TIDMJKX
RNS Number : 6652M
JKX Oil & Gas PLC
01 August 2017
JKX Oil & Gas plc ('JKX' or the 'Company')
Half-Yearly Results
For the six months ended 30 June 2017
Highlights
-- Executed Phase 1 of the appraisal program at Rudenkivske
field and completed several enhancement projects in Ukraine
-- Completed workover of well 25 in Russia
-- Restarted production in Hungary after a break of more than 3
years
-- Average production decreased by 17.3% at 8,598 boepd (2016:
10,393 boepd)
-- Restructured and extended the short-term bond liabilities
-- Commenced negotiations to resolve legal disputes with the
Ukrainian Government
-- Significant changes at the Board level following the Annual
General Meeting
Key Financials
-- Revenue: $38.0m (2016: $35.4m)
-- Other cost of sales: $12.6m (2016: $9.7m)
-- Loss from operations before tax and exceptional costs $2.2m
(2016: $2.8m loss)
-- Exceptional costs $3.1m (2016: $3.1m)
-- Loss for the period: $7.7m (2016: $10.1m loss)
-- Loss per share: 4.46 cents (2016: loss 5.86 cents)
-- Operating cash flow: $4.0m (2016: $7.8m)
-- Capital expenditure: $10.4m (2016: $2.2m)
-- Total cash balance: $4.2m (31 December 2016: $14.3m)
Outlook
-- Analysis of results of Phase 1 of Rudenkivske appraisal
program and preparation for Phase 2 in Ukraine
-- Progress of field development using best working and
technical practices from North America adapted to Ukraine
-- Successful completion of well 5 workover to increase gas
production in Russia
-- Workover of well Hn-1 in Hungary and search for farm-in
partner
-- Amicable settlement of the legal disputes with the Ukrainian
Government
-- Review of different options to raise external financing to
enable execution of our strategy
Acting CEO, Victor Gladun commented:
"During the first half of the year, we have started implementing
the Field Development Plans, completed Phase 1 of the appraisal
program in the Rudenkivske field in Ukraine, completed well 25
workover in Russia and restructured the significant short-term bond
liabilities.
On the Board level, continued disputes between major
shareholders and the Board resulted in a change of the Executive
Directors for the second time in 18 months. The Board is actively
looking for new Executive and Non Executive Directors. I have taken
on the role of Acting CEO to secure a smooth transition. Tom Reed
acted as Advisor to the Board and Advisor to the Acting CEO and
Russell Hoare served as Acting CFO from the date of the Annual
General Meeting ("AGM") on 30 June 2017 until 31 July 2017 to help
with the transition. Irrespective of changes in the management
team, the Company will continue to seek to mitigate its litigation
risks and potential liabilities with the Ukrainian Government,
execute on Field Development Plans, and establish opportunities for
long-term growth".
For further information please contact EM Communications:
Stuart Leasor
leasor@em-comms.com
T: +44 20 3709 5711
M: +44 7703 537721
Jeroen van de Crommenacker
crommenacker@em-comms.com
T: +44 20 3709 5713
M: +44 7887 946719
Chairman's statement
In the last six months, the development plans laid out by your
Board in the 2016 Annual Report have been pursued, with mixed
results. The period has also been characterized by continued
disputes between major shareholders and the Board, resulting in a
change in the executive directors for the second time in 18 months.
The plans to navigate the current uncertainties are set out below
but our commitment to shareholders continues to be based on
transparent communication, the reduction of needless cost and
increasing efficiency and production.
Performance
In the first half of the year, average production decreased by
17.3% to 8,598 boepd with a focus away from enhancements projects
and resources committed instead to the appraisal program in
Ukraine, the results of which are discussed in the Chief
Executive's Statement. The Company has focused on tight control
over cash, enabling the funding of the appraisal program in
Ukraine, significant workover activity in Russia and the
commencement of production in Hungary after a 3-year break.
International oil and gas prices in the last six months have
remained volatile around historically low levels. The 17.3%
decrease in production offset by improvement in prices translates
into a 7.3% increase in half-year revenue to $38.0 million. This is
addressed more fully in the Financial Review.
Ukrainian legal cases
For claims relating to 2010 amounting to approximately $11.3
million (including interest and penalties), Poltava Petroleum
Company ('PPC') filed an appeal to the Supreme Court in Ukraine
('SCU') in March 2017. The SCU refused to accept the appeal for a
hearing and PPC has no current grounds upon which to file further
appeals in this particular case. In the meantime, on 1 June 2017,
the Kharkiv Appellate Administrative Court upheld the decision of
another court in Poltava which found in favour of PPC on technical
grounds and cancelled the tax notification decisions against the
Company. The tax authorities have filed an appeal against this
decision and until we have the result of that appeal, we will
continue to hold the accounting provision for the full amount on
the balance sheet of the Company.
Court action in relation to the 2015 claims, amounting to
approximately $25.9 million, was postponed while the result of the
Hague arbitration was unknown (see below) and since then PPC has
been successful with continuing to suspend any action while we seek
a settlement with the Ukrainian Government (also discussed
below).
During 2016, searches were undertaken by the Ukrainian police at
the office of PPC and the homes of two of our employees. The
searches undertaken were the result of an investigation into claims
of alleged underpayment of taxes which have been made against PPC
by a local prosecutor. In January 2017 there were further searches
at both the Poltava and Kyiv offices of PPC, followed by requests
for documentation.
PPC cooperated fully with the authorities and believes that it
is in full legal compliance with the matters outlined in the police
requests and that the various searches and requests are completely
unjustified. We referred the matter to the British and US Embassies
in Kyiv to ask for their assistance in engaging with the relevant
authorities to resolve the situation.
In respect of the Company's international arbitration against
Ukraine to recover production related taxes in Ukraine ('Rental
Fees') paid by PPC since 2011 and, damages to the business, the
tribunal dismissed the main element of the Company's claim for
payment of excessive Rental Fees on 6 February 2017. The tribunal
ruled that Ukraine was found not to have violated its treaty
obligations in respect of excessive levying of such taxes, but
awarded the Company damages of approximately $11.8 million plus
interest and costs of $0.3 million in relation to subsidiary
claims. In response to this result, the Government of Ukraine
submitted an appeal to the UK High Court against the damages award
to which the Company has responded. The High Court will consider
the appeal in the second half of 2017.
While disappointed with the overall result of the arbitration,
we are confident that the Company will be successful defending the
appeal in the High Court. The conclusion of these proceedings
presents an opportunity to draw a line under historical legal
issues and engage with the Government of Ukraine to settle this
award and the local tax issues and return focus to key operational
matters. We have commenced this settlement process in earnest, will
re-engage with it once the new management team has been appointed,
and in the meantime continue to defend our local legal cases. While
we are optimistic regarding the outcome of these matters, given the
magnitude of the legal provisions recorded in respect of the 2010
and 2015 claims, we have considered the risk to the Group's ability
to continue as a going concern further in Note 2 to the financial
information.
Your Board
Following the replacement of the entire Board on 28 January 2016
and the appointment of further independent directors during the
first half of 2016, the composition of the Board was compliant with
the UK Corporate Governance Code in respect of the number of
independent Non Executive Directors, although the Board remained
concerned with the presence of shareholder representatives as I set
out in my letter to shareholders ahead of our Annual General
Meeting ("AGM") on 30 June 2017.
Prior to that meeting, our largest shareholder, Eclairs Group
Limited ("Eclairs"), had make public requests to remove all
directors from the Board and appoint their own representative, but
having been informed that this would not comply with UK law,
limited their request to a resolution to remove Tom Reed, the Chief
Executive Officer ("CEO"), Russell Hoare, the Chief Financial
Officer ("CFO") and Vladimir Rusinov, a representative of Proxima
Capital Group ("Proxima"), from the Board. As obliged by law, the
Company included such resolutions in the agenda for the AGM.
Following this request from Eclairs, Proxima, the Company's 20%
shareholder with two representatives on the Board, withdrew their
support for the current executive and non-executive members of the
Board.
Despite the overwhelming support of all other shareholders who
voted at the AGM, the combined votes of Eclairs and Proxima
resulted in the removal of the CEO and the CFO. One Proxima
representative was also removed from the Board. The appointment of
an Eclairs representative was, however, rejected through the
combined votes of Proxima and most of the smaller shareholders. The
independent directors and myself are disappointed at this turn of
events and, as promised in my letter to shareholders prior to the
AGM, are unlikely to serve on the Board for the long term.
