REG-Cadogan Petroleum: Annual Financial Report <Origin Href="QuoteRef">CADP.L</Origin> - Part 1
26/04/2016 14:10
CADOGAN PETROLEUM PLC
ANNUAL FINANCIAL REPORT
2015
OVERVIEW
Summary of 2015
Key highlights of 2015:
* LTI/TRI1: 0/0 (2014: 0/0)
* Greenhouse gases emissions: 1,295 tonnes CO2 equiv. (2014: 1,620)
* Production: 39,680 boe (2014: 39,834 boe)
* Realised price at year end: 35.7$/boe (2014: 60.5$/boe)
* Gross revenues2: $75.4 million (2014: $32.6 million)
* Gross profit: $5.9 million (2014 : $2.8 million)
* Loss for the year: $23.3 million (2014: $59.3 million)
* Cash and cash equivalent at 31 December 2015 increased by $0.5 million to
$49.43million (2014: decreased by $7.6 million to $48.9 million)
* Net cash, which included cash and cash equivalents less short-term
borrowings, increased to $36.5 million at 31 December 2015 compared to
$31.6 million at 31 December 2014.
1LTI Lost Time Incidents; TRI: Total Recordable Incidents
2Gross revenues of $75.4 million (2014: $32.6 million) included $73.3 million
(2014: $29.4 million) from trading of natural gas, $1.8 million (2014: $2.4
million) from exploration and production and $0.4 million (2014: $0.8 million)
from service
3Excluding $0.9 million (2014: $0.5 million) of Cadogan's share of cash and
cash equivalents in joint ventures
Group Overview
The Group has continued to maintain exploration and production assets in
Ukraine, to conduct trading operations, which include the importing of gas from
Slovakia and Poland and local purchasing and sales with physical delivery of
natural gas, and to operate a service business which includes work-over, civil
works services, assistance in obtaining legal permits and other services
provided to E&P companies.
The Group's assets are located in both of the proven hydrocarbon basins in
on-shore Ukraine, the Dnieper-Donets basin and the Carpathian basin.
The Group commissioned to an independent third party the assessment of the
Reserves and Resources as of 31 December 2015. The evaluation was done
according to the SPE "Guidelines for Application of the Petroleum Resources
Management System" (PRMS).
The summary of the Group's Reserves and Resources in the nine licences is
reported in the table in page 16.
Borynya and Bitlyanska fields
The 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 Borynya, Bitlyanska and Vovchenska structures. It holds
Probable and Possible reserves; as well as Contingent and Prospective
resources.
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.
Monastyretska field
The Monastyretska licence covers an area of 25.9 square kilometres, located in
the Carpathian fold belt (Skuba unit) in Western Ukraine. It includes three
structures, one of which is regularly producing oil. It holds Proved, Probable
and Possible reserves; as well as Contingent and Prospective resources.
Pokrovskoe field
The Pokrovska licence area covers 49.5 square kilometres and is located in the
Dnieper-Donets basin. It holds contingent resources in the Visean and
prospective resources in the Permian. Facilities in the Pokrovska area are
approximately 10 kilometres away from the UkrTransGas system. The licence will
expire on 10 August 2016. The work programme obligation for the licence has
been fulfilled.
Zagoryanska field
The Zagoryanska licence expired on 24 April 2014, and covered an area of 49.6
square kilometres located in the Dnieper-Donets basin, with gas being
discovered in the Visean and Turnesian reservoirs.
Cadogan alone, as Eni had no interest, has requested via one of its
subsidiaries a 20 years production licence covering an area of 34 square
kilometres as ENI had no interest to enter into the production phase. All
assets on the Group's Balance Sheet related to this licence were impaired in
full in 2013.
Pirkovskoe field
The Pirkovska licence expired on 19 October 2015, and covered an area of 71.6
square kilometres, adjacent to the Group's Zagoryanska licence.
It holds contingent resources in the Turnesian and in the Visean; and
prospective resources in the Permian.
Cadogan owns the Krasnozayarska gas treatment plant in the Pirkovska licence
area which is connected to the UkrTransGas system. The plant is presently under
conservation. Cadogan has requested a 20 years production licence. All E&E
assets on the Group's Balance Sheet related to this licence have been impaired
in full.
Minor fields
Cadogan owns three exploration, development and production licences either
directly or through subsidiaries and joint ventures in other minor fields, of
which two are currently in commercial production (Debeslavetska and
Cheremkhivska) and one (Slobodo-Rungurska) has no activity ongoing.
