2,077) (1,768)
(Increase)/decrease in receivables (2,699) 78
Increase in payables 530 22
Cash used in operations (4,246) (1,668)
Income taxes paid - -
Net cash outflow from operating activities (4,246) (1,668)
Investing activities
Interest received 50 468
Loans to subsidiary companies (6,237) (8,803)
Net cash used in investing activities (6,187) (8,335)
Net decrease in cash and cash equivalents (10,433) (10,003)
Effect of foreign exchange rate changes (73) 74
Cash and cash equivalents at beginning of year 17,477 27,406
Cash and cash equivalents at end of year 6,971 17,477
Company Statement of Changes in Equity for the year ended 31 December 2019
Share
premium
Share account Cumulative
capital $'000 Retained Other translation
$'000 earnings Reserve reserves Total
$'000 $'000 $'000 $'000
As at 1 January 2018 13,525 329 141,254 - (108,719) 46,389
Net loss for the year - - (1,148) - - (1,148)
Total comprehensive loss - - (1,148) - - (1,148)
for the year
Share based award - - - 79 - 79
As at 1 January 2019 13,525 329 140,106 79 (108,719) 45,320
Net loss for the year - - (1,788) - - (1,788)
Total comprehensive loss - - (1,788) - - (1,788)
for the year
Share based award - - - 413 - 413
As at 31 December 2019 13,525 329 138,318 492 (108,719) 43,945
Notes to the Company Financial Statements for the year ended 31 December 2019
31. Significant accounting policies
The separate financial statements of the Company are presented as required by
the Companies Act 2006 (the "Act"). As permitted by the Act, the separate
financial statements have been prepared in accordance with International
Financial Reporting Standards, as adopted in the EU.
The financial statements have been prepared on the historical cost basis. The
principal accounting policies adopted are the same as those set out in note 3
to the Consolidated Financial Statements except as noted below.
As permitted by section 408 of the Act, the Company has elected not to present
its profit and loss account for the year. Cadogan Petroleum plc reports a loss
for the financial year ended 31 December 2019 of $1.8 million (2018: $1.1
million).
Investments
Investments in subsidiaries are stated at cost less, where appropriate,
provisions for impairment.
Receivables from subsidiaries
Loans to subsidiary undertakings are subject to IFRS 9's new expected credit
loss model. As all intercompany loans are repayable on demand, the loan is
considered to be in stage 3 of the IFRS 9 ECL model on the basis the subsidiary
does not have enough liquid assets in order to repay the loans if demanded.
Lifetime ECLs are determined using all relevant, reasonable and supportable
historical, current and forward-looking information that provides evidence
about the risk that the subsidiaries will default on the loan and the amount of
losses that would arise as a result of that default. All recovery strategies
indicated that the Company will fully recover the full balances of the loans so
no ECL has been recognised in the current period.
Critical accounting judgements and key sources of estimation uncertainty
The Company's financial statements, and in particular its investments in and
receivables from subsidiaries, are affected by certain of the critical
accounting judgements and key sources of estimation uncertainty.
The critical estimates and judgments referred to application of the expected
credit loss model to intercompany receivables (note 33). Management determined
that the interest free on demand loans were required to be assessed on the
lifetime expected credit loss approach and assessed scenarios considering risks
of loss events and the amounts which could be realised on the loans. In doing
so, consideration was given to factors such as the cash held by subsidiaries
and the underlying forecasts of the Group's divisions and their incorporation
of prospective risks and uncertainties.
32. Auditor's remuneration
The auditor's remuneration for audit and other services is disclosed in note 10
to the Consolidated Financial Statements.
33. Investments
The Company's subsidiaries are disclosed in note 17 to the Consolidated
Financial Statements. The investments in subsidiaries are all stated at cost
less any provision for impairment.
34. Financial assets
The Company's principal financial assets are bank balances and cash and cash
equivalents and receivables from related parties none of which are past due.
