TIDMRPT
RNS Number : 1979M
Regal Petroleum PLC
13 September 2019
Press Release
13 September 2019
REGAL PETROLEUM PLC
2019 INTERIM RESULTS
Regal Petroleum plc (the "Company", and with its subsidiaries,
the "Group"), the AIM-quoted (RPT) oil and gas exploration and
production group with assets in Ukraine, today announces its
unaudited results for the six month period ended 30 June 2019.
Highlights
Operations
-- Aggregate average daily production from the MEX-GOL, SV
and VAS fields over the six month period to 30 June 2019
of 4,192 boepd, which compares with an aggregate average
daily production rate of 2,790 boepd during the first half
of 2018, an increase of approximately 50%
-- Reserves upgrade at VAS field announced in August 2019,
nearly doubling proved + probable (2P) reserves to 3.145
MMboe (from 1.80 MMboe)
Finance
-- Revenue for the six month period ended 30 June 2019 up
27% to $31.3 million (1H 2018: $24.6 million)Operating
profit for the period of $13.7 million (1H 2018: $44.5
million, including one-off item of $34.5 million)
-- Operating profit for the period of $13.7 million (1H 2018:
$44.5 million, including one-off item of $34.5 million)
-- Profit before tax for the first half of 2019 of $13.3 million
(1H 2018: $45.0 million, including one-off item of $34.5
million)
-- Cash and cash equivalents of $67.8 million at 30 June 2019
(31 December 2018: cash and cash equivalents of $53.2 million),
with cash and cash equivalents at 10 September 2019 of
$62.0 million
Outlook
-- Development work for the remainder of 2019 at MEX-GOL and
SV fields: refinement of the geological model; testing
and if successful, hook up of MEX-119 well; hydraulic fracturing
operations on MEX-120 well; commencement of SV-54 well;
planning for further new well in SV field; assessment and
workover of existing wells; installation of compression
equipment; and continued investment in gas processing facilities,
pipeline network and other infrastructure
-- Development work for the remainder of 2019 at VAS field:
completion of processing and interpretation of new 3D seismic
data; development of new geological model; planning for
a new well; installation of compression equipment; and
continued investment in gas processing facilities, pipeline
network and other infrastructure
This announcement contains inside information for the purposes
of Article 7 of EU Regulation 596/2014.
For further information, please contact:
Regal Petroleum plc Tel: 020 3427 3550
Chris Hopkinson, Chairman
Sergii Glazunov, Chief Executive Officer
Strand Hanson Limited Tel: 020 7409 3494
Rory Murphy / Richard Tulloch
Citigate Dewe Rogerson Tel: 020 7638 9571
Nick Hayns / Elizabeth Kittle
Dmitry Sazonenko, MSc Geology, MSc Petroleum Engineering, Member
of AAPG, SPE and EAGE, Director of the Company, has reviewed and
approved the technical information contained within this press
release in his capacity as a qualified person, as required under
the AIM Rules.
Definitions
bbl barrel
bbl/d barrels per day
boe barrel of oil equivalent
boepd barrel of oil equivalent per day
HSES health, safety, environment and security
LPG liquefied petroleum gas
MEX-GOL Mekhediviska-Golotvshinska
m(3) cubic metre
Mm(3) thousand cubic metres
MMboe million barrels of oil equivalent
MMscf/d million standard cubic feet per day
% per cent
scf standard cubic feet measured at 20 degrees
Celsius and one atmosphere
SV Svyrydivske
$ United States Dollar
UAH Ukrainian Hryvnia
VAS Vasyschevskoye
VED Vvdenska
Chairman's Statement
During the first half of 2019, the Group has continued with the
development of the MEX-GOL, SV and VAS gas and condensate fields in
north-eastern Ukraine, with a solid operational and financial
performance during the period. Drilling of the MEX-119 development
well, which commenced in February 2019, has now been completed and
the well will be tested in the near future, and as announced on 21
August 2019, a reassessment of reserves and resources at the VAS
field as at 31 December 2018 resulted in a significant reserves
upgrade.
At the MEX-GOL and SV fields, production was reasonably stable
during the first half of 2019, with higher production volumes
compared with the same period last year, and at the VAS field
production was also steady, and significantly higher than during
the first half of 2018, following the hook-up of the VAS-10 well in
November 2018.
Aggregate average daily production from the MEX-GOL, SV and VAS
fields during the first half of 2019 was 4,192 boepd, which
compares with an aggregate daily production rate of 2,790 boepd
during the first half of 2018, an increase of approximately
50]%.
The Group's financial performance for the six month period ended
30 June 2019, was positive and an improvement on the corresponding
half-year period in 2018. During the first half of 2019, the
Group's profit before tax was $13.3 million (1H 2018: $45.0
million, which includes a one-off item of $34.5 million),
predominantly as a result of improved revenues of $31.3 million (1H
2018: $24.6 million) from higher production volumes offset by lower
hydrocarbon prices. Cash generated from operations during the
period was also higher at $17.6 million (1H 2018: $13.1
million).
The fiscal and economic situation in Ukraine was reasonably
stable during 2019, with a better economic outlook, GDP growth,
reduced inflation and stability in the Ukrainian Hryvnia exchange
rates. Nevertheless, there are still fiscal and economic stresses
in Ukraine and a continued weakness in the Ukrainian banking
sector.
The Ukrainian Government has implemented a number of reforms in
the oil and gas sector in recent years, which include the
deregulation of the gas supply market in late 2015, and more
recently, reductions in the subsoil tax rates relating to oil and
gas production and a simplification of the regulatory procedures
applicable to oil and gas exploration and production activities in
Ukraine.
The deregulation of the gas supply market, supported by
electronic gas trading platforms and improved pricing transparency,
has meant that the market gas prices in Ukraine now broadly
correlate with the imported gas prices. During the first half of
2019, gas prices trended lower, reflecting a similar trend in
European gas prices, and were lower than in the same period in
2018. Similarly, condensate and LPG prices were also lower by
comparison with the first half of 2018.
Board and Management Changes
In June 2019, Bruce Burrows was appointed as Finance Director of
the Company, and Oleksiy Zayets was appointed as Chief Financial
Officer of the Company's Ukrainian operations.
Outlook
Whilst there are still challenges in the business environment in
Ukraine, the situation is improving gradually. After the steady
operational performance during the first half of 2019, we are
eagerly awaiting the results of the MEX-119 development well and
the hydraulic fracturing operations on the MEX-120 well, which are
expected in the near future. We are also looking forward to
achieving further successes in the development activities planned
for the remainder of 2019 and delivering a steadily increasing
production and revenue stream in the future.
In conclusion, on behalf of the Board, I would like to thank all
of our staff for the continued dedication and support they have
shown during the year.
Chris Hopkinson
Chairman
12 September 2019
Chief Executive Officer's Statement
Introduction
The Group continued its good progress at the Ukrainian fields
during 2019, with development activity at the MEX-GOL and SV fields
including the drilling of the MEX-119 development well, which has
now reached its final depth, with testing expected in the near
future, the successful workover of the MEX-106 well to renew the
production tubing, and hydraulic fracturing operations at the
MEX-120. At the VAS field, acquisition of the remaining coverage of
3D seismic over the field was completed in early 2019 and the data
acquired is being processed and interpreted. Overall production was
steady during the first half of 2019, and significantly higher than
in the first half of 2018.
Production
The average daily production of gas, condensate and LPG from the
MEX-GOL, SV and VAS fields for the six month period ended 30 June
2019 was as follows:-
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
1H 2019 1H 2018 1H 2019 1H 2018 1H 2019 1 2018 1H 2019 1H 2018
-------- -------- -------- -------- -------- ------- -------- --------
MEX-GOL
& SV 14.0 9.7 542 340 273 182 3,203 2,183
-------- -------- -------- -------- -------- ------- -------- --------
VAS 4.9 3.1 81 38 - - 989 607
-------- -------- -------- -------- -------- ------- -------- --------
Total 18.9 12.8 623 378 273 182 4,192 2,790
-------- -------- -------- -------- -------- ------- -------- --------
Production rates were higher in the first half of 2019 when
compared with the corresponding period in 2018 predominantly due to
the successes of the SV-12 and VAS-10 wells in the second half of
2018.
The Group's average daily production for the period from 1 July
2019 to 10 September 2019 from the MEX-GOL and SV field was 12.8
MMscf/d of gas, 519 bbl/d of condensate and 237 bbl/d of LPG (2,935
boepd in aggregate) and from the VAS field was 4.4 MMscf/d of gas
and 43 bbl/d of condensate (864 boepd in aggregate).
Operations
The fiscal and economic conditions in Ukraine have continued to
improve over the recent period, with good stability in the
Ukrainian Hryvnia, reductions in the subsoil tax rates and
improvements in the regulatory procedures in the oil and gas sector
in Ukraine, although hydrocarbon prices have been trending lower,
adversely affecting the Group's realised prices for gas, condensate
and LPG.
At the MEX-GOL and SV fields, the Group continued to work with
P.D.F. Limited to utilise their re-evaluation study of these
fields, which involved analysis of all available geological,
geophysical, petroleum engineering and well performance data. The
continuing work included interpretation of newly reprocessed
existing 3D seismic data, and utilising this data to update the
geological subsurface model of the fields. This work, undertaken in
conjunction with P.D.F. Limited, is enabling the Group to refine
its strategies for the further development of the fields, including
the timing and level of future capital investment required to
exploit the hydrocarbon resources.
In early 2017, the Group entered into an agreement with NJSC
Ukrnafta, the majority State-owned oil and gas producer, relating
to the SV-2 well, which is a suspended well owned by NJSC Ukrnafta
located within the Group's SV licence area. Under the agreement,
the Group agreed to undertake a workover of the well, which was
successful, and resulted in the well being brought back into
production in August 2017. Pursuant to the agreement, the gas and
condensate produced from the well is sold under an equal net profit
sharing arrangement between the Group and NJSC Ukrnafta, with the
Group accounting for the hydrocarbons produced and sold from the
well as revenue, and the net profit share due to NJSC Ukrnafta
being treated as a lease expense in cost of sales.
Following on from the success of the SV-2 well operations, in
November 2017, the Group entered into a similar agreement with NJSC
Ukrnafta, in relation to the SV-12 well, which is also a suspended
well owned by NJSC Ukrnafta located within the SV licence area. The
terms of this agreement are fundamentally consistent with the
agreement relating to the SV-2 well, including the equal net profit
sharing arrangement between the Group and NJSC Ukrnafta. Workover
operations were undertaken on this well during the first half of
2018, which were successfully concluded in July 2018 and the well
was put on production from two intervals in the B-22 Visean
formation.
The MEX-119 development well, which was spudded in February
2019, is targeting production from the B-20 horizon in the Visean
formation. The well has now reached its final depth of 4,822
metres, which is slightly shallower than its planned depth, after
all targeted horizons were encountered. Testing operations will be
undertaken in the near future, and subject to the results thereof,
the well will be hooked up to the gas processing facility.