Shale gas
In addition to the above licences the Group has a 15% 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 business model
We aim to increase value through:
* Sourcing additional E&P assets to diversify Cadogan's portfolio both
geographically and operationally; we will pursue exploration and/or near
term development assets with significant upside as well as producing assets
to cover G&A and provide free cash flow for exploration activities
* Pursuing farm-out to contain investments in Ukraine
* Maintaining sufficient capital base, complementingE&P cash flow
withrevenues from gas trading and oil services businesses
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 and gas trading.
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
Though the events of the Euromaidan Revolution are now more than two years
behind us, the full extent of the political and economic repercussions have yet
to be felt. Ukraine has still not entered a period of real stability and its
political leadership is struggling to utilize the broad mandate it was granted
to implement the types of changes and reforms most of the citizens expect.
Within the context of corruption-related scandals and a high-profile cabinet
member resignation, implementation of the reform program put forth by the
European Community, the United States and financial institutions such as the
International Monetary Fund and the European Bank for Reconstruction and
Development has been delayed. These delays, coupled with the unresolved
tensions with Russia surrounding the annexation of Crimea and ongoing
confrontations in eastern Ukraine, have only served to add to the short-term
uncertainty plaguing the country.
This unstable environment has led to a further devaluation of the local
currency. In the oil and gas sector, delays in the renewal and approval process
for licences as well as the extension of the "temporary" punitive 70% subsoil
use tax regime for the remainder of the year, have created additional
challenges. For Cadogan, this has translated into a severe cash drain from the
E&P gross revenues derived from gas; a reduction of the USD value of its
non-current assets accounted in local currency; and the impairment of the
Pirkovska licence's book value as a result of delayed responses to the
company's application for converting this exploration licence into a 20-year
production licence.
On a more positive note, some reforms have in fact been initiated and the
unwinding of the post-Soviet regulatory system is well on its way. The country
has started the adoption of the Third European Energy Package; while its
implementation is currently in progress, some delays might be expected due to
ongoing discussions on the unbundling model for Naftogaz. Significant progress
has also been made in diversifying the supply of imported gas thanks to the
implementation of reverse flow from Europe.
Despite the challenging business climate, Cadogan has performed well.
Production has been maintained at similar levels to the previous year, CO2
emissions have been reduced, traded volumes of gas have been significantly
increased and efforts to streamline and contain costs have turned the company
into a cash neutral position, or actually, slightly cash positive. This is a
remarkable achievement given the combination of adverse factors -- including
the reduction of the oil and gas prices -- which have created havoc for many of
Cadogan's peers.
Notwithstanding the positive results achieved by Cadogan and its Management,
there remains a compelling need to diversify its portfolio geographically. This
drive to diversify is one of the cornerstones of the new strategy that was
approved by the Board in the second half of the year. Management is pursuing
opportunities to diversify while building a more robust production base. With
its solid balance sheet, low cost operations, proven resilience to a low price
environment and the international experience of its leadership team, Cadogan is
poised to leverage its strengths and take advantage of the very real
opportunities that lie ahead.
Zev Furst
Non-executive Chairman
25 April 2016
Chief Executive's Review
2015 has been another challenging year for the oil and gas industry and for
Ukraine. Cadogan has weathered the storm by continuing with its cost reduction
initiatives, by applying strict discipline to all spending and by reducing the
working capital. The result is that cash has been preserved and is available
to be used to capture the opportunities that will materialize in a distressed
market.
Key developments during the year:
* G&A have been further reduced by decreasing the head count, replacing
expatriates with Ukrainian nationals and moving Kiev office to smaller,
cheaper premises still located in the city centre. Current G&A on
annualized basis are 13% lower than what they were in 2014
* Work-over on gas wells and production optimization on the oil well allowed
Cadogan to meet the production budget notwithstanding a 4 month delay in
the renewal of the Monastyretska licence
* Applications have been filed to convert Pirkovska from exploration licence
into 20 year production licence
* Volumes of traded gas have more than tripled over the previous year as a
result of broadening both the supplier and the client base
* Gross profits, before G&A and taxes, have more than doubled, from $2.8
million in 2014 to $5.9 million this year
* Cash and cash equivalents at year-end total $49.4 million (2014: $48.9
million), excluding $0.9 million (2014: $0.5 million) of Cadogan's share of
cash and cash equivalents in joint ventures.. Net cash, which included cash
and cash equivalents mostly denominated in USD net of short-term borrowings
denominated in UAH, increased to $36.5.
