REG - Petroneft Resources - Preliminary Results
21 June 2019
PetroNeft Resources plc
("PetroNeft" or the "Group" or the "Company")
2018 Final Results
PetroNeft (AIM: PTR) owner and operator of Licences 61 and 67, Tomsk Oblast, Russian Federation, is pleased to report its final results for the year ended 31 December 2018.
Highlights
· C-4 well at Cheremshanskoye produced about 450 bopd on test
· Gross production at Licence 61 in 2018 was 713,603 barrels of oil or an average of 1,955 bopd
o While this represents a reduction in production it is ahead of expectations due to continued good performance of horizontal wells at South Arbuzovskoye
· 64.2 mmbbls total proved and probable (2P) reserves net to PetroNeft
For further information, contact:
David Sturt, CEO, PetroNeft Resources plc
+971 55 191 9808
John Frain/Brian Garrahy, Davy (NOMAD and Joint Broker)
+353 1 679 6363
Henry Fitzgerald-O'Connor, Canaccord Genuity Limited (Joint Broker)
+44 207 523 8000
Joe Heron / Douglas Keatinge, Murray Consultants
+353 1 498 0300
The information contained in this announcement has been reviewed and verified by Mr. David Sturt, Chief Executive Officer and Executive Director of PetroNeft, for the purposes of the Guidance Note for Mining and Oil & Gas Companies issued by the London Stock Exchange in June 2009. Mr. Sturt holds a B.Sc. Degree in Earth Sciences from Kingston University and an MSc. in Exploration Geophysics from The University of Leeds. He is a member of the Petroleum Exploration Society Great Britain and has over 35 years' experience in oil and gas exploration and development.
Forward Looking Statements
This report contains forward-looking statements. These statements relate to the Group's future prospects, developments and business strategies. Forward-looking statements are identified by their use of terms and phrases such as 'believe', 'could', 'envisage', 'potential', 'estimate', 'expect', 'may', 'will' or the negative of those, variations or comparable expressions, including references to assumptions.
The forward-looking statements in this report are based on current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. These forward-looking statements speak only as at the date of these financial statements
Chairman's Statement
2018 was a year of significant change for our Company which saw the retirement of our Chief Executive Officer Dennis Francis in November 2018.
Dennis was a founder of PetroNeft in 2004 and oversaw its growth from a private company to a public company listed on the London AIM and Dublin ESM stock exchanges. In that time period the Company evolved from an explorer to an established production company employing over 170 people in the Tomsk Region of Russia. In 2016 Mr. Francis received a Certificate of honour from the Subsurface Management Department for the Tomsk Region (TomskNedra) for significant contributions to the development of mineral resources in the Tomsk Region.
In early 2019 the Company announced the appointment of David Sturt as the new Chief Executive Officer. David had been a Non-Executive Director of the Company since 2016 and brings over 35 years of international experience in the upstream oil and gas industry gained working on projects in Europe, CIS, Africa, South America and SE Asia.
In the period between Dennis' retirement and David commencing as CEO, Karl Johnson, our Vice President of Operations assumed the role of Interim CEO.
I would like to thank Dennis for his many years of dedicated service to PetroNeft and to thank Karl for his work as Interim CEO. I would also like to sincerely welcome David to his new position.
I would also like to thank Paul Dowling for his long service with the Company, first as CFO and Director and then as CFO on a consultancy basis following his departure from the Board in 2016. At the end of 2018, Paul elected to end his full-time consultancy contract, but continues to provide his services on a part-time basis to assist the Company in certain matters.
Operations
The existing production wells at Licence 61 generally performed well during 2018, with a slower than expected natural decline. No new wells were drilled on Licence 61 in 2018.
At Licence 67 we drilled the C-4 appraisal well in conjunction with our Joint Venture partner, Arawak Energy. Oil was tested across two zones in the Upper Jurassic horizon and we achieved combined open hole test rates of 399 bfpd. We also encountered oil pay in the Lower Jurassic horizon, however, the reservoir was of lower quality. A subsequent cased hole test achieved a rate of 450 bopd. We are pleased with the result of the C-4 well, which enabled us to receive State Reserves committee (GKZ) approval for C1 + C2 reserves of 2.5 Mtons for the Cheremshanskoye Oil Field, equivalent to 2P reserves of approximately 19.26 mmbbls and we believe that potential exists for significant upward revision to these figures in the future.
2019 outlook
The geo-political and investment climate for Russia, as with other emerging markets, remains challenging. This has resulted in a significant difference between the market capitalization of the company and the long-term value of its assets and reserves. We are committed to narrowing that gap and are actively examining all available options to do so.
The Company, in conjunction with its 50/50 Joint Venture partners, Oil India and Arawak Energy has engaged financial advisers to evaluate the possible sale of Licence 61 and/or Licence 67. While there is no certainty that any transaction will be completed, we have seen an encouraging level of interest from a range of well-financed industry players. We continue to evaluate the exploration, appraisal and development potential for both licence areas to ensure that, if we receive bids for either licence area which appropriately value the asset, we will be able to make an informed decision on whether or not to sell.
Reserves
The table below contains the details of the oil reserves of the Company and highlights the large potential of the Sibkrayevskoye oil field and the potential upside that could be achieved from prospects such as Emtorskaya, which lies north of Lineynoye.
