REG-Cadogan Petroleum: Annual Financial Report <Origin Href="QuoteRef">CADP.L</Origin> - Part 1
30/04/2015 18:40
CADOGAN PETROLEUM PLC
ANNUAL FINANCIAL REPORT
2014
Key developments during 2014:
Management continued the optimisation of administrative and operational costs
in 2014. Significant cost cutting initiatives have been implemented resulting
in a decrease of administrative expenses from $8.9 million in 2013 to $7.0
million in 2014. Management have taken the decision to continue with the
structure optimisation throughout 2015.
In 2014, the Group started trading energy products in Ukraine, such as natural
gas and diesel. Trading operations include the importing of gas from European
countries, local purchasing and sales operations with physical delivery of
natural gas and diesel.
A new exploration well at Debeslavetskoe area was drilled.
The Group has recorded significant impairment charges in 2014, including $40.2
million relating to the Group's share of $57.4 million impairment of the assets
of the Pokrovskoe joint venture and $5.1 million of Oil and Gas Assets relating to
the Pirkovskoe and Debeslavetskoe fields.
Net cash and cash equivalents at year-end total $48.9 million (2013: $56.5
million) excluding $0.5 million (2013: $0.2 million) of Cadogan's share of cash
and cash equivalents in joint ventures. Cash and cash equivalents at 30 April
2015 is $49.7 million, including $20 million of restricted cash.
Group Overview
The Group's assets are located in two of the three proven hydrocarbon basins in
Ukraine, the Dnieper-Donets basin and the Carpathian basin.
Zagoryanska field
The Zagoryanska licence covers an area of 49.6 square kilometres and is located
in the Dnieper-Donets basin. As at year-end, five wells have been drilled in
this field with gas being discovered in the Upper and Lower Visean and
Turnaisian reservoirs, at depths varying from 4,500 to 5,500 metres.
The licence expired on 24 April 2014 and, thus, the abandonment plans for the
wells have been prepared. At the same time Cadogan, via its subsidiary,
requested the 20 years production licence and the extension of the
stratigraphic exploration intervals to the Upper Carboniferous and Permian. ENI
has no interest to enter into the production phase with Cadogan. All assets on
the Group's Balance Sheet related to this licence were impaired in full in
2013.
Pokrovskoe field
The Pokrovskoe licence area covers 49.5 square kilometres and is located in the
Dnieper-Donets basin. It has prospective resources in the Permian, Upper and
Lower Carboniferous. Facilities in the Pokrovskoe area are approximately 10
kilometres away from the UkrTransGas system. The work programme obligation for
the licence has been fulfilled.
Following the 3D seismic stratigraphic interpretation of the block, new
prospects have been identified in the Upper Carboniferous and Permian
formations. Given this, a licence extension for those stratigraphic intervals
has been requested and obtained in 2014. The Group has assessed the Pokrovskoe
licence for impairment and recognised $40.2 million of impairment as at 31
December 2014.
Pirkovskoe field
Pirkovskoe is adjacent to the Group's Zagoryanska licence. The exploration and
appraisal licence covers 71.6 square kilometres and had 2.26 million barrels of
oil equivalent (mmboe) of "2P"reserves. The proved reserves in Pirk 1, tested
by a third party company, produced an inconclusive result due to damaged
formation and therefore, those reserves have been reclassified from reserves to
contingent resources together with corresponding assets. Prospective net
interest recoverable resources of 63.85 mmboe have been identified in the
Permian horizons, based on in-house assessment, following the 3D interpretation
of the area. In 2014 Cadogan received the stratigraphic exploration extension
to the Upper Carboniferous and Permian horizons.
Cadogan owns the Krasnozayarska gas treatment plant on the Pirkovska licence
area which is connected to the UkrTransGas system. The plant is presently
providing services to the third party operator and is included in the
reportable service segment.
Borynya and Bitlyanska fields
The Borynya and Bitlyanska exploration and development licence covers an area
of 390 square kilometres, tectonically belonging to the Krosno zone of the
folded Carpathians and includes the Bitlya, Borynya and Vovchenska areas. The
Borynya and Bitlyanska fields hold 276.8 mmboe of recoverable resources
including condensate (in house evaluation). No reserves and resources have been
associated to the depleted Vovchenska field.
Borynya 3 well was re-entered and tested Krosno 1 interval with promising
results in 2013. The well is monitored, routinely bled-off, fluid samples
extracted, measured and kept on hold for an eventual fracturing job and
possible re-entry to the deeper intervals.
Minor fields
Cadogan owns exploration, development and production licences either directly
or through subsidiaries and joint ventures in several minor fields, of which
two are currently in commercial production (Debeslavetska and Cheremkhivska),
one (Monastyretska)is in pilot commercial development and the other
(Slobodo-Rungurska) is idle.
In addition to the above licences the Group has a 15 per cent interest in
Westgasinvest LLC ("WGI"), which holds the Reklynetska, Zhuzhelianska,
Cheremkhivsko-Strupkivska, Debeslavetska Exploration, Debeslavetska Production,
Baulinska, Filimonivska, Kurinna, Sandugeyivska and Yakovlivska licences for
unconventional activities.