Hydraulic fracturing operations on the MEX-120 well were
commenced in September 2019 and results are anticipated in the near
future. In addition at the MEX-GOL and SV fields, the Group
completed successful workover operations on the MEX-106 well to
replace the production tubing, upgraded the gas processing
facilities and pipeline network, and undertook remedial work on
existing wells.
At the VAS field, the acquisition of new 3D seismic data over
the remaining areas of the field was finally completed in January
2019, after the seismic contractor experienced some local access
issues which delayed the acquisition field work. The data acquired
is now being processed and interpreted.
However, as announced on 12 March 2019, a regulatory issue did
arise when the State Service of Geology and Subsoil of Ukraine
issued an order for suspension (the "Order") of the production
licence for the VAS field. Under the applicable legislation, the
Order would lead to a shut-down of production operations at the VAS
field, but the Group has issued legal proceedings to challenge the
Order, and has obtained a ruling suspending operation of the Order
pending a hearing of the substantive issues. The Group does not
believe that there are any grounds for the Order, and intends to
pursue its challenge to the Order through the Ukrainian Courts. As
such, operations continue as usual at the VAS field.
Reserves Update
In the first half of 2019, the Group commissioned DeGolyer and
MacNaughton ("D&M") to prepare an updated assessment of the
remaining reserves and resources at the VAS field as at 31 December
2018 in order to update the Group's reserves and resources since
the previous reserves estimation undertaken by Senergy (GB) Limited
("Senergy") as at 1 January 2016.
The updated assessment of 1.895 MMboe of proved (1P) and 3.145
MMboe of proved + probable (2P) reserves shows a material increase
in these categories of remaining reserves from the 2016 Senergy
estimates, which were 0.66 MMboe and 1.80 MMboe respectively. These
increases reflect a higher level of confidence in the understanding
of the subsurface at the field as a result of the new data obtained
since 2016.
Further details of the D&M assessment are set out in the
Company's announcement dated 21 August 2019.
Outlook
During the remainder of 2019, the Group will continue to develop
the MEX-GOL, SV and VAS fields. At the MEX-GOL and SV fields, the
development programme includes revision of the geological model
utilising the newly interpreted reprocessed seismic data, testing
the MEX-119 development well, completing the hydraulic fracturing
operations at the MEX-120 well, commencing a new well, SV-54, in
the SV field, which is planned to be spudded later in the year,
planning for a further well in the SV field, investigating workover
opportunities for other existing wells, installation of compression
equipment, further upgrading of the gas processing facilities and
pipeline network, and remedial and upgrade work on existing wells,
pipelines and other infrastructure.
At the VAS field, the processing and interpreting of the new 3D
seismic data will be completed, a new geological model will be
developed, and planning for a new well will be undertaken. It is
also intended to undertake further evaluation of the VED area of
the licence, which appears highly prospective on the current 2D
seismic data and will benefit from the improved imaging of the new
3D seismic data. Work is also planned to install compression
equipment, and upgrade the gas processing facilities, pipeline
network and other infrastructure.
There has also been encouraging new legislation relating to the
oil and gas sector in Ukraine, demonstrating the Ukrainian
Government's stated intention to promote and support the domestic
oil and gas production industry. These new measures include
reductions in the subsoil taxes applicable to the production of
hydrocarbons, which became effective for gas production from new
wells drilled after 1 January 2018 and came into effect for
condensate production from all wells from 1 January 2019.
Furthermore, new legislation was introduced last year to simplify a
number of the regulatory procedures relating to oil and gas
exploration and production activities in Ukraine.
These measures, and the general improvement in the business
climate in Ukraine, are encouraging and supportive of the
independent oil and gas producers in Ukraine.
Finally, I would like to add my thanks to all of our staff for
the continued hard work and dedication they have shown during this
year.
Sergii Glazunov
Chief Executive Officer
Finance Review
The Group maintained a solid financial performance during the
first half of 2019, broadly consistent with the second half of
2018. The underlying operating performance was, however, a
significant improvement on the comparative period of the first half
of 2018. The performance in the first half of 2018 did however
benefit significantly from a $34.5 million impairment reversal.
Excluding this impairment reversal impact, the operating profit
during the first half of 2019 was higher at $13.7 million (1H 2018:
$10.1 million), mainly as a result of improved revenue of $31.3
million (1H 2018: $24.6 million) derived from higher production
volumes offset by lower hydrocarbon prices.
Profit before tax during the period was also higher at $13.3
million (1H 2018: $10.5 million, excluding $34.5 million impairment
reversal). Cash generated from operations was higher at $17.6
million (1H 2018: $13.1 million).
The market price in Ukraine for gas broadly correlates to the
price of imported gas, which generally reflects trends in European
gas prices, which declined during the first half of 2019.
For the six-month period ended 30 June 2019, the average
realised gas, condensate and LPG prices were $256/Mm(3)
(UAH6,921/Mm(3) ), $54/bbl and $52/bbl respectively (1H 2018:
$280/Mm(3) (UAH7,491/Mm(3) ), $69/bbl and $73/bbl
respectively).
During the period from 1 July 2019 to 10 September 2019, the
average realised gas, condensate and LPG prices were $173/Mm(3)
(UAH4,402/Mm(3) ), $59/bbl and $54/bbl respectively.
The subsoil tax rates applicable to gas production were stable
during the period at 29% for gas produced from deposits at depths
above 5,000 metres and 14% for gas produced from deposits below
5,000 metres, but reductions in the subsoil rates applicable to new
wells and to condensate production have been implemented, under
which (i) for new wells drilled after 1 January 2018, the subsoil
tax rates were reduced from 29% to 12% for gas produced from
deposits at depths above 5,000 metres and from 14% to 6% for gas
produced from deposits below 5,000 metres for the period between
2018 and 2022, and (ii) with effect from 1 January 2019 and
applicable to all wells, the subsoil tax rates for condensate were
reduced from 45% to 31% for condensate produced from deposits above
5,000 metres and from 21% to 16% for condensate produced from
deposits below 5,000 metres.
In addition, with effect from 1 January 2019, a transmission
tariff of UAH91.87/Mm(3) ($3.23/Mm(3) ) for use of the Ukrainian
national pipeline system became applicable to oil and gas producers
in Ukraine, including the Group.
In the six-month period ended 30 June 2019, cost of sales was
higher at $17.3 million (1H 2018: $12.8 million), mainly due to
higher lease expenses relating to the profit share in respect of
the SV-12 well and the introduction of the transmission tariff,
which was partially offset by the decrease in the subsoil tax
relating to the production of condensate.
Despite the increased operational activity, administrative
expenses for the first half of 2019 at $2.9 million were consistent
with the comparative period (1H 2018: $2.9 million).
The tax charge for the six month period ended 30 June 2019 of
$3.4 million (1H 2018: $6.1 million charge) comprises a current tax
charge of $1.7 million (1H 2018: $2.1 million charge) and a
deferred tax charge of $1.7 million (1H 2018: $4.0 million
charge).
At 30 June 2019, the Group derecognised a deferred tax asset of
$2.1 million due to losses expected in the foreseeable future.
A deferred tax asset relating to the development and production
asset at the MEX-GOL and SV fields of $1.4 million (31 December
2018: $1.1 million) was recognised at 30 June 2019 on the tax
effect of the temporary differences between the carrying value of
the development and production asset at the MEX-GOL and SV fields
and its tax base.
A deferred tax liability relating to the development and
production asset at the VAS field of $0.3 million (31 December
2018: $0.5 million) was recognised at 30 June 2019 on the tax
effect of the temporary differences between the carrying value of
the development and production asset at the VAS field and its tax
base.
Capital investment of $6.7 million reflects investment in the
Group's oil and gas development and production assets during the
period (1H 2018: $5.0 million), primarily relating to the
expenditure associated with the drilling of the MEX-119 well.
Cash and cash equivalents held at 30 June 2019 were $67.8
million (31 December 2018: $53.2 million cash and cash
equivalents). The Group's cash and cash equivalents balance at 10
September 2019 was $62 million, held as to $20.4 million equivalent
in Ukrainian Hryvnia, $41.6 million equivalent predominantly in US
Dollars, Euros and Pounds Sterling.
Since early 2014, the Ukrainian Hryvnia has devalued
significantly against the US Dollar, falling from UAH8.3/$1.00 on 1
January 2014 to UAH26.2/$1.00 on 30 June 2019, which resulted in
substantial foreign exchange translation losses for the Group over
that period, and in turn adversely impacted the carrying value of
the MEX-GOL and SV asset due to the translation of two of the
Group's subsidiaries from their functional currency of Ukrainian
Hryvnia to the Group's presentation currency of US Dollars.
However, in the first half of 2019, the exchange rate between the
Ukrainian Hryvnia and the US Dollar has been reasonably stable,
averaging UAH26.9/$1.00 during the period (average rate during 1H
2018: UAH26.8/$1.00). Nevertheless, further devaluation of the
Ukrainian Hryvnia against the US Dollar may affect the carrying
value of the Group's assets in the future.
Cash from operations has funded the capital investment during
the year, and the Group's current cash position and positive
operating cash flow are the sources from which the Group plans to
fund the development programmes for its assets in the remainder of
2019.
Bruce Burrows
Finance Director
Principal Risks and Uncertainties
The Group has a risk evaluation methodology in place to assist
in the review of the risks across all material aspects of its
business. This methodology highlights external, operational and
technical, financial and corporate risks, and assesses the level of
risk and potential consequences. It is periodically presented to
the Audit Committee and the Board for review, to bring to their
attention potential risks and, where possible, propose mitigating
actions. Key risks recognised and mitigation factors are detailed
below:
Risk Mitigation
External risks
-----------------------------------------------
Risk relating to Ukraine
-----------------------------------------------
Ukraine is an emerging market and The Group minimises this risk by
as such, the Group is exposed to continuously monitoring the market
greater regulatory, economic and in Ukraine and by maintaining a
political risks than it would be strong working relationship with
in other jurisdictions. Emerging the Ukrainian regulatory authorities.
economies are generally subject The Group also maintains a significant
to a volatile political and economic proportion of it cash holdings in
environment, which makes them vulnerable international banks outside Ukraine.
to market downturns elsewhere in
the world, and could adversely
impact the Group's ability to operate
in the market.
-----------------------------------------------
Regional conflict
-----------------------------------------------
Ukraine continues to have a strained As the Group has no assets in Crimea
relationship with Russia, following or the areas of conflict in the
Ukraine's agreement to join a free east of Ukraine, nor do its operations
trade area with the European Union, rely on sales or costs incurred
which resulted in the implementation there, the Group has not been directly
of mutual trade restrictions between affected by the conflict. However,
Russia and Ukraine on many key the Group continues to monitor the
products. Further, the conflict situation and endeavours to procure
in parts of eastern Ukraine has its equipment from sources in other
not been resolved to date, and markets. The disputes and interruption
Russia continues to occupy Crimea. to the supply of gas from Russia
This conflict has put further pressure has indirectly encouraged Ukrainian
on relations between Ukraine and Government support for the development
Russia, and the political tensions of the domestic production of hydrocarbons
have had an adverse effect on the since Ukraine imports a significant
Ukrainian financial markets, hampering proportion of its gas, which has
the ability of Ukrainian companies resulted in legislative measures
and banks to obtain funding from to improve the regulatory requirements
the international capital and debt for hydrocarbon extraction in Ukraine.
markets. This strained relationship
between Russia and Ukraine has
also resulted in disputes and interruptions
in the supply of gas from Russia.
