REG - Gulf Keystone Petrol - 2017 Half Year Results Announcement <Origin Href="QuoteRef">GKP.L</Origin> - Part 2
19/09/2017 07:07
- Part 2: For the preceding part double click ID:nRSS0976Ra
issue but are not yet
effective.
- IFRS 9 Financial Instruments, effective from 1 January 2018
- IFRS 15 Revenue from contracts with customers, effective from 1
January 2018
- IFRS 16 Leases, effective from 1 January 2019
The Group is currently evaluating the impact of adopting these new accounting
standards.
Going concern
The Group closely monitors and manages its liquidity risk. Regular cash
forecasts are produced and sensitivities run for different scenarios
including, but not limited to, changes in commodity prices, different
production rates from the Shaikan Block and costs contingencies. The Group has
taken appropriate action to reduce its cost base and has $133.8 million of
free cash at 18 September 2017. The Group's forecasts, taking into account the
risks applicable to the Group, show that the Group will be able to have
sufficient financial headroom for the 12 months from the date of approval of
the half year results.
Based on the analysis performed, the Directors have a reasonable expectation
that the Group has adequate resources to continue in operational existence for
the foreseeable future. Thus they continue to adopt the going concern basis of
accounting in preparing the half year results.
Sales revenue and interest income
The recognition of revenue, particularly the recognition of revenue from
export sales, is considered to be a key accounting judgement. For all sales,
the goods are considered to be delivered and the title passed at the point of
loading at the Shaikan field. For sales into the local market, it is clear
that, at this point of delivery, economic benefit will flow to the Group and
that revenue and costs can be measured reliably and therefore revenue is
recognised. As the payment mechanism for sales to the export market is
developing within the Kurdistan Region of Iraq, the Group currently considers
that revenue can best be reliably measured when the cash receipt is assured.
The assessment of whether cash receipt is reasonably assured is based on
management's evaluation of the reliability of the MNR's payments to the
international oil companies operating in the Kurdistan Region of Iraq in line
with the KRG's announcement in February 2016 of its intention to apply the PSC
terms.
Management makes the following assumptions in arriving at the value of sales
revenue:
- point of sale is the Shaikan facility;
- cash is received and revenue is recognised for all sales, net of
royalty, as the royalty is taken "in-kind" by the KRG;
- cash receipts from the MNR represent the non-governmental contractors'
share of revenue; and,
- where appropriate, payables to the MNR are offset against amounts due
for previously unrecognised revenue in line with the terms of the Shaikan
PSC.
To the extent that revenue arises from test production during an evaluation
programme, an amount is charged from evaluation costs to cost of sales so as
to reflect a zero net margin.
Under IAS 12 'Income Taxes', where income tax arising from the Group's
activities under production sharing contracts is settled by a third party on
behalf of the Group, and where the Group would otherwise be liable for such
income tax, the associated sales are required to be shown gross including the
notional tax, and a corresponding income tax charge shown in the statement of
comprehensive income. However, due to the uncertainty over the payment
mechanism for oil sales in Kurdistan and the fact that there is no
sufficiently well-established tax regime in place in the Kurdistan Region of
Iraq, it has not been possible to measure reliably the taxation due that has
been paid on behalf of the Group by the KRG. Therefore the notional tax
amounts have not been included in revenue or in the tax charge. This is an
accounting presentational issue and there is no taxation to be paid.
Interest income is accrued on a time basis, by reference to the principal
outstanding and at the effective rate of interest applicable, which is the
rate that exactly discounts estimated future cash receipts through the
expected life of the financial asset to that asset's net carrying amount on
initial recognition.
Oil and gas assets
The Group changed its accounting policy for oil and gas assets from modified
full cost to successful efforts in 2016. This change resulted in the write off
of the costs associated with the Sheikh Adi and Ber Bahr blocks by the Group.
