REG - Gulf Keystone Petrol - 2016 Full Year Results <Origin Href="QuoteRef">GKP.L</Origin> - Part 4

Gulf Keystone PetroleumAnnouncement

06/04/2017 07:06

- Part 4: For the preceding part double click  ID:nRSF7359Bc 

of an Exit Event, to sell sufficient common shares to satisfy the Exit Event
Awards. 
 
On 21 March 2012, the Board approved the Exit Event Awards to certain
Executive Directors and employees, subject to the occurrence of an Exit Event,
equivalent to the value of 0.02 million common shares (adjusted for
consolidation on 100:1 basis). The Exit Event Trustee will hold the remaining
0.08 million common shares (adjusted for consolidation on 100:1 basis) to
satisfy any future Exit Event Awards to full-time employees of the Company and
subsidiary companies, subject to the occurrence of an Exit Event, with such
beneficiaries to be determined in due course. A further award of 0.01 million
common shares (adjusted for consolidation on 100:1 basis) was made to staff in
December 2013, with no additional Exit Event Awards made to Directors. The
first tranche of Exit Event Awards expired in March 2017. 
 
An Exit Event envisages a sale of either the Company or a substantial
proportion (i.e. more than 50%) of its assets. 
 
These share-based payments are measured at the fair value of the associated
liability at the year end. As at
31 December 2016, the fair value of Exit Event Awards was $nil (2015: $nil)
based on the market value of the shares and the probability of the Exit Event
occurring assessed as of that date. 
 
23. Related party transactions 
 
The Group has a related party relationship with its subsidiaries. The Company
and its subsidiaries, in the ordinary course of business, enter into various
sales, purchase and service transactions with joint operations in which the
Group has a material interest. These transactions are under terms that are no
less favourable to the Group than those arranged with third parties. 
 
Remuneration of key management personnel 
 
The remuneration of the Directors and Officers, the key management personnel
of the Group, is set out below in aggregate for each of the categories
specified in IAS 24 Related Party Disclosures.  Those identified as key
management personnel include the Directors of the Company and the following
key personnel: 
 
J Stafford - Vice President Operations 
 
AR Peart - Legal and Commercial Director 
 
U Eminkahyagil - Kurdistan Country Manager 
 
M Messaoudi - Algeria Country Manager 
 
N Zahawi - Chief Strategy Officer 
 
N Kernoha - Financial Controller 
 
G Papineau-Legris - Commercial Director 
 
M Ross - Legal Director & Company Secretary 
 
The values below are calculated in accordance with IAS 19 and IFRS 2. 
 
                                2016$'000  2015$'000  
                                                      
 Short-term employee benefits   5,136      6,357      
 Other allowances               -          746        
 Share-based payment - options  302        794        
                                5,438      7,897      
 
 
Further information about the remuneration of individual Directors is provided
in the Directors' Emoluments section of the Remuneration Committee Report. 
 
24. Financial instruments 
 
                              2016$'000  2015$'000  
                                                    
 Financial assets                                   
 Cash and cash equivalents    92,870     43,641     
 Loans and receivables        40,976     15,223     
                              133,846    58,864     
                                                    
 Financial liabilities                              
 Trade and other payables     41,844     127,399    
 Reinstated Note              98,886     -          
 Convertible bonds (Level 1)  -          310,444    
 2014 Notes (Level 1)         -          234,094    
                              140,730    671,937    
 
 
All loans and payables, except for the Reinstated Notes and the prior year
Convertible Bonds and 2014 Notes, are due to be settled within one year and
are classified as current liabilities. 
 
The maturity profile and fair values of the Reinstated Notes and the prior
year Convertible Bonds and 2014 Notes are disclosed in note 16. The maturity
profile of all other financial liabilities is indicated by their
classification in the balance sheet as "current" or "non-current".  Further
information relevant to the Group's liquidity position is disclosed in the
Directors' Report under "Going Concern". 
 
Fair value hierarchy 
 
In line with IFRS 13 - 'Fair Value Measurement' the Group uses the following
hierarchy for determining the fair value of financial instruments by valuation
technique: 
 
Level 1: quoted (unadjusted) prices in active markets for identical assets or
liabilities; 
 
Level 2: other techniques for which all inputs which have a significant effect
on the recorded fair value are observable, either directly or indirectly; and 
 
Level 3: techniques which use inputs which have a significant effect on the
recorded value that are not based on observable market data. 
 