-----------------------------------------------
Banking system in Ukraine
-----------------------------------------------
The banking system in Ukraine has The creditworthiness and potential
been under great strain in recent risks relating to the banks in Ukraine
years due to the weak level of are regularly reviewed by the Group,
capital, low asset quality caused but the geopolitical and economic
by the economic situation, currency events since 2013 in Ukraine have
depreciation, changing regulations significantly weakened the Ukrainian
and other economic pressures generally, banking sector. In light of this,
and so the risks associated with the Group has taken and continues
the banks in Ukraine have been to take steps to diversify its banking
significant, including in relation arrangements between a number of
to the banks with which the Group banks in Ukraine. These measures
has operated bank accounts. However, are designed to spread the risks
following remedial action imposed associated with each bank's creditworthiness,
by the National Bank of Ukraine, and the Group endeavours to use
Ukraine's banking system has improved banks that have the best available
moderately. Nevertheless, Ukraine creditworthiness. Nevertheless,
continues to be supported by funding and despite some recent improvements,
from the International Monetary the Ukrainian banking sector remains
Fund under a 14-month Stand-By weakly capitalised and so the risks
Arrangement aggregating $3.9 billion associated with the banks in Ukraine
approved in December 2018, which remain significant, including in
replaced a previous funding programme relation to the banks with which
from the International Monetary the Group operates bank accounts.
Fund. An initial tranche of $1.4 As a consequence, the Group also
billion has been disbursed, and maintains a significant proportion
the disbursement of further tranches of its cash holdings in international
is dependent on semi-annual reviews banks outside Ukraine.
of the status of fiscal, economic
and regulatory reforms in Ukraine.
-----------------------------------------------
Geopolitical environment in Ukraine
-----------------------------------------------
Although there have been some improvements The Group continually monitors the
in recent years, there has not market and business environment
been a final resolution of the in Ukraine and endeavours to recognise
political, fiscal and economic approaching risks and factors that
situation in Ukraine and its ongoing may affect its business. In addition,
effects are difficult to predict the involvement of Lovitia Investments
and likely to continue to affect Limited, as the indirect majority
the Ukrainian economy and potentially shareholder with extensive experience
the Group's business. Whilst not in Ukraine, is considered helpful
materially affecting the Group's to mitigate such risks.
production operations, the instability
has disrupted the Group's development
and operational planning for its
assets.
-----------------------------------------------
Operational and technical risks
-----------------------------------------------
Health, Safety, Environment and
Security ("HSES")
-----------------------------------------------
The oil and gas industry, by its The Group maintains an HSES management
nature, conducts activities which system and requires that management,
can cause health, safety, environmental staff and contractors adhere to
and security incidents. Serious this system. The system ensures
incidents can not only have a financial that the Group meets Ukraine legislative
impact but can also damage the standards in full and achieves international
Group's reputation and the opportunity standards to the maximum extent
to undertake further projects. possible.
-----------------------------------------------
Industry risks
-----------------------------------------------
The Group is exposed to risks which The Group has well qualified and
are generally associated with the experienced technical management
oil and gas industry. For example, staff to plan and supervise operational
the Group's ability to pursue and activities. In addition, the Group
develop its projects and development engages with suitably qualified
programmes depends on a number local and international geological,
of uncertainties, including the geophysical and engineering experts
availability of capital, seasonal and contractors to supplement and
conditions, regulatory approvals, broaden the pool of expertise available
gas, oil, condensate and LPG prices, to the Group. Detailed planning
development costs and drilling of development activities is undertaken
success. As a result of these uncertainties, with the aim of managing the inherent
it is unknown whether potential risks associated with oil and gas
drilling locations identified on exploration and production, as well
proposed projects will ever be as ensuring that appropriate equipment
drilled or whether these or any and personnel are available for
other potential drilling locations the operations, and that local contractors
will be able to produce gas, oil are appropriately supervised.
or condensate. In addition, drilling
activities are subject to many
risks, including the risk that
commercially productive reservoirs
will not be discovered. Drilling
for hydrocarbons can be unprofitable,
not only due to dry holes, but
also as a result of productive
wells that do not produce sufficiently
to be economic. In addition, drilling
and production operations are highly
technical and complex activities
and may be curtailed, delayed or
cancelled as a result of a variety
of factors.
-----------------------------------------------
Production of hydrocarbons
-----------------------------------------------
Producing gas and condensate reservoirs In 2016, the Group engaged external
are generally characterised by technical consultants to undertake
declining production rates which a comprehensive review and re-evaluation
vary depending upon reservoir characteristics study of the MEX-GOL and SV fields
and other factors. Future production in order to gain an improved understanding
of the Group's gas and condensate of the geological aspects of the
reserves, and therefore the Group's fields and reservoir engineering,
cash flow and income, are highly drilling and completion techniques,
dependent on the Group's success and the results of this study and
in operating existing producing further planned technical work is
wells, drilling new production being used by the Group in the future
wells and efficiently developing development of these fields. In
and exploiting any reserves, and addition, an evaluation study was
finding or acquiring additional undertaken on the VAS field prior
reserves. The Group may not be to its acquisition in 2016 and this
able to develop, find or acquire was updated in 2019. The Group has
reserves at acceptable costs. The established an ongoing relationship
experience gained from drilling with such external technical consultants
undertaken to date highlights such to ensure that technical management
risks as the Group targets the and planning is of a high quality
appraisal and production of these in respect of all development activities
hydrocarbons. on the Group's fields.
-----------------------------------------------
Risks relating to further development
and operation of the Group's gas
and condensate fields in Ukraine
-----------------------------------------------
The planned development and operation The Group's technical management
of the Group's gas and condensate staff, in consultation with its
fields in Ukraine is susceptible external technical consultants,
to appraisal, development and operational carefully plan and supervise development
risk. This could include, but is and operational activities with
not restricted to, delays in delivery the aim of managing the risks associated
of equipment in Ukraine, failure with the further development of
of key equipment, lower than expected the Group's fields in Ukraine. This
production from wells that are includes detailed review and consideration
currently producing, or new wells of available subsurface data, utilisation
that are brought on-stream, problematic of modern geological software, and
wells and complex geology which utilisation of engineering and completion
is difficult to drill or interpret. techniques developed for the fields.
The generation of significant operational With operational activities, the
cash is dependent on the successful Group ensures that appropriate equipment
delivery and completion of the and personnel is available for the
development and operation of the operations, and that operational
fields. contractors are appropriately supervised.
In addition, the Group performs
a review of its oil and gas assets
for impairment on an annual basis,
and considers whether an assessment
of its oil and gas assets by a suitably
qualified independent assessor is
appropriate or required.
-----------------------------------------------
Drilling and workover operations
-----------------------------------------------
Due to the depth and nature of The utilisation of detailed sub-surface
the reservoirs in the Group's fields, analysis, careful well planning
the technical difficulty of drilling and engineering design in designing
or re-entering wells in the Group's work programmes, along with appropriate
fields is high, and this and the procurement procedures and competent
equipment limitations within Ukraine, on-site management, aims to minimise
can result in unsuccessful or lower these risks.
than expected outcomes for wells.
-----------------------------------------------
Maintenance of facilities
-----------------------------------------------
There is a risk that production The Group's facilities are operated
or transportation facilities can and maintained at standards above
fail due to non-adequate maintenance, the Ukraine minimum legal requirements.
control or poor performance of Operations staff are experienced
the Group's suppliers. and receive supplemental training
to ensure that facilities are properly
operated and maintained. Service
providers are rigorously reviewed
at the tender stage and are monitored
during the contract period.
-----------------------------------------------
Financial risks
-----------------------------------------------
Exposure to cash flow and liquidity
risk
-----------------------------------------------
There is a risk that insufficient The Group maintains adequate cash
funds are available to meet the reserves and closely monitors forecasted
Group's development obligations and actual cash flow, as well as
to commercialise the Group's oil short and longer-term funding requirements.
and gas assets. Since a significant The Group does not currently have
proportion of the future capital any loans outstanding, internal
requirements of the Group is expected financial projections are regularly
to be derived from operational made based on the latest estimates
cash generated from production, available, and various scenarios
including from wells yet to be are run to assess the robustness
drilled, there is a risk that in of the liquidity of the Group. However,
the longer term, insufficient operational as the risk to future capital funding
cash is generated, or that additional is inherent in the oil and gas exploration
funding, should the need arise, and development industry and reliant
cannot be secured. in part on future development success,
it is difficult for the Group to
take any other measures to further
mitigate this risk, other than tailoring
its development activities to its
available capital funding from time
to time.
-----------------------------------------------
Ensuring appropriate business practices
-----------------------------------------------
The Group operates in Ukraine, The Group maintains anti-bribery
an emerging market, where certain and corruption policies in relation
inappropriate business practices to all aspects of its business,
may, from time to time occur, such and ensures that clear authority
as corrupt business practices, levels and robust approval processes
bribery, appropriation of property are in place, with stringent controls
and fraud, all of which can lead over cash management and the tendering
to financial loss. and procurement processes. In addition,
office and site protection is maintained
to protect the Group's assets.
-----------------------------------------------
Hydrocarbon price risk
-----------------------------------------------
The Group derives its revenue principally The Group sells a proportion of
from the sale of its Ukrainian its hydrocarbon production through
gas, condensate and LPG production. long-term offtake arrangements,
These revenues are subject to commodity which include pricing formulae so
price volatility and political as to ensure that it achieves market
influence. A prolonged period of prices for its products, as well
low gas, condensate and LPG prices utilising the electronic market
may impact the Group's ability platforms in Ukraine to achieve
to maintain its long-term investment market prices for its remaining
programme with a consequent effect products. However, hydrocarbon prices
on growth rate, which in turn may in Ukraine are implicitly linked
impact the share price or any shareholder to world hydrocarbon prices and
returns. Lower gas, condensate so the Group is subject to external
and LPG prices may not only decrease price trends.
the Group's revenues per unit,
but may also reduce the amount
of gas, condensate and LPG which
the Group can produce economically,
as would increases in costs associated
with hydrocarbon production, such
as subsoil taxes and royalties.
The overall economics of the Group's
key assets (being the net present
value of the future cash flows
from its Ukrainian projects) are
far more sensitive to long term
gas, condensate and LPG prices
than short-term price volatility.
However, short-term volatility
does affect liquidity risk, as,
in the early stage of the projects,
income from production revenues
is offset by capital investment.