Throughout 2015 Cadogan has protected shareholder value, increased its
resilience to a low price environment and has made a step towards becoming more
integrated along the business chain by further developing the gas trading
business. Its low cost basis combined with the revenues generated by the
trading and service businesses have helped preserve the cash that will be used
to fuel a strategy of growth and geographic diversification.
I consider this as a positive result given the unfavourable scenario in which
Cadogan has operated.
2015 has not been a turning point for both Ukraine and the oil industry. Whilst
military confrontation in the East of the country has receded, the country has
remained embroiled in a political and economic crisis. Besides, the subsoil
use tax has remained enforced at a punitive 70% rate throughout the year
despite the anticipation that it would be revoked. Oil and gas prices have
continued to fall and this has posed an unprecedented level of strain on all
key players, sometime challenging the very business model on which the oil and
industry has prospered over the last decade.
In such an extremely challenging context, Cadogan has focused on protecting
shareholders' value by pursing cash neutrality acting on three levers: cost
efficient production of its proved reserves, relentless pursuit of all possible
cost savings initiatives combined with strict discipline in spending, and gas
trading.
All these initiatives successfully brought Cadogan to be slightly cash
generative; they have also made Cadogan stronger than most of its peers and
well equipped to pursue its strategy of growth and asset diversification in the
current challenging context.
Core Operations
Core operations have concentrated on safely and cost efficiently managing the
producing assets while taking all necessary actions to preserve the portfolio
of licences. Applications for the conversion of Zagoryanska and Pirkovska
exploration licences into 20-year production licences have been filed and the
outcome of the applications is expected in the first half of 2016. As the award
of Pirkovska licence was not received at the time of issuing this report,
respective E&E assets were impaired.
A revision of the reserves and resources was requested to a third party to
update previous evaluation in light of the recent developments, including the
internal prospect generation work of the previous year; its results are
encouraging as they have identified volumes of 3P reserves and 2C resources
larger than anticipated.
Work-overs on Debeslavetska and production optimization on Monastyretska fields
have allowed Cadogan to meet the production budget notwithstanding a four
months' delay in the award of the licence. This remarkable achievement has been
somewhat down-played by the subsoil use tax, which has been maintained at 70%
throughout the year; higher taxes and lower prices have prevented Cadogan from
meeting its production revenue budget.
Opportunities to grow and diversify the portfolio have been pursued in the
second part of the year, but none of them has been finalized primarily because
of a value gap between market and sellers` expectations; additionally, many
potentially interesting opportunities are with companies with heavy debt
burden.
Last, but not the least, all activities have been conducted with the utmost
attention to safety and environmental protection. No accidents or spills have
occurred during 2015 and LTI stands at a remarkable zero since July 23rd 2011
(over 2.2 million worked hours). All Cadogan staff and management deserve to be
commended for this outstanding achievement.
Non-E&P Operations
The service business has been penalized by the oil and gas industry crisis in
Ukraine, with companies cancelling or deferring the execution of works. While
this has negatively impacted 2015 revenues, there are reasonable expectations
that some of the work deferred will be executed in 2016.
In 2015 trading business segment generated $73.3 million of revenues and $4.6
million of gross profit. Trading margins have remained healthy through the
year, but are expected to be eroded by new legislation, which requires sellers
to store 50% of the gas sold to final consumers and to provide financial
guarantee for 20% of the traded volumes, as well as by increased competition,
with more traders interested in entering the Ukrainian market. We intend to
balance this erosion of margins by broadening our client base and leveraging on
the competitive advantage of being one of the first companies to have used the
reverse flow opportunity to import gas in Ukraine.
Outlook
The management team is of the firm opinion that Cadogan is well positioned to
succeed in the current challenging context as it has:
* a strong balance sheet, with nearly $50 million of cash, including $20
million of restricted cashpledged for credit line used for trading1;
* a low cost operation model which can be replicated both in and outside of
Ukraine;
* non E&P activities whose net revenues nearly balance the G&A, thus allowing
Cadogan to manage this transitional period without burning cash.
1 $12.9 million of the credit line was outstanding as at 31 December 2015
(2014: $17.3 million)
While Ukraine remains the country where Cadogan is rooted, a geographic
diversification of the portfolio will be an objective while pursuing value
growth. In support of this strategy Cadogan has entered into Technical Service
Agreements with reputable consultancy firms to strengthen and broaden its pool
of competences.