Capital Risk Management 
 
The Group manages its capital to ensure that the entities within the Group
will be able to continue as going concerns while maximising the return to
stakeholders through the optimisation of the debt and equity balance. The
Group is not subject to externally imposed capital requirements. The capital
structure of the Group consists of cash, cash equivalents, Reinstated Notes
and equity attributable to equity holders of the parent, comprising issued
capital, reserves and accumulated losses as disclosed in Note 19, the
Consolidated Statement of Comprehensive Income and the Consolidated Statement
of Changes in Equity. 
 
Capital Structure 
 
The Group's Board of Directors reviews the capital structure on a regular
basis and makes adjustments to it in light of changes in economic conditions.
As part of this review, the Board considers the cost of capital and the risks
associated with each class of capital. 
 
On 14 October 2016, the Group successfully completed the Balance Sheet
Restructuring reducing the Group's debt from over $600 million to $100 million
of the Reinstated Notes through the partial conversion of the guaranteed notes
and full conversion of the convertible bonds to the Company's common shares. 
The Reinstated Notes give the Group an option to defer the payment of the
first two years of interest until the maturity of the Reinstated Notes (see
note 16 for further details). The Group also has the flexibility to raise
additional debt of up to $45 million through the use of the Super Senior Debt
basket and the General Debt Basket. The Reinstated Notes do not contain a Debt
Service Reserve Account requirement freeing up $32.5 million of cash for
general use. In conjunction with the Restructuring, the Group completed a
successful $25.0 million Open Offer on 14 October 2016. 
 
The Group has seen a significant improvement in the pattern of cash receipts
from the MNR for the oil sent for export with the total receipts of $114
million net to the Group in 2016 and further receipts of $36 million in the
first quarter of 2017 in relation to 2016 sales. 
 
Significant Accounting Policies 
 
Details of the significant accounting policies and methods adopted, including
the criteria for recognition, the basis of measurement and the basis on which
income and expenses are recognised, in respect of each class of financial
asset, financial liability and equity instrument are disclosed in the Summary
of Significant Accounting Policies. 
 
Financial Risk Management Objectives 
 
The Group's management monitors and manages the financial risks relating to
the operations of the Group. These financial risks include market risk
(including commodity price, currency and fair value interest rate risk),
credit risk, liquidity risk and cash flow interest rate risk. 
 
The Group currently has no currency risk or other hedges against financial
risks as the benefit of entering into such agreements is not considered to be
significant enough as to outweigh the significant cost and administrative
burden associated with such hedging contracts. The Group does not use
derivative financial instruments for speculative purposes. 
 
The risks are closely reviewed by the Board on a regular basis and steps are
taken where necessary to ensure these risks are minimised. 
 
Market risk 
 
The Group's activities expose it primarily to the financial risks of changes
in foreign currency exchange rates, oil prices and changes in interest rates
in relation to the Group's cash balances. The operating currencies of the
Group are Great British pounds (GBP), US dollars (USD), Algerian dinars (DZD)
and Iraqi dinars (IQD). 
 
The Group's exposure to currency risk is low as the Reinstated Notes are
denominated in USD, which is the main currency for the Group's transactions,
and following the utilisation of sterling funds from previous equity raises.
During the year the majority of funds raised in the GBP equity issue were
converted to USD at the spot rate, with a small balance being held in GBP to
meet GBP denominated expenditure. Previously, currency hedges were entered
into to address foreign currency risk arising when entering into funding
transactions in GBP. 
 
There have been no changes to the Group's exposure to other market risks or
any changes to the manner in which the Group manages and measures the risk. 
The Group does not hedge against the effects of movement in oil prices. The
risks are monitored by the Board on a regular basis. 
 
Foreign currency risk management 
 
The Group undertakes certain transactions denominated in foreign currencies,
being any currency other than the functional currency of the Group subsidiary
concerned. Hence, exposures to exchange rate fluctuations arise. 
 
At 31 December 2016, a 10% weakening or strengthening of the US dollar against
the other currencies in which the Group's monetary assets and monetary
liabilities are denominated would not have a material effect on the Group's
net current assets or loss before tax. 
 