Strategic Report
The Strategic Report has been prepared in accordance with Section 414A of the
Companies Act 2006 (the "Act"). Its purpose is to inform members of the Company
and help them assess how the Directors have performed their legal duty under
Section 172 of the Act to promote the success of the Company.
Our consistent business model
We aim to increase value through:
Our unique expertise and knowledge of both the Ukrainian market and best
Western practices;
Having a very disciplined investment process with capital used as underwriting
capital to farm-out;
Focusing our stand-alone drilling or workover activities to lower risk
initiatives with limited capital commitment until we obtain success in
generating new or increased production; and
Obtaining a proper return on cash to achieve material impact on the Company's
profitability or cash flow focusing on yield-generating fixed income
investments, within the Company's or its management's areas of expertise.
Principal activity and status of the Company
The Company is registered as a public limited company (registration number
05718406) in England and Wales. Its principal activity is oil and gas
exploration, development and production.
The Company's shares have a standard listing on the Official List of the UK
Listing Authority and are traded on the main market of the London Stock
Exchange.
Chairman's Statement
In 2014 the Company pursued its strategy of furthering the evaluation,
de-risking and promotion of its assets in the east and the west of the country.
The unstable local situation was not supportive of pursuing business
development initiatives. Instead, decisive actions to optimise our activities
and reduce our cost base were implemented to strengthen the Company's position
to maintain its financial resilience pending results from operations. The
activities as a Service Contractor and Gas Trading were further developed with
a very positive impact on improving the Company's financial standing.
Revenue this year has increased from $3.8 million in 2013 to $32.6 million in
2014 primarily thanks to the trading operations, which represent $29.4 million
of total revenues; revenues from production and service business have slightly
declined to $2.4 million (2013: $2.5 million) and $0.8 million (2013: $1.2
million) respectively.
The cash position at 31 December 2014 remained strong at $48.9 million,
including restricted cash of $20 million.
Despite the new revenue generation activities and cost optimisation during the
year, the Group has recorded a significant loss in 2014 due to the impairment
of its oil and gas assets and investments in joint ventures. Loss before tax
was $59.1 million (2013: $14.4 million) reflecting $54.7 million (2013: $6.6 million)
share of losses of joint ventures and $5.1 million (2013: $nil) impairment of oil
and gas assets. Share of losses in joint ventures mainly include the impairment
of oil and gas assets in joint ventures and losses arising on translation of
Balance Sheet items from UAH to USD, being the presentation currency of the Group.
Operations
As anticipated, the principal focus for 2014 was to reduce the risk of present
and anticipated operations while maximising the existing production potential.
Our exploration department identified new drillable prospects in Pokrovskoe and
Pirkovskoe, following the continuous refinement process of the 3D seismic
interpretation. The shallow well Debeslavetska 15 was drilled with no
commercial result. Due to surface logistic constraints the location had to be
moved few hundred metres apart and did not hit the planned target as a result.
The area's exploration potential is confirmed. The work-over activity in
Pirkovskoe 1 well run by a local contractor continues. It confirms the
hydrocarbon potential but so far has not achieved commercial results. Local
contractors confirmed their interest in the other suspended deep wells in the
eastern licences. The total production has marginally increased in the year.
Gas production in Debeslavetska and Cheremkhivska was kept constant while in
Monastyretska the Blazh 1 well production increased to 45 bopd.
The re-evaluation of the Group's assets continues and our outlook remains
positive.
The Board
The Company is committed to acting professionally, fairly and with integrity in
all of its dealings and relationships wherever it operates, and to implementing
and enforcing effective systems to counter bribery and corruption in all its
forms. All policies included into the "Working with Integrity" documents have
been disseminated to the staff and are available to view on the Company's
website. Our adherence to the principles contained in these policy documents
remains unshakeable and have been the focus in our way of conduct.
Recent Political Developments
Strategy and Prospects
The political situation in Ukraine continues to be unstable, as the fast
deterioration that followed the events at the end of 2013 made the year 2014
the most challenging and unpredictable in the country's recent history. Despite
our optimism on the continuation of the progress experienced in the last
months, we remain cautious on the challenges ahead and how much they will
continue to create a remaining level of unpredictability in the political and
economical environment. This challenge has obviously been aggravated by the
recent oil price collapse which, even though favourable for the country's
balance is unfavourable for the Exploration and Production ("E&P") industry.
The strategy reassessment by the International Oil Companies ("IOC")
present in Ukraine will also keep affecting our Ukrainian operations. The local
market instability gave to us the opportunity to quickly implement
adequate measures to increase its competitive value and readdressed its focus
to the local operators and possible partners and aggressively develop the gas
and oil trading activity, which represents a valuable contribution to the
financial integrity of the Company.
The Board continues to develop further relationships and opportunities
overseas, our established presence in Ukraine, our skilled staff both in Kiev
and also in the east and west of the country, and our adherence to the highest
standards of corporate governance gives us the opportunity to act as a beacon
for the western industry and industry standards. We believe that the Company is
uniquely placed to create value from any emerging opportunity.
We continuously work to make 2015 an exciting and successful year for both the
Company and the people of Ukraine.
Annual General Meeting
I look forward to meeting shareholders at the Company's Annual General Meeting
to be held on 25 June 2015 at Chandos House, 2 Queen Anne Street, London W1G
9LQ.
