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Regal Petroleum PLC (RPT)

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Tuesday 03 April, 2018

Regal Petroleum PLC

Full Year Results

RNS Number : 5231J
Regal Petroleum PLC
03 April 2018
 

3 April 2018

 

REGAL PETROLEUM PLC

 

2017 AUDITED RESULTS

 

Regal Petroleum plc (the "Company", and with its subsidiaries, the "Group"), the AIM-quoted (RPT) oil and gas exploration and production group, today announces its audited results for the year ended 31 December 2017.

 

Highlights

 

Ukraine Operations

 

·     

Aggregate 2017 year end production of approximately 2,800 boepd, compared with approximately 1,700 boepd at 2016 year end, representing an increase of nearly 65% over the year, largely as a result of the significant contributions of the new MEX-109 well and the successful workover of the SV-2 well

 

·     

Average production from the MEX-GOL and SV fields over the year to 31 December 2017 was 197,961 m3/d of gas, 47 m3/d of condensate and 24 m3/d of LPG (1,629 boepd in aggregate) (2016: 157,228 m3/d of gas, 41 m3/d of condensate and 19 m3/d of LPG (1,321 boepd in aggregate)) 

 

·     

Average gas and condensate production from the VAS field over the year to 31 December 2017 was 86,242 m3/d of gas and 6.5 m3/d of condensate (608 boepd in aggregate) (Period from 4 July 2016 to 31 December 2016: 82,624 m3/d of gas and 6.5 m3/d of condensate (556 boepd in aggregate))

 

 

Finance

 

·     

Profit for the year to 31 December 2017 of $2.3 million (2016: $1.3 million loss)

 

·     

Revenue for the year to 31 December 2017 of $35.1 million (2016: $25.7 million)

 

·     

Cash generated from operations during the year of $18.0 million (2016: $10.0 million)

 

·     

Average realised gas, condensate and LPG prices in Ukraine for the year to 31 December 2017 of $241/Mm3 (UAH6,412/Mm3), $67/bbl and $56/bbl respectively (2016: $213/Mm3 (UAH5,441/Mm3) gas, $51/bbl condensate and $43/bbl LPG)

 

·     

Cash and cash equivalents of $14.2 million and short-term investments of $16.0 million at 31 December 2017 (31 December 2016: $20.0 million and nil respectively), with cash and cash equivalents at 28 March 2018 of $20.3 million, held as $13.5 million equivalent in Ukrainian Hryvnia and the balance of $6.8 million equivalent predominately in US Dollars and Pounds Sterling. The Group's other short-term investments at 28 March 2018 were $16.0 million

 

 

Outlook

·     

Focus during 2018 at MEX-GOL and SV fields on completion of geophysical studies on existing seismic data and refinement of new geological model, workover of SV-12 well, planning for new well, installation of additional compression equipment, continued investment in gas processing facilities and pipeline network, and upgrading of existing wells

 

·     

Focus during 2018 at VAS field on acquisition, processing and interpretation of new 3D seismic, drilling of VAS-10 well and continued investment in gas processing facilities, pipeline network and other infrastructure

 

·     

Funding of 2018 development programme planned to be from existing cash resources and operational cash flow

 

The Annual Report and Financial Statements for 2017, together with the Notice of Annual General Meeting, will be posted to shareholders and published on the Company's website during May 2018.

 

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

 

For further information, please contact:

 

Regal Petroleum plc

Tel: 020 3427 3550 

Chris Hopkinson, Chairman

 

Sergii Glazunov, CEO

 

 

 

Strand Hanson Limited

Tel: 020 7409 3494

Rory Murphy / Richard Tulloch

 

 

 

Citigate Dewe Rogerson

Tel: 020 7638 9571

Louise Mason-Rutherford / Shabnam Bashir

 

 

 

Philip Frank, PhD Geology, Chartered Geologist, FGS, PESGB, Director of the Company, has reviewed and approved the technical information contained within this press release in his capacity as a qualified person, as required under the AIM Rules for Companies.

 

 

Definitions

 

 

 

bbl

barrel

boe

barrels of oil equivalent

Bscf

thousands of millions of scf

boepd

barrels of oil equivalent per day

HSES

health, safety, environment and security

km

kilometres

km2

square kilometres

LPG

liquefied petroleum gas

MEX-GOL

Mekhediviska-Golotvshinska

m3

cubic metres

m³/d

cubic metres per day

Mm³

thousand cubic metres

MMm³

million cubic metres

Mtonnes

thousand tonnes

MMbbl

million barrels

MMboe

million barrels of oil equivalent

%

per cent

scf

standard cubic feet measured at 14.7 pounds per square inch and 60 degrees Fahrenheit

SV

Svyrydivske

$

United States Dollar

UAH

Ukrainian Hryvnia

VAS

Vasyschevskoye

VED

Vvdenska

 

Chairman's Statement

 

I am pleased to introduce the 2017 Audited Results.  During 2017, the Group has made very promising progress in the development of its MEX-GOL, SV and VAS gas and condensate fields in north-eastern Ukraine, with significant improvements in production rates, leading to a much improved financial performance.

 

At the Group's MEX-GOL and SV fields, production was reasonably stable during the first half of 2017, but in June 2017, the new MEX-109 well, utilising improved drilling and completion techniques developed as a result of recent studies, was completed successfully and put on production, and in August 2017, following completion of its workover, the SV-2 well was also put on production. Together, these successes have nearly doubled output from the MEX-GOL-SV licence areas.  In addition, the VAS field has continued to produce consistently during the year.  With the improved contribution from the new wells on the MEX-GOL and SV fields, aggregate production at the end of 2017 from all fields was approximately 2,800 boepd.  This compares with an aggregate production rate of approximately 1,700 boepd at the end of 2016, which represents an increase of nearly 65% over the year.

 

The fiscal and economic situation in Ukraine continues to improve, with a better economic outlook, GDP growth and improved stability in the Ukrainian Hryvnia exchange rates, although the inflation rate did increase moderately.  Nevertheless, there continue to be stresses in the economy and weaknesses in the Ukrainian banking sector.

 

The Ukrainian Government has implemented a number of reforms in the oil and gas industry in recent years, which include the deregulation of the gas supply market in late 2015, and more recently, reductions in the subsoil tax rates relating to oil and gas production and a proposed simplification of the regulatory procedures applicable to oil and gas exploration and production activities in Ukraine. 

 

The deregulation of the gas supply market, supported by electronic gas trading platforms and improved pricing transparency, has meant that the market gas prices in Ukraine now broadly correlate with the imported gas prices.  During 2017, gas prices were reasonably stable, allowing for some seasonal variation, and were higher than in 2016.  Furthermore, condensate and LPG prices were also higher by comparison with last year.

 

As regards the Group's financial performance in the year ended 31 December 2017, I am pleased to report that the Group made a profit of $2.3 million (2016: $1.3 million loss), mainly as a result of improved revenues from higher production volumes and hydrocarbon prices.  Cash generated from operations during the year was higher at $18.0 million (2016: $10.0 million). 

 

Board and Management Changes

 

During the year, there were significant changes to the management and Board of Directors of the Company.  With effect from the start of August 2017, Sergii Glazunov became Chief Executive Officer, having previously been Finance Director, and Yevhen (Gene) Palyenka was appointed Chief Financial Officer.  Later in August 2017, Bruce Burrows joined the Board as Non-Executive Director, and Adrian Coates stepped down from the Board at the same time.

 

I joined the Board as Non-Executive Director in September 2017, and was appointed Non-Executive Chairman in October 2017.  At the same time, Phil Frank joined the Board as Non-Executive Director, and Keith Henry and Alastair Graham stepped down from the Board.  On behalf of the Board, I would like to thank each of Keith, Alastair and Adrian for their valued contributions during their respective tenures with the Company.

 

Outlook

 

Whilst there are still challenges in the business environment in Ukraine, the situation is improving and the Group is continuing to progress the development of its Ukrainian fields.  After the operational successes of 2017 and the increased production output during the year, we are looking forward to achieving further successes in the development activities planned for 2018 and delivering a steadily increasing production and revenue stream in the future.

 

In conclusion, on behalf of the Board, I would like to thank all of our staff for the continued dedication and support they have shown during the year.

 

Chris Hopkinson

Chairman

 

 

 

 

 

 

Chief Executive Officer's Statement

 

Introduction

 

The Group has made good progress at its Ukrainian fields during 2017, with the increase in development activity at the MEX-GOL and SV fields resulting in the successes of the MEX-109 well, which came on production in June 2017, and the SV-2 well, which came on production in August 2017, providing a significant boost to production rates.

 

During the year, the Group continued its work on the subsurface of the MEX-GOL and SV fields, utilising the results of P.D.F Limited's comprehensive re-evaluation study to plan additional development of these fields. This work included detailed reprocessing of the existing 3D seismic data, using the latest processing technology, with the reprocessed data now under interpretation. As well as the drilling of the MEX-109 well and the workover of the SV-2 well, the Group undertook workover operations on the GOL-2 and SV-6 wells during the year to eliminate water ingress into the wells, but these operations were not successful and the Group is currently considering further remedial work on these wells. In addition, the Group installed additional compression equipment, upgraded the gas processing facilities and pipeline network, and undertook remedial work on existing wells.

 

At the VAS field, planning took place for the acquisition of new 3D seismic over the field and the drilling of the VAS-10 well, both of which activities commenced in early 2018.

 

Health, Safety, Environment and Security ("HSES")

 

The Group is committed to maintaining the highest HSES standards and the effective management of these areas is an intrinsic element of the overall business ethos. Through strict enforcement of the Group's HSES Management System, together with regular management meetings, training and the appointment of dedicated safety professionals, the Group strives to ensure that the impact of its business activities on its staff, contractors and the environment is as low as is reasonably practicable. The Group reports safety and environmental performance in accordance with industry practice and guidelines.

 

I am pleased to report that during 2017, a total of 448,618 man-hours of staff and contractor time were recorded without a Lost Time Incident occurring.  The total number of safe man-hours now stands at over 1,444,850 man-hours without a Lost Time Incident.  No environmental incidents were recorded during the year.

 

Production

 

Average daily production from the MEX-GOL and SV fields over the year ended 31 December 2017 was 197,961 m³/d of gas, 47 m³/d of condensate and 24 m³/d of LPG (1,629 boepd in aggregate) (2016: 157,228 m3/d of gas, 41 m3/d of condensate and 19 m³/d of LPG (1,321 boepd in aggregate).  Production rates improved significantly following the commencement of production from the MEX-109 well in June 2017 and the SV-2 well in August 2017.

 

Average daily production of gas and condensate from the VAS field for the year ended 31 December 2017 was 86,242 m3/d of gas and 6.5 m3/d of condensate (608 boepd in aggregate) (Period from 4 July 2016 to 31 December 2016: 82,624 m3/d of gas and 6.5 m3/d of condensate (556 boepd in aggregate)), contributing material volumes to the Group's production output.

 

The Group's average production for the period from 1 January 2018 to 28 March 2018 from the MEX-GOL and SV field was 272,656 m³/d of gas, 53 m³/d of condensate and 32 m³/d of LPG (2,169 boepd in aggregate) and from the VAS field was 86,214 m³/d of gas and 6.2 m³/d of condensate (606 boepd in aggregate). 

 

Operations

 

The improving geopolitical situation in Ukraine, coupled with the stabilisation of the Ukrainian Hryvnia, the higher hydrocarbon prices and improvements in the fiscal and economic situation over the last year, meant that the Group was able to increase the development programme at its Ukrainian fields during 2017.

 

At the MEX-GOL and SV fields, the Group continued to work with P.D.F. Limited to utilise their re-evaluation study of these fields, which involved analysis of all available geological, geophysical, petroleum engineering and well performance data.  The continuing work included detailed reprocessing of existing 3D seismic data, using the latest processing technology, to try to improve the definition in such data.  Interpretation of this new dataset is underway, with the intention of utilising it to refine the new geological subsurface model of the fields.  This work, undertaken in conjunction with P.D.F. Limited, will enable the Group to refine its strategies for the further development of the fields, including the timing and level of future capital investment required to exploit the hydrocarbon resources. 

 

The MEX-109 well, which was spudded in July 2016, targeted the Visean reservoirs ("B-Sands") in the MEX-GOL field.  The well was drilled to a depth of 4,873 metres, and completed in the B-20 Visean reservoir. It was brought on production in June 2017. The initial production rates were very encouraging and the well has been producing consistently in excess of 90,000 m3/d since then.  

 

In early 2017, the Group entered into an agreement with NJSC Ukrnafta, the majority State-owned oil and gas producer, relating to the SV-2 well, which is a suspended well owned by NJSC Ukrnafta located within the Group's SV licence area. Under the agreement, the Group agreed to undertake a workover of the well, which, if successful, would result in the well being brought back into production.  Pursuant to the agreement, the gas and condensate produced from the well is to be sold under an equal net profit sharing arrangement between the Group and NJSC Ukrnafta. The workover operations were successful and production from the well recommenced in August 2017, providing a further significant boost to production volumes.

 

Following on from the success of the SV-2 well operations, in November 2017, the Group entered into a similar agreement with NJSC Ukrnafta, in relation to the SV-12 well, which is also a suspended well owned by NJSC Ukrnafta located within the SV licence area. The terms of the new agreement are fundamentally consistent with the agreement relating to the SV-2 well, including the equal net profit sharing arrangement between the Group and NJSC Ukrnafta.  Investigative work has been undertaken to ascertain the condition of the well and preparations for workover operations on the well are underway. It is anticipated that the workover operations will be concluded during the fourth quarter of 2018.   

 

The Group also undertook workover operations on the GOL-2 and SV-6 wells during the year to eliminate water ingress into the wells. Although these operations were successful in preventing the water ingress, the wells did not return to production and are now under observation. The Group is currently considering further remedial work on these wells.  In addition at the MEX-GOL and SV fields, the Group installed additional compression equipment, upgraded the gas processing facilities and pipeline network, and undertook remedial work on existing wells.

 

At the VAS field, during 2017, planning work took place for the acquisition of new 3D seismic data over the field and the drilling of the VAS-10 well.  The acquisition of the 3D seismic will shortly be completed and thereafter the data will be processed and interpreted. 

 

The VAS-10 well was spudded on 13 March 2018, with a planned depth of 3,450 metres. The well is designed to appraise horizons in the Visean formation, and to evaluate the western edge of field, at an offset of approximately 1 km from the nearest currently producing well.  The drilling operations are scheduled to be completed in June 2018 and, subject to successful testing, production hook-up is anticipated during the third quarter of 2018. 

 

Outlook

 

During 2018, the Group is continuing to develop the MEX-GOL, SV and VAS fields.  At the MEX-GOL and SV fields, the development programme includes revision of the geological model utilising the newly interpreted reprocessed seismic data, concluding the workover of the SV-12 well, planning for a new development well, investigating workover opportunities for other existing wells, installation of additional compression equipment, further upgrading of the gas processing facilities and pipeline network, and remedial work on existing wells, pipelines and other infrastructure.  

 

At the VAS field, the work on processing and interpreting the new 3D seismic data will continue, as will the drilling of the VAS-10 well. In addition, consideration and planning for a further appraisal/development well will be undertaken.  It is also intended to undertake further evaluation of the VED area of the licence, which appears highly prospective on the current 2D seismic data and will benefit from the improved imaging of the new 3D seismic data.  Work is also planned to upgrade the gas processing facilities, pipeline network and other infrastructure.  

