REG - Enwell Energy PLC - 2022 INTERIM RESULTS
30/09/2022 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20220930:nRSd2599Ba&default-theme=true
RNS Number : 2599B Enwell Energy PLC 30 September 2022
30 September 2022
ENWELL ENERGY PLC
2022 INTERIM RESULTS
Enwell Energy plc ("Enwell Energy" or the "Company", together with its
subsidiaries, the "Group"), the AIM-quoted (ENW) oil and gas exploration and
production group, announces its unaudited results for the six month period
ended 30 June 2022.
Highlights
Operational
● Aggregate average daily production of 3,026 boepd (calculated on the days when
the Group's fields were actually in production) (1H 2021: 4,917 boepd)
● SV-31 development well successfully completed and brought on production in May
2022
Financial
● Revenue of $77.2 million (1H 2021: $41.1 million), up 88% as a result of
significantly higher gas prices offset by lower production volumes
● Gross profit of $51.5 million (1H 2021: $21.6 million), up 138%
● Operating profit of $48.9 million (1H 2021: $18.1 million), up 170%
● Cash generated from operations of $12.5 million (1H 2021: $19.2 million), down
35%
● Net profit of $32.4 million (1H 2021: $13.8 million), up 135%
● Cash, cash equivalents of $77.4 million as at 30 June 2022, and of $76.2
million as at 28 September 2022 (31 December 2021: $92.5 million)
● Average realised gas, condensate and LPG prices in Ukraine were much higher,
particularly gas prices, at $1,165/Mm(3) (UAH33,524/Mm(3)), $103/bbl and
$165/bbl respectively (1H 2021: $249/Mm(3) (UAH6,897/Mm(3)) gas, $74/bbl
condensate and $66/bbl LPG)
Outlook
● The Russian invasion of Ukraine in February 2022 has had a significant impact
on all aspects of life in Ukraine, including the Group's business and
operations, with all field operations being suspended from 24 February to 15
March 2022, after which production operations and some field activities
resumed at the MEX-GOL and SV fields, and subsequently on the SC licence area.
At the VAS field all operations have remained suspended since the invasion,
but a resumption of production operations is planned in October 2022. The
scale and duration of disruption to the Group's business is currently unknown,
and there remains significant uncertainty about the outcome of the conflict in
Ukraine.
● The Group retains the majority (75% as at 28 September 2022) of its cash
outside Ukraine, which enhances the Group's ability to navigate the current
risk environment for the foreseeable future, and provides a material buffer to
any further disruptions to the Group's operations.
● Subject to the Group's ability to operate safely, development work planned for
the remainder of 2022 includes:
○ at the MEX-GOL and SV fields: investigating the deepening of the MEX-109 well
to explore a deeper horizon; investigating the hydraulic fracturing of the
SV-29 well; and planning the drilling of two new wells, MEX-107 and MEX-114,
at the MEX-GOL field
○ at the SC licence: completing the testing of the SC-4 well; completing the
interpretation of the 150 km(2) of 3D seismic data acquired over the 2021-2022
winter period; and planning for the development of the licence area
○ at the VAS field: planning for the further development of the field; planning
for a new well to explore the VED prospect within the VAS licence area; and
maintenance of the gas processing facilities and other field infrastructure
● Development programme for the remainder of 2022 expected to be funded from
existing cash resources and operational cash flow
Sergii Glazunov, CEO, commented: "The military conflict in Ukraine is
entirely overshadowing and hugely impacting all aspects of life in Ukraine.
Nevertheless, after a brief suspension, we were able to restart production at
our MEX-GOL and SV fields, although production operations at our VAS field
remained suspended. Subsequently, we were also able to complete the drilling
of the SC-4 well on our SC licence area and are now testing this well, and are
planning to shortly resume production operations at the VAS field. Our ability
to continue to operate is testament to the diligence and fortitude of our
operations team.
Maintaining operations in the current environment is extremely challenging,
and the safety and well-being of our staff is paramount, but, subject to that,
we will endeavour to continue our operations for the benefit of all our
stakeholders and make our best contribution to the economy in Ukraine."
This announcement contains inside information for the purposes of Article 7 of
EU Regulation No. 596/2014, which forms part of United Kingdom domestic law by
virtue of the European Union (Withdrawal) Act 2018, as amended.
For further information, please contact:
Enwell Energy plc Tel: 020 3427 3550
Chris Hopkinson, Chairman
Sergii Glazunov, Chief Executive Officer
Bruce Burrows, Finance Director
Strand Hanson Limited Tel: 020 7409 3494
Rory Murphy / Matthew Chandler
Arden Partners plc Tel: 020 7614 5900
Ruari McGirr / Elliot Mustoe (Corporate Finance)
Simon Johnson (Corporate Broking)
Citigate Dewe Rogerson Tel: 020 7638 9571
Ellen Wilton
Dr Gehrig Schultz, BSc Geophysical Engineering, PhD Geophysics, Member of the
European Association of Geophysical Engineers, Member of the Executive
Coordinating Committee of the Continental European Energy Council, and a
Non-Executive Director of the Company, has reviewed and approved the technical
information contained within this announcement in his capacity as a qualified
person, as required under the AIM Rules for Companies.
Definitions/Glossary
Arkona LLC Arkona Gas-Energy
bbl barrel
bbl/d barrels per day
boe barrels of oil equivalent
boepd barrels of oil equivalent per day
Company Enwell Energy plc
€ Euro
GDP gross domestic product
Group Enwell Energy plc and its subsidiaries
km kilometre
km(2) square kilometre
LPG liquefied petroleum gas
MEX-GOL Mekhediviska-Golotvshinska
m(3) cubic metres
Mm³ thousand cubic metres
MMboe million barrels of oil equivalent
MMscf million scf
MMscf/d million scf per day
% per cent.
QHSE quality, health, safety and environment
SC Svystunivsko-Chervonolutskyi
scf standard cubic feet measured at 20 degrees Celsius and one atmosphere
SV Svyrydivske
$ United States Dollar
UAH Ukrainian Hryvnia
VAS Vasyschevskoye
VED Vvdenska
Chairman's Statement
I present the results for the first half of 2022 in circumstances that I wish
were different. The invasion of Ukraine by Russia in February 2022 and the
ongoing conflict has created a very challenging and worrying outlook for both
the current and future situation in Ukraine, and I am greatly saddened by the
terrible events occurring there.
The invasion has had a significant impact on all aspects of life in Ukraine,
including the Group's business and operations, with all field operations being
suspended from 24 February to 15 March 2022, after which production operations
and some field activities resumed at the MEX-GOL and SV fields. Subsequently,
in July 2022, drilling operations on the SC-4 well resumed on the SC licence
area to complete the well. However, all operations have remained suspended at
the VAS field to date, although a resumption of production operations is
planned for October 2022. The overall scale and duration of disruption to the
Group's business is currently unknown, and there remains significant
uncertainty about the outcome of the ongoing conflict in Ukraine.
Notwithstanding the disruption caused by the invasion, during the period, the
Group continued with some development activities at the MEX-GOL, SV and VAS
gas and condensate fields and SC licence in north-eastern Ukraine. At the SV
field, the SV-31 development well was completed and brought on production in
May 2022, and planning has continued for the drilling of two new wells,
MEX-107 and MEX-114, in the MEX-GOL field, as well as the possible deepening
of the MEX-109 well to explore a deeper horizon. At the SV-29 development
well, additional horizons were perforated and tested but stabilised production
was not established and consequently the possible hydraulic fracturing of the
well is under consideration. Drilling of the SC-4 appraisal well on the SC
licence area was completed and testing of this well is now underway, alongside
ongoing planning for the further development of the VAS field.
Aggregate average daily production (calculated on the days when the fields
were actually in production) from the MEX-GOL, SV and VAS fields during the
first half of 2022 was 3,026 boepd, which is lower than the aggregate daily
production rate of 4,917 boepd achieved during the first half of 2021 due to
the disruption caused by the invasion.
Although production volumes were lower, the dramatic rise in gas prices during
the period has meant that revenues were still strong at $77.2 million (1H
2021: $41.1 million). The Group's net profit was also higher at $32.4 million
(1H 2021: $13.8 million) and operating profit was $48.9 million (1H 2021:
$18.1 million).
There is significant disruption to the fiscal and economic environment in
Ukraine due to the ongoing conflict resulting in a contraction in GDP, an
increase in the rate of inflation and a weakening of the Ukrainian Hryvnia
against other currencies. Furthermore, it is likely that fiscal and economic
uncertainties will continue in the future until an acceptable resolution of
the conflict occurs.
The Ukrainian Government has implemented a number of reforms in the oil and
gas sector in recent years, which include the deregulation of the gas supply
market in late 2015, and subsequently, reductions in the subsoil tax rates
relating to oil and gas production and a simplification of the regulatory
procedures applicable to oil and gas exploration and production activities in
Ukraine.
The deregulation of the gas supply market, supported by electronic gas trading
platforms and improved pricing transparency, has meant that Ukrainian market
gas prices broadly correlated with imported gas prices. During 2022 to date,
gas prices have increased significantly, reflecting a similar trend in
European gas prices, substantially as a result of the disruption to worldwide
oil and gas supplies caused by the conflict. Condensate and LPG prices were
also much higher by comparison to last year for the same reason.
However, in Q1 2022, the Ukrainian Government imposed two material measures on
oil and gas producers. Firstly, in January 2022, temporary partial gas price
regulations were imposed until 30 April 2022, designed to support the
production of certain designated food products, further details of which were
set out in the Company's announcement dated 17 January 2022. Secondly, changes
to the subsoil production tax rates applicable to gas production were
introduced with effect from 1 March 2022, pursuant to which the tax rates were
linked to gas prices, the incentive rates for new wells were extended for a
further 10 years and improvements were made to the regulatory environment. In
addition, an excise tax applicable to LPG sales was cancelled in February
2022, and the VAT rate applicable to condensate and LPG sales was reduced in
March 2022. Further details were set out in the Company's announcement dated
13 April 2022.
Outlook
The invasion of Ukraine by Russia means that there is a devastating
humanitarian situation in Ukraine, as well as extreme challenges to the
fiscal, economic and business environment. These circumstances mean that it is
extremely difficult to plan future investment and operational activities at
the Group's fields, but subject to it being safe to do so, the Group is
planning to undertake further development activities during the remainder of
2022 and beyond in order to continue the development of its fields. However,
in doing so, the Group is taking and will take all measures available to
protect and safeguard its personnel and business, with the safety and
wellbeing of its personnel and contractors being paramount. The Group retains
the majority (75% as at 28 September 2022) of its cash outside Ukraine, and
this has enabled the Board to reach the opinion that the Group has sufficient
resources to navigate the current risk environment for the foreseeable future.
In conclusion, on behalf of the Board, I would like to thank all of our staff
for their continued dedication and support they showed during this year,
especially their remarkable fortitude since the invasion of Ukraine in
February 2022.
Chris Hopkinson
Chairman
29 September 2022
Chief Executive's Statement
Introduction
The Russian invasion of Ukraine has materially disrupted the Group's
development activity at its Ukrainian fields during the first half of 2022,
with operations suspended at all fields immediately after the invasion in
February 2022. However, production operations and some field activities
resumed at the MEX-GOL and SV fields in mid-March 2022, and this enabled the
completion of the SV-31 development well, which came on production in May
2022. At the SV-29 development well, further intervals were perforated, but it
was not possible to establish a stabilised flow rate, and the potential
hydraulic fracturing of this well is now under consideration. In addition,
upgrades to the gas processing facilities were completed.
On the SC licence area, drilling of the SC-4 appraisal well was suspended for
a period, but drilling resumed in July 2022, and the well has now been
completed and is undergoing testing. In addition, the interpretation of the
150 km(2) of 3D seismic, which was acquired over the 2021-2022 winter period,
is nearing completion.
At the VAS field, all operations have remained suspended since the invasion,
but a resumption of production operations is planned for October 2022. In
addition, planning for the further development of the field, as well as for a
proposed new well to explore the VED prospect within the VAS licence area has
continued.