-----------------------------------------------
Currency risk
-----------------------------------------------
Since the beginning of 2014, the The Group's sales proceeds are received
Ukrainian Hryvnia has significantly in Ukrainian Hryvnia, and the majority
devalued against major world currencies, of the capital expenditure costs
including the US Dollar, where for the current investment programme
it has fallen from UAH8.3/$1.00 will be incurred in Ukrainian Hryvnia,
on 1 January 2014 to UAH26.2/$1.00 thus the currency of revenue and
on 30 June 2019, although it was costs are largely matched. In light
relatively stable during 2019. of the previous devaluation and
This devaluation was a significant volatility of the Ukrainian Hryvnia
contributor to the imposition of against major world currencies,
the banking restrictions by the and since the Ukrainian Hryvnia
National Bank of Ukraine over recent does not benefit from the range
years. In addition, the geopolitical of currency hedging instruments
events in Ukraine over recent years, which are available in more developed
are likely to continue to impact economies, the Group has adopted
the valuation of the Ukrainian a policy that, where possible, funds
Hryvnia against major world currencies. not required for use in Ukraine
Further devaluation of the Ukrainian be retained on deposit in the United
Hryvnia against the US Dollar will Kingdom, principally in US Dollars.
affect the carrying value of the
Group's assets.
-----------------------------------------------
Counterparty and credit risk
-----------------------------------------------
The challenging political and economic The Group monitors the financial
environment in Ukraine means that position and credit quality of its
businesses can be subject to significant contractual counterparties and seeks
financial strain, which can mean to manage the risk associated with
that the Group is exposed to increased counterparties by contracting with
counterparty risk if counterparties creditworthy contractors and customers.
fail or default in their contractual Hydrocarbon production is sold on
obligations to the Group, including terms that limit supply credit and/or
in relation to the sale of its title transfer until payment is
hydrocarbon production, resulting received.
in financial loss to the Group.
-----------------------------------------------
Financial markets and economic
outlook
-----------------------------------------------
The performance of the Group is The Group's sales proceeds are received
influenced by global economic conditions in Ukrainian Hryvnia and a significant
and, in particular, the conditions proportion of investment expenditure
prevailing in the United Kingdom is made in Ukrainian Hryvnia, which
and Ukraine. The economies in these minimises risks related to foreign
regions have been subject to volatile exchange volatility. However, hydrocarbon
pressures in recent periods, with prices in Ukraine are implicitly
the global economy having experienced linked to world hydrocarbon prices
a long period of difficulties, and so the Group is subject to external
and more particularly the events price movements. The Group holds
that have occurred in Ukraine over a significant proportion of its
recent years. This has led to extreme cash reserves in the United Kingdom,
foreign exchange movements in the mostly in US Dollars, with reputable
Ukrainian Hryvnia, high inflation financial institutions. The financial
and interest rates, and increased status of counterparties is carefully
credit risk relating to the Group's monitored to manage counterparty
key counterparties. risks. Nevertheless, the risks that
the Group faces as a result of these
risks cannot be predicted and many
of these are outside of the Group's
control.
-----------------------------------------------
Corporate risks
-----------------------------------------------
Ukraine production licences
-----------------------------------------------
The Group operates in a region The Group ensures compliance with
where the right to production can commitments and regulations relating
be challenged by State and non-State to its production licences through
parties. In 2010, this manifested Group procedures and controls or,
itself in the form of a Ministry where this is not immediately feasible
Order instructing the Group to for practical or logistical considerations,
suspend all operations and production seeks to enter into dialogue with
from its MEX-GOL and SV production the relevant Government bodies with
licences, which was not resolved a view to agreeing a reasonable
until mid-2011. In 2013, new rules time frame for achieving compliance
relating to the updating of production or an alternative, mutually agreeable
licences led to further challenges course of action. Work programmes
being raised by the Ukrainian authorities are designed to ensure that all
to the production licences held licence obligations are met and
by independent oil and gas producers continual interaction with Government
in Ukraine, including the Group, bodies is maintained in relation
which may result in requirements to licence obligations and commitments.
for remediation work, financial
penalties and/or the suspension
of such licences, which, in turn,
may adversely affect the Group's
operations and financial position.
In March 2019, a Ministry Order
was issued instructing the Group
to suspend all operations and production
from its VAS production licence.
The Group is challenging this Order
through legal proceedings, during
which production from the licence
is continuing, but this matter
remains unresolved. All such challenges
affecting the Group have thus far
been successfully defended through
the Ukrainian legal system. However,
the business environment is such
that these types of challenges
may arise at any time in relation
to the Group's operations, licence
history, compliance with licence
commitments and/or local regulations.
In addition, these licences carry
ongoing compliance obligations,
which if not met, may lead to the
loss of a licence.
-----------------------------------------------
Extension of MEX-GOL and SV licences
-----------------------------------------------
The Group's production licences The Group monitors legislation in
for the MEX-GOL and SV fields currently Ukraine which is likely to affect
expire in 2024. However, in the its licences and the obligations
estimation of its reserves, it associated therewith, and ensures
is assumed that licence extensions that its licence compliance obligations
will be granted in accordance with are monitored and maintained as
current Ukrainian legislation and such compliance is a likely to be
that consequently the fields' development a factor in the extension of the
will continue until the end of licences in 2024.
the fields' economic life in 2038
for the MEX-GOL field and 2042
for the SV field. Despite such
legislation, it is possible that
licence extensions will not be
granted, which would affect the
achievement of full economic field
development and consequently the
carrying value of the Group's MEX-GOL
and SV asset in the future.
-----------------------------------------------
Risks relating to key personnel
-----------------------------------------------
The Group's success depends upon The Group periodically reviews the
skilled management as well as technical compensation and contractual terms
expertise and administrative staff. of its staff. In addition, the Group
The loss of service of critical has developed relationships with
members from the Group's team could a number of technical and other
have an adverse effect on the business. professional experts and advisers,
who are used to provided specialist
services as required.
-----------------------------------------------
Directors Responsibility Statement
The Directors confirm that, to the best of their knowledge:-
a) the unaudited condensed interim consolidated financial
statements have been prepared in accordance with IAS 34 as adopted
by the European Union; and
b) these unaudited interim results include:
(i) a fair review of the information required (i.e. an
indication of important events and their impact and a description
of the principal risks and uncertainties for the remaining six
months of the financial year); and
(ii) a fair review of the information required on related party transactions.
A list of current Directors is maintained on the Group's
website, www.regalpetroleum.com.
Press Release
Condensed Interim Consolidated Income Statement
6 months 6 months
ended ended
30 Jun 19 30 Jun 18
(unaudited) (unaudited)
Note $000 $000
Revenue 4 31,273 24,643
Cost of sales 5 (17,347) (12,753)
------------------------------------- ----- ------------ ------------
Gross profit 13,926 11,890
Administrative expenses (2,857) (2,893)
Reversal of impairment of property,
plant and equipment - 34,469
Other operating gains, (net) 2,619 1,063
Operating profit 13,688 44,529
Finance income 516 541
Finance costs (220) (72)
Net impairment gains on financial
assets 11 34
Loss on disposal of subsidiary 1 (115) -
Other losses, (net) (625) (54)
Profit before taxation 13,255 44,978
Income tax expense 6 (3,368) (6,119)
------------------------------------- ----- ------------ ------------
Profit for the period 9,887 38,859
------------------------------------- ----- ------------ ------------
Earnings per share (cents)
Basic and diluted 7 3.1c 12.1c
------------------------------------- ----- ------------ ------------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Comprehensive
Income
6 months ended 6 months
ended
30 Jun 19 30 Jun 18
(unaudited) (unaudited)
$000 $000
Profit for the period 9,887 38,859
Other comprehensive income:
Items that may be subsequently reclassified
to profit or loss:
Equity - foreign currency translation 4,919 2,731
Items that will not be subsequently reclassified
to profit or loss:
Re-measurements of post-employment benefit
obligations - -
-------------------------------------------------- --------------- ------------
Total other comprehensive income 4,919 2,731
Total comprehensive income for the period 14,806 41,590
-------------------------------------------------- --------------- ------------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Balance Sheet
30 Jun 19 31 Dec 18
(unaudited) (audited)
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 8 56,390 50,192
Intangible assets 9 4,930 4,880
Right-of-use assets 3 1,075 -
Corporation tax receivable 19 27
Deferred tax asset 6 1,364 3,283
63,778 58,382
Current assets
Inventories 2,527 1,605
Trade and other receivables 10 4,644 10,130
Cash and cash equivalents 12 67,809 53,222
------------------------------- ----- ------------ ----------
74,980 64,957
Total assets 138,758 123,339
------------------------------- ----- ------------ ----------
Liabilities
Current liabilities
Trade and other payables (4,208) (4,836)
Lease liabilities 3 (405) -
Corporation tax payable (245) (1,297)
------------------------------- ----- ------------ ----------
(4,858) (6,133)
------------------------------- ----- ------------ ----------
Net current assets 70,122 58,824
------------------------------- ----- ------------ ----------
Non-current liabilities
Provision for decommissioning 11 (4,542) (3,137)
Lease liabilities 3 (681) -
Defined benefit liability (490) (468)
Deferred tax liability 6 (284) (504)
(5,997) (4,109)
Total liabilities (10,855) (10,242)
------------------------------- ----- ------------ ----------
Net assets 127,903 113,097
------------------------------- ----- ------------ ----------
Equity
Called up share capital 28,115 28,115
Share premium account 555,090 555,090
Foreign exchange reserve (97,342) (102,261)
Other reserves 4,273 4,273
Accumulated losses (362,233) (372,120)
------------------------------- ----- ------------ ----------
Total equity 127,903 113,097
------------------------------- ----- ------------ ----------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Changes in
Equity
Called up Share Merger Capital Foreign
share premium reserve contributions exchange Accumulated
capital account reserve reserve* losses Total equity
$000 $000 $000 $000 $000 $000 $000
As at 1
January 2019
(audited) 28,115 555,090 (3,204) 7,477 (102,261) (372,120) 113,097
Profit for the
period - - - - - 9,887 9,887
Other
comprehensive
income
- exchange
differences - - - - 4,919 - 4,919
--------------- ------------- ------------- --------- -------------- ------------- -------------- -------------
Total
comprehensive
income - - - - 4,919 9,887 14,806
As at 30 June
2019
(unaudited) 28,115 555,090 (3,204) 7,477 (97,342) (362,233) 127,903
--------------- ------------- ------------- --------- -------------- ------------- -------------- -------------
Called up Share Capital Foreign
share premium Merger contributions exchange Accumulated
capital account reserve reserve reserve* losses Total equity
$000 $000 $000 $000 $000 $000 $000
As at 1
January 2018
(audited) 28,115 555,090 (3,204) 7,477 (100,932) (426,178) 60,368
Change in
accounting
policy - - - - - (106) (106)
Restated total
equity at the
beginning of
the financial
year 28,115 555,090 (3,204) 7,477 (100,932) (426,284) 60,262
Profit for the
period - - - - - 38,859 38,859
Other
comprehensive
income
- exchange
differences - - - - 2,731 - 2,731
--------------- ------------- ------------- --------- -------------- ------------- -------------- -------------
Total
comprehensive
income - - - - 2,731 38,859 41,590
As at 30 June
2018
(unaudited) 28,115 555,090 (3,204) 7,477 (98,201) (387,425) 101,852
--------------- ------------- ------------- --------- -------------- ------------- -------------- -------------
* Predominantly as result of exchange differences on
retranslation, where the subsidiaries functional currency is not US
Dollar
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Cash Flows
6 months ended 6 months ended
30 Jun 19 30 Jun 18
(unaudited) (unaudited)
Note $000 $000
Operating activities
Cash generated from operations 13 17,596 13,103
Equipment rental income 15 -
Income tax paid (2,811) (2,267)
Interest received 2,636 1,079
-------------------------------------------------------- ----- --------------- ---------------
Net cash inflow from operating activities 17,436 11,915
-------------------------------------------------------- ----- --------------- ---------------
Investing activities
Disposal of subsidiary (7) -
Purchase of property, plant and equipment (4,105) (2,995)
Purchase of intangible assets (19) (25)
Proceeds from sale of property, plant and equipment 16 15
Proceeds from disposal of other short-term investments - 16,000
-------------------------------------------------------- ----- --------------- ---------------
Net cash (outflow)/inflow from investing activities (4,115) 12,995
-------------------------------------------------------- ----- --------------- ---------------
Financing activities
Principal elements of lease payments (197) -
Net cash outflow from financing activities (197) -
Net increase in cash and cash equivalents 13,124 24,910
Cash and cash equivalents at beginning of the period 12 53,222 14,249
Change in accounting policies - (9)
ECL of cash and cash equivalents (31) -
Effect of foreign exchange rate changes 1,494 886
Cash and cash equivalents at end of the period 12 67,809 40,036
-------------------------------------------------------- ----- --------------- ---------------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Notes to the Unaudited Condensed Interim Consolidated Financial
Statements
1. General Information and Operational Environment
Regal Petroleum plc (the "Company") and its subsidiaries
(together the "Group") is a gas, condensate and LPG production
group.