Guido Michelotti
Chief Executive Officer
Operations Review
25 April 2016 In 2015 the Group held working interests in seven conventional
(2014: 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. The Zagoryanska
and Pirkovska licences expired and the process to have the licences re-awarded
is ongoing.
Summary of the Group's licences (as at 31 December 2015)
Working Licence Expiry Licence type(1)
interest (%)
Major
licences
40.0 Zagoryanska Expired(3) (4) E&D
70.0 Pokrovska August 2016 E&D
100.0 Pirkovska Expired(3) E&D
99.8 Bitlyanska December 2019 E&D
Minor
licences
99.2 Debeslavetska(2) November 2026 Production
99.2 Debeslavetska(2) September 2016 E&D
54.2 Cheremkhivska(2) May 2018 Production
100.0 Slobodo-Rungurska April 2016(5) E&D
99.2 Monastyretska November 2019 E&D
1. E&D = Exploration and Development.
2. 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").
3. The application for the award of a 20 year production licence has been
filed. Though the Group has fulfilled the legal obligations and
requirements and applied for the licence before the expiration date delays
are expected because of recently introduced changes to the awarding
process.
4. The application for the award of a 20 year production licence has been
filed by a wholly owned Cadogan subsidiary as eni was not interested
5. The licence expired on 11 April 2016
In addition to the above licences the Group has a 15 per cent interest in
Westgasinvest LLC ("WGI"), which holds the Reklynetska, Zhuzhelianska,
Cheremkhivska, Debeslavetska Exploration, Debeslavetska Production, Baulinska,
Filimonivska, Kurinna, Sandugeyivska and Yakovlivska licences for
unconventional activities.
Late in the year Cadogan engaged Brend Vik, one of the major Ukrainian G&G
consultants, to update its reserves and resources in lights of the developments
occurred since the last evaluation of 2009. Brend Vik has recently completed
its evaluation and the results are presented on page 17.
In general, 3P reserves and 2C resources increased if compared to in-house
evaluation, while the perspective resources decreased. In particular, the
Permian and Upper Carboniferous intervals in Pokrovskoe and Pirkovskoe, well
identifiable by seismic analysis, were not considered adequately correlated
with existing log and wells' data; supplementary data collection is required
from future wells' re-entry and drilling in order to move these potential
volumes back to the prospective status.
Bitlyanska licence area
The Group holds a 99.8 per cent working interest in the Bitlyanska exploration
and development licence. The Bitlyanska licence covers an area of 390 square
kilometres. Bitlyanska, Borynya and Vovchenska are three hydrocarbon
discoveries in this licence area.
Borynya 3 well, during monitoring and routine bleed-off always flows methane
shows.
Monastyretska licence area
The Group holds a 99.2 per cent working interest in Monastyretska licence. A
new exploration and development period was granted up to November 2019. The
licence has been regularly producing oil at a rate of 48boepd. Evaluation of a
re-entry and stimulation of two existing wells is ongoing.
Pokrovska licence
The Group holds a 70 per cent working interest in the Pokrovska exploration and
development licence. The Pokrovska licence area covers 49.5 square kilometres.
The licence will expire on 10 August 2016 and Cadogan is preparing to
eventually file an application for the award of a new licence.
Zagoryanska licence (expired)
The Zagoryanska licence expired in April 2014. Cadogan, via its subsidiary LLC
Zagvydobuvannya, requested the awarding of a 20 years' production licence,
which licence area covers 34 square kilometres. The Ministry of Ecology issued
the approval and the process was at the level of the regional authorities,
before the final approval. The process has been delayed because of the recent
introduction of a new law which re-allocates the authority amongst the involved
state entities. The plug and abandonment of wells has started and the activity
is being conducted by one of Cadogan's subsidiaries (Astro-Service LLC) and
jointly funded by the former licencees (eni and Cadogan) in proportion to their
participating interests.
Pirkovska licence (expired)
The Pirkovska licence expired on 19 October 2015 and Cadogan has requested the
award of a 20 years' production licence. The licence covers an area of 88
square kilometres. Likewise for Zagoryanska licence, the approval process has
been delayed by changes introduced by a new law.
Minor fields
These fields are contained in licences located in Western Ukraine, and include
the following:
* Debeslavetska Production licence area
The field is currently producing 60 boepd (2014: 65 boepd). A work-over
activity is ongoing to mitigate the production decline.
