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Hardy Oil & Gas (HDY)

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Thursday 07 June, 2018

Hardy Oil & Gas

Final Results

RNS Number : 5681Q
Hardy Oil & Gas plc
07 June 2018
 

7 June 2018

 

Hardy Oil and Gas plc

("Hardy", the "Company" or the "Group")

 

Final Results for the year ended 31 March 2018

 

Hardy Oil and Gas plc (LSE: HDY), the oil and gas exploration and production company focused on India, reports its results for the year ended 31 March 2018 (FY18).

 

All financial amounts are stated in US dollars unless otherwise indicated.

 

SUMMARY

CY-OS/2 - Government of India's (GOI) appeal of the CY-OS/2 international arbitration award, in favour of Hardy (the Award), continued. The Award entitles Hardy to further time to appraise a natural gas discovery located within the CY-OS/2 block and to compensation. On 1 May 2018 the Supreme Court of India two-member bench referred the matter to a larger bench. We remain resolved to see off all legal challenges put forward by the GOI whether in India or in other jurisdictions in which we elect to execute or confirm this unanimous international arbitration award.

 

PY-3 - Progress was made in our PY-3 oil field asset wherein we were able to establish a consensus regarding a development plan for the field. This achievement facilitated the submission of an extension application for the PY-3 field Production Sharing Contract by up to 10 years.

 

GS-01 - Our plan to acquire a further interest in, and operatorship of the GS-01 asset remains in place. The acquisition process is primarily dependent on the settlement of liquidated damages relating to an Unfinished Minimum Work Programme.

 

Financial - Total comprehensive loss of $4.7 million for FY18 compared to a loss of $9.2 million for FY17. The loss is attributable primarily to general and administrative expenditure which included a significant increase in legal expenses. In FY17 the Group wrote-down $3.0 million of Property Plant and Equipment associated with PY-3, $4.5 million of deferred tax asset and reversed the decommissioning provision by $0.8 million. Cash and short-term investments at 31 March 2018 amounted to $9.2 million; Hardy has no debt.

 

OUTLOOK

CY-OS/2 - The GOI Supreme Court hearings are expected to recommence in August of this year and may continue into 2019. We will continue legal process to enforce the Award in the US and the UK.

 

PY-3 - Revised full field development plan (RFFDP) was unanimously agreed among the PY-3 partners. The RFFDP is currently under review by the Directorate General of Hydrocarbons and we will commence the tendering process to recommence production once we have secured the MC approval for the RFFDP and commensurate budgets and subsequent confirmation of the GOI sanctioning of an extension to the PY-3 PSC.

 

GS-01 - If we can conclude the acquisition process, we will either need to explore alternative development plans or trust that the GOI's policy to allow free market pricing will be realised.

 

Ian MacKenzie, Chief Executive Officer of Hardy, commented: "The Group's primary objective remains the enforcement of the CY-OS/2 Award which will deliver new cash resources to expand our portfolio within or outside of India. Having secured unanimous approval from the PY-3 uJV partners, we will be aiming to secure Management Committee approval of the PY-3 RFFDP, the regularisation of past and present budgets and the receipt of an extension of the PY-3 PSC. Achieving this will create a clear path to realising the recommencement of production from PY-3."

 

For further information please visit www.hardyoil.com or contact:

 

Hardy Oil and Gas plc

012 2461 2900

Ian MacKenzie, Chief Executive Officer




Arden Partners plc

020 7614 5900

Paul Shackleton, Ciaran Walsh




Tavistock

020 7920 3150

Simon Hudson, Barney Hayward


 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

 

Chairman's Statement

 

Introduction

During the year ended 31 March 2018 (FY18) we spent considerable time and resources disputing the Government of India's (GOI) Special Leave Petition (SLP) filed in the Supreme Court of India (SC) wherein they are disputing a previous Delhi High Court judgment that India courts do not have jurisdiction to hear an appeal of the CY-OS/2 arbitration award (the Award). The Award entitles Hardy Exploration & Production (India) Inc (HEPI) to further time to appraise a natural gas discovery located within the CY-OS/2 block and to compensation for being deprived of the benefit of our investment in the block. On 1 May 2018 the SC two-member bench referred the matter to a larger bench. We are clearly disappointed with this action as it results in further delay. We remain resolved to see off all legal challenges put forward by the GOI whether in India or in other jurisdictions in which we elect to execute or confirm this unanimous international arbitration award.

 

We are delighted with the progress made in our PY-3 oil field asset wherein we were able to establish a consensus regarding a development plan for the field. This achievement facilitated the submission of an extension application for the PY-3 field Production Sharing Contract by up to 10 years.

 

Strategy

The Group's long-term strategy is to be an active participant in the upstream oil and gas industry, realise value from our current India focused portfolio and pursue new opportunities as they arise. The successful conclusion to the enforcement of the CY-OS/2 Award process would provide Hardy with significant funds to add new upstream assets. Securing management committee (MC) approval for the PY-3 Revised full field development plan (RFFDP) and GOI sanctioning of an extension of the production sharing contract (PSC) will facilitate activity to recommence production. We have clear plans in place for the other assets in our portfolio. The Group's short-term strategic objectives are focused on achieving positive outcomes from various legal and dispute resolution processes. Our strategies to mitigate negative outcomes have been formulated with input and guidance from various legal experts and advisors.

 

Market overview

Due to strong global demand, commodity pricing levels have risen to their highest since 2014. Since January 2017, the beginning of a crude oil production cut agreement among certain countries within and outside the Organization of the Petroleum Exporting Countries (OPEC), the EIA estimates that global petroleum inventories have declined at an average rate of more than 0.5 million barrels per day (b/d) and looking forward, US and Iran tensions may also contribute to declines in global production. Industry costs have stabilised but remain much lower than in 2014. We anticipate some upward pressure on the cost of upstream services and equipment, should oil prices remain above $70 per barrel. India is enjoying a period of robust growth and continues to rely on the import of oil and gas to meet its energy requirements. Prime Minister Modi's objective to increase domestic production and improve energy security has resulted in more proactive measures being taken by the GOI including new licencing auction rounds discovered small fields (DSF) and open acreage licencing policy (OALP).

 

Performance

As at 31 March 2018, the Group had $9.2 million of cash and short-term investments with no secured debt. The Group has sufficient resources to pursue our primary objective to enforce the CY-OS/2 Award. The Group maintains robust internal control and risk management systems appropriate for a company of our size and resources.

 

Governance

The Board composition remained constant throughout the year. Further details of the Board's activities this year can be found in the Corporate Governance section of this Report. The Group's near-term principal risks remain the timing or execution of planned activities may not commence as forecast; the possible relinquishment of appraisal acreage; liabilities related to ongoing disputes and cost associated with noted disputes.

 

In accordance with provision C.2.2 of the 2016 UK Code, the Directors have assessed the prospects of the Group over a longer period than the 12 months required for the "Going Concern" statement. The Board conducted this review for a period of three years to 31 March 2021.

 

Management's demonstrated commitment to achieve our objectives, notwithstanding the actions being adopted by the GOI, regarding the appeal of the CY-OS/2 Award, and those of the uJV partners of PY-3. Management's continued resilience under these challenging circumstances is to be commended.

 

Objectives and outlook

Our foremost objective, the enforcement of the CY-OS/2 Award, will deliver new resources to the Group allowing us to expand our portfolio of upstream oil and gas assets and resume activity consistent with our business model of being a full cycle oil and gas producer. Our other near-term priorities remain the recommencement of production from the PY-3 oil field, enforcing our rights to recovery amounts due from uJV partners and disputing various claims against HEPI.

 

Alasdair Locke

Chairman

 

 

Chief Executive Officer's Review

 

Introduction

In FY18 we were disappointed with the progress of CY-OS/2 litigation as the GOI's Special Leave Petition (SLP) before the Supreme Court of India (SC) was affected by continual adjournments and delays. After having the matter listed 41 times over 17 months, at considerable cost, the SC bench decided that it could not decide the matter and referred the SLP to a larger SC bench. We are fully committed to seeing through the enforcement of the CY-OS/2 award which will provide a significant capital infusion and allow us to recommence appraisal of the Ganesha natural gas discovery within the CY-OS/2 block.

 

In FY18 we were successful in establishing a consensus, among the parties to the PY-3 unincorporated Joint Venture (uJV), regarding the future development of the PY-3 field. This achievement facilitated our ability to submit an extension application in accordance with the GOI extension policy We continued to fulfil our obligations as Operator of the PY-3 uJV, including the developing of a revised full field development plan (RFFDP), protecting the uJV interests against unfounded third-party claims and other compliance requirements. Notwithstanding our efforts, the non-operating partners continued to deny any liabilities for the costs that HEPI has and continues to incur in fulfilling obligations of the operator and as a result arbitration was initiated. The arbitration process is expected to conclude by the end of the calendar year.

 

Implementing our strategy

Enforcement of the CY-OS/2 Award is our primary focus. Successful implementation of the CY-OS/2 Award will create a robust platform for Hardy to rebuild our portfolio of upstream assets. The recommencement of production from the PY-3 field, considering current economic conditions, remains viable under the PY-3 Operating Committee's recommended RFFDP which is currently under review by the Directorate General of Hydrocarbons (the technical advisory arm of the Ministry of Petroleum and Natural Gas).

 

Operations

On 1 May 2018, the SC bench comprising of Hon'able R Agrawal and A Sapre, referred the GOI's SLP to a larger SC bench. The SLP is challenging a Delhi HC judgement that the Indian Courts do not have jurisdiction to hear an appeal of the CY-OS/2 international arbitration as the seat of arbitration was Malaysia. We are disappointed with the duration and conclusion of the SC but remain resolved to challenge the GOI's appeal to a larger SC bench. The SC hearings are expected to recommence in August of this year and may continue into 2019.

 

We continue to believe that:

·  The arbitration award, issued by a tribunal, comprising three former Chief Justices of India, was unanimous and well-reasoned.

·  The dispute resolution articles of the Production Sharing Contract (PSC) clearly state that an arbitration award is to be final and binding on all parties.

 

In our view therefore, the GOI's appeal breaks the sanctity of the PSC. However, should the Supreme Court overrule the HC ruling then the merits of the award will be heard in an Indian High Court. India is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention). This allows entities / nation states the right to enforce foreign arbitral awards in any jurisdiction which is a signatory to the New York Convention. Statute of limitation constraints prompted Hardy to initiate legal proceedings (award confirmation) in the USA to preserve our rights to enforce the CY-OS/2 Award. In FY 2017 we also initiated enforcement of our legal rights in the UK. Our preference remains to conclude the process within the framework of India's judicial system which would result in restoration of the block, enabling Hardy to continue with an appraisal programme.