The Directors consider that the carrying amount of receivables from related
parties approximates to their fair value.
34. Financial assets (continued)
Receivables from subsidiaries
At the balance sheet date gross amounts receivable from the fellow Group
companies were $349.9 million (2018: $341.1 million). The Company recognized no
additional expected credit loss provisions in relation to receivables from
subsidiaries in 2019 (2018: nil). The accumulated provision on receivables as
at 31 December 2019 was $312.6 million (2018: $312.6 million). The carrying
value of the receivables from the fellow Group companies as at 31 December 2019
was $37.3 million (2018: $28.5 million). Receivables from subsidiaries are
interest free and repayable on demand. There are no past due receivables. The
receivables are classified as non-current based on the expected timing of
receipt notwithstanding their terms.
Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Company and short-term bank
deposits with an original maturity of three months or less. The carrying value
of these assets approximates to their fair value.
35. Financial liabilities
Trade and other payables
2019 2018
$'000 $'000
Accruals 211 157
Trade creditors 139 75
Other creditors and payables - 382
350 614
Trade payables principally comprise amounts outstanding for trade purchases and
ongoing costs. The average credit period taken for trade purchases is 34 days
(2018: 35 days).
The Directors consider that the carrying amount of trade and other payables
approximates to their fair value. No interest is charged on balances
outstanding.
36. Share capital
The Company's share capital is disclosed in note 26 to the Consolidated
Financial Statements.
37. Cumulative translation reserve
The directors decided to change the functional currency of the Company from
sterling to US dollars with effect from 1 January 2016. The effect of a change
in functional currency is accounted for prospectively. In other words, the
Company translates all items into the US dollar using the exchange rate at the
date of the change. The resulting translated amounts for non-monetary items are
treated as their historical cost. Exchange differences arising from the
translation of an operation previously recognised in other comprehensive income
in accordance with paragraphs 32 and 39(c) IAS 21 "Foreign Currency" are not
reclassified from equity to profit or loss until the disposal of the operation.
38. Financial instruments
The Company manages its capital to ensure that it is able to continue as a
going concern while maximising the return to shareholders. Refer to note 27 for
the Group's overall strategy and financial risk management objectives.
The capital resources of the Company consist of cash and cash equivalents
arising from equity, comprising issued capital, reserves and retained earnings.
Categories of financial instruments
2019 2018
$'000 $'000
Financial assets - loans and receivables (includes cash and
cash equivalents)
Cash and cash equivalents 6,971 17,477
Amounts due from subsidiaries 37,324 19,476
44,295 36,953
Financial liabilities - measured at amortized cost
Trade creditors (139) (75)
(139) (75)
Interest rate risk
All financial liabilities held by the Company are non-interest bearing. As the
Company has no committed borrowings, the Company is not exposed to any
significant risks associated with fluctuations in interest rates.
Credit risk
Credit risk refers to the risk that counterparty will default on its
contractual obligations resulting in financial loss to the Company. For cash
and cash equivalents, the Company only transacts with entities that are rated
equivalent to investment grade and above. Other financial assets consist of
amounts receivable from related parties.
The Company's credit risk on liquid funds is limited because the counterparties
are banks with high credit ratings assigned by international credit-rating
agencies.
The carrying amount of financial assets recorded in the Company financial
statements, which is net of any impairment losses, represents the Company's
maximum exposure to credit risk.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of
Directors, which has built an appropriate liquidity risk management framework
for the management of the Company's short, medium and long-term funding and
liquidity management requirements. The Company maintains adequate reserves, by
continuously monitoring forecast and actual cash flows.
The Company's financial liabilities are not significant and therefore no
maturity analysis has been presented.
Foreign exchange risk and foreign currency risk management
The Company undertakes certain transactions denominated in foreign currencies.
Hence, exposures to exchange rate fluctuations arise, the Company considers
exposure to be minimal. The Company holds a large portion of its monetary
assets and monetary liabilities in US dollars. More information on the foreign
exchange risk and foreign currency risk management is disclosed in note 27 to
the Consolidated Financial Statements.