Ryder Scott Estimated Reserves in Oil Fields (net to PetroNeft)
Oil Field Name
Proved
Proved & Probable
Proved, Probable & Possible
Licence 61
1P mmbo
2P mmbo
3P mmbo
Lineynoye
6.6
12.5
15.6
Tungolskoye
0.3
2.8
3.6
Kondrashevskoye
0.7
1.3
1.6
Arbuzovskoye
1.2
3.8
5.0
Sibkrayevskoye
5.8
29.4
29.4
North Varyakhskoye
0.2
0.4
0.5
14.8
50.2
55.7
Licence 67
Ledovoye
1.5
14.0
17.4
Total net to PetroNeft
16.3
64.2
73.1
· Licence 61 as at 31 December 2018 (Ryder Scott report as at 1 January 2016, adjusted for 2016, 2017 and 2018 production).
· Reserves reflect just PetroNeft's 50% share of reserves for each licence.
· All oil in discovered fields is in the Upper Jurassic section.
· Reserves were determined in accordance with the Society of Petroleum Engineers ("SPE") Petroleum Resources Management System ("PRMS") rules.
Review of PetroNeft loss for the year
The loss after taxation for the year was US$7,561,762 (2017: US$3,239,041). The loss included the share of joint venture's net loss in WorldAce Investments of US$6,339,613 (2017: US$4,285,833) which rose mainly due to the write-off of wells at Tungolskoye and the share of joint venture's net loss in Russian BD Holdings B.V. of US$508,757 (2017: US$381,654).
2018
2017
US$'000
US$'000
Continuing operations
Revenue
1,767
1,713
Cost of sales
(1,560)
(1,550)
Gross profit
207
163
Administrative expenses
(1,390)
(1,403)
Exchange (loss)/gain on intra-Group loans
(123)
52
Operating loss
(1,306)
(1,188)
Share of joint venture's net loss - WorldAce Investments Limited
(6,340)
(4,286)
Share of joint venture's net loss - Russian BD Holdings B.V.
(508)
(382)
Finance revenue
966
3,511
Finance costs
(117)
-
Loss for the year for continuing operations before taxation
(7,305)
(2,345)
Income tax expense
(257)
(894)
Loss for the year
(7,562)
(3,239)
Revenue
Revenue in 2018 and 2017 includes income as operator of both licences and the revenue of PetroNeft's wholly owned subsidiary, Granite Construction, in respect of construction services provided in relation to both joint ventures.
Income of PetroNeft Group as Operator of Licence 61 and Licence 67
PetroNeft performs the role of operator for both the licence 61 and 67 joint ventures. This means that PetroNeft employees and management are responsible for the day to day running of both Licences. Major strategic and financial decisions relating to the Licences require unanimous approval by both shareholders in the respective joint venture agreements.
As operator, PetroNeft is entitled to charge certain administrative, management and technical costs to the joint ventures. The costs associated with this revenue are included in cost of sales.
In 2018 PetroNeft Group charged a total of US$0.85 million (2017: US$0.85 million) to the joint ventures in respect of management services. PetroNeft also owns a small construction company, Granite Construction, which carries out ad hoc construction projects such as well pads and on-site accommodation on both Licences as well as maintaining the winter road network each year. In 2018 Granite Construction charged the WorldAce Group US$0.92 million (2017: US$0.86 million) in respect of these services.
Administrative expenditure was in line with last year. In 2017 the Company implemented a cost cutting program across the Group and the Directors and management agreed to reduce and defer significant portions of their remuneration; as at 31 December 2018 a total of US$934,041 (2017: US$824,080) had been deferred by the Directors and senior management - see Note 14 for details.
Finance Revenue
Most of the finance revenue relates to interest receivable on loans to joint ventures. During 2018 PetroNeft recognised interest income of US$3,686,372 (2017: US$3,238,839) on its loans to WorldAce Group and US$387,687 (2017: US$270,773) on its loans to Russian BD Holdings B.V. As a result of early adoption of amendments to IAS 28 in respect of Long-term Interest in Associates and Joint Ventures the Group recognised a loss allowance of US$3,109,501 given the uncertainties relating to WorldAce The allowance was set against Finance Revenue.
Finance Costs
Finance costs relate to interest payable on loan from Petrogrand AB. The Company agreed a secured loan facility of up to US$2m with Petrogrand AB in January 2018. This loan facility was fully drawn down in 2018. For more details see Note 14.
Key Financial Metrics - WorldAce Group
Because of the equity method of consolidation that applies to PetroNeft's interest in WorldAce, it is difficult to extract meaningful metrics from the PetroNeft consolidated income statement. Therefore, the metrics below are an extraction from the audited financial statements of the WorldAce Group and give an indication as to the performance of Licence 61:
WorldAce Group
WorldAce Group
2018
2017
US$'000
US$'000
Continuing operations
Revenue
31,370
27,637
Cost of sales
(27,773)
(25,273)
Gross profit
3,597
2,364
Administrative expenses
(3,122)
(3,093)
Operating profit/(loss)
475
(729)
Write-off of oil and gas properties
(4,096)
-
Write-off of exploration and evaluation assets
(5)
(26)
Finance revenue
129
66
Finance costs
(9,183)
(7,883)
Loss for the year for continuing operations before taxation
(12,680)
(8,572)
Income tax
-
-
Loss for the year
(12,680)
(8,572)
PetroNeft's 50% share
(6,340)
(4,286)
Net Loss - WorldAce Group
PetroNeft's share of the net loss of WorldAce Group for the full year increased to US$6.3 million from US$4.3 million in 2017. The increase in the loss for the year before taxation can be attributed to the write-off of the cost of some non-performing wells. Of the US$9.0 million in interest payable by WorldAce, US$3.7 million is payable to PetroNeft.