The result of this very complicated process is that your current
Board consists of myself as Chairman, two independent directors and
one representative of Proxima. The Board's independence and
integrity has been maintained for now and we have set ourselves the
task of finding replacements for the CEO and CFO. We have also
commenced the search for alternate candidates for the Chairman and
independent director roles, following the tendering of my
resignation along with those of the two independent non-executive
directors. We aim to complete such searches within the next three
months to ensure effective continuing management of the Company.
The General Director of our Ukrainian operating subsidiary, Victor
Gladun, has taken on the role of Acting CEO for this period and up
until 31 July Tom Reed acted as Advisor to the Board and Advisor to
the Acting CEO and Russell Hoare continued as Acting CFO to assist
with the transition.
Staff
Following significant staff reductions across the Group during
2016, the increased operational activity in Ukraine, Russia and
Hungary and the uncertainties over governance and management of the
Company in recent weeks, it is a testament to the commitment and
resilience of our employees that the Company continues to operate
effectively.
I'd like to thank all of our employees for their continued hard
work and faith in the Company.
Outlook
Given the current situation, my responsibility as Chairman is to
execute a swift and successful search for a new executive team and
new independent board members so that the Company can move forward,
and the interests of all shareholders can continue to be protected
in accordance with the highest standards of corporate governance.
We will update you in due course as we progress this
initiative.
Chief Executive's statement
Performance highlights
The performance highlights for the period are:
-- Average production of 8,598 boepd (2016: 10,393 boepd)
-- Executed Phase 1 of the appraisal program at Rudenkivske
field in Ukraine
-- Completed several enhancement projects in Ukraine, workover
of well 25 in Russia, and sidetrack of well Hn-2 in Hungary
-- Completed the bond restructuring which was negotiated in late
2016, thereby removing a material near-term liability
For the six months to 30 June 2017, production decreased by
17.3% from the same period as last year to 8,598 boepd.
Gas production in Russia was lower by 25% due to well-25
workover which was offline for approximately four months, partly
compensated for by several successful acid stimulations on
producing wells during the period.
Gas production in Ukraine declined by 7% period-on-period and
oil production has declined by 22% due to fewer enhancements of
existing well stock while human and physical resources were
diverted to the preparation for, and execution of, the first phase
of the Rudenkivske appraisal and stimulation program.
The Company also resumed production and sales in Hungary after a
break of more than three years.
Ukraine
Average production in Ukraine in the first half of 2017
decreased by 8.5% period-on period to 3,766 boepd (2016: 4,114
boped).
PPC's workover rig was engaged in well preparation for the
appraisal frac program, and the operations and technical teams of
the Company were focused on designing and implementing the
Rudenkivske appraisal frac program which reduced the number of
enhancement projects possible during the first half of 2017.
However, the Company has continued to systematically calculate the
technical potential of existing well stock to close gaps between
actual and potential production and the enhancement program was
restarted in June.
The first phase of the appraisal program for the Rudenkivske
field included workovers of 4 previously plugged and abandoned
wells located in an area of the license with contingent resources.
The team completed 12 hydraulic fracturing stages within just 28
days, including inter-field mobilizations, significantly beating
previous time and cost performances by the Company in Ukraine.
Initial flowback results for these wells were disappointing -
although three out of four wells had gas shows in fractured
intervals, previously unidentified water influx preventing
commercial gas production at least until water-bearing zones are
isolated. Currently the opportunities for lifting of gas in these
wells are being evaluated and the information gathered during these
stages are being used to redesign the second phase of
stimulations.
Russia
Average production from the Koshekhablskoye field in the first
half of 2017 was 4,654 boepd (2016: 6,222 boepd), a 25% decrease on
the average for the first half of 2016 mainly due to a planned
production tubing replacement workover on well-25. The well was
offline for approximately four months, much longer than initially
anticipated, due to a fire on the workover rig and the time
required by the rig operator to procure the necessary replacement
equipment.
Periodic acid treatments have been performed during the period
on well-27 and well-25 to maintain production rates.
The plans to replace damaged tubing in well-5 are currently
being reviewed. Successful completion of a well-5 workover should
bring production in Russia closer to 40 MMcfd during the second
half of 2017.
Hungary
In Hungary, the sidetrack of well Hn-2 was successfully
completed in January 2017 and gas sales commenced in February 2017
after a break of more than three years. Average production in the
first half of 2017 was 178 boepd.
A low-cost opportunity to workover and recomplete well Hn-1 on
the same field was identified and is currently being planned.
Out of six Mining Plots (production licences) in Hungary
covering 200 square kilometers in which JKX has a 100% equity
interest, Em d V (Mezokeresztes) and Tiszavasvári IV plots present
the most potential. As the Company continues to search for a
farm-in partner to develop these fields, these investment
opportunities will be ranked among others throughout the Group and
pursued accordingly.
Slovakia
In Slovakia, drilling of three exploration wells was
continuously delayed throughout 2016 and first half of 2017 as
discussions of community and environmental issues continued with
local activists and governmental licensing bodies. The completion
of a series of Environmental Impact Assessments on the identified
well sites should facilitate the ongoing permitting process, with a
view to exploration drilling starting in Q4 2017.
Current and future activity
The current portfolio of assets of JKX consists mostly of mature
fields in Russia and Ukraine, with few early-stage assets. When we
developed the Field Development plans last year, we identified that
the only field in our portfolio in Ukraine with significant growth
opportunities is the Rudenkivske field with estimated 2.3 Tcf of
gas in place and 0.6 Tcf of 2C contingent resources.
We have designed a program to appraise the field and unlock
these resources and convert them to reserves minimizing both the
costs and time required to complete the program, and to allow for
adjustments if we need to make them. The selected approach involves
re-entering Soviet-era plugged and abandoned wells which, on one
hand, provides access to the reservoirs at much lower cost compared
with drilling a new well, yet, on the other hand, bears various
technical risks related to re-entering and re-completing old wells
with unknown well-bore integrity while relying on log and
production data gathered several decades ago. We have initially
split the appraisal program into two phases keeping these risks in
mind.
Although executed to best international standards and with
significant improvement made compared to our own history, results
of Phase one of the appraisal program showed that our understanding
of the complex geology of the Rudenkivske field is incomplete and
needs thorough reassessment prior to spending larger amounts of
capital on drilling. Work completed to date provided valuable data
to adjust our plans for Phase two of the appraisal campaign and
further full-field development plan.
Alongside further work on appraisal of the Rudenkivske field, we
will continue to identify and rank investment opportunities across
our portfolio and seek internal and external capital to implement
them in the most efficient manner. Additionally, we will continue
to evaluate opportunities to optimize our existing portfolio of
assets and to acquire assets for future growth.
Operational review
Group production
For the six months to 30 June 2017, the Company produced 8,598
boepd, comprised of 46.9 MMcfd of gas and 779 bpd of oil and
condensate, a decrease of 17.3% on the same period in 2016. The
majority of this decline was due to Well 25 being worked over for 4
months, a well that produces approximately 1,500 boepd. The
workover on this well has now been completed.
Ukraine
Novomykolaivske licences
Production
Average production from the Novomykolaivske group of fields in
the first half of 2017 was 2,508 boepd comprising 10.9 MMcfd of gas
and 699 bpd of oil and condensate, a 3% decrease on the average for
the first half of 2016.
Development drilling and other well activity
No drilling took place in the first half of 2017 as the focus
was on preparing wells for and carrying out the Phase 1 fracturing
campaign. In order to carry out the technically challenging
workovers of the old wells there have been as many as 3 workover
rigs operating at the same time. The duration of the workovers
decreased dramatically in the reporting period allowing us to
release the two leased workover rigs (ZJ-20 and Cooper rig) leaving
PPC's own workover rig (TW100) to continue. The following workovers
and well interventions were carried out in the first half of
2017:
Workovers for the Phase 1 frac campaign were as follows:
-- 19R, 25R and 6R were worked over using the TW100 rig. 19R
took a total of 105 days and was cleaned out to a depth of 4,800m.
25R took a total of 20 days and cleaned out to a depth of 4,249 m.
6R took 29 days and was cleaned out to a depth of 4,395m.
-- 10R was worked over using the ZJ-20, it took a total of 77
days and was cleaned out to a depth of 4,542m and plugged back to
4,490m.
-- The ZJ-20 was used to run monobores in 19R, 10R and 25R. The
TW100 ran a monobore in 6R.
-- R27 workover was started with the Cooper rig however at a
depth of 1,835m the well was suspended due to the well being
excluded from Phase 1.
