REG - Enwell Energy PLC - 2023 INTERIM RESULTS
29/12/2023 07:00
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RNS Number : 1401Y Enwell Energy PLC 29 December 2023
29 December 2023
ENWELL ENERGY PLC
2023 INTERIM RESULTS
Enwell Energy plc ("Enwell Energy" or the "Company", and together with its
subsidiaries, the "Group"), the AIM-quoted (AIM: ENW) oil and gas exploration
and production group, today announces its unaudited results for the six month
period ended 30 June 2023.
Highlights
Operational
● Aggregate average daily production of 2,730 boepd (calculated on the days when
the Group's fields were actually in production) (1H 2022: 3,026 boepd)
● GOL-107 development well successfully completed in Q4 2023 and is undergoing
long-term test production
Financial
● Revenue of $33.1 million (1H 2022: $77.2 million) and gross profit of $19.6
million (1H 2022: $51.5 million), down primarily as a result of significantly
lower gas prices
● Operating profit of $17.2 million (1H 2022: $48.9 million), down primarily as
a result of significantly lower gas prices
● Net profit of $12.5 million (1H 2022: $32.4 million)
● Cash, cash equivalents of $33.8 million as at 30 June 2023 (1H 2022: $77.4
million), down as a result of the £48.1 million interim dividend paid in June
2023, and of $79.1 million as at 14 December 2023
● Average realised gas, condensate and LPG prices in Ukraine were significantly
lower at $419/Mm(3) (UAH15,315/Mm(3)), $46/bbl and $92/bbl respectively (1H
2022: $1,165/Mm(3) (UAH33,524/Mm(3)) gas, $103/bbl condensate and $165/bbl
LPG)
● Interim dividend of 15 pence per ordinary share, £48.1 million in aggregate,
paid in June 2023 (1H 2022: nil)
Outlook
● The Russian invasion of Ukraine in February 2022 has had and continues to have
a significant impact on all aspects of life in Ukraine, including the Group's
business and operations. The scale and duration of future disruption to the
Group's business is currently unknown, and there remains significant
uncertainty about the outcome of the war in Ukraine
● In April and May 2023, the Ukrainian authorities took a number of regulatory
actions against the Group, which included the suspension of the VAS production
licence and SC exploration licence, and consequently all work at these
licences has been suspended
● Subject to the resolution of the regulatory issues and the Group's ability to
operate safely, development work planned for 2024 at the MEX-GOL and SV fields
includes planning the deepening of the MEX-109 well to explore a deeper
horizon, investigating the hydraulic fracturing of the SV-29 well, planning a
workover of the MEX-102 well to access a shallower horizon, investigating the
possible sidetracking of the MEX-119 well to access additional reserves,
installing additional compression equipment and upgrading the flow-line
network and other field infrastructure
● Further work on the VAS field and SC licence area will remain suspended until
there is a resolution of the regulatory issues, including the lifting of the
suspension orders
● Currently, the Group retains approximately a quarter 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
● Development programme for the remainder of 2023 and 2024 expected to be funded
from existing cash resources and operational cash flow
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
Zeus Capital Limited Tel: 020 7614 5900
Alexandra Campbell-Harris (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
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 2023 in circumstances which are
very challenging for the Group. The invasion of Ukraine by Russia in February
2022 and the ongoing conflict has created a very difficult 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. The overall scale and duration
of future disruption to the Group's business is currently unknown, and there
remains significant uncertainty about the outcome of the ongoing war in
Ukraine.
Notwithstanding the continued disruption caused by the war, during 2023, 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
MEX-GOL field, the GOL-107 development well was completed in late October
2023, and after initial testing demonstrated gas flows from the well, albeit
at lower than expected rates, the well has now been hooked up to the gas
processing facilities for longer-term testing to establish its optimal
operating parameters and to assess whether stimulation may improve production
rates. Additionally, at the MEX-GOL field, planning has continued for the
deepening of the MEX-109 well to explore a deeper horizon, a workover of the
MEX-102 well to access a shallower horizon and investigating the possible
sidetracking of the MEX-119 well to access additional reserves. At the SV
field, the possible hydraulic fracturing of the SV-29 development well remains
under consideration. Drilling of the SC-4 appraisal well on the SC licence
area was completed and testing of this well demonstrated strong flow rates of
gas and condensate, and planning for the installation of surface facilities
and pipelines has been undertaken. At the VAS field, planning for the further
development of the field continued.
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 2023 was 2,730 boepd, which is lower than the aggregate daily
production rate of 3,026 boepd achieved during 2022 due to the disruption
caused by the war, natural field decline and a significant decrease in
commodity prices.
The significant decrease in gas prices, coupled with the lower production
volumes, during the period has meant that revenues were lower at $33.1 million
(1H 2022: $77.2 million). The Group's net profit was also lower at $12.5
million (1H 2022: $32.4 million), operating profit was $17.2 million (1H 2022:
$48.9 million), but cash generated from operations was steady at $12.4 million
(1H 2022: $12.5 million).
There is significant disruption to the fiscal and economic environment in
Ukraine due to the ongoing conflict resulting in a contraction in the economy,
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 war 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, the 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
prices for gas broadly correlated with imported gas prices. During 2023 to
date, gas prices decreased significantly, reflecting a similar trend in
European gas prices. Condensate and LPG prices were also lower by comparison
to the previous year.
Restructuring of Smart Holding Group
In January 2023, the Company was notified that there had been a restructuring
of the ownership of the PJSC Smart-Holding Group, a member of which held a
major shareholding in the Company, and which was ultimately controlled by Mr
Vadym Novynskyi ("Mr Novynskyi"). Under this restructuring, which occurred
with effect from 1 December 2022, Mr Novynskyi disposed of his major indirect
shareholding interest in the Company to two trusts registered in Cyprus named
the SMART Trust and the STEP Trust. Further information is contained in the
Company's announcement dated 17 January 2023, and the TR-1 Forms published on
26 January 2023.
Regulatory Actions by Ukrainian Authorities and Suspension of VAS and SC
Licences
In early December 2022, the Ukrainian Government imposed sanctions on Mr
Novynskyi, as set out in the Company's announcement dated 9 December 2022.