Revenue, Cost of Sales and Gross Margin - WorldAce Group
Gross Revenue from oil sales was US$31.4 million for the year (2017: US$27.6 million). Cost of sales includes depreciation of US$2.3 million (2017: US$2.6 million), which was lower mainly due to lower production. The gross margin improved during the year due to improved oil prices. Operating costs per barrel (cost of sales excluding depreciation and Mineral Extraction Tax) were higher at US$10.68 (2017: US$10.36 per barrel) due to lower production. We would expect the gross margin to improve in future periods as our facilities and field operations are fully staffed and can handle additional production from the Sibkrayevskoye oil field once it comes online. We produced 713,603 barrels of oil (2017: 816,476 barrels) in the year and sold 706,395 barrels of oil (2017: 822,388 barrels) achieving an average oil price of US$44 per barrel (2017: US$35 per barrel). All oil was sold on the domestic market in Russia.
Finance Costs - WorldAce Group
Gross Finance costs of US$9.2 million (2017: US$7.9 million) mainly relates to interest on loans from PetroNeft and Oil India.
Current and Future Funding of PetroNeft Group
In previous Annual Reports we outlined that PetroNeft expected to start receiving interest due on its shareholder loans to WorldAce in 2017 once the development of the Sibkrayeskoye oil field in Licence 61 was up and running. The S-374 appraisal well drilled in 2016 at the Sibkrayevskoye oil field, to assess the true extent of the field 10km to the south of existing wells, did not encounter commercial hydrocarbons. The result of this well has led to the postponement of the commencement of the development of the Sibkrayevskoye oil field. As a consequence of this, the date by which PetroNeft expects to start receiving interest due on its shareholder loans to WorldAce has been delayed until 2020 at the earliest.
The success of the S-375 well in 2017 has led to a period of extended testing at Sibkrayevskoye and we are currently refining and re-evaluating the development program. However, significant funding is required to develop the Sibkrayevskoye oil field.
While there were consolidated net current liabilities at the year-end of US$2.8m (2017: US$1.1m), the Company has implemented a cost cutting program across the Group and the Directors and management have agreed to reduce and defer significant portions of their remuneration. Note 14 outlines the amounts owed to the Board and management in this regard.
In January 2018 the Company agreed a secured loan facility for up to US$2 million with Swedish company Petrogrand AB ("Petrogrand"). The loan was due to mature on 31 December 2018, however, in March 2019 the Company agreed an increase in the facility by US$500,000 to US$2.5 million and a revised maturity date of 15 December 2019 (which may be extended by mutual consent of the parties). The revised terms include the potential entitlement to bonus payments of US$2.5 million per Licence if either or both Licence 61 or Licence 67 are sold before 31 December 2020. Discussions on a further supplementary financing for ongoing general corporate purposes are well advanced and the Company expects to update shareholders in the near future.
As previously announced the Company has engaged a financial advisor with the aim to test the market for both of its licences. This process is ongoing and the level of interest and the calibre of companies in the process to date is encouraging. Over the past twelve months the asset acquisition market in Russia has seen increased activity, especially for the larger domestic companies. This gives management reason for optimism about a positive outcome. It is expected that both loan facilities would be repaid from the proceeds of sale of one of the Licences.
The ability to re-finance the Petrogrand loan represents a material uncertainty that may cast significant doubt upon the Group's and the Company's ability to continue as a going concern as described in Note 2 to the Preliminary Financial Statements.
Summary
2018 saw the drilling of a successful well at the Cheremshanskoye oil field in Licence 67 which has led to additional reserves being approved in Russia. The retirement of Dennis Francis was also a major event in 2018, however I am confident that David Sturt, thanks to his knowledge and experience, will focus on creating shareholder value whether through exploration, appraisal, development or sale of assets.
Our industry is continuing to experience unstable times but we have valuable future development targets at West Lineynoye, Cheremshanskoye and Sibkrayevskoye that can be profitable at a wide range of oil prices.
Annual Report and AGM
The annual report will be mailed to shareholders and published on the Company's website (www.petroneft.com) on 28 June 2019. The AGM will be held in Dublin on 20 September 2019.
Finally, I know that I speak for all the Directors, management and staff of the Group in giving sincere thanks to our shareholders, both old and new, for your continued support throughout the past year.
David Golder
Non-Executive Chairman
Consolidated Income Statement
For the year ended 31 December 2018
2018
2017
Note
US$
US$
Continuing operations
Revenue
1,767,074
1,712,574
Cost of sales
(1,559,982)
(1,550,119)
Gross profit
207,092
162,455
Administrative expenses
(1,389,582)
(1,402,867)
Exchange (loss)/gain on intra-Group loans
(123,235)
52,093
Operating loss
(1,305,725)
(1,188,319)
Share of joint venture's net loss - WorldAce Investments Limited
(6,339,613)
(4,285,833)
Share of joint venture's net loss - Russian BD Holdings B.V.
(508,757)
(381,654)
Finance revenue
966,039
3,510,435
Finance costs
(116,825)
-
Loss for the year for continuing operations before taxation
(7,304,881)
(2,345,371)
Income tax expense
(256,881)
(893,670)
Loss for the year attributable to equity holders of the Parent
(7,561,762)
(3,239,041)
Loss per share attributable to ordinary equity holders of the Parent
Basic and diluted - US dollar cent
4
(1.07)
(0.46)
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2018
2018
2017
US$
US$
Loss for the year attributable to equity holders of the Parent
(7,561,762)
(3,239,041)
Other comprehensive income to be reclassified to profit or loss in subsequent years:
Currency translation adjustments - subsidiaries
102,440
(37,190)
Share of joint ventures' other comprehensive income - foreign exchange translation differences
(8,456,256)
2,551,042
Total comprehensive loss for the year attributable to equity holders of the Parent
(15,915,578)
(725,189)
Consolidated Balance Sheet
As at 31 December 2018
2018
2017
Note
US$
US$
Assets
Non-current Assets
Property, plant and equipment
5
38,296
88,202
Equity-accounted investment in joint ventures - WorldAce Investments Limited
6
-
-
Equity-accounted investment in joint ventures - Russian BD Holdings B.V.