Zev Furst
Non-executive Chairman
30 April 2015
Chief Executive's Review
In spite of an extremely challenging political and economic situation in the
Ukraine, with significant instability brought by fighting between Government
forces and rebels most of the year in the Eastern part of the country, as well
as continued disappointments in the exploration and appraisal activities,
Cadogan reached a major milestone in 2014 which culminates years of focus on
protecting shareholder value in the face of adverse events: For the last months
of 2014 as well as the beginning of 2015 the Company has operated at above cash
flow breakeven, primarily as a result of its successful launch of a trading
activity. Given the non-core nature of the trading business and its critical
reliance on key executives in the management, it should not be seen as a
strategic development yet but instead as a significant tactical achievement to
support the Company's turnaround at a difficult time, by turning geopolitical
adversity into an opportunity to monetise market dislocations.
Continued discipline in cost management has also played a key part in bringing
Cadogan to a situation where it has the financial flexibility to manage its
options from a position of strength, with general and administrative ("G&A")
expenses at an annual run rate below $4.5 million for 2015 after another round
of material costs reduction at the beginning of the year.
Core Operations
The Company's announced strategy to protect cash flows by rightsizing its
operation and limiting upstream activity to the strict minimum necessary in
order to facilitate farm-outs has been pursued throughout the year, without yet
delivering significant progress. The unstable environment has made it difficult
to progress on potential partnerships as the majority of operators, foreign or
domestic, have remained on the side-lines for most of the year. The drop in
energy prices at the end of 2014 has further depressed the attractiveness of
our assets in the short term. However we believe that Ukraine is about to turn
the corner in 2015 and we are confident that the partnership opportunities will
keep on expanding.
Our limited well operations have yielded mixed results. The disappointing
drilling result of Debeslavetska 15, the first well of our program targeting
shallow horizons, does not invalidate the program in our opinion. Other
activities include a successful increase in the oil production of the Blaz-1
well as a result of our activities on the well, the stabilisation of the gas
production in the Debeslavetska and Cheremkhivska licences, as well as
continued work-over activities in Pirkoskoe via a farm-out to a local operator,
although with no result so far.
The most promising achievement in the geological and geophysical ("G&G") area
has been the identification of new sizeable drillable prospects in Pokrovskoe
and Pirkovskoe from the extensive re-interpretation of the 3D seismic data.
These targets present attractive economics that we believe enhance the value of
our overall asset portfolio.
Non-Core Operations
As anticipated in last year's CEO statement, non-core operations are now
playing a key role in strengthening the Company's financial position. Making
Cadogan able to withstand even a temporary failure of exploration and appraisal
activities has been a key focus since I took over as CEO in 2011, this ability
being a critical advantage for an intrinsically high-risk Junior E&P company.
In fact, despite more than $70 million of unproductive capital expenditures and
more than $50 million of cumulative G&A expenses over the period, the Company
has a material increase in its cash position since I took over. Initial
achievements in asset recovery and monetisation of stale assets on the balance
sheet are progressively giving way to revenue generation from new businesses.
So far these businesses have grown under the constraint that no material
investment would be made to support them given their non-core nature. As the
Company redesigns its E&P strategy, a decision will have to be made whether to
make the investments necessary to support the growth of these activities or
whether they should be discontinued or sold.
The service activity has made a positive contribution, albeit smaller than in
2013 and below expectations for 2014, mainly as a result of the postponement of
work programs caused by the political instability. Foreign IOCs, which remain
our core customer base, have been particularly defensive with operations being
brought to a standstill. We remain optimistic on the next year's activity as
the country normalises.
Investments in fixed income have generated a little short of $1 million despite
being conservatively kept to within 10% of the Company's cash position. This
comes in addition to the benefit of our strategy of shifting the majority of
our cash to US$ which allowed Cadogan to benefit from the current US$ rise
against most currencies.
The trading activity, mostly in gas and to a limited extend in diesel, has been
able to capture opportunities arising from dislocated gas and currency markets
as well as the unpredictable political and regulatory environment and the
complex access to transport and storage infrastructure. It now represents the
large majority of our turnover and gross profit, and has been developed within
a disciplined risk management environment under my direct oversight. The
challenge of a volatile and depreciating Hryvna, approximately 48% down against
the US$ during 2014 and 65% down as at 1 April 2015 with limited convertibility
throughout most of 2014, as well as an unpredictable series of short-term gas
supply deals between Russia and Ukraine have played to our sophistication and
conservative management of risk.
Outlook
Cadogan remains better positioned than ever to exploit Ukraine's rebound as,
helped by its upcoming IMF-led debt restructuring and the stabilisation of the
East Ukraine region, the country restarts its progress towards increased
transparency and lower energy dependency of imported gas. In support of our
ability to exploit local opportunities the Company has continued the execution
of its strategy of "Ukrainisation" of its staff by attracting, promoting and
developing outstanding local human resources. I am proud to announce the
appointment of Marta Halabala as a Company Secretary this year, in the
continuation of the appointment of Volodymyr Pogrebniak as Finance Director
in 2011.
The Company will also continue to assess opportunities outside of Ukraine in
order to balance its portfolio, keeping a very strict risk/return hurdle.