 

The resumption of production from our PY-3 asset remains a priority. We made good progress in this regard as a RFFDP was unanimously agreed among the PY-3 partners and as a result we were able to submit an extension application to the GOI in accordance with its policy. The RFFDP provides for recommencing production from an existing well prior to December 2019; drilling one development well in the first half of 2020; and tie-in to the PY-1 infrastructure to export produced gas. The RFFDP is currently under review by the DGH and we will commence the tendering process once we have secured the MC approval for the RFFDP and commensurate budgets and subsequent confirmation of the GOI sanctioning of an extension to the PY-3 PSC.

 

Our plan to acquire a further interest in, and operatorship of the GS-01 asset remains in place. The acquisition process is primarily dependent on the settlement of liquidated damages relating to an Unfinished Minimum Work Programme. The GOI current gas pricing policy stipulates a price of $3.1 per mmbtu which does not support the proposed development plan for Dhirubhai 33. If we can conclude the acquisition process, we will either need to explore alternative development plans or trust that the GOI's policy to allow free market pricing needs to be realised.

 

Health, Safety and Environment (HSE)

As an offshore operator, the Group is committed to excellent health and safety practices which are at the forefront in all our activities. Although all offshore activities were suspended in 2012, our intention to initiate activities in the future means that we will continue our commitment to maintain high HSE standards throughout the organisation.

 

Financial

The Group is reporting a total comprehensive loss of $4.7 million for the year ended 31 March 2018 (FY18) compared to a loss of $9.2 million for the year ended 31 March 2017 (FY17). The loss is attributable primarily to general and administrative expenditure which included a significant increase in legal expenses of over $2.3 million. In FY17 the Group wrote-down $3.0 million of Property Plant and Equipment associated with PY-3, $4.5 million of deferred tax asset and reversed the decommissioning provision by $0.8 million.

 

Conservation of cash resources is paramount for the Group. Total general and administrative expenditure increased from $2.6 million in FY17 to $5.2 million in FY18. The increase is attributable to legal expenditures which we project will continue through FY19 but will fall significantly in FY20 as ongoing litigation matters are concluded. The Group projects administrative expenses for FY19 to be around $4.5 million.

 

Cash used in operating activities amounted to $5.4 million for the year ended 31 March 2018 compared to a cash outflow of $3.2 million for the year ended 31 March 2017. The Group's capital expenditure was marginal and investment income at $0.4 million. With cash and short-term investments of $9.2 million as at 31 March 2018, and no debt.

 

Outlook

The Group's primary objective remains the enforcement of the CY-OS/2 Award which will deliver new cash resources to expand our portfolio within or outside of India. Having secured unanimous approval from the PY-3 uJV partners, we will be aiming to secure Management Committee approval of the PY-3 RFFDP, the regularisation of past and present budgets and the receipt of an extension of the PY-3 PSC. Achieving this will create a clear path to realising the recommencement of production from PY-3.

 

Ian MacKenzie

Chief Executive Officer

 

OPERATIONAL REVIEW

 

The Group's exploration and production assets are based in India and are held through its wholly owned subsidiary, Hardy Exploration & Production (India) Inc. (HEPI)

 

Health, Safety and Environment

The Group is committed to excellent health and safety practices which are at the forefront in all our activities. Although all offshore activities are currently suspended, maintaining high HSE standards throughout the organisation remains core to all our undertakings. The Group's HSE policy document is regularly reviewed and amended as appropriate.

 

Block CY-OS/2:

Appraisal (Hardy 75 per cent interest - Operator)

 

HEPI is the Operator of the CY-OS/2 block which is located offshore India's East Coast and encompasses a natural gas discovery, Ganesha. In 2009 HEPI was informed that the GOI had deemed the block relinquished citing expiration of time to appraise the Ganesha discovery. Since this time HEPI has relied upon the contractual rights provided under a Production Sharing Contract. In accordance with that contract a tribunal issued an order concluding that the GOI action was illegal and required the GOI to reinstate the block. The GOI has subsequently been attempting to have the award overturned by the India Courts. The GOI's request for the Indian courts to hear an appeal of the tribunal award has been frustrated by the Delhi HC Division Bench 27 July 2016 judgement which concluded that India did not have jurisdiction to hear the GOI appeal. The GOI had appealed this decision to the Supreme Court (SC) of India which was ongoing throughout FY18.

 

GOI Appeal - The GOI Special Leave Petition was listed before the SC bench, comprising of Hon'able Judges Rajesh Kumar Agrawal and Abhay Manohar Sapre, 41 times over a 17 month period. Following this protracted and costly process, on 1 May 2018 the India SC bench took the decision not to pass judgement and instead referred the matter to a larger SC bench. An extract from the judgement is provided below;

 

From the Judgement of THE SUPREME COURT OF INDIA, CIVIL APPELLATE JURISDICTION, CIVIL APPERAL NO. 4628 OF 2018

 

"In our opinion, though, the question regarding the "seat" and "venue" for holding arbitration proceedings by the arbitrators arising under the Arbitration Agreement/International Commercial Arbitration Agreement is primarily required to be decided keeping in view the terms of the arbitration agreement itself, but having regard to the law laid down by this Court in several decisions by the Benches of variable strength as detailed above, and further taking into consideration the aforementioned submissions urged by the learned counsel for the parties and also keeping in view the issues involved in the appeal, which frequently arise in International Commercial Arbitration matters, we are of the considered view that this is a fit case to exercise our power under Order VI Rule 2 of the Supreme Court 12 Rules, 2013 and refer this case (appeal) to be dealt with by the larger Bench of this Court for its hearing."

 

Prior to the 1 May 2018 order, on 14 March 2018, the SC bench had issued a Stay Order prohibiting HEPI from executing the arbitration award. The order stated that "…as the matter had been substantially heard and is likely to be decided very soon,.." they deemed it appropriate to stay the enforcement of the award. Notwithstanding the assertion articulated in the 14 March Order, the matter was not decided. It is understood that a new bench may be constituted later in the year however it is unclear how long this process will take.

 

The table below summarises the extraordinary actions HEPI has undertaken to enforce its contractual rights provided to it under the GOI's PSC -

 

Date

Description

Listings #

Duration (days)

01 2009

GOI via DGH issues notice of relinquishment.



05 2010 - 03 2013

The Tribunal of an arbitration process, initiated by the CY-OS/2 Joint Venture, determined that the relinquishment was illegal and issued an order for the GOI to reinstate the block and awarded compensation for denial of investment.


1,035

07 2013 - 03 2015

A GOI appeal, in the HC of Delhi (single judge), against the arbitration award dismissed the appeal based on the withdrawal of the GOI.

10

738

08 2015 - 01 2016

A GOI application, in the HC of Delhi (single judge), seeking for a review of the HC's 03 2015 dismissal.

7

169

02 - 06 2016

A GOI appeal, to the HC of Delhi (two-member bench), against the arbitration award was dismissed based on the bench's judgement that the Seat of arbitration was Malaysia and as a result India courts did not have jurisdiction to hear an appeal of the merits of the arbitration Award.

11

159

10 2016 - 04 2018

A GOI appeal, to the SC of India (two-member bench), of the HC judgement passed in favour of HEPI in July 2016. Substantial arguments heard on 17 occasions. 14 March 2018 the bench issued a Stay order restricting HEPI from enforcing the award. On 1 May the bench Issued an order referring matter to a larger SC bench

41

570

08 2018 - present

As per the SC order of 1 May 2018 the GOI appeal has been referred to a larger SC bench and the Hon'ble the Chief Justice of India has been requested to constitute the appropriate Bench for hearing and disposal of this appeal.

12+

365+

 

+ - Hardy estimate

Enforcement - HEPI has previously filed an execution petition with the Delhi HC and this has run in parallel with the GOI's appeal. The Delhi HC execution petition has been continually adjourned due to the ongoing GOI appeal in the SC. It is expected that the execution hearings will progress should GOI's appeal in the SC be dismissed.

 

In late July 2017, the Group initiated enforcement proceedings in the UK's High Court of Justice. HEPI had previously initiated Confirmation proceedings in the Federal Court of Washington DC, United States of America. These actions have been initiated to maintain HEPI's right to enforce all or a part of the Award in the US and the UK. The Confirmation proceedings in the Federal Court of DC have been due since November 2017. To date there has been no indication when the Federal Court will pass judgement. In July 2017, Justice Leggatt passed an enforcement order in the London Commercial High Court of Justice. The GOI is currently contesting that order in the UK. HEPI's primary objective remains to conclude the appeal and enforcement process within the Indian judicial system.

 

FY19 Objectives - We will continue to seek the restoration of the CYOS/2 block to the joint venture in a timely manner. The SC deferment of judgement to a larger bench means that the appeal and enforcement process in India is likely to continue through 2018. HEPI believes that it has a strong position as the unanimous international award, passed by three former Chief Justices of India, is well reasoned. Hardy intends to recommence work on the appraisal of the Ganesha-1 natural gas discovery once the block has been restored to the CY-OS/2 joint venture.

 

Contingent asset - As at 31 March 2018, Hardy's 75 per cent share of the compensation awarded by the Hon'ble Arbitration Tribunal amounted to approximately $78.2 million.

 

Background - Hardy is the operator of the CY-OS/2 exploration block and holds a 75 per cent participating interest. The block is in the northern part of the Cauvery Basin immediately offshore from Pondicherry, India and covers approximately 859 km2. The Ganesha-1 discovery well was drilled to a depth of 4,089 m and on testing the well flowed natural gas at a peak rate of 10.7 mmscfd.

 

Award summary - relinquishment by the Ministry of Petroleum and Natural Gas (MOPNG) of the GOI was illegal; the unincorporated Joint Venture (uJV) shall be entitled to a period of three years from the date on which the block is restored to it, to carry out further appraisal; the uJV shall be paid compensation calculated at the simple rate of 9 per cent per annum on the amount of Rs. 5.0 billion from the date of relinquishment till the date of the award; interest will then accrue at a rate of 18 per cent per annum on the amount of Rs. 5.0 billion until the block is restored to the uJV.

 

Block CY-OS 90/1 (PY-3):

Oil Field (Hardy 18 per cent interest - Operator)

 

Operations - The PY-3 field was shut-in in July 2011. Since then Hardy has been working diligently to establish a consensus amongst stakeholders regarding the optimal development of the field with an objective to recommence production at the earliest opportunity.