Regal Petroleum plc is a company quoted on the AIM Market of the
London Stock Exchange and incorporated in England and Wales under
the Companies Act 2006. The Company's registered office is at 16
Old Queen Street, London SW1H 9HP, United Kingdom and its
registered number is 4462555.
As at 31 December 2018, Pelidona Services Limited held
173,128,587 ordinary shares (54.00%) in the issued share capital of
the Company. On 20 June 2019, Pelidona Services Limited increased
its shareholding interest in the Company to 264,996,769 ordinary
shares (82.65%). As at 30 June 2019, the Company's immediate parent
company was Pelidona Services Limited, which is 100% owned by
Lovitia Investments Limited, which is 100% owned by Mr V Novynskyi.
Accordingly, the Company is ultimately controlled by Mr V
Novynskyi.
On 4 March 2019, the Group disposed of its 100% shareholding in
Refin LLC to a company under common control for consideration of
approximately $9,250. The carrying amount of this subsidiary
company at the date of disposal was $125,000, and so the disposal
resulted in recognition of a loss on disposal of $115,000.
The Group's gas, condensate and LPG extraction and production
facilities are located in Ukraine. The ongoing political and
economic instability in Ukraine, which commenced in late 2013, has
led to a deterioration of Ukrainian State finances, volatility of
financial markets, illiquidity in capital markets, higher inflation
and a depreciation of the national currency against major foreign
currencies, although there have been some gradual improvements
recently.
The Ukrainian economy is showing signs of stabilisation after
the previous years of political and economic tensions. The
year-on-year inflation rate in Ukraine decreased to 3.6% during the
first half 2019 (as compared to 9.8% in 2018), while GDP grew at
2.5% in the first six months of 2019 (after 3.3% growth in
2018).
The National Bank of Ukraine ("NBU") continued its inflation
targeting policy and periodically raised its key policy rate from
12.5% in May 2017 to 17% in July 2019. This has helped restrain
inflation below 10%, although the cost of domestic funding has
increased significantly. The NBU adhered to a floating Ukrainian
Hryvnia exchange rate, which finished the first half 2019 at
UAH26.17/$1.00, compared to UAH26.19/$1.00 as at 30 June 2018 (31
December 2018: UAH27.69/$1.00).
Among the key mitigating factors enabling the recent relative
stability of the Ukrainian Hryvnia were the agreement on a new
International Monetary Fund ("IMF") programme, strong revenues of
agricultural exporters, tight Ukrainian Hryvnia liquidity and a
growth in remittances from labour migrants.
In December 2018, the IMF approved a 14-month Stand-By
Arrangement ("SBA") for Ukraine, totalling $3.9 billion which
replaced the previous Extended Fund Facility Programme. The first
tranche under the SBA of $1.4 billion was received in December
2018, and further disbursements will be considered until November
2019, depending on Ukraine's success in fulfilling the terms of the
Memorandum on Economic and Financial Policies agreed with the
IMF.
In 2019-2020, Ukraine faces major public debt repayments, which
will require the arrangement of substantial domestic and external
financing in an increasingly challenging financing environment for
emerging markets. Despite certain improvements in 2018-2019, the
outcome of these matters and the ongoing effects of the political
and economic situation are difficult to predict, but they may have
further severe effects on the Ukrainian economy and the Group's
business.
Further details of risks relating to Ukraine can be found within
the Principal Risks and Uncertainties section earlier in this
announcement.
Having considered the Principal Risks and Uncertainties section
of this announcement, the Directors have a reasonable expectation
that the Group has adequate resources to continue in operational
existence for the foreseeable future regarded as at least 12 months
from the date of this announcement. Accordingly, the going concern
basis has been adopted in preparing these unaudited condensed
interim consolidated financial statements for the period ended 30
June 2019.
The unaudited condensed interim consolidated financial
statements for the six month period ended 30 June 2019 have been
prepared in accordance with International Accounting Standard 34
'Interim Financial Reporting' as adopted by the European Union. The
unaudited condensed interim consolidated financial statements do
not include all the notes of the type normally included in annual
financial statements. Accordingly, this report should be read in
conjunction with the annual consolidated financial statements for
the year ended 31 December 2018, which have been prepared in
accordance with International Financial Reporting Standards
(hereinafter "IFRSs") as adopted by the European Union.
These unaudited condensed interim consolidated financial
statements do not comprise statutory accounts within the meaning of
section 434 of the Companies Act 2006. Statutory accounts for the
year ended 31 December 2018 were approved by the Board of Directors
on 29 April 2019 and subsequently filed with the Registrar of
Companies. The Auditor's Report on those accounts was not qualified
and did not contain any statement under section 498 of the
Companies Act 2006.
The Auditor has carried out a review of the unaudited condensed
interim consolidated financial statements for the six month period
ended 30 June 2019 and its report is shown at the end of this
announcement.
2. Accounting Judgements and Estimates
The accounting policies and methods of computation and
presentation used are consistent with those used in the Group's
Annual Report and Financial Statements for the year ended 31
December 2018, with the exception of the following new or revised
standards and interpretations:
New and amended standards adopted by the Group
A number of new or amended standards became applicable for the
current reporting period. The Group had to change its accounting
policies as a result of the adoption of IFRS 16 Leases.
The impact of the adoption of the leasing standard and the new
accounting policies are disclosed in Note 3 below. The other
standards did not have any impact on the Group's accounting
policies and did not require retrospective adjustments.
Estimates
The preparation of the unaudited condensed interim consolidated
financial statements requires management to make judgements,
estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets and liabilities, income
and expenses. Actual results may differ from these estimates.
In preparing these unaudited condensed interim consolidated
financial statements, the significant judgements made by management
in applying the Group's accounting policies and the key sources of
estimation uncertainty were consistent with those that applied to
the consolidated financial statements for the year ended 31
December 2018 with certain updates described below.
Recoverability of Development and Production Assets in
Ukraine
According to the Group's accounting policies, costs capitalised
as assets are assessed for impairment at each balance sheet date if
impairment indicators exist. In assessing whether an impairment
loss has occurred, the carrying value of the asset or
cash-generating unit ("CGU") is compared to its recoverable amount.
The recoverable amount is the greater of fair value less costs to
dispose and value in use and is determined for an individual asset,
unless the asset does not generate cash inflows that are largely
independent of those from other assets or groups of assets. If the
recoverable amount of an asset is estimated to be less than its
carrying amount, the carrying amount of the asset is reduced to its
recoverable amount and the respective impairment loss is recognised
as an expense immediately. A previously recognised impairment loss
is reversed only if there has been a change in the estimates used
to determine the asset's recoverable amount since the last
impairment loss was recognised. If that is the case, the carrying
amount of the asset is increased to its recoverable amount, but so
that the increased carrying amount does not exceed the carrying
amount that would have been determined, net of depreciation, had no
impairment loss been recognised for the asset in prior years. Such
reversals are recognised as income immediately.
MEX-GOL and SV gas and condensate fields
At 30 June 2019, the Group performed an assessment of external
and internal indicators to ascertain whether there was any
indication of potential impairment of the recoverable amount of the
oil and gas development production asset at the MEX-GOL and SV
fields. Based on this assessment, the Group concluded that no
external or internal impairment indicators existed as at 30 June
2019, and accordingly no impairment testing was required as at that
date.
VAS gas and condensate field
Following the successful outcome of the recent drilling project
and the subsequent revision of the field development plan for the
VAS field in 2019, the Group considered it appropriate to undertake
a reassessment of the reserves and resources at the VAS field.
Accordingly, the Group engaged independent petroleum consultants
DeGolyer and MacNaughton ("D&M") to prepare an updated estimate
of remaining reserves and resources as of 31 December 2018. The
revised field development plan for this field prepared in 2019
assumes an increase in the number of new wells from one to three
wells. The final report issued by D&M in August 2019 provided
an estimate of the Group's proved plus probable ("2P") reserves of
3.1 MMboe. The report represents a significant increase in the
remaining reserves and resources in this field since the previous
estimation undertaken by Senergy (GB) Limited as at 1 January 2016
(1.8 MMboe). The increase in 2P reserves caused the revision of the
expected economic life of the field from 2024 to 2028. Further
details of this reserves update are set out in the Company's
announcement made on 21 August 2019.
At 30 June 2019, the Group performed an assessment of external
and internal indicators to ascertain whether there was any
indication of potential impairment of the recoverable amount of the
oil and gas development production asset at the VAS field. Based on
this assessment, the Group concluded that no external or internal
impairment indicators existed as at 30 June 2019, and accordingly
no impairment testing was required as at that date.