I am proud of how Cadogan's employees have risen to the challenge of the last
years, and am excited in our ability to leverage the financial flexibility we
created for ourselves to exploit the opportunities that we have ahead of us.
Bertrand des Pallieres
Chief Executive Officer
30 April 2015
Operations Review
In 2014 the Group held working interests in nine conventional (2013: nine) gas,
condensate and oil exploration and production licences in the east and west of
Ukraine. All these assets are operated by the Group and are located in either
the Carpathian basin or the Dnieper-Donets basin, in close proximity to the
Ukrainian gas distribution infrastructures.
Summary of the Group's licences (as at 31 December 2014)
Working
interest (%) Licence Expiry Licence type(1)
Major licences
40.0 Zagoryanska April 2014(4) E&D
70.0 Pokrovskoe August 2016(5) E&D
100.0 Pirkovskoe October 2015(5) E&D
99.8 Bitlyanska December 2014(3) E&D
Minor licences
99.2 Debeslavetska(2) November 2026 Production
99.2 Debeslavetska(2) September 2016 E&D
53.4 Cheremkhivska(2) May 2018 Production
100.0 Slobodo-Rungurska April 2016 E&D
99.2 Monastyretska November 2014(3) E&D
E&D = Exploration and Development.
Debeslavetska and Cheremkhivska licences are held by WGI, in which the Group
has a 15% interest. The Group has 99.2% and 53.4% of economic benefit in
conventional activities in Debeslavetska and Cheremkhivska licences
respectively through Joint Activity Agreements ("JAA").
Licence extension process is ongoing and is expected to be completed in Q2
2015.
Obtaining 20 years production licence is in process.
Extension to the upper Permian interval was obtained in 2014.
In addition to the above licences the Group has a 15 per cent interest in
Westgasinvest LLC ("WGI"), which holds the Reklynetska, Zhuzhelianska,
Cheremkhivsko-Strupkivska, Debeslavetska Exploration, Debeslavetska Production,
Baulinska, Filimonivska, Kurinna, Sandugeyivska and Yakovlivska licences for
unconventional activities.
Recent developments of political and economic turmoil in Ukraine have had a low
impact on the Group licences as the Group has assets in three regions:
Western Ukraine (Lviv and Ivano-Frankivsk regions), which is not an area of conflict;;
Kiev - the capital, where there was a low level of instability throughout 2014 year; and
Central Ukraine, represented by the Poltava region, which is not under the
anti-terrorist operation.
Zagoryanska licence
The Zagoryanska licence covered 49.6 square kilometres and expired on 24 April
2014. The Group held a 40 per cent working interest in the Zagoryanska licence
area. The wells abandonment plans have been prepared in agreement with the
joint venture partner, ENI. At the same time Cadogan, via its subsidiary LLC
Zagvydobuvannya, requested the 20 years production licences and the extension
of the stratigraphic exploration intervals to the Upper Carboniferous and
Permian for the same area. ENI has no interest to enter into the production
phase with Cadogan.
To value and price all the possible remaining resources in the block, a
stratigraphic re-interpretation of the 3D seismic data is currently ongoing.
Pokrovskoe licence
The Group holds a 70 per cent working interest in the Pokrovskoe licence. The
Pokrovskoe licence area covers 49.5 square kilometres. It has prospective
resources in the Permian, Upper and Lower Carboniferous.
On the basis of the previous results and the clear indication of the presence
of a positive hydrocarbons generation and migration system, it was decided to
continue the seismic and geological investigation of the area. The thorough 3D
seismic re-interpretation has been successfully concluded for the relative
shallow horizons. One drillable prospect in the Permian formation (at about
2,200m-2400m depth) and one in the Upper Carboniferous (at about 2,200m depth)
have been identified with two other leads in the Upper Carboniferous under
evaluation. The extension to the new stratigraphic exploration intervals in the
Upper Carboniferous and Permian have been requested and granted to Cadogan
along with the change of the previous work programme.
Pirkovska licence
The Group holds a 100 per cent working interest in the Pirkovska licence which
had 2.26 mmboe of Proved and Probable Reserves of gas and condensate (2013:
2.26 mmboe). The proved reserves in Pirk 1, tested by a third party company,
produced an inconclusive result due to damaged formation; therefore those
reserves have been reclassified from reserves to contingent resources.
This exploration and appraisal licence covers 71.6 square kilometres and
expires in October 2015; the necessary steps to renew the licence have already
started.
On the basis of the previous results and the clear indication of the presence
of a positive hydrocarbons' generation and migration system, it was decided to
continue the seismic and geological investigation of the area. The thorough 3D
seismic re-interpretation has been successfully concluded for the relatively
shallow horizons. The total prospective net interest recoverable resources
after the 3D stratigraphic interpretation and attribute analysis performed
in-house on the Permian reservoir are estimated in 383.11 Bcf (63.85 mmboe).
The extension to the new stratigraphic exploration intervals in the Upper
Carboniferous and Permian have been requested and granted to Cadogan in 2014
along with the change of the previous work programme.
The Group owns the Krasnozayarska gas treatment plant, located in the Pirkovska
licence area, which is connected to the UkrTransGas system and is continuing
the service contract with a nearby local operator.