 

PY-3's Production Sharing Contract (PSC) is due to expire in December 2019 and it is eligible for an extension of up to ten years. On 29 December 2017, HEPI submitted an extension application, in accordance with the GOI PSC Extension Policy No. O-19025/10/2005-ONG-D-V (Part-II) dated 28 March 2016. The application included, among other requirements, a Revised Full Field Development Plan (RFFDP) that has been unanimously approved by the uJV partners and has been recommended to the Management Committee which includes the GOI. The RFFDP programme envisions;

 

·      Contracting a floating production, storage and offloading vessel or equivalent;

·      Recommencing production from an existing well prior to December 2019,

·      Drilling one development well in the first half of 2020; and

·      A tie-in to the PY-1 infrastructure to export produced gas.

 

After considerable deliberation and debate, the PY-3 Operating Committee agreed that drilling in the prospective north-east area of the field will be reviewed further once production has recommenced. The RFFDP is currently under review by the Director General of Hydrocarbons (DGH). Once the DGH review is complete it is expected that a Management Committee meeting will be convened to discuss the adoption of the RFFDP, to approve the budget for FY19, and to recommend the GOI award an extension of the PSC in accordance with the above noted policy.

 

Samson Maritime Limited (Samson) has previously secured an award, amounting to $5.0 million, against HEPI for offshore services provided in the PY-3 field during 2011 and 2012. The full amount of the award is included in current liabilities. Samson has subsequently filed an execution petition with the Madras High Court and secured an attachment order on HEPI's Indian based bank accounts. HEPI has implemented measures to allow it to continue to settle its liabilities in India and is seeking partial relief from the attachment order. The order issued by the Madras High Court was broadly worded and as a result the State Bank of India (SBI) and HEPI have sought clarification regarding the status of the PY-3 site restoration fund account (SRF). It is the SBI and HEPI's view that this account is a special scheme between the PY-3 uJV and the GOI and is not legally attachable. Samson, SBI and HEPI have made their filings and the matter is under consideration by the Madras High Court.

 

In March 2017, Hardy initiated arbitration with the uJV partners to collect outstanding amounts associated with expenditures incurred by HEPI in fulfilling its responsibilities as operator of PY-3, including the amounts due to Samson. The uJV partners have made several counter claims for substantial damages they attribute to alleged Gross Negligence and Wilful Misconduct. In addition ONGC is claiming reimbursement of Cess and Royalty paid since commencement of production that was in excess of their participating interest. The ONGC claim states that HEPI, as operator, was negligent in not collecting the amounts from TPL and HOEC. We believe that all counter claims are baseless and without merit. The dispute resolution process is expected to conclude by the end of 2018.

 

FY19 Objective - The sequence of events for FY19 is to:

·      Secure MC approval of RFFDP and Budgets, and of a request to GOI for extension of PSC

·      Obtain confirmation of GOI sanctioning of extension

·      Initiate tendering process

·      Obtain unanimous consent from uJV partners to award contracts (if required secure MC approval of revised estimates)

·      Collect cash-calls from all uJV partners prior to entering into contracts with vendors

 

It is expected that offshore activity could commence within 9 to 12 months of the sanctioning of the RFFDP by the Management Committee. The development plans under consideration would require funding of more than the Group's current cash resources.

 

Background - The PY-3 field is located off the east coast of India, 80 km south of Pondicherry in water depths between 40 m and 450 m. The licence covers 81 km2 and produces high quality light crude oil. The field has produced over 24.8 mmbbl and was shut-in in July 2011 due to the expiry of the production facilities' marine classification and absence of approval to extend the contract.

 

Block GS-OSN-2000/1 (GS-01):

Appraisal (Hardy 10 per cent interest)

 

Operations - The matter of possible liquidated damages associated with unfinished minimum work programme (UMWP), which has been under consideration since 2009, continued to be deliberated by the GOI and the operator. It is our understanding that this is a common matter for NELP I to NELP VII licences starting from 2005 to 2016, including the Group's D9 licence which was relinquished in 2012. HEPI and other operators have been working with industry associations to develop a policy to facilitate a resolution. The GS-01 uJV has conveyed to the GOI that this matter needs to be closed out prior to the progression of further activity on the block. The Group has previously provided for $0.3 million of liquidated damages which is HEPI's share of the Operator's estimate.

 

Objective - Finalise the quantum of liquidated damages outstanding prior to concluding discussions with our partner to acquire its participating interest and the Operatorship of the block. Following this, a priority will be to revisit a proposed FDP taking into consideration the prevailing commodity pricing and  cost environment.

 

Background - In 2011, the GS-01 joint venture secured the GOI's agreement for the declaration of commerciality (DOC) proposal for the Dhirubhai 33 discovery GS01-B1 (drilled in 2007) which flow-tested at a rate of 18.6 mmscfd gas with 415 bbld of condensate through a 56/64 inch choke at flowing tubing head pressure of 1,346 psi. The GS-01 licence is in the Gujarat-Saurashtra offshore basin off the west coast of India, north west of the prolific Bombay High oil field, with water depths varying between 80 m and 150 m. The retained discovery area covers 600 km2.

 

 

Financial Review

In the year ended 31 March 2018, the Group recorded a total comprehensive loss of US$4.7 million and at year end had total cash and short-term investments of US$9.2 million with no debt.

 

Summary statement

 

 

Statement of comprehensive income

FY18

(audited)

US$ million

FY17

(audited)

US$ million

 

Production Cost

Ongoing PY-3 cost of $0.3 million, the write-back of $0.6 million decommissioning provision and write-off of $0.3 million of Inventory

0.0

0.5

 

Impairment of PY-3

-

(3.0)

 

Administrative expense

The Group incurred a significant increase in administrative expenses almost entirely due to an increase in legal fees. Legal fees and other dispute related expenditure amounted to $2.9 million. HEPI's legal fees were significantly compounded by the fact that the matter in the SC of India was listed 41 times over 17 months. Excluding legal costs, G&A expenditure was $2.3 million an increase of $0.3 million from FY17. The increase is attributed to an increase in provision for bad or doubtful debt, the appreciation of GBP against the dollar and other general inflation.

 

To date HEPI has incurred $3.5 million in legal expenditures to dispute the GOI appeal of the CY-OS/2 Award. Due to the extraordinarily protracted process in India's judicial system, HEPI has initiated enforcement of the award in the US and the UK. The confirmation process in both jurisdictions has resulted in additional legal expenditures. HEPI was also involved in two arbitrations with Aban Offshore, and the PY-3 uJV partners.

 

(5.2)

(2.6)

 

Interest and investment income

The Group realised interest income of $0.5 million and incurred no finance costs.

0.5

0.4

 

Taxation

No current tax is payable for the year ended 31 March 2018. Having consideration for the outstanding sanctioning of the OC approved RFFDP and extension of the PY-3 PSC, the projected tax payable in the future that may be offset by the Group's carried forward loss amount was not recognized in the year. The Group previously provided for the full write-down of the deferred tax asset of $4.5 million in FY17.

-

(4.5)

 

Total comprehensive loss

The Group's decrease in total comprehensive loss is attributable to absence of write-downs in FY18 as compared to the previous years.

(4.7)

(9.2)

Statement of financial position

FY18

(audited)

US$ million

FY17

(audited)

US$ million

Non-current assets

Non-current assets primarily represent successful or work-in-progress exploration expenditure. This includes an Intangible asset of $51.1 million attributable to CY-OS/2 and an Indian Rupee denominated site restoration deposit of $5.1 million relating to PY-3. The Company regularly reviews the underlying assumptions used to support the carrying value of the assets

 

Contingent Asset - The CY-OS/2 Arbitration Award in favour of HEPI also entitles HEPI to compensation of $78.2 million as at the balance sheet date in addition to the reinstatement of the block. The compensation is likely to be subject to tax.

56.2

55.9

Current assets

The Group's cash and short-term investments reduced by $5.3 million to $9.2 million. This is primarily due to the payment of general and administrative expenses. Trade and other receivables of $4.7million represents amounts due to be recovered from joint arrangements operated by HEPI regarding PY-3 and CY-OS/2.

14.6

19.3

Non-current liabilities

The Group's non-current liabilities represent a provision for the decommissioning of the PY-3 field. The provision has been estimated based on observed long-term industry cost trends. Having considered prevailing rates for offshore services the provision was reduced by $0.6 million

3.9

4.5

Current liabilities

Trade and other accounts payable comprises amounts due to vendors and other provisions associated with various joint arrangements including the award of $4.9 million due to Samson Maritime plus interest accruing theron.

9.1

8.1

Statement of cash flow

FY18

(audited)

US$ million

FY17

(audited)

US$ million

Cash flow (used in) operating activities

Cash used in operating activities of $(5.2) million comprised primarily administrative costs with the balance of $(0.3) million relating to working capital

(5.4)

(3.2)

Capital expenditure

The Company did not incur any material capital expenditures in the year. A $0.3 million outflow is associated with the rolling up of interest accrued on a deposit committed to the site restoration of the PY-3 field

(0.3)

(0.4)

Financing activity

Interest and investment income, realised predominantly from Indian rupee deposits, amounted to $0.4 million.

0.5

0.4

Cash and short-term investments

Sufficient resources are available to meet ongoing operating and administrative expenditure. The Group has no debt.

9.2

14.5

 

Principal Risks and Uncertainties

 

As an oil and gas exploration and production Group with operations focused in India, Hardy is subject to a variety of risks and uncertainties. Managing risk effectively is a critical element of our corporate responsibility and underpins the safe delivery of our business plans and strategic objectives

 

Board

The Group has a systematic approach to risk identification and risk management which combines the Board's assessment of risk with risk factors originating from, and identified by, the Group's senior management team. Risks are identified, assessed for materiality, documented, and monitored through a risk register with senior management involved in the process. Risks that are identified as high and/or trending upwards are noted and assigned to the Executive Director to monitor and, if possible, proactively mitigate. The risk register is part of a dynamic database in which new risks may be added when identified or removed as they are eliminated or become immaterial. The Board has formed a sub-committee on risk which reports periodically to the Audit Committee. The Board is provided with regular updates of the identified principal risks at scheduled Board meetings.