 

It is also intended to commission updated assessments of the remaining reserves and resources at each of the MEX-GOL and SV fields and the VAS field, which will be undertaken by an independent petroleum reserves consultant later in 2018.  The extensive re-evaluation of the MEX-GOL and SV fields by P.D.F. Limited, the interpretation work being undertaken on the reprocessed 3D seismic dataset and the ongoing revision of the geological model, means that the Group considers that now is an appropriate time to undertake a reassessment of the remaining reserves and resources at the MEX-GOL and SV fields, and this reassessment is planned to be undertaken during the first half of 2018.  Similarly, the interpretation of the newly acquired 3D seismic and associated subsurface studies, together with the data collected from the VAS-10 well at the VAS field, means that a reassessment of the remaining reserves and resources at the VAS field will also be appropriate by the end of 2018.

 

There has also been encouraging new legislation relating to the oil and gas sector in Ukraine, which demonstrates the Ukrainian Government's stated intention to promote and support the domestic oil and gas production industry. These new measures include reductions in the subsoil taxes applicable to the production of hydrocarbons, which became effective for new wells from 1 January 2018 and for condensate production from 1 January 2019. Furthermore, there is newly announced legislation to simplify a number of the regulatory procedures relating to oil and gas exploration and production activities in Ukraine, which, has passed through the Ukrainian Parliament and is now awaiting the signature of the President of Ukraine to bring it into law.

 

These measures, and the general improvement in the business climate in Ukraine, are encouraging and supportive of the independent oil and gas producers in Ukraine.

 

Finally, I would like to add my thanks to all of our staff for the continued hard work and dedication they have shown during this successful year.

 

 

Sergii Glazunov

Chief Executive Officer

 

 

 

 

 

 

Overview of Assets and Reserves

 

Assets

 

1.

MEX-GOL and SV fields

 

Regal Petroleum Corporation Limited (a wholly owned subsidiary in the Group) holds a 100% working interest in and is the operator of the MEX-GOL and SV fields. The production licences extend over a combined area of 269 km², approximately 200 km east of Kiev. The two licences are adjacent and the interests are operated and managed as one field. The licences were granted in July 2004 and have a duration of 20 years.

 

The fields are located, geologically, towards the middle of the Dnieper-Donets sedimentary basin which extends across the majority of north-east Ukraine. The vast majority of Ukrainian gas and condensate production comes from this basin. The reservoirs comprise a series of gently dipping Carboniferous sandstones of Visean age ("B-Sands") inter-bedded with shales at approximately 4,700 metres below the surface, with a gross thickness between 800 metres and 1,000 metres. Analysis suggests that these deposits range from fluvial to deltaic in origin, and much of the trapping at these fields is stratigraphic in nature. Below these reservoirs is a thick sequence of shale above deeper, similar, sandstones which are encountered at a depth of around 5,800 metres. These sands are of Tournasian age ("T-Sands") and may offer additional gas potential. Deeper sandstones of Devonian age ("D-Sands") have also been penetrated in the fields.

 

2.

VAS field

 

LLC Prom-Enerho Produkt (a wholly owned subsidiary in the Group) holds a 100% working interest in and is the operator of the VAS field. The production licence extends over an area of 33.2 km² and is located approximately 17 km south-east of Kharkiv. The licence was granted in August 2012 and has a duration of 20 years.

 

The field is also located, geologically, towards the middle of the Dnieper-Donets sedimentary basin in the north-east of Ukraine.  The field is trapped in an anticlinal structure broken into several faulted blocks, which are gently dipping to the north, stretching from the north-east to south-west along a main bounding fault. The gas is located in Carboniferous sandstones of Bashkirian, Serpukhovian and Visean age at depths of 2,900 - 3,400 metres below the surface.  

 

Reserves

 

1.

MEX-GOL and SV fields

 

The Group's estimates of the remaining Reserves and Resources at the MEX-GOL and SV licence areas are derived from an assessment undertaken by independent petroleum consultants, ERC Equipoise Limited ("ERCE"), as at 31 December 2013 (the "ERCE Report"), which was announced on 25 March 2014. During the period from 1 January 2014 to 31 December 2017, the Group has produced 2.04 MMboe from these fields.

 

The ERCE Report estimated the remaining Reserves as at 31 December 2013 in the Visean B-Sands reservoirs of the MEX-GOL and SV fields, based on the drilling of ten further wells, as follows:-

 

 

 

Proved

(1P)

Proved + Probable

(2P)

Proved + Probable + Possible (3P)

 

Gas

 

8.3 Bscf

50.1 Bscf

71.2 Bscf

 

Condensate

 

0.4 MMbbl

2.5 MMbbl

4.1 MMbbl

 

LPG

 

17.4 Mtonnes

105.6 Mtonnes

149.8 Mtonnes

 

Total

 

1.9 MMboe

11.7 MMboe

17.2 MMboe

 

The ERCE Report estimated the Contingent Resources in the Visean B-Sands reservoirs of the MEX-GOL and SV fields as follows, based on the potential drilling of up to 113 future wells (not currently budgeted):-

 

 

 

Contingent Resources (1C)

Contingent Resources (2C)

Contingent Resources (3C)

 

Gas

 

198 Bscf

334 Bscf

519 Bscf

 

Condensate

 

8.5 MMbbl

17.4 MMbbl

32.7 MMbbl

 

Total

 

41.5 MMboe

73.1 MMboe

119.1 MMboe

 

2.

VAS field

 

The Group's estimates of the remaining Reserves and Resources at the VAS field and the Prospective Resources at the VED prospect are derived from an assessment undertaken by independent petroleum consultants, Senergy (GB) Limited, as at 1 January 2016 (the "Senergy Report"), which was announced on 5 July 2016 in connection with the Group's acquisition of PEP. During the period from 1 January 2016 to 31 December 2017, 0.4 MMboe were produced from the field.

 

The Senergy Report estimates the remaining Reserves as at 1 January 2016 in the VAS field, based on the drilling of one further well, as follows:-

 

 

 

Proved

(1P)

Proved + Probable

(2P)

Proved + Probable + Possible (3P)

 

Gas

 

91.5 MMm3

251.5 MMm3

448.6 MMm3

 

Condensate

 

6.90 Mtonne

19.0 Mtonne

33.82 Mtonne

 

Total

 

0.66 MMboe

1.80 MMboe

3.21 MMboe

 

 

The Senergy Report estimates the Contingent Resources as at 1 January 2016 in the VAS field, based on the drilling of an additional further well, as follows:-

 

 

 

Contingent Resources (1C)

Contingent Resources (2C)

Contingent Resources (3C)

 

Gas

 

153.0 MMm3

280.3 MMm3

515.4 MMm3

 

Condensate

 

6.3 Mm3

11.4 Mm3

20.7 Mm3

 

Total

 

158.6 MMm3

294.5 MMm3

538.0 MMm3

 

The Senergy Report estimates the Prospective Resources as at 1 January 2016 in the VED prospect as follows:-

 

 

 

Low

Best

High

Mean

 

Gas and Condensate

 

441.8 MMm3

1,078.9 MMm3

2,582.6 MMm3

1,234.7 MMm3

 

 

Finance Review

 

The Group made a profit of $2.3 million (2016: $1.3 million loss) during the year ended 31 December 2017, mainly as a result of improved revenue from higher production volumes and hydrocarbon prices.  Revenue in the year, derived from the sale of the Group's Ukrainian gas, condensate and LPG production, was higher at $35.1 million (2016: $25.7 million).

 

Cash generated from operations during the year increased to $18.0 million (2016: $10.0 million), as a result of higher production volumes and hydrocarbon prices.

 

For the year ended 31 December 2017, the average realised gas, condensate and LPG prices were $241/Mm3 (UAH6,412/Mm3), $67/bbl and $56/bbl respectively (2016: $213/Mm3 (UAH5,441/Mm3) gas, $51/bbl condensate and $43/bbl LPG).

 

During the period from 1 January 2018 to 28 March 2018, the average realised gas, condensate and LPG prices were $277/Mm3 (UAH7,574/Mm3), $70/bbl and $55/bbl respectively.  The current realised gas price is $265/Mm3 (UAH6,972/Mm3).

 

Since the deregulation of the gas supply market in Ukraine in October 2015, the market price for gas has broadly correlated to the price of imported gas, which generally reflects trends in European gas prices. Gas prices are also subject to seasonal variation. During the 2017 year, gas prices were reasonably stable, allowing for some seasonal variation, and were higher than in 2016, as were condensate and LPG prices by comparison with 2016.

 

In the first half of 2017, the Group commenced selling all of its gas production to LLC Smart Energy ("Smart Energy"), which is part of the PJSC Smart-Holding Group, which is ultimately controlled by Mr Vadim Novinskiy, who, through an indirect 54% majority shareholding, ultimately controls the Group. This arrangement came about as a consequence of the introduction of a number of new taxation regulations in Ukraine, which significantly increased the regulatory burden on affected companies. Due to the corporate structure of the Group, a substantial proportion of its gas production is produced by a non-Ukrainian subsidiary of the Group, which operates in Ukraine as a branch, or representative office as it is classified in Ukraine. As a result, the new tax regulations impose additional regulatory obligations on the Group's potential customers, who may be less inclined to purchase the Group's gas and/or may seek discounts on sales prices. In light of this situation, the Group and Smart Energy reached an agreement under which Smart Energy will purchase all of the Group's gas production and assume responsibility for the regulatory obligations under the Ukrainian tax regulations, as well as combining the Group's gas production with Smart Energy's own gas production so as to sell such gas as combined volumes, which should result in higher sales prices due to the larger sales volumes. In order to cover Smart Energy's sales, administration and regulatory compliance costs, the Group sells its gas to Smart Energy at a small discount to the gas sales prices achieved by Smart Energy, who sell the combined volumes in line with market prices. The terms of sale, effective from June 2017, for the Group's gas to Smart Energy are (i) payment for one third of the estimated monthly volume of gas by the 20th of the month of delivery, and (ii) payment of the remaining balance by the 10th of the month following the month of delivery. As a consequence of their common ultimate control, the Company and Smart Energy are deemed to be related parties under the AIM Rules for Companies, and more details of this arrangement are set out in the announcement made on 30 June 2017, as well as in Note 5 and 32 below.

 

The subsoil taxes rates applicable to gas and condensate production were stable during the year at 29% for gas produced from deposits at depths above 5,000 metres and 14% for gas produced from deposits below 5,000 metres, and 45% for condensate produced from deposits above 5,000 metres and 21% for condensate produced from deposits below 5,000 metres.

 

However, in December 2017, the Ukrainian Government passed new legislation under which (i) for new wells drilled after 1 January 2018, the subsoil tax rates will be reduced from 29% to 12% for gas produced from deposits at depths above 5,000 metres and from 14% to 6% for gas produced from deposits below 5,000 metres, and (ii) with effect from 1 January 2019 and applicable to all wells, the subsoil tax rates for condensate will be reduced from 45% to 29% for condensate produced from deposits above 5,000 metres and from 21% to 14% for condensate produced from deposits below 5,000 metres.

 

In addition, with effect from 1 April 2017, a transmission tariff of UAH296.80/Mm3 ($11.00/Mm3) for use of the Ukrainian national pipeline system became applicable to oil and gas producers in Ukraine, including the Group. However, shortly after its imposition, the tariff was suspended following a legal challenge to the legality of the tariff, and it is currently uncertain if, and/or when the tariff will be reinstated, and what the amount of the tariff may be.

 

Cost of sales for the year ended 31 December 2017 was higher at $24.3 million (2016: $18.6 million), mainly due to the inclusion of a full year of the cost of sales of hydrocarbons from the VAS field of $5.7 million (Period from 4 July 2016 to 31 December 2016: $2.6 million).

 

Administrative expenses for the year were higher at $5.3 million (2016: $4.7 million), primarily as a result of the inclusion of administrative expenses relating to LLC Prom-Enerho Produkt ("PEP"), the owner of the VAS field, of $0.4 million (Period from 4 July 2016 to 31 December 2016: $0.1 million) and staff termination compensation of $0.2 million (2016:nil).

 

The tax charge for the year of $4.3 million (2016: $4.1 million charge) comprises a current tax charge of $3.0 million (2016: $1.9 million) and a deferred tax charge of $1.3 million (2016: $2.2 million charge).

 

The Group has recognised a deferred tax asset of $9.3 million at 31 December 2017 (31 December 2016: $11.1 million). This comprises a deferred tax asset of $2.6 million (31 December 2016: $3.7 million) in relation to UK tax losses carried forward, and $6.7 million (31 December 2016: $7.4 million) relating to the Group's MEX-GOL and SV asset and the provision for decommissioning in Ukraine, which is recognised on the tax effect of temporary timing differences between the carrying value of such asset and its tax base. The reduction in the deferred tax asset in 2017 is primarily due to a decrease of forecasted taxable income for the following five years caused by partial settlement of intra-group loans receivable by the Company.  The Group has also recognised a deferred tax liability of $0.8 million at 31 December 2017 (31 December 2016: $1.2 million liability) relating to the Group's VAS asset in Ukraine, which is recognised on the tax effect of temporary timing differences between the carrying value of such asset and its tax base, mainly due to revaluation of the VAS asset at the date of acquisition by the Group.

 

Capital investment of $4.0 million reflects investment in the Group's oil and gas development and production assets during the period (2016: $13.9 million), primarily a continuation of the expenditure associated with the drilling of the MEX-109 well. 

 

Under the agreement between the Group and NJSC Ukrnafta relating to the SV-2 well, which was a suspended well owned by NJSC Ukrnafta located within the Group's SV licence area, the Group agreed to carry out a workover of the well and, if successful, to operate, produce and sell the gas and condensate from the well under an equal net profit sharing arrangement with NJSC Ukrnafta. The workover was successful and production from this well commenced in August 2017.

 

Cash and cash equivalents held at 31 December 2017 were $14.2 million and short-term investments were $16.0 million (31 December 2016: $20.0 million and nil respectively). The Group's cash and cash equivalents balance at 28 March 2018 was $20.3 million, held as to $13.5 million equivalent in Ukrainian Hryvnia and the balance of $6.8 million equivalent predominantly in US Dollars and Pounds Sterling. The Group's other short-term investments at 28 March 2018 were $16.0 million.

 

Since early 2014, the Ukrainian Hryvnia has devalued significantly against the US Dollar, falling from UAH8.3/$1.00 on 1 January 2014 to UAH28.1/$1.00 on 31 December 2017, which resulted in substantial foreign exchange translation losses for the Group over that period, and in turn adversely impacted the carrying value of the MEX-GOL and SV asset due to the translation of two of the Group's subsidiaries from their functional currency of Ukrainian Hryvnia to the Group's presentation currency of US Dollars. However in 2017, the exchange rate between the Ukrainian Hryvnia and the US Dollar has been reasonably stable averaging UAH26.6/$1.00 during the period (average rate during 2016: UAH 27.0/$1.00).  Nevertheless, further devaluation of the Ukrainian Hryvnia against the US Dollar may affect the carrying value of the Group's assets in the future.

Cash from operations has funded the capital investment during the period, and the Group's current cash position and positive operating cash flow are the sources from which the Group plans to fund the development programmes for its assets in 2018.

