REG-Cadogan Petroleum: Annual Financial Report
26/04/2018 07:30
26 April 2018
Cadogan Petroleum plc
Preliminary Results for year ended 31 December 2017
The Board of Cadogan Petroleum plc, (“Cadogan” or “the Company”), is
pleased to announce the Company’s annual results for the year ended 31
December 2017.
Key Financial highlights of 2017:
§ Average realised price: 41.6$/boe (2016: 34.5$/boe)
§ Gross revenues(1): $15.1 million (2016: $19.7 million)
§ Gross profit: $2.1 million (2016: $1.1 million)
§ G&A(2): $5.0 million (2016: $5.6 million)
§ Loss for the year: $1.6 million (2016: $5.9 million)
§ Loss per share: 0.7 cents (2016: 2.6 cents)
§ Net cash(3) at year end: $37.6 million (2016: $39.7 million)
Key Operational Highlights of 2017:
§ Production: 56,516 boe (2016: 42,495 boe), a 33% increase year-on-year
§ 78% increase in production from the key Monastyretska licence, located in
Western Ukraine
§ Completed first step of the diversification strategy by acquiring a 90%
interest in Exploenergy s.r.l., in Italy
§ A good year for trading, which generated a healthy profit of $1.3
million(4) (2016: loss of $2.0 million)
§ Oil Service operations reduced Group costs by retaining margin within the
Group
§ No LTIs’(5) and a further reduction of emissions(6): 24.11 of CO(2)e/boe
produced (2016: 29.89 CO(2)e/boe)
Cadogan has successfully delivered on the first pillar of its strategy, which
is to make Ukraine its platform for growth by monetising the value of its
legacy assets, both core and non-core.
The Group has continued to maintain exploration and production assets in
Ukraine, to conduct gas trading operations and to operate an oil service
business in Ukraine. Cadogan’s assets are concentrated in the West of the
country, far away from the zone of military confrontation with Russia. Gas
trading includes the importing of gas from Slovakia and Poland and local
purchasing and sales with physical delivery of natural gas. The oil services
business focuses on work-over operations, civil works services and other
services provided to Exploration and Production (“E&P”) companies.
Our business model
We aim to increase value through:
§ Maintaining a robust balance sheet, monetising the remaining value of our
Ukrainian assets; E&P cash flow to be supplemented with revenues from gas
trading and oil services
§ Pursuing farm-outs to progress investments in Ukrainian licences
§ Sourcing additional E&P assets to diversify Cadogan’s portfolio, both
geographically and operationally; target assets are either in mature
exploration or appraisal stage and are located in Europe, Africa, Middle East
or Central Asia
The Group has continued to actively pursue its strategy of portfolio
re-loading and geographical diversification. At the beginning of 2017, it
implemented the first step of this strategy through the acquisition
of a 90% participating interest in Exploenergy s.r.l., an Italian company.
Both gas trading and the service business optimise the use of existing
available resources, such as cash as working capital for trading and equipment
and competences for the service business, and continue to contribute to the
Group’s goal of being cash neutral, while actively searching for value
accretive opportunities in the E&P domain.
Ukraine
West Ukraine
The Group was able to increase oil production by 78% from the Monastyretska
licence, via the successful re-entry of two old, suspended wells rented from
Ukrnafta(7) under a profit sharing agreement. Both wells are currently
producing with sucker road pumps. The licence is located in the Carpathian
fold belt (Skuba unit), in Western Ukraine.
The Group also continued to produce gas from the Debeslavetske and
Cheremkhivske gas fields and has maintained both the Bitlyanska licence and
its 15% interest in Westgasinvest LLC (“WGI”), which holds the
Cheremkhivsko-Strupkivska, Debeslavetska Production, Filimonivska, Kurinna,
Sandugeyivska and Yakovlivska licences for shale gas exploitation. Eni is the
operator of these shale gas licences and Cadogan is carried through the
exploration phase. Eni has recently notified Cadogan of its intention to exit
the shale gas project and discussions are on-going to agree acceptable exit
terms and more generally on the future of WGI. Following Eni’s decision to
exit the joint venture and given the uncertainty over the future of WGI the
investment has been impaired.
East Ukraine
Cadogan’s application to convert the Pirkovska licence from exploration into
production has not yet been awarded. The application has been impacted by a
dispute between central and local authorities on the distribution of gas
royalties, which has brought the award process in the region to a halt. These
assets remain impaired.
Subsidiary businesses
Gas trading operations continued, with sales in Ukraine of both imported and
locally produced gas. Despite lower volumes, margins increased substantially
as the new team delivered on expectations. Finally, the Group continued
providing oil services through its wholly-owned subsidiary Astroservice LLC.
These primarily related to well abandonment, site restoration and well
workover operations. Unlike previous years, these services were rendered to
Group companies during the year as their activity in Ukraine picked-up.
Italy
In January 2017, Cadogan, through its fully owned Dutch subsidiary, finalised
the purchase of a 90% interest in Exploenergy s.r.l. (“Exploenergy”) for a
deferred cash consideration of up to €50,000 per licence, contingent upon
licences being awarded. Exploenergy is an Italian company, which has filed
applications for two exploration licences (Reno Centese and Corzano), located
in the Po Valley region, in close proximity to fields discovered by the former
operator. Two leads have been identified on these licences, with combined
unrisked prospective resources estimated to be in excess of 60 bcf of gas.
Both applications are in an advanced stage of their approval process, which
will resume after the national and local election held in early March 2018.
___________________________
(1) Gross revenues of $15.1 million (2016: $19.7 million) included $12.7
million (2016: $15.6 million) from trading of natural gas, $2.4 million (2016:
$1.6 million) from exploration and production
2 Administrative expenses (“G&A”)
3 Net cash includes cash and cash equivalents less short term borrowings
(4) $0.9 million net of interest income received on receivables
5LTI: Lost Time Incidents; TRI: Total Recordable Incidents
(6) E&P operations emissions. For details please see the Annual Report
(7) PJSC “Ukrnafta”
The information contained within this announcement is deemed to constitute
inside information as stipulated under the Market Abuse Regulation (EU) No.
596/2014. Upon the publication of this announcement, this inside information
is now considered to be in the public domain.
For further information, please contact
Cadogan Petroleum plc
Guido Michelotti Chief Executive Officer +380 (44) 594 5870
Ben Harber Company Secretary +44 0207 264 4366
Cantor Fitzgerald Europe
David Porter/Nick Tullock +44 (0) 20 7894 7000
Strategic Report
The Strategic Report has been prepared in accordance with Section 414A of the
Companies Act 2006 (the “Act”) and presented hereunder. Its purpose is to
inform stakeholders 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.
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 also conducts gas trading
and provides services to other operators.
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.
Key performance indicators
The Group monitors its performance through five key 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;
- to maintain no lost time incident; and
- to grow and geographically diversify the portfolio.
The Group’s performance in 2017 against these KPI’s is set out in the
table below, together with the prior year performance data.
Unit 2017 2016 2017 vs 2016
Average production (working interest basis) ((1)) boepd 155 116 + 33.6%
Overhead (G&A) $ million 5.0 5.6 -10.7%
Basic loss per share ((2)) cents (0.7) (2.6) -73.1%
Lost time incidents ((3)) incidents 0 1
Geographic diversification new assets 1 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 relates to the number of injuries where an
employee/contractor is injured and has time off work (IOGP classification)
Chairman’s Statement
2017 has been a good year for Cadogan, which has made significant progress
towards profitability notwithstanding the challenging context in the countries
where it has assets.
The process of integrating Ukraine within Europe did not progress as expected
and a number of warnings came from the European Community, the EBRD and the
leading international financial institutions, asking for an acceleration of
the process, particularly in terms of fight against corruption and
transparency. The economic crisis is not yet over and the confrontation with
Russia has remained an open wound and this has exerted some influence of the
political agenda. The ban has remained in place on the direct import of
Russian gas resulting in the volumes needed to match internal demand being
imported from Europe using reverse flow.
The slow pace of reform in the energy sector and the perception of limited
transparency have penalised Ukraine which has not witnessed a recovery of
foreign direct investment nor new players entering the local exploration and
production sector notwithstanding the healthier oil prices. The country's goal
of becoming energy independent in the near future has resulted in given a
wake-up call to the state-owned companies and also to some of the local
privately held companies and this has generated an increase in the drilling
activity with some international contractors winning sizable contracts. This
is an encouraging development for Astro-Service LLC as it creates
opportunities to monetise its value.
The challenging situation facing the E&P industry is represented by the
difficulties that the Company faced to convert Zagoryanska and Pirkovska from
exploration into production licences. A dispute between local and central
authorities on the distribution of royalties which went on for most of 2017
brought the award process in the Poltava council to a complete halt: several
applications to award or convert licences were rejected and the Zagoryanska
licence was a casualty as the last rejection came at the end of the three year
time-frame allowed for conversion. After investing tens of millions of dollars
and proving the existence of commercial quantities of gas, 30 million m(3)
were produced, the company was not awarded its production licence, an award
which in most of the countries is a recognised right.
In Italy the pace of progress towards the award of the licences has been
hampered by concerns at local level on the long-term sustainability of E&P
activities in general and by the local and national elections scheduled for
the first quarter of 2018. The company has used this time to introduce itself
to regional and national authorities and will now re-focus its communication
towards local stakeholders.
In a context that has remained challenging, Cadogan has delivered on its
strategy of building in Ukraine its platform for growth. Costs have remained
under strict control, with a streamlining of the Executive directorships and a
right sizing of the gas operations in West Ukraine contributing to savings.
E&P operations from the assets operated by the Company have been taken to
profitability, driven by an increase in oil production from Monastyretska
licence where management sees an upside for further growth, working capital
have been optimised and gas trading has delivered healthy margins.
Management has continued to actively pursue opportunities to renew and
geographically diversify the portfolio. Many opportunities have been reviewed
using stringent investment criteria that are aimed at delivering long-term
value for the shareholders and one was finalised. As a Board, we are confident
that these efforts will produce results and are not prepared to relax the
selection criteria.
Zev Furst
Non-Executive Chairman
25 April 2018
Chief Executive’s Review
2017 was a good year for Cadogan, with reduced losses of $1.6 million, the
best result over the last six years. Net of losses in joint venture
(“JV”), where the Group is carried and not an operator, the Group would
have delivered a $0.7 million profit (2016: $5.8 million loss). This
achievement is the result of multiple efforts, including:
§ a strict discipline in controlling costs;
§ E&P operations brought firmly into profitability, due to increased oil
production and despite the impact of a punitive tax on gas production;
§ a good year for gas trading, with a healthy margin; and
§ effective efforts to recover past receivables, some of which had been
previously impaired as deemed of no value, and the fending-off potential past
tax liability.
2017 was also the year that saw the Company’s efforts to geographically
diversify its portfolio come to fruition, with the first acquisition outside
of Ukraine of an Italian E&P company, which has filed the application for two
licences in the prolific Po Valley.
While 2017 witnessed signs of recovery for the oil & gas industry, it has been
another difficult year for Ukraine, which remained embroiled in its
confrontation with Russia and continued to be economically challenged. The
country has made slow progress towards modernisation of its oil & gas
legislative framework but the few steps made have fallen short of creating an
environment conducive to investment, which the country needs to maximise its
domestic production. In this uncertain context, Cadogan has remained one of
the few, if not the only, truly foreign investor operating in Ukraine’s E&P
sector.
Cadogan’s application to convert the Pirkovska exploration licence into a
production licence is a reflection of the uncertainties that still impact the
E&P industry in Ukraine. The application was filed two years ago and has been
rejected 4 times, together with nearly 70 other applications, by the Poltava
local Council, due to its dispute with the Central Government over the split
of royalties. An agreement has been reached, effective from 1 January 2018,
bringing into law the distribution of royalties and consequently we are
cautiously optimistic that the application will be accepted, as Cadogan has
fulfilled all the obligations and submitted the documents in due time.
Eni has informed its partners, Nadra(1) and Cadogan, of its intention to exit
WGI, the shale gas project, and discussions are on-going on whether and under
which terms to accept Eni’s exit and, in general, on the future of the
project. As a precaution, Cadogan’s management has decided to impair the
residual value of its 15% participating interest in the project. Eni’s
decision, which comes on top of similar decisions for the Pokrovska and
Zagoryanska licences, has a marginal impact on Cadogan’s business. This is a
testimony of Cadogan’s proven ability to generate value from a legacy of
fragile foundations and marginal assets.
Against this challenging background, Cadogan has done well in 2017. In
particular:
§ the average production rate through the year increased up to 155 boepd,
the highest level in the last five years, and this increase was achieved with
minimal capital deployment; and
§ the result of E&P business segment in 2017 was $0.3 million higher than in
the year before, out-performing the 21% increase in the average realised price
over the same period of time.
Other highlights of 2017 are:
§ A 33% increase in production, from 42,495 boe in 2016 to 56,516 boe this
year;
§ A 11% reduction of overhead (G&A), from $5.6 million in 2016 to $5.0
million this year; this is in addition to the 15% reduction achieved in 2016
and of the 13% reduction in 2015;
§ A good year for trading which generated a healthy margin by leveraging a
limited amount of Cadogan’s financial resources;
§ The first step in the process of geographic diversification of the
portfolio with the acquisition of Exploenergy in Italy;
§ A robust balance sheet, with $37.6 million of net cash, kept mostly in UK
banks; and
§ A year without LTIs’ and with a further reduction of emissions into
atmosphere.
In summary, Cadogan has successfully delivered on the first pillar of its
strategy, which is to make Ukraine its platform for growth by monetising the
value of its legacy assets, both core and non-core.
Core operations
Cadogan has continued to safely and efficiently produce from its fields in the
West of Ukraine. Oil production has increased by 78% over the value of the
previous year, while gas production has remained constant. This is a
remarkable achievement, given the advanced stage of depletion of the two gas
fields. Oil operating costs have remained under tight control and gas
operations have been further streamlined to match revenues (net of a 70%
royalty) with costs. Achieving break-even despite operating our gas assets
with a 70% royalty is a testimony of what an efficient operator Cadogan has
become and is something we are very proud of. Nonetheless, operating gas
assets with a 70% royalty is not sustainable and we will explore alternatives.
The performances of wells located on the Monastyretska licence has been
monitored, with a view to gathering data for input into an integrated
reservoir study to be awarded in 2018. The primary purpose of the study is to
identify the optimum exploitation strategy while assessing reserves. The
management team are of the opinion that the field potential has been
underestimated in the past, given the field performances to date.
Notwithstanding the repeated filings, the approval for Pirkovska licence has
not yet been granted. The debate between Poltava local and central authorities
on the royalty distribution and the failure to appoint the Head of the
Licensing Authority2 after 2 years, have not helped.