 

Principal risks and uncertainties

The underlying risks and uncertainties inherent in Hardy's current business model have been grouped into four categories: strategic, financial, operational and compliance. The Board has identified principal risks and uncertainties for FY19 and established clear policies and responsibilities to mitigate their possible negative impact on the business, a summary of which is provided below:

 

Risk or uncertainty

Mitigation action

Strategic - In the short term the Group's strategy is predominantly influenced by ongoing arbitration and litigation and the outcomes of such. The Group seeks to mitigate risks inherent with such litigious matters, however duration is out of the control of the Group and the risk of an adverse outcome cannot be fully mitigated. It is the Group's intention to rebuild a portfolio of upstream oil and gas assets upon positive conclusion of the CY-OS/2 dispute and the securing of an extension to the PY-3 PSC and approved RFFDP.

1. Asset portfolio exclusively in one geopolitical region

Convey business constraints to accomplishing our objective via direct and open dialogue with government officials, active participation in industry lobby groups including the Association of Oil and Gas Operators. Further additions to the Group's portfolio may be considered once tangible progress is made in our existing portfolio.

Financial - Volatility in international crude oil prices and India's natural gas administered pricing policy may adversely affect some of the Group's prospects and projected results from future operations. Other major financial risks facing the Group could be: financing constraints for further appraisal and development; cost overruns; and adverse results from ongoing or pending arbitration and litigation.

1. Prolonged delay in enforcement of CY-OS/2 Award

Secure high quality and reputable legal counsel. Management of stakeholder expectation. Preserve and action the right to enforce in other jurisdictions.

2. Arbitration and Litigation - the Group is involved in disputes with service providers, uJV partners and Indian tax authorities

The Group has secured high quality, reputable professional advisors and legal counsel in India and other jurisdictions. Proactive and constructive engagement with uJV partners. Sanctioning of a PY-3 RFFDP may mitigate several outstanding or pending disputes.

3. Cost of litigation

 

Budget for litigation remains high. Effective management and monitoring of advisory costs. Explore timely resolution of disputes that are not material and/or strategic in nature.

4. Liquidated damages started (LD), unfinished Minimum Work Programme (MWP)

Monitor through media and dialogue with operator, prepare for possible dispute. Engagement with industry lobby groups to facilitate formulation of industry wide resolution. A provision has been made based on management's assessment of a reasonable outcome.

Operational - Offshore exploration and production activities by their nature involve significant risks. Hardy is the operator of two blocks. However, currently there are no committed plans to undertake offshore operations. The role of operator of an asset introduces additional responsibilities and commensurate potential liabilities.

1. Securing approval for further development of PY-3 including extension of the PSC

Comply with all criteria outlined in the GOI's extension policy. Communicate with partners to address individual interests and agendas. Mitigate expenditures prior to budget approvals.

2. PY-3 HSE - status of PY-3 wells

Four subsea wells were securely shut-in in March 2012. The shut-in of wells has been longer than expected and, in the absence of an extension of the PSC, full abandonment of the PY-3 field may need to be initiated.

3. Contractual dispute with uJV partners

Maintain communication with senior members of uJV partners. In April 2017, Hardy initiated the dispute resolution procedures provided for under the PY-3 joint operating agreement by instigating binding arbitration proceedings. PY-3 uJV partners have filed counter claims.

4. Enforcement of arbitration award

Samson Maritime Limited has secured an award against HEPI on PY-3 which is enforceable in India. Samson has frozen India bank accounts of HEPI. This has resulted in some business disruption and the Company is seeking various legal remedies. Processes and procedures are in place to mitigate the impact of enforcement proceedings. The financial institution which maintains the PY-3 Site Restoration Fund (SRF) has erroneously interpreted a court order securing against various assets of Hardy to include the uJV's SRF. All related parties are seeking clarification from the commensurate judicial authority.

Compliance - The Group's current business is dependent on the continuing enforceability of the PSCs, farm-in agreements, and exploration and development licences. The Group's core operational activities are dependent on securing various governmental approvals. Developments in politics, laws, regulations and/or general adverse public sentiment could compromise securing such approvals in the future.

1. Regulatory and political environment in India

Ensure full compliance of all laws, regulations and provision of contracts. Develop sustainable relationships with government and communities. Actively collaborate with industry groups to formulate and communicate interests to government authorities.

2. Taxation and significant third-party claims

Secured the services of leading professional and legal service providers. Proactive communication with taxation authorities to ensure queries are addressed and assessments are agreed or challenged as required.

 

Viability Statement

 

In accordance with the provision of section C.2.2 of the 2016 revision of the UK Code, the Directors have assessed the viability of the Group over a three-year period to March 2021, considering the Group's current position and the potential impact of the principal risks documented in this report. Based on this assessment, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to March 2021.

 

In making this statement, the Directors have considered the resilience of the Group, its current position, the principal risks facing the business in severe but reasonable scenarios and the effectiveness of any mitigating actions. This assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity over the period.

 

The assessment highlighted that the cashflow position in the latter half of the three-year period is projected to fall to a level wherein a funding deficit is likely to arise in certain circumstances. These circumstances could include;

 

•     cash outflow in respect of current liabilities (including Samson Maritime) without commensurate recovery of debts due from uJV partners; and

•     the materialisation of contingent liabilities or unprovided for claims by third parties and government authorities.

 

To a certain extent, the materialisation of the instances listed above can be mitigated by the reduction of overhead and pursuing legal avenues to protect the Group's assets. Further, most liabilities of a material nature are limited to the wholly owned subsidiary Hardy Exploration & Production (India) Inc and the Group's cash and short-term investments are held within Hardy Oil and Gas plc.

 

The Directors have determined that the three-year period to March 2021 is an appropriate period over which to provide its Viability Statement. This covers the period when the Group hopes to have a RFFDP and PSC extension approved as well as clarity regarding its holdings in CY-OS/2 and GS-01. The PY-3 development is an asset that may require additional funding during this period. In making our assessment, the Directors have considered the Group's current cash position, that no capital is committed, and they have not considered the receipt of the CY-OS/2 Contingent Asset of $78.2 million.

 

 

Consolidated Statement of Comprehensive Income

For the year ended 31 March 2018

 


Notes

Year ending

31 March 2018

US$

Year ending 31 March 2017

US$

Continuing Operations




Revenue

3

-

-

Cost of Sales




Production costs

4

21,679

514,525

Impairment of Block CY-OS-90/1 (PY-3)

13

-

(3,026,688)

Gross profit/ (loss)


21,679

(2,512,163)

Administrative expenses


(5,241,983)

(2,614,386)

Operating loss

5

(5,220,304)

(5,126,549)

Interest and investment income

10

484,117

429,857

Loss before taxation


(4,736,187)

(4,696,692)

Taxation

11

-

(4,485,662)

Loss after taxation


(4,736,187)

(9,182,354)

Total other comprehensive income


-

-

Total comprehensive loss for the year attributable to owners of the parent


(4,736,187)

(9,182,354)

Loss per share




Basic & diluted

12

(0.06)

(0.12)

 

Consolidated Statement of Changes in Equity

For the year ended 31 March 2018

 


Share capital

US$

Share Premium US$

Shares option reserve

US$

Retained earnings / (loss)

US$

Total

 

US$

At 31 March 2016

737,641

120,936,441

1,854,349

(51,827,964)

71,700,467

Total Comprehensive loss for the year

-

-

-

(9,182,354)

(9,182,354)

Share based payment

-

-

78,163

-

78,163

Adjustment of lapsed vested options

-

-

(1,168,024)

1,168,024

-

At 31 March 2017

737,641

120,936,441

764,488

(59,842,294)

62,596,276

Total Comprehensive loss for the year

-

-

-

(4,736,187)

(4,736,187)

At 31 March 2018

737,641

120,936,441

764,488

(64,578,481)

57,860,089

 

Consolidated Statement of Financial Position

As at 31 March 2018

 


Notes

31 March 2018

US$

31 March 2017

US$

Assets




Non-Current assets




Property, plant and equipment

13

22,863

 24,885

Intangible assets

14

51,128,774

 51,130,501

Site restoration deposits

20

5,059,523

4,723,237

Total non-current assets


56,211,160

55,878,623

Current assets




Inventories

15

659,656

942,365

Trade and other receivables

16

4,740,148

 3,862,656

Short-term investments

17

8,934,123

 14,179,026

Cash and cash equivalents

22

241,952

 286,881

Total current assets


14,575,879

19,270,928

Total assets


70,787,039

75,149,551

Equity and Liabilities




Equity attributable to owners of the parent




Share capital

18

737,641

737,641

Share premium

19

120,936,441

 120,936,441

Shares option reserve

19

764,488

764,488

Retained loss


(64,578,481)

(59,842,294)

Total equity


57,860,089

62,596,276

Non-current liabilities




Provision for decommissioning

20

3,854,995

4,452,916

Total non-current liabilities


3,854,995

4,452,916

Current liabilities




Trade and other payables

21

9,071,955

8,100,359

Total current liabilities


9,071,955

8,100,359

Total liabilities


12,926,950

12,553,275

Total equity and liabilities


70,787,039

75,149,551

Approved and authorised for issue by the Board of Directors on 6 June 2018

 

Consolidated Statement of Cash Flows

For the year ended 31 March 2018

 


Notes

Year ending

31 March 2018

US$

Year ending

31 March 2017

US$

Operating activities




Cash flow (used in) operating activities

(5,428,470)

(3,240,252)

Tax (deducted) / refund


-

98,347

Net Cash (used in) operating activities


(5,428,470)

(3,141,905)

Investing activities



Expenditure on other fixed assets

(9,193)

(6,328)

Site restoration deposit

(336,286)

(412,039)

Realised from short term investments

5,244,903

2,588,917

Net cash from investing activities


4,899,424

2,170,550

Financing activities



Interest and investment income

484,117

429,857

Net cash from financing activities


484,117

429,857

Net (decrease) in cash and cash equivalents

(44,929)

(541,498)

Cash and cash equivalents at the beginning of the year


286,881

828,379

Cash and cash equivalents at the end of the year

22

241,952

286,881

 

Notes

 

1.    Accounting Policies

The following accounting policies have been applied in the preparation of the consolidated financial statements of Hardy Oil and Gas plc ("Hardy" or the "Group"). The domicile, country of incorporation, address of the registered office and a description of the Group's principal activities can be found in the Directors' Report.

 

These financial statements are for the year ending 31 March 2018.

 

a)   Basis of measurement

Hardy prepares its financial statements on a historical cost basis except as otherwise stated.