Overall production in the first half of 2022 was lower than in the
corresponding period in 2021 due to the disruption to production operations
caused by the ongoing conflict in Ukraine.
Production
The average daily production of gas, condensate and LPG for the 167 days that
the MEX-GOL and SV fields were producing and for the 55 days that the VAS
field was producing during the six month period ended 30 June 2022 is shown
below.
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
1H 2022 1H 2021 1H 2022 1H 2021 1H 2022 1H 2021 1H 2022 1H 2021
11.1 19.7 451 694 261 331 2,592 4,403
MEX-GOL & SV
2.2 2.8 24 28 - - 434 514
VAS
13.3 22.5 475 722 261 331 3,026 4,917
Total
The average daily production of gas, condensate and LPG from the MEX-GOL, SV
and VAS fields over the entire six month period ended 30 June 2022 (inclusive
of shut-in periods) is shown below.
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
1H 2022 1H 2021 1H 2022 1H 2021 1H 2022 1H 2021 1H 2022 1H 2021
10.2 19.7 416 694 241 331 2,392 4,403
MEX-GOL & SV
0.7 2.8 7 28 - - 132 514
VAS
10.9 22.5 423 722 241 331 2,524 4,917
Total
The Russian invasion of Ukraine in February 2022 meant that the Group
suspended all field operations for the period from 24 February to 15 March
2022, after which production operations and some field activities resumed at
the MEX-GOL and SV fields, while all operations remained suspended at the VAS
field and on the SC licence area. Subsequently, in July 2022, drilling resumed
at the SC-4 well on the SC licence area and this well has now been completed,
but all operations remained suspended at the VAS field since it is located
near Kharkiv in north-eastern Ukraine, which has experienced significant
military activity. However, a resumption of production operations at this
field is planned for October 2022. As a result of the disruptions to
operations caused by the invasion, the Group's average daily production for
2022 to date has been materially affected, although production is currently
continuing at the MEX-GOL and SV fields at a rate of approximately 2,700
boepd.
Operations
Notwithstanding the impact of the COVID-19 pandemic beginning in 2020, in the
period leading up to the Russian invasion of Ukraine, there was relative
fiscal and economic stability in Ukraine, as well as reductions in the subsoil
tax rates and improvements in the regulatory procedures in the oil and gas
sector in Ukraine. However, the Russian invasion has caused significant
disruption to the fiscal and economic conditions in Ukraine since then. During
the first half of 2022, the material increase in gas prices in Europe did,
however, feed through to the Group's realised prices in Ukraine, and provided
a significant boost to the Group's revenues and profitability during the
period.
During 2022 to date, the Group has continued to refine its geological
subsurface models of the MEX-GOL, SV and VAS fields, as well as the SC licence
area, in order to enhance its strategy for the further development of such
fields and licence area, including the timing and level of future capital
investment required to exploit the hydrocarbon resources.
At the MEX-GOL and SV fields, the SV-31 development well was completed in May
2022, having been drilled to a final depth of 5,240 metres. At that time, one
interval, at a drilled depth of 5,210 - 5,219 metres, within the V-22 Visean
formation was perforated, and, following initial testing, the well was hooked
up to the gas processing facilities. The well has produced strongly since
then, and pursuant to the plans for this well, two additional intervals, at
drilled depths of 5,187 - 5,189 and 5,120 - 5,123 metres, respectively within
the V-22 and V-21 Visean formations, have recently been perforated to access
additional reserves. These additional intervals have also proved productive
and materially boosted production rates from this well, which are currently
approximately 3.53 MMscf/d of gas and 210 bbl/d of condensate (835 boepd in
aggregate).
At the SV-29 development well, additional intervals, at drilled depths of
4,955 - 4,960 and 5,037 - 5,046 metres, within the V-19 and V-20 Visean
formation respectively were perforated, but such intervals were not
productive. This well was completed in August 2021, having been drilled to a
final depth of 5,450 metres. Previously, two intervals, at drilled depths of
5,246 - 5,249 metres and 5,228 - 5,232 metres respectively, within the V-22
Visean formation, were perforated, and although some gas flows were achieved,
a stabilised flow from these intervals was not established. In light of the
intermittent gas flows in these intervals, the possible hydraulic fracturing
of the well is now under consideration.
The Group continued to operate each of the SV-2 and SV-12 wells under joint
venture agreements with NJSC Ukrnafta, the majority State-owned oil and gas
producer. Under the agreements, the gas and condensate produced from the
respective wells is sold under an equal net profit sharing arrangement between
the Group and NJSC Ukrnafta, with the Group accounting for the hydrocarbons
produced and sold from the wells as revenue, and the net profit share due to
NJSC Ukrnafta being treated as a lease expense in cost of sales. However,
during Q4 2021, the SV-2 well experienced water ingress and consequently had
to be taken off production. A workover of this well was commenced to remove
and replace the production string, but this work was suspended as a result of
the Russian invasion of Ukraine. However, workover operations have now
re-commenced and are ongoing.
In addition, in Q4 2021, the MEX-109 well also experienced water ingress and
as a result was taken off production. A workover of the well was commenced,
and steps were taken to seal the source of the water ingress, but again the
work was suspended as a result of the Russian invasion. However, the workover
operations have now been completed, and the previously producing horizon has
now been sealed to prevent water ingress into that horizon, so as to avoid
possible disruption to another well which is producing from the same horizon.
As a result, further production from such horizon in this well will not be
possible, and the possible deepening of this well to explore deeper horizons
is now being considered.
Finally, at the MEX-GOL and SV fields, the upgrades to the gas processing
facilities have been completed. These works involved an upgrade of the LPG
extraction circuit, an increase to the flow capacity of the facilities, and a
significant increase to the liquids tank storage capacity, which are designed
to improve overall plant efficiencies, improve the quality of liquids produced
and boost recoveries of LPG, while reducing environmental emissions.
On the SC licence area, after a period of suspension, drilling operations
resumed at the SC-4 well in July 2022 and the well has now been drilled to its
final depth of 5,585 metres. The well is primarily an appraisal well,
targeting production from the V-22 horizon, as well as exploring the V-16 and
V-21 horizons, in the Visean formation. Currently, testing operations are
underway at the well. In addition, the interpretation of the 150 km(2) of 3D
seismic, that was acquired over the 2021 - 22 winter, is now nearing
completion.
At the VAS field, the resumption of production operations is scheduled for
October 2022, and planning for the further development of the field, as well
as for a proposed new well to explore the VED prospect within the VAS licence
area, has continued.
In March 2019 (as set out in the Company's announcement made on 12 March
2019), a regulatory issue arose when the State Service of Geology and Subsoil
of Ukraine issued an order for suspension (the "Order") of the production
licence for the VAS field. Under the applicable legislation, the Order would
lead to a shut-down of production operations at the VAS field, but the Group
issued legal proceedings to challenge the Order, and has obtained a ruling
suspending operation of the Order pending a hearing of the substantive issues.
The Group does not believe that there are any grounds for the Order, and
intends to pursue its challenge to the Order through the Ukrainian Courts.
Outlook
The Russian invasion of Ukraine in February 2022 has caused significant
disruption to Ukraine as a whole and to the Group's business activities, and
until there is a satisfactory resolution to the conflict, such disruption and
uncertainty is likely to continue. However, and subject to it being safe to do
so, during the remainder of 2022, the Group plans to continue to develop the
MEX-GOL, SV and VAS fields, as well as moving forward with the appraisal and
development of the SC licence area.
At the MEX-GOL and SV fields, the development programme includes completing
the workover of the SV-2 well, the possible deepening of the MEX-109 well to
explore deeper horizons in the Visean formation, preparations for the drilling
of two further wells, MEX-107 and MEX-114, in the MEX-GOL field, installation
of further compression equipment, and remedial and upgrade work on existing
wells, the flow-line network and pipelines and other infrastructure.
On the SC licence area, it is planned to complete the testing of the SC-4
well, finalise the interpretation of the recently acquired 3D seismic, and
continue planning for the development of the licence area, including
construction of gas processing facilities.
At the VAS field, planning for the further development of the field, as well
as for a proposed new well to explore the VED prospect within the VAS licence
area will continue, and maintenance of the gas processing facilities and other
infrastructure is planned.
Finally, I would like to add my thanks to all of our staff for the continued
hard work and dedication they have shown over the course of 2022 to date, and
to especially recognise their continuing efforts and professionalism in the
face of the extremely challenging current situation in Ukraine.
Sergii Glazunov
Chief Executive Officer
Finance Review
Despite the significant disruption caused by the Russian invasion of Ukraine
earlier this year, and almost entirely as a result of the well documented
monumental increase in global gas prices, the Group's financial performance in
the first six months of 2022 showed an improvement on the corresponding period
in 2021, with a net profit for the period of $32.4 million being an
approximate 135% increase on the first six months of 2021 (1H 2021: $13.8
million).
Revenue for the period, derived from the sale of the Group's Ukrainian gas,
condensate and LPG production, was up at $77.2 million (1H 2021: $41.1
million). Most notably, within this total, the revenue from gas sales alone
was up approximately 125% at $64.1 million (1H 2021: $28.5 million).
Aggregate production for the first half of 2022 (calculated on the days when
the Group's fields were actually in production) was down approximately 38% at
3,026 boepd (1H 2021: 4,917 boepd) due to the disruption to operations as a
result of the Russian invasion of Ukraine.
As noted in the Group's 2021 Annual Report and as amplified after the Russian
invasion of Ukraine, rarely has natural gas, and its pricing, been more of a
focus of public attention, with the significant global rise in the commodity's
pricing being well documented over recent months. These global, and
particularly European, price increases were also experienced in Ukraine during
the first half of 2022, and underpinned the 368% rise in average gas price
realisations in the period at $1,165/Mm(3) (UAH33,524/Mm(3)), with condensate
and LPG average sales prices also up by 39% and 150% at $103/bbl and $165/bbl
respectively (1H 2021: $249/Mm(3) (UAH6,897/Mm(3)), $74/bbl and $66/bbl
respectively).
During the period from 1 July 2022 to 31 August 2022, the average realised
gas, condensate and LPG prices were $729/Mm(3) (UAH26,674/Mm(3)), $44/bbl and
$118/bbl respectively.
Cost of sales for the period was up approximately 32% at $25.7 million (1H
2021: $19.5 million). The major contributor to this increase is the material
rise in the revenue-related costs of taxes and well rental (with their direct
link to commodity prices), up approximately 80% at a combined $18.4 million
(1H 2021: $10.2 million), partially offset by the 40% decrease in Depreciation
of Producing Assets to $3.3 million (1H 2021: $5.5 million). The decline in
production drove a decline in depreciation but such decline was more than
offset by commodity prices to drive up the revenue-related costs of taxes and
well rental. Excluding these tax expenses directly related to commodity
prices, the residual cost of sales is consistent at $12.8 million (1H 2021:
$12.2 million).
Gross profit for the period was higher at $51.5 million (1H 2021: $21.6
million).
Cash generated from operations fell 35% to $12.5 million (1H 2021: $19.1
million), most significantly as a consequence of the $36.4 million increase in
receivables (1H 2021: $5.4 million).
The subsoil tax rates applicable to gas production were stable during the
first two months of 2022 at 29% for gas produced from deposits at depths
shallower than 5,000 metres and 14% for gas produced from deposits deeper than
5,000 metres, except in respect of gas produced from new wells drilled after 1
January 2018, where the subsoil tax rates were reduced from 29% to 12% for gas
produced from deposits at depths shallower than 5,000 metres and from 14% to
6% for gas produced from deposits deeper than 5,000 metres for the period
between 2018 and 2022. The subsoil tax rates for condensate were 31% for
condensate produced from deposits shallower than 5,000 metres and 16% for
condensate produced from deposits deeper than 5,000 metres.
However, with effect from 1 March 2022, changes to the subsoil production tax
rates applicable to gas production were introduced. These changes modified the
applicable tax rates based on gas prices, extended the incentive rates for new
wells for a further 10 years and made improvements to the regulatory
environment. The legislation which introduced these changes also included
provisions that these rates will not be increased for 10 years.