The benefit of this voluntary change in the accounting policy is ensuring that
the balance sheet reflects only the assets that will bring future economic
benefits to the Group. In addition, the successful efforts method is more
widely adopted by listed oil companies and therefore the change in the policy
will make the Group's financial statements more comparable to those of its
peers (note 16).
Adoption of new and revised accounting standards
As of 1 January 2017, a number of accounting standard amendments and
interpretations became effective, as noted in the 2016 Annual Report and
Accounts (pages 82 and 83). The adoption of these amendments and
interpretations has not had a material impact on the financial statements of
the Group for the six months ended 30 June 2017.
3. Segment information
There has been no change in the basis of segmentation or in the basis of
measurement of segments' profit or loss during the period. The accounting
policies of the reportable segments are consistent with the Group's accounting
policies, which are described in the Group's latest Annual Report.
The operations of the Group comprise one class of business: oil and gas
exploration, development and production and the sale of hydrocarbons and
related activities. The reportable segments in accordance with IFRS 8 are
therefore the three geographical regions that the Group operates within as
described below:
- Kurdistan Region of Iraq: the Kurdistan segment consists of the
Shaikan Block and the Erbil office which provides support to the operations in
Kurdistan, as well as segmental information relating to the previously held
Ber Bahr block (note 16);
- United Kingdom: the UK segment provides geological, geophysical and
engineering services to the Gulf Keystone Group; and
- Algeria: the Algerian segment consists of the Algiers office and the
Group's operations in Algeria.
The Corporate segment manages activities that serve more than one segment and
represents all overhead and administration costs incurred that cannot be
directly linked to one of the above segments.
Algeria Kurdistan UnitedKingdom Corporate Elimination Total
30 June 2017 (unaudited) $'000 $'000 $'000 $'000 $'000 $'000
Revenue
Oil sales - 78,308 - - - 78,308
Inter-segment sales - - 2,578 - (2,578) -
Total revenue - 78,308 2,578 - (2,578) 78,308
Profit/ (loss) before tax 20 13,095 (398) (11,788) (310) 619
Tax credit - - 37 - - 37
Profit/ (loss) after tax 20 13,095 (361) (11,788) (310) 656
Total assets 20 553,739 13,794 66,582 4,609 638,744
Algeria Kurdistan UnitedKingdom Corporate Elimination Total
30 June 2016 (unaudited/ as restated (note 16)) $'000 $'000 $'000 $'000 $'000 $'000
Revenue
Oil sales - 102,068 - - - 102,068
Inter-segment sales - - 3,868 - (3,868) -
Total revenue - 102,068 3,868 - (3,868) 102,068
Loss before tax (56) (188,681) (58) (43,334) (172) (232,301)
Tax expense (1) - (253) - - (254)
Loss after tax (57) (188,681) (311) (43,334) (172) (232,555)
Total assets 66 578,773 14,422 1,237,908 (1,198,417) 632,752
Algeria Kurdistan UnitedKingdom Corporate Elimination Total
31 December 2016 (audited) $'000 $'000 $'000 $'000 $'000 $'000
Revenue
Oil sales - 194,409 - - - 194,409
Inter-segment sales - - 5,542 - (5,542) -
Total revenue - 194,409 5,542 - (5,542) 194,409
(Loss)/profit before tax (662) (170,330) (1,164) 154,964 (116) (17,308)
Tax expense - - (127) - - (127)
(Loss)/profit after tax (662) (170,330) (1,291) 154,964 (116) (17,435)
Total assets 38 546,163 12,864 75,675 5,454 640,194
4. Revenue
Six months ended 30 June 2017Unaudited Six months ended 30 June 2016Unaudited Year ended 31 December 2016Audited
$'000 $'000 $'000
Oil Sales 78,308 102,068 194,409
Interest revenue 80 46 100
78,388 102,114 194,509
194,509
During the period to 30 June 2017, the Group sold Shaikan oil to the export
market generating revenue of $72.0 million (H1 2016: $52.9 million). The
Group also recognised $6.3 million (H1 2016: $49.2 million) of revenue arrears
by offsetting payables to the MNR against amounts due for previously
unrecognised revenue. Revenue for commercial sales is recognised in line with
the terms of the Shaikan PSC, the applicable sales contracts and the Group's
accounting policy.