 

The Group manages its revenue, cash from operations and production volumes as key performance indicators. The achieved results for 2017 were as follows:

·     

revenue of $35.1 million (2016: $25.7 million)

 

·     

cash from operations of $18.0 million (2016: $10.0 million)

 

·     

daily production volumes from the MEX-GOL and SV fields for the year of 197,961 m³/d of gas, 47 m³/d of condensate and 24 m³/d of LPG (1,629 boepd in aggregate) (2016: 157,228 m3/d of gas, 41 m3/d of condensate and 19 m³/d of LPG (1,321 boepd in aggregate))

 

·     

daily production volumes from the VAS field for the year of 86,242 m³/d of gas and 6.5 m³/d of condensate (608 boepd in aggregate) (Period from 4 July 2016 to 31 December 2016: 82,624 m3/d of gas and 6.5 m3/d of condensate (556 boepd in aggregate))

 

·     

aggregate production volumes from the MEX-GOL and SV fields for the year of 72,255,906 m3 of gas, 17,014 m3 of condensate and 8,763 m3 of LPG, equating to a combined total oil equivalent of 594,577 boe (2016: 57,545,607 m3 of gas, 15,146 m3 of condensate and 7,014 m3 of LPG (483,603 boe in aggregate))

 

·     

aggregate production volumes from the VAS field for the year of 31,478,359 m3 of gas and 2,374 m3 of condensate, equating to a combined total oil equivalent of 221,760 boe (Period from 4 July 2016 to 31 December 2016: 14,955,029 m3 of gas and 1,178 m3 of condensate (100,701 boe in aggregate)).

 

 

Yevhen Palyenka

Chief Financial Officer

 

 

 

 

 

Principal Risks and Uncertainties

 

The Group has a risk evaluation methodology in place to assist in the review of the risks across all material aspects of its business. This methodology highlights external, operational and technical, financial and corporate risks and assesses the level of risk and potential consequences. It is periodically presented to the Audit Committee and the Board for review, to bring to their attention potential risks and, where possible, propose mitigating actions. Key risks recognised and mitigation factors are detailed below:

 

Risk

Mitigation

External risks

 

Risk relating to Ukraine

 

Ukraine is an emerging market and as such the Group is exposed to greater regulatory, economic and political risks than it would be in other jurisdictions. Emerging economies are generally subject to a volatile political and economic environment, which makes them vulnerable to market downturns elsewhere in the world, and could adversely impact the Group's ability to operate in the market.

The Group minimises this risk by continuously monitoring the market in Ukraine and by maintaining a strong working relationship with the Ukrainian regulatory authorities. The Group also maintains a significant proportion of it cash holdings in international banks outside Ukraine.

 

Regional conflict

 

Ukraine continues to have a strained relationship with Russia, following Ukraine's agreement to join a free trade area with the European Union, which resulted in the implementation of mutual trade restrictions between Russia and Ukraine on many key products. Further, the conflict in parts of eastern Ukraine has not been resolved to date, and Russia continues to occupy Crimea.  This conflict has put further pressure on relations between Ukraine and Russia, and the political tensions have had an adverse effect on the Ukrainian financial markets, hampering the ability of Ukrainian companies and banks to obtain funding from the international capital and debt markets. This strained relationship between Russia and Ukraine has also resulted in disputes and interruptions in the supply of gas from Russia.

As the Group has no assets in Crimea or the areas of conflict in the east of Ukraine, nor do its operations rely on sales or costs incurred there, the Group has not been directly affected by the conflict. However, the Group continues to monitor the situation and endeavours to procure its equipment from sources in other markets. The disputes and interruption to the supply of gas from Russia has indirectly encouraged Ukrainian Government support for the development of the domestic production of hydrocarbons since Ukraine imports a significant proportion of its gas, which has resulted in legislative measures to improve the regulatory requirements for hydrocarbon extraction in Ukraine.

Banking system in Ukraine

 

The banking system in Ukraine has been under great strain in recent years due to the weak level of capital, low asset quality caused by the economic situation, currency depreciation, changing regulations and other economic pressures generally, and so the risks associated with the banks in Ukraine have been significant, including in relation to the banks with which the Group has operated bank accounts. However, following remedial action imposed by the National Bank of Ukraine, Ukraine's banking system has improved and at the end of May 2017, Moody's revised its outlook for the Ukrainian banking system from negative to stable. Nevertheless, Ukraine continues to be supported by funding from the International Monetary Fund under a four-year Extended Funding Facility aggregating $17.5 billion approved in March 2015. Since then, Ukraine has received four tranches under the funding programme totalling $8.4 billion, with the most recent tranche of $1 billion in April 2017. Further disbursements of International Monetary Fund tranches depend on the implementation of Ukrainian Government reforms, and other economic, legal and political factors, including reforms to the banking system in Ukraine.

The creditworthiness and potential risks relating to the banks in Ukraine are regularly reviewed by the Group, but the geopolitical and economic events since 2013 in Ukraine have significantly weakened the Ukrainian banking sector. In light of this, the Group has taken and continues to take steps to diversify its banking arrangements between a number of banks in Ukraine. These measures are designed to spread the risks associated with each bank's creditworthiness, and the Group endeavours to use banks that have the best available creditworthiness.  Nevertheless, and despite some recent improvements, the Ukrainian banking sector remains weakly capitalised and so the risks associated with the banks in Ukraine remain significant, including in relation to the banks with which the Group operates bank accounts. As a consequence, the Group also maintains a significant proportion of its cash holdings in international banks outside Ukraine.

 

Geopolitical environment in Ukraine

 

Although there have been some improvements in recent years, there has not been a final resolution of the political, fiscal and economic situation in Ukraine and its ongoing effects are difficult to predict and likely to continue to affect the Ukrainian economy and potentially the Group's business.  Whilst not materially affecting the Group's production operations, the instability has disrupted the Group's development and operational planning for its assets.

The Group continually monitors the market and business environment in Ukraine and endeavours to recognise approaching risks and factors that may affect its business. In addition, the involvement of Energees Management Limited, as a major shareholder with extensive experience in Ukraine, is considered helpful to mitigate such risks.

 

Operational and technical risks

 

Health, Safety, Environment and Security ("HSES")

 

The oil and gas industry, by its nature, conducts activities which can cause health, safety, environmental and security incidents. Serious incidents can not only have a financial impact but can also damage the Group's reputation and the opportunity to undertake further projects.

The Group maintains a HSES management system and requires that management, staff and contractors adhere to this system. The system ensures that the Group meets Ukraine legislative standards in full and achieves international standards to the maximum extent possible.

Industry risks

 

The Group is exposed to risks which are generally associated with the oil and gas industry. For example, the Group's ability to pursue and develop its projects and development  programmes depends on a number of uncertainties, including  the  availability of capital, seasonal  conditions, regulatory approvals, gas, oil, condensate and LPG prices, development costs and drilling success. As a result of these uncertainties, it is unknown whether potential drilling locations identified on proposed projects will ever be drilled or whether these or any other potential drilling locations will be able to produce gas, oil or condensate. In addition, drilling activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. Drilling for hydrocarbons can be unprofitable, not only due to dry holes, but also as a result of productive wells that do not produce sufficiently to be economic. In addition, drilling and production operations are highly technical and complex activities and may be curtailed, delayed or cancelled as a result of a variety of factors. 

The Group has well qualified and experienced technical management staff to plan and supervise operational activities. In addition, the Group engages with suitably qualified local and international geological, geophysical and engineering experts and contractors to supplement and broaden the pool of expertise available to the Group. Detailed planning of development activities is undertaken with the aim of managing the inherent risks associated with oil and gas exploration and production, as well as ensuring that appropriate equipment and personnel are available for the operations, and that local contractors are appropriately supervised.

Production of hydrocarbons

 

Producing gas and condensate reservoirs are generally characterised by declining production rates which vary depending upon reservoir characteristics and other factors. Future production of the Group's gas and condensate reserves, and therefore the Group's cash flow and income, are highly dependent on the Group's success in operating existing producing wells, drilling new production wells and efficiently developing and exploiting any reserves, and finding or acquiring additional reserves. The Group may not be able to develop, find or acquire reserves at acceptable costs. The experience gained from drilling undertaken to date highlights such risks as the Group targets the appraisal and production of these hydrocarbons.

 

 

In 2016, the Group engaged external technical consultants to undertake a comprehensive review and re-evaluation study of the MEX-GOL and SV fields in order to gain an improved understanding of the geological aspects of the fields and reservoir engineering, drilling and completion techniques, and the results of this study and further planned technical work is being used by the Group in the future development of these fields.  The Group has established an ongoing relationship with such external technical consultants to ensure that technical management and planning is of a high quality in respect of all development activities on the Group's fields.

 

Risks relating to further development and operation of the Group's gas and condensate fields in Ukraine

 

The planned development and operation of the Group's gas and condensate fields in Ukraine is susceptible to appraisal, development and operational risk. This could include, but is not restricted to, delays in delivery of equipment in Ukraine, failure of key equipment, lower than expected production from wells that are currently producing, or new wells that are brought on-stream, problematic wells and complex geology which is difficult to drill or interpret. The generation of significant operational cash is dependent on the successful delivery and completion of the development and operation of the fields.  These risks have been demonstrated by the previous downgrade in the Group's remaining reserves which resulted in the reduction in the value in use, and consequent impairment loss relating to the Group's MEX-GOL and SV asset in Ukraine.

The Group's technical management staff, in consultation with its external technical consultants, carefully plan and supervise development and operational activities with the aim of managing the risks associated with the further development of the Group's fields in Ukraine. This includes detailed review and consideration of available subsurface data, utilisation of modern geological software, and utilisation of engineering and completion techniques developed for the fields. With operational activities, the Group ensures that appropriate equipment and personnel is available for the operations, and that operational contractors are appropriately supervised. In addition, the Group performs a review of its oil and gas assets for impairment on an annual basis, and considers whether an assessment of its oil and gas assets by a suitably qualified independent assessor is appropriate or required.

Drilling and workover operations

 

Due to the depth and nature of the reservoirs in the Group's fields, the technical difficulty of drilling or re-entering wells in the Group's fields is high, and this and the equipment limitations within Ukraine, can result in unsuccessful or lower than expected outcomes for wells.

The utilisation of detailed sub-surface analysis, careful well planning and engineering design in designing work programmes, along with appropriate procurement procedures and competent on-site management, aims to minimise these risks.

Maintenance of facilities

 

There is a risk that production or transportation facilities can fail due to non-adequate maintenance, control or poor performance of the Group's suppliers.

 

The Group's facilities are operated and maintained at standards above the Ukraine minimum legal requirements. Operations staff are experienced and receive supplemental training to ensure that facilities are properly operated and maintained.  Service providers are rigorously reviewed at the tender stage and are monitored during the contract period.

Financial risks

 

Exposure to cash flow and liquidity risk

 

There is a risk that insufficient funds are available to meet the Group's development obligations to commercialise the Group's oil and gas assets. Since a significant proportion of the future capital requirements of the Group is expected to be derived from operational cash generated from production, including from wells yet to be drilled, there is a risk that in the longer term insufficient operational cash is generated, or that additional funding, should the need arise, cannot be secured. 

 

 

 

The Group maintains adequate cash reserves and closely monitors forecasted and actual cash flow, as well as short and longer-term funding requirements. The Group does not currently have any loans outstanding, internal financial projections are regularly made based on the latest estimates available, and various scenarios are run to assess the robustness of the liquidity of the Group.  However, as the risk to future capital funding is inherent in the oil and gas exploration and development industry and reliant in part on future development success, it is difficult for the Group to take any other measures to further mitigate this risk, other than tailoring its development activities to its available capital funding from time to time.

Ensuring appropriate business practices

 

The Group operates in Ukraine, an emerging market, where certain inappropriate business practices may, from time to time occur, such as corrupt business practices, bribery, appropriation of property and fraud, all of which can lead to financial loss.

The Group maintains anti-bribery and corruption policies in relation to all aspects of its business, and ensures that clear authority levels and robust approval processes are in place, with stringent controls over cash management and the tendering and procurement processes. In addition, office and site protection is maintained to protect the Group's assets.

 

 

Hydrocarbon price risk

 

The Group derives its revenue principally from the sale of its Ukrainian gas, condensate and LPG production. These revenues are subject to commodity price volatility and political influence. A prolonged period of low gas, condensate and LPG prices may impact the Group's ability to maintain its long-term investment programme with a consequent effect on growth rate, which in turn may impact the share price or any shareholder returns. Lower gas, condensate and LPG prices may not only decrease the Group's revenues per unit, but may also reduce the amount of gas, condensate and LPG which the Group can produce economically, as would increases in costs associated with hydrocarbon production, such as subsoil taxes and royalties. The overall economics of the Group's key assets (being the net present value of the future cash flows from its Ukrainian projects) are far more sensitive to long term gas, condensate and LPG prices than short-term price volatility. However, short-term volatility does affect liquidity risk, as, in the early stage of the projects, income from production revenues is offset by capital investment.

The Group sells a proportion of its hydrocarbon production through long-term offtake arrangements, which include pricing formulae so as to ensure that it achieves market prices for its products, as well utilising the electronic market platforms in Ukraine to achieve market prices for its remaining products.  However, hydrocarbon prices in Ukraine are implicitly linked to world hydrocarbon prices and so the Group is subject to external price trends.

Currency risk

 

Since the beginning of 2014, the Ukrainian Hryvnia has significantly devalued against major world currencies, including the US Dollar, where it has fallen from UAH8.3/$1.00 on 1 January 2014 to UAH28.1/$1.00 on 31 December 2017, although it was relatively stable during 2017. This devaluation was a significant contributor to the imposition of the banking restrictions by the National Bank of Ukraine over recent years.  In addition, the geopolitical events in Ukraine over recent years, are likely to continue to impact the valuation of the Ukrainian Hryvnia against major world currencies. Further devaluation of the Ukrainian Hryvnia against the US Dollar will affect the carrying value of the Group's assets. 

The Group's sales proceeds are received in Ukrainian Hryvnia, and the majority of the capital expenditure costs for the current investment programme will be incurred in Ukrainian Hryvnia, thus the currency of revenue and costs are largely matched. In light of the previous devaluation and volatility of the Ukrainian Hryvnia against major world currencies, and since the Ukrainian Hryvnia does not benefit from the range of currency hedging instruments which are available in more developed economies, the Group has adopted a policy that, where possible, funds not required for use in Ukraine be retained on deposit in the United Kingdom, principally in US Dollars. 

Counterparty and credit risk

 

The challenging political and economic environment in Ukraine means that businesses can be subject to significant financial strain, which can mean that the Group is exposed to increased counterparty risk if counterparties fail or default in their contractual obligations to the Group, including in relation to the sale of its hydrocarbon production, resulting in financial loss to the Group.

The Group monitors the financial position and credit quality of its contractual counterparties and seeks to manage the risk associated with counterparties by contracting with creditworthy contractors and customers. Hydrocarbon production is sold on terms that limit supply credit and/or title transfer until payment is received.

Financial markets and economic outlook

 

The performance of the Group is influenced by global economic conditions and, in particular, the conditions prevailing in the United Kingdom and Ukraine. The economies in these regions have been subject to volatile pressures in recent periods, with the global economy having experienced a long period of difficulties, and more particularly the events that have occurred in Ukraine over recent years.  This has led to extreme foreign exchange movements in the Ukrainian Hryvnia, high inflation and interest rates, and increased credit risk relating to the Group's key counterparties.

The Group's sales proceeds are received in Ukrainian Hryvnia and a significant proportion of investment expenditure is made in Ukrainian Hryvnia, which minimises risks related to foreign exchange volatility. However, hydrocarbon prices in Ukraine are implicitly linked to world hydrocarbon prices and so the Group is subject to external price movements. The Group holds a significant proportion of its cash reserves in the United Kingdom, mostly in USD, with reputable financial institutions.  The financial status of counterparties is carefully monitored to manage counterparty risks. Nevertheless, the risks that the Group faces as a result of these risks cannot be predicted and many of these are outside of the Group's control.