As announced on 4 January 2023, new legislation, Law No. 2805-IX, relating to
the natural resources sector was enacted in Ukraine, which came into force on
28 March 2023. This legislation is a substantial package of new procedures and
reforms designed to improve the regulatory process relating to the exploration
and development of natural resources in Ukraine. However, the legislation
includes provisions that if the ultimate beneficial owner of a mineral or
hydrocarbon licence becomes the subject of sanctions in Ukraine, then the
State Geologic and Subsoil Survey of Ukraine (the "SGSS") may suspend or
revoke that licence.
Following Law No. 2805-IX coming into force on 28 March 2023, the Ukrainian
authorities have taken a number of regulatory actions against certain of the
Group's subsidiary companies in Ukraine.
As announced on 12 April 2023, such regulatory actions included conducting a
search at the Group's Yakhnyky office, from where the MEX-GOL and SV fields
are operated, and placing certain physical assets of the Ukrainian branch
(representative) office of Regal Petroleum Corporation Limited ("RPC") and LLC
Arkona Gas-Energy ("Arkona") (which respectively hold the MEX-GOL and SV
fields and the SC exploration licence) under seizure, thereby restricting any
actions that would change registration of the property rights relating to such
assets. However, the use of such assets was not restricted and therefore the
Company has been able to continue to operate and produce gas and condensate
from the MEX-GOL and SV fields. In addition, the Ministry of Justice of
Ukraine (the "MoJ") made an Order cancelling the registration entry made on
behalf of a subsidiary of the Company named LLC Regal Petroleum Corporation
(Ukraine) Limited in the Unified State Register of Legal Entities,
Individuals-entrepreneurs and Civil Institutions of Ukraine (the "State
Register") relating to the ultimate beneficial owners of such company, which
were stated as being the trustees of the SMART Trust and STEP Trust, as
previously notified to the Company, thereby restoring the previous entry in
the State Register, Mr Novynskyi. Furthermore, the SGSS issued an Order to RPC
requiring that additional information be provided and/or violations be
eliminated in the disclosures relating to the ultimate beneficial owners of
the MEX-GOL and SV licences respectively.
On 2 May 2023, the MoJ made further Orders cancelling the registration entry
made on behalf of three further Ukrainian subsidiaries of the Company named
LLC Prom-Enerho Produkt ("PEP"), Arkona and LLC Well Investum ("Well
Investum") respectively in the State Register relating to the ultimate
beneficial owners of such companies, which again were stated as being the
trustees of the SMART Trust and STEP Trust, thereby restoring the
previous entry, Mr Novynskyi. PEP holds the VAS production licence, Arkona
holds the SC exploration licence and Well Investum is a dormant company.
Following the issuance of the abovementioned Orders by the MoJ, Mr Novynskyi
is registered in the State Register as the ultimate beneficial owner of each
of PEP and Arkona, and is consequently recognised by the SGSS as the ultimate
beneficial owner of each of the VAS production licence and SC exploration
licence. As a result, on 4 May 2023, the SGSS issued orders suspending the VAS
production licence and SC exploration licence for a period of 5 years
effective from that date. Accordingly, the Company ceased all field and
production operations on the VAS and SC licence areas.
New Auditor and Temporary Suspension from trading on AIM
In December 2022, as a result of the sanctions imposed on Mr Novynskyi, the
Company's previous auditor resigned, but Zenith Audit Ltd were appointed as
the Company's new auditor in September 2023. As the Company did not have an
auditor prior to the appointment of Zenth Audit Ltd, it was not able to
publish and post its audited 2022 Annual Report and Financial Statements to
shareholders by the requisite deadline of 30 June 2023 as required by Rule 19
of the AIM Rules for Companies. As a result, trading in the Company's ordinary
shares on AIM was suspended with effect from 3 July 2023 pending the Company's
compliance with such requirements. However, following the publication of the
Annual Report and Financial Statements for the year ended 31 December 2002 on
21 December 2023, and with the publication of these unaudited interim results
for the six month period ended 30 June 2023, it is expected that the
suspension from trading will be lifted shortly.
Interim Dividend
On 15 June 2023, the Company paid an interim dividend of 15 pence per ordinary
share, aggregating to approximately £48.1 million, which was the Company's
maiden dividend payment to its shareholders.
Outlook
The ongoing war in Ukraine means that there is a devastating humanitarian
situation in Ukraine, as well as extreme challenges to the fiscal, economic
and business environment. This has been exacerbated in respect of the Group by
the regulatory actions of the Ukrainian authorities, culminating in the
suspension of the VAS and SC licences.
These circumstances mean that it is extremely difficult to plan future
investment and operational activities at the Group's fields but, subject to
resolution of the current regulatory issues with the Ukrainian authorities,
and subject to it being safe to do so, the Group is planning to undertake
further limited development activities during the remainder of 2023 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 approximately a quarter of its
cash reserves outside Ukraine, and this provides a material buffer to any
further disruptions to the Group's operations. 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 the continued dedication and support they showed during this year,
especially their remarkable fortitude since the invasion of Ukraine in
February 2022.
Chris Hopkinson
Chairman
Chief Executive's Statement
Introduction
The war in Ukraine, coupled with regulatory actions by the Ukrainian
authorities, materially disrupted the Group's development activity at its
Ukrainian fields during the first half of 2023. At the MEX-GOL and SV fields,
production operations and some limited field activities continued. The GOL-107
development well was completed in late October 2023 and, after initial testing
of the well demonstrated gas flows, albeit at lower than expected rates, the
well has now been hooked up to the gas processing facilities to undergo
longer-term testing to establish its optimal operating parameters and assess
whether stimulation of the well may improve flow rates.
On the SC licence area, after the SC-4 appraisal well was completed and
successfully tested in October 2022, the well was suspended as a future
production well. Planning for the development of the field was undertaken,
which included planning for the installation of gas processing facilities and
other surface infrastructure.
At the VAS field, production operations continued 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 also continued.
However, as announced on 4 May 2023, as a result of regulatory actions by the
Ukrainian authorities, the VAS production licence and the SC exploration
licence were suspended for a period of five years.
Overall production in the first half of 2023 was lower than the corresponding
period in 2022 due to the disruption to production operations caused by the
war in Ukraine and natural field decline, as well as the suspension of the VAS
production licence in May 2023.