Bitlyanska licence area
The Bitlyanska exploration and development licence covers an area of 390 square
kilometres with the Group's interest at 99.8 per cent. There are three
hydrocarbon discoveries in this licence area, namely Bitlyanska, Borynya and
Vovchenska. The Borynya and Bitlyanska fields hold 276.89 mmboe (2013: 336.5
mmboe) of contingent recoverable resources including condensates. After initial
in-house evaluation, no reserves or resources have been allocated to the
depleted Vovchenska field.
Borynya 3 well, after having been re-entered and tested in 2013, was kept on
hold, monitored and routinely bled-off for an eventual fracturing job and way
forward evaluation, which also considered the deeper horizons.
The planned vintage seismic lines in the Vovchenska area were purchased and
interpreted; a new additional seismic programme has been prepared to define
possible prospective exploration areas to investigate; the survey was
postponed. The work programme and obligations for this licence have been
changed and we are awaiting the licence renewal.
Minor fields
The Group has a number of minor licence areas located in Western Ukraine. These
include the following:
Debeslavetska Production licence area
A production licence containing 2P reserves 0.766 mmboe of Proved Reserves
(2013: 0.79 mmboe). The field is currently producing 64.8 boepd (2013: 65.73
boepd). The new compressor unit and the dehydration facilities for production
optimisation were successfully performed and contributed to the energy and
emissions saving as per the programme.
Debeslavetska Exploration licence area
In the exploration licence, surrounding the Debeslavetska Production area, an
Amplitude Versus Offset ("AVO") and Inversion analysis was successfully carried
out with existing seismic data. In order to confirm and evaluate those findings
about 100 km of 2D seismic lines were recorded. The seismic acquisition started
on December 2013 and ended in April 2014. Following the processing and
interpretation of the old and new data, three prospects have been identified.
The location of the best promising prospect was selected on the basis of i)
nearby facilities, ii) multiple targets and iii) non-depleted areas, also by
using the InSar data. The expected well drilling spud-in was in July 2014. It
was delayed to December 2014 due to longer than forecasted procedures for land
allotment and complications with the well location, meaning that it had to be
offset from the selected coordinates. The exploration drilling result has been
negative; the Cretaceous formations did not provide the expected sealing
(missing shale on top of Cretaceous limestone) for the main producing levels
that were in truncation and over-lapping the Cretaceous formation.
Cheremkhivska Production licence area
A production licence containing 0.19 mmboe of 2P reserves (2013: 0.203 mmboe).
This licence is currently producing 17.4 boepd (2013: 20.73 boepd). Potential
gas production from shallow intervals seems to be promising for this licence.
Preliminary amplitude versus offset ("AVO") studies on the only available line
were positive but the planned 30 km of seismic lines to be acquired in 2014
were postponed.
Slobodo-Rungurska licence area
An exploration and development licence with no booked reserves (2013: nil). The
current evaluation of the block has allowed us to identify prospective gross
oil resources in shallow reservoir levels (Old Sloboda reservoirs) of 5.75
mmboe and 27.9 mmboe in the relatively deeper reservoir levels (1600m).
Additional petrophysical and reservoir studies are currently underway.
Monastyretska licence area
A new exploration and development licence for this block has been requested to
the competent authority and we are awaiting the renewal. No booked reserves/
resources have been considered in 2014 (2013: nil). To enhance the Blazhiv 1
well production, a chemical treatment was implemented bringing about positive
results with production increasing from 25 boepd to 45 boepd. Currently the
production is on hold as we await the formal licence renewal approval.
Financial review
Overview
In 2014 in addition to performing the E&P work programme the Group focused on
managing the cost base by implementing a number of cost optimisation
initiatives as well as starting an energy trading business.
Trading operations include the importing of gas from Slovakia and local
purchasing and sales operations with physical delivery of natural gas and
diesel. Also, the Group continued to operate its service business which
includes drilling, construction and other services provided to E&P companies.
Revenue has increased from $3.8 million in 2013 to $32.6 million in 2014 due to
gas and diesel trading operations, which represent $29.4 million of total
revenues; revenues from production have slightly declined to $2.4 million
(2013: $2.5 million).
Revenue from the service business, which includes drilling and construction
services, decreased to $0.8 million (2013: $1.2 million) mainly due to the
postponement of service contracts by clients as a result of the situation in
Ukraine.
The cash position of $48.9 million at 31 December 2014, including restricted
cash of $20 million, has decreased from $56.5 million at 31 December 2013.
Income statement
Loss before tax was $59.1 million (2013: $14.4 million), of which $54.7 million
(2013: $6.6 million) is a share of losses of joint ventures and $5.1 million
(2013: $nil) is an impairment of oil and gas assets. Share of losses in Joint
Ventures mainly include the impairment of oil and gas assets in joint ventures
and losses arising on translation of Balance Sheet items from UAH to USD, being
the presentation currency of the Group.
Revenues of $32.6 million (2013: $3.8 million) are comprised of $29.4 million
in gas and diesel sales of trading reportable segment, $2.4 million gas sales
of E&P reportable segment and $0.8 million sales of service reportable segment.
Cost of sales represents $26.8 million of purchases of gas for trading
operating segment, $2.9 million of production royalties and taxes, depreciation
and depletion of producing wells and direct staff costs for exploration and
development and service segment. Gross profit has increased to $2.8 million
(2013: $0.8 million).