* Debeslavetska Exploration licence area
In the exploration licence, surrounding the Debeslavetska Production area,
two prospects have been identified. The licence holds prospective resources
and will expire on 7 September 2016. Cadogan is evaluating whether to apply
for a new E&P period after the expiry of the current licence terms.
* Cheremkhivska Production licence area
This licence is currently producing 15.7 boepd (2014: 17.4 boepd).
* Slobodo-Rungurska exploration and development licence area
The licence expired on 11 April 2016. Cadogan is evaluating whether to apply
for a new E&P period after the expiry of the current licence terms.
FINANCIAL REVIEW
Overview
Together with completion of E&P programme, in 2015 the Group continued to
approach cash neutrality through a number of cost reduction initiatives, and
developing service activities and energy trading businesses.
Revenue has increased from $32.6 million in 2014 to $75.4 million in 2015 due
to gas trading operations, which represent $73.3 million (2014: $29.4 million)
of total revenues; revenues from production have slightly declined to $1.8
million (2014: $2.4 million) owing to lower realized price.
Revenue from the service business, which includes drilling and civil
works services, decreased to $0.4 million (2014: $0.8 million) mainly due to
the postponement of service contracts by clients as a result of the situation
in Ukraine.
The cash position of $49.4 million at 31 December 2015, including restricted
cash of $20 million used as a pledge for credit line, has increased from $48.9
million at 31 December 2014. Net cash, which included cash and cash equivalents
mostly denominated in USD net of short-term borrowings denominated in UAH,
increased to $36.5 million at 31 December 2015 compared to $31.6 million at 31
December 2014.
The cash position of $49.4 million at 31 December 2015, including restricted
cash of $20 million, has increased from $48.9 million at 31 December 2014.
Income statement
Loss before tax was $22.2 million (2014: $59.1 million), of which $10.5 million
(2014: $5.1 million) is impairment of oil and gas assets and $12.8 million
(2014: $54.7 million) is a share of losses of joint ventures. 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
the presentation currency of the Group USD.
Revenues of $75.4 million (2014: $32.6 million) are comprised of $73.3 million
(2014: 29.4 million) in gas and diesel sales of trading reportable segment,
$1.8 million (2014: $2.4 million) gas sales of E&P reportable segment and $0.4
million (2014: $0.8 million) sales of service reportable segment. Cost of sales
represents $67.4 million (2014: $26.8 million) of purchases of gas for trading
operating segment, $2.2 million (2014: $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 $5.9 million (2014: $2.8 million).
* Administrative expenses of $6.1 million (2014: $7.0 million) comprise staff
costs, professional fees, Directors' remuneration and depreciation charges
on non-producing property, plant and equipment.
* Reversal of impairment of other assets of $1.3 million (2014: $0.9 million)
comprised of $0.1 million provision for inventory (2014: $0.3 million) and
$1.4 million release in relation to an impairment of Ukrainian VAT (2014:
$1.1 million).
* Share of losses in joint ventures of $12.8 million (2014: $54.7 million)
comprised of loss of: i) $8.8 million in relation to non-cash impairment of
non-current assets of Pokrovska licence, $2.6 million (2014: $12.7 million)
of translation loss which arose mainly on translation of non-current assets
of Gazvydobuvannya LLC (Pokrovska licence) from UAH to USD, being the
presentation currency of the Group $0.9 million loss from operations, ii)
$0.2 million in relation to Zagoryanska licence; and iii) loss of $0.3
million (2014: $0.7 million) from operations of Westgasinvest LLC.
* Net foreign exchange gain of $2.5 million (2014: $3.0 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.
* Finance costs of $2.6 million (2014: $0.5 million) represent $2.4 million
(2014: $0.4 million) of interest on credit line used for trading and $0.2
million (2014: $nil) of interest on tax provision.
Cash flow statement
The Consolidated Cash Flow Statement on page 55 shows operating cash outflow
before movements in working capital of $1.1 million (2014: $3.9 million). In
addition, the Group has incurred capital expenditure of $0.3 million (2014:
$0.5 million) on intangible Exploration and Evaluation ("E&E") assets and $0.2
million (2014: $1.6 million) on Property, Plant and Equipment ("PP&E"). In 2015
the Group contributed $0.7 million (2014: $3.0 million) into joint ventures, to
repay its current liabilities.