Production
The average daily production of gas, condensate and LPG for the 181 days that
the MEX-GOL and SV fields were producing and for the 124 days that the VAS
field was producing, in each case, during the six month period ended 30 June
2023 is shown below:
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
1H 2023 1H 2022 1H 2023 1H 2022 1H 2023 1H 2022 1H 2023 1H 2022
9.8 11.1 384 451 413 261 2,400 2,592
MEX-GOL & SV
1.7 2.2 17 24 - - 330 434
VAS
11.5 13.3 401 475 413 261 2,730 3,026
Total
The disruptions to operations caused by the war, coupled with the regulatory
actions taken by the Ukrainian authorities, have materially adversely affected
the Group's average daily production in 2023 to date. Nevertheless, production
is currently continuing at the MEX-GOL and SV fields at a rate of
approximately 2,200 boepd.
Operations
In the period leading up to the Russian invasion of Ukraine in February 2022,
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 war has caused
significant disruption to the fiscal and economic conditions in Ukraine since
then. During the first half of 2023, gas prices in Europe declined and this
fed through to the Group's realised prices in Ukraine, which had adversely
affected the Group's revenues and profitability during the period.
During 2023, the Group 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 field, drilling of the GOL-107 development well, targeting
production from the V-20 and V-23 Visean formations, commenced in December
2022 and was completed in late October 2023, with the well having been drilled
to a final depth of 5,190 metres. One interval, at a drilled depth of 5,140 -
5,143 metres, within the V-23 formation, was perforated and demonstrated gas
flows, but at lower than anticipated rates. The well has now been hooked up to
the gas processing facilities to undergo longer-term testing to establish its
optimal operating parameters and assess whether stimulation of the well may
improve flow rates.
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 undertaken to replace
the production string and remove obstructions in the well, but this work was
unsuccessful and further remedial work is being considered.
On the SC licence area, after completion and successful testing of the SC-4
well, the well was suspended as a future production well. 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. In
testing, the well demonstrated stabilised flow rates of 3 MMscf/d of gas and 3
bbl/d of condensate (535 boepd in aggregate), and planning for the
installation of gas processing facilities and other surface infrastructure has
been undertaken.
At the VAS field, production operations continued, 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, was undertaken.
However, as announced on 4 May 2023, as a result of regulatory actions by the
Ukrainian authorities, the VAS production licence and the SC exploration
licence were suspended for a period of five years.
Outlook
The ongoing war in Ukraine has caused significant disruption to the country as
a whole and to the Group's business activities, and until there is a
satisfactory resolution to the conflict, the disruption and uncertainty are
likely to continue. However, subject to resolution of the current regulatory
issues with the Ukrainian authorities and it being safe to do so, during 2024,
the Group plans to continue the development of its fields to the extent it is
possible to do so.
At the MEX-GOL and SV fields, the development programme includes planning the
deepening of the MEX-109 well to explore a deeper horizon in the Visean
formation, investigating the hydraulic fracturing of the SV-29 well, planning
a workover of the MEX-102 well to access a shallower horizon, investigating
the possible sidetracking of the MEX-119 well to access additional reserves,
installing additional compression equipment and upgrading and maintaining the
flow-line network and pipelines and other field infrastructure, as well as
planning for the further development of the fields.
Further work on the VAS and SC licence areas will remain suspended until there
is a resolution of the regulatory issues, including the lifting of the
suspension orders made in respect of those licences.
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 2023, 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
Notwithstanding the significant disruption caused by the war in Ukraine, the
Group was able to manage only a modest decline in production volumes during
the first half of 2023. However, the significant decrease in gas prices in the
period resulted in material reductions in revenue and profitability by
comparison with the corresponding period in 2022. Nevertheless, the Group
achieved a net profit for the period of $12.5 million (1H 2022: $32.4
million).
Revenue for the period, derived from the sale of the Group's Ukrainian gas,
condensate and LPG production, was lower at $33.1 million (1H 2022: $77.2
million), primarily as a result of the decrease in commodity prices in the
period.
Aggregate production for the first half of 2023 (calculated on the days when
the Group's fields were actually in production) was down approximately 9.8% at
2,730 boepd (1H 2022: 3,026 boepd) due to the disruption to operations as a
result of the war in Ukraine, natural field decline and the suspension of the
VAS production licence in May 2023.
During 2023, global, and particularly European, commodity prices decreased
significantly, and these decreases also occurred in Ukraine, and resulted in
the 64% decline in average gas price realisations in the period at $419/Mm(3)
(UAH15,315/Mm(3)), with condensate and LPG average sales prices also down by
55% and 44% at $46/bbl and $92/bbl respectively (1H 2022: $1,165/Mm(3)
(UAH33,524/Mm(3)), $103/bbl and $165/bbl respectively).
During the period from 1 January 2023 to 14 December 2023, the average
realised gas, condensate and LPG prices were $395/Mm(3) (UAH14,426/Mm(3)),
$71/bbl and $100/bbl respectively.
Gross profit for the period was lower at $19.6 million (1H 2022: $51.5
million).
Cost of sales for the period was lower at $13.6 million (1H 2022: $25.7
million).
The subsoil tax rates applicable to gas production were stable during the
first six months of 2023 and were 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 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 war 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, passed
legislation which modified such methodology to ensure that it operates as
originally intended (with such reference price being aligned with domestic
prices). This methodology had an implementation date of 1 August 2022.
In addition, the excise tax on LPG sales was suspended between 24 February
2022 and 30 September 2022, but was then reinstated, and the VAT rate
applicable to condensate and LPG sales was reduced to 7% (from 20%) with
effect from 18 March 2022.
Administrative expenses for the period were slightly higher at $3.7 million
(1H 2022: $3.4 million). Other expenses in the period were $0.8 million (1H
2022: $5.2 million), down primarily due to the decrease in charitable
donations during the period.
The tax charge for the six months ended 30 June 2023 was lower at $5.0 million
(1H 2022: $10.4 million charge), and comprised a current tax charge of $3.1
million (1H 2022: $8.7 million charge) and a deferred tax charge of $1.9
million (1H 2022: $1.7 million charge).
A deferred tax asset relating to the Group's provision for decommissioning as
at 30 June 2023 of $0.6 million (31 December 2022: $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 2023 of $6.2 million (31
December 2022: $3.7 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 2023 of $0.3 million (31 December 2022: $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 asset relating to the Group's development and production assets at the VAS
field as at 30 June 2023 of $0.5 million (31 December 2022: deferred tax
liability of $23,000) 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.