Corporate risks

 

Ukraine production licences

 

The Group operates in a region where the right to production can be challenged by State and non-State parties. During 2010, this manifested itself in the form of a Ministry Order instructing the Group to suspend all operations and production from its MEX-GOL and SV production licences, which was not resolved until mid-2011. In 2013, new rules relating to the updating of production licences led to further challenges being raised by the Ukrainian authorities to the production licences held by independent oil and gas producers in Ukraine, including the Group, which may result in requirements for remediation work, financial penalties and/or the suspension of such licences, which, in turn, may adversely affect the Group's operations and financial position. All such challenges affecting the Group have thus far been successfully defended through the Ukrainian legal system. However, the business environment is such that these types of challenges may arise at any time in relation to the Group's operations, licence history, compliance with licence commitments and/or local regulations.   In addition, these licences carry ongoing compliance obligations, which if not met, may lead to the loss of a licence.

The Group ensures compliance with commitments and regulations relating to its production licences through Group procedures and controls or, where this is not immediately feasible for practical or logistical considerations, seeks to enter into dialogue with the relevant Government bodies with a view to agreeing a reasonable time frame for achieving compliance or an alternative, mutually agreeable course of action. Work programmes are designed to ensure that all licence obligations are met and continual interaction with Government bodies is maintained in relation to licence obligations and commitments.

 

 

Extension of MEX-GOL and SV licences

 

The Group's production licences for the MEX-GOL and SV fields currently expire in 2024.  However, in the estimation of its reserves, it is assumed that licence extensions will be granted in accordance with current Ukrainian legislation and that consequently the fields' development will continue until the end of the fields' economic life in 2036. Despite such legislation, it is possible that licence extensions will not be granted, which would affect the achievement of full economic field development and consequently the carrying value of the Group's MEX-GOL and SV asset in the future.

The Group monitors legislation in Ukraine which is likely to affect its licences and the obligations associated therewith, and ensures that its licence compliance obligations are monitored and maintained as such compliance is a likely to be a factor in the extension of the licences in 2024.

Risks relating to key personnel

 

The Group's success depends upon skilled management as well as technical expertise and administrative staff. The loss of service of critical members from the Group's team could have an adverse effect on the business.

The Group periodically reviews the compensation and contractual terms of its staff. In addition, the Group has developed relationships with a number of technical and other professional experts and advisers, who are used to provided specialist services as required.

 

 

Consolidated Income Statement

for the year ended 31 December 2017

 

 

 

 

 

 

 

2017

2016

 

Note

$000

$000

 

 

 

 

Revenue

5

35,053

 25,659

Cost of sales

6

(24,272)

 (18,633)

Gross profit

 

10,781

 7,026

Administrative expenses

7

(5,311)

 (4,681)

Other operating gains and (losses) (net)

12

(26)

30

Operating profit

 

5,444

 2,375

Finance income

10

1,307

 770

Finance costs

11

(112)

 (185)

Other losses (net)

 

(50)

 (121)

Profit on ordinary activities before taxation

 

6,589

 2,839

Income tax expense

13

(4,301)

 (4,098)

Profit/(loss) for the year

 

2,288

 (1,259)

 

Earnings/(Loss) per share (cents)

 

 

 

Basic and diluted

15

0.7c

(0.4c)

 

The Notes set out below are an integral part of these consolidated financial statements.

 

 

 

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2017

 

 

 

2017

 

2016

 

$000

$000

 

 

 

Profit/ (loss) for the year

2,288

(1,259)

 

 

 

Other comprehensive expense:

 

 

Items that may be subsequently reclassified to profit or loss:

 

Equity - foreign currency translation

 

(1,247)

 

(5,900)

Items that will not be subsequently reclassified to profit or loss:

 

 

Re-measurements of post-employment benefit obligations

(1)

(104)

 

 

 

 

 

 

Total other comprehensive expense

(1,248)

(6,004)

 

 

 

 

 

 

Total comprehensive income / (expense) for the year

1,040

(7,263)

 

 

 

 

Company Statement of Comprehensive Income

for the year ended 31 December 2017

 

2017

2016

 

$000

$000

 

 

 

Profit / (loss) for the year

12,239

(15,616)

 

 

 

Total comprehensive income /(expense) for the year

12,239

(15,616)

 

The Notes set out below are an integral part of these consolidated financial statements.

 

 

 

 

 

 

Consolidated Balance Sheet

at 31 December 2017

 

 

 

 

 

 

2017

2016

 

Note

$000

$000

Assets

 

 

 

Non-current assets

 

 

 

Property, plant and equipment

16

14,962

 21,354

Intangible assets

17

5,590

 6,530

Corporation tax receivable

 

37

 54

Deferred tax asset

25

9,261

 11,121

 

 

29,850

 39,059

 

 

 

 

Current assets

 

 

 

Inventories

19

1,394

 1,200

Trade and other receivables

20

6,536

 4,243

Other short-term investments

21

16,000

-

Cash and cash equivalents

21

14,249

 19,966

 

 

38,179

 25,409

 

 

 

 

Total assets

 

68,029

64,468

 

 

 

 

Liabilities

 

 

 

Current liabilities

 

 

 

Trade and other payables

22

(2,423)

(1,435)

Corporation tax payable

 

(1,116)

(300)

 

 

(3,539)

(1,735)

 

 

 

 

Net current assets

 

34,640

23,674

 

 

 

 

Non-current liabilities

 

 

 

Provision for decommissioning

23

(3,027)

 (1,915)

Defined benefit liability

24

(275)

 (303)

Deferred tax liability

25

(820)

 (1,187)

 

 

(4,122)

 (3,405)

 

 

 

 

Total liabilities

 

(7,661)

(5,140)

 

 

 

 

Net assets

 

60,368

59,328

 

 

 

 

Equity

 

 

 

Called up share capital

26

28,115

 28,115

Share premium account

 

555,090

 555,090

Foreign exchange reserve

 

(100,932)

(99,684)

Other reserves

27

4,273

4,273

Accumulated losses

 

(426,178)

(428,466)

Total equity

 

60,368

59,328

 

The Notes set out below are an integral part of these consolidated financial statements.

 

 

 

 

 

Consolidated Statement of Changes in Equity

        at 31 December 2017

 

 

 

Called

up share capital

Share

premium

account

Merger

reserve

Capital contributions reserve

Foreign exchange reserve*

Accumulated losses

Total equity

 

$000

$000

$000

$000

$000

$000

$000

 

 

 

 

 

 

 

 

As at 1 January 2016

 28,115

 555,090

 (3,204)

 7,477

 (93,784)

 (427,103)

 66,591

Loss for the year

-

-

-

-

-

 (1,259)

(1,259)

Other comprehensive expense

  - exchange differences

-

-

-

-

(5,900)

-

(5,900)

  - re-measurements of post-employment benefit obligations

-

-

-

-

 -

 (104)

(104)

Total comprehensive expense

-

-

-

-

(5,900)

 (1,363)

 (7,263)

As at 31 December 2016

 28,115

 555,090

 (3,204)

 7,477

 (99,684)

 (428,466)

 59,328

 

 

 

 

 

 

 

 

 

Called

up share capital

Share

premium

account

Merger

reserve

Capital contributions reserve

Foreign exchange reserve*

Accumulated losses

Total equity

 

$000

$000

$000

$000

$000

$000

$000

 

 

 

 

 

 

 

 

As at 1 January 2017

 28,115

 555,090

 (3,204)

 7,477

 (99,684)

 (428,466)

 59,328

Profit for the year

-

-

-

-

-

2,288

2,288

Other comprehensive expense

  - exchange differences

-

-

--

-

(1,247)

-

(1,247)

  - re-measurements of post-employment benefit obligations

-

-

-

-

(1)

(1)

(1)

Total comprehensive expense

-

-

-

-

(1,247)

2,287

1,040

As at 31 December 2017

28,115

555,090

(3,204)

7,477

(100,931)

(426,179)

60,368

 

* Predominantly as a result of exchange differences on non-monetary assets and liabilities where the subsidiaries' functional currency is not the US Dollar.

 

 

                 

           The Notes set out below are an integral part of these consolidated financial statements.

 

 

 

Consolidated Cash Flow Statement

for the year ended 31 December 2017

 

 

 

2017

2016

 

Note

$000

$000

 

 

 

 

Operating activities

 

 

 

Cash generated from operations

29

17,982

9,971

Income tax paid

 

(2,133)

(2,219)

Interest received

 

906

809

Net cash inflow from operating activities

 

16,755

8,561

 

 

 

 

Investing activities

 

 

 

Acquisition of subsidiary, net of cash acquired

 

-

(11,560)

Purchase of property, plant and equipment

 

(6,151)

(7,242)

Purchase of intangible assets

 

(121)

(60)

Proceeds from sale of property, plant and equipment

 

8

11

Other short-term investments

21

(16,000)

12,635

Net cash outflow from investing activities

 

(22,264)

(6,216)

 

 

 

 

Financing activities

 

 

 

Repayment of non-interest bearing borrowings

 

-

(1,095)

Net cash outflow from financing activities

 

-

(1,095)

 

 

 

 

Net (decrease) / increase in cash and cash equivalents

 

(5,509)

 1,250

Cash and cash equivalents at beginning of year

 

19,966

 19,920

Effect of foreign exchange rate changes

 

(208)

 (1,204)

Cash and cash equivalents at end of year

21

14,249

 19,966

 

The Notes set out below are an integral part of these consolidated financial statements.

 

 

Notes forming part of the financial statements

 

1.

Statutory Accounts

 

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2017 or 2016, but is derived from those accounts. The Auditor has reported on those accounts, and its reports were unqualified and did not contain statements under sections 498(2) or (3) of the Companies Act 2006.

 

The statutory accounts for 2017 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

 

While the financial information included in this preliminary announcement has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"), this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to distribute the full financial statements that comply with IFRS in May 2018.

 

2.

General Information and Operational Environment

 

Regal Petroleum plc (the "Company") and its subsidiaries (the "Group") is a gas, condensate and LPG production group.

The Company is a company quoted on the AIM Market of London Stock Exchange plc and incorporated in England and Wales under the Companies Act 2006. The Company's registered office is at 16 Old Queen Street, London SW1H 9HP, United Kingdom and its registered number is 4462555. The principal activities of the Group and the nature of the Group's operations are set out earlier in this announcement.

As of 31 December 2017 and 2016 the Company's immediate parent company was Energees Management Limited, which is 100% owned by Pelidona Services Limited, which is 100% owned by Lovitia Investments Ltd, which is 100% owned by Mr V Novinskiy. Accordingly, the Company was ultimately controlled by Mr V Novinskiy.

The Group's gas, condensate and LPG extraction and production facilities are located in Ukraine. The ongoing political and economic instability in Ukraine, which commenced in late 2013, has led to a deterioration of Ukrainian State finances, volatility of financial markets, illiquidity on capital markets, higher inflation and a depreciation of the national currency against major foreign currencies and has continued in 2017, though to a lesser extent as compared to 2014-2016.

The inflation rate in Ukraine during 2017 increased to 14% (as compared to 12% in 2016).

Devaluation of the Ukrainian Hryvnia during 2017 has been moderate.  As at 29 March 2018, the official exchange rate of the Ukrainian Hryvnia against the US Dollar was UAH26.4/$1.00, compared to UAH28.1/$1.00 as at 31 December 2017 (31 December 2016: UAH27.2/$1.00).

In 2017, there was a further easing of the currency control restrictions that were introduced by the National Bank of Ukraine during 2014 - 2015. In particular, the required share of foreign currency for mandatory sale was decreased from 65% to 50% from 4 April 2017, and the settlement period for export-import transactions in foreign currency was increased from 120 to 180 days from 26 May 2017. In addition, from 13 June 2016, Ukrainian companies were permitted to pay dividends to non-residents with a limit of $5 million per month.

Further details of risks relating to Ukraine can be found within the Principal Risks and Uncertainties section of this announcement.

 

3.

Accounting Policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of Preparation

The Group has prepared its consolidated financial statements under International Financial Reporting Standards ("IFRSs") and interpretations issued by the IFRS Interpretations Committee ("IFRS IC"), as adopted by the European Union. The financial statements have been prepared in accordance with the Companies Act 2006 as applicable to companies using IFRS.

The financial statements are prepared on the historical cost basis as modified by the initial recognition of subsidiary acquisition and financial instruments based on fair value.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

Going Concern

Based on the positive operational and financial performance of the Group and for the reasons outlined in the Principal Risks and Uncertainties section of this announcement, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future regarded as at least 12 months after the date of signing of these financial statements.Accordingly,the going concern basis has been adopted in preparing its consolidated financial statements for the year ended 31 December 2017. The use of this basis of accounting takes into consideration the Company's and the Group's current and forecast financing position, additional details of which are provided in the Principal Risks and Uncertainties section of this announcement.

New and amended standards adopted by the Group

The Group has applied the following new and revised standards and interpretations for the first time for its annual reporting period commencing 1 January 2017. These improvements relate to the following areas:

Amendment to IAS 12, 'Income taxes', regarding recognition of deferred tax assets for unrealised losses

Amendment to IAS 7, 'Cash flow statements', regarding the Disclosure initiative

Annual improvements 2014-2016 IFRS 12, 'Disclosure of interests in other entities'

The adoption of these amendments had no significant impact on these financial statements.

Impact of standards issued but not yet applied by the Group

Certain new accounting standards and interpretations have been published that are not mandatory for 2017 reporting periods and have not been early adopted by the Group. The Group's assessment of the impact of these new standards and interpretations is set out below:

IFRS 9, 'Financial instruments', addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income ("OCI") and fair value through profit and loss. The basis of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in OCI, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the 'hedged ratio' to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39.

The Group has decided not to adopt IFRS 9 until it becomes mandatory on 1 January 2018. The Group does not expect the new guidance to have a significant impact on the classification and measurement of its financial assets and liabilities.

The following table reconciles the carrying amounts of financial assets, from their previous measurement categories in accordance with IAS 39 into their new measurement categories upon transition to IFRS 9 on 1 January 2018:

 

Group

 

 

 

 

 

In thousands of US dollars

Measurement category

Carrying value per
 IAS 39

(closing balance at
31 December 2017)

Effect

Carrying value per IFRS 9

(opening balance at
1 January 2018)

 

IAS 39

IFRS 9

Remeasurement

Reclassification

 

ECL

Other

Manda-tory

Volunta-ry

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

L&R*

AC**

14,249

(9)

-

-

-

14,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other short-term investments

L&R*

AC**

16,000

(35)

-

-

-

15,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other accounts receivable

L&R*

AC**

2,632

(62)

-

-

-

2,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

-

-

32,881

(106)

-

-

-

32,775

 

 

 

 

 

 

 

 

 

                       

*L&R - Loans and receivables

**AC - Amortised cost

 

Company

 

 

 

 

 

In thousands of US dollars

Measurement category

Carrying value per
 IAS 39

(closing balance at
31 December 2017)

Effect

Carrying value per IFRS 9

(opening balance at
1 January 2018)

 

IAS 39

IFRS 9

Remeasurement

Reclassification

 

ECL

Other

Manda-tory

Volunta-ry

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

L&R*

AC**

4,411

(2)

-

-

-

4,409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other short-term investments

L&R*

AC**

16,000

(35)

-

-

-

15,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other accounts receivable

L&R*

AC**

464

-

-

-

-

464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans to subsidiary undertakings

L&R*

AC**

38,225

-

-

-

-

38,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

-

-

59,100

(37)

-

-

-

59,063

 

 

 

 

 

 

 

 

 

                       

*L&R - Loans and receivables

**AC - Amortised cost

The new standard also introduces expanded disclosure requirements and changes in presentation. Management of the Group does not expect a significant impact on its consolidated financial statements effected by implementation of IFRS 9 on 1 January 2018.

IFRS 15, 'Revenue from contracts with customers' deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations. The standard is effective for first interim periods within annual reporting periods beginning on or after 1 January 2018. The Group will adopt the new standard from 1 January 2018. The Group does not expect the new standard to have a significant impact on financial statements of the Group.