In 2015 the Group financed its trading operations with short-term borrowings
(note 24) with proceeds of $13.2 million and repayments of $12.2 million (2014:
proceeds of $17.3 million)
Balance sheet
The cash position of $49.4 million at 31 December 2015, including restricted
cash of $20 million used as a pledge for credit line, has increased from $48.9
million at 31 December 2014. Net cash, which included cash and cash equivalents
mostly denominated in USD net of short-term borrowings denominated in UAH,
increased to $36.5 million at 31 December 2015 compared to $31.6 million at 31
December 2014.
Intangible E&E assets of $2.7 million (2014: $18.3 million) represent the
carrying value of the Group's investment in E&E assets as at 31 December 2015.
The PP&E balance was $1.7 million at 31 December 2015 (2014: $3.8 million).
Investments in joint ventures of $2.2 million (2014: $14.3 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 (note 19).
Trade and other receivables of $14.4 million (2014: $17.9 million) include
$11.7 million (2014: $13.6 million) trading prepayments and receivables, $1.8
million receivable from joint ventures in respect of management charges (2014:
$1.9 million).
The $12.9 million outstanding short-term borrowings as of 31 December 2015
(2014: $17.3 million) represents UAH 313.2 million borrowed in UAH to purchase
natural gas and diesel (2014: UAH 278.9 million). 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. Borrowings
are taken in UAH in order to preserve the USD amount of own cash and mitigate a
risk related to currency fluctuations in Ukraine. A short-term credit line
provide an easy access to quick financings to support the Group's trading
operations.
The $3.7 million of trade and other payables as of 31 December 2015 (2014: $5.1
million) represent $0.9 million (2014: $0.3 million) worth of trading payables
for supplies of natural gas, $0.9 million of VAT payable for supplies of
natural gas, and $0.2 million (2014: $0.2 million) of interest accrued and $1.7
million (2014: $2.1 million) of other creditors and accruals.
Provisions include $0.7 million of long term provision for decommission costs
(2014: $0.1 million of long-term provision and $0.6 million of current
provision) and $1.5 million provision for corporate tax for the dispute on the
treatment of taxable income and expenses.
Key performance indicators
The Group monitors its performance with reference to clear targets set out
through three 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 decrease administrative expenses;
* to increase the Group's basic earnings per share; and
* to maintain no lost time incidents.
The Group's performance in 2015 against these targets is set out in the table
below, together with the prior year performance data.
Unit 2015 2014
Financial KPIs
Average production (working interest boepd 109 109
basis) (1)
Administrative expenses $ million 6.1 7.0
Basic loss per share (2) cents (10.1) (25.6)
Non-financial KPIs
Lost time incidents (3) incidents 0 0
1. Average production is calculated as the average daily production during the
year
2. 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
3. Lost time incidents in million working hours relate to injuries where an
employee/contractor is injured and has time off work (IOGP classification)
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
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 nature The Group maintains a HSE management
conducts activities which can cause system in place and demands that
health, safety and environmental management, staff and contractors adhere
incidents. Serious incidents can have to it. The system ensures that the Group
not only a financial impact but can meets Ukraine legislative standards in
also damage the Group's reputation and full and achieves international standards
the opportunity to undertake further to the maximum extent possible.
projects.
Drilling and Work-Over operations
The technical difficulty of drilling The incorporation of detailed sub-surface
or re-entering wells in the Group's analysis into a robustly engineered well
locations and equipment limitations design and work programme, with
can result in the unsuccessful appropriate procurement procedures and
completion of the well. competent on site management, aims to
minimise risk.
Production and maintenance
There is a risk that production or All plants are operated and maintained at
transportation facilities can fail due standards above the Ukraine minimum legal
to non-adequate maintenance, control requirements. Operative staff is
or poor performance of the Group's experienced and receive supplemental
suppliers. training to ensure that facilities are
properly operated and maintained. When not
in use the facilities are properly kept
under conservation and routine monitoring.
Service providers are rigorously reviewed
at the tender stage and are monitored
during the contract period.
Sub-surface risks
The success of the business relies on All externally provided and historic data
accurate and detailed analysis of the is rigorously examined and discarded when
sub-surface. This can be impacted by appropriate. New data acquisition is
poor quality data, either historic or considered and appropriate programmes
recently gathered, and limited implemented, but historic data can be
coverage. Certain information provided reviewed and reprocessed to improve the
by external sources may not be overall knowledge base. Agreements with
accurate. qualified local and international G&G
contractors have been entered into to
supplement and broaden the pool of
expertise available to the Company.
Some local contractors may not acquire Detailed supervision of local contractors
data accurately, and there is by Cadogan management is followed. Plans
frequently limited choice of locally are discussed well in advance with both
available equipment or contractors of local and international contractors in an
a desirable standard. effort to ensure that appropriate
equipment is available.