In Italy contacts have been established and Cadogan introduced itself to the
regional authorities of the Lombardia and Emilia Romagna regions, as well as
to the civil servants of the competent Ministries in Rome (Industry and
Environment). The process to secure the licence award has been re-launched and
will continue into next year shifting the focus to the local level, town halls
and stakeholders at large.
Non E&P operation
Trading has been re-launched after a difficult 2016, with a new team, a lower
cost structure, reduced financial costs and a system in place to better manage
credit risk. Results have been encouraging, with $0.9 million3 of profit which
has supplemented E&P revenues.
Oil services conversely contributed a limited amount of cash, as they have
been used primarily to serve the Group (well’s operations). The company
competed for and won tenders launched by the Group and have therefore saved
money for the Group, thus contributing to keeping costs under control.
The results achieved in 2017 have been possible due to the continued efforts
and commitment of Cadogan’s Management and staff. To them, the men and women
who have worked for Cadogan go my heartfelt thanks.
Outlook
Cadogan has made another major step towards becoming a leaner and more
efficient operator of marginal fields. We have also made solid progress in
delivering a sustainable performance, which, along with a robust balance
sheet, maintains our strong platform and a springboard on which to build our
future of growth.
We expect oil production to grow further, up to 75% over 2017 production,
driven by a three wells program of work-overs and stimulations in
Monastyretska oil field4; we also expect that our perception of an upside in
reserves and resources be confirmed by an integrated reservoir study, which
was awarded in the first quarter of 2018.
While working to maximise production, we will undertake the actions necessary
to safeguard the remaining licences and maximise their value. We have engaged
a UK qualified consultant to assist us in the farm-out of the high risk-high
reward Bitlyanska licence and are planning the drilling of two wells in the
next 12-18 months, one each in Bitlyanska and Monastyretska. In parallel, we
will support the operator Westgasinvest LLC (“WGI”)5 in the follow-up of
the application for the extension of Cher licence.
We will continue to operate our gas trading business and expect trading
volumes to increase over 2017 notwithstanding the challenges of a market still
evolving in a manner that is sometimes unpredictable.
As E&P activity in Ukraine picks up, Cadogan will actively explore
opportunities to spin-off its E&P services business.
The management team will continue to actively pursue value accretive
opportunities to utilise the preserved cash, thus delivering on the second
pillar of our strategy, to generate growth and value outside of Ukraine. In
doing so, strict discipline and stringent investment criteria will be
maintained through the selection process, with a clear focus on long term
value generating opportunities. With the benefit of hindsight, of the near 70
opportunities that entered our pipeline over the last couple of years, our
disciplined approach has served the company well.
Guido Michelotti
Chief Executive Officer
25 April 2018
__________________________
(1) NJSC “Nadra Ukrayny”
2 The licensing Authority, the State Service of Geology and Mineral Resources
of Ukraine, has been headed by an Acting Chief since January 2015
3 Trading result of $1.4 million excluding interest received on receivables
was $0.9 million
4 The operations on the first of the three well program was completed in late
February 2018 and delivered nearly a doubling of the well production rate
5 WGI, a company participated by Eni Ukraine Holdings BV, 50.01%, NJSC
“Nadra Ukrayny”, 34.99%, and Cadogan Ukraine Holdings Limited 15%, is the
licence holder of Debeslavetska and Cheremkhivska licences
Operations Review
Overview
At 31 December 2017 the Group held working interests in four conventional gas,
condensate and oil exploration and production licences in the west of Ukraine.
All these assets are operated by the Group and are located in the Carpathian
basin in close proximity to the Ukrainian gas distribution infrastructures.
Summary of the Group’s licences (as at 31 December 2017)
Working interest (%) Licence Expiry Licence type (()(1))
99.8 Bitlyanska December 2019 E&D
99.2 Debeslavetska ((2)) November 2026 Production
54.2 Cheremkhivska ((2)) May 2018 Production
99.2 Monastyretska November 2019 E&D
(1) E&D = Exploration and Development
(2) In addition, the Group has 99.2% and 54.2% of economic benefit in
conventional activities in Debeslavetska and Cheremkhivska licences,
respectively through Joint Activity Agreements (“JAA”).
In addition to the above, the Group has:
§ filed an application to convert the Pirkovska licence from an exploration
to production licence; and
§ a 15% carried interest in Westgasinvest LLC (“WGI”), which holds the
Cheremkhivsko-Strupkivska, Debeslavetska Production, Filimonivska, Kurinna,
Sandugeyivska and Yakovlivska licences for unconventional (shale gas)
exploitation.
East Ukraine
East Ukraine has been historically a core area for Cadogan. Today, after the
voluntarily relinquishment of Pokrovska’s licence at the end of the
exploration phase and the authority’s refusal to award the production
licence for Zagoryanska, notwithstanding all requirements having been met, the
only asset in that part of Ukraine is the Pirkovska licence which remains
impaired. The applications for the award of 20-year production licence has
been repeatedly submitted for approval, but the approval has not yet been
granted, although the Group has fulfilled its legal obligations and
requirements and filed the applications in due time. Delays have occurred due
to legislative changes introduced into the award process and to a dispute
between central and local authorities on the distribution of revenues from
subsoil use tax (royalties). This dispute brought the award process to a
complete halt in the Poltava Council and costed the Company the Zagoryanska
licence whose conversion from exploration to production was not approved in
the three-year’s time frame allowed for conversion.
West Ukraine
The Bitlyanska licence covers an area of 390 square kilometres. Bitlyanska,
Borynya and Vovchenska are three hydrocarbon discoveries in this licence area.
The Borynya field holds 3P reserves, contingent recoverable resources and
prospective resources. Bitlyanska and Vovchenska fields hold contingent
recoverable resources.
Borynya 3 well, has been kept on hold, monitored and routinely bled-off for an
eventual re-entry and stimulation.
The Monastyretska licence continued to regularly produce oil at an average
production rate of 81 boepd (2016: 46 boepd). Two producing wells were added
in December 2016 and sucker rod pumps installed later in the year.
The Debeslavetska and Cheremkhivska licences continued producing with a stable
gas production rate of 74 boepd (2016: 70 boepd).
Gas trading
The Group continued to import gas from Europe via the Slovakian and Polish
borders and to sell it in Ukraine along with some locally purchased
quantities. Despite the lower volumes being sold, margins were much higher due
to actions taken by management, including, primarily a reduction in
administrative and financial costs and an overhaul of the trading team.
Opportunistic purchases in summer also contributed to the overall margin.
Service
The Group continued providing services through its wholly-owned subsidiary
Astroservice LLC. Services provided were primarily related to well abandonment
and site restoration and were rendered mostly to the Group’s companies as
their activities increased.
Financial Review - Overview
In 2017 the Group continued with its efforts to approach cash neutrality and
profitability through a number of cost reduction initiatives, while
supplementing E&P revenues with gas trading.
The E&P business positively contributed to the financial results of the Group,
due to a combination of increased production and higher prices. The service
business focused on providing drilling and work-over services to the
subsidiaries of the Group and the trading business earned healthy margin.
These results have been supplemented by further monetising of the Group’s
assets, tight control on costs and optimisation of the working capital cycle.
Net cash, which included cash and cash equivalents mostly denominated in USD
net of short-term borrowings denominated in UAH, decreased to $37.6 million at
31 December 2017 compared to $39.7 million at 31 December 2016. This was
mostly due to increased prepayments made for gas trading and stock of gas at
the end of the year.
Income statement
Revenues from production increased from $1.6 million in 2016 to $2.4 million
in 2017, mainly due to production volume increase from 42,495 boe in 2016 to
56,516 boe in 2017. E&P cost of sales increased from $1.2 million in 2016 to
$1.7 million in 2017. These include production royalties and taxes, fees paid
for the rented wells, depreciation and depletion of producing wells and direct
staff and other costs for exploration and development. Overall, in 2017, E&P
made a positive contribution of $0.7 million (2016: $0.4 million) to gross
profit, representing a positive $0.3 million (2016: loss of $11 thousand)
business segment result.
The oil services business in 2017 focused on the internal activities providing
its services, including drilling and work-overs, to the subsidiaries of the
Group.
Gas trading business showed good results in 2017. Although revenues decreased
from $15.6 million in 2016 to $12.7 million in 2017, cost of sales decreased
even further, from $15.5 million in 2016 to $11.4 million in 2017, resulting
in an overall contribution to profit of $1.3 million (2016: $69 thousand). In
addition, staff costs (G&A) were reduced, and trading receivables recovered
together with interest. These efforts turned a loss of $2.0 million in 2016
into a profit of $1.4 million in 2017.
Administrative expenses (“G&A”) continued to be under strict control.
Ukrainian G&A remained flat as staff were compensated for the loss of earning
power due to the devaluation of local currency and the overall G&A went down
from $5.6 million in 2016 to $5.0 million in 2017.
The reversal of impairment of other assets increased to $1.5 million (2016:
impairment of $82 thousand) primarily due to: i) VAT of $1.4 million (2016:
$69 thousand), which was previously impaired, as a result of the Group
receiving a VAT refund in cash of $1.4 million (2016: $nil) and also offsets
of VAT recoverable against trading margin earned; and ii) inventories of $0.1
million (2016: loss of $0.1 million) due to the successful sale of production
stock that had previously been impaired due to being held for a considerable
time.
Share of loss in joint ventures of $2.3 million (2016: $0.2 million losses)
relates to the decision to impair the residual value of Westgasinvest LLC
given Eni’s communication of their intention to exit the project.
Finance income of $0.7 million (2016: costs of $1.1 million) reflects interest
expense to BNP Paribas (“BNPP”) on a credit line used for trading of
$0.3 million (2016: $1.4 million), net of i) interest income on cash deposits
used for trading of $0.1 million (2016: $31 thousand); ii) investment revenue
of $0.2 million (2016: $0.1 million); iii) reversal of interest in respect of
a previously accrued provision for corporate tax of $0.2 million (2016: cost
of $33 thousand); and iv) interest income on receivables of $0.5 million
(2016: $0.2 million).
The tax benefit in 2017 increased to $1.3 million (2016: expense of $0.1
million), partially due to the Group reaching a settlement with the UK tax
authorities in August 2017 on a past tax claim for which a provision
previously accrued has been reversed and also due to the deferred tax asset
recognised on the tax losses carried forward from the Monastyretska licence,
which is profitable from continuous growing production.
Balance sheet
Intangible Exploration and Evaluation (“E&E”) assets of $1.7 million
(2016: $2.4 million) represent the carrying value of the Bitlyanska licence.
This decreased due to reclassification of the Monastyretska licence from
Intangible Exploration and Evaluation assets to the Property Plant & Equipment
(note 15). The Property Plant & Equipment (PP&E) balance was $2.1 million at
31 December 2017 (2016: $1.3 million). Investments in joint venture of $nil
million (2016: $2.3 million) represent the carrying value of the Group’s
investments in Westgasinvest LLC, for which impairment of $2.3 million has
been recognised (note 17).
Trade and other receivables of $4.5 million (2016: $4.1 million), include $1.3
million (2016: $2.2 million) trading receivables, $1.8 million prepayments for
natural gas (2016: $0.8 million), $0.9 million VAT recoverable (2016: $ 0.8
million), which is expected to be recovered through production, trading and
services activities, and $0.5 million (2016: $0.4 million) of other
receivables and receivables from joint venture. The $1.4 million of trade and
other payables as of 31 December 2017 (2016: $1.6 million) represent $0.5
million (2016: $0.2 million) of trade payables, $0.5 million (2016: $0.9
million) of accrued expenses and $0.4 million (2016: $0.2 million) of other
creditors.
Provisions include $0.4 million (2016: $8 thousand) of short-term provision
for decommissioning cost and $0.4 million of long-term provision for
decommissioning costs (2016: $0.7 million of long-term provision).
The cash position of $37.6 million at 31 December 2017, including $7 million
used as a pledge for the credit line, has decreased from $43.3 million at 31
December 2016. Net cash, which included cash and cash equivalents mostly
denominated in United States Dollar (“USD”) net of short-term borrowings
denominated in Ukrainian Hryvna (“UAH”), decreased to $37.6 million at 31
December 2017 compared to $39.7 million at 31 December 2016. This was mainly
due to prepayments made for the gas at the end of the year.
Cash flow statement
The Consolidated Cash Flow Statement shows operating cash outflow before
movements in working capital of $2.3 million (2016: $4.4 million), which
represent mostly cash generated by the E&P and Trading business segment net of
corporate expenses. Working capital has been further improved, which resulted
in a $0.4 million cash inflow (2016: $8.2 million).
The Group, during 2017, made minimum capital deployment by investing $0.6
million (2016: $0.2 million) in the purchase of PP&E and E&E assets, mostly
for implementing the exploration work program.
In 2017 the Group financed its trading operations with short-term borrowings
(Note 22) with proceeds of $3.3 million and repayments of $7.0 million (2016:
proceeds of $1.9 million and repayments of $10.2 million).
Related party transactions
Related party transactions are set out in note 28 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 used in Ukraine in operations rather
than being remitted to the UK.
Risks and uncertainties
There are a number of potential risks and uncertainties that 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, who are carrying out a robust assessment
of the principal risks facing the Group, including those potentially
threatening its business model, future performance, solvency and liquidity.
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 conducts activities, which can cause health, safety and environmental incidents. Serious incidents can have not only a financial impact but can also damage the Group’s reputation and the opportunity to undertake further projects. The Group maintains a HSE management system in place and demands that management, staff and contractors adhere to it. The system ensures that the Group meets Ukrainian legislative standards in full and achieves international standards to the maximum extent
possible. ISO and OSHA certification of the Management system is being pursued.
Drilling and Work-Over operations
The technical difficulty of drilling or re-entering wells in the Group’s locations and equipment limitations can result in the unsuccessful completion of the well. The incorporation of detailed sub-surface analysis into a robustly engineered well design and work programme, with appropriate procurement procedures and competent on site management, aims to minimise risk. Only certified personnel are hired to operate on
the rig floor
Production and maintenance
There is a risk that production or transportation facilities could fail due to non-adequate maintenance, control or poor performance of the Group’s suppliers. All plants are operated and maintained at standards above the Ukrainian minimum legal requirements. Operative staff are experienced and receive supplemental training to ensure that facilities are properly operated and maintained. When not in use the
facilities are properly kept under conservation and routinely monitored. 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 accurate and detailed analysis of the sub-surface. This can be impacted by poor quality data, either historic or recently gathered, and limited coverage. Certain information provided by external sources may not be accurate. All externally provided and historic data is rigorously examined and discarded when appropriate. New data acquisition is considered and appropriate programmes implemented, but historic data can be reviewed and reprocessed to improve the overall knowledge
base. Agreements with qualified local and international contractors have been entered into to supplement and broaden the pool of expertise available to the Company.