7
-
-
Financial assets at amortised cost
8
35,525,743
49,439,502
35,564,039
49,527,704
Current Assets
Inventories
9
6,547
21,908
Trade and other receivables
10
249,280
587,601
Cash and cash equivalents
11
801,938
9,389
1,057,765
618,898
Total Assets
36,621,804
50,146,602
Equity and Liabilities
Capital and Reserves
Called up share capital
12
9,429,182
9,429,182
Share premium account
140,912,898
140,912,898
Share-based payments reserve
6,796,540
6,796,540
Retained loss
(91,003,253)
(83,441,491)
Currency translation reserve
(36,958,374)
(28,604,558)
Other reserves
336,000
336,000
Equity attributable to equity holders of the Parent
29,512,993
45,428,571
Non-current Liabilities
Deferred tax liability
3,219,203
3,001,617
3,219,203
3,001,617
Current Liabilities
Interest-bearing loans and borrowings
2,116,825
-
Trade and other payables
13
1,772,783
1,716,414
3,889,608
1,716,414
Total Liabilities
7,108,811
4,718,031
Total Equity and Liabilities
36,621,804
50,146,602
Consolidated Statement of Changes in Equity
For the year ended 31 December 2018
Called up share capital
Share premium account
Share-based payment and other reserves
Currency translation reserve
Retained loss
Total
US$
US$
US$
US$
US$
US$
At 1 January 2017
9,429,182
140,912,898
7,132,540
(31,118,410)
(80,202,450)
46,153,760
Loss for the year
-
-
-
-
(3,239,041)
(3,239,041)
Currency translation adjustments - subsidiaries
-
-
-
(37,190)
-
(37,190)
Share of joint ventures' other comprehensive income - foreign exchange translation differences
-
-
-
2,551,042
-
2,551,042
Total comprehensive loss for the year
-
-
-
2,513,852
(3,239,041)
(725,189)
At 31 December 2017
9,429,182
140,912,898
7,132,540
(28,604,558)
(83,441,491)
45,428,571
At 1 January 2018
9,429,182
140,912,898
7,132,540
(28,604,558)
(83,441,491)
45,428,571
Loss for the year
-
-
-
-
(7,561,762)
(7,561,762)
Currency translation adjustments - subsidiaries
-
-
-
102,440
-
102,440
Share of joint ventures' other comprehensive income - foreign exchange translation differences
-
-
-
(8,456,256)
-
(8,456,256)
Total comprehensive loss for the year
-
-
-
(8,353,816)
(7,561,762)
(15,915,578)
At 31 December 2018
9,429,182
140,912,898
7,132,540
(36,958,374)
(91,003,253)
29,512,993
Consolidated Cash Flow Statement
For the year ended 31 December 2018
2018
2017
US$
US$
Operating activities
Loss before taxation
(7,304,881)
(2,345,371)
Adjustment to reconcile loss before tax to net cash flows
Non-cash
Depreciation
38,936
62,748
Share of loss in joint ventures
6,848,370
4,667,487
Finance revenue
(966,039)
(3,510,435)
Finance costs
116,825
-
Working capital adjustments
Decrease in trade and other receivables
276,593
294,434
Decrease in inventories
12,960
7,066
Increase in trade and other payables
192,955
555,937
Income tax paid
(30,034)
(9,783)
Net cash flows used in operating activities
(814,315)
(277,917)
Investing activities
Loan facilities advanced to joint venture undertakings
(392,000)
(40,000)
Interest received
1,481
823
Net cash used in investing activities
(390,519)
(39,177)
Financing activities
Proceeds from loan facilities
2,000,000
-
Net cash received from financing activities
2,000,000
-
Net increase/(decrease) in cash and cash equivalents
795,166
(317,094)
Translation adjustment
(2,617)
6,865
Cash and cash equivalents at the beginning of the year
9,389
319,618
Cash and cash equivalents at the end of the year
11
801,938
9,389
Notes to the Preliminary Financial Statements
For the year ended 31 December 2018
1. Basis of Accounting and Presentation of Financial Information
While the financial information included in this announcement has been prepared in accordance with the Group's accounting policies under International Financial Reporting Standards ("IFRS") as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The Company is distributing the full financial statements that comply with IFRS on 28 June 2019.
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2018 or 2017 but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the Company's annual general meeting. The auditors havemade reports under Section 391 of the Irish Companies Act, 2014 in respect of 2017. Their report was unmodified but did draw attention to the material uncertainty relating to going concern. The 2018 audited financial statements will be distributed to shareholders on 28 June 2019.
Adoption of IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations
A number of amendments to IFRS (principally the introduction of IFRS 9 ''Financial instruments'' and IFRS 15 ''Revenue from Contracts with Customers'') became effective for, and have been applied in preparing, these Financial Statements. The introduction of these amendments on 1 January 2018 did not result in material changes to the results or financial position of the Group. An early adoption of amendments to IAS 28 in respect of Long-term Interest in Associates and Joint Ventures the Group resulted to recognised a loss allowance of US$3,109,501 given the uncertainties relating to WorldAce. Full details of the approach taken to the introduction of the new standards and the impact of adoption will be provided in the full financial statements that comply with IFRS which will be distributed to shareholders on 28 June 2019.