The new subsoil production tax rates applicable to gas production are as
follows:
(i) when gas prices are up to $150/Mm(3), the rate for wells drilled prior to 1
January 2018 ("old wells") is 14.5% for gas produced from deposits at depths
shallower than 5,000 metres and 7% for gas produced from deposits deeper than
5,000 metres, and for wells drilled after 1 January 2018 ("new wells") is 6%
for gas produced from deposits at depths shallower than 5,000 metres and 3%
for gas produced from deposits deeper than 5,000 metres;
(ii) when gas prices are between $150/Mm(3) and $400/Mm(3), the rate for old wells
is 29% for gas produced from deposits at depths shallower than 5,000 metres
and 14% for gas produced from deposits deeper than 5,000 metres, and for new
wells is 12% for gas produced from deposits at depths shallower than 5,000
metres and 6% for gas produced from deposits deeper than 5,000 metres;
(iii) when gas prices are more than $400/Mm(3), for the first $400/Mm(3), the rate
for old wells is 29% for gas produced from deposits at depths shallower than
5,000 metres and 14% for gas produced from deposits deeper than 5,000 metres,
and for new wells is 12% for gas produced from deposits at depths shallower
than 5,000 metres and 6% for gas produced from deposits deeper than 5,000
metres, and for the difference between $400/Mm(3) and the actual price, the
rate for old wells is 65% for gas produced from deposits at depths shallower
than 5,000 metres and 31% for gas produced from deposits deeper than 5,000
metres, and for new wells is 36% for gas produced from deposits at depths
shallower than 5,000 metres and 18% for gas produced from deposits deeper than
5,000 metres.
The tax rates applicable to condensate production were unchanged and so remain
at 31% for condensate produced from deposits shallower than 5,000 metres and
16% for condensate produced from deposits deeper than 5,000 metres, for both
old and new wells.
As a direct result of the conflict in Ukraine, including the significant
decline in domestic consumption disrupting the previous supply, demand and
pricing dynamics, there has been a divergence between domestic and European
gas pricing, and accordingly, the methodology (linked to European prices) used
to determine the reference gas price for the subsoil tax rates has had a
significantly detrimental effect for domestic gas producers. In order to
address this issue, the Ukrainian Parliament, in September 2022, approved
draft legislation which modifies such methodology to ensure that it operates
as originally intended (with such reference price being aligned with domestic
prices). This legislation has not yet completed all of the requisite
procedural steps to be enacted and brought into force, but the draft
legislation envisages an effective implementation date of 1 August 2022 if
enacted.
In addition, the excise tax on LPG sales has been suspended between 24
February 2022 and 30 September 2022, but is now being reinstated, and the VAT
rate applicable to condensate and LPG sales was reduced to 7% (from 20%) with
effect from 18 March 2022.
Finally, in early 2022, the Ukrainian Government imposed temporary and partial
gas price regulation to support the production of certain food products
through the supply of gas at regulated prices to the producers of such
products. Under this scheme, all independent gas producers in Ukraine were
required to sell up to 20% of their natural gas production for the period
until 30 April 2022 at a price set as the cost of sales of the relevant gas
producer (based on established accounting rules) for such gas, plus a margin
of 24%, plus existing subsoil production taxes (the "Regulated Price"). This
gas was then sold to specified producers of designated socially important food
products at the Regulated Price, so as to reduce the energy costs of such
producers during the period through to 30 April 2022. The designated products
were certain types of flour, milk (with up to 2.5% fat), bread, eggs, chicken
and sunflower oil, for sale in the Ukrainian domestic market. This temporary
scheme has now concluded. Further details are set out in the Company's
announcement dated 17 January 2022.
Administrative expenses for the period were 13% lower at $3.4 million (1H
2021: $4.0 million), primarily as a result of a 19% decrease in payroll and
related taxes, and no performance related payments being made in 2022.
Other expenses in the period increased significantly as a result of the
charitable donation of $5.0 million (1H 2021: nil) for financial support to
the Ukrainian war, security and relief effort.
The tax charge for the six months ended 30 June 2022 increased by 148% to
$10.4 million (1H 2021: $4.2 million charge) mainly due to the material
increase in profit before tax, and comprised a current tax charge of $8.7
million (1H 2021: $4.0 million charge) and a deferred tax charge of $1.7
million (1H 2021: $0.2 million charge).
A deferred tax asset relating to the Group's provision for decommissioning as
at 30 June 2022 of $0.5 million (31 December 2021: $0.5 million) was
recognised on the tax effect of the temporary differences of the Group's
provision for decommissioning at the MEX-GOL and SV fields, and its tax base.
A deferred tax liability relating to the Group's development and production
assets at the MEX-GOL and SV fields as at 30 June 2022 of $6.6 million (31
December 2021: $5.7 million) was recognised on the tax effect of the temporary
differences between the carrying value of the Group's development and
production asset at the MEX-GOL and SV fields, and its tax base.
A deferred tax asset relating to the Group's provision for decommissioning as
at 30 June 2022 of $0.2 million (31 December 2021: $0.3 million) was
recognised on the tax effect of the temporary differences on the Group's
provision on decommissioning at the VAS field, and its tax base. A deferred
tax liability relating to the Group's development and production assets at the
VAS field as at 30 June 2022 of $0.2 million (31 December 2021: $0.05 million)
was recognised on the tax effect of the temporary differences between the
carrying value of the Group's development and production asset at the VAS
field, and its tax base.
Capital investment of $12.0 million reflects the investment in the Group's oil
and gas development and production assets during the period (1H 2021: $13.0
million), primarily relating to the drilling of the SV-29, SV-31 and SC-4
wells.
A review for any indicators of impairment of the carrying value of the Group's
assets was undertaken at the end of the period and this review did conclude
that the Russian invasion of Ukraine had resulted in such an indicator.
Impairment reviews were therefore conducted on the carrying value of the
Group's assets but resulted in a conclusion that no impairment to carrying
value had occurred on any Group asset.
With the material increase in commodity prices during the period, and
necessary payment term accommodations that needed to be agreed with the
Group's largest indirect off-taker pursuant to a contract facilitated by the
Group's related party, LLC Smart Energy, trade receivables were up materially
at $39.5 million (1H 2021: $5.3 million). Since the period end, $7.1 million
of those trade receivables has been paid, and the balance is expected to be
fully received in the near term.
Cash, cash equivalents and short-term investments held as at 30 June 2022 were
$77.4 million (31 December 2021: $92.5 million), the decrease being
predominantly a result of the $35.6 million increase in Trade and Other
Receivables. Cash, cash equivalents, short-term investments and trade and
other receivables combined totalled $126.0 million (31 December: $105.6
million), a 19% increase. The Group's cash and cash equivalents balance as at
28 September 2022 was $76.2 million, held as to $18.5 million equivalent in
Ukrainian Hryvnia and the balance of $57.7 million equivalent predominantly in
US Dollars, Euros and Pounds Sterling.
During the first six months of 2022, the Ukrainian Hryvnia was relatively
stable against the US Dollar, weakening modestly from UAH27.3/$1.00 on 31
December 2021 to UAH29.3/$1.00 on 30 June 2022. The impact of this was $7.9
million of foreign exchange loss (1H 2021: $3.9 million of foreign exchange
gain). Increases and decreases in the value of the Ukrainian Hryvnia against
the US Dollar affect the carrying value of the Group's assets. However, since
the period end, in July 2022, the National Bank of Ukraine devalued the
Ukrainian Hryvnia by 25% against the US Dollar in order to protect its foreign
exchange reserves as the ongoing war continues to materially affect the
Ukrainian economy, and currently the official exchange rate of the Ukrainian
Hryvnia to the US Dollar is UAH36.57/$1.00. This is not expected to a have a
material net impact on the Group with its production and sales dictated by
(but not directly linked to) international commodity prices, and should
materially offset general price increases that will result from such
devaluation.
Cash from operations has funded capital investment during the period, and the
Group's current cash position and positive operating cash flow are the sources
from which the Group plans to fund the development programmes for its assets
over the remainder of 2022 and beyond. This is coupled with the fact that the
Group is currently debt-free, and therefore has no debt covenants that may
otherwise impede its ability to implement contingency plans if domestic and/or
global circumstances dictate. This flexibility and ability to monitor and
manage development plans and liquidity is a cornerstone of our planning, and
underpins our assessments of the future. With monetary resources at the end of
the period of $77.4 million ($58.8 million of which was held outside Ukraine),
and annual running costs of less than $8 million, the Group remains in a very
strong position, notwithstanding the impact of the current ongoing conflict in
Ukraine, as well as any local or global shocks that may occur to the industry
and/or the Group.
Bruce Burrows
Finance Director
Principal Risks and How We Manage Them
The Group has a risk evaluation methodology in place to assist in the review
of the risks across all material aspects of its business. This methodology
highlights external, operational and technical, financial and corporate risks
and assesses the level of risk and potential consequences. It is periodically
presented to the Audit Committee and the Board for review, to bring to their
attention potential risks and, where possible, propose mitigating actions. Key
risks recognised and mitigation factors are detailed below:-
Risk Mitigation
External risks
Military conflict in Ukraine
On 24 February 2022, Russia invaded Ukraine and there is currently a serious The Group has assets in the areas of conflict in the east of Ukraine, and the
and ongoing military conflict within Ukraine. This conflict is having a huge conflict has disrupted its operations in those areas. The Group has suspended
impact on Ukraine and its population, with significant destruction of all field operations at the VAS field to date, and is only undertaking limited
infrastructure and buildings in the areas of conflict, as well as damage in field and production operations at the MEX-GOL and SV fields and SC licence
other areas of Ukraine. The conflict is resulting in significant casualties area. At the MEX-GOL and SV fields, inventories of hydrocarbons are being
and has caused a huge humanitarian catastrophe and refugee influx into maintained at minimum levels. At the sites where operations are suspended,
neighbouring countries. The conflict is also impacting the fiscal and economic there are no staff on site, except for necessary security staff. Where
environment in Ukraine, as well as the financial stability and banking system possible, all other staff work remotely and have been supplied with all
in Ukraine, including restrictions on the transfer of funds outside Ukraine. necessary devices and software to facilitate remote working. Additionally, the
The conflict is an escalation of the previous Regional Conflict risk faced by Group aims to maintain the significant majority of its cash resources outside
the business, a dispute that has been going on since 2014 in parts of eastern Ukraine (being 75% as at 28 September 2022). The Group continues to monitor
Ukraine, and, since that time, Russia has continued to occupy Crimea. The the situation and endeavours to protect its assets and safeguard its staff and
current conflict is also having a significant adverse effect on the Ukrainian contractors.
financial markets, hampering the ability of Ukrainian companies and banks to
obtain funding from the international capital and debt markets. The conflict
has disrupted the Group's business and operations, causing the suspension of
field operations, albeit recommenced in March 2022 at the MEX-GOL and SV
fields and July 2022 at the SC licence area, and planned to be recommenced at
the VAS field in October 2022, and has also impacted the supply of materials
and equipment and the availability of contractors to undertake field
operations. At present, the conflict is ongoing and the scope and duration of
the conflict is uncertain.
Risk relating to Ukraine
Ukraine is an emerging market and as such the Group is exposed to greater The Group endeavours to minimise this risk by continuously monitoring the
regulatory, economic and political risks than would be the case in other market in Ukraine and by maintaining a strong working relationship with the
jurisdictions. Emerging economies are generally subject to a volatile Ukrainian regulatory authorities. The Group also maintains a significant
political and economic environment, which makes them vulnerable to market proportion of its cash holdings in international banks outside Ukraine.
downturns elsewhere in the world and could adversely impact the Group's
ability to operate in the market. Furthermore, the military conflict in
Ukraine is impacting the fiscal and economic environment, the financial and
banking system, and the economic stability of Ukraine. As a result, Ukraine
will require financial assistance and/or aid from international financial
agencies to provide economic support and assist with the reconstruction of
infrastructure and buildings damaged in the conflict.