39. Related parties
Amounts due from subsidiaries
The Company has entered into a number of unsecured related party transactions
with its subsidiary undertakings. The most significant transactions carried out
between the Company and its subsidiary undertakings are mainly for short and
long-term financing. Amounts owed from these entities are detailed below:
2019 2018
$'000 $'000
Cadogan Petroleum Holdings Limited 37,324 28,457
37,324 28,457
Refer to note 33 for details on the Company's receivables due from
subsidiaries.
The remuneration of the Directors, who are the key management personnel of the
Group, is set out below in aggregate for each of the categories specified in
IAS 24 Related Party Disclosures. In 2018 there were no other employees in the
Company. Further information about the remuneration of individual Directors is
provided in the audited part of the Annual Report on Remuneration 2019 on pages
44 to 64.
Remuneration Amounts owing
2019 2018 2019 2018
$'000 $'000 $'000 $'000
Directors' remuneration 1,431 1,182 594 -
The total remuneration of the highest paid Director was $0.6 million in the
year (2018: $0.8 million).
40. Events after the balance sheet date
Events after the balance sheet date are disclosed in note 30 to the
Consolidated Financial Statements.
Glossary
IFRSs International Financial Reporting Standards
JAA Joint activity agreement
UAH Ukrainian hryvnia
GBP Great Britain pounds
$ United States dollars
bbl Barrel
boe Barrel of oil equivalent
mmboe Million barrels of oil equivalent
mboe Thousand barrels of oil equivalent
mboepd Thousand barrels of oil equivalent per day
boepd Barrels of oil equivalent per day
bcf Billion cubic feet
mmcm Million cubic metres
mcm Thousand cubic metres
Reserves Those quantities of petroleum anticipated to be
commercially recoverable by application of development projects to known
accumulations from a given date forward under defined conditions. Reserves
include proved, probable and possible reserve categories.
Proved Reserves Those additional Reserves which analysis of
geoscience and engineering data can be estimated with reasonable certainty to
be commercially recoverable, from a given date forward, from reservoirs and
under defined economic conditions, operating methods and government
regulations.
Probable Reserves Those additional Reserves which analysis of
geoscience and engineering data indicate are less likely to be recovered than
proved Resources but more certain to be recovered than possible Reserves.
Possible Reserves Those additional Reserves which analysis of
geoscience and engineering data indicate are less likely to be recoverable than
probable Reserves.
Contingent Resources Those quantities of petroleum estimated, as of a given
date, to be potentially recoverable from known accumulations by application of
development projects, but which are not currently considered to be commercially
recoverable due to one or more contingencies.
Prospective Resources Those quantities of petroleum which are estimated as of
a given date to be potentially recoverable from undiscovered accumulations.
P1 Proved Reserves
P2 Probable Reserves
P3 Possible Reserves
1P Proved Reserves
2P Proved plus Probable Reserves
3P Proved plus Probable plus Possible Reserves
Workover The process of performing major maintenance or remedial
treatment of an existing oil or gas well
E&E / E&P Exploration and Evaluation / Exploration and
Production
LTI Lost time incidents
Shareholder Information
Enquiries relating to the following administrative matters should be addressed
to the Company's registrars: Link Asset Services, The Registry, 34 Beckenham
Road, Beckenham, Kent BR3 4TU.
Telephone number:
UK: 0871 664 0300 (calls cost 12p per minute plus network extras).
International: +44 (0) 371 664 0300
Lines are open 9am - 5.30pm, Monday - Friday, excluding public holidays.
* Loss of share certificates.
* Notification of change of address.
* Transfers of shares to another person.
* Amalgamation of accounts: if you receive more than one copy of the Annual
Financial Report, you may wish to amalgamate your accounts on the share
register.