Management has used the following assumptions in arriving at the value of
sales revenue during the year:
· point of sale is the Shaikan facility;
· cash is received and revenue is recognised for all sales, net of
royalty, as the royalty is taken "in-kind" by the KRG;
· deductions for transportation costs as well as the discount to Brent,
for the quality of the crude, have been estimated at c.$20/bbl based on the
discussions with the MNR and are subject to audit and reconciliation, and the
establishment of a retroactive quality bank for Kurdistan crude exports
delivered through the international pipeline to Turkey;
· cash receipts by GKPI as the operator represent the non-governmental
contractors' share of revenue; and
· the Group's current working interest in the Shaikan Block is 80%.
5. Cost of Sales
Six months ended 30 June 2017Unaudited Six months ended 30 June 2016Unaudited Year ended 31 December 2016Audited
$'000 $'000 $'000
Production costs 21,309 32,453 61,191
Depreciation of oil & gas properties 41,079 39,916 81,636
62,388 72,369 142,827
142,827
Production costs represent the Group's share of gross production expenditure
for the Shaikan field for the period and include capacity building charges
of $7.2 million (H1 2016: $8.5 million) and Shaikan PSC production bonus of
$nil (H1 2016: $8.0 million). There is no deferral of costs associated with
unrecognised sales in accordance with the Group's revenue policy. Production
and depreciation, depletion and amortisation ("DD&A") costs related to revenue
arrears recognised in 2017 have been charged to the income statement in prior
periods when the oil was lifted.
A unit-of-production method, based on full entitlement production, commercial
reserves and costs for Shaikan full field development, has been used to
calculate the DD&A charge for the period. Commercial reserves are proven and
probable ("2P") reserves, estimated using standard recognised evaluation
techniques. Production and reserves entitlement associated with unrecognised
sales in accordance with the Group's revenue policy have been included in the
full year DD&A calculation.
6. Finance costs
Six months ended 30 June 2017Unaudited Six months ended 30 June 2016Unaudited Year ended 31 December 2016Audited
$'000 $'000 $'000
Interest payable in respect of convertible bonds - 13,908 22,203
Interest payable in respect of guaranteed bonds - 21,862 35,232
Effective interest on reinstated notes (Note 13) 5,537 - 2,481
Unwinding of discount on provisions 355 346 699
Capitalised finance costs - (432) (433)
5,892 35,684 60,182
60,182
7. Other gains
Other gains consist of foreign exchange gains.
8. Profit/ (loss) per share
The calculation of the basic and diluted loss per share is based on the
following data:
Six months ended 30 June 2017Unaudited Six months ended 30 June 2016Unaudited/ As restated (note 16) Year ended 31 December 2016Audited
$'000 $'000 $'000
Profit/ (loss)
Profit/ (loss) after tax for the purposes of basic and diluted loss per share 656 (232,555) (17,435)
Weighted average number of shares used:
Basic ('000) 229,232 9,634 56,565
Diluted ('000) 230,964 9,634 56,565
56,565
On 9 December 2016, all common shares have been consolidated on a 100:1 basis.
As a result, prior interim weighted average number of shares has been
restated.
30 June 2017Number ('000)Unaudited 30 June 2016Number1 ('000)Unaudited 31 December20161Number ('000)Audited
Number of shares
Share options 1,534 - 1,761
Warrants outstanding - 400 400
Common shares held by the EBT 98 36 98
Common shares held by the Exit Event Trustee 100 100 100
Total potentially anti-dilutive shares 1,732 536 2,359
2,359
1For the periods ended 30 June 2016 and 31 December 2016, the impact of share
options, warrants, and common shares held by the Employee Benefit Trust
("EBT") and the Exit Event Trustee has an anti-dilutive effect on the loss per
share. As a result, there is no difference between basic and diluted earnings
per share.