Banking system in Ukraine
The banking system in Ukraine has been under great strain in recent years due The creditworthiness and potential risks relating to the banks in Ukraine are
to the weak level of capital, low asset quality caused by the economic regularly reviewed by the Group, but the geopolitical and economic events in
situation, currency depreciation, changing regulations and other economic Ukraine over recent years have significantly weakened the Ukrainian banking
pressures generally, and so the risks associated with the banks in Ukraine sector. This has been exacerbated by the current military conflict in Ukraine.
have been significant, including in relation to the banks with which the Group In light of this, the Group has taken and continues to take steps to diversify
has operated bank accounts. This situation was improving moderately following its banking arrangements between a number of banks in Ukraine. These measures
remedial action by the National Bank of Ukraine, but the current military are designed to spread the risks associated with each bank's creditworthiness,
conflict has significantly affected such improvements, and the National Bank and the Group endeavours to use banks that have the best available
of Ukraine has imposed a number of restrictive measures designed to protect creditworthiness. Nevertheless, and despite the recent improvements, the
the banking system, including restrictions of the transfer of funds outside Ukrainian banking sector remains weakly capitalised and so the risks
Ukraine (albeit that the Group aims to maintain the significant majority of associated with the banks in Ukraine remain significant, including in relation
its cash resources outside Ukraine (being 75% as at 28 September 2022). In to the banks with which the Group operates bank accounts. As a consequence,
addition, Ukraine continues to be supported by funding from the International the Group also maintains a significant proportion of its cash holdings in
Monetary Fund, and has requested further funding support from the international banks outside Ukraine.
International Monetary Fund.
Geopolitical environment in Ukraine
Although there were some improvements in recent years, there has not been a The Group continually monitors the market and business environment in Ukraine
final resolution of the political, fiscal and economic situation in Ukraine, and endeavours to recognise approaching risks and factors that may affect its
and the current military conflict has had a severe detrimental effect on the business. In addition, the involvement of Smart Holding (Cyprus) Limited, as
economic situation in Ukraine. The ongoing effects of this are difficult to an indirect major shareholder with extensive experience in Ukraine, is
predict and likely to continue to affect the Ukrainian economy and potentially considered helpful to mitigate such risks. However, the invasion of Ukraine
the Group's business. This situation is currently affecting the Group's creates material challenges in planning future investment and operations. The
production and field operations, and the ongoing instability is disrupting the Group is limiting its operational activities to minimise risk to its staff and
Group's development and operational planning for its assets. contractors, and to limit its financial exposure.
Climate change
Any near and medium-term continued warming of the Planet can have potentially The Group's plans include: assessing, reducing and/or mitigating its emissions
increasing negative social, economic and environmental consequences, in its operations; and identifying climate change-related risks and assessing
generally, globally and regionally, and specifically in relation to the Group. the degree to which they can affect its business, including financial
The potential impacts include: loss of market; and increased costs of implications. The HSE Committee is specifically tasked with overseeing
operations through increasing regulatory oversight and controls, including measuring, benchmarking and mitigating the Group's environmental and climate
potential effective or actual loss of licences to operate. As a diligent impact, which will be reported on in future periods. At this stage, the Group
operator, aware of and responsive to its good stewardship responsibilities, does not consider climate change to have any material implications on the
the Group not only needs to monitor and modify its business plans and Group's financial statements, including accounting estimates.
operations to react to changes, but also to ensure its environmental footprint
is as minimal as it can practicably be in managing the hydrocarbon resources
the Group produces.
Operational and technical risks
Quality, Health, Safety and Environment ("QHSE")
The oil and gas industry, by its nature, conducts activities which can cause The Group maintains QHSE policies and requires that management, staff and
health, safety, environmental and security incidents. Serious incidents can contractors adhere to these policies. The policies ensure that the Group meets
not only have a financial impact but can also damage the Group's reputation Ukrainian legislative standards in full and achieves international standards
and the opportunity to undertake further projects. The military conflict in to the maximum extent possible. As a consequence of the COVID-19 pandemic the
Ukraine poses significant risks to field operations, by way of potential Group has implemented processes and controls intended to ensure protection of
threat to the lives of employees and contractors, and damage to equipment and all our stakeholders and minimise any disruption to our business. As a
infrastructure. consequence of the current military conflict in Ukraine, operations at the VAS
field are currently suspended entirely, and only limited field and production
operations are continuing at the MEX-GOL and SV fields and SC licence area.
Only essential staff are located at site, and all other staff are working
remotely, either from areas away from the conflict areas or outside Ukraine.
The Group has invested in technology that allows many staff to work just as
effectively from remote locations.
Industry risks
The Group is exposed to risks which are generally associated with the oil and The Group has well qualified and experienced technical management staff to
gas industry. For example, the Group's ability to pursue and develop its plan and supervise operational activities. In addition, the Group engages with
projects and undertake development programmes depends on a number of suitably qualified local and international geological, geophysical and
uncertainties, including the availability of capital, seasonal conditions, engineering experts and contractors to supplement and broaden the pool of
regulatory approvals, gas, oil, condensate and LPG prices, development costs expertise available to the Group. Detailed planning of development activities
and drilling success. As a result of these uncertainties, it is unknown is undertaken with the aim of managing the inherent risks associated with oil
whether potential drilling locations identified on proposed projects will ever and gas exploration and production, as well as ensuring that appropriate
be drilled or whether these or any other potential drilling locations will be equipment and personnel are available for the operations, and that local
able to produce gas, oil or condensate. In addition, drilling activities are contractors are appropriately supervised.
subject to many risks, including the risk that commercially productive
reservoirs will not be discovered. Drilling for hydrocarbons can be
unprofitable, not only due to dry holes, but also as a result of productive
wells that do not produce sufficiently to be economic. In addition, drilling
and production operations are highly technical and complex activities and may
be curtailed, delayed or cancelled as a result of a variety of factors.
Production of hydrocarbons
Producing gas and condensate reservoirs are generally characterised by In recent years, the Group has engaged external technical consultants to
declining production rates which vary depending upon reservoir characteristics undertake a comprehensive review and re-evaluation study of the MEX-GOL and SV
and other factors. Future production of the Group's gas and condensate fields in order to gain an improved understanding of the geological aspects of
reserves, and therefore the Group's cash flow and income, are highly dependent the fields and reservoir engineering, drilling and completion techniques, and
on the Group's success in operating existing producing wells, drilling new the results of this study and further planned technical work are being used by
production wells and efficiently developing and exploiting any reserves, and the Group in the future development of these fields. The Group has established
finding or acquiring additional reserves. The Group may not be able to an ongoing relationship with such external technical consultants to ensure
develop, find or acquire reserves at acceptable costs. The experience gained that technical management and planning is of a high quality in respect of all
from drilling undertaken to date highlights such risks as the Group targets development activities on the Group's fields.
the appraisal and production of these hydrocarbons.
Risks relating to the further development and operation of the Group's gas and
condensate fields in Ukraine
The planned development and operation of the Group's gas and condensate fields The Group's technical management staff, in consultation with its external
in Ukraine is susceptible to appraisal, development and operational risk. This technical consultants, carefully plan and supervise development and
could include, but is not restricted to, delays in the delivery of equipment operational activities with the aim of managing the risks associated with the
in Ukraine, failure of key equipment, lower than expected production from further development of the Group's fields in Ukraine. This includes detailed
wells that are currently producing, or new wells that are brought on-stream, review and consideration of available subsurface data, utilisation of modern
problematic wells and complex geology which is difficult to drill or geological software, and utilisation of engineering and completion techniques
interpret. The generation of significant operational cash is dependent on the developed for the fields. With regards to operational activities, the Group
successful delivery and completion of the development and operation of the ensures that appropriate equipment and personnel are available for the
fields. The military conflict in Ukraine is impacting planning and operations, and that operational contractors are appropriately supervised. In
implementation of development and operations at the Group's fields. addition, the Group performs a review of indicators of impairment of its oil
and gas assets on an annual basis, and considers whether an assessment of its
oil and gas assets by a suitably qualified independent assessor is appropriate
or required.
Drilling and workover operations
Due to the depth and nature of the reservoirs in the Group's fields, the The utilisation of detailed sub-surface analysis, careful well planning and
technical difficulty of drilling or re-entering wells in the Group's fields is engineering design in designing work programmes, along with appropriate
high, and this and the equipment limitations within Ukraine, can result in procurement procedures and competent on-site management, aims to minimise
unsuccessful or lower than expected outcomes for wells. these risks.
Maintenance of facilities
There is a risk that production or transportation facilities can fail due to The Group's facilities are operated and maintained at standards above the
non-adequate maintenance, control or poor performance of the Group's Ukrainian minimum legal requirements. Operations staff are experienced and
suppliers. receive supplemental training to ensure that facilities are properly operated
and maintained. Service providers are rigorously reviewed at the tender stage
and are monitored during the contract period.
Financial risks
Exposure to cash flow and liquidity risk
There is a risk that insufficient funds are available to meet the Group's The Group maintains adequate cash reserves and closely monitors forecasted and
development obligations to commercialise the Group's oil and gas assets. Since actual cash flow, as well as short and longer-term funding requirements. The
a significant proportion of the future capital requirements of the Group is Group aims to maintain the significant majority of its cash resources outside
expected to be derived from operational cash generated from production, Ukraine (being 75% as at 28 September 2022). The Group does not currently have
including from wells yet to be drilled, there is a risk that in the longer any loans outstanding, internal financial projections are regularly made based
term insufficient operational cash is generated, or that additional funding, on the latest estimates available, and various scenarios are run to assess the
should the need arise, cannot be secured. The military conflict in Ukraine has robustness of the Group's liquidity. However, as the risk to future capital
disrupted production operations at the Group's fields, and consequently funding is inherent in the oil and gas exploration and development industry
reduced anticipated cash flows from those fields, and this has increased the and reliant in part on future development success, it is difficult for the
risk regarding sufficiency of capital for development. In addition, the Group to take any other measures to further mitigate this risk, other than
conflict may disrupt the sales market for hydrocarbons that are produced. tailoring its development activities to its available capital funding from
Currently, however, hydrocarbon prices are very high, which is ameliorating time to time.
the potential reduction in cash flows resulting from lower production, and the
Group's sales counterparties are expected to meet their financial obligations.
Ensuring appropriate business practices
The Group operates in Ukraine, an emerging market, where certain inappropriate The Group maintains anti-bribery and corruption policies in relation to all
business practices may, from time to time occur, such as corrupt business aspects of its business, and ensures that clear authority levels and robust
practices, bribery, appropriation of property and fraud, all of which can lead approval processes are in place, with stringent controls over cash management
to financial loss. and the tendering and procurement processes. In addition, office and site
protection is maintained to protect the Group's assets.
Hydrocarbon price risk
The Group derives its revenue principally from the sale of its Ukrainian gas, The Group sells a proportion of Its hydrocarbon production through offtake
condensate and LPG production. These revenues are subject to commodity price arrangements, which include pricing formulae so as to ensure that it achieves
volatility and political influence. A prolonged period of low gas, condensate market prices for its products, as well utilising the electronic market
and LPG prices may impact the Group's ability to maintain its long-term platforms in Ukraine to achieve market prices for its remaining products.
investment programme with a consequent effect on its growth rate, which in However, hydrocarbon prices in Ukraine are implicitly linked to world
turn may impact the Company's share price or any shareholder returns. Lower hydrocarbon prices and so the Group is subject to external price trends. In
gas, condensate and LPG prices may not only decrease the Group's revenues per January 2022, the Ukrainian Government imposed temporary partial gas price
unit, but may also reduce the amount of gas, condensate and LPG which the regulations until 30 April 2022, designed to support the production of certain
Group can produce economically, as would increases in costs associated with designated food products. Whilst an unhelpful interference in the functioning
hydrocarbon production, such as subsoil taxes and royalties. The overall of the deregulated gas supply market in Ukraine, in its stated form and
economics of the Group's key assets (being the net present value of the future duration, this temporary scheme was not a material risk to the Company and its
cash flows from its Ukrainian projects) are far more sensitive to long term cash generation, and has now expired.
gas, condensate and LPG prices than short-term price volatility. However,
short-term volatility does affect liquidity risk, as, in the early stage of
the projects, income from production revenues is offset by capital investment.