Depreciation of Development and Production Assets
Development and production assets held in property, plant and
equipment are depreciated on a unit of production basis at a rate
calculated by reference to proven and probable reserves at the end
of the period plus the production in the period, and incorporating
the estimated future cost of developing and extracting those
reserves. Future development costs are estimated using assumptions
about the number of wells required to produce those reserves, the
cost of the wells, future production facilities and operating
costs, together with assumptions on oil and gas realisations, and
are revised annually. The reserves estimates used are determined
using estimates of gas in place, recovery factors, future
hydrocarbon prices and also
take into consideration the Group's latest development plan for
the associated development and production asset. Additionally, the
latest development plan and therefore the inputs used to determine
the depreciation charge, assume that the current licences for the
MEX-GOL and SV fields, which are due to expire in July 2024, can be
extended until the end of the economic life of the fields.
In light of the revision of the field development plan for the
VAS field and the re-assessment of the 2P reserves at this field
performed in 2019 by D&M as described above, the Group has
revised the estimate of 2P reserves and future cost of developing
and extracting those reserves used for the depletion and
amortisation calculation. The effect of the change in estimates
made in the current reporting period was appropriately recognised
in profit or loss in the period of the change and amounted to a
decrease of $84,600 in the depletion charge of property, plant and
equipment (the depletion charge decreased by $942,600 due to the
increase in 2P reserves and increased by $858,000 due to the
increase in future capital expenditure) and a decrease of $162,000
in amortisation of mineral reserves for the first half of 2019.
Provision for Decommissioning
The Group has decommissioning obligations in respect of its
Ukrainian assets. The full extent to which the provision is
required depends on the legal requirements at the time of
decommissioning, the costs and timing of any decommissioning works
and the discount rate applied to such costs.
A detailed assessment of gross decommissioning cost was
undertaken on a well-by-well basis using local data on day rates
and equipment costs. The discount rate applied on the
decommissioning cost provision at 30 June 2019 was 5.09% (31
December 2018: 8.14%). The discount rate is calculated in real
terms based on the yield to maturity of Ukrainian Government bonds
denominated in the currency in which the liability is expected to
be settled and with the settlement date that approximates the
timing of settlement of decommissioning obligations.
The change in estimate applied to calculate the provision as at
30 June 2019 resulted from the revision of the estimated costs of
decommissioning (increase of $101,000 in provision), the decrease
in the discount rate applied (increase of $1,397,000 in provision)
and the extension of the economic life of the VAS field as a result
of the revision of the field development plan in 2019 (decrease of
$581,000 in provision). The decrease in discount rate at 30 June
2019 resulted from the decrease in Ukrainian Eurobonds yield and
the respective decrease of country risk premium. The costs are
expected to be incurred by 2038 on the MEX-GOL field, by 2042 on
the SV field, and by 2028 on the VAS field (31 December 2018: by
2038 on the MEX-GOL field, by 2042 on the SV field and 2024 on the
VAS field respectively), which is the end of the estimated economic
life of the respective fields. If the costs on the MEX-GOL and SV
fields were to be incurred at the current expiry of the production
licences in 2024, the provision for decommissioning at 30 June 2019
would be $7,978,000 (31 December 2018: $6,268,000).
Changes in presentation
Where necessary, corresponding figures have been adjusted to
conform to changes in the presentation in the current period.
3. Changes in accounting policies
This note explains the impact of the adoption of IFRS 16 Leases
on the Group's financial statements and also discloses the new
accounting policies that have been applied from 1 January 2019.
The Group has adopted IFRS 16 retrospectively from 1 January
2019, but has not restated comparatives for the 2018 reporting
period, as permitted under the specific transitional provisions in
the standard. The reclassifications and the adjustments arising
from the new leasing rules are therefore recognised in the opening
balance sheet on 1 January 2019.
Adjustments recognised on adoption of IFRS 16
On adoption of IFRS 16, the Group recognised lease liabilities
in relation to leases which had previously been classified as
'operating leases' under the principles of IAS 17 Leases. These
liabilities were measured at the present value of the remaining
lease payments, discounted using the lessee's incremental borrowing
rate as of 1 January 2019. The weighted average lessee's
incremental borrowing rate applied to the lease liabilities on 1
January 2019 was 19.8% for contracts in UAH and 7.4% for contracts
in USD.
2019
$000
Operating lease commitments disclosed as at 31 December 2018 1,884
Discounted using the lessee's incremental borrowing rate of at the date of initial
application (667)
(Less): short-term leases recognised on a straight-line basis as expense (85)
(Less): low-value leases recognised on a straight-line basis as expense (10)
------------------------------------------------------------------------------------ ------
Lease liability recognised as at 1 January 2019 1,122
------------------------------------------------------------------------------------ ------
Of which are:
Current lease liabilities 371
Non-current lease liabilities 751
------------------------------------------------------------------------------------ ------
The associated right-of-use assets for property leases were
measured on a retrospective basis as if the new rules had always
been applied. Other right-of-use assets were measured at the amount
equal to the lease liability, adjusted by the amount of any prepaid
or accrued lease payments relating to that lease recognised in the
balance sheet as at 31 December 2018. There were no onerous lease
contracts that would have required an adjustment to the
right-of-use assets at the date of initial application.
The recognised right-of-use assets relate to the following types
of assets:
30 Jun 19 1 Jan 19
$000 $000
Properties 538 595
Land 325 311
Wells 212 216
1,075 1,122
The change in accounting policy affected the following items in
the balance sheet on 1 January 2019:
-- right-of-use assets - increase by $1,122,000
-- lease liabilities - increase by $1,122,000.
Practical expedients applied
In applying IFRS 16 for the first time, the Group has used the
following practical expedients permitted by the standard:
-- the use of a single discount rate to a portfolio of leases
with reasonably similar characteristics;
-- reliance on previous assessments on whether leases are onerous;
-- the accounting for operating leases with a remaining lease
term of less than 12 months as at 1 January 2019 as short-term
leases;
-- the exclusion of initial direct costs for the measurement
of the right-of-use asset at the date of initial application;
and
-- the use of hindsight in determining the lease term where
the contract contains options to extend or terminate the
lease.
The Group has also elected not to reassess whether a contract
is, or contains a lease at the date of initial application.
Instead, for contracts entered into before the transition date, the
Group relied on its assessment made applying IAS 17 and IFRIC 4
Determining whether an Arrangement contains a Lease.
The Group's leasing activities and how these are accounted
for
The Group leases various wells, offices, equipment and land.
Rental contracts are typically made for fixed periods of 1 to 25
years but may have extension options as described in (ii) below.
Lease terms are negotiated on an individual basis and contain a
wide range of different terms and conditions. The lease agreements
do not impose any covenants, but leased assets may not be used as
security for borrowing purposes.
Until the 2018 financial year, leases of property, plant and
equipment were classified as either finance or operating leases.
Payments made under operating leases (net of any incentives
received from the lessor) were charged to profit or loss on a
straight-line basis over the period of the lease.
From 1 January 2019, leases are recognised as a right-of-use
asset and a corresponding liability at the date at which the leased
asset is available for use by the Group. Each lease payment is
allocated between the liability and finance cost. The finance cost
is charged to profit or loss over the lease period so as to produce
a constant periodic rate of interest on the remaining balance of
the liability for each period. The right-of-use asset is
depreciated over the shorter of the asset's useful life and the
lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially
measured on a present value basis. Lease liabilities include the
net present value of the following lease payments:
-- fixed payments (including in-substance fixed payments),
less any lease incentives receivable;
-- variable lease payment that are based on an index or a rate;
-- amounts expected to be payable by the lessee under residual
value guarantees;
-- the exercise price of a purchase option if the lessee is
reasonably certain to exercise that option; and
-- payments of penalties for terminating the lease, if the
lease term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be determined, the
lessee's incremental borrowing rate is used, being the rate that
the lessee would have to pay to borrow the funds necessary to
obtain an asset of similar value in a similar economic environment
with similar terms and conditions.
Right-of-use assets are measured at cost comprising the
following:
-- the amount of the initial measurement of lease liability;
-- any lease payments made at or before the commencement date
less any lease incentives received;
-- any initial direct costs; and
-- restoration costs.
Payments associated with short-term leases and leases of
low-value assets are recognised on a straight-line basis as an
expense in profit or loss. Short-term leases are leases with a
lease term of 12 months or less.
(i) Variable lease payments
Estimation uncertainty arising from variable lease payments
Some property leases contain variable payment terms that are
linked to the volume of production. For wells, up to 100 per cent
of lease payments are on the basis of variable payment terms.
Variable payment terms are used for a variety of reasons, including
minimising the fixed costs base for wells under reconstruction.
Variable lease payments that depend on the volume of production are
recognised in profit or loss in the period in which the condition
that triggers those payments occurs.
(ii) Extension and termination options
Extension and termination options are included in a number of
property and equipment leases across the Group. These terms are
used to maximise operational flexibility in terms of managing
contracts. The majority of extension and termination options held
are exercisable only by the Group and not by the respective
lessor.
Critical judgements in determining the lease term
In determining the lease term, management considers all facts
and circumstances that create an economic incentive to exercise an
extension option, or not exercise a termination option. Extension
options (or periods after termination options) are only included in
the lease term if the lease is reasonably certain to be extended
(or not terminated).
The assessment is reviewed if a significant event or a
significant change in circumstances occurs which affects this
assessment and that is within the control of the lessee.
(iii) Residual value guarantees
The Group does not provide residual value guarantees in relation
to equipment leases.
4. Segmental Information
In line with the Group's internal reporting framework and
management structure, the key strategic and operating decisions are
made by the Board of Directors, who review internal monthly
management reports, budgets and forecast information as part of
this process. Accordingly, the Board of Directors is deemed to be
the Chief Operating Decision Maker within the Group.
The Group's only class of business activity is oil and gas
exploration, development and production. The Group's operations are
located in Ukraine, with its head office in the United Kingdom.
These geographical regions are the basis on which the Group reports
its segment information. The segment results as presented represent
operating profit before depreciation, amortisation and reversal of
impairment of non-current assets.
6 months ended 30 June 2019 (unaudited)
Ukraine United Kingdom Total
$000 $000 $000
Revenue
Gas sales 23,347 - 23,347
Condensate sales 6,127 - 6,127
Liquefied Petroleum Gas sales 1,799 - 1,799
------------------------------- -------- --------------- --------
Total revenue 31,273 - 31,273
Segment result 19,723 (1,107) 18,616
Depreciation and amortisation (4,928) - (4,928)
Operating profit 13,688
------------------------------- -------- --------------- --------
Segment assets 114,564 24,203 138,767
Capital additions* 6,722 - 6,722
6 months ended 30 June 2018 (unaudited)
Ukraine United Kingdom Total
$000 $000 $000
Revenue
Gas sales 18,497 - 18,497
Condensate sales 4,789 - 4,789
Liquefied Petroleum Gas sales 1,357 - 1,357
--------------------------------------------------------- -------- --------------- --------
Total revenue 24,643 - 24,643
Segment result 14,076 (829) 13,247
Depreciation and amortisation (3,187) - (3,187)
Reversal of impairment of property, plant and equipment 34,469 - 34,469
--------------------------------------------------------- -------- --------------- --------
Operating profit 44,529
--------------------------------------------------------- -------- --------------- --------
Segment assets 80,197 31,684 111,881
Capital additions* 5,311 - 5,311
12 months ended 31 December 2018 (audited)
Ukraine United Kingdom Total
2018 2018 2018
$000 $000 $000
Revenue
Gas sales 49,668 - 49,668
Condensate sales 12,772 - 12,772
Liquefied Petroleum Gas sales 3,658 - 3,658
-------------------------------------------------------- ------- -------------- -------
Total revenue 66,098 - 66,098
Segment result 41,311 (1,509) 39,802
Depreciation and amortisation (7,901) - (7,901)
Reversal of impairment of property, plant and equipment 34,469 - 34,469
-------------------------------------------------------- ------- -------------- -------
Operating profit 66,370
-------------------------------------------------------- ------- -------------- -------
Segment assets 95,782 27,557 123,339
Capital additions* 9,552 - 9,552
*Comprises additions to property, plant and equipment and
intangible assets (Notes 8 and 9).