Data can be misinterpreted leading to the construction of inaccurate models and subsequent plans. All analytical outcomes are challenged internally and peer reviewed. Analysis is performed using modern geological software.
Area available for drilling operations is limited due to logistics, infrastructures and moratorium. This increases the risk for setting optimum well coordinates. If not covered by 3D seismic or fitting over 2D seismic lines, the eventual well’s dislocation will not be accepted.
The Group may not be successful in proving commercial production from its Bitlyanska licence and consequently the carrying values of the Group’s oil and gas assets may have to be impaired. The Group performs a review of its oil and gas assets for impairment on an annual basis, and considers whether to commission a review from a third or a Competent Person’s Report (“CPR”) from an independent qualified contractor depending on the
circumstances.
Financial risks
The Group is at risk from changes in the economic environment both in Ukraine and globally, which can cause foreign exchange movements, changes in the rate of inflation and interest rates and lead to credit risk in relation to the Group’s key counterparties. Revenues in Ukraine are received in UAH and expenditure is made in UAH, however the prices for hydrocarbons are implicitly linked to USD prices. 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 26 to the Consolidated Financial Statements for detail on financial risks.
The Group is at risk that the counterparty will default on its contractual obligations resulting in a financial loss to the Group. Procedures are in place to scrutinise new counterparty via a Know Your Customer (“KYC”), which covers their solvency. In addition, we seek to reduce the risk of customer non-performance by limiting the title transfer to product until the payment is
received, prepaying only to known credible suppliers.
The Group is at risk that fluctuations in gas prices will have a negative result for the trading operations resulting in a financial loss to the Group. The Group mostly enters into back-to-back transactions where the price is known at the time of committing to purchase and sell the product. Sometimes the Group takes exposure to open inventory positions when justified by the market conditions in Ukraine,
which is supported by the multi-angle analysis of the specific deals, market trends, building models of the gas prices and foreign exchange rates development for medium term.
Country risks
Legislative changes may bring unexpected risk and be time consuming for securing licences. Accurate monitoring and dialogue with competent authorities are kept in place to minimise the risk. In all cases, deployment of capital in Ukraine is limited and investments are kept at the level required to fulfil licence obligations.
Ukraine has not progressed as much as expected towards integration with Europe, the economic crisis is not yet over and the confrontation with Russia has remained an open wound. This exercises some influence on the political agenda, negatively impacts the creation of a transparent market and introduces an element of unpredictability in the development of the legislative framework. The Group minimises this risk by maintaining the funds in international banks outside Ukraine, by limiting the deployment or capital in country and by continuously maintaining a working dialogue with the regulatory authorities. The assets of the Group are
located far from the area of confrontation with Russia.
Other risks
The Group's success depends upon skilled management as well as technical and administrative staff. The loss of service of critical members from the Group's team could have an adverse effect on the business. The Group periodically reviews the compensation and contract terms of its staff.
The Group is at risk of underestimating the risk and complexity associated with the entry into new countries. The Group applies a set of very rigorous and strict screening criteria in order to evaluate potential investment opportunities. It also seeks for opinion of independent and qualified experts when deemed necessary. Additionally, the level of required rate
of return is adjusted to the perceived level of risk.
Local communities and stakeholders may cause delays to the projects executions and postpone the activities The Group maintains a transparent and open dialogue with authorities and stakeholders to identify their needs and propose solutions which address them as well as to illustrate the activities which it intends to conduct and the measures to mitigate their
impact. Local needs and protection of the environment are always taken into consideration when designing mitigation measures, which may go beyond the legislative minimum requirement.
Statement of Reserves and Resources
During the year 2017 the company conducted a number of rig-less activities in
the two gas fields to maintain a sustainable production, in particular in
Cheremkhivska where the producible reserves (P1) increased by 0.012 million
boe.
Summary of Reserves(1)
at 31 December 2017
Mmboe
Proved, Probable and Possible Reserves at 1 January 2017 7.87
Production (0.06)
Revisions 0.01
Proved, Probable and Possible Reserves at 31 December 2017 7.82
(1 The study has been conducted as at 31 December 2016 by third-party Brend
Vik and since then Cadogan has entered into a Technical Service Agreement with
Brend Vik.)
Reserves are assigned to the Bitlyanska, Monastyretska, Cheremkhivska and
Debeslavetska fields. In addition to the tabled reserves Cadogan has 15.40
million boe of contingent resources associated with Bitlyanska and
Monastyretska licences.
Corporate Responsibility
The Board recognises the requirement under Section 414C of the Companies Act
2006 (the “Act”) to detail information about environmental matters,
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 safeguard and profitably prolong our business. The Board recognises
that the protection of the health and safety of its employees and communities
as well as of the environment which it impacts is not just an obligation, but
it is part of the personal ethics and beliefs of management and staff these
are the key drivers for the sustainable development of the Company’s
activity. Cadogan Petroleum, its management and employees are committed to
continuously improve the Health, Safety and Environment (HSE) performances,
our Code of Ethics and the adoption of internationally recognised best
practices and standards are for both our, and our employees’, references for
conducting operations.
Our activities are carried out in accordance with a policy manual, endorsed by
the Board, which has been disseminated to all staff. The Working with
Integrity policy and procedures includes the company’s position on business
conduct and ethics, anti-bribery, the acceptance of gifts and hospitality and
whistleblowing.
The former Chief Operating Officer is the Chairman of the HSE Committee and is
supported in his role by Cadogan Ukraine’s HSE Manager. His role is to
ensure that the Group has developed suitable procedures, and that operational
management have incorporated them into daily operations and that she/he has
the necessary level of autonomy and authority to discharge her/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 on
the health and safety initiatives and to report back on progress. Management
is regularly reporting to the Board on HSE and key safety and environmental
issues, which are discussed by the Executive Management. The Health, Safety
and Environment Committee Report can be found in the Annual Report.
Health, safety and environment
The Group has developed an integrated HSE management system. The system aims,
by using a continuous improvement programme, to ensure that a safety and
environmental protection culture is embedded in the organisation and
continuously improved. The HSE management system ensures that both Ukrainian
and international standards are met, with the Ukrainian HSE legislation
requirements taken as an absolute minimum. 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 and
Company’s standards.
A proactive approach to the prevention of incidents has been in place
throughout 2017, which relies on a proper and reliable induction and near-miss
reporting. Staff training on HSE matters and discussion on near miss reporting
are recognised as the key factors 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 emergency drills regularly run on operations’
sites and offices, to ensure that international best practices and standards
are maintained to comply with or exceed those required by Ukrainian
legislation.
The Board monitors the main Key Performance Indicators (lost time incidents,
nearmiss records, mileage driven, training received, CO2 emissions) as
business parameters and entry point 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 2017, the Group recorded over 255,000
man-hours worked with no incidents and close worked to 600,000 hours since
last injury in February 2016.
During 2017 the Group continued to monitor the activity’s performances in
terms of greenhouse gas emissions as well as to collect statistical data
related to consumption of electricity and industrial water and fuel
consumption by cars, plants and other work sites, recording a continuous
improvement in the efficiency.
Employees
Wellness and professional development is part of the Company’s sustainable
development policy and wherever possible local staff are recruited. The Group
activity in Ukraine is managed by an entirely by local staff. 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 are aware of the Group’s grievance procedures.
The cessation of the operational activity in the East of the country and the
need to reduce costs to remain profitable forced the Group to reduce the level
of staffing. The concerned personnel were duly informed and all the necessary
procedures were taken. Qualified local contractors are engaged to supplement
the required expertise when and to the extent it is necessary.
Sufficient level of health insurance is 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.
Diversity
The Board recognises the benefits and importance of diversity (gender, ethnic,
age, sex, disability, educational and professional backgrounds, etc.) and
strives to apply diversity values across the business. We endeavour to
employ a skilled workforce that reflects the demographic of the jurisdictions
in which we operate. The board will review the existing policies and further
develop a diversity policy during the 2018 financial year.
Gender diversity
The Board of Directors of the Company comprised seven male Directors
throughout the year to 31 December 2017. The appointment of any new Director
is made on the basis of merit.
As at 31 December 2017, the Company comprised a total of 74 persons, as
follows:
Male Female
Non-executive directors 5 -
Executive directors 1 -
Management, other than Executive directors 7 2
Other employees 37 22
Total 50 24
Human rights
Cadogan’s commitment to the fundamental principles of human rights is
embedded in our HSE polices and throughout our business processes. We promote
the core principles of human rights pronounced in the UN Universal Declaration
of Human Rights. Our support for these principles is embedded throughout our
Code of Conduct, our employment practices and our relationships with suppliers
and partners wherever we do business.
Community
The Group’s activities are carried out in rural areas of Ukraine and the
Board is aware of its responsibilities to the local communities in which it
operates and from which some of the employees are recruited. In our
operational sites, management works with the local councils to ensure that the
impact of operations is as low as practicable by putting in place measures to
mitigate their effect. Projects undertaken include improvement of the road
infrastructure in the area, which provides easier access to the operational
sites while at the same time minimising inconvenience for the local population
and allowing improved road communications in the local communities, especially
during winter season or harsh meteorological conditions. Specific community
activities are undertaken for the direct benefit of local communities. All
activities are followed and supervised by managers who are given specific
responsibility for such tasks.
The Group’s local companies see themselves as part of the community and are
involved not only with financial assistance when agreed, but also with
practical help and support. All these activities are run in accordance with
our Working with Integrity policy and procedures. The recruitment of local
staff generates additional income for areas that otherwise are predominantly
dependent on the agricultural sector.
Approval
The Strategic Report was approved by the Board of Directors on 25 April 2018
and signed on its behalf by:
Ben Harber
Company Secretary
25 April 2018
Consolidated Income Statement
For the year ended 31 December 2017
Notes 2017 $’000 2016 $’000
CONTINUING OPERATIONS
Revenue 6 15,145 19,692
Cost of sales (13,093) (18,623)
Gross profit 2,052 1,069
Administrative expenses 7 (4,981) (5,603)
Impairment of oil and gas assets 15 (162) (90)
Reversal of impairment/(impairment) of other assets 8 1,462 (82)
Share of losses in joint venture 16 (2,323) (143)
Net foreign exchange (losses)/gains (116) 38
Other operating income/(loss), net 480 (9)
Operating loss (3,588) (4,820)
Gain on acquisition 17 - 99
Finance income/(costs), net 11 672 (1,087)
Loss before tax (2,916) (5,808)
Tax benefit/(charge) 12 1,332 (110)
Loss for the year (1,584) (5,918)
Attributable to:
Owners of the Company (1,585) (5,912)
Non-controlling interest 1 (6)
(1,584) (5,918)
Loss per Ordinary share cents cents
Basic 13 (0.7) (2.6)
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
2017 $’000 2016 $’000
Loss for the year (1,584) (5,918)
Other comprehensive loss
Items that may be reclassified subsequently to profit or loss:
Unrealised currency translation differences (671) (987)
Other comprehensive loss (671) (987)
Total comprehensive loss for the year (2,255) (6,905)
Attributable to:
Owners of the Company (2,256) (6,899)
Non-controlling interest 1 (6)
(2,255) (6,905)
Consolidated Balance Sheet As at 31 December 2017
Notes 2017 $’000 2016 $’000
ASSETS
Non-current assets
Intangible exploration and evaluation assets 14 1,715 2,354
Property, plant and equipment 15 2,095 1,312
Investments in joint ventures 17 - 2,323
Deferred tax asset 21 323 -
4,133 5,989
Current assets
Inventories 18 2,292 1,879
Trade and other receivables 19 4,497 4,146
Cash and cash equivalents 20 37,640 43,300
44,429 49,325
Total assets 48,562 55,314
LIABILITIES
Non-current liabilities
Provisions 24 (412) (670)
(412) (670)
Current liabilities
Short-term borrowings 22 - (3,574)
Trade and other payables 23 (1,406) (1,640)
Provisions 24 (358) (1,306)
(1,764) (6,520)
Total liabilities (2,176) (7,190)
NET ASSETS 46,386 48,124
EQUITY
Share capital 25 13,525 13,337
Share premium 329 -
Retained earnings 192,842 194,427
Cumulative translation reserves (162,170) (161,499)
Other reserves 1,589 1,589
Equity attributable to owners of the Company 46,115 47,854
Non-controlling interest 271 270
TOTAL EQUITY 46,386 48,124
The consolidated financial statements of Cadogan Petroleum plc, registered in
England and Wales no. 05718406, were approved by the Board of Directors and
authorised for issue on 25 April 2018. They were signed on its behalf by:
Guido Michelotti
Chief Executive Officer
25 April 2018
Consolidated Cash Flow Statement
For the year ended 31 December 2017
Note 2017 $’000 2016 $’000
Operating loss (3,588) (4,820)
Adjustments for:
Depreciation of property, plant and equipment 15 211 138
Impairment of oil and gas assets 15 162 90
Share of losses in joint ventures 17 2,323 143
Impairment of receivables 8 51 59
(Reversal of impairment)/Impairment of inventories 8 (77) 92
Reversal of impairment of VAT recoverable 8 (1,436) (69)
(Gain)/Loss on disposal of property, plant and equipment (9) 13
Effect of foreign exchange rate changes 116 (38)
Operating cash flows before movements in working capital (2,247) (4,391)
(Increase)/decrease in inventories (564) 1,047
Decrease in receivables 469 9,321
Decrease in payables and provisions 367 (2,014)
Cash from operations (1,975) 3,963
Interest paid (298) (1,591)
Interest on receivables received 561 230
Income taxes paid (107) (8)
Net cash (outflow)/inflow from operating activities (1,819) 2,594
Investing activities
Investments in joint venture - (2,337)
Purchases of property, plant and equipment (68) (119)
Purchases of intangible exploration and evaluation assets (568) (39)
Proceeds from sale of property, plant and equipment 198 29
Net cash inflow from acquisition of subsidiaries 17 - 2,041
Interest received 205 156
Net cash used in investing activities (233) (269)
Financing activities
Proceeds from short-term borrowings 3,365 1,908
Repayments of short-term borrowings (7,075) (10,232)
Net cash used in financing activities (3,710) (8,324)
Net decrease in cash and cash equivalents (5,762) (5,999)
Effect of foreign exchange rate changes 102 (108)
Cash and cash equivalents at beginning of year 43,300 49,407
Cash and cash equivalents at end of year 37,640 43,300
Consolidated Statement of Changes in Equity For the year ended 31 December 2017
Share capital $’000 Retained earnings $’000 Cumulative translation reserves $’000 Non-controlling interest $’000 Total $’000
Share premium account $’000 Other reserves $’000 Equity attributable to owners of the Company
As at 1 January 2016 13,337 - 2 00 , 339 (1 60 , 512 ) 1,589 54 , 753 2 76 55 , 029
Net loss for the year - - (5,912) - - (5,912) (6) (5,918)
Other comprehensive loss - - - (987) - (987) - (987)
Total comprehensive loss for the year - - (5,912) (987) - (6,899) (6) (6,905)
As at 1 January 2017 13,337 - 194 , 427 (16 1 , 499 ) 1,589 47 , 854 27 0 48 , 124
Net loss for the year - - (1,585) - - (1,585) 1 (1,584)
Other comprehensive loss - - - (671) - (671) - (671)
Total comprehensive loss for the year - - (1,585) ( 671 ) - (2,256) 1 (2,255)
Issue of ordinary shares 188 329 - - - 517 - 517
As at 31 December 2017 13,525 329 192,842 (162,170) 1,589 46,115 271 46,386
Notes to the Consolidated Financial Statements
For the year ended 31 December 2017
1. General information
Cadogan Petroleum plc (the “Company”, together with its subsidiaries the
“Group”), is registered in England and Wales under the Companies Act 2006.