IFRS 16 'Leases' was issued in January 2016. It will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change. The standard will affect primarily the accounting for the Group's operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments of $103,000. However, the Group has not yet determined to what extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Group's profit and classification of cash flows. Some of the commitments may be covered by the exception for short-term and low-value leases and some commitments may relate to arrangements that will not qualify as leases under IFRS 16. The standard is mandatory for first interim periods within annual reporting periods beginning on or after 1 January 2019. At this stage, the Group does not intend to adopt the standard before its effective date. The Group is currently assessing the impact of the new standard on its consolidated financial statements.

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions.

Exchange differences on intra-group balances with foreign operation

The Group has certain inter-company monetary balances of which the Company is the beneficial owner. These monetary balances are payable by a subsidiary that is a foreign operation and are eliminated on consolidation.

In the consolidated financial statements, exchange differences arising on such payables because the transaction currency differs from the subsidiary's functional currency are recognised initially in other comprehensive income if the settlement of such payables is continuously deferred and is neither planned nor likely to occur in the foreseeable future.

In such cases, the respective receivables of the Company are regarded as an extension of the Company's net investment in that foreign operation, and the cumulative amount of the abovementioned exchange differences recognised in other comprehensive income is carried forward within the foreign exchange reserve in equity and is reclassified to profit or loss only upon disposal of the foreign operation.

When the subsidiary that is a foreign operation settles its quasi-equity liability due to the Company, but the Company continues to possess the same percentage of the subsidiary, i.e. there has been no change in its proportionate ownership interest, such settlement is not regarded as a disposal or a partial disposal, and therefore cumulative exchange differences are not reclassified.

The designation of inter-company monetary balances as part of the net investment in a foreign operation is re-assessed when management's expectations and intentions on settlement change due to a change in circumstances.

Where, because of a change in circumstances, a receivable balance, or part thereof, previously designated as a net investment into a foreign operation is intended to be settled, the receivable is de-designated and is no longer regarded as part of the net investment.

In such cases, the exchange differences arising on the subsidiary's payable following de-designation are recognised within finance costs / income in profit or loss, similar to foreign exchange differences arising from financing.

Basis of Consolidation

The consolidated financial statements incorporate the financial information of the Company and entities controlled by the Company (and its subsidiaries) made up to 31 December each year.

Subsidiaries

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis at the non-controlling interest's proportionate share of the recognised amounts of the acquiree's identifiable net assets.

Acquisition-related costs are expensed as incurred.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss.

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity.

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group's accounting policies.

Segment reporting

The Group's only class of business activity is oil and gas exploration, development and production. The Group's primary operations are located in Ukraine, with its head office in the United Kingdom. The geographical segments are the basis on which the Group reports its segment information to management. Operating segments are reported in a manner consistent with the internal reporting provided to the Board of Directors.

Commercial Reserves

Proved and probable oil and gas reserves are estimated quantities of commercially producible hydrocarbons which the existing geological, geophysical and engineering data show to be recoverable in future years from known reservoirs. The proved and probable reserves conform to the definition approved by the Petroleum Resources Management System.

Oil and Gas Development and Producing Assets

The Group applies the successful efforts method of accounting for oil and gas assets, having regard to the requirements of IFRS 6 "Exploration for and Evaluation of Mineral Resources".

All licence acquisition, exploration and evaluation costs are initially capitalised as intangible assets in cost centres by field or by exploration area, as appropriate, pending determination of commerciality of the relevant property. Directly attributable administration costs are capitalised insofar as they relate to specific exploration activities, as are finance costs to the extent they are directly attributable to financing development projects. Pre-licence costs and general exploration costs not specific to any particular licence or prospect are expensed as incurred.

If prospects are deemed to be impaired ('unsuccessful') on completion of the evaluation, the associated costs are charged to the Income Statement. If the field is determined to be commercially viable, the attributable costs are transferred to development / producing assets within property, plant and equipment in single field cost centres.

Subsequent expenditure is capitalised only where it either enhances the economic benefits of the development / producing asset or replaces part of the existing development / producing asset.

Net proceeds from any disposal of an exploration asset are initially credited against the previously capitalised costs. Any surplus proceeds are credited to the Income Statement. Net proceeds from any disposal of development / producing assets are credited against the previously capitalised cost. Gains and losses on disposals of development / producing assets are determined by comparing proceeds from sale with the appropriate portion of the net capitalised costs of the asset and are recognised in the Income Statement for the year.

Depreciation, Depletion and Amortisation

All expenditure carried within each field is amortised from the commencement of commercial production on a unit of production basis, which is the ratio of gas production in the period to the estimated quantities of commercial reserves at the end of the period plus the production in the period, generally on a field by field basis. In certain circumstances, fields within a single development area may be combined for depletion purposes. Costs used in the unit of production calculation comprise the net book value of capitalised costs plus the estimated future field development costs necessary to bring the reserves into production.

Impairment

At each balance sheet date, the Group reviews the carrying amount of development and producing assets to determine whether there is any indication that those assets have suffered an impairment loss. This includes exploration and appraisal costs capitalised which are assessed for impairment in accordance with IFRS 6. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss.

For development / producing assets, the recoverable amount is the greater of fair value less costs to dispose and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using an expected weighted average cost of capital. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately.

Should an impairment loss subsequently reverse, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Decommissioning Provision

Where a material liability for the removal of existing production facilities and site restoration at the end of the productive life of a field exists, a provision for decommissioning is recognised. The amount recognised is the present value of estimated future expenditure determined in accordance with local conditions and requirements. The cost of the relevant property, plant and equipment is increased with an amount equivalent to the provision and depreciated on a unit of production basis. Changes in estimates are recognised prospectively, with corresponding adjustments to the provision and the associated fixed asset. The unwinding of the discount on the decommissioning provision is included within finance costs.

Property, Plant and Equipment other than Oil and Gas Assets

Property, plant and equipment other than oil and gas assets are stated at cost less accumulated depreciation and any provision for impairment. Depreciation is charged so as to write off the cost of assets on a straight-line basis over their useful lives as follows:

 

Useful lives in years

 

Buildings and constructions

10 to 20 years

Machinery and equipment

2 to 5 years

Vehicles

5 years

Office and other equipment

4 to 12 years

Spare parts and equipment purchased with the intention to be used in future capital investment projects are recognised as development and production assets within property, plant and equipment.

Inventories

Inventories typically consist of materials, spare parts and hydrocarbons, and are stated at the lower of cost and net realisable value. Cost of finished goods is determined on the weighted average bases. Cost of other than finished goods inventory is determined on the first in first out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

Revenue Recognition

Revenue from sale of goods represents amounts invoiced in respect of sales of gas, condensate and LPG exclusive of indirect taxes and excise duties and is recognised at the point of transfer of risks and rewards of ownership of the goods, normally when the goods are shipped. To the extent that revenue arises from test production during an evaluation programme, an amount is charged from intangible exploration assets to cost of sales so as to reflect a zero net margin.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount.

Foreign Currencies

The Group's consolidated financial statements and those of the Company are presented in US Dollars. The functional currency of the subsidiaries which operate in Ukraine is Ukrainian Hryvnia. The remaining entities have US Dollars as their functional currency.

The functional currency of individual companies is determined by the primary economic environment in which the entity operates, normally the one in which it primarily generates and expends cash. In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency ("foreign currencies") are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Income Statement. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items which are measured in terms of historical cost in a foreign currency are not retranslated. Gains and losses arising on retranslation are included in net profit or loss for the period, except for exchange differences arising on balances which are considered long term investments where the changes in fair value are recognised directly in other comprehensive income.

On consolidation, the assets and liabilities of the Group's subsidiaries which do not use US Dollars as their functional currency are translated into US Dollars as follows:

(a)

assets and liabilities for each Balance Sheet presented are translated at the closing rate at the date of that Balance Sheet,

(b)

income and expenses for each Income Statement are translated at average monthly exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and

(c)

all resulting exchange differences are recognised in other comprehensive income.

The principal rates of exchange used for translating foreign currency balances at 31 December 2017 were $1:UAH28.1 (2016: $1:UAH27.2), $1:£0.7 (2016: $1:£0.8), $1:€0.8 (2016: $1:€0.9).

None of the Group's operations are considered to use the currency of a hyperinflationary economy, however this is kept under review.

Pensions

The Group contributes to a local government pension scheme in Ukraine and defined benefit plans. The Group has no further payment obligations towards the local government pension scheme once the contributions have been paid.

Defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The Group companies participate in a mandatory Ukrainian State-defined retirement benefit plan, which provides for early pension benefits for employees working in certain workplaces with hazardous and unhealthy working conditions. The Group also provides lump sum benefits upon retirement subject to certain conditions. The early pension benefit (in the form of a monthly annuity) is payable by employers only until the employee has reached the statutory retirement age. The pension scheme is based on a benefit formula which depends on each individual member's average salary, his/her total length of past service and total length of past service at specific types of workplaces ("list II" category).

The liability recognised in the Balance Sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Since Ukraine has no deep market in such bonds, the market rates on government bonds are used.

The current service cost of the defined benefit plan, recognised in the Income Statement in employee benefit expense, except where included in the cost of an asset, reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes curtailments and settlements. Past-service costs are recognised immediately in the Income Statement.

The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in employee benefit expense in the Income Statement.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise.

In October 2017 there were certain changes introduced to the Law of Ukraine on Mandatory State Pension Insurance:

-

Increase in retirement age and required employment period which resulted in increase of preferential pensions period covered by the Group and consequently past service costs;

-

Decrease of index used in the calculation of insurance period which subsequently led to decrease of pensions amount;

-

The Government of Ukraine deblocked pensions indexation starting from 2019 which are now estimated as 50% of salary increase and 50% of inflation.

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Rentals payable / receivable under operating leases are charged / credited to the Income Statement on a straight-line basis over the term of the relevant lease. Benefits received or given as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.

Taxation

The tax expense represents the sum of the current tax and deferred tax.

Current tax, including UK corporation and overseas tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally 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 against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is calculated at the tax rates which are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Other taxes which include recoverable value added tax, sales tax and custom duties represent the amounts receivable or payable to local tax authorities in the countries where the Group operates.

Financial Instruments

Financial assets and financial liabilities are recognised on the Group's Balance Sheet when the Group becomes a party to the contractual provisions of the instrument.

The Group classifies its financial assets as loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

The Group does not currently utilise derivative financial instruments.

Trade Receivables

Trade receivables are amounts due from customers for goods sold in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets.

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.

The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

For the financial assets carried at amortised cost the evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

For loans and receivables category, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the consolidated Income Statement.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated Income Statement.

Investments and loans to subsidiaries

Investments in subsidiaries and loans issued to subsidiaries for subsequent finance of the business are stated at cost and reviewed for impairment if there are indications that the carrying value may not be recoverable.

Trade Payables

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

Equity Instruments

Ordinary shares are classified as equity. Equity instruments issued by the Company and the Group are recorded at the proceeds received, net of direct issue costs. Any excess of the fair value of consideration received over the par value of shares issued is recorded as share premium in equity.

Cash and Cash Equivalents

Cash and cash equivalents comprise cash on hand and deposits held at call with banks and other short-term highly liquid investments which are readily convertible to a known amount of cash with no significant loss of interest.

Other short-term investments

Other short-term investments include current accounts and deposits held at banks, which do not meet cash and cash equivalents definition. Other short-term investments are measured initially at fair value and subsequently carried at amortised cost using the effective interest method. Interest received on other short-term investments is disclosed within operating cash flow.

4.

Critical Accounting Estimates and Assumptions

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions which have a risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

(a)

Recoverability of Development and Production Assets in Ukraine

According to the Group's accounting policies, costs capitalised as assets are assessed for impairment at each balance sheet date if impairment indicators exist. In assessing whether an impairment loss has occurred, the carrying value of the asset is compared to its recoverable amount. In previous years, management had assessed value in use, using a discounted cash flow model to measure its recoverable amount. The cash flows in the model were projected in real terms, i.e. they did not take into account the impact on cash flows of the estimated commodity price index during the period of projection. The discount rate was adjusted accordingly and represented a real terms discount rate. No impairment loss was recognised as a result of the assessment as at 31 December 2016.  In the current year, no impairment indicators were identified, due to a favourable change in the Group's performance and the economic environment in Ukraine, and therefore, no impairment test was required. In addition, the Group considered if there were any triggers to reverse any previously recognised impairment and concluded that there was insufficient information to be able to do so.  The Group is currently undertaking certain projects with the purpose of refining its field development strategy, including the required capital expenditure, and the re-assessment of its mineral reserves. The information that will be obtained from these projects is expected to enable the Group to determine the need for any re-assessment of the carrying value of its oil and gas assets.

(b)

Recoverability of inter-company loans receivable by the Company from a subsidiary

The Company has certain inter-company loans receivable from a subsidiary, which are eliminated on consolidation. For the purpose of the Company's financial statements, these receivable balances are impaired if the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the original effective interest rate is less than the asset's carrying amount, and the resulting impairment loss is recognised in profit or loss in the Company's financial statements. In previous years, impairment charges were recognised against the cumulative balance of the loans issued to subsidiaries based on an analysis of their recoverability. During 2017, the Company received $12,450,000 in repayment of loans receivable from its subsidiaries, including $6,360,000 of interest accrued, which had been impaired in the prior year.  In light of this repayment, the provision related to the interest was reversed in the amount repaid. In addition, the Company considered if there were any triggers to reverse any additional previously recognised impairment and concluded that there was insufficient information to be able to do so.  The Group is currently undertaking certain projects with the purpose of refining its field development strategy, including the required capital expenditure, and the re-assessment of its mineral reserves. The information that will be obtained from these projects is expected to enable the Company to determine the need for any re-assessment of the carrying value of its inter-company loans.

(c)

 Decommissioning

The Group has decommissioning obligations in respect of its Ukrainian assets. The full extent to which the provision is required depends on the legal requirements at the time of decommissioning, the costs and timing of any decommissioning works and the discount rate applied to such costs.

A detailed assessment of gross decommissioning cost was undertaken on a well-by-well basis using local data on day rates and equipment costs. The discount rate applied on the decommissioning cost provision at 31 December 2017 was 4.7% (31 December 2016: 6.11%). The discount rate is calculated in real terms based on the yield to maturity of Ukrainian Government bonds denominated in the currency in which the liability is expected to be settled and with the settlement date that approximates the timing of settlement of decommissioning obligations.

The change in estimate during 2017 reflects a combination of a revision in the estimated costs (increase of $559,000) and the discount rate applied (increase of $421,000).

The decommissioning costs are estimated to be incurred by June 2036 on the MEX-GOL and SV gas and condensate fields, which is the current estimated end of the economic life of the fields, and by 2024 on the VAS gas and condensate field. Management believes that the current licences for the MEX-GOL and SV gas and condensate fields, which are due to expire in July 2024, will be extended until June 2036.

(d)

Depreciation of Development and Production Assets

Development and production assets held in property, plant and equipment are depreciated on a unit of production basis at a rate calculated by reference to proven and probable reserves and incorporating the estimated future cost of developing and extracting those reserves. Future development costs are estimated using assumptions about the number of wells required to produce those reserves, the cost of the wells, future production facilities and operating costs, together with assumptions on oil and gas realisations, and are revised annually. The reserves estimates used are determined using estimates of gas in place, recovery factors, future hydrocarbon prices and also take into consideration the Group's latest development plan for the associated development and production asset. Additionally, the latest development plan and therefore the inputs used to determine the depreciation charge, assume that the current licences for the MEX-GOL and SV gas and condensate fields which are due to expire in July 2024, can be extended until June 2036.