 

b)   Going Concern

The Group has in the past generated working capital from its production activities and successfully raised finance to provide additional funding for its ongoing exploration and development programmes. The Directors have reviewed the Group's ongoing activities and having regard to the Group's existing working capital position, the Directors are of the opinion that the Group has adequate resources to enable it to undertake its planned activities over the next 12 months from the date of these financial statements (in coming to this opinion the Directors have not included the receipt of any funds from the CY-OS/2 arbitration award).

 

c)   Basis of Preparation

Hardy prepares its financial statements in accordance with applicable International Financial Reporting Standards (IFRS) and interpretations issued by the International Accounting Standards Board as adopted by the European Union.

 

As at the date of approval of these financial statements, there are several standards and interpretations that are in issue but not yet effective. The Directors have specifically considered IFRS 15 and IFRS 9. The Directors do not anticipate that the adoption of these standards and interpretations in future reporting periods will have a material impact on the Group's results.

 

d)   Presentational currency

These financial statements are presented in US dollars. All financial information presented is rounded to the nearest US dollar, with some disclosures rounded to the nearest million.

 

e)   Basis of consolidation

The consolidated financial statements include the results of Hardy Oil and Gas plc and its subsidiary undertaking. The Group comprises of the parent company, Hardy Oil and Gas plc, and the wholly owned subsidiary Hardy Exploration & Production (India) Inc. ('HEPI') which is incorporated under the Laws of State of Delaware, United States of America. The members of the Group are engaged in the business of exploration and production of oil and gas and all are included in the consolidated financial statements.

 

The Group participates in several unincorporated joint arrangements which involve the joint control of assets used in the Group's oil and gas exploration and production activities. The Group accounts for all its joint arrangements as joint operations by recognising its share of assets, liabilities, income and expenditure of joint arrangement in the Consolidated Statement of Financial Position and Consolidated Statement of Comprehensive Income as appropriate.

 

f)    Revenue

Revenue represents the sale value of the Group's share of oil (which excludes the profit oil sold and paid to the Government of India as a part of profit sharing). Revenues are recognised when crude oil has been lifted and title has been passed to the buyer.

 

g)   Oil and gas assets

 

i)    Exploration and evaluation assets

Hardy has adopted the successful efforts based accounting policy for its oil and gas assets.

 

Costs incurred prior to acquiring the legal rights to explore an area are expensed immediately in the income statement.

 

Expenditure incurred in connection with, and directly attributable to, the acquisition, exploration and appraisal of oil and gas assets are capitalised for each licence granted and are held within intangible exploration assets and not depleted.

 

Exploration drilling costs are initially capitalised on a well-by-well basis until the success or otherwise of the well has been established. The success or failure is assessed on a well-by-well basis. Exploration well costs are written off on completion of the well unless the results indicate the presence of hydrocarbons which have reasonable commercial potential.

 

Following appraisal of such wells, if commercial reserves are established and technical feasibility for extraction is demonstrated, the related capital intangible exploration and appraisal costs are transferred into a cost centre within the Property Plant and Equipment - development assets after testing for impairment, if any. Where exploration well results indicate the presence of hydrocarbons which are ultimately not considered commercially viable, all related costs will be written-off to the income statement.

 

ii)   Oil and gas development and producing assets

Development and production assets are accumulated on a field-by-field basis. These comprise the cost of developing commercial reserves discovered to put them into production and the exploration and evaluation costs transferred from intangible exploration and evaluation assets, as stated in the policy above. In addition, interest payable incurred on borrowings directly attributable to development projects, if any, and assets acquired for the production phase, as well as cost of recognising provision for future restoration and decommissioning, are capitalised.

 

iii)  Decommissioning

At the end of the producing life of a field, costs are incurred in removing and decommissioning facilities, plugging and abandoning wells. The full discounted cost of decommissioning is estimated and considered as an asset and liability. The decommissioning cost is included within the cost of property, plant and equipment development assets. Any revision in the estimated cost of decommissioning which alters the provisions required also adjusted in the cost of asset. The amortisation of the asset, calculated on a unit of production basis based on proved reserves, is shown as within the depletion charge on oil and gas assets in the Statement of Comprehensive Income and unwinding of the discount on the provision is included in the finance costs.

 

iv)  Disposal of assets

Proceeds from any disposal of assets are credited against the specific capitalised costs included in the relevant cost pool and any loss or gain on disposal is recognised in the Statement of Comprehensive Income.

 

h)   Depletion and impairment

 

i)     Depletion

The net book values of the producing assets are depreciated on a field by field basis using the unit of production method, based on proved and probable reserves. Hardy periodically obtains an independent third-party assessment of reserves which is used as a basis for computing depletion.

 

ii)    Impairment

Exploration assets are reviewed regularly for indications of impairment following the guidance in IFRS 6 Exploration and Evaluation of Mineral Resources, where circumstances indicate that the carrying value might not be recoverable. In such circumstances, if the exploration asset has a corresponding development / producing cost pool, then the exploration costs are transferred to the cost pool and depleted on unit of production. In cases where no such development/producing cost pool exists, the impairment of exploration costs is recognised in the Statement of Comprehensive Income.

 

Impairment reviews on development / producing oil and gas assets for each field are carried out when indicators of impairment exist by comparing the net book value of the cost pool with the associated discounted future cash flows.  If there is any impairment in a field representing a material component of the cost pool, an impairment test is carried out for the cost pool. If the net book value of the cost pool is higher than the associated discounted future cash flows, the excess amount is recognised in the Statement of Comprehensive Income as impairment and deducted from the pool value.

 

i)    Investments

Investments by the parent company in its subsidiaries are stated at cost less any impairment provisions.

 

j)    Short term investments

Short term investments are regarded as "financial assets at fair value through profit or loss" and are carried at fair value. In practice, the nature of these investments is such that all income is remitted and recognised as interest and investment income and the fair value equates to the value of initial outlay and therefore, in normal circumstances, no fair value gain or loss is recognised in the Statement of Comprehensive Income.

 

k)   Inventory

Inventory of crude oil is valued at the lower of average cost or net realisable value. Average cost is determined based on actual production cost for the year. Inventories of drilling stores are recorded at cost including taxes, duties and freight. Provision is made for obsolete or defective items where appropriate, based on technical evaluation.

 

l)    Financial instruments

Financial assets and financial liabilities are initially recognised at fair value in the Group's Statement of Financial Position based on the contractual provisions of the instrument.

 

Trade receivables are not interest bearing and their fair value is deemed to be their nominal value as reduced by any necessary provisions for estimated irrecoverable amounts. Trade payables are not interest bearing and their fair value is deemed to be their nominal value.

 

m)  Equity

Equity instruments issued by Hardy are recorded at net proceeds after direct issue costs.

 

n)   Taxation

The tax expense represents the sum of current tax and deferred tax. Current tax is based on the taxable profit of the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income as it excludes certain items of income or expenses that are taxable or deductible in years other than the current year and it further excludes items that are never taxable or deductible. The current tax liability is calculated using the tax rates that have been enacted or substantially enacted by the year end date.

 

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the liability method.

 

Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available in the future against which deductible temporary differences can be utilised.

 

Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which temporary differences reverse, based on tax rates and laws enacted at the year-end date.

 

o)   Foreign currencies

Foreign currency transactions are accounted for at the exchange rate prevailing on the date of the transaction. At the year-end date, all foreign currency monetary assets and monetary liabilities are restated at the closing exchange rate. Exchange difference arising from transactions during the year and from the year end retranslation are reflected in the Statement of Comprehensive Income.

 

Rate of exchanges were as follows:


31 March

2018

31 March

2017

US$ to £1

1.40

1.23

Indian Rupees to US$1

64.89

64.85

 

p)   Share based payments

Hardy issues share options to Directors and employees, which are measured at fair value at the date of grant. The fair value of the equity settled options determined at the grant date is expensed on a straight-line basis over the vesting period. In performing the valuation of these options, only market conditions are considered. Fair value is derived by use of the binomial model. The expected life used in the model is based on management estimates and considers non-transferability, exercise restrictions and behavioural considerations. In case of lapsed vested options, the amount recognised in the shares option reserve is adjusted to retained earnings as a reserve movement.

 

q)   Contingent assets

Contingent assets are disclosed but not recognised where the receipt of income is probable but not virtually certain. The asset and related income is only recognised in the year when the receipt becomes virtually certain.

 

2.  Critical accounting estimates and judgments

The preparation of the Group's financial statements requires the use of estimates and judgements that affect the carrying value of assets and liabilities at the balance sheet date and the reported amounts of revenue and expenditure for the year. These estimates and judgements are made based on management's knowledge of the facts, taking into account historical experiences and expectations of future events that are believed to be reasonable under the particular circumstances. By definition the actual results will most likely differ from the estimates made. The estimates and assumptions that could have a significant risk of causing a material adjustment to the carrying value of assets and liabilities within the next financial year are addressed below:

 

i)     Intangible assets- exploration

Intangible assets comprise of capitalised exploration expenditures associated with a natural gas discovery on the CY-OS/2 exploration licence. The GOI had notified the Group of the relinquishment of the licence to which Hardy and the GOI entered arbitration to resolve the dispute. The arbitration tribunal ruled in favour of HEPI and ordered the reinstatement of the licence. The GOI has subsequently appealed the award at several levels of the Indian judicial system. Full details are disclosed in note 14 to these financial statements. This is regarded as a significant area of judgment and Management having considered that the arbitration tribunal has confirmed that the relinquishment was illegal, the appeal by the GOI was dismissed by the District Bench of the High Court of Delhi, and legal advice maintains a legal right to the licence. As a result, it has been adjudged that there is no indication of impairment.

 

ii)    Recoverability of Receivables from PY-3 Joint Venture Partners

Where the Group is the operator of, or is the largest owner in, a field it recovers a percentage of the costs incurred from its joint arrangement partners in accordance with the levels of participating interests. Partners may either be Indian state-owned companies or private enterprises. Cash calls on partners are usually made in advance of incurring field expenditure. However a number of these have not been paid, pertaining to period from 2011 to 2017 and the Group commenced arbitration against PY-3 partners in FY17 seeking $8.36 million (plus interest). The Group has strong legal advice that its claim is valid and it will continue to pursue this amount by all legal means. Due however to the length of time the amounts have been outstanding prudent provision has been made against the sums due totalling US$ 5.1 million (2017: US$ 4.8 million). There is always uncertainty associated with any arbitration process and the amount recovered may therefore materially differ both from that claimed and from the amount recognised. This is regarded as a significant estimate and Management have considered the correspondence between the Group and the Debtors, standing of the individual organisations and legal advice.