Data can be misinterpreted leading to All analytical outcomes are challenged
the construction of inaccurate models internally and peer reviewed.
and subsequent plans. Interpretations are carried out on modern
geological software.
Area available for drilling operations If not covered by 3D seismic or fitting
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.
Risk Mitigation
The Group may not be successful in Group performs a review of its oil and gas
achieving commercial production from assets for impairment on annual basis, and
an asset and consequently the carrying considers whether to commission a review
values of the Group's oil and gas from a third or a Competent Person's
assets may not be recovered through Report ("CPR") from an independent
future revenues, because of reservoir qualified contractor depending on the
performances below the expectations circumstances
Financial risks
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 2016.
The Group could be impacted by failing These risks are mitigated by employing
to meet regulatory reporting suitably qualified professionals who,
requirements in the UK, and statutory working with advisers when needed, are
tax and filing requirements in both monitoring regulatory reporting
Ukraine and the UK. requirements and ensuring that timely
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 cause the prices for hydrocarbons are implicitly
foreign exchange movements, changes in linked to USD prices.
the rate of inflation and interest
rates and lead to credit risk in The Group continues to hold most of its
relation to the Group's key cash reserves in the UK mostly in USD.
counterparties. 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 a of customer non-performance by limiting
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 fluctuations The Group mostly enters into back-to-back
in gas prices will have a negative transactions where the price is known at
result for the trading operations the time of committing to purchase and
resulting in a financial loss to the sell the product. Sometimes the Group
Group. takes exposure to open inventory positions
when justified by the market conditions in
Ukraine.
Risk Mitigation
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.
Legislative changes may bring Accurate monitoring and dialogue with
unexpected risk and time consuming for competent authorities are kept in place to
securing the licences obligations.1 minimize the risk.
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 jurisdictions. maintaining a working dialogue with the
Emerging economies are generally regulatory authorities.
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 critical
members from the Group's team could
have an adverse effect on the
business.
Statement of Reserves and Resources
In December 2015, the Group commissioned a third party the Reserves and
Resources Evaluation of the Group's oil and gas assets in Ukraine. The
evaluation was assigned to a qualified Ukrainian G&G consulting contractor
which delivered its final report in March 2016. The evaluation was conducted in
accordance with SPE Petroleum Resources Management System ('PRMS'). The summary
of the Reserves and Resources as per the report issued in March 2016 (as at 31
December 2015) is presented below.
Summary of Reserves1 at 31 December 2015
mmboe
Proved, Probable and Possible Reserves at 1 5.58
January 2015
Production (0.04)
Revisions 3.17
Proved, Probable and Possible Reserves at 31 8.71
December 20152
Reserves for Zagoryanska and Pirkovska as at 31 14.30
December 20153
Total Proved, Probable and Possible Reserves at 23.01
31 December 2015
1 The study has been conducted by third-party Brend Vik and since then Cadogan
has entered into a Technical Service Agreement with Brend Vik.
2 Proved, Probable and Possible Reserves at 31 December includes 0.80 mmboe
assigned to Pokrovska licence in which the Group holds 70% at 31 December 2015
3 Zagoryanska and Pirkovska licence were expired as at 31 December 2015.
Reserves are assigned to the Bitlyanska, Monastyretska, Debeslavetska,
Pokrovskoe fields. The reserves for Zagoryanska and Pirkovska fields were
presented separately due to the fact that these licences were under renewal at
31 December 2015.
Brend Vik also estimated resources in its evaluation. In particular 30.1 mmboe
of contingent resources were assigned to the Bitlyanska, Monastyretska,
Pokrovska licences; 8.8 mmboe were assigned to Zagoryanska and Pirkovska
licences which were under renewal at 31 December 2015. In terms of Prospective
Resources, 9.5 mmboe were assigned to Bitlyanska, Monastyretska, Debeslavetska,
Cheremkhivska, Pokrovska and Slobodo-Rungurska licences and 5.0 mmboe to
Pirkovska licence which was under renewal at 31 December 2015.
Corporate Responsibility
The Board recognises the requirement under Section 414C of the Companies Act
2006 (the "Act") to detail information about employees, human rights and
community issues, including information about any policies it has in relation
to these matters and the effectiveness of these policies.