2. Going Concern
As described in the Chairman's Statement on page 6 PetroNeft agreed an extension of the loan facility and an increase by US$500,000 up to US$2.5 million with Swedish company Petrogrand AB (in March 2019). The loan matures on 15 December 2019 and is secured by way of a floating charge on the assets of PetroNeft. The original loan facility was used for general corporate purposes and to finance the drilling programme in 2018. The increase is being used for general corporate purposes. This loan facility has provided time and space for a more long-term financing solution to be put in place. Discussions on a further supplementary financing for ongoing general corporate purposes are well advanced and the Company expects to update shareholders in the near future.
The Group has analysed its cash flow requirements through to 30 June 2020 in detail. The cash flows are highly dependent on the successful re-financing of the Petrogrand loan and on future production rates and oil prices achieved in its joint-venture undertaking, WorldAce Investments Limited. Should the Petrogrand loan not be re-financed the Group will need additional funding in order to continue as a going concern.
The Group has put in place cost saving measures and the Board and management have agreed to reduce and defer significant portions of their remuneration. Note 14 outlines the amounts owed to the Board and management in this regard.
In 2018 the Company, in conjunction with its joint venture partners engaged financial advisers to evaluate the disposal of Licence 61 and/or Licence 67. While there remains significant uncertainty that any transaction will be completed, the Company has seen interest from a range of well-financed industry players. The result of the C-4 well which was drilled during 2018 has generated additional interest. The Company has signed non-disclosure agreements and opened data rooms in relation to the potential sale or farmout of both Licence 61 and 67. As there are delaying factors, including regulatory requirements, around transferring licences and in a share for share type transaction, the timeframe to close such a successful transaction could be at least six months following binding agreement between the parties. The Board is confident that one of these options will bring a solution.
2. Going Concern (continued)
The above circumstances represent material uncertainties that may cast significant doubt upon the Group and the Company's ability to continue as a going concern. Nevertheless, after making enquiries, and considering the uncertainties described above, the Directors are confident that the Group and the Company will have adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the annual report and accounts.
Accordingly, these financial statements do not include any adjustments to the carrying amount or classification of assets and liabilities that would result if the Group or Company was unable to continue as a going concern.
3. Segment information
At present the Group has one reportable operating segment, which is oil exploration and production through its joint venture undertakings. As a result, there are no further disclosures required in respect of the Group's reporting segment.
The risk and returns of the Group's operations are primarily determined by the nature of the activities that the Group engages in, rather than the geographical location of these operations. This is reflected by the Group's organisational structure and the Group's internal financial reporting systems.
Management monitors and evaluates the operating results for the purpose of making decisions consistently with how it determines operating profit or loss in the consolidated financial statements.
Geographical segments
Although the joint venture undertakings WorldAce Investments Limited and Russian BD Holdings B.V. are domiciled in Cyprus and the Netherlands, the underlying businesses and assets are in Russia. Substantially all of the Group's sales and capital expenditures are in Russia.
4. Loss per Ordinary Share
Basic loss per Ordinary Share amounts are calculated by dividing net loss for the year attributable to ordinary equity holders of the Parent by the weighted average number of Ordinary Shares outstanding during the year. Basic and diluted earnings per Ordinary Share are the same as the potential Ordinary Shares are anti-dilutive.
2018
2017
Numerator
US$
US$
Loss attributable to equity shareholders of the Parent for basic and diluted loss
(7,561,762)
(3,239,041)
(7,561,762)
(3,239,041)
Denominator
Weighted average number of Ordinary Shares for basic and diluted earnings per Ordinary Share
707,245,906
707,245,906
Diluted weighted average number of shares
707,245,906
707,245,906
Loss per share:
Basic and diluted - US dollar cent
(1.07)
(0.46)
The Company has instruments in issue that could potentially dilute basic earnings per Ordinary Share in the future, but are not included in the calculation for the reasons outlined below:
· Employee Share Options - These potential Ordinary Shares are anti-dilutive for the years ended 31 December 2018 and 2017.
5.
Property, Plant and Equipment
Group
Plant and machinery
US$
Cost
At 1 January 2017
945,868
Translation adjustment
47,060
At 1 January 2018
992,928
Disposals
(324)
Translation adjustment
(152,799)
At 31 December 2018
839,805
Depreciation
At 1 January 2017
802,402
Charge for the year
62,748
Translation adjustment
39,576
At 1 January 2018
904,726
Charge for the year
38,936
Disposals
(324)
Translation adjustment
(141,829)
At 31 December 2018
801,509
Carrying amount
At 31 December 2018
38,296
At 31 December 2017
88,202
6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited
PetroNeft Resources plc has a 50% interest in WorldAce Investments Limited, a joint venture which holds 100% of LLC Stimul-T, an entity involved in oil and gas exploration and the registered holder of Licence 61. The interest in this joint venture is accounted for using the equity accounting method. WorldAce Investments Limited is incorporated in Cyprus and carries out its activities, through LLC Stimul-T, in Russia.