The calculation of diluted earnings per share excludes 0.4 million (H1 2016:
0.4 million) share options that were non-dilutive for the period because the
exercise price of these options exceeded the average fair value of the shares
during the period. These share incentives could potentially dilute earnings
per share in the future.
9. Reconciliation of profit from operations to net cash generated in operating
activities
Six monthsended30 June 2017Unaudited$'000 Six monthsended30 June 2016Unaudited$'000 Year ended 31 December 2016Audited$'000
Profit from operations 6,261 14,033 26,046
Adjustments for:
Depreciation of property, plant and equipment 41,293 40,195 82,176
Amortisation of intangible assets 24 5 38
Share-based payment expense 1,293 809 1,255
Decrease in inventories 440 134 2,573
Reversal of provisions (271) - -
Write off of exploration costs - 875 -
(Increase)/decrease in receivables (10,109) 462 (22,129)
Decrease in payables (3,783) (9,827) (40,522)
Net cash generated by operations 35,148 46,686 49,437
Income tax received - 182 182
Net cash generated in operating activities 35,148 46,868 49,619
10. Property, plant and equipment
The net book value at 30 June 2017 includes property, plant and equipment
relating to the Shaikan Block with a carrying value of $451.6 million (30 June
2016: $524.7 million; FY 2016: $488.6 million). The remainder of the balance,
with a carrying value of $0.7 million (30 June 2016: $1 million; FY 2016: $0.7
million), comprises fixtures and equipment.
The additions to the Shaikan assets of $4.1 million during the period include
the costs of various studies and production facilities improvement projects.
Associated with production, a DD&A charge of $41.1 million was recognised on
the Shaikan oil and gas asset (30 June 2016: $39.9 million; FY 2016: $81.6
million), which has been included within cost of sales. A depreciation charge
of $0.2 million was recognised on fixtures and equipment (30 June 2016: $0.3
million; FY 2016: $0.5 million), which has been included in general and
administrative expenses.
11. Trade and other receivables
30 June 2017Unaudited$'000 30 June 2016Unaudited$'000 31 December 2016Audited$'000
Trade receivables 48,000 12,494 36,000
Other receivables 3,335 525 4,976
Prepayments and accrued income 289 534 589
51,624 13,553 41,565
The Directors consider that the carrying amount of trade and other receivables
approximates their fair value and no amounts are provided against them.
12. Trade and other payables
30 June 2017Unaudited$'000 30 June 2016Unaudited$'000 31 December 2016Audited$'000
Trade payables 2,478 10,152 2,922
Other creditors 26,769 35,015 26,917
Accrued expenses 22,285 69,346 26,445
51,532 114,513 56,284
Trade and other payables principally comprise amounts outstanding for trade
purchases and ongoing costs.
In accordance with the Bilateral MNR Agreement signed between GKPI and the MNR
on 16 March, 2016, the Group has received cumulative payments on account for
back-costs of approximately $16.2 million (FY 2016: $16.2 million) in
recognition of the Group and MNR's intention, subject to the satisfaction of
certain conditions, to recognise the allocation to MNR of the Shaikan
Government Participation Option with effect from 1 August 2012. The treatment
of the Shaikan Government Participation Option is subject to the execution of
a revised Shaikan PSC and the amounts received have been included in Other
creditors until this has been finalised.