The address of the registered office is 6th Floor, 60 Gracechurch Street,
London EC3V 0HR. The nature of the Group’s operations and its principal
activities are set out in the Operations Review and the Financial Review.
2. Adoption of new and revised Standards
The accounting policies applied are consistent with those adopted and
disclosed in the Group financial statements for the year ended 31 December
2016, except for changes arising from the adoption of the following new
accounting pronouncements which became effective in the current reporting
period:
§ Amendments to IAS 7 Disclosure initiative. The amendments require an entity
to provide disclosures that enable users of financial statements to evaluate
changes in liabilities arising from financing activities, including both cash
and non-cash changes. The application of these amendments has had no impact on
the Group’s consolidated financial results but gave rise to additional
disclosure as at note 20;
§ Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised
Losses. The amendments clarify how an entity should evaluate whether there
will be sufficient future taxable profits against which it can utilise a
deductible temporary difference. The application of these amendments has had
no impact on the Group’s consolidated financial statements as the Group
already assesses the sufficiency of future taxable profits in a way that is
consistent with these amendments; and
New IFRS accounting standards, amendments and interpretations not yet adopted
The following new IFRS accounting standards in issue but not yet effective:
IFRS 15 Revenue from Contracts with Customers
IFRS 15 will replace IAS 18 Revenue and IAS 11 Construction Contracts and
establishes a unified framework for determining the timing, measurement and
recognition of revenue. The principle of the new standard is to recognise
revenue as performance obligations are met rather than based on the transfer
of risks and rewards.
The effective date of the standard is 1 January 2018 to allow companies more
time to deal with transitional issues of application.
The Group evaluated the potential impact of adopting IFRS 15. As the Group’s
revenue is predominantly derived from arrangements in which the transfer of
risks and rewards coincides with the fulfilment of performance obligations
(note 3(f)), the timing and amount of revenue recognised is unlikely to be
materially affected for the majority of sales.
IFRS 15 also includes disclosure requirements including qualitative and
quantitative information about contracts with customers to help users of the
financial statements understand the nature, amount, timing and uncertainty of
revenue.
IFRS 9 Financial Instruments
IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement
and addresses the following three key areas:
§ Classification and measurement establishes a single, principles-based
approach for the classification of financial assets, which is driven by cash
flow characteristics and the business model in which an asset is held. This is
not expected to have any presentational impacts on the Group financial
statements;
§ Impairment introduces a new ‘expected credit loss’ impairment model,
requiring expected credit losses to be recognised from when financial
instruments are first recognised. The transition to this model is expected to
result in changes in the systems and computational methods used by the Group
to assess receivables and similar assets for impairment. However, given the
profile of the Group’s counterparty exposures, this is not expected to have
a material impact on the amounts recorded in the financial statements; and
§ Hedge Accounting aligns the accounting treatment with risk management
practices of an entity, including making a broader range of exposures eligible
for hedge accounting and introducing a more principles-based approach to
assessing hedge effectiveness. The adoption of IFRS 9 will not require changes
to existing hedging arrangements but may provide scope to apply hedge
accounting to a broader range of transactions in the future. The Group does
not currently hedge account.
IFRS 9 will take effect for annual reporting periods beginning on or after 1
January 2018 with retrospective application. The Group will take an option not
to restate comparative information. The Group’s implementation activities to
date have principally focused on gaining an understanding of the likely
effects of IFRS 9 given the nature of financial instruments held by the Group.
The Group has performed an impact analysis which, whilst subject to further
detailed analysis during H1 2018, indicated that there would be no material
impact on the Group results.
IFRS 16 Leases
IFRS 16 replaces the following standards and interpretations: IAS 17 Leases
and IFRIC 4 Determining whether an Arrangement contains a Lease. The new
standard provides a single lessee accounting model for the recognition,
measurement, presentation and disclosure of leases. IFRS 16 applies to all
leases including subleases and requires lessees to recognise assets and
liabilities for all leases, unless the lease term is 12 months or less, or the
underlying asset has a low value. Lessors continue to classify leases as
operating or finance.
IFRS 16 was issued in January 2016 and will apply to annual reporting periods
beginning on or after 1 January 2019. The Group will evaluate the potential
impact of IFRS 16 on the financial statements and performance measures. This
will include an assessment of whether any arrangements the Group enters into
will be considered a lease under IFRS 16, including areas such as well rental
arrangements and service contracts with potential lease elements. A more
detailed impact analysis and transition activities will be undertaken during
2018.
3. Significant accounting policies
(a) Basis of accounting
The financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”) and as adopted by the European Union
(“EU”), and therefore the Group financial statements comply with Article 4
of the EU IAS Regulation.
The financial statements have been prepared on the historical cost convention
basis, except for certain financial assets and liabilities, which have been
measured at fair values and using accounting policies consistent with IFRS.
The financial information for the year ended 31 December 2017 and 31 December
2016 set out in this announcement does not constitute the Company's statutory
financial statements for the year ended 31 December 2017 but is extracted from
the audited financial statements for those years. The 31 December 2016
accounts have been delivered to the Registrar of Companies. The statutory
financial statements for 2017 will be delivered to the Registrar of Companies
in due course.
The auditors have reported on the financial statements for the year ended 31
December 2017; their report was unqualified and did not include a reference to
any matters to which the auditor drew attention by way of emphasis without
qualifying their report. It did not contain statements under section 498 (2)
or (3) of the Companies Act 2006.
While the financial information included in this preliminary announcement has
been prepared in accordance with the recognition and measurement criteria of
International Financial Reporting Standards (IFRSs and IFRIC interpretations)
issued by the International Accounting Standards Board and as endorsed for use
in the European Union, and with those parts of the Companies Act 2006
applicable to companies preparing their accounting under IFRS. This
announcement does not itself contain sufficient information to comply with
IFRSs.
The principal accounting policies adopted are set out below:
(b) Going concern
The Group's business activities, together with the factors likely to affect
future development, performance and position are set out in the Strategic
Report. The financial position of the Group, its cash flow and liquidity
position are described in the Financial Review.
The Group’s cash balance at 31 December 2017 was $37.6 million (2016: $43.3
million). It includes pledged cash of $7 million (2016: $10.9 million) (Note
20). The Directors believe that the funds available at the date of the issue
of these financial statements are sufficient for the Group to manage its
business risks and planned investments successfully.
The directors’ confirmation that they have carried out a robust assessment
of the principal risks facing the Group, including those that could
potentially threaten its business model, future performance, solvency or
liquidity is in the Annual Report.
The Group’s forecasts and projections, taking into account reasonably
possible changes in trading activities, operational performance, start dates
and flow rates for commercial production and the price of hydrocarbons sold to
Ukrainian customers, show that there are reasonable expectations that the
Group will be able to operate on funds currently held and those generated
internally, for the foreseeable future.
The Group continues to pursue its farm-out campaign, which, if successful,
will enable it to farm-out a portion of its interests in its oil and gas
licences to spread the risks associated with further exploration and
development.
After making enquiries and considering the uncertainties described above, the
Directors have a reasonable expectation that the Company and the Group have
adequate resources to continue in operational existence for the foreseeable
future and consider the going concern basis of accounting to be appropriate
and, thus, they continue to adopt the going concern basis of accounting in
preparing the annual financial statements.
(c) Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and entities controlled by the Company (its subsidiaries) made up
to 31 December each year. IFRS 10 defines control to be investor control over
an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to control those returns
through its power over the investee.
The results of subsidiaries acquired or disposed of during the year are
included in the consolidated income statement from the effective date of
acquisition or up to the effective date of disposal, as appropriate. Where
necessary, adjustments are made to the financial statements of subsidiaries to
bring accounting policies used into line with those used by the Group. All
intra-group transactions, balances, income and expenses are eliminated on
consolidation.
Non-controlling interests in subsidiaries are identified separately from the
Group’s equity therein. Those interests of non-controlling shareholders that
are present ownership interests entitling their holders to a proportionate
share of net assets upon liquidation may be initially measured at fair value
or at the non-controlling interests’ proportionate share of the fair value
of the acquiree’s identifiable net assets. The choice of measurement is made
on an acquisition-by-acquisition basis. Other non-controlling interests are
initially measured at fair value.
Subsequent to acquisition, the carrying amount of non-controlling interests is
the amount of those interests at initial recognition plus the non-controlling
interests’ share of subsequent changes in equity. Total comprehensive income
is attributed to non-controlling interests even if this results in the
non-controlling interests having a deficit balance.
Changes in the Group’s interests in subsidiaries that do not result in a
loss of control are accounted for as equity transactions. The carrying amount
of the Group’s interests and the non-controlling interests are adjusted to
reflect the changes in their relative interests in the subsidiaries. Any
difference between the amount by which the non-controlling interests are
adjusted and the fair value of the consideration paid or received is
recognised directly in equity and attributed to the owners of the Company.
(d) Business combinations
The acquisition of subsidiaries is accounted for using the acquisition method.
The cost of the acquisition is measured at the aggregate of the fair values,
at the date of exchange, of assets given, liabilities incurred or assumed, and
equity instruments issued in exchange for control of the acquiree.
Acquisition-related costs are recognised in profit or loss as incurred. The
acquiree’s identifiable assets, liabilities and contingent liabilities that
meet the conditions for recognition under IFRS 3 Business Combinations are
recognised at their fair value at the acquisition date, except for non-current
assets (or disposal groups) that are classified as held for resale in
accordance with IFRS 5 Non-Current Assets held for sale and Discontinued
Operations. These are recognised and measured at fair value less costs to
sell.
(e) Investments in joint ventures
A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement. A
joint venture firm recognises its interest in a joint venture as an investment
and shall account for that investment using the equity method in accordance
with IAS 28 (http://www.iasplus.com/en/standards/ias/ias28-2011) Investments
in Associates and Joint Ventures.
Under the equity method, the investment is carried on the balance sheet at
cost plus changes in the Group’s share of net assets of the entity, less
distributions received and less any impairment in value of the investment. The
Group Consolidated Income Statement reflects the Group’s share of the
results after tax of the equity-accounted entity, adjusted to account for
depreciation, amortisation and any impairment of the equity accounted
entity’s assets. The Group Statement of Comprehensive Income includes the
Group’s share of the equity-accounted entity’s other comprehensive income.
Financial statements of equity-accounted entities are prepared for the same
reporting year as the Group. The Group assesses investments in
equity-accounted entities for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. In
doing so, the Group applies the criteria of IFRS 6 ‘Exploration for and
evaluation of mineral resources’ as the joint venture holds exploration
phase assets. If any such indication of impairment exists, the carrying amount
of the investment is compared with its recoverable amount, being the higher of
its fair value less costs of disposal and value in use. If the carrying amount
exceeds the recoverable amount, the investment is written down to its
recoverable amount.
The Group ceases to use the equity method of accounting from the date on which
it no longer has joint control over the joint venture or significant influence
over the associate, or when the interest becomes classified as an asset held
for sale.
(f) Revenue recognition
Revenue is measured at the fair value of the consideration received or
receivable and represents amounts receivable for hydrocarbon products and
services provided in the normal course of business, net of discounts, value
added tax (‘VAT’) and other sales-related taxes, excluding royalties on
production. Sales of hydrocarbons are recognised when the title has passed
(defined point in the pipeline for gas sales and loading point for oil).
Revenue from services is recognised in the accounting period in which services
are rendered. The main types of services provided by the Group are drilling
and civil works services. Interest income is accrued on a time basis, by
reference to the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts estimated future cash
receipts through the expected life of the financial asset to that asset’s
net carrying amount on initial recognition.
To the extent that revenue arises from test production during an evaluation
programme, an amount is credited to evaluation costs and charged to cost of
sales, so as to reflect a zero net margin.
(g) Foreign currencies
The functional currency of the Group’s Ukrainian operations is Ukrainian
Hryvnia. The functional currency of the Group’s UK subsidiaries and the
parent company is US Dollar. The vast majority of the Group’s earnings and
costs are linked to US dollars or US dollar linked currencies. The investing
activity of the Company is being conducted in US dollars and the majority of
the Group’s funds are currently denominated in US dollars. The Group primary
operating environment is outside UK and UK subsidiaries remain registered in
UK only due to listing.
In preparing the financial statements of the individual companies,
transactions in currencies other than the functional currency of each Group
company (‘foreign currencies’) are recorded in the functional currency at
the rates of exchange prevailing on the dates of the transactions. At each
balance sheet date, monetary assets and liabilities that are denominated in
foreign currencies are retranslated into the functional currency at the rates
prevailing on the balance sheet date. Non-monetary assets and liabilities
carried at fair value that are denominated in foreign currencies are
translated at the rates prevailing at the date when the fair value was
determined. Non-monetary items that are measured in terms of historical cost
in a foreign currency are not retranslated. Foreign exchange differences on
cash and cash equivalents are recognised in operating profit or loss in the
period in which they arise.
Exchange differences are recognised in the profit or loss in the period in
which they arise except for exchange differences on monetary items receivable
from or payable to a foreign operation for which settlement is neither planned
nor likely to occur. This forms part of the net investment in a foreign
operation, which is recognised in the foreign currency translation reserve and
in profit or loss on disposal of the net investment.