Share of net assets
US$
At 1 January 2017
-
Elimination of unrealised profit on intra-Group transactions
(27,336)
Share of net loss of joint venture for the year
(4,285,833)
Translation adjustment
2,356,702
Credited against loans receivable from WorldAce Investments Limited (Note 8)
1,956,467
At 1 January 2018
-
Elimination of unrealised profit on intra-Group transactions
(1,174)
Share of net loss of joint venture for the year
(6,339,613)
Translation adjustment
(7,760,793)
Credited against loans receivable from WorldAce Investments Limited (Note 8)
14,101,580
At 31 December 2018
-
The balance sheet position of WorldAce Investments Limited shows net liabilities of US$57,974,076 (2017: US$29,773,264) following a loss in the year of US$12,679,226 (2017: US$8,571,665) together with a negative currency translation adjustment of US$15,521,586 (2017: positive US$4,713,403). PetroNeft's 50% share is included above and results in a negative carrying value of US$24,304,633 (2017: US$10,203,053). Therefore, the share of net assets is reduced to Nil and, in accordance with IAS 28 Investments in Associates and Joint Ventures, the amount of US$24,304,633 (2017: US$10,203,053) is deducted from other assets associated with the joint venture on the Balance Sheet which are the loans receivable from WorldAce Investments (see Note 8).
6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited (continued)
Additional financial information in respect of PetroNeft's 50% interest in the equity-accounted joint venture entity is disclosed below:
50% Share of WorldAce Group
2018
2017
US$
US$
Continuing operations
Revenue
15,684,984
13,818,415
Cost of sales
(13,886,409)
(12,636,469)
Gross profit
1,798,575
1,181,946
Administrative expenses
(1,560,913)
(1,546,643)
Operating profit/(loss)
237,662
(364,697)
Write-off of oil and gas properties
(2,048,038)
-
Write-off of exploration and evaluation assets
(2,346)
(13,051)
Finance revenue
64,712
33,176
Finance costs
(4,591,603)
(3,941,261)
Loss for the year for continuing operations before taxation
(6,339,613)
(4,285,833)
Income tax expense
-
-
Loss for the year
(6,339,613)
(4,285,833)
Loss for the year
(6,339,613)
(4,285,833)
Other comprehensive income to be reclassified to profit or loss in subsequent years:
Currency translation adjustments
(7,760,793)
2,356,702
Total comprehensive loss for the year
(14,100,406)
(1,929,131)
Finance costs mainly relate to interest on shareholder loans from Oil India International B.V. and PetroNeft. The details of gross interest accrued on loans to PetroNeft are disclosed in Note 14 Related party disclosures.
The currency translation adjustment results from the movement of the Russian Rouble during the year. All Russian Rouble carrying values in Stimul-T, the 100% subsidiary of WorldAce are converted to US Dollars at each period end. The resulting gain or loss is recognised through other comprehensive income and transferred to the currency translation reserve. The Russian Rouble depreciated against the US Dollar during the year from RUB57.86:US$1 at 31 December 2017 to RUB69.47:US$1 at 31 December 2018.
6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited (continued)
50% Share of WorldAce Group
2018
2017
US$
US$
Non-current Assets
Oil and gas properties
29,786,687
39,312,150
Property, plant and equipment
128,111
184,027
Exploration and evaluation assets
7,804,586
9,321,748
Assets under construction
562,307
824,992
38,281,691
49,642,917
Current Assets
Inventories
848,776
605,240
Trade and other receivables
380,156
282,925
Cash and cash equivalents
225,846
68,613
1,454,778
956,778
Total Assets
39,736,469
50,599,695
Non-current Liabilities
Provisions
(573,540)
(658,513)
Interest-bearing loans and borrowings
(65,682,097)
(61,435,277)
(66,255,637)
(62,093,790)
Current Liabilities
Interest-bearing loans and borrowings
(974,793)
(715,405)
Trade and other payables
(1,493,077)
(2,677,132)
(2,467,870)
(3,392,537)
Total Liabilities
(68,723,507)
(65,486,327)
Net Liabilities
(28,987,038)
(14,886,632)
Interest-bearing loans and borrowings are shareholder loans from Oil India International B.V. and PetroNeft. The details of loans due to PetroNeft are disclosed in Note 14 Related party disclosures.
Capital commitments
2018
2017
US$
US$
Details of capital commitments at the balance sheet date are as follows:
Contracted for but not provided in the financial statements
60,710
466,114
6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited (continued)
Future minimum rentals payable under non-cancellable operating leases at the balance sheet date are as follows:
2018
2017
US$
US$
Within one year
76,971
65,570
After one year but not more than five years
333,355
244,391
More than five years
513,455
421,508
923,781
731,469
The above capital commitments in the joint venture are incurred jointly with Oil India International B.V. The Group has a 50% share of these commitments.
7. Equity-accounted Investment in Joint Venture - Russian BD Holdings B.V.
PetroNeft Resources plc has a 50% interest in Russian BD Holdings B.V., a joint venture which holds 100% of LLC Lineynoye, an entity involved in oil and gas exploration and the registered holder of Licence 67. The interest in this joint venture is accounted for using the equity accounting method. Russian BD Holdings B.V. is incorporated in the Netherlands and carries out its activities in Russia.