In addition, the military conflict in Ukraine may disrupt the sales market for
hydrocarbons, although, currently, hydrocarbon prices are very high, and the
Group's sales counterparties are expected to meet their financial obligations.
Currency risk
Since the beginning of 2014, the Ukrainian Hryvnia significantly devalued The Group's sales proceeds are received in Ukrainian Hryvnia, and the majority
against major world currencies, including the US Dollar, where it has fallen of the capital expenditure costs for the current investment programme will be
from UAH8.3/$1.00 on 1 January 2014 to UAH29.3/$1.00 on 30 June 2022, and incurred in Ukrainian Hryvnia, thus the currency of revenue and costs are
UAH36.57$1.00 on 29 September 2022. This devaluation has been a significant largely matched. In light of the previous devaluation and volatility of the
contributor to the imposition of banking restrictions by the National Bank of Ukrainian Hryvnia against major world currencies, and since the Ukrainian
Ukraine over recent years. In addition, the geopolitical events in Ukraine Hryvnia does not benefit from the range of currency hedging instruments which
over recent years and the current military conflict in Ukraine are likely to are available in more developed economies, the Group has adopted a policy
continue to impact the valuation of the Ukrainian Hryvnia against major world that, where possible, funds not required for use in Ukraine be retained on
currencies. Further devaluation of the Ukrainian Hryvnia against the US Dollar deposit in the United Kingdom and Europe, principally in US Dollars.
will affect the carrying value of the Group's assets.
Counterparty and credit risk
The challenging political and economic environment in Ukraine and current The Group monitors the financial position and credit quality of its
military conflict means that businesses can be subject to significant contractual counterparties and seeks to manage the risk associated with
financial strain, which can mean that the Group is exposed to increased counterparties by contracting with creditworthy contractors and customers.
counterparty risk if counterparties fail or default in their contractual Hydrocarbon production is sold on terms that seek to limit supply credit
obligations to the Group, including in relation to the sale of its hydrocarbon and/or title transfer until payment is received.
production, resulting in financial loss to the Group.
Financial markets and economic outlook
The performance of the Group is influenced by global economic conditions and, The Group's sales proceeds are received in Ukrainian Hryvnia and a significant
in particular, the conditions prevailing in the United Kingdom and Ukraine. proportion of investment expenditure is made in Ukrainian Hryvnia, which
The economies in these regions have been subject to volatile pressures in minimises risks related to foreign exchange volatility. However, hydrocarbon
recent periods, with the global economy having experienced a long period of prices in Ukraine are implicitly linked to world hydrocarbon prices and so the
difficulty, the COVID pandemic, and more particularly the current military Group is subject to external price movements. The Group holds a significant
conflict in Ukraine. This has led to extreme foreign exchange movements in the proportion of its cash reserves in the United Kingdom and Europe, mostly in US
Ukrainian Hryvnia, high inflation and interest rates, and increased credit Dollars, with reputable financial institutions. The financial status of
risk relating to the Group's key counterparties. counterparties is carefully monitored to manage counterparty risks.
Nevertheless, the overall exposure that the Group faces as a result of these
risks cannot be predicted and many of these are outside of the Group's
control.
Corporate risks
Ukrainian production licences
The Group operates in a region where the right to production can be challenged The Group ensures compliance with commitments and regulations relating to its
by State and non-State parties. During 2010, this manifested itself in the production licences through Group procedures and controls or, where this is
form of a Ministry Order instructing the Group to suspend all operations and not immediately feasible for practical or logistical considerations, seeks to
production from its MEX-GOL and SV production licences, which was not resolved enter into dialogue with the relevant Government bodies with a view to
until mid-2011. In 2013, new rules relating to the updating of production agreeing a reasonable time frame for achieving compliance or an alternative,
licences led to further challenges being raised by the Ukrainian authorities mutually agreeable course of action. Work programmes are designed to ensure
to the production licences held by independent oil and gas producers in that all licence obligations are met and continual interaction with Government
Ukraine, including the Group. In March 2019, a Ministry Order was issued bodies is maintained in relation to licence obligations and commitments.
instructing the Group to suspend all operations and production from its VAS
production licence. The Group is challenging this Order through legal
proceedings, during which production from the licence is able to continue
(although the Russian invasion caused production to be suspended, with
resumption planned for October 2022), but this matter remains unresolved. In
2020, LLC Arkona Gas-Energy ("Arkona") faced a challenge from PJSC Ukrnafta
concerning the validity of its SC production licence, which was ultimately
resolved in Arkona's favour by a decision of the Supreme Court of Ukraine in
February 2021. All such challenges affecting the Group have thus far been
successfully defended through the Ukrainian legal system. However, the
business environment is such that these types of challenges may arise at any
time in relation to the Group's operations, licence history, compliance with
licence commitments and/or local regulations. In addition, production licences
in Ukraine are issued with and/or carry ongoing compliance obligations, which
if not met, may lead to the loss of a licence.
Risks relating to key personnel
The Group's success depends upon skilled management as well as technical The Group periodically reviews the compensation and contractual terms of its
expertise and administrative staff. The loss of service of critical members staff. In addition, the Group has developed relationships with a number of
from the Group's team could have an adverse effect on the business. The technical and other professional experts and advisers, who are used to provide
current military conflict in Ukraine has meant that, as far as possible, the specialist services as required. As a result of the military conflict, only
Group's staff have needed to move away from areas of conflict and work essential staff are located at site, and all other staff are working remotely,
remotely. either from areas away from the conflict areas or outside Ukraine. The Group
has invested in technology that allows many staff to work just as effectively
from remote locations.
Directors' Responsibility Statement
The Directors confirm that, to the best of their knowledge:
a) the unaudited condensed interim consolidated financial
statements have been prepared in accordance with UK-adopted International
Accounting Standard 34, 'Interim Financial Reporting' ("IAS 34") and the AIM
Rules for Companies; and
b) these unaudited interim results include:
(i) a fair review of the information required (i.e. an indication
of important events and their impact and a description of the principal risks
and uncertainties for the remaining six months of the financial year); and
(ii) a fair review of the information required on related party
transactions.
A list of current Directors is maintained on the Group's website,
www.enwell-energy.com.
Condensed Interim Consolidated Income Statement
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
Note $000 $000
Revenue 3 77,228 41,050
Cost of sales 4 (25,690) (19,452)
Gross profit 51,538 21,598
Administrative expenses (3,428) (3,953)
Other operating income, (net) 5 824 469
Operating profit 48,934 18,114
Net impairment losses on financial assets (679) (19)
Other expenses, (net) 6 (5,227) (39)
Finance income - 87
Finance costs (248) (197)
Profit before taxation 42,780 17,946
Income tax expense 7 (10,408) (4,157)
Profit for the period 32,372 13,789
Earnings per share (cents)
Basic and diluted 8 10.1c 4.3c
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Condensed Interim Consolidated Statement of Comprehensive Income
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
Profit for the period 32,372 13,789
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss:
Equity - foreign currency translation (7,943) 3,927
Total other comprehensive (loss)/income (7,943) 3,927
Total comprehensive income for the period 24,429 17,716
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Condensed Interim Consolidated Balance Sheet
30 Jun 22 31 Dec 21
(unaudited) (audited)
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 9 83,487 87,418
Intangible assets 10 11,206 12,340
Right-of-use assets 716 1,008
Deferred tax asset 7 375 361
95,784 101,127
Current assets
Inventories 2,395 1,862
Trade and other receivables 11 48,678 13,059
Cash and cash equivalents 14 77,370 87,780
Other short-term investments 14 - 4,762
128,443 107,463
Total assets 224,227 208,590
Liabilities
Current liabilities
Trade and other payables (8,344) (12,306)
Lease liabilities (391) (455)
Corporation tax payable (4,519) (5,445)
(13,254) (18,206)
Net current assets 115,189 89,257
Non-current liabilities
Provision for decommissioning 12 (993) (5,467)
Lease liabilities (421) (648)
Defined benefit liability (390) (427)
Deferred tax liability 7 (6,119) (5,197)
Other non-current liabilities 13 (104) (128)
(8,027) (11,867)
Total liabilities (21,281) (30,073)
Net assets 202,946 178,517
Equity
Called up share capital 28,115 28,115
Foreign exchange reserve (111,554) (103,611)
Other reserve (3,204) (3,204)
Capital contribution reserve 7,477 7,477
Retained earnings 282,112 249,740
Total equity 202,946 178,517
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Condensed Interim Consolidated Statement of Changes in Equity
Called up share capital Share premium account Merger Capital contributions reserve Foreign exchange reserve* Retained earnings Total equity
reserve
$000 $000 $000 $000 $000 $000 $000
As at 1 January 2022 (audited) 28,115 - (3,204) 7,477 (103,611) 249,740 178,517
Profit for the period - - - - - 32,372 32,372
Other comprehensive income
- exchange differences - - - - (7,943) - (7,943)
Total comprehensive income - - - - (7,943) 32,372 24,429
As at 30 June 2022 (unaudited) 28,115 - (3,204) 7,477 (111,554) 282,112 202,946
Called up share capital Share premium account Merger Capital contributions reserve Foreign exchange reserve* Accumulated losses/ Total equity
Retained earnings
reserve
$000 $000 $000 $000 $000 $000 $000
As at 1 January 2021 (audited) 28,115 555,090 (3,204) 7,477 (105,222) (356,641) 125,615
Profit for the period - - - - - 13,789 13,789
Other comprehensive income
- exchange differences - - - - 3,927 - 3,927
Total comprehensive income - - - - 3,927 13,789 17,716
Transactions with owners in their capacity as owners:
Cancellation of share premium account - (555,090) - - - 555,090 -
As at 30 June 2021 (unaudited) 28,115 - (3,204) 7,477 (101,295) 212,238 143,331
* Predominantly as a result of exchange differences on retranslation, where
the subsidiaries' functional currency is not US Dollars
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Condensed Interim Consolidated Statement of Cash Flows
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
Note $000 $000
Operating activities
Cash generated from operations 15 12,501 19,148
Charitable donations (4,996) (23)
Equipment rental income - 15
Income tax paid (9,143) (2,897)
Interest received 536 261
Net cash (outflow)/inflow from operating activities (1,102) 16,504
Investing activities
Purchase of property, plant and equipment (12,074) (13,092)
Proceeds from disposal of other short-term investments 4,762 -
Purchase of intangible assets (23) (2,233)
Proceeds from return of prepayments for shares - 250
Proceeds from sale of property, plant and equipment 2 9
Net cash outflow from investing activities (7,333) (15,066)
Financing activities
Payment of principal portion of lease liabilities (239) (330)
Net cash outflow from financing activities (239) (330)
Net (decrease)/increase in cash and cash equivalents (8,674) 1,108
Cash and cash equivalents at beginning of the period 14 87,780 60,993
ECL* of cash and cash equivalents (223) (4)
Effect of foreign exchange rate changes (1,513) 760
Cash and cash equivalents at end of the period 14 77,370 62,857
*ECL - Expected credit losses
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Notes to the Unaudited Condensed Interim Consolidated Financial Statements
1. General Information and Operational Environment
Enwell Energy plc (the "Company") and its subsidiaries (together the "Group")
is a gas, condensate and LPG production group.
Enwell Energy plc is a public limited company incorporated in England and
Wales under the Companies Act 2006, whose shares are quoted on the AIM Market
of London Stock Exchange plc. The Company's registered office is at 16 Old
Queen Street, London SW1H 9HP, United Kingdom and its registered number is
4462555.
As at 30 June 2022, the Company's majority shareholder, with 82.65% of the
issued share capital, and immediate parent company was Smart Energy (CY) Ltd,
which is 100% owned by Smart Holding (Cyprus) Ltd, which is 100% owned by Mr
Vadym Novynskyi. Accordingly, the Company is ultimately controlled by Mr Vadym
Novynskyi.