For the purpose of presenting consolidated financial statements, the results
and financial position of each entity of the Group, where the functional
currency is not the US dollar, are translated into US dollars as follows:
i. assets and liabilities of the Group’s foreign
operations are translated at the closing rate on the balance sheet date;
ii. income and expenses are translated at the average
exchange rates for the period, where it approximates to actual rates. In other
cases, if exchange rates fluctuate significantly during that period, the
exchange rates at the date of the transactions are used; and
iii. all resulting exchange differences arising, if any,
are recognised in other comprehensive income and accumulated equity
(attributed to non-controlling interests as appropriate), transferred to the
Group’s translation reserve. Such translation differences are recognised as
income or as expenses in the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
The relevant exchange rates used were as follows:
Year ended 31 December 2017 Year ended 31 December 2016
GBP/USD USD/UAH GBP/USD USD/UAH
Closing rate 1.3494 28.3865 1.2346 27.4770
Average rate 1.2890 26.8034 1.3557 25.8169
(h) Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the consolidated income
statement because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never taxable
or deductible. The Group’s liability for current tax is calculated using tax
rates that have been enacted or substantively enacted by the balance sheet
date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit. This is accounted for using the balance sheet liability method.
Deferred tax liabilities are generally recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible
temporary differences can be utilised. Such assets and liabilities are not
recognised if the temporary difference arises from the initial recognition of
goodwill or from the initial recognition (other than in a business
combination) of other assets and liabilities in a transaction that affects
neither the taxable profit nor the accounting profit. Deferred tax liabilities
are recognised for taxable temporary differences arising on investments in
subsidiaries and associates, and interests in joint ventures, except where the
Group is able to control the reversal of the temporary difference and it is
probable that the temporary difference will not reverse in the foreseeable
future.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered. Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in the income statement, except when it
relates to items charged or credited in other comprehensive income, in which
case the deferred tax is also dealt with in other comprehensive income.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax
liabilities and when they relate to income taxes levied by the same taxation
authority and the Group intends to settle its current tax assets and
liabilities on a net basis.
In case of the uncertainty of the tax treatment, the Group assess, whether it
is probable or not, that the tax treatment will be accepted, and to determine
the value, the Group use the most likely amount or the expected value in
determining taxable profit (tax loss), tax bases, unused tax losses, unused
tax credits and tax rates.
(i) Other property, plant and equipment
Property, plant and equipment (‘PP&E’) are carried at cost less
accumulated depreciation and any recognised impairment loss. Depreciation and
amortisation is charged so as to write-off the cost or valuation of assets,
other than land, over their estimated useful lives, using the straight-line
method, on the following bases:
Other
PP&E
10% to 30%
The gain or loss arising on the disposal or retirement of an asset is
determined as the difference between the sales proceeds and the carrying
amount of the asset and is recognised in income.
(j) Intangible exploration and evaluation assets
The Group applies the modified full cost method of accounting for intangible
exploration and evaluation (‘E&E’) expenditure, which complies with
requirements set out in IFRS 6 Exploration for and Evaluation of Mineral
Resources. Under the modified full cost method of accounting, expenditure made
on exploring for and evaluating oil and gas properties is accumulated and
initially capitalised as an intangible asset, by reference to appropriate cost
centres being the appropriate oil or gas property. E&E assets are then
assessed for impairment on a geographical cost pool basis, which are assessed
at the level of individual licences.
E&E assets comprise costs of (i) E&E activities which are in progress at the
balance sheet date, but wherethe existence of commercial reserves has yet to
be determined (ii) E&E expenditure which, whilst representing part of the E&E
activities associated with adding to the commercial reserves of an established
cost pool, did not result in the discovery of commercial reserves.
Costs incurred prior to having obtained the legal rights to explore an area
are expensed directly to the income statement as incurred.
Exploration and Evaluation costs
E&E expenditure is initially capitalised as an E&E asset. Payments to acquire
the legal right to explore, costs of technical services and studies, seismic
acquisition, exploratory drilling and testing are also capitalised as
intangible E&E assets.
Tangible assets used in E&E activities (such as the Group’s vehicles,
drilling rigs, seismic equipment and other property, plant and equipment) are
normally classified as PP&E. However, to the extent that such assets are
consumed in developing an intangible E&E asset, the amount reflecting that
consumption is recorded as part of the cost of the intangible asset. Such
intangible costs include directly attributable overheads, including the
depreciation of PP&E items utilised in E&E activities, together with the cost
of other materials consumed during the exploration and evaluation phases.
E&E assets are not amortised prior to the conclusion of appraisal activities.
Treatment of E&E assets at conclusion of appraisal activities
Intangible E&E assets related to each exploration property are carried
forward, until the existence (or otherwise) of commercial reserves has been
determined. If commercial reserves have been discovered, the related E&E
assets are assessed for impairment on individual assets basis as set out below
and any impairment loss is recognised in the income statement. Upon approval
of a development programme, the carrying value, after any impairment loss, of
the relevant E&E assets is reclassified to the development and production
assets within PP&E.
Intangible E&E assets that relate to E&E activities that are determined not to
have resulted in the discovery of commercial reserves remain capitalised as
intangible E&E assets at cost less accumulated amortisation, subject to
meeting a pool-wide impairment test in accordance with the accounting policy
for impairment of E&E assets set out below.
Impairment of E&E assets
E&E assets are assessed for impairment when facts and circumstances suggest
that the carrying amount may exceed its recoverable amount. Such indicators
include, but are not limited to those situations outlined in paragraph 20 of
IFRS 6 Exploration for and Evaluation of Mineral Resources such as, a) licence
expiry during year or in the near future and will not likely to be renewed; b)
expenditure on E&E activity neither budgeted nor planned; c) commercial
quantities of mineral resources have been discovered; and d) sufficient data
exist to indicate that carrying amount of E&E asset is unlikely to be
recovered in full from successful development or sale.
Where there are indications of impairment, the E&E assets concerned are tested
for impairment. Where the E&E assets concerned fall within the scope of an
established full cost pool, which are not larger than an operating segment,
they are tested for impairment together with all development and production
assets associated with that cost pool, as a single cash generating unit.
The aggregate carrying value of the relevant assets is compared against the
expected recoverable amount of the pool, generally by reference to the present
value of the future net cash flows expected to be derived from production of
commercial reserves from that pool. Where the assets fall into an area that
does not have an established pool or if there are no producing assets to cover
the unsuccessful exploration and evaluation costs, those assets would fail the
impairment test and be written off to the income statement in full.
Impairment losses are recognised in the income statement as additional
depreciation and amortisation and are separately disclosed.
(k) Development and production assets
Development and production assets are accumulated on a field-by-field basis
and represent the cost of developing the commercial Reserves discovered and
bringing them into production, together with E&E expenditures incurred in
finding commercial Reserves transferred from intangible E&E assets.
The cost of development and production assets comprises the cost of
acquisitions and purchases of such assets, directly attributable overheads,
finance costs capitalised, and the cost of recognising provisions for future
restoration and decommissioning.
Depreciation of producing assets
Depreciation is calculated on the net book values of producing assets on a
field-by-field basis using the unit of production method. The unit of
production method refers to the ratio of production in the reporting year as a
proportion of the Proved and Probable Reserves of the relevant field, taking
into account future development expenditures necessary to bring those Reserves
into production.
Producing assets are generally grouped with other assets that are dedicated to
serving the same Reserves for depreciation purposes, but are depreciated
separately from producing assets that serve other Reserves.
(l) Impairment of development and production assets and other property, plant
and equipment
At each balance sheet date, the Group reviews the carrying amounts of its PP&E
to determine whether there is any indication that those assets have suffered
an impairment loss. If any such indication exists, the recoverable amount of
the asset is estimated in order to determine the extent of the impairment loss
(if any). Where the asset does not generate cash flows that are independent
from other assets, the Group estimates the recoverable amount of the
cash-generating unit to which the asset belongs. The recoverable amount is the
higher of fair value less costs to sell and value in use. In assessing value
in use, the estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset for which the
estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated
to be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment
loss is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the
asset (cash-generating unit) is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not exceed
the carrying amount that would have been determined had no impairment loss
been recognised for the asset (cash-generating unit) in prior years. A
reversal of an impairment loss is recognised as income immediately.
(m) Inventories
Oil and gas stock and spare parts are stated at the lower of cost and net
realisable value. Costs comprise direct materials and, where applicable,
direct labour costs and those overheads that have been incurred in bringing
the inventories to their present location and condition. Cost is allocated
using the weighted average method. Net realisable value represents the
estimated selling price less all estimated costs of completion and costs to be
incurred in marketing, selling and distribution.
(n) Financial instruments
Recognition of financial assets and financial liabilities
Financial assets and financial liabilities are recognised on the Group’s
balance sheet when the Group becomes a party to the contractual provisions of
the instrument.
Derecognition of financial assets and financial liabilities
The Group derecognises a financial asset only when the contractual rights to
cash flows from the asset expire; or it transfers the financial asset and
substantially all the risks and rewards of ownership of the asset to another
entity. If the Group neither transfers nor retains substantially all the risks
and rewards of ownership and continues to control the transferred asset, the
Group recognises its retained interest in the asset and an associated
liability for the amount it may have to pay. If the Group retains
substantially all the risks and rewards of ownership of a transferred
financial asset, the Group continues to recognise the financial asset and also
recognises a collateralised borrowing for the proceeds received. The Group
derecognises financial liabilities when the Group’s obligations are
discharged, cancelled or expired.
Financial assets
The Group classifies its financial assets in the following categories: loans
and receivables; available-for-sale financial assets; held to maturity
investments; and financial assets at fair value through profit or loss
(“FVTPL”). The classification depends on the purpose for which the
financial assets were acquired. Management determines the classification of
its financial assets at initial recognition and re-evaluates this designation
at every reporting date.
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. They are
included in current assets, except for those with maturities greater than
twelve months after the balance sheet date which will then be classified as
non-current assets. Loans and receivables are classified as “other
receivables” and “cash and cash equivalents” in the balance sheet.
Trade and other receivables
Trade and other receivables are measured at initial recognition at fair value,
and are subsequently measured at amortised cost using the effective interest
rate method.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, on-demand deposits, and other
short-term highly liquid investments that are readily convertible to a known
amount of cash with three months or less remaining to maturity and are subject
to an insignificant risk of changes in value.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of
impairment at each balance sheet date. Appropriate allowances for estimated
irrecoverable amounts are recognised in profit or loss when there is objective
evidence that the asset is impaired. The allowance recognised is measured as
the difference between the asset’s carrying amount of the financial asset
and the present value of estimated future cash flows discounted at the
effective interest rate computed at initial recognition.
Evidence of impairment could include: significant financial difficulty of the
issuer or counterparty; default or delinquency in interest or principal
payments; or it becoming probable that the borrower will enter bankruptcy or
financial re-organisation.
For certain categories of financial assets, such as trade receivables, assets
that are assessed not to be impaired individually are, in addition, assessed
for impairment on a collective basis.
The carrying amount of the financial assets is reduced by the impairment loss
directly for all financial assets with the exception of trade receivables,
where the carrying amount is reduced through the use of an allowance account.
Subsequent recoveries of amounts previously written off are credited against
the allowance account. Changes in the carrying amount of the allowance account
are recognised in profit or loss.
If, in a subsequent period, the amount of the impairment loss decreases and
the decrease can be related objectively to an event occurring after the
impairment was recognised, the previously recognised impairment loss is
reversed through profit or loss to the extent that the carrying amount of the
investment at the date the impairment is reversed does not exceed what the
amortised cost would have been had the impairment not been recognised.
Financial liabilities
Financial liabilities are classi?ed as either ?nancial liabilities ‘at
FVTPL’ or ‘other ?nancial liabilities’
Trade payables and short-term borrowings
Trade payables and short-term borrowings are initially measured at fair value,
and are subsequently measured at amortised cost, using the effective interest
rate method.
(o) Provisions
Provisions are recognised when the Group has a present obligation (legal or
constructive) as a result of a past event, it is probable that the Group will
be required to settle that obligation and a reliable estimate can be made of
the amount of the obligation. The amount recognised as a provision is the best
estimate of the consideration required to settle the present obligation at the
balance sheet date, taking into account the risks and uncertainties
surrounding the obligation. When a provision is measured using the cash flows
estimated to settle the present obligation, its carrying amount is the present
value of those cash flows.
(p) Decommissioning
A provision for decommissioning is recognised in full when the related
facilities are installed. The decommissioning provision is calculated as the
net present value of the Group’s share of the expenditure expected to be
incurred at the end of the producing life of each field in the removal and
decommissioning of the production, storage and transportation facilities
currently in place. The cost of recognising the decommissioning provision is
included as part of the cost of the relevant asset and is thus charged to the
income statement on a unit of production basis in accordance with the
Group’s policy for depletion and depreciation of tangible non-current
assets. Period charges for changes in the net present value of the
decommissioning provision arising from discounting are included within finance
costs.
4. Critical accounting judgements and key sources of estimation
uncertainty
In the application of the Group’s accounting policies, which are described
in note 3, the Directors are required to make judgements, estimates and
assumptions about the carrying amounts of the assets and liabilities that are
not readily apparent from other sources. The estimates and associated
assumptions are based on historical experience and other factors that are
considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period or in the period
of the revision and future periods if the revision affects both the current
and future periods.
The following are the critical judgements and estimates that the Directors
have made in the process of applying the Group’s accounting policies and
that have the most significant effect on the amounts recognised in the
financial statements.
Critical judgements
(a) Classification of the exploration licence as PP&E
Although Monastyretska is an exploration licence, in Ukraine it is allowed to
produce hydrocarbons from an exploration licence. In 2017 the Group
significantly increased production of oil on this licence and confirmed
commercially viable reserves. Due to this, assets of Monastyretska have been
reclassified from E&E to PP&E and started to be depreciated.
(b) Impairment of investments in joint ventures
The Group’s investments in joint ventures are accounted for using the equity
method. The carrying value of the Group’s investments is reviewed at each
balance sheet date with reference to the impairment indicators in IFRS 6. As a
result impairment of $2.3 million has been recognised in the financial
statements following Eni’s notification of exit from WGI. Further details
are provided in Note 17.
Areas of key estimation uncertainty
(a) Impairment of E&E assets
The outcome of ongoing exploration, and therefore the recoverability of the
carrying value of intangible exploration and evaluation assets, is inherently
uncertain. Management assess impairment indicators and if necessary performs
impairment review, which considers key sources of estimation to implement the
Group’s policy with respect to exploration and evaluation assets and
considers these assets for impairment at least annually with reference to
indicators in IFRS 6 (Note 14).
5. Segment information
Segment information is presented on the basis of management’s perspective
and relates to the parts of the Group that are defined as operating segments.
Operating segments are identified on the basis of internal reports provided to
the Group’s chief operating decision maker (“CODM”). The Group has
identified its senior management team as its CODM and the internal reports
used by the senior management team to oversee operations and make decisions on
allocating resources serve as the basis of information presented. These
internal reports are prepared on the same basis as these consolidated
financial statements.