Other administrative expenses of $7.0 million (2013: $8.9 million) comprise
other staff costs, professional fees, Directors' remuneration and depreciation
charges on non-producing property, plant and equipment.
Impairment of oil and gas assets of $5.1million (2013: $nil) represents
impairment charge for Debeslavetske and Cheremkhivske assets as a result of an
impairment assessment of its recoverability as at 31 December 2014 and certain
obsolete property, plant and equipment ("PP&E") assets at Pirkovska licence.
Reversal of impairment of other assets of $0.9 million (2013: $0.2 million)
comprised of $0.3 million provision for inventory (2013: release $0.1 million)
and $1.1 million release in relation to an impairment of Ukrainian VAT (2013:
$0.1 million).
Share of losses in joint ventures of $54.7 million (2013: $6.6 million)
comprised of loss of: i) $40.2 million in relation to Pokrovska licence, of
which $44.2 million is non-cash impairment offset by $4.0 deferred tax liability,
$12.7 million (2013: $nil) of translation loss which arose mainly on
translation of non-current assets of Gazvydobuvannya LLC (Pokrovskoe licence)
from UAH to USD, being the presentation currency of the Group $0.2million profit
from operations (mainly as the result of VAT recovery which were previously
impaired), ii) $1.3 million in relation to Zagoryanska licence; and iii) loss
of $0.7 million from operations of Westgasinvest LLC.
Net foreign exchange gain of $3.0 million (2013: loss of $0.3 million) mainly
relates to the revaluation of the USD-denominated monetary assets of the
Group's UK entities which have GBP as a functional currency.
Cash flow statement
The Consolidated Cash Flow Statement on page 65 shows operating cash outflow
before movements in working capital of $3.9 million (2013: $8.7 million). Cash
outflows from movements in working capital in 2014 of $16.1 million mostly
represent an increase in trading receivables and prepayments of $13.6 million
(note 21), increase in trading inventories of $8.4 million (note 20), offset by
increase in prepayments received and trading payables of $2.8 million (note 25)
in relation to trading reportable segment and $3.1 million of change in working
capital for other reportable segments. In addition, the Group has incurred
capital expenditure of $0.5 million (2013: $3.0 million) on intangible
Exploration and Evaluation ("E&E") assets and $1.6 million (2013: $0.8 million)
on PP&E. In 2014 the Group invested $3.0 million (2013: $4.7 million) into
joint ventures, mainly to repay the operating service charges to Cadogan for
prior years.
In 2014 the Group financed its trading operations with short-term borrowings
(note 24) and as at 31 December 2014 the outstanding amount was $17.3 million
(2013: $nil), which decreased to $7.8 million as at 30 April 2015. Borrowings
are represented by credit line drawn in UAH at Ukrainian bank, 100% subsidiary
of UK bank. Credit line is secured by $20 million of cash balance placed at UK
bank.
Balance sheet
The cash position of $48.9 million at 31 December 2014, including restricted
cash of $20 million, has decreased from $56.5 million at 31 December 2013.
Intangible E&E assets of $18.3 million (2013: $6.0 million) represent the
carrying value of the Group's investment in E&E assets as at 31 December 2014.
The PP&E balance of $3.8 million at 31 December 2014 (2013: $43.9 million)
reflects the cost of developing fields with commercial reserves and bringing
them into production. Due to unsuccessful testing of Pirk-1 well, $14.6 million
of PP&E assets have been reclassified to E&E so as to use them in further
exploration and evaluation works. Management reassessed classification of
capital expenditures following the impairment test and the production and
development assets. As a result, $14.6 million were reclassified to E&E as the
Group expects to continue exploration at Pirkovskoe field and targets other
geological horizons. Cadogan plans to use the existing assets at Pirkovskoe
field in their exploration activities. As a result of the impairment assessment
of PP&E assets as at 31 December 2014, the Group has recognised $5.1 million
impairment including $2.9 million at Pirkovskoe field and $2.2 million of
Debeslavetska and Cheremkhivska.
Investments in joint ventures of $14.3 million (2013: $65.9 million) mainly
represent the carrying value of the Group's investments into Pokrovska licences
and Westgasinvest LLC (costs related to Zagoryanska licence have been fully
impaired as well as impairment on Pokrovska licence assets (note 19).
Trade and other receivables of $17.9 million (2013: $6.9 million) include
$13.6 million trading prepayments and receivables, $1.9 million receivable from joint
ventures in respect of management charges (2013: $4.1 million) and VAT
recoverable of $1.8 million (2013: $0.3 million) in respect to VAT arising on
gas trading purchases.
In October 2014 the Group started to use the short-term facility in Ukraine for
its trading operations. The $17.3 million outstanding as of 31 December 2014
($7.8 million as at 30 April 2015) represents UAH 278.9 million borrowed in UAH
to purchase natural gas and diesel (UAH 174.7 million as at 30 April 2015).
The $5.1 million of trade and other payables as of 31 December 2014 (2013: $3.4
million) represent $2.5 million (2013: $nil) worth of advances received from
clients for future supplies of natural gas and $2.3 million (2013: $3.4 million)
of other creditors and accruals.