You can access your shareholding details and a range of other services at the
Shareholder Portal www.signalshares.com.
Information concerning the day-to-day movement of the share price of the
Company can be found on the Group's website www.cadoganpetroleum.com or that of
the London Stock exchange www.prices.londonstockexchange.com.
Unsolicited mail
As the Company's share register is, by law, open to public inspection,
shareholders may receive unsolicited mail from organisations that use it as a
mailing list. To reduce the amount of unsolicited mail you receive, contact:
The Mailing Preference Service, FREEPOST 22, London W1E 7EZ. Telephone: 0845
703 4599. Website: www.mpsonline.org.uk.
Financial calendar 2019/2020
Annual General Meeting June 2020
Half Yearly results announced August 2019
Annual results announced May 2020
Investor relations
Enquiries to: info@cadoganpetroleum.com
Registered office
Shakespeare Martineau LLP,
6th Floor, 60 Gracechurch Street, London EC3V 0HR
Registered in England and Wales no. 05718406
Ukraine
48/50A Zhylyanska Street
Business center "Prime", 8th floor
01033 Kyiv
Ukraine
Email: info@cadoganpetroleum.com
Tel: +38 044 594 58 70
Fax: +38 044 594 58 71
www.cadoganpetroleum.com
References to page numbers throughout this announcement relates to the page
numbers within the Annual Report of the Company for the year ended 31st
December 2019
[1] Gross revenues of $5.9 million (2018: $14.7 million) included $0.9 million
(2018: $9.9 million) from trading of natural gas, $4.9 million (2018: $4.7
million) from exploration and production and $0.06 million from services (2018:
$0.1 million)
[2] Administrative expenses ("G&A")
[3] Astroservice LLC used its rig for the workover campaign on the
Monastyretska license
[4] LTI: Lost Time Incidents; TRI: Total Recordable Incidents
[5] Segment result being the gross profit net of administrative expenses of the
segment
[6] Taxable benefits include life and medical insurance provided to the
executive and leased car. There are no contributions to pension schemes.
[7] Provision for welcome bonus of 5,500,000 ordinary shares based on a share's
price of GBP0.0525 has been recognized. Precise value of the bonus will be
calculated in 2020 using the market value of the shares on the business day
prior to the date of issue.
[8] 2015 CEO's salary is the sum of Mr. des Pallieres' salary for the period
January to June and of Mr. Michelotti's salary for the period July to December
[9] In relation to performance in 2016 and 2015, the CEO used the entire amount
of the bonus to buy at market price newly issued company shares on 22 September
2017
[10] 2019 Annual bonus is a sum of Mr Michelotti's bonus of $112,140 and
provision for welcome bonus for Mr Khallouf of $382,969 to be issued in shares
during 2020
[11] The new Remuneration Policy approved in June 2018, reduces the maximum
allowable bonus from 200% to 125% of the base salary
[12] The amount is including a provision for welcome bonus for Mr Khallouf of
$382,969 to be granted in shares during 2020
[13] Mr Michelotti undertook to use the entire bonus to buy company's share at
market price in order to leave the Company cash neutral
[14] Year-end performance-based bonus was an alternative to an up-front sign-on
bonus. Mr Michelotti use the entire bonus to buy company's share at market
price on 22 September 2017
[15] $280,298 paid as fees, pension and loss of office
[16] From 1 August, 2011
[17] From 19 March 2009
[18] Included salary of Mr Michelotti and Mr Khallouf.
[19] All employees mean all employees of the Group, including CEO and other
Directors (note 11, page 94).
[20] 2019 Annual bonus is a sum of Mr Michelotti's bonus of $112,140 and
welcome bonus provision for Mr Khallouf of $382,969 to be granted in shares
during 2020.
[21] Please note that the salary of the CEO for 2020 will remain at EUR440,000.
References to page numbers throughout this announcement relates to the page
numbers within the Annual Report of the Company for the year ended 31st
December 2019.
END
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