Capital investment of $3.0 million reflects the investment in the Group's oil
and gas development and production assets during the period (1H 2022: $12.0
million), primarily relating to the drilling of the GOL-107 well. This
significant $9.0 million reduction in capital investment is a function of the
deferral of certain aspect of the Group's development plans necessitated by
the ongoing war in Ukraine.
As a result of the war, necessary payment term accommodations 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, with the
consequence that trade receivables remained high at $44.9 million (1H 2022:
$39.5 million). The trade receivables were all paid post period end.
Cash and cash equivalents held as at 30 June 2023 were lower at $33.8 million
(1H 2022: $77.4 million), the decrease being predominantly as a result of the
payment of the interim dividend of £48.1 million in June 2023. The Group's
cash and cash equivalents balance as at 14 December 2023 was $79.1 million,
held as to $58.5 million equivalent in Ukrainian Hryvnia and the balance of
$20.6 million equivalent predominantly in US Dollars, Euros and Pounds
Sterling.
During the first six months of 2023, the Ukrainian Hryvnia was stable against
the US Dollar, at UAH36.6/$1.00 on 31 December 2022 and UAH36.6/$1.00 on 30
June 2023. The impact of this was $0.7 million of foreign exchange gain (1H
2022: $7.9 million of foreign exchange loss). Increases and decreases in the
value of the Ukrainian Hryvnia against the US Dollar affect the carrying value
of the Group's assets. The official exchange rate of the Ukrainian Hryvnia to
the US Dollar on 14 December 2023 was UAH37.0/$1.00. This movement is not
expected to have a material net impact on the Group, as its production and
sales are dictated by (but not directly linked to) international commodity
prices, which are expected to materially offset general cost increases that
will result from such devaluation.
Cash from operations has funded the capital investment during the first six
months of 2023, 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 2023 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 $33.8 million equivalent,
and annual running costs of less than $8 million, the Group remains in a very
strong position, notwithstanding the impact of the current conflict in
Ukraine, as well as any local or global shocks that may occur to the industry
and/or the Group.
On 15 June 2023, the Company paid an interim dividend of 15 pence per ordinary
share, approximately £48.1 million in aggregate, which was the Company's
maiden dividend payment to its shareholders.
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
War 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 war within Ukraine. This war is having a huge impact on Ukraine war has disrupted its operations in those areas. The Group has been only
and its population, with significant destruction of infrastructure and undertaking limited field and production operations at the MEX-GOL, SV and VAS
buildings in the areas of conflict, as well as damage in other areas of fields and SC licence area. At the fields, inventories of hydrocarbons are
Ukraine. The war is resulting in significant casualties and has caused a huge being maintained at minimum levels. At the sites where operations are
humanitarian catastrophe and refugee influx into neighbouring countries. The suspended, there are no staff permanently on site, except for necessary
war is also impacting the fiscal and economic environment in Ukraine, as well security staff. Where possible, all other staff work remotely and have been
as the financial stability and banking system in Ukraine, including supplied with all necessary devices and software to facilitate remote working.
restrictions on the transfer of funds outside Ukraine. The war is an Additionally, the Group aims to maintain a significant proportion of its cash
escalation of the previous regional conflict risk faced by the business, a resources outside Ukraine. The Group continues to monitor the situation and
dispute that has been going on since 2014 in parts of eastern Ukraine, and endeavours to protect its assets and safeguard its staff and contractors.
since that time Russia has continued to occupy Crimea. The current war is also
having a significant adverse effect on the Ukrainian financial markets,
hampering the ability of Ukrainian companies and banks to obtain funding from
the international capital and debt markets. The war has disrupted the Group's
business and operations, causing the suspension of field operations, albeit
these recommenced in March 2022 at the MEX-GOL and SV fields, in July 2022 at
the SC licence area and in October 2022 at the VAS field, and has also
impacted the supply of materials and equipment and the availability of
contractors to undertake field operations. At present, the war is ongoing and
the scope and duration of the war is uncertain.
Risk relating to Ukraine
Ukraine is an emerging market and as such the Group is exposed to greater The Group minimises this risk by continuously monitoring the market in Ukraine
regulatory, economic and political risks than it would be in other and by maintaining as strong a working relationship as possible 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 war 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 war.
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 war in Ukraine. In light of
have been significant, including in relation to the banks with which the Group this, the Group has taken and continues to take steps to diversify its banking
has operated bank accounts. This situation was improving moderately following arrangements between a number of banks in Ukraine. These measures are designed
remedial action by the National Bank of Ukraine, but the current war has to spread the risks associated with each bank's creditworthiness, and the
significantly affected such improvements, and the National Bank of Ukraine has Group endeavours to use banks that have the best available creditworthiness.
imposed a number of restrictive measures designed to protect the banking Nevertheless, and despite the recent improvements, the Ukrainian banking
system, including restrictions on the transfer of funds outside Ukraine sector remains weakly capitalised and so the risks associated with the banks
(albeit that the Group aims to maintain a significant proportion of its cash in Ukraine remain significant, including in relation to the banks with which
resources outside Ukraine. In addition, Ukraine continues to be supported by the Group operates bank accounts. As a consequence, the Group also maintains a
funding from the International Monetary Fund, and has requested further significant proportion of its cash holdings in international banks outside
funding support from the International Monetary Fund. Ukraine.
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 war has had a severe detrimental effect on the economic business. However, the war in Ukraine creates material challenges in planning
situation in Ukraine. The ongoing effects of this are difficult to predict and future investment and operations. The Group is limiting its operational
likely to continue to affect the Ukrainian economy and potentially the Group's activities to minimise risk to its staff and contractors, and to limit its
business. This situation is currently affecting the Group's production and financial exposure.
field operations, and the ongoing instability is disrupting the Group's
development and operational planning for its assets.
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, the does not consider climate change to have any material implications on the
Group not only needs to monitor and modify its business plans and operations Group's financial statements, including accounting estimates.