There are no inter-segment sales within the Group and all
products are sold in the geographical region in which they are
produced. The Group is not significantly impacted by
seasonality.
During the first half of 2019, the Group continued selling all
of its gas production to its related party, LLC Smart Energy
("Smart Energy"). Smart Energy has oil and gas operations in
Ukraine and is part of the PJSC Smart-Holding Group, which is
ultimately controlled by Mr Vadym Novynskyi, who, through an
indirect 82.65% majority shareholding, ultimately controls the
Group. This arrangement began in 2017 as a consequence of the
Ukrainian Government introducing a number of new provisions into
the Ukrainian Tax Code over recent years, including transfer
pricing regulations for companies operating in Ukraine. The
introduction of those regulations meant that there was an increased
regulatory burden on affected companies in Ukraine who must prepare
and submit reporting information to the Ukrainian Tax Authorities.
Due to the corporate structure of the Group, a substantial
proportion of its gas production is produced by a non-Ukrainian
subsidiary of the Group, which operates in Ukraine as a branch, or
representative office as it is classified in Ukraine. Under the tax
regulations, this places additional regulatory obligations on each
of the Group's potential customers who may be less inclined to
purchase the Group's gas and/or may seek discounts on sales prices.
As a result, Smart Energy agreed to purchase all of the Group's gas
production and to assume responsibility for the regulatory
obligations under the Ukrainian tax regulations. Furthermore, Smart
Energy agreed to combine the Group's gas production with its own
gas production, and to sell such gas as combined volumes, which has
resulted in higher sales prices due to the larger sales volumes. In
order to cover Smart Energy's sales, administration and regulatory
compliance costs, the Group agreed to sell its gas to Smart Energy
at a discount of 0.5% to the gas sales prices achieved by Smart
Energy, who sell the combined volumes in line with market prices.
Due to changes in the regulatory regime in Ukraine, which has
increased the burden of administration and regulatory compliance
obligations involved in the sale of gas, and in order to ensure
that the Group is compliant with current transfer pricing
regulations in Ukraine, the Group and Smart Energy have agreed to
increase the discount on the price at which the Group sells its gas
to Smart Energy from 0.5% to 2%. The terms of sale for the Group's
gas to Smart Energy are (i) payment for one third of the estimated
monthly volume of gas by the 20(th) of the month of delivery, and
(ii) payment of the remaining balance by the 10(th) of the month
following the month of delivery.
5. Cost of Sales
6 months ended 6 months ended
30 Jun 19 30 Jun 18
(unaudited) (unaudited)
$000 $000
Production taxes 6,660 6,106
Depreciation of property, plant and equipment 4,297 2,677
Rent expenses 3,256 1,323
Staff costs 1,161 987
Cost of inventories recognised as an expense 688 717
Transmission tariff for Ukrainian gas system 336 -
Amortisation of mineral reserves 244 409
Other expenses 705 534
17,347 12,753
New legislation relating to the oil and gas sector in Ukraine
has been introduced over the last year, and in this regard, with
effect from 1 January 2019, the subsoil tax rates applicable to
condensate production were reduced from 45% to 31% for condensate
produced from deposits above 5,000 metres and from 21% to 16% for
condensate produced from deposits below 5,000 metres.
From 1 January 2019, a transmission tariff for use of the
Ukrainian gas system of UAH91.87 per 1000 m(3) of gas was
introduced.
6. Taxation
The income tax charge of $3,368,000 for the six month period
ended 30 June 2019 relates to a urrent tax charge of $1,684,000 and
a deferred tax charge of $1,684,000 (six month period ended 30 June
2018: current tax charge of $2,102,000 and deferred tax charge of
$4,017,000).
The movement in the period was as follows:
6 months ended 6 months ended
30 Jun 19 30 Jun 18
(unaudited) (unaudited)
$000 $000
Deferred tax asset recognised on tax losses
At beginning of the period 2,134 2,567
(Charged)/credited to Income Statement - current year (2,134) 4,669
At end of the period - 7,236
------------------------------------------------------- --------------- ---------------
Deferred tax asset/(liability) recognised relating to development and production assets at
MEX-GOL-SV fields and provision for decommissioning
At beginning of the period 1,149 6,694
Credited/(charged) to Income Statement - current period 209 (8,801)
Effect of exchange difference 6 488
--------------------------------------------------------------------------------------------
At end of the period 1,364 (1,619)
-------------------------------------------------------------------------------------------- ------ --------
Deferred tax liability recognised relating to development and production assets at VAS field
and provision for decommissioning
At beginning of the period (504) (820)
Credited to Income Statement - current period 241 115
Effect of exchange difference (21) (56)
----------------------------------------------------------------------------------------------
At end of the period (284) (761)
---------------------------------------------------------------------------------------------- ------ ------
Taxes on income in the interim periods are accrued using the tax
rate that would be applicable to the expected total annual profit
or loss.
At 30 June 2019, the Group derecognised a deferred tax asset of
$2,134,000 due to losses expected in the foreseeable future. There
was a further $101 million (31 December 2018: $85 million) of
unrecognised UK tax losses carried forward for which no deferred
tax asset has been recognised. These losses can be carried forward
indefinitely, subject to certain rules regarding capital
transactions and changes in the trade of the Company.
The deferred tax asset relating to the Group's provision for
decommissioning at 30 June 2019 of $208,000 (31 December 2018:
$161,000) was recognised on the tax effect of the temporary
differences of the Group's provision for decommissioning at the
MEX-GOL and SV fields, and its tax base. The deferred tax asset
relating to the Group's development and production assets at the
MEX-GOL and SV fields at 30 June 2019 of $1,156,000 (31 December
2018: $988,000) was recognised on the tax effect of the temporary
differences between the carrying value of the Group's development
and production asset at the MEX-GOL and SV fields, and its tax
base.
The deferred tax asset relating to the Group's provision for
decommissioning at 30 June 2019 of $293,000 (31 December 2018:
$271,000) was recognised on the tax effect of the temporary
differences on the Group's provision on decommissioning at the VAS
field, and its tax base. The deferred tax liability relating to the
Group's development and production assets at the VAS field at 30
June 2019 of $577,000 (31 December 2018: $775,000) was recognised
on the tax effect of the temporary differences between the carrying
value of the Group's development and production asset at the VAS
field, and its tax base.
UK Corporation tax change
A change to the UK corporation tax rate was announced in the
Chancellor's Budget on 16 March 2016. The change announced is to
reduce the corporation tax rate to 17% from 1 April 2020. Changes
to reduce the UK corporation tax rate to 19% from 1 April 2017 and
to 18% from 1 April 2020 were substantively enacted on 26 October
2015. The changes to reduce the UK corporation tax rate to 17% from
1 April 2020 were substantively enacted on 6 September 2016 and the
effect of these changes are included in these unaudited condensed
interim consolidated financial statements.
7. Profit per Share
The calculation of basic and diluted earnings per ordinary share
has been based on the profit for the six month period ended 30 June
2019 and 30 June 2018 and 320,637,836 ordinary shares, being the
average number of shares in issue for the period. There are no
dilutive instruments.
8. Property, Plant and Equipment
6 months ended 30 Jun 19 6 months ended 30 Jun 18
(unaudited) (unaudited)
-------------------------------------
Oil and gas Oil and gas Oil and gas
development and exploration and Other development and Other
production assets evaluation assets fixed production assets fixed
Ukraine assets Total Ukraine assets Total
$000 $000 $000 $000 $000 $000 $000
Cost
At beginning of
the period 104,809 1,259 1,293 107,361 101,927 1,104 103,031
Additions 5,791 796 68 6,655 4,959 303 5,262
Change in
decommissioning
provision 1,058 - - 1,058 (393) - (393)
Disposals (51) - - (51) (11) (25) (36)
Exchange
differences 6,292 117 45 6,454 7,622 43 7,665
At end of the
period 117,899 2,172 1,406 121,477 114,104 1,425 115,529
Accumulated
depreciation and
impairment
At beginning of
the period 56,567 - 602 57,169 87,591 478 88,069
Charge for the
period 4,388 - 103 4,491 2,677 79 2,756
Reversal of
impairment - - - - (36,117) - (36,117)
Impairment
charged
for individual
assets - - - - 1,648 - 1,648
Disposals (17) - (4) (21) (2) (17) (19)
Exchange
differences 3,409 - 39 3,448 6,257 34 6,291
At end of the
period 64,347 - 740 65,087 62,054 574 62,628
Net book value
at the
beginning of
the period 48,242 1,259 691 50,192 14,336 626 14,962
------------------ ----------------- ------------------ ------- --------- ------------------ ------- --------
Net book value
at end of the
period 53,552 2,172 666 56,390 52,050 851 52,901
------------------ ----------------- ------------------ ------- --------- ------------------ ------- --------
As described in Note 2, as at 30 June 2019, the Group concluded
that no external or internal impairment indicators existed as at 30
June 2019, and accordingly no impairment testing was required as at
that date.
Additions to the oil and gas development and production assets
in the amount of $4,649,000 relate to the drilling costs of the
MEX-119 well on MEX-GOL field.
During the first half 2019, the Group completed the acquisition
of new 3D seismic over the VAS field which will assist in the
evaluation of the VAS licence, and particularly the VED area of the
licence. Since no commercially viable reserves have been identified
in the VED area as yet, the costs of the seismic over this area
were capitalised within property, plant and equipment as
exploration and evaluation assets.