-- Diagnostic Fracture Injection Test ('DFIT') or Data Frac were
carried out on 19R and 10R using a local pump truck. With a DFIT
performed on R25 using Schlumberger's pumps.
Ignativske South waterflood project:
-- The deepening of IG124 was attempted using the Cooper rig.
Unfortunately the workover could not be completed due to excessive
losses and the inability to block these losses using cement. Prior
to the rig down of the Cooper rig the cement plug across the
pre-drilled liner was drilled out to enable re-perforating in the
future if required. The shallowest perforations were left open for
reservoir monitoring and water injection. Once the reservoir
pressure increases through injection to a level of about 1,000 psi
the deepening of this well will be reconsidered.
-- An Electric Submersible Pump ('ESP') was run in IG110 using a
crane which enabled water injection into the southern part of
Ignativske to re-start with a total of 80,000 stb injected into
IG126 and IG124 from late January to late February at which time
the pump broke due to excessive sand production. A screen and
repaired pump were finally installed in late June when the water
injection was re-started at a rate of 4,000 stb/d in IG126.
Enhancements and behind pipe:
-- 17m of pre-frac perforations were added in 6R which produced
at an initial rate of 8 MMscf/d before declining to 0.3 MMscf/d in
3 weeks.
-- An ESP was run into IG128 using the workover rig. This
increased the oil rate from 38 to 132 stb/d of oil before declining
to a monthly average of 116 stb/d of oil.
-- NN22 was worked over using the TW100, due to gas evident
during the workover, testing was carried out without adding new
perforations. NN22 produced 8 MMscf/d, before declining to 1.4
MMscf/d.
-- Wireline operations have focussed on the clearance of wax and
salt build up in the production tubing of a number of wells. A
sustained programme of wax clearance has helped stabilise oil
production.
Rudenkivske Phase 1 appraisal and stimulation campaign
A project to execute the Rudenkivske appraisal and stimulation
program was ongoing for more than 6 months and involved the
following main stages - field data analysis, ranking of wells,
workover and preparation of wells and stimulation of those
wells.
A total of 31 old wells in the Rudenkivske field were reviewed
for suitability for fracturing based on the current state of the
completion. 13 wells were short-listed based on petrophysical
interpretation (two of them were consequently perforated in the end
of 2016). Remaining wells were reviewed on a reservoir by reservoir
basis to select suitable fracture intervals. After modelling the
fracs in FracPro, production forecasts were generated and wells
were ranked. Additional consideration was given to location of the
wells to allow us to delineate the reservoir for the purpose of
de-risking contingent resources.
Prior to the frac campaign numerous studies were conducted in
order to enhance performance of the fracs. To determine the least
damaging fluid for our reservoirs rheology and retained
permeability tests were carried out on fluids from two suppliers at
various concentrations and water tests from three different
sources. Friction loop tests were conducted to determine the
friction profile of the fluid while pumping. The retained
permeability tests had to be conducted on R103 core from the
Devonian due to the difficulty in getting access to the heritage
core from legacy operators. Cement Bond Log ('CBL') tests were run
and barrel tests were conducted using all the available guns to
confirm ability to effectively perforate through the monobore and
the old casing with the limited amount of perforating guns
available in country.
In late May, the Group commenced its stimulation program on the
Rudenkivske field in Ukraine and we have now completed Phase 1 of
the campaign with a total of 12 stages pumped within 28 days.
For 19R, 5 stages were completed within 6 days with a total of
324 tonnes of proppant placed. Upon initial flowback of the well we
observed a mixture of injected and formation water which restricted
the flow of gas. Several Production Logging Tools ('PLT") were run
which identified the water producing interval however at present
focus is on maintaining the clean-up prior to sealing off the water
zone.
For 10R, the initial 3 stages were completed in the lower
Tournaisian formation within 5 days with a total of 221 tonnes of
proppant placed before the well was put on flowback. We observed
non-commercial volumes of gas constrained by flow of formation
water, and we decided to plug and abandon the well.
For 25R, the first smaller stage was completed in the
Tournaisian interval with a total of 35 tons of proppant placed in
formation. Upon the initial flowback and fracture clean up the
steady flow of gas with no formation water was observed and a
larger fracture treatment for the same Tournaisian zone was
performed. A total of 80 tons of proppant was placed in the same
interval technically proving the possibility of re-fracturing in
the future.
Due to continuing petrophysical uncertainties a Pulse Neutron
Neutron ('PNN') log was run in 6R prior to fracturing to help
better identify gas zones in the future. Prior to pumping the main
stage, the small skin-frac was placed to test and verify zone
saturation and make adjustments to the main frac design. Upon
confirmation of gas saturation and absence of formation water the
main stage was pumped with a total of 30 tons of proppant placed in
the Devonian formation.
As flow rates from the above completed zones were significantly
below initial forecasts, we have decided to complete the Phase 1 of
the campaign. We have now fracture stimulated only 10 out of 48
zones initially identified. Initial findings will be used to fine
tune the rest of the program.
Prior to this appraisal campaign, the Group conducted
stimulation in 2013 on well R103 when a total of 10 stages were
completed, with 673 tonnes of proppant placed, but the program took
67 days as opposed to 28 days. Initial results show radical
improvement in efficiency and execution which has been possible by
applying North American standards of planning and work practices
and combining our local teams with experienced North American
expertise.
Tests are planned early in Q3 to determine petrophysical
constants across our 3 key reservoir intervals, from core only
recently available, in order to help refine the petrophysics
interpretation which was found to be the source of most uncertainty
in the Phase 1 campaign.
Production facilities
Routine operations at the main processing facility, the LPG
plant and the oil loading facility continued smoothly throughout
the period.
Extensive field operations were carried out to enable the
fracturing of the Phase 1 wells which included: flowline
connections, roads, water pits and pads able to accommodate a frac
fleet amongst other items.
Elyzavetivske Production Licence
Production
Average production from the Elyzavetivske field in the first
half of 2017 was 1,257 boepd comprising 7.4 MMcfd of gas and 19 bpd
of condensate, a 20% decrease on the average for the first half of
2016.
Drilling and development activity
PPC successfully acquired permission to open up both EM53 and
EM205 to production. EM53 produced an initial gas rate of 1.5
MMscf/d before eventually stabilising at 0.7 MMscf/d. EM205
produced an initial gas rate of 0.6 MMscf/d prior to declining to
0.2 MMscf/d.
Further development activity is being reviewed.
Production facilities
The Elyzavetivske production facility continues to operate
efficiently and there have been no further changes following the
upgrade at the end of 2014 and the addition of compression in 2015.
The plant now has sufficient capacity to accommodate future
production from additional wells that are currently being planned
and no further modifications are expected. The plant has now been
connected with the grid which has led to a small reduction in fuel
gas usage.
Russia
Koshekhablskoye licence
Production
Average production from the Koshekhablskoye field in the first
half of 2017 was 4,654 boepd comprising 27.6 MMcfd of gas and 50
bpd of condensate, a 25% decrease on the average for the first half
of 2016.
Workover and well stimulation activity
Due to a leak in the tubing of Well 25 the well was worked over
to pull the carbon steel tubing and replace it with chrome. Monthly
acid treatment has been carried out using coiled tubing on well 27
resulting in a gas rate of between 8 and 16 MMscf/d. Production
from crestal well-20 has declined slightly from 13 to 12.6 MMscf/d
during the period and is still relatively stable despite the fish
preventing us from entering the well with coiled tubing to carry
out acid jobs. The deep east-flank well-15 continues to cycle
between 0.3 MMcfd and 1.5 MMcfd, with fluid build-up being cleared
periodically.
Facilities
The plant shut down planned for Q3 2017 has been cancelled as
all required plant changes were carried out last year.
Licence obligations
The best way to assess the Callovian reservoir and satisfy
related obligations is being reassessed together with local design
institute.
Hungary
JKX operates six Mining Plots (production licences) in Hungary
covering 200 sq km and which are 100% owned by Riverside Energy
Kft, the Company's wholly-owned Hungarian subsidiary:
Hajdúnánás 28 sq
IV km
Hajdúnánás V 7 sq km
Tiszavasvári IV 41 sq km
Em d V 100 sq km
Pely I 18 sq km
Jaszkiser II 6 sq km
The licence terms will enable JKX to carry out appraisal and
development activity over a 35 year period and JKX is currently
seeking a farm-in partner, or partners, to participate in the
development of these assets.
In Hungary, the sidetrack of well Hn-2 within the Hajdúnánás
Field (Hajdúnánás IV Mining Plot) was completed successfully in
January 2017 and gas sales commenced in February 2017 after a break
of more than three years. Production continued throughout first
half of 2017.