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 war in Ukraine poses to the maximum extent possible. As a result of the COVID-19 pandemic the Group
significant risks to field operations, by way of potential threat to the lives has implemented processes and controls intended to ensure protection of all
of employees and contractors, and damage to equipment and infrastructure. our stakeholders and minimise any disruption to our business. As a consequence
of the current war in Ukraine, operations at the MEX-GOL, SV and VAS fields
and SC licence area have been suspended for periods, and currently only
limited field and production operations are continuing at the MEX-GOL and SV
fields. 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 war in Ukraine is impacting planning and implementation of operations, and that operational contractors are appropriately supervised. In
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 a significant proportion of its cash resources outside
expected to be derived from operational cash generated from production, Ukraine. The Group does not currently have any loans outstanding, internal
including from wells yet to be drilled, there is a risk that in the longer financial projections are regularly made based on the latest estimates
term insufficient operational cash is generated, or that additional funding, available, and various scenarios are run to assess the robustness of the
should the need arise, cannot be secured. The war in Ukraine has disrupted Group's liquidity. However, as the risk to future capital funding is inherent
production operations at the Group's fields, and consequently reduced in the oil and gas exploration and development industry and reliant in part on
anticipated cash flows from those fields, and this has increased the risk future development success, it is difficult for the Group to take any other
regarding sufficiency of capital for development. In addition, the conflict measures to further mitigate this risk, other than tailoring its development
may disrupt the sales market for hydrocarbons that are produced. Currently, activities to its available capital funding from time to time. The Group aims
however, hydrocarbon prices are very high, which is ameliorating the potential to maintain as diverse a range of banking relationships as possible to reduce
reduction in cash flows, and the Group's sales counterparties are meeting the risks associated with limited accessibility to banking services which may
their financial obligations. In addition to the risk of operational cash exist from time to time.
shortfalls, there is a risk that even with robust cash flows and cash
balances, the Group, from time to time, can suffer from non-Ukrainian
operational banking appetite for businesses such as the Group's business,
which can ultimately manifest itself in having a restricted access to banking
services.
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 is 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 war in Ukraine may disrupt the sales market for hydrocarbons,
although, currently, hydrocarbon prices are very high, and the Group's sales
counterparties are meeting 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 UAH36.6/$1.00 on 31 December 2022, and incurred in Ukrainian Hryvnia, thus the currency of revenue and costs are
UAH37.0/$1.00 on 14 December 2023. 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 war in Ukraine are likely to continue to are available in more developed economies, the Group has adopted a policy
impact the valuation of the Ukrainian Hryvnia against major world currencies. that, where possible, funds not required for use in Ukraine be retained on
Further devaluation of the Ukrainian Hryvnia against the US Dollar will affect deposit in the United Kingdom and Europe, principally in US Dollars.
the carrying value of the Group's assets.
Counterparty and credit risk
The challenging political and economic environment in Ukraine and current war The Group monitors the financial position and credit quality of its
means that businesses can be subject to significant financial strain, which contractual counterparties and seeks to manage the risk associated with
can mean that the Group is exposed to increased counterparty risk if counterparties by contracting with creditworthy contractors and customers.
counterparties fail or default in their contractual obligations to the Group, Hydrocarbon production is sold on terms that limit supply credit and/or title
including in relation to the sale of its hydrocarbon production, resulting in transfer until payment is received.
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 war in Group is subject to external price movements. The Group holds a significant
Ukraine. This has led to extreme foreign exchange movements in the Ukrainian proportion of its cash reserves in the United Kingdom and Europe, mostly in US
Hryvnia, high inflation and interest rates, and increased credit risk relating Dollars, with reputable financial institutions. The financial status of
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, which was not resolved until March 2023. 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. During 2023, the Ukrainian authorities have taken a number of regulatory
actions against the Group, which have culminated in Ministry Orders being made
in May 2023 to suspend all operations and production at the VAS production
licence and SC exploration licence. Excepting the current suspension Orders
made in respect of the VAS production licence and SC exploration licence, all
such challenges affecting the Group have been successfully defended through
the Ukrainian legal system. In July 2023, new legislation was introduced in
Ukraine, which will come into force in September 2024, and which requires that
branches (or representative offices) of foreign companies operating in Ukraine
register their ultimate beneficial owners in Ukrainian Registries. Regal
Petroleum Corporation Ltd ("RPC"), which holds the MEX-GOL and SV licences,
operates such a branch and will therefore be required to register its ultimate
beneficial owners from the implementation of this law, which raises a
potential risk that such registration will not be accepted by the Ukrainian
authorities, and possibly result in regulatory action against RPC and/or its
licences and assets, including suspension of the MEX-GOL and SV licences. 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 war in Ukraine has meant that, as far as possible, the Group's staff specialist services as required. As a result of the war, only essential staff
have needed to move away from areas of conflict and work remotely. 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.
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 23 30 Jun 22
(unaudited) (unaudited)
Note $000 $000
Revenue 3 33,137 77,228
Cost of sales 4 (13,577) (25,690)
Gross profit 19,560 51,538
Administrative expenses (3,684) (3,428)
Other operating income, (net) 5 1,279 824
Operating profit 17,155 48,934
Net impairment losses on financial assets (184) (679)
Other expenses, (net) 6 780 (5,227)
Finance costs (359) (248)
Profit before taxation 17,392 42,780
Income tax expense 7 (4,918) (10,408)
Profit for the period 12,474 32,372
Earnings per share (cents)
Basic and diluted 8 3.9c 10.1c
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 23 30 Jun 22
(unaudited) (unaudited)
$000 $000
Profit for the period 12,474 32,372
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss:
Equity - foreign currency translation 698 (7,943)
Total other comprehensive (loss)/income 698 (7,943)
Total comprehensive income for the period 13,172 24,429
The Notes set out below are an integral part of these unaudited condensed
interim consolidated financial statements.