9. Intangible Assets
6 months ended 30 Jun 19 6 months ended 30 Jun 18
(unaudited) (unaudited)
Mineral reserve Other intangible Mineral reserve Other intangible
rights assets Total rights assets Total
$000 $000 $000 $000 $000 $000
Cost
At beginning of
the period 6,709 330 7,039 6,618 257 6,875
Additions - 67 67 - 49 49
Exchange
differences 390 21 411 475 20 495
-------------------- ------------------- ------------------- ----- ------------------- ------------------- -----
At end of the
period 7,099 418 7,517 7,093 326 7,419
-------------------- ------------------- ------------------- ----- ------------------- ------------------- -----
Accumulated amortisation
and impairment
At beginning of
the period 1,965 194 2,159 1,161 124 1,285
Amortisation
charge for the
period 244 57 301 409 41 450
Exchange
differences 121 6 127 90 11 101
-------------------- ------------------- ------------------- ----- ------------------- ------------------- -----
At end of the
period 2,330 257 2,587 1,660 176 1,836
-------------------- ------------------- ------------------- ----- ------------------- ------------------- -----
Net book value at
beginning of the
period 4,744 136 4,880 5,457 133 5,590
-------------------- ------------------- ------------------- ----- ------------------- ------------------- -----
Net book value at
end of the period 4,769 161 4,930 5,433 150 5,583
-------------------- ------------------- ------------------- ----- ------------------- ------------------- -----
Intangible assets consist mainly of the hydrocarbon production
licence relating to the VAS gas and condensate field which is held
by LLC Prom-Enerho Produkt. The Group amortises this intangible
asset using the straight-line method over the term of the economic
life of the VAS field until 2028. The economic life of the VAS
field was extended as a result of the new assessment of 2P
reserves, as described in Note 2.
At 30 June 2019, the Group performed an assessment of external
and internal indicators to ascertain whether there was any
indication of potential impairment of intangible assets. Based on
this assessment, the Group concluded that no external or internal
impairment indicators existed as at 30 June 2019, and accordingly
no impairment testing was required as at that date.
10. Trade and Other Receivables
30 Jun 19 31 Dec 18
(unaudited) (audited)
$000 $000
Trade receivables 1,909 5,012
Other financial receivables 263 202
Less credit loss allowance (99) (99)
---------------------------------- ------------ ----------
Total financial receivables 2,073 5,115
Prepayments and accrued income 2,340 4,771
Other receivables 231 244
Total trade and other receivables 4,644 10,130
Due to the short-term nature of the current trade and other
financial receivables, their carrying amount is assumed to be the
same as their fair value. All trade and other financial
receivables, except those provided for, are considered to be of
high credit quality.
The majority of the trade receivables are from a related party,
LLC Smart Energy, that purchases all of the Group's gas production
(see Note 4). The applicable payment terms are payment for one
third of the estimated monthly volume of gas by the 20(th) of the
month of delivery, and payment of the remaining balance by the
10(th) of the month following the month of delivery. The trade
receivables were paid in full after the end of the period.
Prepayments and accrued income mainly consist of prepayment of
$693,000 relating to the development of the MEX-GOL field and
$579,000 relating to the development of the VAS field (31 December
2018: $3,988,000 relating to the development of the MEX-GOL
field).
11. Provision for Decommissioning
6 months ended 6 months ended
30 Jun 19 30 Jun 18
(unaudited) (unaudited)
$000 $000
At beginning of the period 3,137 3,027
Amounts provided 141 91
Unwinding of discount 128 72
Change in estimate 917 (484)
Effect of exchange difference 219 210
------------------------------ -------------- --------------
At end of the period 4,542 2,916
The provision for decommissioning is based on the net present
value of the Group's estimated liability for the removal of the
Ukraine production facilities and well site restoration at the end
of production life.
The non-current provision of $4,542,000 (31 December 2018:
$3,137,000) represents a provision for the decommissioning of the
Group's MEX-GOL, SV and VAS production facilities, including site
restoration. None of the provision was utilised during the
reporting period.
As described in Note 2, the change in estimates applied to
calculate the provision as at 30 June 2019 resulted from the
revision of the estimated costs of decommissioning (increase of
$101,000 in provision), the decrease in the discount rate applied
(increase of $1,397,000 in provision) and the extension of the
economic life of the VAS field as a result of the revision of the
field development plan in 2019 (decrease of $581,000 in
provision).
12. Financial Instruments
The Group's financial instruments comprise cash and cash
equivalents and various items such as debtors and creditors that
arise directly from its operations. The Group has bank accounts
denominated in British Pounds, US Dollars, Euros, and Ukrainian
Hryvnia. The Group does not have any borrowings. The main future
risks arising from the Group's financial instruments are currency
risk, interest rate risk, liquidity risk and credit risk.
The Group's financial assets and financial liabilities, measured
at amortised cost, which approximates their fair value, comprise
the following:
30 Jun 19 31 Dec 18
(unaudited) (audited)
$000 $000
Financial assets
Cash and cash equivalents 67,809 53,222
Trade and other receivables 2,073 5,115
-----------
69,882 58,337
Financial Liabilities
Lease liabilities 1,086 -
Trade payables 178 105
Accruals 1,052 1,284
-----------
2,316 1,389
All assets and liabilities of the Group where fair value is
disclosed are of level 2 value hierarchy and valued using current
cost accounting techniques.
At 30 June 2019, the Group held cash and cash equivalents in the
following currencies:
30 Jun 19 (unaudited) 31 Dec 18
(audited)
$000 $000
US Dollars 39,237 27,699
Ukrainian Hryvnia 28,269 25,264
British Pounds 215 215
Euros 88 44
67,809 53,222
------------------- ---------------------- ------------
All of the cash and cash equivalents held in Ukrainian Hryvnia
are held in banks within Ukraine, and all other cash and cash
equivalents are held in banks within Europe and the United
Kingdom.
13. Reconciliation of Operating Profit to Operating Cash Flow
6 months ended 6 months ended
30 Jun 19 30 Jun 18
(unaudited) (unaudited)
$000 $000
Operating profit 13,688 44,529
Reversal of impairment of property, plant and equipment - (34,469)
Depreciation and amortisation 4,928 3,187
Less interest income recorded within operating profit (2,792) (873)
Provision for VAT repayment 405 -
Fines and penalties received (15) -
Loss from credit loss allowance 41 11
Loss from write off of non-current assets - 2
Reversal of loss allowance on other financial assets (11) (38)
Gain on sales of current assets, net (18) (71)
Decrease in provisions (9) (4)
Decrease/(increase) in inventory (742) 153
Decrease in receivables 3,251 256
(Decrease)/increase in payables (1,130) 420
--------------------------------------------------------- --------------- ---------------
Cash generated from operations 17,596 13,103
--------------------------------------------------------- --------------- ---------------
14. Contingencies and Commitments
Amounts related to works contracted but not yet undertaken in
relation to the Group's 2019 investment programme at the MEX-GOL,
SV and VAS gas and condensate fields in Ukraine, but not recorded
in the unaudited condensed interim consolidated financial
statements at 30 June 2019, were $2,368,000 (31 December 2018:
$2,607,000).
During 2010 - 2019, the Group has been in dispute with the
Ukrainian tax authorities in respect of VAT receivables on imported
leased equipment, with a disputed liability of up to UAH8,487,000
($324,000) inclusive of penalties and other associated costs. There
is a level of ambiguity in the interpretation of the relevant tax
legislation, and the position adopted by the Group has been
challenged by the Ukrainian tax authorities, which has led to legal
proceedings to resolve the issue. The Group had been successful in
three court cases in respect of this dispute in ourts of different
levels. On 20 September 2016, a hearing was held in the Supreme
Court of Ukraine of an appeal of the Ukrainian tax authorities
against the decision of the Higher Administrative Court of Ukraine,
in which the appeal of the Ukrainian tax authorities was upheld. As
a result of this appeal decision, all decisions of the lower courts
were cancelled, and the case was remitted to the first instance
court for a new trial. On 1 December 2016 and 7 March 2017, the
Group received positive decisions in the first and second instance
courts, but further legal proceedings may arise. Since the Group
had been successful in previous court cases in respect of this
dispute in ourts of different levels, the date of the next legal
proceedings has not been set and as the Group believes that
adequate defences exist to the claim, no liability has been
recognised in these unaudited condensed interim consolidated
financial statements for the six months ended 30 June 2019 (31
December 2018: nil).
On 12 March 2019 the Group announced the publication of an Order
for suspension (the "Order") by the State Service of Geology and
Subsoil of Ukraine affecting the production licence for its VAS gas
and condensate field. The Group is confident there are no
violations of the terms of the licence or in relation to the
operational activities of the Group that would justify the Order or
the suspension of the licence. The Group has issued legal
proceedings in the Ukrainian Courts to challenge the validity of
the Order, and in these proceedings, on 18 March 2019 the Court
made a ruling on interim measures to suspend the Order pending
hearings of the substantive issues of the case to be held
subsequently. The effect of this ruling is that the suspension of
operational activities at the VAS licence is deferred until the
result of the legal proceedings is determined. These legal
proceedings are continuing through the Ukrainian Court system and
the ultimate outcome is not yet known. However, the Group considers
that the Order is groundless and that the outcome of the legal
proceedings challenging the Order will ultimately be in favour of
the Group, and consequently, the Group does not expect any negative
effect on its operations in respect of this matter.
In the first half 2019, a review of the Group's VAT compliance
by HM Revenue & Customs resulted in the disallowance of VAT
reclaims of GBP296,190 and interest of GBP22,942, which is
equivalent to approximately $405,000.
15. Related Party Disclosures
Key management personnel of the Group are considered to comprise
only the Directors. Remuneration of the Directors for the six month
period ended 30 June 2019 was $369,000 (six month period ended 30
June 2018: $468,000, and year ended 31 December 2018:
$810,000).
During the period, Group companies entered into the following
transactions with related parties which are not members of the
Group:
6 months ended 6 months ended
30 Jun 19 30 Jun 18
(unaudited) (unaudited)
$000 $000
Sale of goods/services 23,185 18,514
Purchase of goods/services 444 230
Amounts owed by related partied 1,683 2,580
Amounts owed to related parties 157 61
--------------------------------- --------------- ---------------
All related party transactions were with subsidiaries of the
ultimate parent company, and primarily relate to the sale of gas to
LLC Smart Energy (Note 4), the rental of office facilities and
vehicles and the sale of equipment. The amounts outstanding were
unsecured and have been or will be settled in cash.
As of 30 June 2019, the Company's immediate parent company was
Pelidona Services Limited, which is 100% owned by Lovitia
Investments Limited, which is 100% owned by Mr V Novynskyi.
Accordingly, the Company was ultimately controlled by Mr V
Novynskyi.
The Group operates bank accounts in Ukraine with a related party
bank, Unex Bank, which is ultimately controlled by Mr V Novynskyi.
There were the following transactions and balances with Unex Bank
during the period:
6 months ended 6 months ended
30 Jun 19 30 Jun 18
(unaudited) (unaudited)
$000 $000
Interest income - 1
Bank charges 1 20
Closing cash balance - 26
At the date of this announcement, none of the Company's
controlling parties prepares consolidated financial statements
available for public use.
16. Events occurring after the Reporting Period
There were no significant events to report.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR LLFVDATIFLIA
(END) Dow Jones Newswires
September 13, 2019 02:00 ET (06:00 GMT)
Enwell Energy (LSE:ENW)
Historical Stock Chart
From Jan 2025 to Feb 2025
Enwell Energy (LSE:ENW)
Historical Stock Chart
From Feb 2024 to Feb 2025