A low-cost opportunity to workover and recomplete well Hn-1 on
the same field was identified and is planned for the second half of
2017.
Of the other five Mining Plots Em d V (Mez keresztes) and
Tiszavasvári IV present the most potential. Further development of
these assets will require a 3D seismic acquisition, exploration
drilling program comprised of up to 2 wells, and a redevelopment
program of up to 5 wells for Mez keresztes, and drilling of the
Tiv-12 and possible Tiv-10 and Tiv-8 appraisal wells for
Tiszavasvári IV.
As the Company continues to search for a farm-in partner to
develop these fields, these investment opportunities will be ranked
among others throughout the Group and pursued accordingly.
Slovakia
Exploration
JKX holds a 25% equity interest in the Svidnik, Medzilaborce,
Snina and Pakostov exploration licences in the Carpathian fold belt
in north east Slovakia.
The drilling of three exploration wells was continuously delayed
throughout 2016 and the first half of 2017 as discussions regarding
community and environmental issues continued with local activists
and governmental licensing bodies. The completion of a series of
Environmental Impact Assessments on the identified well sites
should facilitate the ongoing permitting process, with a view to
exploration drilling starting in Q4 2017.
Financial performance
First Second First
half half half
Production summary 2017 2016 2016
Production
Oil (Mbbl) 141 174 180
Gas (Bcf) 8.5 9.8 10.2
----------------------- ------ ------ --------
Oil equivalent (Mboe) 1,556 1,810 1,881
----------------------- ------ ------ ------
Daily production
Oil (bopd) 779 945 993
Gas (MMcfd) 46.91 53 56
----------------------- ------ ------ ------
Oil equivalent (boepd) 8,598 9,833 10,393
----------------------- ------ ------ ------
First Second First
half half half
2017 2016 2016
Operating results $m $m $m
Revenue
Oil 7.1 9.6 6.2
Gas 28.7 26.4 27.9
Liquefied petroleum gas 2.2 2.5 1.3
38.0 38.4 35.4
----------------------------------------- ------------------- ------- ------
Cost of sales
Exceptional item - production based
taxes (1.8) (24.3) -
Exceptional item - provision for
impairment of oil and gas assets - (2.0) -
Other cost of sales (12.6) (9.8) (9.7)
Depreciation, depletion and amortisation
- oil and gas assets (10.1) (8.1) (10.7)
Other production based taxes (9.0) (9.1) (8.6)
Total cost of sales (33.5) (53.3) (29.0)
----------------------------------------- ------------------- ------- ------
Gross profit before exceptional
items 6.3 11.4 6.4
----------------------------------------- ------------------- ------- ------
Gross profit/(loss) after exceptional
items 4.5 (14.9) 6.4
----------------------------------------- ------------------- ------- ------
Operating expenses
Disposal of property, plant and
equipment (0.6) - -
Exceptional items (1.3) (1.4) (3.1)
Other administrative expenses (6.6) (12.6) (9.6)
(Loss)/gain on foreign exchange (1.3) (0.1) 0.5
----------------------------------------- ------------------- ------- ------
Loss from operations before exceptional
items (2.2) (1.1) (2.8)
----------------------------------------- ------------------- ------- ------
Loss from operations after exceptional
items (5.3) (29.0) (5.8)
----------------------------------------- ------------------- ------- ------
First Second First
half half half
Earnings 2017 2016 2016
Net loss ($m) (7.7) (27.0) (10.1)
Net loss before exceptional items
($m) (5.0) (0.5) (7.0)
Basic weighted average number of
shares in issue (m) 172 172 172
Loss per share before exceptional
items (basic, cents) (2.89) (0.25) (4.09)
Loss per share after exceptional
items (basic, cents) (4.46) (15.70) (5.86)
Pre-exceptional earnings before
interest, corporation tax,
depreciation and amortisation(1)
($m) 8.3 7.4 8.4
----------------------------------------- ------------------- ------- ----------
First Second First
half half half
Realisations 2017 2016 2016
Oil (per bbl) $57.45 $49.65 $39.92
Gas (per Mcf) $3.67 $2.94 $2.96
LPG (per tonne) $497.53 $496 $254
---------------- ------- ------ ------
First Second First
half half half
Cost of production ($/boe) 2017 2016 2016
Production costs (excluding exceptional
item) $7.84 $5.33 $5.43
Depreciation, depletion and amortisation $6.46 $5.90 $5.67
Production based taxes $5.76 $5.21 $4.57
----------------------------------------- ----- ------ -----
First Second First
half half half
Cash flow 2017 2016 2016
Cash generated from operations ($m) 4.0 9.2 7.8
Operating cash flow per share (cents) 2.3 5.4 4.5
-------------------------------------- ----------------- ------ -----
First Second First
half half half
Statement of Financial Position 2017 2016 2016
Total cash(2) ($m) 4.2 14.3 18.6
Borrowings ($m) 16.3 16.8 23.8
Net debt(3) ($m) (12.1) (2.5) (5.2)
Net debt to equity (%) (7.9) (1.6) (2.9)
Return on average capital employed(4)
(%) (9.3) (11.0) (11.4)
Additions to property, plant and
equipment/intangible assets ($m)
- Ukraine 8.3 2.6 1.5
- Russia 1.7 (0.3) 0.6
- Other 0.4 1.2 0.1
-------------------------------------- ------ ------ ------
Total 10.4 3.5 2.2
-------------------------------------- ------ ------ ------
1. Pre-exceptional earnings before interest, tax, depreciation
and amortisation ('EBITDA') is a non-IFRS measure and calculated
using loss from operations of $5.3m (2016: $5.8m) and adding back
depreciation, depletion and amortisation and exceptional items of
$13.6m (2016: $14.2m). EBITDA is an indicator of the Group's
ability to generate operating cash flow that can fund its working
capital needs, service debt obligations and fund capital
expenditures.
2. Total cash is Cash and cash equivalents plus Restricted Cash.
3. Net cash/(debt) is Total cash less Borrowings (excluding derivatives).
4. Return on average capital employed is the annualised loss for
the period divided by average capital employed.
Financial review
Results for the period
The Group recorded a loss of $7.7m for the period which is
significantly lower than the loss for the same period in 2016. In
2016, the $10.1m loss was after exceptional charges of $3.1m
incurred due to replacement of the Board in January 2016. For the
current period, the loss is stated after exceptional charges of
$1.4m relating to the provision for severance payments to the
Executive Directors following the Company's AGM on 30 June 2017, a
negative movement of $1.5m (net of deferred taxes) in provision for
production based taxes in Ukraine and a gain of $0.2m in the
onerous lease provision. Therefore, the loss before exceptional
items has significantly improved compared to the same period last
year by $2.0 m. The Company's financial performance for the first
half of 2017 has been positively impacted by improved oil and gas
prices, offset by lower production as discussed in detail in the
operational review and covered below.
Revenue
Despite the 17.3% production decrease across the Group, the
improved commodity prices and commencement of sales in Hungary
resulted in a 7.3% increase in half-year revenues to $38.0m (2016:
$35.4m) (see revenues bridge chart).
http://www.rns-pdf.londonstockexchange.com/rns/6652M_-2017-7-31.pdf
2017 2016 Change %
Group revenues $m $m $m Change
Ukraine 28.9 25.6 3.3 12.9
Russia 7.9 9.7 (1.8) (18.6)
Hungary 1.1 - 1.1 100.0
--------------- ---- ---- ------ --------
Total 38.0 35.4 2.6 7.3
--------------- ---- ---- ------ --------
Realisations 2017 2016 Change % Change
Ukraine
Gas ($/Mcf) 6.57 5.77 0.80 13.9
Oil ($/bbl) 57.45 39.92 17.53 43.9
LPG ($/tonne) 497.53 254.70 242.83 95.3
Russia
Gas ($/Mcf) 1.66 1.50 0.16 10.7
Hungary
Gas ($/Mcf) 6.06 - 6.06 100
Group
Gas ($/Mcf) 3.67 2.94 0.73 24.8
Oil ($/bbl) 57.45 39.92 17.53 43.9
LPG ($/tonne) 497.53 254.70 242.83 95.3
-------------- ------ ------ ------- --------
Average exchange
rates 2017 2016 Change % Change
Russia (RUB/$) 57.84 70.23 12.39 17.6
Ukraine (UAH/$) 26.78 25.65 (1.13) (4.4)
2017 2016 Change
Ukrainian
revenues $m $m $m % Change
Gas 20.0 18.4 1.6 8.7
Oil 6.7 5.9 0.8 13.6
Liquefied
Petroleum
Gas ('LPG') 2.2 1.3 0.9 69.2
Total 28.9 25.6 3.3 12.9
------------- ---- ---- ------ ----------
Ukraine revenues
As the revenue bridge chart demonstrates, one factor affecting
revenues from our Ukrainian business was the decreased production
due to the suspension of enhancement activity in Ukraine in 2017
due to planning and preparation for the stimulation programme on
the Rudenkivske field. Gas sales volumes in Ukraine were 7.6% lower
at 3,453 boepd (2016: 3,737 boepd) as a result of reduced gas
production to 3,766 boepd (2016: 4,114 boepd).