The Group is currently undertaking certain projects on the MEX-GOL and SV fields with the purpose of refining its field development strategy, including the required capital expenditure, and the re-assessment of its mineral reserves. These projects include the interpretation of a reprocessed 3D seismic dataset, further analysis of technical and economic data, and ongoing revision of the geological model. The information that will be obtained from these projects is to be used in a re-assessment of the remaining reserves and resources at these fields, which is planned to be completed in the middle of 2018.

(e)

Recoverability of materials and spare parts inventory

The majority of the Group's materials and spare parts inventory balance comprises items to be used in the Ukraine drilling programme. Where there is uncertainty whether these items will be realised through the drilling programme, or through sale, the materials are recorded at scrap value. Where materials inventory is intended for sale, management uses current market rates to estimate the recoverable amount through sale.

(f)

Recognition of deferred tax asset

The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient and suitable taxable profits will be available in the future against which the reversal of temporary differences can be deducted. This requires judgment for forecasting future profits.

Further details of the deferred tax assets recognised can be found in Note 25.

(g)

Exchange differences on intra-group balances with foreign operations

During 2017, a Group subsidiary, Regal Petroleum Corporation (Ukraine) Limited, settled $12,480,000 of intra-group liability of which the Company is the beneficial owner. A further amount of $6,000,000 is expected to be settled by the end of 2018. As such, a foreign exchange difference of $351,000 accumulated on the intra-group balance of $14,560,000 since the date of de-designation of this balance as part of the Company's net investment in the foreign operation up to 31 December 2017 was recognised in profit or loss in these consolidated financial statements. No reclassification of the foreign exchange difference accumulated in equity prior to de-designation, was made as there has been no change in the Company's proportionate ownership interest in the foreign operation and therefore no disposal or partial disposal of the foreign operation. There were no changes in management's plans or intentions regarding the payment of intra-group balances unsettled as at 31 December 2017, other than the abovementioned amounts of $6,000,000, and as such, a foreign exchange difference related to the balance designated as net investment in a foreign operation was recognised in other comprehensive income in the Company Statement of Comprehensive Income for the year ended 31 December 2017.

5.

Segmental Information

In line with the Group's internal reporting framework and management structure, the key strategic and operating decisions are made by the Board of Directors, who review internal monthly management reports, budget and forecast information as part of this process. Accordingly, the Board of Directors is deemed to be the Chief Operating Decision Maker within the Group.

The Group's only class of business activity is oil and gas exploration, development and production. The Group's operations are located in Ukraine, with its head office in the United Kingdom. These geographical regions are the basis on which the Group reports its segment information. The segment results as presented represent operating profit before depreciation, amortisation and impairment of non-current assets.

 

Ukraine

United Kingdom

Total

 

2017

2017

2017

 

$000

$000

$000

 

 

 

 

Revenue

 

 

 

Gas sales

24,936

-

24,936

Condensate sales

7,957

-

7,957

Liquefied Petroleum Gas sales

2,160

-

2,160

Total revenue

35,053

-

35,053

 

 

 

 

Segment result

19,213

(1,773)

17,440

Depreciation, amortisation and impairment of non-current assets

 

 

(11,996)

Operating profit

 

 

5,444

 

 

 

 

Segment assets

44,630

23,399

68,029

 

 

 

 

Capital additions*

4,024

-

4,024

 

There are no inter-segment sales within the Group and all products are sold in the geographical region in which they are produced.

 

During 2017, the Group commenced selling all of its gas production to its related party, LLC Smart Energy ("Smart Energy"). Smart Energy has oil and gas operations in Ukraine and is part of the PJSC Smart-Holding Group, which is ultimately controlled by Mr Vadim Novinskiy, who through an indirect 54% majority shareholding, ultimately controls the Group. This arrangement came about as a consequence of the Ukrainian Government introducing a number of new provisions into the Ukrainian Tax Code over the last two years, including transfer pricing regulations for companies operating in Ukraine. The introduction of the new regulations has meant that there is an increased regulatory burden on affected companies in Ukraine who must prepare and submit reporting information to the Ukrainian Tax Authorities. Due to the corporate structure of the Group, a substantial proportion of its gas production is produced by a non-Ukrainian subsidiary of the Group, which operates in Ukraine as a branch, or representative office as it is classified in Ukraine.  Under the new tax regulations, this places additional regulatory obligations on each of the Group's potential customers who may be less inclined to purchase the Group's gas and/or may seek discounts on sales prices. As a result of discussions between the Company and Smart Energy, Smart Energy agreed to purchase all of the Group's gas production and to assume responsibility for the regulatory obligations under the Ukrainian tax regulations. Furthermore, Smart Energy has agreed to combine the Group's gas production with its own gas production, and to sell such gas as combined volumes, which should result in higher sales prices due to the larger sales volumes. In order to cover Smart Energy's sales, administration and regulatory compliance costs, the Group has agreed to sell its gas to Smart Energy at a small discount to the gas sales prices achieved by Smart Energy, who sell the combined volumes in line with market prices. The terms of sale, effective from June 2017, for the Group's gas to Smart Energy are (i) payment for one third of the estimated monthly volume of gas by the 20th of the month of delivery, and (ii) payment of the remaining balance by the 10th of the month following the month of delivery.

 

 

 

 

Ukraine

United
Kingdom

Total

 

2016

2016

2016

 

$000

$000

$000

 

 

 

 

Revenue

 

 

 

Gas sales

 16,529

 -

 16,529

Condensate sales

 5,696

 -

 5,696

Liquefied Petroleum Gas sales

 3,434

 -

 3,434

Total revenue

 25,659

 -

 25,659

 

 

 

 

Segment result

 13,773

 (2,257)

 11,516

Depreciation, amortisation and impairment of non-current assets

 

 

(9,141)

Operating profit

 

 

2,375

 

 

 

 

Segment assets

50,960

13,508

64,468

 

 

 

 

Capital additions*

13,899

-

13,899

 

*Comprises additions to property, plant and equipment (Note 16)

 

6.

Cost of Sales

 

 

2017

2016

 

$000

$000

 

 

 

Depreciation of property, plant and equipment

10,796  

8,620  

Production taxes

7,856  

4,401  

Staff costs (Note 9)

1,867  

1,402  

Cost of inventories recognised as an expense

1,063  

760  

Amortisation of mineral reserves

822  

417

Rent expenses (Note 28)

707  

93  

Impairment of inventory

179

-

Cost of purchased gas

6  

1,712  

Geological services

-  

40  

Other expenses

976  

1,188  

 

24,272  

18,633  

 

 

 7.

Administrative Expenses

 

 

 

2017

2016

 

$000

$000

 

 

 

 

 

 

Staff costs (Note 9)

3,473  

 2,580  

Consultancy fees

520  

 1,063  

Auditors' remuneration

349  

 281  

Rent expenses (Note 28)

266  

 279  

Amortisation of other intangible assets

104  

36

Depreciation of other assets

94  

 68  

Other expenses

505  

374

 

5,311  

4,681 

 

 

 

 

 

 

 

 

 

 

 

2017

2016

 

$000

$000

 

 

 

 

 

 

Audit of the Company and subsidiaries

234  

209

Audit related assurances services - interim review

51  

50

Total assurance services

285  

259

 

 

 

Tax compliance services

63  

22

Tax advisory services

1  

-

Total non-audit services

64  

22

 

 

 

Total audit and other services

349  

281

 

All amounts shown as auditor's remuneration in 2017 and 2016 were payable to the Group auditors, PricewaterhouseCoopers LLP and other member firms of PricewaterhouseCoopers LLP.

 

8.

Remuneration of Directors

 

 

2017

2016

 

$000

$000

 

 

 

Directors' emoluments

940 

694  

The emoluments of the individual Directors were as follows:

 

 

 

Total

emoluments

Total

emoluments

 

2017

2016

 

$000

$000

Executive Directors:

 

 

Keith Henry

432

337

Sergii Glazunov

174

121

 

 

 

Non-executive Directors:

 

 

Alastair Graham

88

74

Adrian Coates

68

61

Alexey Pertin

58

61

Yulia Kirianova

58

40

Chris Hopkinson

31

-

Bruce Burrows

19

-

Phil Frank

12

-

 

940

694

 

Sergii Glazunov was appointed as a Chief Executive Officer in August 2017, and is paid $252,000 per annum. Prior to his appointment as Chief Executive Officer, Mr Glazunov was Finance Director, and was paid $118,000 for the period from January 2017 to July 2017.

Chris Hopkinson was appointed as Non-Executive Director in September 2017, for which he was paid £45,000 per annum. In October 2017, he was appointed Non-Executive Chairman, for which he is now paid £100,000 per annum.

Bruce Burrows was appointed as Non-Executive Director in August 2017, and is paid £45,000 per annum.

Phil Frank was appointed as Non-Executive Director in October 2017, and is paid £45,000 per annum.

Keith Henry's role as Executive Chairman was made redundant in October 2017. He was paid £250,000 per annum for the period from January 2017 to October 2017, and thereafter was paid termination compensation of £123,886 and unused holiday pay of £12,500.

Adrian Coates stepped down as Non-Executive Director in August 2017. He was paid £45,000 per annum for the period from January 2017 to August 2017, and thereafter termination compensation of £22,500.

Alastair Graham stepped down as Non-Executive Director in October 2017. He was paid £45,000 per annum for the period from January 2017 to October 2017, and thereafter was paid termination compensation of £32,500.

The emoluments include base salary and fees. According to the register of Directors' interests, no rights to subscribe for shares in or debentures of the Group companies were granted to any of the Directors or their immediate families during the financial year, and there were no outstanding options to Directors.

 

9.

Staff Numbers and Costs

 

 

Number of employees

 

 

 

2017

2016

Group

 

 

Management / operational

130  

113

Administrative support

66  

58

 

196  

171

The average monthly number of employees on a full time equivalent basis during the year (including Executive Directors) was as follows:

 

The increase in the average monthly number of employees is due to an increase in employees upon the acquisition of PEP in July 2016.

The aggregate staff costs of these employees were as follows:

 

2017

2016

 

$000

$000

 

 

 

Wages and salaries

4,739  

3,435

Other pension costs

540  

499

Social security costs

61  

48

 

5,340  

3,982

 

10.

Financial Income

 

During 2017, the Group recorded interest income of $956,000 (2016: $770,000) from placement of cash on current and deposit accounts and recognised foreign exchange gains less losses of $351,000 (2016: nil).

 

11.

Financial Costs

 

 

2017

2016

 

$000

$000

 

 

 

Unwinding of discount on decommissioning provision (Note 23)

112

82

Loss on early settlement of non-interest bearing loan

103

 

112  

185

 

 

12.   Other operating gains and (losses), (net) 

 

2017

2016

 

$000

$000

 

 

 

Impairment of non-current assets (Note 16)

(180)

-

Gain on sales of current assets

117  

91

Rental income

6  

22

Agency remuneration

-

(29)

Allowance of doubtful debts

(31)

(64)

Other operating income, net

62

10

 

(26)

30

 

 

 

13.

Income tax expense

a)   Income tax expense and (benefit):

 

 

 

 

 

 

 

 

 

2017

2016

 

 

 

$000

$000

Current tax

 

 

 

 

Overseas - current year

 

 

3,037

 1,977  

Overseas - prior year

 

 

-

 (38)

 

 

 

 

 

Deferred tax (Note 25)

 

 

 

 

UK - current year

 

 

(603)

121

UK - prior year

 

 

1,516

 1,847

Overseas - current year

 

 

351

191

Income tax expense

 

 

4,301

 4,098

 

b)   Factors affecting tax charge for the year:

 

The tax assessed for the year is different from the blended rate of corporation tax in the UK of 19.25%. The expense / (income) for the year can be reconciled to the profit / (loss) as per the Income Statement as follows:

 

 

 

 

 

 

2017

2016

 

 

$000

$000

 

 

 

 

 

 

 

 

 

Profit on ordinary activities before taxation

6,589

 2,839

 

Tax charge at UK tax rate of 19.25% (2016: 20%)

1,268

 568  

 

 

 

 

 

Tax effects of:

 

 

 

Lower foreign corporate tax rates in Ukraine (18%)

(33)

 (18)

 

Disallowed expenses and non-taxable income

(2,905)

 (1,962)

 

Losses not recognised as deferred tax assets

4,455

 3,212  

 

Adjustment for reduction in UK corporate tax rate

-

 492  

 

Realisation of previously unrecognised deferred tax assets on provision for unused vacations

-

 (3)

 

Adjustments in respect of prior periods

1,516

 1,809

 

Tax expense for the year

4,301

 4,098

 

The tax effect of disallowed expenses and non-taxable income are mainly represented by foreign exchange differences of Regal Petroleum Corporation (Ukraine) Limited.

 

The tax effect losses not recognised as deferred tax assets are mainly represented by accumulated losses of Regal Petroleum Corporation (Ukraine) Limited.

14.

Profit/(Loss) for the Financial Year

The Company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented its own Income Statement in these financial statements. The Group profit for the year includes a Parent Company profit after tax of $12,239,000 for the year ended 31 December 2017. For the year ended 31 December 2016, the Group loss included a Parent Company loss after tax of $15,616,000.

15.

Earnings / (Loss) per Share

The calculation of basic profit or loss per ordinary share has been based on the profit or loss for the year and 320,637,836 (2016: 320,637,836) ordinary shares, being the weighted average number of shares in issue for the year. There are no dilutive instruments.

16.

Property, Plant and Equipment

 

 

2017

2016

 

Development and Production assets

Ukraine

Other fixed

assets

Total

Development and Production assets

Ukraine

Other fixed

assets

Total

Group

$000

$000

$000

$000

$000

$000

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

At beginning of year

100,490

902

101,392

 99,254

 719

 99,973

Additions

3,749

275

4,024

5,973

229

6,202

Additions due to acquisition of subsidiary

-

-

-

7,610

87

7,697

Change in decommissioning provision

1,119

-

1,119

359

-

359

Disposals

(48)

(13)

(61)

(153)

(17)

(170)

Exchange differences

(3,383)

(60)

(3,443)

(12,553)

(116)

(12,669)

At end of year

101,927

1,104

103,031

100,490

902

101,392

 

 

 

 

 

 

 

  Accumulated depreciation and impairment

 

 

 

 

 

At beginning of year

79,649

389

80,038

 81,114

 356

 81,470

Charge for year

10,812

119

10,931

8,620

68

8,688

Impairment charged for individual assets

180

-

180

-

-

-

Disposals

(21)

(11)

(32)

(1)

(11)

(12)

Exchange differences

(3,029)

(19)

(3,048)

(10,084)

(24)

(10,108)

At end of year

87,591

478

88,069

79,649

389

80,038

Net book value at beginning of year

20,841

513

21,354

 18,140

 363

  18,503

Net book value at end of year

14,336

626

14,962

20,841

513

21,354

 

 

 

 

 

 

According to the results of the annual count and revision carried out in 2017, individual obsolete and damaged non-current assets were impaired by the amount of $180,000 (Note 12).

In accordance with the Group's accounting policies, the oil and gas development and producing assets are tested for impairment at each balance sheet date if impairment indicators exists. As at 31 December 2017, no impairment indicators were identified.

17.