The Group's gas, condensate and LPG extraction and production facilities are
located in Ukraine. Since 2013, there has been ongoing political and economic
instability in Ukraine, which has led to a deterioration of Ukrainian State
finances, volatility of financial markets, illiquidity in capital markets,
higher inflation and a depreciation of the national currency against major
foreign currencies, although there had been some recent gradual improvements.
Impact of the ongoing war in Ukraine
On 24 February 2022, Russia commenced a military invasion of Ukraine. This was
quickly followed by the enactment of martial law by the Ukrainian President's
Decree, approved by the Parliament of Ukraine, and the corresponding
introduction of related temporary restrictions that impact, amongst other
areas, the economic environment and business operations in Ukraine.
Currently, seven months after the initial military attack, fighting continues
in and around several major Ukrainian cities, causing very significant numbers
of reported military and civilian casualties and significant dislocation of
the Ukrainian population. As of the date hereof, the Russian army has occupied
territories in the east and south of Ukraine, including the majority of the
Kherson, Zaporizhzhia, Luhansk and Donetsk regions. Russian attacks have
targeted and destroyed civilian infrastructure over wide areas of Ukraine,
including hospitals and residential complexes. The invasion caused, and
continues to cause, significant turbulence and disruption to the social and
economic environment in Ukraine, with many businesses being forced to suspend
their operations. According to a projection published by the International
Monetary Fund ("IMF") in April 2022, Ukrainian GDP may fall 35% in 2022.
On 3 June 2022, the National Bank of Ukraine ("NBU") increased the key policy
interest rate to 25%, which was aimed at suspending price increases and
strengthening the Ukrainian Hryvnia exchange rate. The NBU has also introduced
temporary restrictions on foreign currency trades and limited the ability to
perform cross-border payments for non-critical imports and repayment of debt
to foreign creditors, apart from international institutions. At that time, the
Ukrainian Hryvnia exchange rate with the US Dollar was effectively fixed at
UAH29.25:$1.00 on the foreign exchange market to ensure the stable operation
of Ukraine's financial system, and this was increased to UAH36.57:$1.00 in
July 2022. As a result, commercial interbank quotes remain close to the
officially imposed NBU exchange rate. Despite the uncertainty and instability
in the general situation within Ukraine, the banking system remains relatively
stable, with sufficient liquidity even as martial law continues, and banking
services are available to both legal entities and individual bank customers.
The Ukrainian Government is taking action to limit the negative effects of the
war on the Ukrainian economic environment during the period of martial law and
beyond, including but not limited to:
● the Parliament of Ukraine has adopted a temporary easing of the tax regime
until the end of martial law, including the suspension of tax audits and has
cancelled penalties for violating the tax law;
● gasoline, heavy distillates, liquefied gas, oil and petroleum are subject to
VAT at a reduced rate of 7%, and the excise tax rate for the imported fuel
group of products' was suspended between 24 February 2022 and 30 September
2022, although it is now being reinstated at its previous level;
● a number of measures were taken to limit prices for energy resources,
including prohibiting export of gas, setting a level of electricity price on
transactions a day ahead and intraday markets; and
● the Parliament of Ukraine passed a law (№ 7038-d) to increase the subsoil
tax rate on natural gas production during martial law. This law introduced a
differentiated subsoil tax rate on the production of natural gas depending on
sale prices for natural gas.
Additional financial support was received from a number of international
institutions, including from the IMF and European Bank for Reconstruction and
Development ("EBRD"), to support the economy and the population. Such
financial support is critical for Ukraine to continue to service its debts in
the foreseeable future, including record high State debt repayments in 2022.
Given the fast-moving nature of the situation in Ukraine and the
unpredictability of the outcome, it is impracticable to assess the full impact
of the war on the economic environment.
Gas market developments
On 30 December 2021, the Cabinet of Ministers adopted Resolution № 1433 and
Resolution № 1435, according to which all independent gas producers in
Ukraine (as identified by a Committee set up by the Ukrainian Government (the
"Committee")) were required to sell up to 20% of their natural gas production
for the period until 30 April 2022 at a price set at the cost of sales of the
relevant gas producer (based on established accounting rules) for such gas,
plus a margin of 24%, plus existing production taxes (the "Regulated Price").
This gas was then to be sold to specified producers of designated socially
important food products (as identified by the Committee) at the Regulated
Price to reduce the energy costs of such producers during the period through
to 30 April 2022. Although the introduction of these measures pre-dated the
military conflict in Ukraine, their impact has coincided with the military
conflict, but nevertheless, the measures have not had a material financial
impact on the Group, given the modest volume of gas sold at Regulated Prices
and the reduced production during the applicable period.
On 15 March 2022, the Ukrainian Parliament adopted the Law of Ukraine №
2139-IX "On amendments to the Tax Code of Ukraine and certain legislative acts
of Ukraine on the introduction of differentiated rent (subsoil tax) for
natural gas production", which introduced changes to the subsoil production
tax rates applicable to natural gas production by modifying the applicable
rates based on gas prices, extending the incentive rates for new wells for a
further 10 years and making improvements to the regulatory environment. These
changes took effect on 1 March 2022, and the legislation includes provisions
that these rates will not be increased for 10 years.
The new subsoil production tax rates are as follows:
(a) when gas prices are up to $150/Mm(3), the rate for wells drilled prior to 1
January 2018 ("old wells") is 14.5% for gas produced from deposits at depths
shallower than 5,000 metres and 7% for gas produced from deposits deeper than
5,000 metres, and for wells drilled after 1 January 2018 ("new wells") is 6%
for gas produced from deposits at depths shallower than 5,000 metres and 3%
for gas produced from deposits deeper than 5,000 metres;
(b) when gas prices are between $150/Mm(3) and $400/Mm(3), the rate for old wells
is 29% for gas produced from deposits at depths shallower than 5,000 metres
and 14% for gas produced from deposits deeper than 5,000 metres, and for new
wells is 12% for gas produced from deposits at depths shallower than 5,000
metres and 6% for gas produced from deposits deeper than 5,000 metres;
(c) when gas prices are more than $400/Mm(3), for the first $400/Mm(3), the rate
for old wells is 29% for gas produced from deposits at depths shallower than
5,000 metres and 14% for gas produced from deposits deeper than 5,000 metres,
and for new wells is 12% for gas produced from deposits at depths shallower
than 5,000 metres and 6% for gas produced from deposits deeper than 5,000
metres, and for the difference between $400/Mm(3) and the actual price, the
rate for old wells is 65% for gas produced from deposits at depths shallower
than 5,000 metres and 31% for gas produced from deposits deeper than 5,000
metres, and for new wells is 36% for gas produced from deposits at depths
shallower than 5,000 metres and 18% for gas produced from deposits deeper than
5,000 metres.
Prior to the changes, the tax rate for old wells was 29% for gas produced from
deposits at depths shallower than 5,000 metres and 14% for gas produced from
deposits deeper than 5,000 metres, and for new wells was 12% for gas produced
from deposits at depths shallower than 5,000 metres and 6% for gas produced
from deposits deeper than 5,000 metres. The tax rates applicable to condensate
production were unchanged and remain at 31% for condensate produced from
deposits shallower than 5,000 metres and 16% for condensate produced from
deposits deeper than 5,000 metres, for both old and new wells.
As a direct result of the conflict in Ukraine, including the significant
decline in domestic consumption disrupting the previous supply, demand and
pricing dynamics, there has been a divergence between domestic and European
gas pricing, and accordingly, the methodology (linked to European prices) used
to determine the reference gas price for the subsoil tax rates has had a
significantly detrimental effect for domestic gas producers. In order to
address this issue, the Ukrainian Parliament, in September 2022, approved
draft legislation which modifies such methodology to ensure that it operates
as originally intended (with such reference price being aligned with domestic
prices). This legislation has not yet completed all the requisite procedural
steps to be enacted and brought into force, but the draft legislation
envisages an effective implementation date of 1 August 2022 if enacted.
COVID-19 impact
The COVID-19 pandemic had a significant impact on the economic environment in
Ukraine and throughout the world. The rapid spread of the COVID-19 coronavirus
pandemic, and the restrictions introduced to counteract the pandemic
significantly impacted global commodity and financial markets. The overall
impact of COVID-19 will largely depend on the duration and extent of the
effects of the pandemic on the global and Ukrainian economies. Businesses in
Ukraine adapted to operating in new realities, arranging remote work, supply
and sale modes of operation. At the date hereof, based on the available
information, management believes that the uncertainties attributable to
COVID-19 do not represent a key risk factor that may materially affect the
liquidity and continuity of the Group's operations.
Overall, the final resolution and the ongoing effects of the military conflict
and political and economic situation in Ukraine are difficult to predict, but
they may have further severe effects on the Ukrainian economy and the Group's
business.
As at 29 September 2022, the official NBU exchange rate of the Ukrainian
Hryvnia against the US Dollar was UAH36.57/$1.00, compared with UAH29.25/$1.00
as at 30 June 2022.
Further details of risks relating to Ukraine can be found within the Principal
Risks and Uncertainties section earlier in this announcement.
2. Accounting Judgements and Estimates
Basis of preparation
These unaudited condensed interim consolidated financial statements for the
six month period ended 30 June 2022 have been prepared in accordance with
UK-adopted International Accounting Standard 34, 'Interim Financial Reporting'
("IAS 34") and the AIM Rules for Companies. The accounting policies adopted
are consistent with those of the previous financial year and corresponding
interim reporting period.
These unaudited condensed interim consolidated financial statements do not
comprise statutory accounts within the meaning of section 434 of the Companies
Act 2006. Statutory accounts for the year ended 31 December 2021 were
approved by the Board of Directors on 28 June 2022 and subsequently filed with
the Registrar of Companies. The Auditors' Report on those accounts was not
qualified and did not contain any statement under section 498 of the Companies
Act 2006.
The unaudited condensed interim consolidated financial statements should be
read in conjunction with the annual consolidated financial statements for the
year ended 31 December 2021, which were prepared in accordance with UK-adopted
International Accounting Standards.
The accounting policies and methods of computation and presentation used are
consistent with those used in the Group's Annual Report and Financial
Statements for the year ended 31 December 2021, with the exception of the new
or revised standards and interpretations set out below.
New and amended standards adopted by the Group
The following new standards, amendments to standards and interpretations
became effective for the Group on 1 January 2022 or afterwards (these
standards, amendments to standards and interpretations did not have a material
impact on this unaudited interim condensed consolidated financial
information):
● Amendments to IAS 16 Property, Plant and Equipment prohibit the deduction from
the cost of an item of property, plant and equipment of any proceeds from
selling items produced while bringing that asset into operation and clarify
that these proceeds (and the corresponding costs of production) are recognised
in profit or loss;
● Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets
clarify that the cost of fulfilling a contract comprises the costs that relate
directly to the contract. These can either be incremental costs of fulfilling
that contract or the allocation of other costs that relate directly to
fulfilling contracts;
There are no other amended standards which the Group considers to have a
material impact on these financial statements.
Going Concern
The Group's business activities, together with the factors likely to affect
its future operations, performance and financial position are set out in the
Chairman's Statement, Chief Executive's Statement and Finance Review. The
financial position of the Group, its cash flows and liquidity position are set
out in these unaudited condensed interim consolidated financial statements.
On 24 February 2022, Russia commenced a military invasion of Ukraine. This was
quickly followed by the enactment of martial law by the Ukrainian President's
Decree, approved by the Parliament of Ukraine, and the corresponding
introduction of related temporary restrictions that impact the economic
environment and business operations in Ukraine.