Whilst the realised gas price increased by 16% from an average
of 5,208 UAH per Mcm in 2016 to 6,052 UAH per Mcm in 2017, US
Dollar gas realisations in Ukraine improved only by 13.9% from
$5.77/Mcf to $6.57/Mcf due to the 4.4% devaluation of the Hryvnia.
Since the introduction of a new law affecting the Ukrainian gas
market in 2015, gas prices are more closely following global market
trends. The increase in gas realisations is explained by higher
prices of imported gas from Europe compared to 2016.
Oil realisations also improved from $39.92/bbl in 2016 to
$57.45/bbl in 2017 which is in line with Brent movement from an
average of $41.21/bbl during the 1H 2016 to $52.28/bbl during the
1H 2017. Ukrainian realisations are now higher than Brent, with an
average premium of $5/bbl in 2017, due to the removal of illegal
cheap products from the Ukrainian market and robust local demand
for oil exceeding local supply.
LPG sales were affected by both volume declines, associated with
a reduced volume of gas produced, and an improvement in the market
price achievable in Ukraine. The average price increased to
$497.53/tonne (2016: $254.70/tonne) due to tight controls over
customs clearance imposed by certain market players which resulted
in a limited access of cheaper LPG products. However, the strong
operational performance of the LPG plant enabled it to contribute
$2.2m (2016: $1.3m) to Group revenue.
Russia revenues
Russian gas sales made up 54% of the Group's volumes sold (2016:
56%). Gas production in Russia was lower by 25% to 4,654 boepd
(2016: 6,222 boepd) largely due to the workover of well 25 in
Russia and as the revenue bridge chart shows, this was the largest
negative factor affecting Group revenues in the period.
Gas prices in Russia increased by 10.7% to $1.66/Mcf (2016:
$1.50/Mcf) due to appreciation of the Russian Rouble which
compensated a 9.5% reduction to the Rouble gas sales price from 1
July 2016 obtained from our sole customer. We negotiated a 5-year
"take or pay" contract to give us more certainty over cash flow
from our customer, albeit at a lower price. On 1 July 2017 Russian
gas realisations increased by 3.9% which is in line with the
overall market trend for industrial customers.
Hungary revenues
Hungarian gas and condensate sales commenced in February 2017
and achieved 169 boepd which made up 2% of the Group's volumes sold
(2016: nil).
Loss from operations
Loss from operations before tax and exceptional charges for the
period was $2.2m (2016: loss $2.8m). This was the result of a $2.6m
increase in Group revenues and a $3.0m decrease in the Group's
administrative expenses offset by an increase of $2.7m in cost of
sales due mainly to the activity associated with the stimulation
programme on Rudenkivske field. There was also a negative variance
of $1.8m in foreign exchange loss and $0.6m in loss on disposal of
property, plant and equipment.
Cost of sales
The $2.7m increase in cost of sales before exceptional charges
to $31.7m (2016: $29.0m) comprises the following items:
-- an increase in Ukrainian operating costs by $2.2m, or
47.1%;
-- an increase in Russian operating costs by $0.2m, or 3.2%;
-- an increase in Hungarian operating costs by $1.0m due to
commencement of commercial sales while operating costs in Hungary
in 2016 were classified as administrative expenses;
-- a reduction in the depreciation, depletion and amortisation
('DD&A') charge of $0.6m;
-- an increase in production based taxes by $0.4m;
-- a decrease in Rest of World costs of $0.5m.
The increase in Russian operating costs of $0.2m is largely due
to the Rouble appreciation which increased the US Dollar reported
cost base for Russia throughout the year. Russian property tax
charges remained the same at $0.4m (2016: $0.4m).
Ukrainian operating costs increased by $2.2m due to higher costs
necessary for preparation for stimulation programme and more
significant staff costs, which is in line with the strategy of
strengthening the technical team in Kiev with high calibre
professionals from the United States, including temporary staff
involved during the stimulation campaign. Operating expenses in
2017 also comprise one-off cost of purchase of gas on the market
($0.4m) to fulfil gas commitments of PPC in June which were agreed
and approved before the beginning of the month. PPC committed to
this level of sales in June due to an over-optimistic production
forecast of the stimulation programme results whereas the actual
levels were lower than expected.
Operating costs in Rest of World decreased mainly due to staff
reductions in the technical team in London during 2016 for which
the benefits are now beginning to show against comparative
numbers.
The DD&A charge reduced by $0.6m, largely as a result of
lower production levels in Ukraine and Russia.
Production based taxes (before exceptional charges) increased by
$0.4m, which are considered further below.
Disposal of property, plant and equipment ('PP&E')
A loss on disposal of PP&E of $0.6m was recognised in
Russia. These items were deemed obsolete as a result of a
stock-take in November 2016.
Exceptional charges
Exceptional charges of $3.1million comprised mainly the
following:
-- a $1.4 million of provision for severance costs to the Chief
Executive Officer and Chief Financial Officer who were both removed
from the Board following the Company's AGM on 30 June 2017;
-- a $1.8 million movement in provision for production taxes in
relation to ongoing Rental Fee disputes;
-- a gain of $0.2m due to unwinding of an onerous lease
provision.
Administrative expenses
Excluding the exceptional costs, other administrative expenses
have decreased by $3.0m to $6.6m (2016: $9.6m) as a result of the
following:
-- A decrease in legal and professional fees of $2.7 million
mainly due to:
-- decrease in arbitration legal and court fees of $2.6m due to
completion of the Hague main case;
-- less legal assistance required in Ukraine related to the
court cases in respect of 2010 and 2015 Rental Fees ($0.4m);
and
-- offsetting increase in professional services of $0.3m
incurred in respect of updating and executing the Field Development
Plans.
-- Increase in marketing and development costs of $0.4m due to
involvement of investor relations/ government relations agencies to
raise awareness of our strategy in Ukraine, the United States and
the United Kingdom; and
-- A decrease of $0.7m in staff and other costs across the Group
mainly as a result of our cost savings initiatives. We were able to
significantly reduce the costs of the Company's London
headquarters, including the Board costs. Head office headcount has
been reduced by 45% and we now occupy one floor of the building
where we previously occupied four floors. Headcount reductions in
both Ukraine and Russia were initiated during the latter half of
2016.
Net finance charges
Finance income of $0.2m comprises income from bank deposits of
$0.2m (2016: $0.4m). 2016 income also included a gain on the
repurchase of convertible bonds of $0.5m.
Finance costs have decreased by $0.9m to $1.5m (2016: $2.4m)
comprising convertible bond interest. Despite an increase in
interest rate, overall the liability significantly reduced as a
result of the redemption of $10.0m of the Bonds in February 2016
and repurchase and subsequent cancellation of Bonds with face value
of $2.2m, $1.4m and $6.4m, made in June, September and October
2016, respectively.
A $0.1m charge (2016: $1.3m) arising from fair value movement on
the derivative liability represents the change in fair value of the
conversion option associated with the convertible bond.
Taxation
The total tax charge for the period was $1.0m (2016: $1.5m)
comprising a current tax charge of $1.9m (2016: $1.4m) and a
deferred tax credit of $0.9m (2016: charge $0.1m).
The increase in current tax charge to $1.9m reflects higher
profitability in Ukraine. In Ukraine, the corporate tax rate for
2017 and 2016 was 18%.
Production taxes
Production based tax expense for the period increased to $9.0m
(2016: $8.6m), which has been recognised in cost of sales, due to
commencement of production in Hungary and higher gas production
taxes in Ukraine.
In Ukraine, production tax expense (before exceptional charges)
increased by $0.2m from $7.7m to $7.9m mainly due to an increase in
the average border price which is the basis for calculating the
royalties (UAH6,115 per mcm in 2017 compared to UAH5,028 per mcm in
2016). Oil production tax is lower due to reduced royalty rate from
a maximum from 45% to 29% and lower oil production.