Interest rate risk management 
 
The Group's policy on interest rate management is agreed at the Board level
and is reviewed on an ongoing basis.  The current policy is to maintain a
certain amount of funds in the form of cash for short-term liabilities and
have the rest on relatively short-term deposits, usually one month's notice to
maximise returns and accessibility. Under the terms of the Reinstated Notes,
the Group has the option to pay interest in PIK at 13% or in cash at 10% until
18 October 2018. From 19 October 2018, the Group is mandatorily liable to pay
interest in cash at 10%. 
 
Interest rate sensitivity analysis 
 
Based on the exposure to the interest rates for cash and cash equivalents at
the balance sheet date, a 0.5% increase or decrease in interest rates would
not have had a material impact on the Group's loss for the year or the
previous year.  A rate of 0.5% is used as it represents management's
assessment of the reasonably possible changes in interest rates. 
 
Credit risk management 
 
Credit risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Group. As at 31
December 2016, the maximum exposure to credit risk from a trade receivable
outstanding from one customer is $36 million (2015: $12 million). 
 
The credit risk on liquid funds is limited because the counterparties for a
significant portion of the cash and cash equivalents at the balance sheet date
are banks with good credit ratings assigned by international credit-rating
agencies. 
 
Liquidity risk management 
 
Ultimate responsibility for liquidity risk management rests with the Board of
Directors.  It is the Group's policy to finance its business by means of
internally generated funds, external share capital and debt.  In common with
many exploration companies, the Group raises finance for its exploration and
appraisal activities in discrete tranches to finance its activities for
limited periods.  The Group seeks to raise further funding as and when
required. 
 
25. Change in accounting policy 
 
The Group changed its accounting for its oil and gas assets from modified full
cost to successful efforts during the year.  The latter method allows the
Group to capitalise only those expenditures associated with successfully
locating new oil and natural gas reserves.  All costs that are related to
unsuccessful efforts are expensed. Prior to this change in policy,
unsuccessful exploration and evaluations costs were retained within the
intangible non-current assets and depreciated on a UOP basis by reference to
the commercial reserves of the wider geographic pool. 
 
The Group believes that the adoption of the successful efforts method will
make the Group's financial statements more comparable to those of its peers as
it is a more widely used method and will better reflect the economic substance
of the Group's financial performance. 
 
In line with the requirements of IAS 8 - Accounting Policies, Changes in
Accounting Estimates and Errors, this change in accounting policy is accounted
for retrospectively.  As a result, the Group has restated its 2015
Consolidated Financial statements.  No adjustments to the period prior to 2015
are required as there were no unsuccessful exploration expenditures prior to
2015. 
 
The effect of the change in accounting policy has been adjusted by restating
each of the affected financial statement line items for the prior period, as
follow: 
 
                                31 December  2015$'000  
                                                        
 Consolidated Balance Sheet                             
 Intangible assets (decrease)   (78,987)                
                                                        
                                                        
 Consolidated Income Statement                          
 Impairment expense (increase)  (78,987)                
 Loss per share (increase)                              
 Basic (cents)                  (8.43)                  
 Diluted (cents)                (8.43)                  
                                                        
 
 
26. Contingent liabilities 
 
The Group has a contingent liability of $27 million (net to GKP) in relation
to the proceeds from the sale of test production in the period prior to the
approval of the Shaikan Field Development Plan in July 2013. The PSC does not
appear to address expressly any party's rights to this pre-Development Plan
petroleum. This suggests strongly that there must have been some other
agreement, understanding or arrangement between GKP and the KRG as to how this
pre-Development Plan petroleum would be lifted and sold. The sales were made
based on sales contracts with domestic offtakers which were approved by the
KRG. The Group believes that the receipts from these sales of pre-Development
Plan petroleum are for the account of the Contractor (GKP and MOL), rather
than the KRG and accordingly recorded them as test revenue in prior years.
However, the KRG has requested a repayment of these amounts and we are
currently involved in discussions with them to resolve this matter. 
 
27. Events after the balance sheet date 
 
In March 2017, considering the current healthy cash balance and regularity of
payments from the MNR, the Group has decided to pay its upcoming Reinstated
Notes coupon of $5.0 million at 10% interest rate on 18 April 2017, even
though it has the option to postpone it to maturity (at 13% interest rate). 
 
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