Key performance indicators
The Group monitors its performance in implementing its strategy with reference
to clear targets set out through four key financial and one key non-financial
performance indicators ("KPIs"):
to increase oil, gas and condensate production measured on number of barrels of
oil equivalent produced per day ("boepd");
to increase the Group's oil and gas reserves by de-risking possible resources
and contingent reserves into 2P reserves. This is measured in million barrels
of oil equivalent ("mmboe");
to decrease administrative expenses;
to increase the Group's basic earnings per share; and
to maintain no lost time incidents.
The Group's performance in 2014 against these targets is set out in the table
below, together with the prior year performance data. No changes have been made
to the source of data or calculation used in the year.
Unit 2014(3) 2013
Financial KPIs
Average production (working interest basis) (1) boepd 99 88
2P reserves (2) mmboe 0.6 2.6
Administrative expenses $ million 7.0 8.9
Basic loss per share (4) cents (25.6) (6.4)
Non-financial KPIs
Lost time incidents (5) incidents 0 0
Average production is calculated as the average daily production during the
year.
Quantities of 2P reserves as at 31 December 2013 and 2014 are based on Gaffney,
Cline & Associates' ("GCA") independent reserves report on 2P reserves as at
31 December 2009, dated 16 March 2010, as adjusted for the actual production
during 2013 and actual production and reclassification to contingent resources.
One of the KPIs in previous years was realised price per 1,000 cubic metres.
The Group decided to remove it from the list as the price is outside of
management's control. Realised price is often market-driven but capped by
Ukrainian authorities at a certain maximum level subject to periodic revisions.
Management intention is always to negotiate the selling price which will be as
close as possible to the upper limit approved by government.
Basic loss per Ordinary share is calculated by dividing the net loss for the
year attributable to equity holders of the parent company by the weighted
average number of Ordinary shares during the year.
Lost time incidents relate to injuries where an employee/contractor is injured
and has time off work.
The Group will continue exploration efforts in 2015, particularly at the Pirkovskaya
and Pokrovskaya fields. If successful, management plan to reassess reserves
based using independent petroleum engineer.
In 2014 the Group has made impairment assessment at all material gas and oil
fields. As a result Cadogan recognised a number of impairment losses directly
and through their share in losses of joint ventures. Management believes that
impairment losses are non-recurring and the Group will maintain healthy
financial performance in 2015.
Related party transactions
Related party transactions are set out in note 30 to the Consolidated Financial
Statements.
Treasury
The Group continually monitors its exposure to currency risk. It maintains a
portfolio of cash and cash equivalent balances mainly in US dollars ("USD")
held primarily in the UK. Production revenues from the sale of hydrocarbons are
received in the local currency in Ukraine however the hydrocarbon prices are
linked to the USD denominated gas and oil prices. To date, funds from such
revenues have been held in Ukraine for further use in operations rather than
being remitted to the UK.
Risks and uncertainties
There are a number of potential risks and uncertainties, which could have a
material impact on the Group's long-term performance and could cause the actual
results to differ materially from expected and historical results. Executive
management review the potential risks and then classify them as having a high
impact, above $5 million, medium impact, above $1 million but below $5 million,
and low impact, below $1 million. They also assess the likelihood of these
risks occurring. Risk mitigation factors are reviewed and documented based on
the level and likelihood of occurrence. The Audit Committee reviews the risk
register and monitors the implementation of improved risk mitigation procedures
via Executive management.
The Group has analysed the following categories as key risks:
Risk Mitigation
Operational risks
Health, Safety and Environment
("HSE")
The oil and gas industry by its The Group maintains a HSE system in place
nature conducts activities which can and demands that management, staff and
be seriously impacted by health, contractors adhere to it. The system
safety and environmental incidents. ensures that the Group meets Ukraine
Serious incidents can have not only legislative standards in full and achieves
a financial impact but can also international standards to the maximum
damage the Group's reputation and extent possible.
the opportunity to undertake further
projects.
Drilling operations
The technical difficulty of drilling The incorporation of detailed sub-surface
wells in the Group's locations and analysis into a robustly engineered well
equipment limitations can result in design and work programme, with
the unsuccessful completion of the appropriate procurement procedures and
well. competent on site management, aims to
minimise risk.
Production and maintenance
Some of the Group's facilities have All plants are operated at standards above
been inherited and, although fully the Ukraine minimum legal requirements.
checked, were not installed under Operative staff are experienced and
our supervision and there is a risk receive supplemental training to ensure
of plant failure. that facilities are operated and
maintained at a high standard.
Service providers are rigorously reviewed
There is a risk that production or at the tender stage and are monitored
transportation facilities can fail during the contract period.
due to poor performance of the
Group's suppliers and control of
some facilities being with other
governmental or commercial
organisations.
Work over and abandonment
Certain wells owned by the Group Work programmes are designed to assess the
were drilled by the State and other status of the wells and any work that is
private companies and will be worked not safe or is not technically feasible
over. There is a risk that Cadogan's will be abandoned. Qualified professionals
activities fail because of problems will be used to design a step-by-step
inherited with these sites. approach to re-entering old wells.
Any well stock that is not All sites that are abandoned will be
considered satisfactory for purpose restored and re-cultivated to meet or
or poses an environmental hazard exceed standards required by the relevant
will need to be abandoned. environmental control authorities and in
compliance with recognised international
standards.