We can now attempt to draw a line under our claim against the
Ukrainian Government for overpayment of production taxes as in
February 2017 the international arbitration tribunal issued its
Award on the Company's claims and awarded the Company damages of
approximately $11.8 million plus interest, and costs of $0.3
million in relation to subsidiary claims, although the main part of
our claim was rejected by the tribunal. In March 2017 the Company
received a notice by Ukraine's Ministry of Justice to the High
Court of the United Kingdom naming JKX as a defendant in an
application seeking to set aside the arbitration award against
Ukraine and in favour of JKX. The hearing is planned for October
2017. In the meantime, we have initiated a dialogue with Ukrainian
Government to put aside this historic claim and focus on future
investment in the Ukrainian energy sector. Please refer to Note 14
for detail on legal cases.
In Russia, production taxes were $0.8m (2016: $0.8m). The gas
and condensate mineral extraction tax ('MET') rate applicable in 1H
2017 remained approximately the same at 312 Roubles/Mcm (2016: 312
Roubles/Mcm). The formula for MET is based on gas prices, gas
production as a share of total hydrocarbon output and complexity of
gas reservoirs (depletion rates, depth of the producing horizons
and geographical location of producing fields). Our Russian
subsidiary, YGE, is entitled to a 50% discount based on the depth
of our gas reservoirs.
In addition to production taxes, YGE is subject to a 2.2%
property tax which is based on the net book value of its Russian
assets as calculated for property tax purposes. This amounted to
$0.4m in 2017 (2016: $0.4m) and is included in other cost of
sales.
In Hungary, production taxes were $0.1m (2016: nil).
Loss for the period
Loss for the period before exceptional charges was $5.0m (2016:
$7.0m). Basic loss per share before exceptional items was 2.89
cents (2016: 4.09 cents). Basic loss per share after exceptional
items was 4.46 cents (2016: 5.86 cents).
Cash flows
Cash generated from operations was $4.0m (2016: $7.8m). The
decrease is a result of the $0.2m increase in loss from operations
after exceptional items for the reasons described above, adjusted
for movement in exceptional items of $3.1m, a $0.6m decrease in
non-cash DD&A, a $8.7m cash outflow due to changes in working
capital and other charges of $2.0m for the period.
Income tax paid in the period increased to $1.9m (2016: $0.01m),
due to higher profits earned by our Ukrainian subsidiary. Interest
paid during the period comprised $0.6m (2016: $1.4m), in respect of
financing charges on the convertible bond which significantly
reduced as a result of restructuring.
Following a commencement of the Field Development Plan, group
capital spend for the first half-year significantly increased to
$10.3m (2016: $2.2m).
Net cash outflow from financing activities in the period mainly
relates to the $1.9m of accretion payment to the bondholders in
February 2017 (2016: $10.9m redemption of the Bond in February 2016
and $1.7m used to repurchase 11 convertible bonds).
No dividends were paid to shareholders in the period (2016:
nil).
The resultant decrease in cash and cash equivalents in the
period before adjusting for foreign exchange effects was $10.2m
(2016: $7.6m).
Liquidity
The Group employs a number of financial instruments to manage
the liquidity associated with the Group's operations. These include
cash and cash equivalents, together with receivables and payables
that arise directly from our operations.
Bonds with a principal amount of $10.0m were redeemed on 19
February 2016 in addition to an early redemption premium of $0.9m
in accordance with the terms and conditions of the bond. In order
to reduce the ongoing liability and to improve the Company's
ability to restructure the Bonds, repurchases, and subsequent
cancellation, amounting to $2.2 million, $1.4 million and $6.4
million were made in June, September and October 2016,
respectively, utilising improved operating cash flows within the
Group. These purchases were all made at discounts to face
value.
In January 2017 the Company was able to restructure the
remaining $16 million of Bonds resulting in the liability being
amortised over three years starting from February 2018 with a
payment of $2.6 million made in February 2017. The financing of the
Bonds are now within the operating cash flow capabilities of the
Company and the business can move forward with its development
plans subject to resolution of the Group's legal issues in Ukraine.
Further information on the terms and conditions of the Bonds is
included in Note 8 to the consolidated interim financial
statements.
Outlook
In 2016 we focused on reducing costs and implementing a robust
capital allocation policy which ensured maximised cash flows from
our assets and improvements to the Company's profitability and
liquidity. We announced that drawing a line under our legal claims
and shareholders' issues will allow us focus on our main activity
in 2017 - investment in oil and gas production.
As a result of completing Field Development Plans (FDPs) for
Ukraine and Russia, we embarked on an exciting stimulation
programme in Ukraine which was a significant success from an
execution and efficiency perspective, although disappointing from a
production point of view.
Once we have interpreted the results of stimulation programme,
we will revise our plans in Ukraine. We are planning for all steps
necessary to restart our drilling programme in late 2017 - early
2018. In Russia, we are planning to commence a workover of well 5
and believe that we have the technical expertise and financial
resources to successfully complete this project which will enable
an increase in sustainable production.
Following the results of the AGM on 30 June 2017, I have
remained as acting CFO for a transition period and supported the
Board in developing and financing the Group's strategy ensuring
that our short-term and long-term liabilities, including the bond
payment of $6.9m in February 2018, are successfully managed and
planned for. My transition period has now been completed and I'd
like to take this opportunity to thank the employees of JKX for
their tireless commitment. It has been a privilege to work with
them and I wish them every success for the future of the
Company.
Risks and uncertainties
The Group continuously monitors major strategic, operational,
financial and external risks it faces and determines the
appropriate course of action to manage these risks. Key risks and
uncertainties which may impact the Group's performance have not
changed materially from those stated on pages 29 to 32 of the
Group's 2016 Annual Report, apart from the points made below
reflecting the current transition in executive management.
Financial risk management
The main financial risk faced by the Group is non-availability
of funds to meet business needs and debt servicing requirements
(liquidity risk). The significant factors outside of management
control that could adversely impact cash flows, profits and
liquidity of the Group remain the ongoing legal disputes concerning
Rental Fees in Ukraine, along with international oil and gas prices
and risks associated with operating in Ukraine and Russia given the
short-term economic outlook for these countries remains
uncertain.
These are critical factors to consider when addressing an issue
of whether the Group is a going concern (see Note 2 to the
condensed consolidated interim financial information).
Principal risks and uncertainties for the remaining six months
of 2017 include:
Tax legislation
Starting from 2015, the Company had lodged several claims under
the Agreement between the United Kingdom and Ukraine for the
Promotion and Reciprocal Protection of Investments (the "UK-Ukraine
BIT") with regards to excessive royalties and production taxes
('Rental Fees') paid by the Company's subsidiary Poltava Petroleum
Company ('PPC') plus damages. In February 2017, the tribunal ruled
that Ukraine had not violated its treaty obligations in respect of
excessive levying of such taxes, but awarded the Company damages of
approximately $11.8 million plus interest and costs of $0.3 million
in relation to subsidiary claims. In March 2017 the Company
received a notice by Ukraine's Ministry of Justice to the High
Court of the United Kingdom naming JKX as a defendant in an
application seeking to set aside the arbitration award in favour of
the Company. The High Court will consider the appeal in October
2017.
In parallel to the claims made against Ukraine under the
UK-Ukraine BIT, the Company has persistently defended its position
in Ukrainian courts regarding the Rental Fee charges levied for
2010 and 2015. The Company's Ukrainian subsidiary, PPC, has
recognised total provisions of $37.2 million (including interest
and penalties, see Note 14). Whilst the tribunal ruling poses
additional challenges for the Company, in particular regarding the
2015 claims (totalling $25.9 million), the Company will continue to
defend its position in the Ukrainian courts in all outstanding
cases.
At the same time, the Company has begun a dialogue with the
Government of Ukraine in order to satisfy the terms of the
arbitration award and reach a mutually beneficial outcome.
Reservoir performance
The hydrocarbon reservoirs that we operate in Ukraine and Russia
generate the cash flow that underpins the Group's growth. These
reservoirs may not perform as expected, exposing the Group to lower
profits and less cash to fund planned development.
Existing production from our mature fields at the
Novomykolaivske Complex in Ukraine requires a high level of
maintenance and intervention to minimise natural production
decline. In Russia, acidization of producing wells and other well
maintenance procedures are required from time to time to maintain
stable production levels.