Condensed Interim Consolidated Balance Sheet
30 Jun 23 31 Dec 22
(unaudited) (audited)
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 9 81,092 74,256
Intangible assets 10 8,771 8,994
Right-of-use assets 282 364
Prepayments for fixed assets 926 5,385
Deferred tax asset 7 799 287
91,870 89,286
Current assets
Inventories 2,706 3,358
Trade and other receivables 11 64,489 60,438
Cash and cash equivalents 14 33,831 88,652
101,026 152,448
Total assets 192,896 241,734
Liabilities
Current liabilities
Trade and other payables (24,595) (27,529)
Lease liabilities (150) (229)
Corporation tax payable (1,165) (2,447)
(25,910) (30,205)
Net current assets 75,116 122,243
Non-current liabilities
Provision for decommissioning 12 (7,130) (6,964)
Lease liabilities (241) (258)
Defined benefit liability (317) (323)
Deferred tax liability 7 (5,613) (3,232)
Other non-current liabilities 13 (81) (93)
(13,382) (10,870)
Total liabilities (39,292) (41,075)
Net assets 153,604 200,659
Equity
Called up share capital 28,115 28,115
Foreign exchange reserve (141,007) (141,705)
Other reserve (3,204) (3,204)
Capital contribution reserve 7,477 7,477
Retained earnings 262,223 309,976
Total equity 153,604 200,659
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 2023 (audited) 28,115 - (3,204) 7,477 (141,705) 309,976 200,659
Profit for the period - - - - - 12,474 12,474
Other comprehensive income
- exchange differences - - - - 698 - 698
Total comprehensive income - - - - 698 12,474 13,172
Distributed dividends - - - - - (60,227) (60,227)
As at 30 June 2023 (unaudited) 28,115 - (3,204) 7,477 (141,007) 262,223 153,604
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
* 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 23 30 Jun 22
(unaudited) (unaudited)
Note $000 $000
Operating activities
Cash generated from operations 15 12,353 12,501
Charitable donations (2) (4,996)
Equipment rental income 133 -
Income tax paid (4,233) (9,143)
Interest received 1,585 536
Net cash (outflow)/inflow from operating activities 9,836 (1,102)
Investing activities
Purchase of property, plant and equipment (3,393) (12,074)
Proceeds from disposal of other short-term investments - 4,762
Purchase of intangible assets (1,338) (23)
Proceeds from return of prepayments for shares - -
Proceeds from sale of property, plant and equipment 1 2
Net cash outflow from investing activities (4,730) (7,333)
Financing activities
Payment of dividends (59,623) -
Payment of principal portion of lease liabilities (137) (239)
Net cash outflow from financing activities (59,760) (239)
Net (decrease)/increase in cash and cash equivalents (54,654) (8,674)
Cash and cash equivalents at beginning of the period 14 88,652 87,780
ECL* of cash and cash equivalents 25 (223)
Effect of foreign exchange rate changes (192) (1,513)
Cash and cash equivalents at end of the period 14 33,831 77,370
*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 2023, the Company's immediate parent company was Smart Energy
(CY) Limited, which was 100% owned by Smart Holding (Cyprus) Limited, which
was 100% owned by Proteas Trustees Ltd as trustee of the STEP Trust, and
Proteas Trustee Services Ltd, Afroditi Loukaidou, Elena Iona and Charoula
Sofokleous as trustees of the SMART Trust. Accordingly, the Company was
ultimately controlled by Proteas Trustees Ltd as trustee of the STEP Trust,
and Proteas Trustee Services Ltd, Afroditi Loukaidou, Elena Iona and Charoula
Sofokleous as trustees of the SMART Trust.
The Group's gas, condensate and LPG extraction and production facilities are
located in Ukraine.
Impact of the ongoing war in Ukraine
On 24 February 2022, Russia commenced a military invasion of Ukraine, and
since then there has been an ongoing war in Ukraine. Shortly after the
invasion, the Ukrainian Government imposed martial law, and the corresponding
introduction of related temporary restrictions that impact, amongst other
areas, the economic environment and business operations in Ukraine. The war
has caused significant economic challenges in Ukraine, which has led to a
deterioration of Ukrainian State finances, volatility of financial markets,
illiquidity on capital markets, higher inflation and a depreciation of the
national currency against major foreign currencies.
The war is continuing, causing very significant numbers of military and
civilian casualties and significant dislocation of the Ukrainian population.
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.
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. Such measures
have meant that commercial interbank quotes have remained close to the
official 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 has taken 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 temporary easing of the tax regime until the end of martial law, including
the suspension of tax audits and the cancellation of some 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' is set at zero;
● 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 increase in the subsoil tax rate on natural gas production during martial
law, which action 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 International Monetary Fund and European Bank
for Reconstruction and Development, to support the economy and the population.
Such financial support is critical for Ukraine to continue to service its
debts in the foreseeable future.
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.
Overall, the final resolution and the ongoing effects of the war 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 14 December 2023, the official NBU exchange rate of the Ukrainian
Hryvnia against the US Dollar was UAH37.0/$1.00, compared with UAH36.57/$1.00
as at 30 June 2023.
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 2023 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 2022 were
approved by the Board of Directors on 20 December 2023 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 2022, 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 2022, 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 2023 or afterwards (these
standards, amendments to standards and interpretations did not have a material
impact on this unaudited interim condensed consolidated financial
information):
● IFRS 17 Insurance Contracts;
● Amendments to IFRS 1 Presentation of Financial Statements: Classification of
Liabilities as Current or Non-current;
● Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting
Policies;
● Amendments to IAS 8: Definition of Accounting Estimates;
● Amendments to IAS 12: Deferred Tax related to Assets and Liabilities arising
from a Single Transaction.
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 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 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 of approval of these financial statements, no assets of the Group have
been damaged, and the Group continues to operate its MEX-GOL and SV assets in
the Poltava region, while its SC asset in the Poltava region and all
production and field operations at the VAS asset located in the Kharkiv region
are suspended. 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 of approval of
these financial statements, the war has had, and continues to have, a material
impact on the production and sales levels of the business and execution of the
Group's 2023 budget.
The Group has no debt and funds its operations from its own cash resources.
Cash and cash equivalents were $79.1 million as at 14 December 2023. 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 war 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 war 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 the impact on the
expected cash flows of the Group and Company for 2023 and 2024. 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.
The Company's corporate strategy for the near term is to:
● continue production from MEX-GOL and SV licences, generating cash to cover
Group costs and add to existing cash resources, whilst moderating development
plans to reduce cash spend exposure whilst the war and operational/political
issues continue;
● vigorously pursue legal initiatives to protect the Group's assets, restore all
licences and production, and seek compensation for losses incurred to date and
as may be incurred in the future; and
● tightly manage costs to ensure cash resources are maintained at levels capable
of sustaining the business through the uncertainty that lies ahead.
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 war 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 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 $20.6 million as at 14 December 2023, 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 2022 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 2023
would be to increase it by $616,000 or decrease it by $277,000 (31 December
2022: increase by $1,394,000 or decrease by $626,000).