Share of net assets
US$
At 1 January 2017
-
Share of net loss of joint venture for the year
(381,654)
Translation adjustment
194,339
Credited against loans receivable from Russian BD Holdings BV (Note 8)
187,315
At 1 January 2018
-
Elimination of unrealised profit on intra-Group transactions
(12,117)
Share of net loss of joint venture for the year
(508,757)
Translation adjustment
(695,463)
Credited against loans receivable from Russian BD Holdings BV (Note 8)
1,216,337
At 31 December 2018
-
The balance sheet position of Russian BD Holdings B.V. shows net liabilities of US$3,848,446 (2017: US$1,440,006) following a loss in the year of US$1,017,514 (2017: US$763,308) together with a negative currency translation of US$1,390,926 (2017: positive US$388,678). PetroNeft's 50% share is included above and results in a negative carrying value of US$1,936,340 (2017: US$720,003). Therefore, the share of net assets is reduced to Nil and, in accordance with IAS 28 Investments in Associates and Joint Ventures, the amount of US$1,936,340 (2017: US$720,003) is deducted from other assets associated with the joint venture on the Balance Sheet which are the loans receivable from Russian BD Holdings B.V. (Note 8).
7. Equity-accounted Investment in Joint Venture - Russian BD Holdings B.V. (continued)
Additional financial information in respect of PetroNeft's 50% interest in the equity-accounted joint venture entity is disclosed below:
50% Share of Russian BD Holdings B.V. Group
2018
2017
US$
US$
Revenue
-
-
Cost of sales
-
-
Gross profit
-
-
Administrative expenses
(104,256)
(94,626)
Operating loss
(104,256)
(94,626)
Finance revenue
520
259
Finance costs
(405,021)
(287,287)
Loss for the year for continuing operations before taxation
(508,757)
(381,654)
Taxation
-
-
Loss for the year
(508,757)
(381,654)
Loss for the year
(508,757)
(381,654)
Other comprehensive income to be reclassified to profit or loss in subsequent years:
Currency translation adjustments
(695,463)
194,339
Total comprehensive loss for the year
(1,204,220)
(187,315)
Finance costs comprise of interest on shareholder loans from Belgrave Naftogas B.V. and PetroNeft. The details of gross interest accrued on loans to PetroNeft are disclosed in Note 14 Related party disclosures.
50% Share of Russian BD Holdings B.V. Group
2018
2017
US$
US$
Non-current assets
4,993,522
4,370,482
Current assets
238,093
12,048
Total assets
5,231,615
4,382,530
Non-current liabilities
(6,393,622)
(4,981,608)
Current liabilities
(762,216)
(120,925)
Total liabilities
(7,155,838)
(5,102,533)
Net Liabilities
(1,924,223)
(720,003)
7. Equity-accounted Investment in Joint Venture - Russian BD Holdings B.V. (continued)
Future minimum rentals payable under non-cancellable operating leases at the balance sheet date are as follows:
2018
2017
US$
US$
Within one year
3,939
2,194
After one year but not more than five years
18,840
8,775
More than five years
52,006
26,416
74,785
37,385
Capital commitments
2018
2017
US$
US$
Details of capital commitments at the balance sheet date are as follows:
Contracted for but not provided in the financial statements
78,406
-
8.
Financial assets at amortised cost
2018
2017
US$
US$
Loans to WorldAce Investments Limited (Note 14)
59,161,041
55,474,668
Less: accumulated share of WorldAce Investments Limited losses (Note 6)
(24,304,633)
(10,203,053)
Loss allowance
(3,109,501)
-
31,746,907
45,271,615
Loans to Russian BD Holdings B.V. (Note 14)
5,715,176
4,887,890
Less: accumulated share of Russian BD Holdings B.V. losses (Note 7)
(1,936,340)
(720,003)
3,778,836
4,167,887
35,525,743
49,439,502
The Company has granted a loan facility to its joint venture undertaking WorldAce Investments Limited of up to US$45 million. This loan facility is US$ denominated and unsecured. Interest currently accrues on the loan at USD LIBOR plus 6.0% but the Company has agreed not to seek payment of interest until 2020 at the earliest. The loan is set to mature on 31 December 2025. As at 31 December 2018 the loan was fully drawn down. The realisation of financial assets of $31.7m in respect of WorldAce is dependent on the continued successful development of economic reserves which is subject to a number of uncertainties including the ability to raise finance, future rates of oil production and future international oil prices to continue to successfully generate revenue from the assets or the monetisation of the asset through a sale or farmout.
8. Financial assets at amortised cost (continued)
The loan from the Company to Russian BD Holdings B.V. is repayable on demand. Interest currently accrues on the loan at USD LIBOR plus 5.0% per annum. The group drilled the Cheremshanskoye No. 4 well in 2018. The board believe that the successful well has great potential as it tested oil at 450 bopd and has demonstrated the potential of Licence 67.
The realisation of financial assets of US$3.8m in respect of Russian BD Holdings B.V. is ultimately dependent on the successful development of reserves as outlined above in relation to Cheremshanskoye, which is subject to a number of uncertainties including the ability to finance the well development and bringing the assets to economic maturity and profitability or the monetisation of the asset through a sale or farmout.
9.
Inventories
2018
2017
US$
US$
Materials
6,547
21,908
6,547
21,908
10.
Trade and other receivables
2018
2017
US$
US$
Receivable from joint ventures (Note 14)
170,627
503,527
Prepayments
17,883
61,359
Advances to contractors
758
1,676
Other receivables
60,012
21,039
249,280
587,601
Other receivables are non-interest-bearing and are normally settled on 60-day terms. Amounts owed by subsidiary undertakings are interest-bearing. Interest is charged at 10%.
11.
Cash and Cash Equivalents
Group
2018
2017
US$
US$
Cash at bank
801,938
9,389
801,938
9,389
Bank deposits earn interest at floating rates based on daily deposit rates. Short-term deposits are made for varying periods of between one day and one month depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates.