Segment information is analysed on the basis of the type of activity, products
sold or services provided. The majority of the Group’s operations and all
Group’s revenues are located within Ukraine. Segment information is analysed
on the basis of the types of goods supplied by the Group’s operating
divisions. The Group’s reportable segments under IFRS 8 are therefore as
follows:
Exploration and Production
§ E&P activities on the exploration and production licences for natural gas,
oil and condensate.
Service
§ Drilling services to exploration and production companies; and
§ Civil works services to exploration and production companies.
Trading
§ Import of natural gas from European countries; and
§ Local purchase and sales of natural gas operations with physical delivery
of natural gas.
The accounting policies of the reportable segments are the same as the
Group’s accounting policies described in Note 3. Sales between segments are
carried out at rates considered to approximate market prices. The segment
result represents operating profit under IFRS before unallocated corporate
expenses. Unallocated corporate expenses include management remuneration,
representative expenses and expenses incurred in respect of the maintenance of
office premises. This is the measure reported to the CODM for the purposes of
resource allocation and assessment of segment performance. The Group does not
present information on segment assets and liabilities as the CODM does not
review such information for decision-making purposes.
As of 31 December 2017 and for the year then ended the Group’s segmental
information was as follows:
Exploration and Production Service (()(1)()) Trading Consolidated
$’000 $’000 $’000 $’000
Sales of hydrocarbons 1,779 - 13,367 15,146
Sales between segments 630 - (630) -
Total revenue 2,409 - 12,737 15,146
Cost of sales (1,687) - (11,406) (13,093)
Administrative expenses (454) (26) (265) (745)
Finance income, net (Note 11) ((2)) - - 305 305
Segment results 268 (26) 1,371 1,613
Unallocated administrative expenses (4,236)
Other income, net 2,308
Impairment of oil and gas assets (162)
Share of loss in joint ventures (2,323)
Net foreign exchange gains (116)
Loss before tax (2,916)
(1) The services business segment in 2017 primarily provided
well work-overs and other works to other Group companies as tenders secured
with third parties had been deferred by customers.
(2) Net finance income includes $0.26 million of interest on
short-term borrowings, $0.49 million of interest income on receivables and $67
thousand of interest on cash deposits used for trading.
(3) Trading result excluding interest received on receivables
was $0.9 million.
As of 31 December 2016 and for the year then ended the Group’s segmental
information was as follows:
Exploration and Production Service Trading Consolidated
$’000 $’000 $’000 $’000
Sales of hydrocarbons 598 - 16,598 17,196
Other revenue - 2,496 ((1)) - 2,496
Sales between segments 981 (981) -
Total revenue 1,579 2,496 15,617 19,692
Cost of sales (1,182) (1,893) (15,548) (18,623)
Administrative expenses (408) - (886) (1,294)
Finance cost, net (Note 11) ((2)) - - (1,153) (1,153)
Segment results (11) 603 (1,970) (1,378)
Unallocated administrative expenses (4,309)
Other losses, net (25)
Impairment of oil and gas assets ((3)) (90)
Gain on acquisition of assets 99
Share of loss in joint ventures ((4)) (143)
Net foreign exchange gains 38
Loss before tax (5,808)
(1) Services provided were primarily related to well abandonment and site
restoration.
(2) Net finance cost includes $1.4 million of interest on short-term
borrowings, $0.2 million of interest income on receivables and $31 thousand of
interest on cash deposits used for trading.
(3) Impairment loss recognised in 2016 of $90 thousand related to exploration
and production segment.
(4) Share of losses in the joint ventures includes $1.7 million of operating
losses, $0.8 million of additional impairment of Westgasinvest LLC and $2.3
million of income received by one of the Group subsidiaries for
decommissioning services provided to the joint ventures (Note 17).
6. Revenue
2017 $’000 2016 $’000
Sale of hydrocarbons 15,145 17,196
Other revenues - 2,496
15,145 19,692
Information about major customers
Included in revenues for the year ended 31 December 2017 are revenues of $7.4
million (2016: $6.3 million), which arose from sales to the Group’s two
largest customers.
7. Administrative expenses
2017 $’000 2016 $’000
Staff costs (Note 10) 2,531 3,082
Professional fees 1,206 1,555
Travel 238 316
Office rent 161 138
Insurance 177 122
Other 668 390
4,981 5,603
8. Reversal of impairment / (impairment) of other assets
2017 $’000 2016 $’000
Inventories 77 (92)
Receivables (51) (59)
VAT recoverable 1,436 69
Reversal of impairment /(impairment) of other assets, net 1,462 (82)
The carrying value of inventory as at 31 December 2017 and 2016 has been
impaired to reduce it to net realisable value (see note 18). At 31 December
2017, $77 thousand of impairment has been released following the sale of
previously impaired inventory for this amount.
$1.4 million (2016: $69 thousand) of provision against VAT has been released
following receipt and offsets of VAT payable. $6.4 million remains impaired
due to the continued delays and uncertainty associated with recovering VAT in
Ukraine.
9. Auditor’s remuneration
The analysis of auditor’s remuneration is as follows:
2017 $’000 2016 $’000
Audit fees
Fees payable to the Company’s auditor and their associates for the audit of the Company’s annual accounts 229 146
Fees payable to the Company’s auditor and their associates for other services to the Group:
- The audit of the Company’s subsidiaries 13 43
Total audit fees 242 189
Non-audit fees
- Audit-related assurance services 5 19
- Taxation compliance services 33 36
Non-audit fees 38 55
Audit fees for 2017 refer to BDO LLP of $121 thousand for the audit of group
accounts as of and for the year ended 31 December 2017 and to Deloitte LLP,
the Group’s previous auditor, of $108 thousand, for the audit as of and for
the year ended 31 December 2016. Non-audit service fees in 2017 include $33
thousand of tax compliance services provided by BDO LLP. The tax compliance
services relates to reporting periods prior to BDO LLP’s appointment as the
Group’s auditor and was discontinued upon their appointment. The
audit-related assurance services for 2017 include $5 thousand in respect of
BDO LLP.
10. Staff costs
The average monthly number of employees (including Executive Directors) was:
2017 Number 2016 Number
Executive Directors 1 3
Other employees 68 66
69 69
Total number of employees at 31 December 69 69
$’000 $’000
Their aggregate remuneration comprised:
Wages and salaries 2,150 2,443
Annual bonus 179 475
Social security costs 290 164
2,619 3,082
Within wages and salaries $0.8 million (2016: $1.1 million) relates to amounts
accrued and paid to Executive Directors for services rendered.
11. Finance income/(costs), net
2017 $’000 2016 $’000
Interest expense on short-term borrowings (256) (1,414)
Total interest expense on financial liabilities (256) (1,4 14 )
Interest benefit/(expense) on tax provision (note 24) 189 (33)
Interest income on receivables 494 230
Interest income on cash deposits in Ukraine 67 31
Investment revenue 205 125
Total interest income on financial assets 955 386
Unwinding of discount on decommissioning provision (note 24) (27) (26)
672 (1,087)
12. Tax
2017 $’000 2016 $’000
Current tax - 110
Adjustment in relation to the current tax of prior years (1,009) -
Deferred tax
Recognition of previously unrecognised deferred tax assets (323) -
(1,332) 110
The Group’s operations are conducted primarily outside the UK, namely in
Ukraine. The most appropriate tax rate for the Group is therefore considered
to be 18% (2016: 18%), the rate of profit tax in Ukraine, which is the primary
source of revenue for the Group. Taxation for other jurisdictions is
calculated at the rates prevailing in the respective jurisdictions.
As at 31 December 2015 the Company recognised a short-term provision in
respect of a probable corporate tax obligation of $1.3 million (£0.9 million)
and up to $0.2 million (£0.1 million) of interest in respect on the
classification of taxable income and expenses. On 29 August 2017 the Company
signed a settlement with HMRC. For this reason, the provision in respect of
probable tax obligation of $1 million and interest of $0.2 million has been
reversed.
The taxation charge for the year can be reconciled to the loss per the income
statement as follows:
2017 $’000 2017 % 2016 $’000 2016 %
Loss before tax (2,916) 100 (5,808) 100
Tax credit at Ukraine corporation tax rate of 18% (2016: 18%) (525) 18 (1,045) 18
Permanent differences (923) 32 1,060 (18.2)
Unrecognised tax losses generated in the year 1,174 (40) 378 (6.5)
Recognition of previously unrecognised deferred tax assets (323) 11 - -
Tax credit related to the Joint venture losses 418 14 26 (0.4)
Effect of different tax rates (144) 5 (309) 5.3
(323) 11 110 (1.8)
Adjustments recognised in the current year in relation to the current tax of prior years (1,009) - - -
Income tax (benefit)/expense recognised in profit or loss (1,332) - 110 -
Permanent differences mostly represent differences on profit/(loss) items,
including provisions, accruals, impairments, related to taxation in Ukraine,
where it is probable that such differences will not reverse in the foreseeable
future.
13. Loss per Ordinary share
Basic loss per Ordinary Share is calculated by dividing the net loss for the
year attributable to owners of the Company by the weighted average number of
Ordinary shares outstanding during the year. The calculation of the basic
loss per share is based on the following data:
Loss attributable to owners of the Company 2017 $’000 2016 $’000
Loss for the purposes of basic loss per share being net loss attributable to owners of the Company (1,585) (5,912)
Number of shares Number ‘000 Number ‘000
Weighted average number of Ordinary shares for the purposes of basic loss per share 232,251 231,092
Cent cent
Loss per Ordinary share
Basic (0.7) (2.6)
The Group has no potentially dilutive instruments in issue. Therefore no
diluted loss per share is presented above.
14. Intangible exploration and evaluation assets
Cost $’000
At 1 January 2016 25,333
Additions 39
Disposals (27)
Exchange differences (2,997)
At 1 January 2017 22,348
Additions 461
Disposals (78)
Change in estimate of decommissioning assets (note 24) 27
Transfer to property, plant and equipment (937)
Exchange differences (753)
At 31 December 2017 21,068
Impairment
At 1 January 2016 22,633
Exchange differences (2,639)
At 1 January 2017 19,994
Exchange differences (641)
At 31 December 2017 19,353
Carrying amount
At 31 December 20 1 7 1,715
At 31 December 2016 2,354
The carrying amount of E&E assets as at 31 December 2017 of $1.7 million
(2016: $2.4 million) relates to Bitlyanska licence. Management has performed
an impairment review. As part of the information considered management
carried out the assessment of the Bitlyanska licence’s value in use based on
the underlying discounted cash flow forecasts. The impairment review
supported the conclusion that no impairment was applicable. Key assumptions
used in the impairment assessment were: future gas price was assumed to be
flat $230, real per m3; and the pre-tax discount rate used was 20%, real.
Break-even point in the model would require gas prices to fall to $160 or the
discount rate to increase to 90%.
15. Property, plant and equipment
Cost Development and production assets $’000 Other $’000 Total $’000
At 1 January 2016 6,094 3,173 9,267
Additions 90 29 119
Disposals - (29) (29)
Exchange differences (711) (370) (1,081)
At 1 January 2017 5,473 2,803 8,276
Additions 133 148 281
Change in estimate of decommissioning assets (note 24) 73 - 73
Transfer from E&E 937 - 937
Disposals (51) (324) (375)
Exchange differences (193) (91) (283)
At 31 December 2017 6,372 2,536 8,90 9
Accumulated depreciation and impairment
At 1 January 2016 6,094 1,512 7,606
Impairment 90 - 90
Charge for the year - 138 138
Disposals - (14) (14)
Exchange differences (711) (145) (856)
At 1 January 2017 5,473 1,491 6,964
Impairment 162 - 162
Charge for the year 44 167 211
Disposals (107) (199) (306)
Exchange differences (171) (46) (217)
At 31 December 2017 5,401 1,413 6,814
Carrying amount
At 31 December 2017 971 1,124 2,095
At 31 December 2016 - 1,312 1,312
Other property, plant and equipment include fixtures and fittings for the
development and production activities.
The carrying amount of development and production assets as at 31 December
2017 of $0.9 million relates to Monastyretska licence. The Monastyretska asset
of $0.5 million was classified as an exploration and evaluation asset as at 31
December 2016. Until last year all costs had been capitalised as the licence
is at exploration stage and production was minimal. Given the recent increase
in the number of producing wells and growth of production rate, the Group
concluded that the asset reached commercial feasibility and production from
July 2017 and reclassified this asset to development and production. Past
amounts plus the cost incurred in 2017 have started to be depreciated.
Depreciation includes $17 thousand for Monastyretska licence.
Management has performed an impairment review. As part of the information
considered management carried out the assessment of the Monastyretska
licence’s value in use based on the underlying discounted cash flow
forecasts. The impairment review supported the conclusion that no impairment
was applicable. Key assumptions used in the impairment assessment were: future
oil price was assumed to be flat $330, real per tonne; and the pre-tax
discount rate used was 20%, real.