The production assets of the Group are located in the central and eastern part
of the country (Poltava and Kharkiv regions) which are controlled by the
Ukrainian Government. Following a brief period of suspension, production and
field operations, as well as construction work on upgrades to the gas
processing facilities, at the MEX-GOL and SV fields recommenced. As of the
date hereof, no assets of the Group have been damaged, and the Group continues
to operate its MEX-GOL, SV and SC assets in the Poltava region, while all
production and field operations at the VAS asset located in the Kharkiv region
are suspended, although the Group plans to resume production operations at the
VAS field in the near future. On the SC licence area, completion of the
testing of the SC-4 well is ongoing. No military activities have occurred at
the Group's field locations. The Gas Transmission System Operator of Ukraine
has maintained complete operational and technological control over the
operations of the Ukrainian Gas Transmission System. However, as of the date
hereof, the military conflict has had, and continues to have, a material
impact on the production and sales levels of the business and execution of the
Group's 2022 budget.
The Group has no debt and funds its operations from its own cash resources.
Cash and cash equivalents were $76.2 million as at 28 September 2022, of which
$57.5 million were held outside of Ukraine, in currencies other than the
Ukrainian Hryvnia. The Directors maintain a significant level of flexibility
to modify the Group's development plans as may be required to preserve cash
resources for liquidity management. Absent the potential impact of the
military conflict in Ukraine, the Directors are satisfied that the Group and
the Company are a going concern and will continue their operations for the
foreseeable future.
In assessing the impact of the military conflict on the ability of the Group
and the Company to continue as a going concern, the Directors have analysed a
number of possible scenarios of economic and military developments and their
impact on the expected cash flows of the Group and Company for the remainder
of 2022 and 2023. This includes considering a possible (but in the view of the
Directors, highly unlikely) worst case scenario in which the Group has zero
production as a result of possible future military conflict dictating field
operations being completely shut-in, and all other non-production related
costs being maintained at current levels with no reduction or mitigating
actions as would otherwise be possible. Even in this worst-case scenario, the
Directors are satisfied that the Group and the Company have sufficient liquid
resources to be able to meet their liabilities as they fall due and to be able
to continue as a going concern for the foreseeable future.
In respect of the Group's operations, staff and assets in Ukraine, the
potential short and long-term impact of the future development of the military
conflict is inherently uncertain. Accordingly, this creates a material
uncertainty related to events or conditions that may cast significant doubt on
the Group's ability to continue as a going concern because of the potential
impact on its ability to continue its operations for the foreseeable future
and realise its assets in the normal course of business. The unaudited
condensed interim consolidated financial statements do not include the
adjustments that would result if the Group were unable to continue as a going
concern.
The Company is a UK-based investment holding company. The Company had cash and
cash equivalents of $57.5 million as at 28 September 2022, all of which are
held outside of Ukraine, in US Dollars, Pounds Sterling and Euros. The
Directors are satisfied that the Company is a going concern and will be able
to continue its operations for the foreseeable future, and there is no
material uncertainty in respect of its ability to do so.
Significant accounting judgements and estimates
The preparation of the unaudited condensed interim consolidated financial
statements requires management to make judgements, estimates and assumptions
that affect the application of accounting policies and the reported amounts of
assets and liabilities, income and expenses. Actual results may differ from
these estimates.
In preparing these unaudited condensed interim consolidated financial
statements, the significant judgements made by management in applying the
Group's accounting policies and the key sources of estimation uncertainty were
consistent with those that applied to the consolidated financial statements
for the year ended 31 December 2021 with certain updates described below.
Estimates
Depreciation of Development and Production Assets
Development and production assets held in property, plant and equipment are
depreciated on a unit of production basis at a rate calculated by reference to
proven and probable reserves at the end of the period plus the production in
the period, and incorporating the estimated future cost of developing and
extracting those reserves. Future development costs are estimated using
assumptions about the number of wells required to produce those reserves, the
cost of the wells, future production facilities and operating costs, together
with assumptions on oil and gas realisations, and are revised annually. The
reserves estimates used are determined using estimates of gas in place,
recovery factors, future hydrocarbon prices and also take into consideration
the Group's latest development plan for the associated development and
production asset. The latest development plan and therefore the inputs used to
determine the depreciation charge for the MEX-GOL, SV and VAS fields continue
until the end of the economic life of the fields, which is assessed to be
2038, 2042 and 2028 respectively, based on the assessment contained in the
DeGolyer & MacNaughton reserves report for these fields. The licences for
the MEX-GOL and SV fields have recently been extended until 2044. Were the
estimated reserves at the beginning of the year to differ by 10% from previous
assumptions, the impact on depreciation for the period ended 30 June 2022
would be to increase it by $1,302,000 or decrease it by $750,000 (31 December
2021: increase by $1,195,000 or decrease by $975,000).
Provision for Decommissioning
The Group has decommissioning obligations in respect of its Ukrainian assets.
The full extent to which the provision is required depends on the legal
requirements at the time of decommissioning, the costs and timing of any
decommissioning works and the discount rate applied to such costs.
A detailed assessment of gross decommissioning cost was undertaken on a
well-by-well basis using local data on day rates and equipment costs. The
discount rate applied on the decommissioning cost provision at 30 June 2022
was 22.97% (31 December 2021: 6.29%). The discount rate is calculated in real
terms based on the yield to maturity of Ukrainian Government bonds denominated
in the currency in which the liability is expected to be settled and with the
settlement date that approximates the timing of settlement of decommissioning
obligations.
The change in estimate applied to calculate the provision as at 30 June 2022
resulted from the revision of the estimated costs of decommissioning (increase
of $114,000 in provision) and the increase in the discount rate applied
(decrease of $4,429,000 in provision). The increase in discount rate at 30
June 2022 resulted from the increase in the Ukrainian Eurobonds yield and the
respective increase of country risk premium. The costs are expected to be
incurred by 2038 on the MEX-GOL field, by 2042 on the SV field, by 2028 on the
VAS field, and by 2045 on the SC field, which is the end of the estimated
economic life of the respective fields.
3. Segmental Information
In line with the Group's internal reporting framework and management
structure, the key strategic and operating decisions are made by the Board of
Directors, who review internal monthly management reports, budgets and
forecast information as part of this process. Accordingly, the Board of
Directors is deemed to be the Chief Operating Decision Maker within the Group.
The Group's only class of business activity is oil and gas exploration,
development and production. The Group's operations are located in Ukraine,
with its head office in the United Kingdom. These geographical regions are the
basis on which the Group reports its segment information. The segment results
as presented represent operating profit before depreciation and amortisation.
6 months ended 30 June 2022 (unaudited)
Ukraine United Kingdom Total
$000 $000 $000
Revenue
Gas sales 64,106 - 64,106
Condensate sales 8,081 - 8,081
Liquefied Petroleum Gas sales 5,041 - 5,041
Total revenue 77,228 - 77,228
Segment result 53,588 (922) 52,666
Depreciation and amortisation of non-current assets (3,732) - (3,732)
Operating profit 48 934
Segment assets 165,139 59,088 224,227
Capital additions* 9,724 - 9,724
*Comprises additions to property, plant and equipment and intangible assets
(Notes 9 and 10).
6 months ended 30 June 2021 (unaudited)
Ukraine United Kingdom Total
$000 $000 $000
Revenue
Gas sales 28,514 - 28,514
Condensate sales 9,760 - 9,760
Liquefied Petroleum Gas sales 2,776 - 2,776
Total revenue 41,050 - 41,050
Segment result 25,641 (1,547) 24,094
Depreciation and amortisation (5,980) - (5,980)
Operating profit 18,114
Segment assets 127,927 36,982 164,909
Capital additions* 11,035 - 11,035
*Comprises additions to property, plant and equipment and intangible assets
(Notes 9 and 10).
There are no inter-segment sales within the Group and all products are sold in
the geographical region in which they are produced. The Group is not
significantly impacted by seasonality.
4. Cost of Sales
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
Production taxes 12,931 7,273
Depreciation of property, plant and equipment 3,251 5,529
Rent expenses 5,440 2,964
Staff costs 1,217 1,368
Cost of inventories recognised as an expense 694 910
Transmission tariff for Ukrainian gas system 267 436
Amortisation of mineral reserves 227 236
Other expenses 1,663 736
25,690 19,452
5. Other operating income/(expenses), (net)
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
Interest income on cash and cash equivalents 536 312
Reversal of accruals 236 167
Contractor penalties applied 110 -
Other operating (losses)/income, net (58) (10)
824 469
6. Other income/(expenses), (net)
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
Charitable donations (4,996) (23)
Net foreign exchange (losses)/gains (2) (26)
Other income/(expenses), (net) (229) 10
(5,227) (39)
Following the Russian invasion of Ukraine on 24 February 2022, the Group has
made a number of charitable donations totalling $4,996,000 to State and
volunteer organisations for humanitarian and security assistance.
7. Taxation
The income tax charge of $10,408,000 for the six month period ended 30 June
2022 relates to a сurrent tax charge of $8,682,000 and a deferred tax charge
of $1,726,000 (1H 2021: current tax charge of $4,003,000 and deferred tax
charge of $154,000).
The movement in the period was as follows:
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
Deferred tax (liability)/asset recognised relating to development and
production assets at MEX-GOL-SV fields and provision for decommissioning
At beginning of the period (5,197) (2,705)
Charged to Income Statement - current period (1,740) (249)
Effect of exchange difference 818 (146)
At end of the period (6,119) (3,100)
Deferred tax asset/(liability) recognised relating to development and
production assets at VAS field and provision for decommissioning
At beginning of the period 361 167
Credited to Income Statement - current period 14 95
Effect of exchange difference - 8
At end of the period 375 270
Taxes on income in the interim periods are accrued using the tax rate that
would be applicable to the expected total annual profit or loss. The effective
tax rate for the six month period ended 30 June 2022 was 25% (1H 2021: 23%).
The deferred tax asset relating to the Group's provision for decommissioning
at 30 June 2022 of $517,000 (31 December 2021: $457,000) was recognised on
the tax effect of the temporary differences of the Group's provision for
decommissioning at the MEX-GOL and SV fields, and its tax base. The deferred
tax liability relating to the Group's development and production assets at the
MEX-GOL and SV fields at 30 June 2022 of $6,635,000 (31 December 2021:
$5,654,000) was recognised on the tax effect of the temporary differences
between the carrying value of the Group's development and production asset at
the MEX-GOL and SV fields, and its tax base.
The deferred tax asset relating to the Group's provision for decommissioning
at 30 June 2022 of $150,000 (31 December 2021: $315,000) was recognised on
the tax effect of the temporary differences on the Group's provision on
decommissioning at the VAS field, and its tax base. The deferred tax liability
relating to the Group's development and production assets at the VAS field at
30 June 2022 of $225,000 (31 December 2021: $46,000) was recognised on the
tax effect of the temporary differences between the carrying value of the
Group's development and production asset at the VAS field, and its tax base.
8. Earnings per Share
The calculation of basic and diluted earnings per ordinary share has been
based on the profit for the six month period ended 30 June 2022 and 30 June
2021 and 320,637,836 ordinary shares, being the average number of shares in
issue for the period. There are no dilutive instruments.
9. Property, Plant and Equipment
6 months ended 30 Jun 22 6 months ended 30 Jun 21
(unaudited) (unaudited)
Oil and gas development and production assets Oil and gas exploration and evaluation assets Other Total Oil and gas development and production assets Oil and gas exploration and evaluation assets Other Total
Ukraine fixed Ukraine fixed
assets assets
$000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning of the period 163,170 10,110 2,631 175,911 135,966 2,362 2,217 140,545
Additions 6,469 3,027 185 9,681 10,604 80 55 10,739
Change in decommissioning provision (4,250) (63) - (4,313) (107) - - (107)
Disposals (57) - (25) (82) (36) - (70) (106)
Exchange differences (12,166) (463) 857 (11,772) 5,850 97 75 6,022
At end of the period 153,166 12,611 3,648 169,425 152,277 2,539 2,277 157,093
Accumulated depreciation and impairment
At beginning of the period 87,070 - 1,423 88,493 73,816 - 1,067 74,883
Charge for the period 3,362 - 158 3,520 5,447 - 158 5,605
Disposals (21) - (23) (45) (7) - (9) (16)
Exchange differences (5,933) - (98) (6,037) 3,072 - 48 3,120
At end of the period 84,478 - 1,460 85,932 82,328 - 1,264 83,592
Net book value at the beginning of the period 76,100 10,110 1,208 87,418 62,150 2,362 1,150 65,662
Net book value at end of the period 68,668 12,611 2,189 83,487 69,949 2,539 1,013 73,501
At 30 June 2022, an impairment indicator (the Russian invasion of Ukraine) was
identified by the Group, and impairment tests were performed for the MEX-GOL,
SV, SC and VAS fields. These reviews concluded that no impairment to carrying
value had occurred on any Group asset.