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 2023 (unaudited)
Ukraine United Kingdom Total
$000 $000 $000
Revenue
Gas sales 24,568 - 24,568
Condensate sales 3,736 - 3,736
Liquefied Petroleum Gas sales 4,833 - 4,833
Total revenue 33,137 - 33,137
Segment result 20,781 (146) 20,635
Depreciation and amortisation of non-current assets (3,480) - (3,480)
Operating profit 17 155
Segment assets 170,674 22,222 192,896
Capital additions* 10,171 - 10,171
*Comprises additions to property, plant and equipment and intangible assets
(Notes 9 and 10).
Year ended 31 December 2022 (audited)
Ukraine United Kingdom Total
2022 2022 2022
$000 $000 $000
Revenue
Gas sales 109,461 - 109,461
Condensate sales 12,744 - 12,744
Liquefied Petroleum Gas sales 11,175 - 11,175
Total revenue 133,380 - 133,380
Segment result 84,750 (1,140) 83,610
Depreciation and amortisation of non-current assets (7,837) - (7,837)
Operating profit 75,773
Segment assets 158,982 82,752 241,734
Capital additions* 19,807 - 19,807
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).
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 23 30 Jun 22
(unaudited) (unaudited)
$000 $000
Production taxes 5,772 12,931
Depreciation of property, plant and equipment 3,163 3,251
Rent expenses 1,470 5,440
Staff costs 1,255 1,217
Cost of inventories recognised as an expense 837 694
Transmission tariff for Ukrainian gas system 174 267
Amortisation of mineral reserves 180 227
Other expenses 726 1,663
13,577 25,690
5. Other operating income/(expenses), (net)
6 months ended 6 months ended
30 Jun 23 30 Jun 22
(unaudited) (unaudited)
$000 $000
Interest income on cash and cash equivalents 1,585 536
Reversal of accruals 331 236
Contractor penalties applied 1 110
Other operating (losses)/income, net (639) (58)
1,279 824
6. Other income/(expenses), (net)
6 months ended 6 months ended
30 Jun 23 30 Jun 22
(unaudited) (unaudited)
$000 $000
Charitable donations (2) (4,996)
Net foreign exchange gains/(losses) 712 (2)
Other income/(expenses), (net) 70 (229)
(780) (5,227)
7. Taxation
The income tax charge of $4,918,000 for the six month period ended 30 June
2023 relates to a сurrent tax charge of $3,049,000 and a deferred tax charge
of $1,869,000 (1H 2022: current tax charge of $8,682,000 and deferred tax
charge of $1,726,000).
The movement in the period was as follows:
6 months ended 6 months ended
30 Jun 23 30 Jun 22
(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 (3,232) (5,197)
Charged to Income Statement - current period (2,381) (1,740)
Effect of exchange difference - 818
At end of the period (5,613) (6,119)
Deferred tax asset/(liability) recognised relating to development and
production assets at VAS field and provision for decommissioning
At beginning of the period 287 361
Credited to Income Statement - current period 512 14
Effect of exchange difference - -
At end of the period 799 375
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 2023 was 25% (1H 2022: 25%).
The deferred tax asset relating to the Group's provision for decommissioning
at 30 June 2023 of $595,000 (31 December 2022: $449,000) 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 2023 of $6,208,000 (31 December 2022:
$3,681,000) 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 2023 of $317,000 (31 December 2022: $310,000) 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 asset
relating to the Group's development and production assets at the VAS field at
30 June 2023 of $482,000 (31 December 2022: The deferred tax liability of
$23,000) 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 periods ended 30 June 2023 and 30 June
2022 and 320,637,836 ordinary shares, being the average number of shares in
issue for the periods. There are no dilutive instruments.
9. Property, Plant and Equipment
6 months ended 30 Jun 23 6 months ended 30 Jun 22
(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 135,255 13,093 1,968 150,316 163,170 10,110 2,631 175,911
Additions 8,905 1,125 124 10,154 6,469 3,027 185 9,681
Change in decommissioning provision - - - - (4,250) (63) - (4,313)
Disposals (204) - (28) (232) (57) - (25) (82)
Exchange differences - - - - (12,166) (463) 857 (11,772)
At end of the period 143,956 14,218 2,064 160,238 153,166 12,611 3,648 169,425
Accumulated depreciation and impairment
At beginning of the period 73,108 1,677 1,275 76,060 87,070 - 1,423 88,493
Charge for the period 3,047 - 135 3,182 3,362 - 158 3,520
Disposals (86) - (10) (96) (21) - (22) (43)
Exchange differences - - - - (5,939) - (93) (6,032)
At end of the period 76,069 - 1,400 79,146 84,472 - 1,466 85,938
Net book value at the beginning of the period 62,147 11,416 693 74,256 76,100 10,110 1,208 87,418
Net book value at end of the period 67,887 12,541 664 81,092 68,694 12,611 2,182 83,487
At 30 June 2023, an impairment indicator 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 23 6 months ended 30 Jun 22
(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 5,080 6,433 860 12,373 6,810 8,651 752 16,213
Additions - - 17 17 - - 43 43
Disposals - - (23) (23) - - - -
Exchange differences - - - - (460) (590) (50) (1,100)
At end of the period 5,080 6,433 854 12,367 6,350 8,061 745 15,156
Accumulated amortisation
and impairment
At beginning of the period 2,925 - 454 3,379 3,439 - 434 3,873
Amortisation charge for the period 180 - 59 239 224 - 113 337
Disposals - - (22) (22) - - - -
Exchange differences - - - - (232) - (28) (260)
At end of the period 3,105 - 491 3,596 3,431 - 519 3,950
Net book value at beginning of the period 2,155 6,433 406 8,994 3,371 8,651 318 12,340
Net book value at end of the period 1,975 6,433 363 8,771 2,919 8,061 226 11,206
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 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 2023, an impairment indicator 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 23 31 Dec 22
(unaudited) (audited)
$000 $000
Trade receivables 50,933 46,188
Other financial receivables 399 284
Financial aids 11,199 11,316
Less credit loss allowance (514) (433)
Total financial receivables 62,017 57,355
Prepayments and accrued income 231 509
Other receivables 2,241 2,574
Total trade and other receivables 64,489 60,438
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 purchased all of the Group's gas production. The applicable
payment terms, which were revised in the period, were payment for 35% of the
monthly volume of gas by the 15th of the month following the month of
delivery, and payment of the remaining balance by the end of that month (1H
2022: payment terms are payment for all of the monthly volume of gas by the
10(th) of the month following the month of delivery). This arrangement has now
been terminated, and all outstanding sums have been received from LLC Smart
Energy.