The Group considers the sustainability of its business as a key and competitive
element of its strategy. Meeting the expectations of our stakeholders is the
way in which we secure our licence to operate, and to be recognised in the
values we declare is the best added value we can bring in order to profitably
prolong our business. The Board recognises that it has an obligation to protect
the health and safety of its employees and communities as well as the
environment it impacts; these are the key drivers for the sustainable
development of the Company's activity. Our Code of Ethics and the adoption of
internationally recognised best practices and standards are our, and our
employees', references for conducting our operations.
Our activities are carried out in accordance with a policy manual, endorsed by
the Board, which has been disseminated to all staff. The manual includes
policies on business conduct and ethics, anti-bribery, the acceptance of gifts
and hospitality and whistleblowing.
The Group's Health, Safety and Environment Manager reports directly to the
Chief Operations Officer. His role is to ensure that the Group has developed
suitable procedures, and that operational management have incorporated them
into daily operations and that he has the necessary level of autonomy and
authority to discharge his duties effectively and efficiently.
The Board believes that health and safety procedures and training across the
Group should be to the standard expected in any company operating in the oil
and gas sector. Accordingly, it has set up a Committee to review and agree
health and safety initiatives and report back on progress. Management is
regularly reporting to the Board on health, safety and environment and key
safety and environmental issues which are discussed by the Executive
Management. The Health, Safety and Environment Committee Report is on page 34.
Health, safety and environment
The Group has developed an integrated Health, Safety and Environmental ("HSE")
management system. The system aims, by a continuous improvement programme, to
ensure that a safety and environmental protection culture is embedded in the
organisation. The HSE management system ensures that both Ukrainian and
international standards are met, with the Ukrainian HSE legislation
requirements taken as an absolute minimum although the international
requirements are in the main met or exceeded. All the Group's local operating
companies in east and west Ukraine have all the necessary documentation and
systems in place to ensure compliance with Ukrainian legislation.
A proactive approach to the prevention of incidents has been in place
throughout 2015, which relies on an observation cards system and reliable
near-miss reporting. Staff training on HSE matters is recognised as the key
factor to generate continuous improvement. In-house training is provided to
help staff meet international standards and follow best practice. At present,
special attention is being given to training on risk assessments, emergency
response, incident prevention, reporting and investigation, as well as hazard
and operational ("HAZOP") studies to ensure that international standards are
maintained even if they exceed those required by Ukrainian legislation.
The Board monitors lost time incidents as a key performance indicator of the
business, to reasonably verify that the procedures in place are robust. The
Board has benchmarked safety performance against the HSE performance index
measured and published annually by the International Association of Oil & Gas
Producers. In 2015, the Group recorded close to 324,000 man hours worked. There
were no Lost Time Incidents ("LTIs") recorded in 2015 and over two million man
hours have been worked without an LTI since the previous incident was recorded
in July 2011.
Vehicle safety and driving conduct remain among the Company's priorities in
controlling hazards and preventing injuries. As of the end of 2015, the Company
has recorded almost ten million kilometres driven without an LTI.
During the year 2015 the Company continued to monitor the activity's
performances in terms of greenhouse gas emissions reporting, as well as
Company-wide collection of statistical data related to consumption of
electricity and industrial water and fuel consumption by cars, plants and other
work sites.
Employees
Wellness and professional development is part of the Company's sustainable
development policy and wherever possible local staff is recruited; procedures
are in place to ensure that all recruitments are undertaken on a transparent
and fair basis with no discrimination against applicants. Each operating
company has its own Human Resources staff to ensure that the Group's employment
policies are properly implemented and followed. As required by Ukrainian
legislation, Collective Agreements are in place with the Group's Ukrainian
subsidiary companies which provide an agreed level of staff benefits and other
safeguards for employees. The Group's Human Resources policy covers key areas
such as equal opportunities, wages, overtime and non-discrimination. All staff
is aware of the Group's grievance procedures.
The contingent E&P industry conditions forced the Group to reduce the level of
staffing; the concerned personnel were duly informed and all the necessary
procedures for a smooth solution were applied. Local qualified contractors are
considered for supplementing the required expertise when and to the extent
which is necessary.
Sufficient levels of health insurance are provided by the Group to employees to
ensure they have access to good medical facilities. Each employee's training
needs are assessed on an individual basis to ensure that their skills are
adequate to support the Group's operations, and to help them to develop.
Gender diversity
The Board of Directors of the Company comprised of six male Directors
throughout the year to 31 December 2015. The appointment of any new Director is
made on the basis of merit. See pages 21 to 23
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