10. Intangible Assets
6 months ended 30 Jun 22 6 months ended 30 Jun 21
(unaudited) (unaudited)
Mineral reserve rights Exploration and evaluation intangible assets Other intangible assets Total Mineral reserve rights Exploration and evaluation intangible assets Other intangible assets Total
$000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning of the period 6,810 8,651 752 16,213 6,570 8,286 616 15,472
Additions - - 43 43 - 63 233 296
Disposals - - - - - - (137) (137)
Exchange differences (460) (590) (50) (1,100) 265 335 26 626
At end of the period 6,350 8,061 745 15,156 6,835 8,684 738 16,257
Accumulated amortisation
and impairment
At beginning of the period 3,439 - 434 3,873 2,855 - 385 3,240
Amortisation charge for the period 224 - 113 337 236 - 105 341
Disposals - - - - - - (136) (136)
Exchange differences (232) - (28) (260) 99 - 15 114
At end of the period 3,431 - 519 3,950 3,190 - 369 3,559
Net book value at beginning of the period 3,371 8,651 318 12,340 3,715 8,286 231 12,232
Net book value at end of the period 2,919 8,061 226 11,206 3,645 8,684 369 12,698
Intangible assets consist mainly of the hydrocarbon production licence
relating to the VAS gas and condensate field, which is held by LLC Prom-Enerho
Produkt, and the Svystunivsko-Chervonolutski ("SC") hydrocarbon exploration
licence, which is held by LLC Arkona Gas-Energy. The Group amortises the
hydrocarbon production licence relating to the VAS gas and condensate field
using the straight-line method over the term of the economic life of the VAS
field until 2028. The SC hydrocarbon exploration licence is not amortised due
to it being at an exploration and evaluation stage.
As at 30 June 2022, an impairment indicator (the Russian invasion of Ukraine)
was identified by the Group, and impairment tests were performed for the
MEX-GOL, SV, SC and VAS fields. These reviews concluded that no impairment to
carrying value had occurred on any Group asset.
11. Trade and Other Receivables
30 Jun 22 31 Dec 21
(unaudited) (audited)
$000 $000
Trade receivables 39,493 5,308
Other financial receivables 235 200
Less credit loss allowance (435) (140)
Total financial receivables 39,293 5,368
Prepayments and accrued income 6,550 5,231
Other receivables 2,835 2,460
Total trade and other receivables 48,678 13,059
Due to the short-term nature of the current trade and other financial
receivables, their carrying amount is assumed to be the same as their fair
value. All trade and other financial receivables, except those provided for,
are considered to be of high credit quality.
The majority of the trade receivables are from a related party, LLC Smart
Energy, that purchases all of the Group's gas production. The applicable
payment terms are payment for all of the monthly volume of gas by the 10(th)
of the month following the month of delivery (1H 2021: payment for one third
of the monthly volume of gas by the 15(th) of the month following the month of
delivery, and payment of the remaining balance by the end of that month).
Prepayments and accrued income mainly consist of prepayments of $5,213,000
relating to the development of the MEX-GOL field, $375,000 relating to the
development of the SV field and $404,000 relating to the development of the SC
licence (31 December 2021: $1,366,000 relating to the development of the SV
field, $1,210,000 relating to the development of the MEX-GOL field and
$2,284,000 relating to the development of the SC licence).
12. Provision for Decommissioning
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
At beginning of the period 5,467 6,819
Amounts provided - 127
Unwinding of discount 160 122
Change in estimate (4,313) (234)
Effect of exchange difference (321) 277
At end of the period 993 7,111
The provision for decommissioning is based on the net present value of the
Group's estimated liability for the removal of the Ukrainian production
facilities and well site restoration at the end of production life.
The non-current provision of $993,000 (31 December 2021: $5,467,000)
represents a provision for the decommissioning of the Group's MEX-GOL, SV, VAS
and SC production and exploration facilities, including site restoration. None
of the provision was utilised during the reporting period.
As described in Note 2, the change in estimates applied to calculate the
provision as at 30 June 2022 resulted from the revision of the estimated costs
of decommissioning (increase of $114,000 in the provision) and the increase in
the discount rate applied (decrease of $4,429,000 in the provision).
13. Other non-current liabilities
Other non-current liabilities as at 30 June 2022 and 31 December 2021 consist
of the long-term obligations for the Ukrainian State special purpose fund
measured at amortised cost using an interest rate of 20%
14. Financial Instruments
The Group's financial instruments comprise cash and cash equivalents, other
short-term investments and various items such as debtors and creditors that
arise directly from its operations. The Group has bank accounts denominated in
British Pounds, US Dollars, Euros, and Ukrainian Hryvnia. The Group does not
have any borrowings. The main future risks arising from the Group's financial
instruments are currency risk, interest rate risk, liquidity risk and credit
risk.
The Group's financial assets and financial liabilities, measured at amortised
cost, which approximates their fair value, comprise the following:
30 Jun 22 31 Dec 21
(unaudited) (audited)
$000 $000
Financial assets
Cash and cash equivalents 77,370 87,780
Other short-term investments - 4,762
Trade and other receivables 41,456 5,368
118,826 97,910
Financial liabilities
Lease liabilities 812 1,103
Trade and other payables 1,428 3,404
Other financial liabilities 2,228 2,244
4,468 6,751
At 30 June 2022, the Group held cash and cash equivalents and other short-term
investments in the following currencies:
30 Jun 22 (unaudited) 31 Dec 21
(audited)
$000 $000
US Dollars 58,763 63,247
Ukrainian Hryvnia 18,381 29,011
British Pounds 222 275
Euros 4 9
77,370 92,542
All of the cash and cash equivalents held in Ukrainian Hryvnia are held in
banks within Ukraine, and all other cash and cash equivalents are held in
banks within Europe, Ukraine and the United Kingdom.
15. Reconciliation of Operating Profit to Operating Cash Flow
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
Operating profit 48,934 18,114
Depreciation and amortisation 3,882 6,164
Less interest income recorded within operating profit (536) (312)
Fines and penalties received (110) (1)
Loss from write off of non-current assets - 90
Net (gain)/loss on sale of non-current assets (1) -
Gain on sales of current assets, net - (12)
Decrease in provisions (228) (4)
Increase in inventory (497) (93)
Increase in receivables (36,354) (5,426)
(Decrease)/increase in payables (2,589) 628
Cash generated from operations 12,501 19,148
16. Contingencies and Commitments
Amounts related to works contracted but not yet undertaken in relation to the
Group's 2022 investment programme at the MEX-GOL, SV, VAS and SC gas and
condensate fields in Ukraine, but not recorded in the unaudited condensed
interim consolidated financial statements at 30 June 2022, were $2,435,825
related to Oil and Gas Exploration and Evaluation assets and $1,825,533
related to Oil and Gas Development and Production assets (31 December 2021:
$3,101,000 and $2,674,000 respectively).
Since 2010, the Group has been in dispute with the Ukrainian tax authorities
in respect of VAT receivables on imported leased equipment, with a disputed
liability of up to UAH8,487,000 ($324,000) inclusive of penalties and other
associated costs. There is a level of ambiguity in the interpretation of the
relevant tax legislation, and the position adopted by the Group has been
challenged by the Ukrainian tax authorities, which has led to legal
proceedings to resolve the issue. The Group had been successful in three court
cases in respect of this dispute in сourts of different levels. On 20
September 2016, a hearing was held in the Supreme Court of Ukraine of an
appeal of the Ukrainian tax authorities against the decision of the Higher
Administrative Court of Ukraine, in which the appeal of the Ukrainian tax
authorities was upheld. As a result of this appeal decision, all decisions of
the lower courts were cancelled, and the case was remitted to the first
instance court for a new trial. On 1 December 2016 and 7 March 2017, the Group
received positive decisions in the first and second instance courts, but
further legal proceedings may arise. Since the Group had been successful in
previous court cases in respect of this dispute in сourts of different
levels, the date of the next legal proceedings has not been set and as the
management believes that adequate defences exist to the claim, no liability
has been recognised in these unaudited condensed interim consolidated
financial statements for the six months ended 30 June 2022 (31 December 2021:
nil).
On 12 March 2019, the Group announced the publication of an Order for
suspension (the "Order") by the State Service of Geology and Subsoil of
Ukraine affecting the production licence for its VAS gas and condensate field.
The Group is confident there are no violations of the terms of the licence or
in relation to the operational activities of the Group that would justify the
Order or the suspension of the licence. The Group has issued legal proceedings
in the Ukrainian Courts to challenge the validity of the Order, and in these
proceedings, on 18 March 2019 the Court made a ruling on interim measures to
suspend the Order pending hearings of the substantive issues of the case to be
held subsequently. The effect of this ruling is that the suspension of
operational activities at the VAS licence is deferred until the result of the
legal proceedings is determined. These legal proceedings are continuing
through the Ukrainian Court system and the ultimate outcome is not yet known.
However, the Group considers that the Order is groundless and that the outcome
of the legal proceedings challenging the Order will ultimately be in favour of
the Group, and consequently, the Group does not expect any negative effect on
its operations in respect of this matter.
17. Related Party Disclosures
Key management personnel of the Group are considered to comprise only the
Directors. Remuneration of the Directors for the six month period ended 30
June 2022 was $583,000 (1H 2021: $617,000, and year ended 31 December 2021:
$1,115,000).
During the period, Group companies entered into the following transactions
with related parties which are not members of the Group:
6 months ended 6 months ended
30 Jun 22 30 Jun 21
(unaudited) (unaudited)
$000 $000
Sale of goods/services 63,182 28,417
Purchase of goods/services 515 585
Amounts owed by related parties 39,059 7,732
Amounts owed to related parties 627 825
All related party transactions were with subsidiaries of the ultimate Parent
Company, and primarily relate to the sale of gas to LLC Smart Energy, the
rental of office facilities and vehicles and the sale of equipment. The
amounts outstanding were unsecured and have been or will be settled in cash.
As of 30 June 2022, the Company's immediate parent company was Smart Energy
(CY) Ltd, which is 100% owned by Smart Holding (Cyprus) Ltd, which is 100%
owned by Mr Vadym Novynskyi. Accordingly, the Company was ultimately
controlled by Mr Vadym Novynskyi.
At the date of this announcement, none of the Company's controlling parties
prepares consolidated financial statements available for public use.
18. Events occurring after the Reporting Period
The Russian invasion of Ukraine, which began on 24 February 2022, is ongoing,
and has made the situation in Ukraine extremely challenging. Nevertheless,
after a suspension of all operations immediately after the invasion, the Group
was able to resume production and some field operations at the MEX-GOL and SV
fields in March 2022, and the drilling of the SC-4 well at the SC licence in
July 2022, although operations at the VAS field have remained suspended.
However, with the eastward movement of the conflict area in the Kharkiv
region, the Group is planning to resume production operations at the VAS field
in October 2022.
The events described above constitute non-adjusting post balance sheet events,
and therefore they had no effect on the carrying value of the Group's assets
and liabilities as at 30 June 2022.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END IR FZGZLMLMGZZZRecent news on Enwell Energy
See all newsREG - Enwell Energy PLC - Quarterly Operations Update
AnnouncementREG - Enwell Energy PLC - Reinstatement of Suspension of VAS Licence
AnnouncementREG - Enwell Energy PLC - Board Changes
AnnouncementREG - Enwell Energy PLC - Re-suspensions of MEX-GOL and SV Licences
AnnouncementREG - Enwell Energy PLC - Quarterly Operations Update
Announcement