Intangible assets

 

 

2017

2016

 

Mineral reserve rights

Other intangible assets

Total

Mineral reserve rights

Other intangible assets

Total

Group

$000

$000

$000

$000

$000

$000

 

 

 

 

 

 

 

Cost

 

 

 

 

 

 

At beginning of year

6,832

144

6,976

-

94

94

Additions

-

150

150

-

71

71

Additions due to acquisition of subsidiary

-

-

-

7,479

4

7,483

Disposals

-

 (26)

 (26)

-

(9)

(9)

Exchange differences

(214)

 (11)

 (225)

(647)

(16)

(663)

At end of year

6,618

257

 6,875

6,832

144

6,976

 

 

 

 

 

 

 

  Accumulated amortisation and impairment

 

 

 

 

 

At beginning of year

393

53

446

-

31

31

Charge for year

822

104

 926

417

36

453

Disposals

-

(26)

 (26)

-

(9)

(9)

Exchange differences

(54)

(7)

 (61)

(24)

(5)

(29)

At end of year

1,161

124

 1,285

393

53

446

Net book value at beginning of year

6,439

91

6,530

-

63

63

Net book value at end of year

5,457

133

 5,590

6,439

91

6,530

 

 

 

 

 

 

 

Intangible assets consist mainly of the hydrocarbon production licence relating to the VAS gas and condensate field which is owned by PEP. The Group amortises this intangible asset using the straight-line method over the term of the licence until 2024.

 

In accordance with the Group's accounting policies, intangible assets are tested for impairment at each balance sheet date as part of the impairment testing of the Group's oil and gas development and producing assets if impairment indicators exist. As at 31 December 2017, no impairment indicators were identified.

 

18.

Investments and loans to subsidiaries

 

 

Shares in subsidiary undertakings

Loans to subsidiary undertakings

Total

 

$000

$000

$000

Company

 

 

 

At 1 January 2016

17,279

48,311

65,590

Additions including accrued interest

 -

 5,384  

 5,384  

Impairment of loans to subsidiary

-

(16,209)

(16,209)

Exchange differences

 -

 (1,817)  

(1,817)  

At 31 December 2016

17,279

  35,669  

52,948  

 

 

 

 

At 1 January 2017

17,279

  35,669  

52,948  

Additions including accrued interest

-

3,886

3,886

Repayment of interests and loans

-

(12,450)

(12,450)

Reversal of impairment of loans to subsidiary

-

6,360

6,360

Exchange differences

-

4,760

4,760

At 31 December 2017

17,279

38,225

55,504

As at 31 December 2016, the Company recognised an impairment of $16,209,000 against the carrying value of loans to reflect the significant decrease in the carrying value of the Ukrainian assets due to devaluation of Ukrainian Hryvnia. As at 31 December 2017, part of the impairment totalling $6,360,000 was reversed, which equals the amount of interest paid during the year, which had been fully provided for in previous years.

Subsidiary undertakings

At 31 December 2017, the Company's subsidiary undertakings, all of which are included in the consolidated financial statements, were:

 

Registered address

Country of

incorporation

Country of operation

Principal activity

% of shares held

 

 

 

 

 

 

Regal Petroleum Corporation Limited

26 New Street, St Helier, Jersey JE2 3RA

Jersey

Ukraine

Oil & Natural Gas Extraction

100%

Regal Petroleum 

Corporation (Ukraine) Limited

162 Shevchenko Str., Yakhnyky Village, Lokhvytsya District, Poltava Region, 37212

Ukraine

Ukraine

Service Company

100%

Refin Limited

162 Shevchenko Str., Yakhnyky Village, Lokhvytsya District, Poltava Region, 37212

Ukraine

Ukraine

Service Company

100%

LLC Prom-Enerho Produkt

3 Klemanska Str., Kiev, 02081

Ukraine

Ukraine

Oil & Natural Gas Extraction

100%

Regal Petroleum (Jersey) Limited

26 New Street, St Helier, Jersey JE2 3RA

Jersey

United Kingdom

Holding Company

100%

Regal Group Services Limited

16 Old Queen Street, London, SW1H 9HP

United Kingdom

United Kingdom

Service Company

100%

 

The Parent Company, Regal Petroleum plc, holds direct interests in 100% of the share capital of Regal Petroleum (Jersey) Limited and Regal Group Services Limited, with all other companies owned indirectly by the Parent Company. Regal Petroleum Corporation Limited is controlled through its 100% ownership by Regal Petroleum (Jersey) Limited. Regal Petroleum Corporation (Ukraine) Limited is controlled through its 100% ownership by Regal Petroleum (Jersey) Limited and Regal Group Services Limited, Refin Limited is controlled through its 100% ownership by Regal Petroleum (Jersey) Limited and Regal Petroleum Corporation (Ukraine) Limited and LLC Prom-Enerho Produkt is controlled through its 100% ownership by Regal Petroleum Corporation (Ukraine) Limited.

Regal Group Services Limited, company number 5252958, has taken advantage of the subsidiary audit exemption allowed under section 479A of the Companies Act 2006 for the year ended 31 December 2017.

Inventories

 

 

           Group

 

2017

2016

 

$000

$000

Current

 

 

Materials and spare parts

 1,178  

 1,150  

Finished goods

216  

 50  

 

 1,394  

 1,200  

Inventories consist of materials, spare parts and finished goods. Materials and spare parts are represented by spare parts that were not assigned to any new wells as at 31 December 2017, production raw materials and fuel at the storage facility. Finished goods consist of produced gas held in underground gas storage facilities and condensate and LPG held at the processing facility prior to sale.

All inventories are measured at the lower of cost or net realisable value.

According to the results of a stocktake carried out in 2017, individual obsolete and damaged current assets were impaired by the amount of $179,000 (Note 6).

20.

Trade and Other Receivables

 

 

Group

Company

 

2017

2016

2017

2016

 

$000

$000

$000

$000

 

 

 

 

 

Trade receivables

2,492

 2,203

-

 -

Prepayments and accrued income

3,633

 1,300

31

 29

VAT receivable

156

 543

41

 50

Other receivables

255

 197

 475

 460

 

6,536

 4,243

 547

 539

 

Due to the short-term nature of the current trade and other receivables, their carrying amount is assumed to be the same as their fair value. All trade receivables except provided for are considered to be of high credit quality.

 

At 31 December 2017, the Group's total trade receivables amounted to $2,492,000 and 100% were denominated in Ukrainian Hryvnia (31 December 2016: $2,203,000 and 100% were denominated in Ukrainian Hryvnia). Further description of financial receivables is disclosed in Note 30.

Prepayments and accrued income mainly consists of prepayments of $3,130,000 relating to the development of the VAS field (31 December 2016: $1,048,000 relating to the development of the MEX-GOL field).

The current VAT receivable in respect of the Group includes $156,000 (2016: $543,000) relating to capital expenditure in Ukraine which is expected to be recovered via an offset against VAT payable on future sales in that country. The Group expects to offset the total amount of VAT receivable at 31 December 2017 during the 2018 year, and therefore no VAT receivable was included within non-current trade and other receivables.

 

Movements in the impairment provision for trade and other receivables are as follows:

 

 

Group

Company

2017

2016

2017

2016

$000

$000

$000

$000

 

 

 

 

 

Provision for impairment at 1 January 2017

64

-

-

-

Provision charge for impairment during the year

31

64

-

-

Exchange differences

(5)

-

-

-

Provision for impairment at 31 December 2017

90

64

-

-

 

 

21.

Cash and Cash Equivalents and Other Short-term Investments

 

 

Group

Company

 

2017

2016

2017

2016

 

$000

$000

$000

$000

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

Cash at bank and on hand

1,736  

5,630

332  

275

Demand deposits and term deposits with maturity less than 3 months

12,513

14,336

4,079

9,370

 

14,249  

19,966

4,411  

9,645

 

 

 

 

 

Other short term investments

 

 

 

 

Term deposits with maturity more than 3 months

16,000

-

16,000

-

 

16,000

-

16,000

-

 

Cash at bank earns interest at fluctuating rates based on daily bank deposit rates. Demand deposits are made for varying periods depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates. The terms and conditions upon which the Group's demand deposits are made allow immediate access to all cash deposits, with no significant loss of interest.

The credit quality of cash and cash equivalents balances and other short-term investments may be summarised based on Moody's ratings as follows at 31 December:

 

Cash at bank and on hand

Demand deposits and term deposits with maturity less than 3 months

Total cash and cash equivalents

Term deposits with maturity more than 3 months

Total other short term investments

 

2017

2017

2017

2017

2017

 

$000

$000

$000

$000

$000

 

 

 

 

 

 

A- to A+ rated

691  

4,079

 4,770  

16,000

16,000

B- to B+ rated

-

7,241

 7,241  

-

-

Unrated

 1,045  

1,193

 2,238  

-

-

 

1,736  

12,513

 14,249  

16,000

16,000

 

 

 

Cash at bank and on hand

Demand deposits and term deposits with maturity less than 3 months

Total cash and cash equivalents

Term deposits with maturity more than 3 months

Total other short term investments

 

2016

2016

2016

2016

2016

 

$000

$000

$000

$000

$000

 

 

 

 

 

 

A- to A+ rated

605  

9,370 

9,975  

-

-

B- to B+ rated

-

-

-

-

-

Unrated

5,025  

4,966

9,991  

-

-

 

5,630

14,336   

19,966

-

-

 

22.

Trade and Other Payables

 

 

Group

Company

 

2017

2016

2017

2016

 

$000

$000

$000

$000

 

 

 

 

 

Accruals and other payables

1,369

764  

90  

149

Taxation and social security

965

651

-

 -

Trade payables

67

-

-

 -

Advances received

22

20

-

-

 

 

2,423

1,435  

90  

 149  

           

 

The carrying amounts of trade and other payables are assumed to be the same as their fair values, due to their short-term nature. A description of financial payables is disclosed in Note 30.

 

The increase of accruals is mostly represented by bonuses accrued for employees of $412,000 payable in 2018 and fees payable on a new well lease of $233,000.

23.

Provision for Decommissioning

 

 

2017

2016

 

$000

$000

Group

 

 

At beginning of year

 1,915  

 831  

Amounts provided

139    

 49  

Amounts provided due to acquisition of subsidiary

 -    

816

Unwinding of discount (Note 11)

 112  

 82  

Change in estimate

 980

 310

Exchange differences

 (119)

 (173)

At end of year

 3,027  

 1,915  

 

 

 

The provision for decommissioning is based on the net present value of the Group's estimated liability for the removal of the Ukraine production facilities and well site restoration at the end of production life.

Amounts provided during 2016 as a result of the acquisition of PEP amounted to $816,000, reflecting a provision for decommissioning of existing wells, pipeline and the gas production plant at the VAS gas and condensate field.

The change in estimate during 2017 reflects a combination of a revision in the estimated costs (increase of $559,000) and the discount rate applied (increase of $421,000). The discount rate in real terms applied on the decommissioning cost provision at 31 December 2017 was 4.7% (31 December 2016: 6.11%). The decrease of the discount rate at 31 December 2017 came as a result of a Ukrainian Eurobonds' yield decrease and a respective decrease of Country Risk Premium. These costs are expected to be incurred by 2036 on the MEX-GOL and SV gas and condensate fields (2016: by 2036), and by 2024 on the VAS gas and condensate field, although if the costs on the MEX-GOL and SV gas and condensate fields were to be incurred at the current expiry of the production licences in 2024, the provision for decommissioning at 31 December 2017 would be $2,613,000 (31 December 2016: $2,219,000).

The principal assumptions used are as follows:

 

31 December 2017

31 December 2016

 

 

 

Discount rate, %

4.70%

6.11%

Average cost of restoration per well, $000

179

71

 

The sensitivity of the restoration provision to changes in the principal assumptions is presented below:

 

31 December 2017

31 December 2016

 

$000

$000

 

 

 

Discount rate (increase)/decrease by 1%

(344)/403

(240)/284

Change in average cost of restoration increase/ (decrease) by 10%

197/(197)

134/(134)

 

 

24.

Defined benefit liability

 

 

2017

2016

 

$000

$000

Group

 

 

At the beginning of the year

 303  

164

Amounts provided due to subsidiary acquisition

 -    

26

Income statement charge included in operating profit

 (16)

42

Re-measurements

1

104

Benefits paid

 (5)

(2)

Exchange differences

 (8)

(31)

At end of year

 275  

 303  

 

The principle assumptions used in calculation of the retirement benefit obligations are as follows:

           

 

2017

 

2016

 

 

 

 

Nominal discount rate, %

9.53%

 

12.00%

Nominal salary increase, %

12.00%

 

25.00%

 

The sensitivity of the defined benefit obligation to changes in the principal assumptions is presented below:

 

2017

2016

 

$000

$000

 

 

 

Nominal discount rate increase/decrease by 1%

(35)/43

(37)/44

Nominal salary increase increase/decrease by 1%

31/(28)

12/(22)

 

 

 

25. Deferred Tax

 

 

         

 

 

 

 

 

 

 

2017

2016

 

$000

$000

Deferred tax asset recognised on tax losses - Company and Group

 

 

At beginning of year

3,717

4,470

Charged to Income Statement - current year

 (1,150)

(753)

At end of year

 2,567

3,717

 

 

 

2017

2016

 

$000

$000

Deferred tax asset recognised relating to development and production asset and provision for decommissioning - Group

 

 

At beginning of year

7,404

9,963

Credited to Income Statement - current year

1,051

250

(Charged) to Income Statement - prior year

 (1,516)

(1,847)

Effect of exchange difference

 (245)

(962)

At end of year

 6,694

7,404

 

 

 

2017

2016

 

$000

$000

Deferred tax liability recognised relating mainly to development and production asset - Group

 

 

At beginning of year

(1,187)

-

Acquisition of subsidiary

 -  

(1,499)

Charged to Income Statement - current year

 351

191

Effect of exchange difference

 16

121

At end of year

 (820)

(1,187)

       

At 31 December 2017, the Group recognised a deferred tax asset of $2,567,000 in relation to UK tax losses carried forward (31 December 2016: $3,717,000). There was a further $83 million (31 December 2016: $85 million) of unrecognised UK tax losses carried forward for which no deferred tax asset has been recognised. These losses can be carried forward indefinitely, subject to certain rules regarding capital transactions and changes in the trade of the Company. The Directors consider it appropriate to recognise deferred tax assets resulting from accumulated tax losses at 31 December 2017 to the extent that it is probable that there will be sufficient future taxable profits.

The deferred tax asset relating to the Group's provision for decommissioning at 31 December 2017 of $127,000 (31 December 2016: $68,000) was recognised on the tax effect of the temporary differences on the Group's provision for decommissioning at the MEX-GOL and SV gas and condensate fields, and its tax base. The deferred tax asset relating to the Group's development and production assets at 31 December 2017 of $6,567,000 (31 December 2016: $7,336,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the MEX-GOL and SV gas and condensate fields, and its tax base. This is deemed recoverable on the projected future profits generated by the Group's operations in Ukraine. The forecast profits are based on the current field development plan at the MEX-GOL and SV gas and condensate fields, and are determined using data from the same cash flow model which was used for impairment review of such development and production asset, as outlined in Note 16. Based on these projections, the deferred tax asset recognised will be recovered by 2022. However, should future field development not result in additional production, only $1 million of the $7 million deferred tax recognised would be recoverable based on forecast profits available from the Group's existing wells.

The deferred tax asset relating to the Group's provision for decommissioning at 31 December 2017 of $277,000 (31 December 2016: $151,000) was recognised on the tax effect of the temporary differences on the Group's provision for decommissioning at the VAS gas and condensate fields, and its tax base. The deferred tax liability relating to the Group's development and production assets at 31 December 2017 of $1,097,000 (31 December 2016: $1,338,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the VAS gas and condensate fields, and its tax base.

The impact of the UK losses surrendered to the Ukrainian operating subsidiary in relation to losses was $4,649,000 for 2015. There were no UK losses surrendered for the year ended 31 December 2016-2017.

 

Losses accumulated in a Ukrainian subsidiary service company of UAH 3,130,112,486 ($111,521,999) at 31 December 2017 and UAH 2,448,430,023 ($90,046,074) at 31 December 2016 mainly originated as foreign exchange differences on inter-company loans and for which no deferred tax asset was recognised as this subsidiary is not expected to have taxable profits to utilise these losses in the future.