 

iii)   Provisions

The Group records provisions where it considers it has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation and a reliable estimate of the amount thereof can be made. The recording of provisions is an area which requires the exercise of management's judgement relating to the nature, timing and probability of the liability. The Group's balance sheet includes provisions for liquidated damages on minimum work programmes, Indian taxes, and contractual disputes.

 

iv)   Decommissioning

The liability for decommissioning is reviewed based on cost estimates which are predominated by the charter hire charges of drill ships and supply boats. Accordingly, the provision made in the books will reflect the risk free discounted estimated future cost for decommissioning. Further details are contained in note 20.

 

v)    Carrying value of Oil & Gas and Exploration assets

Management has fully impaired the Group's oil and gas assets due to ongoing uncertainty of likelihood of development and the availability of extension at the end of the current Production Sharing Agreement in 2019. If a development was sanctioned the calculation of the recoverable amount would require the estimation of future cash flows. Previously Management's key assumptions and estimates in the impairment models related to: commodity prices that are based on forward commodity price estimates, fiscal structuring specific to individual assets, commercial reserves and the related cost profiles. Should a development plan be approved by all the partners in the PY-3 field and the Government of India we will review the economic model to determine the appropriate asset value. If circumstances change the total impairment recognised in FY16 and FY17 of $5.8m could be written back. Further details are contained in note 13 and 14

 

3.  Segment analysis

The Group is organised into two business units: India and United Kingdom. The Indian business unit is operated by the wholly owned subsidiary, Hardy Exploration & Production (India) Inc. and Hardy Oil and Gas plc operates in the United Kingdom.

 

The India business unit focuses on exploration and production of oil and gas assets in India. The United Kingdom business unit is the holding company. Management monitors these business units separately for resource allocation, decision making and performance assessment.

 


2018

 US$


 India

 UK

 Inter-segment eliminations

 Total

Revenue





Other income

-

-

-

-






Operating loss

(3,637,805)

(1,582,499)

-

(5,220,304)

Interest income

339,700

144,417

-

484,117

Interest income on inter-corporate loan

-

2,288,570

(2,288,570)

-

Impairment of investment in & loan to Subsidiary

-

(5,586,675)

5,586,675

-

Interest expense on inter-corporate loan

(2,288,570)

-

2,288,570

-

Loss before taxation

(5,586,675)

(4,736,187)

5,586,675

(4,736,187)

Taxation

-

-

-

-

Loss for the period

(5,586,675)

(4,736,187)

5,586,675

(4,736,187)






Non-current assets

56,201,774

9,386


56,211,160

Current assets

5,354,740

9,221,139


14,575,879

Total Segment assets

61,556,514

9,230,525


70,787,039

Inter-corporate loan (net of impairment)

-

48,120,580

(48,120,580)

-

Non-current liabilities

(3,854,995)

-

-

(3,854,995)

Current liabilities

(8,885,544)

(186,411)

-

(9,071,955)

Total Segment liabilities

(12,740,539)

(186,411)

-

(12,926,950)

Inter-corporate borrowings

(115,827,839)

-

115,827,839

-

Capital expenditure

2,982

6,211

-

9,193

Depreciation, depletion and amortisation

7,480

5,462

-

12,942

 


2017

 US$


 India

 UK

 Inter-segment eliminations

 Total

Revenue





Other income

-

-

-

-






Operating loss

(3,488,958)

(1,637,591)

-

(5,126,549)

Interest income

332,430

97,427

-

429,857

Interest income on inter-corporate loan

-

1,517,533

(1,517,533)

-

Impairment of investment in & loan to Subsidiary

-

(65,873,695)

65,873,695

-

Interest expense on inter-corporate loan

(1,517,533)

-

1,517,533

-

Loss before taxation

(4,674,061)

(65,896,326)

65,873,695

(4,696,692)

Taxation

(5,321,891)

836,229

-

(4,485,662)

Loss for the period

(9,995,952)

(65,060,097)

65,873,695

(9,182,354)






Non-current assets

55,869,987

8,636

-

55,878,623

Current assets

4,859,675

14,411,253

-

19,270,928

Total Segment assets

60,729,662

14,419,889

-

75,149,551

Inter-corporate loan (net of impairment)

-

47,627,764

(47,627,764)

-

Non-current liabilities

(4,452,916)

-

-

(4,452,916)

Current liabilities

(7,953,585)

(146,774)

-

(8,100,359)

Total Segment liabilities

(12,406,501)

(146,774)

-

(12,553,275)

Inter-corporate borrowings

(109,748,349)

-

109,748,349

-

Capital expenditure

3,998

2,330

-

6,328

Impairment of Block CY-OS-90/1 (PY-3)

(3,026,688)

-

-

(3,026,688)

Depreciation, depletion and amortisation

(7,257)

(11,515)

-

(18,772)

 

The Group is engaged in one business activity, the exploration, development and production of oil and gas. Other income relates to technical services to third parties, overhead recovery from joint arrangement operations and miscellaneous receipts, if any.

 

4.  Production costs

Production costs, related to PY-3, included in the cost of sales consist of:


2018

US$

2017

US$

Production costs

293,533

288,656

Write down of inventories

282,709

-

Change in decommissioning estimate

(597,921)

(803,181)

Cost of Sales

(21,679)

(514,525)

 

As the PY-3 asset has been fully impaired the change in the value of the decommissioning provision has been recognised immediately in production costs.

 

5.  Operating loss

Operating loss is stated after charging:


 2018

US$

2017

US$

Depreciation and amortisation

12,942

18,772

Operating lease costs - Land and buildings

159,142

151,228

External auditors' remuneration



- Fees payable to the Group's auditors for the audit of the Group's annual accounts

75,205

75,385

- Audit related assurance services

11,234

10,610

Exchange loss / (gain)

15,423

(53,347)

 

The Group has a policy in place which requires approval of the Audit Committee for the award of non-audit services to be provided by the auditors. No non-audit services were provided during the year or in the prior year.

 

6.      Reconciliation of operating loss to operating cash flows


 2018

US$

2017

US$

Operating loss

(5,220,304)

(5,126,549)

Impairment of Block PY-3

-

3,026,688

Depletion, amortisation and depreciation

12,942

18,772

Share based payment expense

-

78,163


(5,207,362)

(2,002,926)

Decrease in inventory

282,709

-

Increase in trade and other receivables

(877,492)

(710,767)

Increase / (decrease) in trade and other payables

373,675

(526,559)

Cash (used in) operating activities

(5,428,470)

(3,240,252)

 

7.      Staff costs

 


 2018

US$

 2017

US$

Wages and salaries

1,032,506

960,332

Social security costs

186,564

188,077

Share based payments charge

-

78,163


1,219,070

1,226,572

 

Staffs costs, including executive Directors' salaries, fees, benefits and share based payments, are shown gross before amounts recharged to joint arrangements.

 

The average monthly number of employees, including executive Directors, employed by the Group are as follows:


2018

2017

Management and administration

9

9

Operations

5

6


14

15

 

The number of permanent employees of the Group as at 31 March 2018 is 13 (2017: 15).

 

8.      Share based payments

Share options have been granted to subscribe for Ordinary Shares of US$0.01 each in the capital of the Company, which are exercisable between 2017 and 2024 at prices of £0.65 to £7.69 per Ordinary Share.

 

Hardy has an unapproved share option scheme for the Directors and employees of the Group. Options are exercisable at the quoted market prices of the Company's shares on the date of grant. The vesting period is three years with a stipulation, subject to compounded share price growth. The options are exercisable for a period of 10 years from the date of grant. Details of the share options outstanding during the years are as follows:

 


2018

2017


Number of options

Weighted average

price

Number of options

Weighted average

price

Outstanding at beginning of the year

675,000

£1.70

1,715,000

£1.78

Granted during the year

-

-

-

-

Lapsed during the year

-

-

1,040,000

£1.80

Outstanding at the end of the year

675,000

£1.70

675,000

£1.70

Exercisable at the end of the year

100,000

£7.69

100,000

£7.69

 

Details of outstanding options at the end of the year with the weighted average exercise (WAEP) price as follows:

 


1 April 2017

Lapsed FY 2018

31 March 2018

FY

Number

WAEP

Number

WAEP

Number

WAEP

2009

100,000

7.69

-

-

100,000

7.69

2013

50,000

1.19

-

-

50,000

1.19

2014

275,000

0.66

-

-

275,000

0.66

2015

250,000

0.65

-

-

250,000

0.65








Total

675,000

1.74

-

-

675,000

1.74

 

The weighted average contractual life of options outstanding is 4.82 years (2017: 5.82 years).

 

9.      Directors' emoluments

Details of each Director's remuneration and share options are set out in the Directors' Remuneration Report that forms part of the Company's Annual report. Directors' emoluments are included within the remuneration of the key management personnel in note 26.

 

10.     Interest and investment income


 2018

US$

 2017

US$

Bank interest

339,198

312,320

Other interest income

502

20,110

Dividend

144,417

97,427


484,117

429,857

 

11.     Taxation

a)   Analysis of taxation charge / (credit) for the year


2018

US$

 2017

US$

Current tax charge



UK corporation Tax

-

-

Foreign Tax - India

-

-

Minimum alternate tax

-

-

Foreign tax - USA

-

-

Total current tax charge

-

-

Deferred tax charge

-

4,485,662

Taxation charge

-

4,485,662

 


2018

US$

2017

US$

Charge in respect of change in tax rates

-

-

Losses incurred during the year

(1,659,847)

(1,792,196)

Origination and reversal of temporary differences

75,409

1,641,911

De-recognition due to potential non-reversal of deferred tax asset

1,584,438

4,635,947

Deferred tax charge

-

4,485,662

 

b)   Factors affecting tax charge for the year


 2018

US$

 2017

US$

Loss before taxation from continuing operations

(4,736,187)

(4,696,692)

Loss before taxation multiplied by the appropriate rate of tax in respective countries (2017: 41.2%)

(1,951,309)

(1,930,237)

Adjustment for expired carried forward losses

291,462

2,614,561

Others

75,409

(834,609)

De-recognition due to potential non-reversal of deferred tax asset

1,584,438

4,635,947

Total tax charge

-

4,485,662

 

Indian operations of the Group are subject to a tax rate of 41.2 per cent which is higher than UK and US corporations tax rates. To the extent that the Indian profits are taxable in the US and/or the UK, those territories should provide relief for Indian taxes paid, principally under the provisions of double taxation agreements. When considering deferred tax assets, the Group considers the highest and best use of the losses available, this is considered to be in India. Based on the current expenditure plans, the Group anticipates that the tax allowances will continue to exceed the depletion charge of each year, though the timing of related tax relief is uncertain.