12. Share capital
2018
2017
€
€
Authorised
1,000,000,000 (2017: 1,000,000,000) Ordinary Shares of €0.01 each
10,000,000
10,000,000
10,000,000
10,000,000
Allotted, called up and fully paid equity
Number of Ordinary Shares
Called up share capital US$
At 1 January 2017
707,245,906
9,429,182
At 1 January 2018
707,245,906
9,429,182
At 31 December 2018
707,245,906
9,429,182
13.
Trade and other payables
2018
2017
US$
US$
Trade payables
428,734
570,476
Trade payables to joint ventures (Note 14)
104,115
212,442
Corporation tax
55,016
54,898
Other taxes and social insurance costs
42,918
83,305
Accruals and other payables
1,142,000
795,293
1,772,783
1,716,414
The Directors consider that the carrying amount of trade and other payables approximates their fair value. Trade and other payables are non-interest-bearing and are normally settled on 60-day terms. Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs.
14. Related party disclosures
Transactions with joint ventures
PetroNeft Resources plc had the following transactions with its joint ventures during the years ended 31 December 2018 and 2017:
Group
Russian BD Holdings BV Group
WorldAce Investments Limited Group
US$
US$
Receivable by PetroNeft Group at 1 January 2017
4,080,882
44,444,591
Advanced during the year
360,251
-
Transactions during the year
142,086
1,798,417
Interest accrued in the year
270,773
3,238,839
Payments for services made during the year
(480,723)
(2,019,374)
Share of joint venture's translation adjustment
(187,315)
(1,956,467)
Translation adjustment
32,962
5,665
At 1 January 2018
4,218,916
45,511,671
Advanced during the year
439,600
-
Transactions during the year
315,053
1,551,260
Interest accrued in the year
387,686
3,686,373
Payments for services made during the year
(309,505)
(1,758,280)
Share of joint venture's translation adjustment
(1,216,337)
(14,101,580)
Translation adjustment
(16,419)
(6,682)
At 31 December 2018
3,818,994
34,882,762
Balance at 31 December 2017 comprised of:
Loans receivable (Note 8)
4,167,887
45,271,615
Trade and other receivables
51,029
452,498
Trade Payables
-
(212,442)
4,218,916
45,511,671
Balance at 31 December 2018 comprised of:
Loans receivable (Note 8)
3,778,836
34,856,408
Trade and other receivables
40,158
130,469
Trade and other payables
-
(104,115)
3,818,994
34,882,762
14. Related party disclosures (continued)
Remuneration of key management
Key management comprise the Directors, the Vice Presidents of Business Development and Operations of the Company and the consulting fees paid to HGR Consulting Limited for the services of the CFO. Their remuneration and fees during the year were as follows:
Remuneration of key management
2018
2017
US$
US$
Compensation of key management
1,064,724
1,103,224
Contributions to defined contribution pension plan
48,947
52,693
Consulting fees (HGR Consulting - see below)
324,115
304,556
1,437,786
1,460,473
The following amounts, which are included in the above, were owed to key management and former CEO Dennis Francis at 31 December 2018 and 2017:
Remuneration, fees and expenses due to Directors who were in office during the year
607,468
424,564
Remuneration due to other key management
133,354
122,946
Consulting fees (HGR Consulting - see below)
193,219
276,570
934,041
824,080
Details of transactions between the Group and other related parties are disclosed below.
Transactions with HGR Consulting Limited
Paul Dowling, Secretary and Chief Financial Officer of PetroNeft (until 31 January 2019), provided his services through HGR Consulting Limited ("HGR") from May 2016. Services provided by HGR during 2018 amounted to US$324,115 (2017: US$304,556). An amount of US$193,219 was owed to HGR at 31 December 2018 (2017: US$276,570).
Transactions with Petrogrand AB
Petrogrand AB is a related party by virtue of Maxim Korobov, a director of PetroNeft, being a significant shareholder of Petrogrand AB. In 2018 the Company agreed a loan facility for up to US$2m with Petrogrand AB. The loan facility is secured by way of a floating charge on the assets of the Company, carries an interest of US$ Libor plus 9% and has the original maturity date of 31 December 2018. This loan facility was fully drawn down in 2018. In March 2019, the parties have agreed an increase in the facility by US$500,000 and a revised maturity date of 15 December 2019. Further detail is contained in Note 15. The following are the details of this transaction in 2018:
Petrogrand AB
2018
US$
Loan facility maximum amount
2,000,000
Loan drawdowns during the year
2,000,000
Interest accrued but not yet paid
116,825
Amount due to Petrogrand AB at 31 December
2,116,825
In 2018 Granite Construction LLC (100% subsidiary of PetroNeft) purchased tubing from Petrogrand Exploration and Production (100% subsidiary of Petrogrand AB) for US$97,458. The amount due was fully paid in 2018.
15. Important Events after the Balance Sheet Date
In January 2018 PetroNeft agreed a loan facility for up to US$2 million with Swedish company Petrogrand AB ("Petrogrand") secured on the assets of PetroNeft. The loan facility was fully drawn down in 2018 and was used to finance the drilling of the successful C-4 well and for general corporate purposes. In March 2019 the parties have agreed an increase in the facility by US$500,000 to US$2.5 million and a revised maturity date of 15 December 2019 (which may be extended by mutual consent of the parties). The revised terms include the potential entitlement to bonus payments of US$2.5 million per Licence if either or both Licence 61 or Licence 67 are sold before 31 December 2020.
16. Board approval
This announcement was approved by the Board of Directors of PetroNeft Resources plc on 20 June 2019.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDFR FMMBTMBITTAL
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