16. Subsidiaries
The Company had investments in the following subsidiary undertakings as at 31
December 2017:
Name Country of incorporation and operation Proportion of voting interest % Activity Registered office
Directly held
Cadogan Petroleum Holdings Ltd UK 100 Holding company 6th Floor 60 Gracechurch Street, London, United Kingdom, EC3V 0HR
Ramet Holdings Ltd Cyprus 100 Holding company 48 Inomenon Ethnon, Guricon House, Floor 2 & 3, 6042, Larnaca, Cyprus
Indirectly held
Cadogan Petroleum Holdings BV Netherlands 100 Holding company Hoogoorddreef 15, 1101 BA Amsterdam
Cadogan Bitlyanske BV Netherlands 100 Holding company Hoogoorddreef 15, 1101 BA Amsterdam
Cadogan Delta BV Netherlands 100 Holding company Hoogoorddreef 15, 1101 BA Amsterdam
Cadogan Astro Energy BV Netherlands 100 Holding company Hoogoorddreef 15, 1101 BA Amsterdam
Cadogan Pirkovskoe BV Netherlands 100 Holding company Hoogoorddreef 15, 1101 BA Amsterdam
Cadogan Zagoryanske Production BV Netherlands 100 Holding company Hoogoorddreef 15, 1101 BA Amsterdam
Zagoryanska Petroleum BV Netherlands 100 Holding company Hoogoorddreef 15, 1101 BA Amsterdam
Pokrovskoe Petroleum BV Netherlands 100 Holding company Hoogoorddreef 15, 1101 BA Amsterdam
Cadogan Ukraine Holdings Limited Cyprus 100 Holding company 48 Inomenon Ethnon, Guricon House, Floor 2 & 3, 6042, Larnaca, Cyprus
Momentum Enterprise (Europe) Ltd Cyprus 100 Holding company 48 Inomenon Ethnon, Guricon House, Floor 2 & 3, 6042, Larnaca, Cyprus
Rentoul Ltd Isle of Man 100 Holding company Commerce House, 1 Bowring Road, Ramsey, Isle of Man IM8 2LQ
Radley Investments Ltd UK 100 Dormant Lynton House 7-12 Tavistock Square London WC1H 9LT
Name Country of incorporation and operation Proportion of voting interest % Activity Registered office
Cadogan Petroleum Trading SAGL Switzerland 100 Dormant Via Clemente Maraini 39, 6900 Lugano, Switzerland
LLC AstroInvest-Ukraine Ukraine 100 Exploration 5a, Pogrebnyak Street, ap. 2, Zinkiv, Poltava region, Ukraine, 38100
LLC Astro Gas Ukraine 100 Exploration 5a, Pogrebnyak Street, ap. 2, Zinkiv, Poltava region, Ukraine, 38100
LLC Astroinvest-Energy Ukraine 100 Exploration 5a, Pogrebnyak Street, ap. 2, Zinkiv, Poltava region, Ukraine, 38100
LLC Industrial Company Gazvydobuvannya Ukraine 100 Exploration 3, Myru str., Poltava, Ukraine, 36022
DP USENCO Ukraine Ukraine 100 Exploration 8, Mitskevycha sq., Lviv, Ukraine, 79000
LLC USENCO Nadra Ukraine 95 Exploration 9a, Karpenka-Karoho str., Sambir, Lviv region, Ukraine
JV Delta Ukraine 100 Exploration 3 Petro Kozlaniuk str, Kolomyia,
LLC Cadogan Ukraine Ukraine 100 Corporate services 48/50A Zhylyanska Street, BC “Prime”, 8th fl. 01033 Kyiv, Ukraine
LLC Astro-Service Ukraine 100 Service Company 3 Petro Kozlaniuk str, Kolomyia,
OJSC AgroNaftoGasTechService Ukraine 79.9 Construction services Ivan Franko str, Hvizdets, Kolomyia district, Ivano-Frankivsk Region, Ukraine
Exploenergy s.r.l. Italy 90 (2016: 0) Exploration Via Triulziana 16c, San Donato Milanese Milano, CAP 20097, Italy
During the year ended 31 December 2017, the Group structure continued to be
rationalised both so as to reduce the number of legal entities and also to
replace the structure of multiple jurisdictions with one based on a series of
sub-holding companies incorporated in the Netherlands for each licence area.
In 2017 the subsidiaries liquidated/sold included: Cadogan Black Sea Holdings
B.V., Cadogan Momentum Holdings Inc. and Global Commodities NC SAS.
17. Joint venture
As at the end of the 2017 reporting periods the details of the Group’s joint
venture is as follows:
Company name Licences held Country of incorporation and operation Ownership share % Activity
LLC Westgasinvest Cheremkhivsko-Strupkivska, Debeslavetska Production, Filimonivska, Yakovlivska, Sandugeyevska, Kurinna licence Ukraine 15 Exploration
As at 31 December 2017 Westgasinvest LLC is accounted for using the equity
method in these consolidated financial statements. According to the
shareholders’ agreements, which regulate the activities of the jointly
controlled entities, all key decisions require unanimous approval from the
shareholders, therefore these entities are jointly controlled.
Summarised financial information in respect of each of the Group’s material
joint ventures is set out below. The summarised financial information below
represents amounts shown in the joint venture’s financial statements
prepared in accordance with IFRSs.
2017 $’000 2016 $’000
Non-current assets 64 1,460
Current assets 591 60
Non-current liabilities - -
Current liabilities (1,141) (391)
Included in the above amounts are:
Cash and cash equivalents 11 49
Current financial liabilities (excluding trade payables) 13 47
Revenue - -
Loss for the period (4,490) (3,150)
Other comprehensive income (820) (1,686)
Total comprehensive loss (5,310) (4,836)
Net assets of the joint venture (486) 1,129
The carrying amounts of the Group’s interest in joint venture recognised in
the financial statements of the Group using the equity method are set out in
the tables below:
LLC Westgasinvest $’000
Net assets recognised as at 1 January 2016 3,881
Loss for the year (1,558)
Net assets recognised as at 1 January 2017 2,323
Loss for the year (2,323)
Carrying amount of Group’s interest as at 31 December 2017 -
In 2017, Eni has informed its partners, NJSC “Nadra Ukrayny” and Cadogan
Ukraine, of its intention to exit the joint venture and discussions are
on-going on whether and under which terms to accept Eni’s exit and, more in
general, on the future of the project. As a result of the subsequent
uncertainty as to the future exploration of the licences following the
proposed exit by Eni which provided a carried interest to the Group,
management has decided to impair the residual value of its 15 % participating
interest in the project. The loss for the year comprises of 15% share in loss
for the period of $0.7 million (2016: $0.7 million) and remaining amount of
$1.6 million (2016: $0.8 million) related to impairment of investment in joint
venture.
Acquisition of remaining interest in joint ventures in 2016
21 December 2016 the Group acquired 30% of the issued share capital of
Pokrovskaya Petroleum B.V. (“Pok”) and 60% of the issued share capital of
Zagoryanskaya Petroleum B.V. (“Zag”) for an immaterial consideration,
resulting in Pokrovskaya Petroleum B.V. and Zagoryanskaya Petroleum B.V.
becoming wholly-owned companies. As a result of the transaction, the Group
acquired $2.0 million of cash and also $5.9 million of VAT credit and $103
million of unused tax losses of both companies, for which the impairment had
been recognised in prior years. The Group consolidated the entities and
recognised a gain in the amount of $99 thousand.
In 2016 till the date of acquisition Zag had $1.2 million of profit and Pok
incurred $2.0 million of losses mainly related to the impairment of E&E assets
due to licence expiration in August 2016.
18. Inventories
2017 $’000 2016 $’000
Natural gas 1,312 987
Other inventories 1,143 1,076
Impairment provision for obsolete inventory (163) (184)
Carrying amount 2,292 1,879
The impairment provision as at 31 December 2017 and 2016 is made so as to
reduce the carrying value of the obsolete inventories to net realisable value.
As at 31 December 2017 and 2016 the Group had no inventories carried at fair
value less costs of disposal. Cost of inventories sold during the year was
$0.3 million (2016: $29 thousand).
19. Trade and other receivables
2017 $’000 2016 $’000
Trading prepayments 1,797 777
Trading receivables 1,338 2,163
VAT recoverable 896 829
Receivable from joint venture 56 58
Other receivables 410 319
4,497 4,146
Trading prepayments represent actual payments made by the Group to suppliers
for the January 2018 gas supply.
Trading receivables represent current receivables from customers and are to be
repaid within four months after the year end. The Group considers that the
carrying amount of receivables approximates their fair value.
VAT recoverable is presented net of the cumulative provision of $6.4 million
(2016: $7.3 million) against Ukrainian VAT receivable has been recognised as
at 31 December 2017. VAT recoverable relates to the gas trading operations,
production and expected to be recovered through the gas and oil sales. Refer
to note 8.
20. Notes supporting statement of cash flows
Cash and cash equivalents as at 31 December 2017 of $37.6 million (2016: $43.3
million) comprise cash held by the Group. The Directors consider that the
carrying amount of these assets approximates to their fair value. As of 31
December 2017 total amount of pledged cash is $7 million (2016: $10.9
million), which related to security of borrowings and held at UK bank (note
22).
Non-cash transactions from financing activities are shown in the
reconciliation of liabilities from financing transactions:
Short term borrowings $’000
At 1 January 2016 12,903
Cash flows (8,324)
Effects of foreign exchange (1,005)
At 1 January 2017 3,574
Cash flows (3,709)
Effects of foreign exchange 135
At 31 December 2017 -
21. Deferred tax
The following are the major deferred tax liabilities and assets recognised by
the Group and movements thereon during the current and prior reporting period:
Temporary differences $’000
Liability as at 1 January 2016 -
Deferred tax benefit -
Exchange differences -
Liability as at 1 January 2017 -
Deferred tax benefit 323
Exchange differences -
Asset as at 31 December 2017 323
At 31 December 2017, the Group had the following unused tax losses available
for offset against future taxable profits:
2017 $’000 2016 $’000
UK 15,028 10,652
Ukraine 182,469 180,475
197,497 191,127
Deferred tax assets have been recognised in respect of those tax losses where
there is sufficient certainty that profit will be available in future periods
against which they can be utilised.
The Group’s unused tax losses of $14.9 million (2016: $10.7 million)
relating to losses incurred in the UK are available to shelter future
non-trading profits arising within the Company. These losses are not subject
to a time restriction on expiry.
Unused tax losses incurred by Ukraine subsidiaries amount to $182.5 million
(2016: $180.5 million). Under general provisions, these losses may be carried
forward indefinitely to be offset against any type of taxable income arising
from the same company of origination. Tax losses may not be surrendered from
one Ukraine subsidiary to another.
22. Short-term borrowings
In October 2014 the Group started to use short-term borrowings as a financing
facility for its trading activities. Borrowings are represented by credit line
drawn in short-term tranches in UAH at a Ukrainian bank which is a 100%
subsidiary of a UK bank. The credit line is secured by $7 million of cash
balance placed at the European bank in the UK.
The outstanding amount as at 31 December 2017 was $nil million (2016: $3.6
million). Interest is paid monthly and as at 31 December 2017 accrued interest
amounted to $nil million (2016: $0.04 million).
23. Trade and other payables
2017 $’000 2016 $’000
Trading payables 477 176
Accruals 480 850
Trade creditors 264 40
VAT payable 17 335
Corporate tax payable - 113
Other payables 168 126
1,406 1,640
Trade creditors and accruals principally comprise amounts outstanding for
ongoing costs. The average credit period taken for trade purchases is 35 days
(2016: 33 days). The Group has financial risk management policies to ensure
that all payables are paid within the credit timeframe.
The Directors consider that the carrying amount of trade and other payables
approximates to their fair value. No interest is generally charged on
outstanding balances.
24. Provisions
The provisions at 31 December 2017 comprise of $0.8 million (2016: $2.0
million) of decommissioning provision.
As at 31 December 2016 the Group recognised a short-term provision of $1.3
million (£1.1 million) in respect of a dispute on the historic classification
taxable income and expenses in a UK tax filing. The Group appealed to the
Tribunal, which was due in September 2017, however on 25 August 2017 the Group
reached settlement with HMRC which resulted in $1 million of reversal of the
provision in respect of possible corporate tax obligation and reversal of $0.2
million of related accrued interest expenses.
Decommissioning
$’000
At 1 January 2016 7 3 2
Unwinding of discount on decommissioning provision (note 11) 26
Exchange differences (80)
At 1 January 2017 678
Change in estimate (note 14 and 15) 100
Unwinding of discount on decommissioning provision (note 11) 27
Exchange differences (35)
At 31 December 2017 770
$’000
At 1 January 2016 732
Non-current 670
Current 8
At 1 January 2017 678
Non-current 412
Current 358
At 31 December 2017 770
In accordance with the Group’s environmental policy and applicable legal
requirements, the Group intends to restore the sites it is working on after
completing exploration or development activities.
A short-term provision of $0.3 million (2016: $8 thousand) has been made for
decommissioning costs, which are expected to be incurred within the next year
as a result of the demobilisation of drilling equipment and respective site
restoration.
The long-term provision recognised in respect of decommissioning reflects
management’s estimate of the net present value of the Group’s share of the
expenditure expected to be incurred in this respect. This amount has been
recognised as a provision at its net present value, using a discount rate that
reflects the market assessment of time value of money at that date, and the
unwinding of the discount on the provision has been charged to the income
statement. These expenditures are expected to be incurred at the end of the
producing life of each field in the removal and decommissioning of the
facilities currently in place (currently estimated to be between 1 and 17
years).
25. Share capital
Authorised and issued equity share capital
2017 2016
Number $’000 Number $’000
Authorised Ordinary shares of £0.03 each 1,000,000 57,713 1,000,000 57,713
Issued Ordinary shares of £0.03 each 235,729 13,525 231,092 13,337
Authorised but unissued share capital of £30 million has been translated into
US dollars at the historic exchange rate of the issued share capital. The
Company has one class of Ordinary shares, which carry no right to fixed
income.
Issued equity share capital
Ordinary shares of £0.03
At 31 December 2016 231,091,734
Issued during year 4,637,588
At 31 December 2017 235,729,322
On 22 September 2017 the Company issued 4,637,588 ordinary shares of £0.03
each in the capital of the Company for cash on the basis of £0.0825 per share
to the CEO, Mr Guido Michelotti.
26. Financial instruments
Capital risk management
The Group manages its capital to ensure that entities in the Group will be
able to continue as a going concern, while maximising the return to
shareholders.
The capital resources of the Group consist of cash and cash equivalents
arising from equity attributable to owners of the Company, comprising issued
capital, reserves and retained earnings as disclosed in the Consolidated
Statement of Changes in Equity.
Externally imposed capital requirement
The Group is not subject to externally imposed capital requirements.
Categories of financial instruments
2017 $’000 2016 $’000
Financial assets – loans and receivables (includes cash and cash equivalents)
Cash and cash equivalents 37,640 43,300
Trading receivable 1,338 2,163
Other receivables 410 318
Receivable from joint venture 56 58
39,444 45,839
Financial liabilities – measured at amortised cost
Accruals 480 850
Trading payables 477 176
Trade creditors 264 40
Other payables 168 10
Short-term borrowings - 3,574
1,389 4,650
The Group considers that the carrying amount of financial instruments
approximates their fair value.
Financial risk management objectives
Management co-ordinates access to domestic and international financial markets
and monitors and manages the financial risks relating to the operations of the
Group in Ukraine through internal risks reports, which analyse exposures by
degree and magnitude of risks. These risks include commodity price risks,
foreign currency risk, credit risk, liquidity risk and cash flow interest rate
risk. The Group does not enter into or trade financial instruments, including
derivative financial instruments, for speculative purposes.
The Audit Committee of the Board reviews and monitors risks faced by the Group
at meetings held throughout the year.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect the value of the financial instruments. The Group is not exposed
to interest rate risk because entities of the Group borrow funds at fixed
interest rates.
Commodity price risk
The commodity price risk related to Ukrainian gas and condensate prices and,
to a lesser extent, prices for crude oil are the Group’s most significant
market risk exposures. World prices for gas and crude oil are characterised by
significant fluctuations that are determined by the global balance of supply
and demand and worldwide political developments, including actions taken by
the Organisation of Petroleum Exporting Countries.