13. Other borrowings
On 14 October 2016, the Company issued $100 million of new guaranteed notes
("Reinstated Notes"). The unsecured Reinstated Notes are guaranteed by Gulf
Keystone Petroleum International Limited, the Company's subsidiary and their
terms are the same as the Guaranteed Notes subject to the following
amendments:
- Maturity date is 18 October 2021. At any time prior to maturity, the
Reinstated Notes are redeemable in part or full at par and can therefore be
refinanced without any prepayment penalty;
- The Company has the option to defer its interest payments until the
maturity of the Reinstated Notes in PIK at 13% or pay in cash at 10% until 18
October 2018. From 19 October 2018, the Company is mandatorily liable to pay
interest in cash at 10%;
- The aggregate principal amount of the Reinstated Notes shall be
increased by the amount of such PIK interest on the date such interest is due
and interest will accrue on the increased principal amount from such date;
- The Company will be permitted to raise up to $45 million of
additional debt at any time on market terms to fund capital and operating
expenditure;
- Certain other amendments, including inter alia, the removal of
security, removal of the Debt Service Reserve Account requirement and the
extension of the grace periods in respect of certain events of default under
the Reinstated Notes
The liabilities associated with Reinstated Notes are presented in the
following tables:
30 June 2017Unaudited$'000 30 June 2016Unaudited$'000 31 December 2016Audited$'000
Liability at the beginning of the period 98,886 555,374 555,374
Interest charged during the period 35,770 57,435
Effective interest on Reinstated Notes 5,537 - 2,481
Interest paid during the period (5,111) - -
Extinguishment of liability and related interest during the year - - (612,809)
Issue of Reinstated Notes - - 96,405
Liability at the end of period 99,312 591,144 98,886
Liability reported in:
30 June 2017Unaudited$'000 30 June 2016Unaudited$'000 31 December 2016Audited$'000
Current liabilities - 276,891 -
Non -current liabilities 99,312 314,253 98,886
99,312 591,144 98,886
For the period ended 30 June 2017, the Company recognised $0.4 million of
interest expense on the Reinstated Notes which was capitalised into the
Reinstated Notes within Other borrowings (H1 2016: $nil; FY 2016: $2.4
million). The interest payment method will be reassessed prior to each
interest payment date. Any difference from what was capitalised or accrued for
the period ended 30 June 2017 and the actual interest payment method selected
will be adjusted prospectively.
The Reinstated Notes are actively traded on the Luxembourg Stock Exchange and
the fair value at the prevailing market price as at the close of business on
the reporting date was:
Market price 30 June 2017$'000
Reinstated Notes $1.002 100,198
As of 30 June 2017, the Group's remaining contractual liability comprising
principal and interest based on undiscounted cash flows at the maturity date
of the Reinstated Notes is as follows:
30 June 2017Unaudited$'000 30 June 2016Unaudited$'000 31 December 2016Audited$'000
Within one year - 329,219 -
Within two to five years 157,033 335,156 167,241
157,033 664,375 167,241
On 18 April 2017, the remaining warrants of 0.4 million at $1.0 each have
expired.
14. Share capital
Common shares Share Share
No. of shares Amount capital premium
000 $'000 $'000 $'000
Issued and fully paid
Balance 1 January 2017 and 30 June 2017 229,430 1,150,158 229,430 920,728
920,728
15. Contingent Liabilities
The Group has a contingent liability of $27 million (net to GKP) in relation
to the proceeds from the sale of test production in the period prior to the
approval of the Shaikan Field Development Plan in July 2013. The Shaikan PSC
does not appear to expressly address any party's rights to this
pre-Development Plan petroleum. This suggests strongly that there must have
been some other agreement, understanding or arrangement between GKP and the
KRG as to how this pre-Development Plan petroleum would be lifted and sold.
The sales were made based on sales contracts with domestic offtakers which
were approved by the KRG. The Group believes that the receipts from these
sales of pre-Development Plan petroleum are for the account of the Contractor
(GKP and MOL), rather than the KRG and accordingly recorded them as test
revenue in prior years. However, the KRG has requested a repayment of these
amounts and we are currently involved in discussions with them to resolve this
matter.
16. Change in accounting policy
As noted in the 2016 Annual Report and Accounts (page109), the Group changed
its accounting for its oil and gas assets from modified full cost to
successful efforts in the second half of 2016. As a result, the Group has
restated its H1 2016 and FY 2015 Consolidated Financial statements.