Our investment in development projects or workovers of old wells
is subject to uncertainty inherent in exploring and developing
hydrocarbon reserves and resources. Accurate reservoir performance
forecasts are critical in achieving the desired economic returns
and to determine the availability and allocation of funds. In
modelling reservoir performance, we rely on multiple sources of
data, some of which are decades old (reflecting the time when
certain wells were originally drilled) and therefore could be not
accurate. If reservoir performance is lower than anticipated,
sufficient financing may reflect on planned investment in other
development projects which will result in lower production, profits
and cash flows.
Commodity prices - Russia and Ukraine
Company policy is not to hedge commodity price exposure on oil,
gas, LPG or condensate and therefore any change in prices would
have a direct effect on the Group's trading results. We are subject
to risk of unfavourable international oil and gas price movements
that can be affected by political developments in Russia and
Ukraine. In Russia the government sets certain gas tariffs to which
the Company's Russian subsidiary, Yuzhgazenergie LLC ('YGE') has
pegged its gas sales price. The tariff has increased by 3.9%
starting from July 2017. The Company is continuously seeking
opportunities to improve its gas realisations.
Ukrainian gas prices have recently been aligned with those
across Europe that exhibit significant volatility and seasonality.
A prolonged period of low gas prices in Ukraine would impact the
Group's liquidity.
Environmental, asset integrity, and safety incidents
As we continue with the development of our oil and gas reserves,
we are exposed to a wide range of significant health, safety,
security and environmental risks that arise as a result of the
geographic spread, operational diversity, regulatory environment
and technical complexity of our exploration and production
activities.
IT threats and cyberattacks, technical failure, non-compliance
with existing standards and procedures, accidents, natural
disasters and other adverse conditions in our operational
locations, could lead to injury, loss of life, damage to the
environment, loss of containment of hydrocarbons and other
hazardous material, as well as the risk of fires and explosions.
Failure to manage these risks effectively could result in loss of
certain facilities, with the associated loss of production, or
costs associated with mitigation, recovery, compensation and fines,
or loss of operating license. The threat of IT and cyberattacks is
particularly evident given the recent global and regional attacks
which have affected many companies and the Company's IT management
is reviewing this risk in particular.
In Russia, YGE maintains a regular dialogue with Rosnedra and
Rosprirodnadzor, the licencing authorities, to ensure that they are
kept informed about the progress of field development and the
associated exploration and reserves determination commitments.
Rosnedra and Rosprirodnazor are fully aware that there are certain
licence commitments under YGE's Koshekhablskoye licence which have
not been met and have issued YGE with notices to this effect. YGE
is addressing these issues and expects to resolve them in 2017.
In April 2017 during a planned workover of well 25 in Russia
there were delays in the workover due to a fire on the workover
rig. The fire was limited to the rig itself and was promptly put
out by the rig crew without any injuries.
Health, safety and the environment is a priority of the Board
who are involved in the planning and implementation of continuous
improvement initiatives. Operations in Ukraine, Russia and Hungary
all have a dedicated HSECQ teams, HSE Management Systems modelled
on the ISO 9000 series, OHSAS 18001 and ISO 14001. Appropriate
insurances by reputable insurers are maintained to manage the
financial exposure to any unexpected adverse events that would
affect normal operations.
Executive Management Changes
Following the Company's AGM on 30 June 2017, the Chief Executive
Officer, Thomas Reed, and Chief Financial Officer, Russell Hoare,
were both removed from the Board and commenced working a limited
transition period during which Mr Reed acted as an Advisor to the
Board and to the Acting CEO and Mr Hoare served as Acting CFO. That
transition period has now expired as recently announced. Until a
permanent replacement is appointed, Victor Gladun, the General
Director of the Company's Ukrainian subsidiary, has been appointed
Acting CEO.
During such a transition, where roles and responsibilities are
being transferred and changed, many of the risks and uncertainties
outlined above become more apparent. The Board is very aware of
this increased risk during the transition period and is closely
monitoring the relevant control mechanisms within the Company to
ensure this period of uncertainty is navigated with minimum
disruption to the business.
Statement of Directors' responsibilities
The Directors confirm that, to the best of their knowledge, this
condensed consolidated interim financial information has been
prepared in accordance with IAS 34 as adopted by the European
Union, and that the interim management report includes a fair
review of the information required by the Disclosure and
Transparency Rules 4.2.7R and 4.2.8R, namely:
-- an indication of important events that have occurred in the
first six months of 2017 and their impact on the condensed set of
financial information, and a description of the principal risks and
uncertainties for the remaining six months of the financial year;
and
-- material related party transactions in the first six months
of 2017 and any material changes in related party transactions
described in the last Annual Report.
A list of current Directors is maintained on the JKX Oil &
Gas plc website www.jkx.co.uk.
On behalf of the Board
Paul Ostling
Non Executive Chairman
31 July 2017
Independent review report to JKX Oil & Gas plc
Report on the condensed consolidated interim financial
information
Our conclusion
We have reviewed JKX Oil & Gas plc's condensed consolidated
interim financial information (the "interim financial statements")
in the half-yearly report of JKX Oil & Gas plc for the 6 month
period ended 30 June 2017. Based on our review, nothing has come to
our attention that causes us to believe that the interim financial
statements are not prepared, in all material respects, in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
Emphasis of matter
Without modifying our conclusion on the interim financial
statements, we have considered the adequacy of the disclosure made
in note 2 to the interim financial statements concerning the
group's ability to continue as a going concern. At 30 June 2017,
the Group has recorded a provision of $37.2m in relation to
additional Rental Fees which may become immediately due and payable
in Ukraine as a result of unfavourable outcomes in one or more of
the ongoing court proceedings. This condition, along with the other
matters explained in note 2 to the financial statements, indicates
the existence of a material uncertainty which may cast significant
doubt about the group's ability to continue as a going concern. The
interim financial information does not include the adjustments that
would result if the group was unable to continue as a going
concern.
What we have reviewed
The interim financial statements comprise the:
-- Condensed consolidated statement of financial position as at
30 June 2017;
-- Condensed consolidated income statement for the period then
ended;
-- Condensed consolidated statement of comprehensive income for
the period then ended;
-- Condensed consolidated statement of cash flows for the period
then ended;
-- Condensed consolidated statement of changes in equity
(unaudited) for the period then ended; and
-- explanatory notes to the interim financial statements.
The interim financial statements included in the half-yearly
report have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 2 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The half-yearly report, including the interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the
half-yearly report in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the half-yearly report based on our review.