 

No deferred tax asset has been recognised in FY18.

 

Write-off of Deferred Tax Asset in the previous year

The Group wrote off the deferred tax asset of US$4,485,662 during FY17. This was in light of the fact that there was no Joint Venture partners agreed field development plan for Block PY-3 as a result of which the Group was not expected to generate profits within a reasonable timeframe to be offset by unused tax losses. Further a portion of the losses carried forward in the Indian operations of the Group had expired in FY17, resulting in a write off of the deferred tax asset.

 

12.     Loss per share

Loss per share is calculated on a loss of US$4,736,187 for the year ended 31 March 2018 (2017: US$9,182,354) on a weighted average of 73,764,035 Ordinary Shares for the year ended 31 March 2018 (2017: 73,764,035). No diluted loss per share is calculated.

 

13.     Property, plant and equipment

Oil and gas assets represent interest in producing oil and gas assets falling under the India cost pool. Other fixed assets consist of office furniture, computers, workstations and office equipment.

 


Oil and gas assets

US$

Other fixed assets

US$

 

Total

US$

Cost




At 1 April 2016

35,465,279

1,780,170

37,245,449

Additions

-

6,328

6,328

Disposals

-

-

-

At 31 March 2017

35,465,279

1,786,498

37,251,777

Additions

-

9,193

9,193

Disposals

-

-

-

At 31 March 2018

35,465,279

1,795,691

37,260,970

Depletion, depreciation and amortisation




At 1 April 2016

32,438,591

1,744,568

34,183,159

Charge for the year

-

17,045

17,045

Impairment of Block PY-3 asset

3,026,688

-

3,026,688

Disposals

-

-

-

At 31 March 2017

35,465,279

1,761,613

37,226,892

Charge for the year

-

11,215

11,215

Disposals

-

-

-

At 31 March 2018

35,465,279

1,772,828

37,238,107

Net book value at 31 March 2018

-

22,863

22,863

Net book value at 31 March 2017

-

24,885

24,885

 

14.     Intangible assets


Exploration US$

Others US$

Total

US$

Costs and net book value




At 1 April 2016

51,128,272

3,956

51,132,228

Amortisation for the year

-

(1,727)

(1,727)

At 31 March 2017

51,128,272

2,229

51,130,501

Amortisation for the year

-

(1,727)

(1,727)

At 31 March 2018

51,128,272

502

51,128,774

 

The details of the exploration assets stated above are as follows:


US$

Exploration expenditure - Block CY-OS/2

51,128,272

 

The exploration intangible asset is carried in the books at capitalised costs based on the following facts.

 

Legal proceedings concerning Block CY-OS/2

 

In March 2009, HEPI were informed by the Government of India that the Block CY-OS/2, in which Hardy acts as Operator and holds a 75 per cent participating interest, was relinquished as HEPI had failed to declare commerciality within the two years from the date of discovery which is applicable to an oil discovery. HEPI disputed this ruling believing that the discovery was a gas discovery and consequently that it was entitled to a period of five years from the date of discovery to declare commerciality. As no agreement was reached the dispute was referred to arbitration under the terms of the PSC.

 

The arbitrators ruled on 2 February 2013 that the discovery was a gas discovery and consequently that the order for the relinquishment of the block was illegal. The arbitrators have ordered the Government of India to restore the block to Hardy and its partners and to allow them a period of three years from the date of restoration to complete the appraisal programme. In addition, the arbitrators awarded costs of $0.2 million and compensation based on the exploration expenditure incurred to date. The compensation awarded is calculated based on 9 per cent per annum charge on expenditure incurred until the date of the award and 18 per cent per annum charge thereafter. As at 31 March 2018, HEPI's 75 per cent share of the compensation awarded is approximately $78.2 million.

 

On 2 August 2013, the Government of India filed an appeal, against the arbitration award, with the High Court Delhi. On 27 July 2016, the GOI's second appeal to the Delhi High Court was dismissed based on jurisdiction. The GOI subsequently filed a Special Leave Petition with the Supreme Court of India challenging the Delhi HC ruling. The Special Leave Petition was listed before the SC bench, 41 times over a 17 month period. On 1 May 2018 the India SC bench took the decision not to pass judgement and instead referred the matter to a larger SC bench. Hardy has previously filed an execution petition with the Delhi HC and this has run in parallel with the GOI's appeal although the matter has been continually adjourned due to the ongoing GOI appeal. It is expected that the execution hearings will progress upon the conclusion of the review by a larger bench of the Supreme Court of India.

 

The Company believes that the unanimous international tribunal award is well reasoned and, based upon external legal advice that the award may not be subject to appeal in the Indian courts as per the India Arbitration and Conciliation Act 1996.

 

In late July 2017, the Group initiated enforcement proceedings in the UK's High Court of Justice. HEPI had previously initiated confirmation proceedings in the Federal Court of Washington DC, United States of America. These actions have been initiated to maintain HEPI's right to enforce all or a part of the Award in the US and the UK. The confirmation proceedings in the Federal Court of DC have been due since November 2017. To date there has been no indication when the Federal Court will pass judgement. HEPI's primary objective remains to conclude the appeal and enforcement process within the Indian judicial system.

 

15.     Inventories


 2018

US$

 2017

US$

 Drilling and production stores and spares

659,656

942,365


659,656

942,365

 

An amount of US$282,709 (2017: Nil) was recognised as an expense relating to a write down in the carrying value of inventory.

 

16.     Trade and other receivables


2018

US$

2017

US$

Amounts due from joint venture partners

4,533,773

3,582,557

Other receivables and prepayments

206,375

280,099


4,740,148

3,862,656

 

17.     Short term investments


2018      

US$

2017      

US$

HSBC US$ Liquidity Fund

8,933,870

 14,129,513

HSBC £ Liquidity Fund

253

 49,513


8,934,123

14,179,026

 

The above investments are in liquid funds which can be converted into cash at short notice. The book value of these investments approximates to their fair values. The fair value is determined based on quoted market prices and is a level 1 valuation under IFRS 13.

 

Income will increase or decrease by US$89,341 (2017: US$141,790) for every one percent change in interest rates.

 

18.     Share Capital


Number

$0.01 Ordinary

Shares

 

 

US$

Authorised Ordinary Shares



At 1 April 2017

200,000,000

2,000,000

At 31 March 2018

200,000,000

2,000,000

Allotted, issued and fully paid Ordinary Shares



At 1 April 2016

73,764,035

737,641

Restricted shares issued during the period

-

-

At 1 April 2017

73,764,035

737,641

Restricted shares issued during the period

-

-

At 31 March 2018

73,764,035

737,641

 

Ordinary Shares issued have equal voting and other rights with no guarantee to dividend or other payments.

 

No restricted shares were awarded in FY 2018. Included within the Ordinary Shares are 432,693 restricted shares in issue. The restricted shares have been issued to certain directors and will unconditionally vest three years from the date of issue provided the individual is still a director of Hardy. During the period of restriction, while Directors are eligible for voting rights and dividends, they are not allowed to dispose these shares.

 

19.     Reserves

 

Hardy holds the following reserves, in addition to share capital and retained earnings:

 

Share premium account

 

The share premium account is the additional amount over and above the nominal share capital that is received for shares issued less any share issue costs.

 

Share option reserve

 

The share option reserve represents the fair value of share options issued to Directors and employees.

 

20.     Provision for decommissioning


US$

At 1 April 2016

5,256,097

Change in decommissioning estimate

(803,181)

At 1 April 2017

4,452,916

Change in decommissioning estimate

(597,921)

At 31 March 2018

3,854,995

 

A provision for the decommissioning of the PY-3 field has been made by estimating the cost of abandonment of existing wells and any required reclamation of the area at current prices using existing technology. The projected costs comprise primarily of the cost of a drillship to abandon the field's existing wells the provision has been calculated using a drillship day-rate of US$143,000. The estimate is calculated based on decommissioning occurring after the end of the current Production Sharing Contract in December 2019. These underlying assumptions are reviewed on a regular basis

 

Having considered the fall in drillship rates the Group has reduced the projected decommissioning cost by US$0.6m (2017: $0.8m). A 5 per cent change in the underlying assumption for the drillship rate would result in an adjustment of approximately $0.14 million to the Decommissioning Provision.

 

An amount of Rs. 328,312,446 (US$5,059,523) (2017: Rs. 306,301,889 (US$4,723,237)) is on deposit with State Bank of India for site restoration obligations. This amount has been treated as a non-current asset as this deposit has end use restriction for site restoration.

 

On an execution petition filed by Samson Maritime Limited, the Madras High Court allowed the freezing of the bank accounts of Hardy Exploration & Production (India) Inc. State Bank of India has incorrectly frozen the deposit for site restoration obligations. This is being contested at the Madras High Court and the Group is fairly confident of obtaining a favourable verdict.

 

21.     Trade and other payables


2018       

US$

2017   

US$

Trade payables

7,231,255

6,662,368

Accruals and other payables

1,840,700

1,437,991


9,071,955

8,100,359

Trade and other payables are unsecured.

 

22.     Financial risk management

Hardy finances its operations through a mixture of equity and retained earnings. Finance requirements are reviewed by the Board when funds are required for acquisition, exploration and development of projects.

 

Hardy's objective is to maintain a strong financial position to sustain future development of the business. There were no changes to the Group's capital management approach during the year.

 

Hardy's treasury functions are responsible for managing fund requirements and investments which include banking, cash flow management, interest and foreign exchange exposure to ensure adequate liquidity to meet cash requirements.

 

Hardy's principal financial instruments are cash, deposits, short term investments, receivables and payables and these instruments are only for the purpose of meeting its requirement for operations.

 

Hardy's main financial risks are foreign currency risk, liquidity risk, interest rate risk and credit risks. Set out below are policies that are used to manage such risks:

 

Foreign currency risk

The Group reports in US dollars and the majority of its business is conducted in US dollars. All revenues from oil sales are received in US dollars and the majority of costs except a portion of expenses for overhead are incurred in US dollars. For currency exposure other than US dollars, a portion of the cash is kept on deposit in other currencies to meet its payments as required. No forward exchange contracts were entered into during the period.

 

Liquidity risk

The Group currently has cash which has been placed in deposits and short-term investments which can be converted into cash at short notice, ensuring sufficient liquidity to meet the Group's expenditure requirements. Hardy has no outstanding loan obligations at period end dates.