The effect of the change in accounting policy has been adjusted by restating
each of the affected financial statement line items for the prior interim
period, as follow:
31 December 2015$'000 30 June 2016$'000
Consolidated Balance Sheet
Intangible assets (decrease) (78,987) (172,681)
Consolidated Income Statement
Impairment expense (increase) (78,987) (175,658)
Cost of sales (decrease) - 3,852
General and administrative expenses (increase) - (875)
Loss per share (increase)
Basic (cents) (843.07) (1792.33)
Diluted (cents) (843.07) (1792.33)
17. Events after the balance sheet date
The Group, together with the MNR and Genel Energy International Limited,
finalised the terms of relinquishment and termination of its rights and
obligations under the Ber Bahr PSC, which has been completed in accordance
with the executed Relinquishment and Termination Agreement on 13 July 2017. As
stated in the agreement, no party will have any further rights, duties,
liabilities or other interest. The KRG fully and finally released each
contractor from any and all obligations, costs, liabilities, claims, actions,
proceedings and demands. The Ber Bahr exploration asset was fully written off
in 2015.
GLOSSARY (See also the glossary in the 2016 Annual Report)
Bilateral MNR Agreement the bilateral agreement between GKPI and the MNR dated 16 March 2016
Capex any expenditure or obligation in respect of expenditure which, in accordance with accounting principles applied by the Company in the preparation of its audited accounts, is treated as capital expenditure (and including the capital element of any
expenditure or obligation incurred in connection with any finance lease)
CSR corporate social responsibility
First Shaikan Amendment First amendment to the Shaikan PSC executed on 1 August 2010.
General Debt Basket the provision in the Reinstated Notes that will permit the Company or GKPI to incur up to $20 million of additional indebtedness at any time outstanding
HSSE health, safety, security and environment
KRG Kurdistan Regional Government
Majority Participating Holders Participating Holders holding in aggregate at least 50.01% of the aggregated principal amount of the Notes and the convertible bonds held by the Participating Holders at the relevant time
MNR Kurdistan's Ministry of Natural Resources
MOL MOL Hungarian Oil and Gas Plc
OPEC The Organisation of the Petroleum Exporting Countries
PSC production sharing contract
Reinstated Notes the $100 million of guaranteed notes issued pursuant to the Notes Reinstatement
Second Shaikan Amendment the second proposed amendment to the Shaikan PSC formally implementing the terms of the Bilateral MNR Agreement (including the First Shaikan Amendment)
Shaikan Government Participation Option underthetermsoftheShaikanPSC,theKRGhastheoption(the"ShaikanGovernment Participation
Option")toparticipatethroughapubliccompanydulyregisteredandincorporatedinKurdistanandregulatedbytheKRGundertheKurdistanOilandGasLawinanundividedinterestinthepetroleumoperations(andallotherrights,obligationsandliabilitiesoftheShaikanContractors)oftheShaikan
Blockasacomponentofthe ShaikanContractors(a"ShaikanContractorEntity").TheShaikan Government Participation Option is over aninterest ofbetween5and20%
and(subjecttosuchextensionasmaybeagreedbytheparties)within180daysofthefirstCommercialDiscoverybeingdeclared.Pursuant to the Second Shaikan Amendment the Shaikan Government Participation Option will be formally exercised and the implementation of the First
Shaikan Amendment will be formally recognised
Third Party Participation Option theoption under the terms of the Shaikan PSC allowing the KRGtonominateathirdpartyasaShaikanContractorEntity, resulting in such party having anundividedinterestinthepetroleumoperationsoftheShaikanBlock(such interest referred to as the"ThirdParty
Interest").
Third Party Interest an undivided interest of between 5% and 15% in Shaikan Block's petroleum operations, to be taken up by an entity nominated by the KRG, who has the option to do so (such option referred to as the "Third Party Participation Option")
This information is provided by RNS
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