Sub-surface risks
The success of the business relies All externally provided and historic data
on accurate and detailed analysis of is rigorously examined and discarded when
the sub-surface. This can be appropriate. New data acquisition is
impacted by poor quality data, considered and appropriate programmes
either historic or recently implemented, but historic data can be
gathered, and limited coverage. reviewed and reprocessed to improve the
Certain information provided by overall knowledge base.
external sources may not be
accurate.
Some local contractors may not Detailed supervision of local contractors
acquire data accurately, and there by Cadogan management is followed. Plans
is frequently limited choice of are discussed well in advance with both
locally available equipment or local and international contractors in an
contractors of a desirable standard. effort to ensure that appropriate
equipment is available.
Data can be misinterpreted leading All analytical outcomes are challenged
to the construction of inaccurate internally and peer reviewed.
models and subsequent plans. Interpretations are carried out on modern
geological software. A staff training
programme has been put in place.
Area available for drilling If not covered by 3D seismic or fitting
operations is limited by logistics, over 2D seismic lines, the eventual well's
infrastructures and moratorium. This dislocation will not be accepted.
increases the risk for setting
optimum well coordinates.
Financial risks
The Group may not be successful in The Group performs a review of its oil and
achieving commercial production from gas assets for impairment on annual basis.
an asset and consequently the The Group considers on an annual basis
carrying values of the Group's oil whether to commission a Competent Person's
and gas assets may not be recovered Report ("CPR") from an independent
through future revenues. reservoir engineer. The CPR provides an
estimate of the Group's reserves and
resources by field/licence area. As no new
production has been achieved during 2014,
management has decided not to commission a
new CPR during 2014.
As part of the annual budget approval
process, the Board considers and evaluates
projects for the forthcoming year and
considers the appropriate level of risk.
The Board has approved a work programme
for 2015. Further attempts to bring in
partners and mitigate the Group's risk
exposure are underway.
There is a risk that insufficient The Group manages the risk by maintaining
funds are available to meet adequate cash reserves and by closely
development obligations to monitoring forecasted and actual cash
commercialise the Group's major flow, as well as short and longer funding licences. requirements. Management reviews these
forecasts regularly and updates are made
where applicable and submitted to the
Board for consideration.
The farm-out campaign to maintain current
cash balances and mitigate risk will
continue through 2015.
The Group could be impacted by These risks are mitigated by employing
failing to meet regulatory reporting suitably qualified professionals who,
requirements in the UK, and working with advisers when needed, are
statutory tax and filing monitoring regulatory reporting
requirements in both Ukraine and the requirements and ensuring that timely
UK. submissions are made.
The Group operates primarily in Clear authority levels and robust approval
Ukraine, an emerging market, where processes are in place, with stringent
certain inappropriate business controls over cash management and the
practices may from time to time tendering and procurement processes.
occur. This includes bribery, theft Adequate office and site protection is in
of Group property and fraud, all of place to protect assets. Anti-bribery
which can lead to financial loss. policies are also in place.
The Group is at risk from changes in Revenues in Ukraine are received in UAH
the economic environment both in and expenditure is made in UAH, however
Ukraine and globally, which can the prices for hydrocarbons are implicitly
cause foreign exchange movements, linked to USD prices.
changes in the rate of inflation and
interest rates and lead to credit
risk in relation to the Group's key
counterparties. The Group continues to hold most of its
cash reserves in the UK mostly in USD.
Cash reserves are placed with leading
financial institutions which are approved
by the Audit Committee. The Group is
predominantly a USD denominated business.
Foreign exchange risk is considered a
normal and acceptable business exposure
and the Group does not hedge against this
risk for its E&P operations.
For trading operations, the Group matches
the revenues and the source of financing.
Refer to note 28 to the Consolidated
Financial Statements for detail on
financial risks.
The Group is at risk that the We monitor the credit quality of our
counterparty will default on its counterparties and seek to reduce the risk
contractual obligations resulting in of customer non-performance by limiting
a financial loss to the Group. the title transfer to product until the
payment is received, prepaying only to
known credible suppliers
The Group is at risk that The Group mostly enters into back-to-back
fluctuations in gas prices will have transactions where the price is known at
a negative result for the trading the time of committing to purchase and
operations resulting in a financial sell the product. Sometimes the Group
loss to the Group. takes exposure to open inventory positions
when justified by the market conditions in
Ukraine.
Corporate risks
Should the Group fail to comply with The Group designs a work programme and
licence obligations, there is a risk budget to ensure that all licence
that its entitlement to the licence obligations are met. The Group engages
will be lost. proactively with government to
re-negotiate terms and ensure that they
are not onerous.
Ukraine is an emerging market and as The Group minimises this risk by
such the Group is exposed to greater maintaining the funds in international
regulatory, economic and political banks outside Ukraine and by continuously
risks, more than other maintaining a working dialogue with the
jurisdictions. Emerging economies regulatory authorities.
are generally subject to a volatile
political environment which could
adversely impact Cadogan's ability
to operate in the market.
The Group's success depends upon The Group periodically reviews the
skilled management as well as compensation and contract terms of its
technical and administrative staff. staff.
The loss of service of
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