These fluctuations may have a significant effect on the Group’s revenues and
operating profits going forward. In 2017 the price for Ukrainian gas was
mainly based on the current price of the European gas imports. Management
continues to expect that the Group’s principal market for gas will be the
Ukrainian domestic market.
The Group does not hedge market risk resulting from fluctuations in gas,
condensate and oil prices, and holds no financial instruments, which are
sensitive to commodity price risk.
Foreign exchange risk and foreign currency risk management
The Group undertakes certain transactions denominated in foreign currencies.
Hence, exposures to exchange rate fluctuations arise, the Group considers
exposure to be minimal. The Group to date has elected not to hedge its
exposure to the risk of changes in foreign currency exchange rates.
Inflation risk management
Inflation in Ukraine and in the international market for oil and gas may
affect the Group’s cost for equipment and supplies. The Directors will
proceed with the Group’s practices of keeping deposits in US dollar accounts
until funds are needed and selling its production in the spot market to enable
the Group to manage the risk of inflation.
Credit risk management
Credit risk refers to the risk that counterparty will default on its
contractual obligations resulting in financial loss to the Group. The
Group’s credit management process includes the assessment, monitoring and
reporting of counterparty exposure on a regular basis. Credit risk with
respect to receivables and advances is mitigated by active and continuous
monitoring the credit quality of its counterparties through internal reviews
and assessment. Trading receivables as at 31 December 2017 have been paid
within four months after year end, there were no material past due receivables
as at year end.
The Group makes allowances for impairment of receivables where there is an
identified event which, based on previous experience, is evidence of a
reduction in the recoverability of cash flows.
The credit risk on liquid funds (cash) is considered to be limited because the
counterparties are financial institutions with high and good credit ratings,
assigned by international credit-rating agencies in the UK and Ukraine
respectively.
The carrying amount of financial assets recorded in the financial statements
represents the Group’s maximum exposure to credit risk.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of
Directors, which has built an appropriate liquidity risk management framework
for the management of the Group’s short, medium and long-term funding and
liquidity management requirements. The Group manages liquidity risk by
maintaining adequate cash reserves and by continuously monitoring forecast and
actual cash flows.
The following tables sets out details of the expected contractual maturity of
financial liabilities.
Within 3 months 3 months to 1 year More than 1 year Total
$’000 $’000 $’000 $’000
At 31 December 2017
Short-term borrowings - - - -
Trade and other payables 1,389 - - 1,389
At 31 December 2016
Short-term borrowings 3,574 - - 3,574
Trade and other payables 1,640 - - 1,640
27. Commitments and contingencies
The Group has working interests in four licences to conduct its exploration
and development activities in Ukraine. Each licence is held with the
obligation to fulfil a minimum set of exploration activities within its term
and is summarised on an annual basis, including the agreed minimum amount
forecasted expenditure to fulfil those obligations. The activities and
proposed expenditure levels are agreed with the government licencing
authority.
The required future financing of exploration and development work on fields
under the licence obligations are as follows:
2017 $’000 2016 $’000
Within one year 931 79
Between two and five years 829 1,635
1,760 1,714
Tax contingent liabilities
The Group assesses its liabilities and contingencies for all tax years open
for audit by UK and Ukraine tax authorities based upon the latest information
available. For those matters where it is probable that an adjustment will be
made, the Group records its best estimate of these tax liabilities, including
related interest charges. Inherent uncertainties exist in estimates of tax
contingencies due to complexities of interpretation and changes in tax laws.
Whilst the Group believes it has adequately provided for the outcome of these
matters, certain periods are under audit by the UK and Ukraine tax
authorities, and therefore future results may include favourable or
unfavourable adjustments to these estimated tax liabilities in the period the
assessments are made, or resolved. The final outcome of tax examinations may
result in a materially different outcome than assumed in the tax liabilities.
28. Related party transactions
All transactions between the Company and its subsidiaries, which are related
parties, have been eliminated on consolidation and are not disclosed in this
note. The application of IFRS 11 has resulted in the existing joint ventures
LLC Astroinvest-Energy, LLC Gazvydobuvannya and LLC Westgasinvest being
accounted for under the equity method and disclosed as related parties. LLC
Astroinvest-Energy and LLC Gazvydobuvannya continued to be related parties
until the acquisition on 21 December 2016 of 100% of these companies by the
Group.
During the period, Group companies entered into the following transactions
with joint ventures who are considered as related parties of the Group:
2017 $’000 2016 $’000
Revenues from services provided and sales of goods 84 2,496
Purchases of goods - -
Amounts owed by related parties 56 58
Amounts owed to related parties - -
Directors’ remuneration
The remuneration of the Directors, who are the key management personnel of the
Group, is set out below in aggregate for each of the categories specified in
IAS 24 Related Party Disclosures. Further information about the remuneration
of individual Directors is provided in the audited part of the Annual Report
on Remuneration 2017 included in the Annual Report.
Purchase of services Amounts owing
2017 $’000 2016 $’000 2017 $’000 2016 $’000
Directors’ remuneration 1,392 1,807 204 479
The total remuneration of the highest paid Director was $0.7 million in the
year (2016: $1.0 million).
The amounts outstanding are unsecured and will be settled in cash. No
guarantees have been given or received and no provisions have been made for
doubtful debts in respect of the amounts owed by related parties.
29. Events after the balance sheet date
There were no events after the balance sheet date.
Company Balance Sheet
As at 31 December 2017
Notes 2017 $’000 2016 $’000
ASSETS
Non-current assets
Investments 32 - -
Receivables from subsidiaries 33 19,576 39,277
19,576 39,277
Current assets
Trade and other receivables 33 78 17
Cash and cash equivalents 33 27,406 28,380
27,484 28,397
Total assets 47,060 67,674
LIABILITIES
Current liabilities
Trade and other payables 34 (671) (934)
(671) (934)
Total liabilities (671) (934)
Net assets 46,389 66,740
EQUITY
Share capital 35 13,525 13,337
Share premium 329 -
Retained earnings (1) 141,254 162,122
Cumulative translation reserves 36 (108,719) (108,719)
Total equity 46,389 66,740
The financial statements of Cadogan Petroleum plc, registered in England and
Wales no. 05718406, were approved by the Board of Directors and authorised for
issue on 25 April 2018.
They were signed on its behalf by:
Guido Michelotti
Chief Executive Officer
25 April 2018
(1 Included in retained earnings, loss for the financial year ended 31
December 201)(7) (was $)(20.9) (million (2016: $5.4 million).)
Company Cash Flow Statement
For the year ended 31 December 2017
2017 $’000 2016 $’000
Operating activities Loss for the year (20,868) (5,445)
Adjustments for: Interest received Effect of foreign exchange rate changes Impairment of receivables from subsidiaries (185) (74) 19,376 (131) 120 3,415
Operating cash flows before movements in working capital (1,751) (2,041)
(Increase)/decrease in receivables (61) 715
Increase in payables 255 562
Cash used in operations (1,557) (764)
Income taxes paid - -
Net cash outflow from operating activities (1,557) (764)
Investing activities
Interest received 185 131
Loans to subsidiary companies 325 (15,790)
Net cash from/(used in) investing activities 510 (15,659)
Net decrease in cash and cash equivalents (1,047) (16,423)
Effect of foreign exchange rate changes 73 (79)
Cash and cash equivalents at beginning of year 28,380 44,882
Cash and cash equivalents at end of year 27,406 28,380
Company Statement of Changes in Equity
For the year ended 31 December 2017
Share capital $’000 Share premium account $’000 Retained earnings $’000 Cumulative translation reserves $’000 Total $’000
As at 1 January 2016 13,337 - 167,567 (108,719) 72,185
Net loss for the year - - (5,445) - (5,445)
Total comprehensive loss for the year - - (5,445) - (5,445)
As at 1 January 2017 13,337 - 162,122 (108,719) 66,740
Net loss for the year - - (20,868) - (20,868)
Total comprehensive loss for the year - - (20,868) - (20,868)
Issue of ordinary shares 188 329 - - 517
As at 31 December 2017 13,525 329 141,254 (108,719) 46,389
30. Significant accounting policies
The separate financial statements of the Company are presented as required by
the Companies Act 2006 (the “Act”). As permitted by the Act, the separate
financial statements have been prepared in accordance with International
Financial Reporting Standards, as adopted in the EU.
The financial statements have been prepared on the historical cost basis. The
principal accounting policies adopted are the same as those set out in note 3
to the Consolidated Financial Statements except as noted below.
As permitted by section 408 of the Act, the Company has elected not to present
its profit and loss account for the year. Cadogan Petroleum plc reports a loss
for the financial year ended 31 December 2017 of $20.9 million (2016: $5.4
million).
Investments
Investments in subsidiaries are stated at cost less, where appropriate,
provisions for impairment.
Critical accounting judgements and key sources of estimation uncertainty
The Company’s financial statements, and in particular its investments in and
receivables from subsidiaries, are affected by certain of the critical
accounting judgements and key sources of estimation uncertainty. The Company
evaluated recoverability of receivables from subsidiaries by assessing the
likelihood of repayments based on the financial position of each subsidiary.
31. Auditor’s remuneration
The auditor’s remuneration for audit and other services is disclosed in note
9 to the Consolidated Financial Statements.
32. Investments
The Company’s subsidiaries are disclosed in note 16 to the Consolidated
Financial Statements. The investments in subsidiaries are all stated at cost
less any provision for impairment.
33. Financial assets
The Company’s principal financial assets are bank balances and cash and cash
equivalents and receivables from related parties none of which are past due.
The Directors consider that the carrying amount of receivables from related
parties approximates to their fair value.
Receivables from subsidiaries
At the balance sheet date gross amounts receivable from the fellow Group
companies were $331.9 million (2016: $332.3 million). The Company recognised
impairment of $19.4 million in relation to receivables from subsidiaries in
2017 (2016: $3.4 million). The accumulated provision on receivable as at 31
December 2017 was $312.5 million (2016: $293.1 million). The carrying value of
the receivables from the fellow Group companies as at 31 December 2017 was
$19.6 million (2016: $39.2 million). Receivables from subsidiaries are
interest free and repayable on demand. There are no past due receivables.
Trade and other receivables
2017 $’000 2016 $’000
Prepayments - -
Other receivables 78 17
78 17
Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Company and short-term
bank deposits with an original maturity of three months or less. The carrying
value of these assets approximates to their fair value.
As of 31 December 2017 cash and cash equivalents in the amount of $7 million,
related to security of the loan provided to the Ukrainian subsidiary and held
at European bank in the UK, was pledged (note 22).
34. Financial liabilities
Trade and other payables
2017 $’000 2016 $’000
Accruals 214 554
Trade creditors 58 29
Other creditors and payables 399 351
671 934
Trade payables principally comprise amounts outstanding for trade purchases
and ongoing costs. The average credit period taken for trade purchases is 39
days (2016: 48 days).
The Directors consider that the carrying amount of trade and other payables
approximates to their fair value. No interest is charged on balances
outstanding.
35. Share capital
The Company’s share capital is disclosed in note 25 to the Consolidated
Financial Statements.
36. Cumulative translation reserve
The directors decided to change the functional currency of the Company from
sterling to US dollars with effect from 1 January 2016.
The effect of a change in functional currency is accounted for prospectively.
In other words, the Company translates all items into the US dollar using the
exchange rate at the date of the change. The resulting translated amounts for
non-monetary items are treated as their historical cost. Exchange differences
arising from the translation of an operation previously recognised in other
comprehensive income in accordance with paragraphs 32 and 39(c) IAS 21
“Foreign Currency” are not reclassified from equity to profit or loss
until the disposal of the operation.
38. Financial instruments
The Company manages its capital to ensure that it is able to continue as a
going concern while maximising the return to shareholders. Refer to note 26
for the Group’s overall strategy and financial risk management objectives.
The capital resources of the Company consist of cash and cash equivalents
arising from equity, comprising issued capital, reserves and retained
earnings.
Categories of financial instruments
2017 $’000 2016 $’000
Financial assets – loans and receivables (includes cash and cash equivalents)
Cash and cash equivalents 27,406 28,380
Amounts due from subsidiaries 19,576 39,277
46,982 67,657
Financial liabilities – measured at amortised cost
Trade creditors (58) (29)
(457) (380)
Interest rate risk
All financial liabilities held by the Company are non-interest bearing. As the
Company has no committed borrowings, the Company is not exposed to any
significant risks associated with fluctuations in interest rates.
Credit risk
Credit risk refers to the risk that counterparty will default on its
contractual obligations resulting in financial loss to the Company. For cash
and cash equivalents, the Company only transacts with entities that are rated
equivalent to investment grade and above. Other financial assets consist of
amounts receivable from related parties.
The Company’s credit risk on liquid funds is limited because the
counterparties are banks with high credit ratings assigned by international
credit-rating agencies.
The carrying amount of financial assets recorded in the Company financial
statements, which is net of any impairment losses, represents the Company’s
maximum exposure to credit risk.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of
Directors, which has built an appropriate liquidity risk management framework
for the management of the Company’s short, medium and long-term funding and
liquidity management requirements. The Company maintains adequate reserves, by
continuously monitoring forecast and actual cash flows.
The Company’s financial liabilities are not significant and therefore no
maturity analysis has been presented.
Foreign exchange risk and foreign currency risk management
The Company undertakes certain transactions denominated in foreign currencies.
Hence, exposures to exchange rate fluctuations arise, the Company considers
exposure to be minimal. The Company holds a large portion of its monetary
assets and monetary liabilities in US dollars. More information on the foreign
exchange risk and foreign currency risk management is disclosed in note 26 to
the Consolidated Financial Statements.
39. Related parties
Amounts due from subsidiaries
The Company has entered into a number of unsecured related party transactions
with its subsidiary undertakings. The most significant transactions carried
out between the Company and its subsidiary undertakings are mainly for short
and long-term financing. Amounts owed from these entities are detailed below:
2017 $’000 2016 $’000
Cadogan Petroleum Holdings Limited 19,576 39,277
19,576 39,277
Refer to note 33 for details on the Company’s receivables due from
subsidiaries.
The remuneration of the Directors, who are the key management personnel of the
Group, is set out below in aggregate for each of the categories specified in
IAS 24 Related Party Disclosures. In 2017 there were no other employees in the
Company. Further information about the remuneration of individual Directors is
provided in the audited part of the Annual Report on Remuneration 2017
included in the Annual Report.
Remuneration Amounts owing
2017 $’000 2016 $’000 2017 $’000 2016 $’000
Directors’ remuneration 989 1,071 - 454
The total remuneration of the highest paid Director was $0.7 million in the
year (2016: $1.0 million).
40. Events after the balance sheet date
Events after the balance sheet date are disclosed in note 29 to the
Consolidated Financial Statements.
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