12. Provision for Decommissioning
6 months ended 6 months ended
30 Jun 23 30 Jun 22
(unaudited) (unaudited)
$000 $000
At beginning of the period 6,964 5,467
Amounts provided - -
Unwinding of discount 166 160
Change in estimate - (4,313)
Effect of exchange difference - (321)
At end of the period 7,130 993
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 $7,130,000 (31 December 2022: $6,964,000)
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.
13. Other non-current liabilities
Other non-current liabilities as at 30 June 2023 and 31 December 2022 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 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 23 31 Dec 22
(unaudited) (audited)
$000 $000
Financial assets
Cash and cash equivalents 33,831 88,652
Trade and other receivables 62,017 46,039
95,848 134,691
Financial liabilities
Lease liabilities 391 487
Trade and other payables 2,160 1,079
Other financial liabilities 20,087 20,422
22,638 21,988
At 30 June 2023, the Group held cash and cash equivalents in the following
currencies:
30 Jun 23 (unaudited) 31 Dec 22
(audited)
$000 $000
US Dollars 21,273 81,274
Ukrainian Hryvnia 12,052 6,882
British Pounds 237 223
Euros 268 273
33,831 88,652
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 23 30 Jun 22
(unaudited) (unaudited)
$000 $000
Operating profit 17,155 48,934
Depreciation and amortisation 3,589 3,882
Less interest income recorded within operating profit (1,585) (536)
Fines and penalties received (1) (110)
Net (gain)/loss on sale of non-current assets (3) (1)
Decrease in provisions 25 (228)
Increase in inventory 709 (497)
Increase in receivables (3,583) (36,354)
(Decrease)/increase in payables (3,953) (2,589)
Cash generated from operations 12,353 12,501
16. Contingencies and Commitments
Amounts related to works contracted but not yet undertaken in relation to the
Group's 2023 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 2023, were $145,000
related to Oil and Gas Exploration and Evaluation assets and $2,344,000
related to Oil and Gas Development and Production assets (31 December 2022:
$156,000 and $8,607,000 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 UAH 8,487,000 ($302,000) inclusive of penalties and other
associated costs. There is a level of ambiguity in the interpretation of the
relevant tax legislation, and the position adopted by the Group has been
challenged by the Ukrainian tax authorities, which has led to legal
proceedings to resolve the issue. The Group had been successful in three court
cases in respect of this dispute in courts of different levels. On 20
September 2016, a hearing was held in the Supreme Court of Ukraine of an
appeal of the Ukrainian tax authorities against the decision of the Higher
Administrative Court of Ukraine, in which the appeal of the Ukrainian tax
authorities was upheld. As a result of this appeal decision, all decisions of
the lower courts were cancelled, and the case was remitted to the first
instance court for a new trial. On 1 December 2016 and 7 March 2017
respectively, the Group received positive decisions in the first and second
instance courts, but no appointment of hearings has been settled yet. No
liability has been recognised in these consolidated financial statements for
the year ended 30 June 2023 (31 December 2022: nil), as the Group has been
successful in previous court cases in respect of this dispute in courts of
different levels, the date of the next legal proceedings has not been set and
as management believes that adequate defences exist to the claim.
In March 2019, the State Geologic and Subsoil Survey of Ukraine published an
Order for suspension dated 11 March 2019 (the "VAS Order") in respect of the
VAS production licence held by LLC Prom-Enerho Produkt ("PEP"). PEP disputed
the VAS Order and issued legal proceedings in the Ukrainian Courts to
challenge the VAS Order, and these legal proceedings progressed through the
various levels of the Ukrainian Court system, with PEP being successful at
each level. The proceedings ultimately reached the Supreme Court of Ukraine,
which, by a decision dated 23 February 2023 upheld PEP's appeal and cancelled
the VAS Order. The Supreme Court is the final appellate court in the legal
proceedings and therefore this decision is final.
In September 2021, an entity named JV Boryslav Oil Company ("Boryslav"), which
is 25.0999% owned by PJSC Ukrnafta ("Ukrnafta"), issued legal proceedings,
claiming that irregular procedures were followed in the grant of the SC
exploration licence, against the State Geologic and Subsoil Survey of Ukraine,
the State Commission of Ukraine for Mineral Resources and LLC Arkona
Gas-Energy ("Arkona"), as defendants, with Ukrnafta named as a third party. In
this claim, the First Instance Court in Ukraine made a ruling in January 2022
in favour of Boryslav, and on 2 November 2022, the Appellate Administrative
Court also made a ruling in favour of Boryslav to uphold the decision of the
First Instance Court. Arkona appealed the decision of the Appellate
Administrative Court to the Supreme Court, and on 3 May 2023, the Supreme
Court published its decision to allow Arkona's appeal and overturn the ruling
made by the Appellate Administrative Court. The Supreme Court represents the
final appellate court in these legal proceedings, and accordingly, the
decision of the Supreme Court is final.
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 2023 was $407,000 (1H 2022: $583,000, and year ended 31 December 2022:
$1,325,000).
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 23 30 Jun 22
(unaudited) (unaudited)
$000 $000
Sale of goods/services 19,410 63,182
Purchase of goods/services 348 515
Amounts owed by related parties 55,719 39,059
Amounts owed to related parties 185 627
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.
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 ongoing war in Ukraine means that the fiscal, economic and humanitarian
situation in Ukraine is unstable and extremely challenging and the final
resolution and consequences of the ongoing war are hard to predict, but they
may have a further serious impact on the Ukrainian economy and business of the
Group. Management continues to identify and mitigate, where possible, the
impact on the Group, but the majority of these factors are beyond their
control, including the duration and severity of war, as well as the further
actions of various governments and diplomacy.
In July 2023, new legislation was introduced in Ukraine, which will come into
force in September 2024, and which requires that branches (or representative
offices) of foreign companies operating in Ukraine register their ultimate
beneficial owners in Ukrainian Registries. Regal Petroleum Corporation Ltd
("RPC"), which holds the MEX-GOL and SV licences, operates such a branch and
will therefore be required to register its ultimate beneficial owners from the
implementation of this law, which raises a potential risk that such
registration will not be accepted by the Ukrainian authorities, and possibly
result in regulatory action against RPC and/or its licences and assets,
including suspension of the MEX-GOL and SV licences.
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