 

Interest rate risk

Surplus funds are placed in deposits and short-term investments at fixed or floating rates. Hardy's policy is to place deposits only with well-established banks or financial institutions that offer competitive interest rates. Further details are disclosed in note 17.

 

Credit risk

Where the Group is the operator of, or is the largest owner in, a field it recovers a percentage of the costs incurred from its joint arrangement partners in accordance with the levels of participating interests. Partners may either be Indian state-owned companies or private enterprises. Cash calls on partners are usually made in advance of incurring field expenditure. The Group is currently engaged in arbitration proceeding against partners in respect of unpaid cash calls; further details are disclosed in note 2.

 

Deposits and other money market instruments, as a general rule, are placed with banks and financial institutions that have ratings of not less than AA or equivalent, which are verified before placing the deposits. Cash surpluses are also invested in short-term investments in certain liquid funds. These funds are primarily invested in terms deposits and graded commercial papers of not less than AA or equivalent.

 

The Board will continue to assess the strategies for managing credit risk and is satisfied with the existing policies. At the year-end credit risk existed in respect of unpaid cash calls as disclosed in note 2. The maximum financial risk exposure relating to the financial assets is the carrying value of such financial assets as at the year-end date.

 

Capital Management

The objective of the Group's capital management is to ensure that there is sufficient liquidity within the Group to carry out the committed work programme requirements of all its production sharing contracts. The Group monitors the long-term cash flow requirements of the business in order to assess the requirement for changes to the capital structure to meet that objective and to maintain flexibility. The Group considers its capital to consist of share capital only.

 

The Board manages the structure of its capital and makes necessary adjustments to accommodate the changes in the economic conditions. To maintain or adjust the capital structure, the Board may issue new shares for cash. No significant changes were made in the objectives, policies or processes during the year ended 31 March 2018.

 

Maturity of financial liabilities

The maturity of financial liabilities, which consists of trade and other payables and the decommissioning provision as at 31 March 2018 and 31 March 2017 are as follows:


2018

US$

2017

US$

Within one year

9,041,205

8,100,359

In more than one year but not more than two years

3,854,995

-

In more than two years but not more than five years

-

4,452,916

In more than five years

-

-

Included within current liabilities is an amount of $4.9m on which interest of 5% per annum is charged until payment.

 

Interest rate risk profile of financial assets

The interest rate risk profile of the financial assets of the Group as at 31 March 2018 is as follows:

 

2018

Fixed rate Financial

assets                 US$

Floating rate

Financial

assets

US$

Financial assets - no interest is earned

US$

 

 

Total

US$

US Dollars

-

8,324

32,682

41,006

Pound Sterling

-

95

195,701

195,796

Indian Rupees

-

-

5,150

5,150

Short term investments

-

8,934,123

-

8,934,123

Cash and cash equivalents

-

8,942,542

233,533

9,176,075

 

2017

Fixed rate Financial

assets                 US$

Floating rate

Financial

assets

US$

Financial assets - no interest is earned

US$

 

 

Total

US$

US Dollars

-

34,381

25,053

59,434

Pound Sterling

-

101

145,372

145,473

Indian Rupees

-

-

81,974

81,974

Short term investments

-

14,179,026

-

14,179,026

Cash and cash equivalents

-

14,213,508

252,399

14,465,907

 

An amount of Rs. 328,312,446 (US$5,059,523) (2017: Rs. 306,301,889 (US$4,723,237)) deposited with State Bank of India for site restoration obligation is treated as a non-current asset. The interest rate of this deposit is based on the highest rate of interest as applicable for the period paid by the State Bank of India.

 

Interest income will increase or decrease by US$89,425 (2017: US$142,135) for every one percent change in interest rates.

 

Currency exposures

The currency exposures of the monetary assets denominated in currencies other than US dollars of the Group as at 31 March 2018 are as follows:

2018

Indian

Rupees                US$

Pound

Sterling

US$

 

Total

US$

US$

5,064,673

195,796

5,260,469

 

2017

Indian

Rupees                US$

Pound

Sterling

US$

 

Total

US$

US$

 4,805,211

 145,471

 4,950,681

 

An amount of US$ 74,140 was recognised as foreign exchange gain (2017: exchange gain of US$43,141) because of exchange rate fluctuations on bank balances and investments made in currencies other than US dollars.

 

Exchange gains will increase by US$53,131 (2017: US$50,002) for every one percent appreciation of Indian rupee and sterling and loss of US$52,079 (2017: US$49,012) for one percent depreciation of Indian rupee and sterling.

 

23.     Financial instruments

Book values and fair values of Hardy's financial assets and liabilities are as follows:

 

Financial assets

 

Financial assets at fair value

through profit or loss

Book value

2018

US$

Fair value

2018

US$

Book value

2017

US$

Fair value

2017

US$

Short term investments

8,934,123

8,934,123

 14,179,026

 14,179,026

Financial assets - loans and receivables





 Cash and short term deposits

241,952

241,952

286,881

286,881

 Trade and other receivables

4,740,148

4,740,148

3,862,656

3,862,656

 Site restoration deposits

5,059,523

5,059,523

4,723,237

4,723,237


18,975,746

18,975,746

23,051,800

23,051,800

 

Financial liabilities

 

Financial liabilities measured

at amortised cost

Book value

2018

US$

Fair value

2018

US$

Book value

2017

US$

Fair value

2017

US$

Accounts payable

9,071,955

9,071,955

8,100,359

8,100,359

 

All the above financial assets and liabilities are current at the period end dates.

 

24.     Other financial commitments under operating leases

The Group entities have entered into commercial leases for land and building and office equipment. These leases have an average life of one to five years and there are no restrictions placed on the lessee by entering into these leases. The minimum future lease payments for the non-cancellable operating leases are as follows:

 


2018

US$

2017

US$

Land and buildings:



One year

15,707

63,525

Two to five years

-

12,766

 

25.     Contingent liabilities

 

Liquidated Damages

The Group has minimum work commitments associated with various exploration licences granted by sovereign authorities through joint arrangements. A number of these commitments have not been fulfilled and consequently the Group is liable to pay liquidated damages. When a liquidated damage payment is probable a provision is created based on management's best judgement. In some instances, there may be a high degree of uncertainty. In such instances, an additional contingent liability is recognised. Currently a contingent liability exists estimated at $1.7 million associated with unfinished minimum work programme liquidated damages. Management does not expect this to be resolved in the next twelve months.

 

Litigation and taxation

In the normal course of business, the Group may be involved in legal and tax disputes which may give rise to claims. Provision is made in the financial statements for all claims where a cash outflow is considered probable. No separate disclosure is made of the detail of claims as to do so could seriously prejudice the position of the Group.

 

26.     Related party transactions

The aggregate remuneration of Directors and the key management personnel, including its subsidiary undertaking, of the Group is as follows:

 


 2018

US$

 2017

US$

 Short term employee benefits

1,095,593

1,047,133

 Share based payments

-

23,280


1,095,593

1,070,413

 

Key management personnel include the Directors and members of the Management Committee of the Group as set out in the overview of the Board of Directors in the business review. Further information about the remuneration of individual Directors is provided in the Director's Remuneration Report which forms part of the Group's 2018 Annual Report.

 

-ends-

 

NOTES TO THE EDITORS

 

Hardy Oil and Gas plc is an upstream oil and gas company focused in India. Its portfolio includes a blend of exploration, appraisal, and production assets. Hardy's goal is to evaluate and exploit its asset base with a view to creating significant value for its shareholders.

 

Hardy Oil and Gas plc is the operator of the PY-3 oil field (shut-in July 2011) located offshore India's east coast in the Cauvery basin. Hardy also has interests in two offshore exploration blocks in India's Saurashtra and Cauvery basins.

 

Hardy is incorporated under the laws of the Isle of Man and headquartered in Aberdeen, UK. Ordinary shares of Hardy were admitted to the Official List and the London Stock Exchange's market for listed securities effective 20 February 2008 under the symbol HDY.

 

The Company's Indian assets are held through the wholly owned subsidiary Hardy Exploration & Production (India) Inc, located in Chennai, India.

 

For further information please refer to our website at www.hardyoil.com

 

GLOSSARY OF TERMS

2C Contingent Resources

Those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects, but which are not currently considered to be commercially recoverable due to one or more contingencies

2D/3D

two dimensional/three dimensional

$

United States Dollar

API°

American Petroleum Institute gravity

The Award

CY-OS/2 arbitration award

Bbld

stock tank barrel per day

BCF

billion cubic feet

CNG

compressed natural gas

CY-OS/2

Offshore exploration licence CY-OS/2 located on the east coast of India

DGH

Directorate General of Hydrocarbons

Dhirubhai 33

gas discovery on GS-01-B1 announced on 15 May 2007

DOC

Declaration of Commerciality

DRDO

Defence Research & Development Organisation of India

FFDP

comprehensive full field development plan

FY

financial year ended 31 March

GAIL

Gas Authority of India Limited

Ganesha-1

Non-associated natural gas discovery on Fan-A1 well located in CY-OS/2

GOI

Government of India

GS-01

Exploration Licence GS-OSN-2000/1

Hardy

Hardy Oil and Gas plc

HEPI

Hardy Exploration & Production (India) Inc

HC

High Court

HSE

Health Safety and Environment

IPO

initial public offering

JA

joint arrangement

KPI

key performance indicator

Km

Kilometre

km2

square kilometre

LSE

London Stock Exchange

M

Metre

mmbtu

million British Thermal Units

mmscfd

million standard cubic feet per day

mmscmd

million standard cubic metres per day

MC

management committee

MOD

Ministry of Defence Government of India

MOPNG

the Ministry of Petroleum and Natural Gas of the Government of India

MWP

minimum work programme

NANG

non-associated natural gas

ONGC

Oil & Natural Gas Corporation

Profit Petroleum

Gross revenue from production of petroleum less costs incurred in realising such revenue

Prospective Resources

those quantities of petroleum which are estimated, as of a given date, to be potentially recoverable from undiscovered accumulations

PSC

production sharing contract

PSDM

pre-stacked depth migration

Psi

pounds per square inch

PY-3

licence CY-OS-90/1

Reliance

Reliance Industries Limited

Rs.

Indian Rupee

the Company

Hardy Oil and Gas plc

the Group

Hardy Oil and Gas plc and Hardy Exploration & Production (India) Inc.

TRI

total recordable injuries

uJV

unincorporated joint venture

UMWP

unfinished minimum work programme

 


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