 

As at 31 December 2017 and 2016, the Group has not recorded a deferred tax liability in respect of taxable temporary differences associated with investments in subsidiaries as the Group is able to control the timing of the reversal of those temporary differences and does not intend to reverse them in the foreseeable future.

UK Corporation tax change

A change to the UK corporation tax rate was announced in the Chancellor's Budget on 16 March 2016. The change announced is to reduce the main tax rate to 17% from 1 April 2020. Changes to reduce the UK corporation tax rate to 19% from 1 April 2017 and to 18% from 1 April 2020 were substantively enacted on 26 October 2015. Changes to reduce the UK corporation tax rate to 17% from 1 April 2020 were substantively enacted on 6 September 2016 and the effect of these changes are included in consolidated financial statement.

26.

Called Up Share Capital

 

 

           2017

         2016

 

Number

$000

Number

$000

Allotted, called up and fully paid

 

 

 

 

Opening balance at 1 January

320,637,836

28,115

320,637,836

28,115

Issued during the year

-

-

-

-

Closing balance at 31 December

320,637,836

28,115

320,637,836

28,115

 

 

 

 

 

There are no restrictions over ordinary shares issued.

 

27.

Other Reserves

The holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at general meeting of shareholders. Distributable reserves are limited to the balance of retained earnings. The share premium reserves are not available for distribution by way of dividends.

Other reserves, the movements in which are shown in the statements of changes in equity, comprise the following:

Capital contributions reserve

The capital contributions reserve is non-distributable and represents the value of equity invested in subsidiary entities prior to the Company listing.

Merger reserve

The merger reserve represents the difference between the nominal value of shares acquired by the Company and those issued to acquire subsidiary undertakings. This balance relates wholly to the acquisition of Regal Petroleum (Jersey) Limited and that company's acquisition of Regal Petroleum Corporation Limited during 2002.

Foreign exchange reserve

Exchange reserve movement for the year attributable to currency fluctuations. This balance predominantly represents the result of exchange differences on non-monetary assets and liabilities where the subsidiaries' functional currency is not the US Dollar.

 

28.

Operating Lease Arrangements

 

The Group as Lessee

 

Group

Company

 

2017

2016

2017

2016

 

$000

$000

$000

$000

 

 

 

 

 

Lease payments under operating leases recognised as an expense for the year

973

372

120

145

Lease payments under operating leases recognised as an expense for the year ended 31 December 2017 are mainly represented by the rentals of office properties in Ukraine and the UK of $266,000 (2016: $279,000) and the leases of land and wells of $707,000 (2016: $93,000).

The increase in lease expenses in 2017 is mainly represented by the lease of the SV-2 well in the amount of $519,000.

At the balance sheet date, the Group had outstanding off-balance sheet commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows:

 

Land and buildings

 

2017

2016

Group and Company

$000

$000

Amounts payable due:

 

 

- Within one year

103

97

 

103

97

Operating lease payments represent rentals payable by the Group for office properties, which were negotiated and fixed for an average of one year.

 

29.

Reconciliation of Operating Profit to Operating Cash Flow

 

 

 

 

 

2017

2016

 

$000

$000

Group

 

 

Operating profit

 5,444  

2,375

Depreciation, amortisation and impairment charges

 11,816  

9,141

Gain on sales of current assets, net

(117)  

(91)

Impairment of non-current assets

180

-

Impairment of inventory

179

-

Loss from write off of doubtful debts

 31  

64

Gain from write off of non-current assets

(15)  

(14)

Movement in provisions

(5)    

(20)

(Increase)/decrease in inventory

(182)  

90

Increase in receivables

(403)

(1,730)

Decrease in payables

1,054  

156

Cash generated from operations

17,982  

9,971

 

 

 

2017

2016

 

$000

$000

Company

 

 

Operating loss

 (1,772)

(18,430)

Movement in provisions (including impairment of subsidiary loans)

 -

16,209

Increase in receivables

(8)

 (13)

Decrease in payables

 (59)

 (34)

Cash used in operations

(1,839)

 (2,268)

 

30.

Financial Instruments

Capital Risk Management

The Group's objectives when managing capital are to safeguard the Group's and the Company's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

The Group defines its capital as equity. The primary source of the Group's liquidity has been cash generated from operations.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets.

The capital structure of the Group consists of equity attributable to the equity holders of the parent, comprising issued share capital, share premium, reserves and retained deficit.

There are no capital requirements imposed on the Group.

The Group's financial instruments comprise cash and cash equivalents and various items such as debtors and creditors that arise directly from its operations. The Group has bank accounts denominated in British Pounds, US Dollars, Euros, Canadian Dollars and Ukrainian Hryvnia. The Group does not have any borrowings. The main future risks arising from the Group's financial instruments are currently currency risk, interest rate risk, liquidity risk and credit risk.

 

The Group's financial assets and financial liabilities, measured at amortised cost, which approximates their fair value comprise the following:

 

 

Financial Assets

 

 

 

2017

2016

 

$000

$000

Group

 

 

Cash and cash equivalents

14,249

19,966

Other short-term investments

16,000    

-

Trade and other receivables

 2,632  

2,224

 

32,881

22,190

 

 

 

2017

2016

 

$000

$000

Company

 

 

Cash and cash equivalents

4,411

9,645

Other short-term investments

16,000

-

Trade and other receivables

464  

442

 

20,875

10,087

 

 

Financial Liabilities

 

 

 

2017

2016

 

$000

$000

Group

 

 

Trade and other payables

 67  

-

Accruals

 653  

345

 

 720  

345

 

 

 

 

 

 

2017

2016

 

$000

$000

Company

 

 

Accruals

90  

 149  

 

90

 149  

 

All assets and liabilities of the Group where fair value is disclosed are level 2 in the fair value hierarchy and valued using the current cost accounting technique.

 

Currency Risk

The functional currencies of the Group's entities are US Dollars and Ukrainian Hryvnia. The following analysis of net monetary assets and liabilities shows the Group's currency exposures. Exposures comprise the monetary assets and liabilities of the Group that are not denominated in the functional currency of the relevant entity.

 

 

2017

2016

Currency

$000

$000

 

 

 

British Pounds

373  

316

Euros

5  

4

Canadian Dollars

2  

2

US Dollars

-

-

Net monetary assets less liabilities

380  

322

Foreign Currency Sensitivity Analysis

The following table presents sensitivities of profit and loss to reasonably possible changes in exchange rates applied at the end of the reporting period, with all other variables held constant:

 

 

2017

2016

 

After tax impact on profit or loss

After tax impact on profit or loss

 

$000

$000

 

 

 

GBP strengthening by 30%

112  

95

EUR strengthening by 30%

2

1

A positive number above indicates a decrease in loss / increase in profit where the indicated currency strengthens against the functional currency. For a weakening of the indicated currency against the functional currency, there would be an equal and opposite impact on the loss / profit, and the balances above are shown negative. A negative number above indicates an increase in loss / decrease in profit where the indicated currency strengthens against the functional currency. For a weakening of the indicated currency against the functional currency, there would be an equal and opposite impact on the loss / profit, and the balances above are shown positive. The Group holds currencies to match the currencies of future capital and operational expenditure.

Interest Rate Risk Management

The Group is not exposed to interest rate risk on financial liabilities as none of the entities in the Group have any external borrowings. The Group does not use interest rate forward contracts and interest rate swap contracts as part of its strategy.

The Group is exposed to interest rate risk on financial assets as entities in the Group hold money market deposits at floating interest rates. The risk is managed by fixing interest rates for a period of time when indications exist that interest rates may move adversely.

The Group's exposure to interest rates on financial assets and financial liabilities are detailed in the liquidity risk section below.

Interest Rate Sensitivity Analysis

The sensitivity analysis below has been determined based on exposure to interest rates for non-derivative instruments at the balance sheet date. A 0.5% increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management's assessment of a reasonably possible change in interest rates.

If interest rates earned on money market deposits had been 0.5% higher / lower and all other variables were held constant, the Group's:

·      loss for the year ended 31 December 2017 would increase by $55,000 in the event of 0.5% higher interest rates and decrease by $55,000 in the event of 0.5% lower interest rates (increase of profit for the year ended 31 December 2016 by $87,000 in the event of 0.5% higher interest rates and decrease by $87,000 in the event of 0.5% lower interest rates). This is mainly attributable to the Group's exposure to interest rates on its money market deposits; and

·      other equity reserves would not be affected (2016: not affected).

Interest payable on the Group's liabilities would have an immaterial effect on the profit or loss for the year.

Liquidity Risk

The Group's objective throughout the year has been to ensure continuity of funding. Operations have primarily been financed through revenue from Ukrainian operations.

Details of the Group's cash management policy are explained in Note 21.

Liquidity risk for the Group is further detailed under the Principal Risks and Uncertainties section of this announcement.

Credit Risk

Credit risk principally arises in respect of the Group's cash balance and other short-term investments. In the UK, where $4.8 million of the overall cash and cash equivalents and $16 million of other short-term investments is held (31 December 2016: $10.0 million cash and cash equivalents and $nil other short-term investments), the Group only deposits cash surpluses with major banks of high quality credit standing (Note 21). As at 31 December 2017, the remaining balance of $9.4 million of cash and cash equivalents was held in Ukraine (31 December 2016: $10.0 million). In May 2017 Standard & Poor's affirmed Ukraine's sovereign credit rating of "B-/B", Outlook Stable. There is no international credit rating information available for the specific banks in Ukraine where the Group currently holds its cash and cash equivalents. 

 

The significant devaluation of the Ukrainian Hryvnia has resulted in the National Bank of Ukraine, among other measures, imposing comprehensive restrictions on the processing of client payments by banks, on the purchase of foreign currency on the inter-bank market and on the remittance of funds outside Ukraine.  These restrictions, and the many other economic issues in Ukraine, have put great strain on the Ukrainian banking system, with increasing risks in the capital strength, liquidity and creditworthiness of a large number of Ukrainian banks, and very high rates in the wholesale and overnight markets. In addition, there have been significant deposit outflows from the banking system and widespread restructuring of bank clients' maturing liabilities. Furthermore, as a result of recommendations from the International Monetary Fund, significant reforms to the Ukrainian banking sector are being implemented, which are intended to strengthen the capitalisation of the Ukrainian banks.

 

In light of the deterioration in the banking sector in Ukraine, the Group has taken     steps to diversify its banking arrangements between a number of banks in Ukraine. These measures are designed to spread the risks associated with each bank's creditworthiness, but the Ukrainian banking sector remains weakly capitalised and so the risks associated with the banks in Ukraine remain significant, including in relation to the banks with which the Group operates bank accounts. 

None of the Group's trade receivables are past due or impaired. 

Interest Rate Risk Profile of Financial Assets

The Group had the following cash and cash equivalent and other short-term investments balances which are included in financial assets as at 31 December 2017 with an exposure to interest rate risk:

Currency

 

Total

Floating rate financial assets

Fixed rate financial assets

Total

Floating rate financial assets

Fixed rate financial assets

 

 

2017

2017

2017

2016

2016

2016

 

 

$000

$000

$000

$000

$000

$000

 

 

 

 

 

 

 

 

Canadian Dollars

 

 2  

 2  

 -  

2

2

-

Euros

 

 5  

 5  

 -  

 4  

 4  

 -  

British Pounds

 

 536  

 536  

 -  

 471  

 471  

 -  

Ukrainian Hryvnia

 

 9,479  

 -  

 9,479  

 9,992  

 -  

 9,992  

US Dollars

 

 20,227  

 4,227  

16,000  

 9,497  

 9,497  

 -  

 

 

 30,249  

 4,770  

25,479  

 19,966  

 9,974  

 9,992  

Cash deposits included in the above balances comprise short-term deposits.

Interest Rate Risk Profile of Financial Liabilities

The Group had no interest bearing financial liabilities at the year-end (2016: $nil).

 

Maturity of Financial Liabilities

The maturity profile of financial liabilities, on an undiscounted basis, is as follows:

 

 

2017

 

 

$000

Group

 

 

In one year or less

 

720  

345

 

 

720

345

 

 

 

 

 

 

 

2017

 

 

$000

$000

Company

 

 

In one year or less

 

90  

149

 

 

90

149

 

 

 

Borrowing Facilities

The Group did not have any borrowing facilities available to it at the year end (2016: $nil).

Fair Value of Financial Assets and Liabilities

The fair value of all financial instruments is not materially different from the book value.

31.

Contingencies and Commitments

 

Amounts contracted in relation to the Group's 2017 investment programme in the MEX-GOL, SV and VAS gas and condensate fields in Ukraine, but not provided for in the financial statements at 31 December 2017, were $3,151,000 (2016: $1,212,000).

 

During 2010 - 2017, the Group has been in dispute with the Ukrainian tax authorities in respect of VAT receivables on imported leased equipment, with a disputed liability of up to UAH8,487,000 ($302,000) inclusive of penalties and other associated costs. There is a level of ambiguity in the interpretation of the relevant tax legislation, and the position adopted by the Group has been challenged by the Ukrainian tax authorities, which has led to legal proceedings to resolve the issue. The Group had been successful in three court cases in respect of this dispute in courts of different levels. On 20 September 2016, a hearing was held in the Supreme Court of Ukraine of an appeal of the Ukrainian tax authorities against the decision of the Higher Administrative Court of Ukraine, in which the appeal of the Ukrainian tax authorities was upheld. As a result of this appeal decision, all decisions of the lower courts were cancelled, and the case was remitted to the first instance court for a new trial. On 1 December 2016 and 7 March 2017 respectively, the Group received positive decisions in the first and second instance courts, but further legal proceedings may arise. Since as at the end of the year, the Group had been successful in previous court cases in respect of this dispute in courts of different levels, the date of the next legal proceedings has not been set and as management believes that adequate defences exist to the claim, no liability has been recognised in these consolidated financial statements for the year ended 31 December 2017 (31 December 2016: nil).

 

32.

Related Party Disclosures

 

Key management personnel of the Group are considered to comprise only the Directors. Details of Directors' remuneration are disclosed in Note 8.

 

During the year, Group companies entered into the following transactions with related parties who are not members of the Group:

 

 

2017

2016

 

$000

$000

 

 

 

Sale of goods / services

 25,030

 65

Purchase of goods / services

 369

 230

Amounts owed by related parties

 2,509

-

Amounts owed to related parties

 30  

 20  

 

All related party transactions were with subsidiaries of the ultimate Parent Company, and primarily relate to the sale of gas (see Note 5 for more details), the rental of office facilities and a vehicle and the sale of equipment. The amounts outstanding were unsecured and will be settled in cash.

 

As of 31 December 2017, the Company's immediate parent company was Energees Management Limited, which is 100% owned by Pelidona Services Limited, which is 100% owned by Lovitia Investments Ltd, which is 100% owned by Mr V Novinskiy. Accordingly, the Company was ultimately controlled by Mr V Novinskiy.

The Group operates bank accounts in Ukraine with a related party bank, Unex Bank, which is ultimately controlled by Mr V Novinskiy.  There were the following transactions and balances with Unex Bank during the year:

 

 

 

2017

2016

 

$000

$000

 

 

 

Interest income

-

 365  

Bank charges

56

 1  

Closing cash balance

 6  

-

 

 

 

At the date of this announcement, none of the Company's controlling parties prepares consolidated financial statements available for public use.

 

33.

Post Balance Sheet Events

 

On 14 March 2018, the Group announced the spud of the VAS-10 well at the VAS field. The well has a target depth of 3,450 metres, with drilling operations scheduled to be completed in June 2018 and, subject to successful testing, production hook-up during the third quarter of 2018.


This information is provided by RNS
The company news service from the London Stock Exchange
 
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