This report, including the conclusion, has been prepared for and
only for the company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the half-yearly
report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
31 July 2017
a) The maintenance and integrity of the JKX Oil & Gas plc
website is the responsibility of the directors; the work carried
out by the auditors does not involve consideration of these matters
and, accordingly, the auditors accept no responsibility for any
changes that may have occurred to the interim financial statements
since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
GROUP FINANCIAL STATEMENTS
Condensed consolidated income statement
Six months
to
Year
30 June to
31 December
2017 2016
Six months
to 30
(unaudited) June (audited)
2016
(unaudited)
Note $000 $000 $000
Revenue 4 37,985 35,361 73,848
----------------------------------------- ---- ------------- ------------- -------------
Cost of sales
----------------------------------------- ---- ------------- ------------- -------------
Exceptional item -production
based taxes 13 (1,824) - (24,340)
Exceptional item - provision
for impairment of oil and gas
assets - - (2,000)
Production based taxes (8,957) (8,595) (17,737)
Depreciation, depletion and amortisation (10,051) (10,669) (18,791)
Other cost of sales (12,642) (9,747) (19,499)
Total cost of sales (33,474) (29,011) (82,367)
----------------------------------------- ---- ------------- ------------- -------------
Gross profit/(loss) 4,511 6,350 (8,519)
----------------------------------------- ---- ------------- ------------- -------------
Disposal of property, plant and
equipment 5 (578) - -
Exceptional items 13 (1,256) (3,055) (4,484)
Other administrative expenses (6,633) (9,566) (22,182)
----------------------------------------- ---- ------------- ------------- -------------
Total administrative expenses (8,467) (12,621) (26,666)
(Loss)/gain on foreign exchange (1,342) 451 431
----------------------------------------- ---- ------------- ------------- -------------
Loss from operations before exceptional
items (2,218) (2,765) (3,930)
----------------------------------------- ---- ------------- ------------- -------------
Loss from operations after exceptional
items (5,298) (5,820) (34,754)
----------------------------------------- ---- ------------- ------------- -------------
Finance income 233 898 1,836
Finance cost (1,535) (2,376) (4,636)
Fair value movement on derivative
liability 9 (68) (1,289) (599)
Loss before tax (6,668) (8,587) (38,153)
Taxation - current (1,865) (1,385) (1,341)
Taxation - deferred
- before the exceptional items 486 (117) 1,209
- on the exceptional items 364 - 1,170
----------------------------------------- ---- ------------- ------------- -------------
Total taxation (1,015) (1,502) 1,038
----------------------------------------- ---- ------------- ------------- -------------
Loss for the period/year attributable
to equity shareholders of the
parent company (7,683) (10,089) (37,115)
----------------------------------------- ---- ------------- ------------- -------------
Basic loss per 10p ordinary share
(in cents)
-before exceptional items 15 (2.89) (4.09) (4.34)
-after exceptional items (4.46) (5.86) (21.56)
Diluted loss per 10p ordinary
share (in cents)
-before exceptional items 15 (2.89) (4.09) (4.34)
-after exceptional items (4.46) (5.86) (21.56)
GROUP FINANCIAL STATEMENTS
Condensed consolidated
statement of comprehensive income
Six months
to
Year
30 June to
31 December
2017 2016
Six months
to 30
(unaudited) June (audited)
2016
(unaudited)
$000 $000 $000
Loss for the period/year (7,683) (10,089) (37,115)
Other comprehensive income to
be reclassified to loss or profit
in subsequent periods when specific
conditions are met
Currency translation differences 3,502 14,128 19,634
------------------------------------------ ------------- ------------- -------------
Other comprehensive income for
the period/year, net of tax 3,502 14,128 19,634
------------------------------------------ ------------- ------------- -------------
Total comprehensive (loss)/income
for the period/year attributable
to equity shareholders of the
parent company (4,181) 4,039 (17,481)
------------------------------------------ ------------- ------------- -------------
GROUP FINANCIAL STATEMENTS
Condensed consolidated
statement of financial position
As at As at
30 June 30 June As at
31 December
2017 2016 2016
(unaudited) (unaudited) (audited)
Note $000 $000 $000
Assets
Non-current assets
Property, plant and equipment 5 196,037 196,635 194,510
Intangible assets 5 8,319 7,918 7,706
Other receivable 6 3,206 3,471 3,277
Deferred tax assets 18,311 15,876 18,724
------------------------------ ---- ------------- ------------- -------------
225,873 223,900 224,217
------------------------------ ---- ------------- ------------- -------------
Current assets
Inventories 4,948 5,075 4,585
Trade and other receivables 4,517 6,761 4,174
Restricted cash 7 218 259 201
Cash and cash equivalents 7 4,011 18,365 14,067
------------------------------ ---- ------------- ------------- -------------
13,694 30,460 23,027
------------------------------ ---- ------------- ------------- -------------
Total assets 239,567 254,360 247,244
------------------------------ ---- ------------- ------------- -------------
Liabilities
Current liabilities
Trade and other payables (10,652) (17,288) (15,687)
Borrowings 8 (5,280) (23,816) (16,795)
Provisions 12 (39,071) (10,481) (34,510)
Derivatives - (1,995) (1,341)
------------------------------ ---- ------------- ------------- -------------
(55,003) (53,580) (68,333)
------------------------------ ---- ------------- ------------- -------------
Non-current liabilities
Provisions 12 (4,601) (4,310) (4,264)
Other payable (3,206) (3,471) (3,277)
Borrowings 8 (11,033) - -
Derivatives 9 (68) - -
Deferred tax liabilities (13,067) (14,671) (14,537)
------------------------------ ---- ------------- ------------- -------------
(31,975) (22,452) (22,078)
------------------------------ ---- ------------- ------------- -------------
Total liabilities (86,978) (76,032) (90,411)
------------------------------ ---- ------------- ------------- -------------
Net assets 152,589 178,328 156,833
------------------------------ ---- ------------- ------------- -------------
Equity
Share capital 11 26,666 26,666 26,666
Share premium 97,476 97,476 97,476
Other reserves (156,409) (165,417) (159,911)
Retained earnings 184,856 219,603 192,602
------------------------------ ---- ------------- ------------- -------------
Total equity 152,589 178,328 156,833
------------------------------ ---- ------------- ------------- -------------
GROUP FINANCIAL STATEMENTS
Condensed consolidated
statement of changes in equity (unaudited)
Attributable to equity shareholders
of the parent
------------------------------------------------------------------------
Other reserves
--------------------------------------
Foreign
Capital currency
Share Share Retained Merger redemption translation
capital premium earnings reserve reserve reserve Total
$000 $000 $000 $000 $000 $000 $000
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
At 1 January
2016 26,666 97,476 229,669 30,680 587 (210,812) 174,266
Loss for the
period - - (10,089) - - - (10,089)
Exchange differences
arising on translation
of overseas operations - - - - - 14,128 14,128
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
Total comprehensive
(loss)/income
attributable
to equity shareholders
of the parent - - (10,089) - - 14,128 4,039
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
Transactions
with equity shareholders
of the parent
Share-based payment
charge - - 23 - - - 23
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
Total transactions
with equity shareholders
of the parent - - 23 - - - 23
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
At 30 June 2016 26,666 97,476 219,603 30,680 587 (196,684) 178,328
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
At 1 January
2017 26,666 97,476 192,602 30,680 587 (191,178) 156,833
Loss for the
period - - (7,683) - - - (7,683)
Exchange differences
arising on translation
of overseas operations - - - - - 3,502 3,502
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
Total comprehensive
(loss)/income
attributable
to equity shareholders
of the parent - - (7,683) - - 3,502 (4,181)
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
Transactions
with equity shareholders
of the parent
Share-based payment
credit - - (63) - - - (63)
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
Total transactions
with equity shareholders
of the parent - - (63) - - - (63)
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
At 30 June 2017 26,666 97,476 184,856 30,680 587 (187,676) 152,589
-------------------------- --------- --------- ---------- --------- ------------ ------------- --------
GROUP FINANCIAL STATEMENTS
Condensed consolidated
statement of cash flows
Six months
to
Year
30 June to
31 December
2017 2016
Six months
to 30
(unaudited) June (audited)
2016
(unaudited)
Note $000 $000 $000
Cash flows from operating activities
Cash generated from operations 17 4,027 7,828 17,038
Interest paid (640) (1,440) (2,392)
Income tax paid (1,864) (6) (10)
-------------------------------------- ---- ------------- ------------- -------------
Net cash generated from operating
activities 1,523 6,382 14,636
-------------------------------------- ---- ------------- ------------- -------------
Cash flows from investing activities
Interest received 233 420 753
Dividend received 80 - -
Proceeds from sale of property,
plant and equipment 266 220 550
Purchase of property, plant and
equipment (10,325) (2,152) (7,366)
Purchase of intangible assets (60) - (90)
-------------------------------------- ---- ------------- ------------- -------------
Net cash used in investing activities (9,806) (1,512) (6,153)
-------------------------------------- ---- ------------- ------------- -------------
Cash flows from financing activities
Restricted cash (17) 53 111
Repayment of borrowings (1,920) (10,856) (10,856)
Repurchase of convertible bonds - (1,692) (9,036)
-------------------------------------- ---- ------------- ------------- -------------
Net cash used in financing activities (1,937) (12,495) (19,781)
-------------------------------------- ---- ------------- ------------- -------------
Decrease in cash and cash equivalents
in the period/year (10,220) (7,625) (11,298)
Effect of exchange rates on cash
and cash equivalents 164 47 (578)
Cash and cash equivalents at
the beginning of the period/year 14,067 25,943 25,943
-------------------------------------- ---- ------------- ------------- -------------
Cash and cash equivalents at
the end of the period/year 7 4,011 18,365 14,067
-------------------------------------- ---- ------------- ------------- -------------
GROUP FINANCIAL STATEMENTS
Notes to the interim financial information
1. General information and accounting policies
JKX Oil & Gas plc (the ultimate parent of the Group
hereafter, 'the Company') is a public limited company listed on the
London Stock Exchange which is domiciled and incorporated in
England and Wales under the UK Companies Act. The registered office
is 6 Cavendish Square, London, W1G 0PD and the principal activities
of the Group are exploration, appraisal, development and production
of oil and gas reserves. The registered number of the Company is
03050645.
The condensed consolidated interim financial information
incorporate the results of JKX Oil & Gas plc and its subsidiary
undertakings as at 30 June 2017 and was approved by the Directors
for issue on 27 July 2017.
This condensed consolidated interim financial information does
not constitute accounts within the meaning of section 434 of the
Companies Act 2006. Statutory accounts for the year ended 31
December 2016 were approved by the Board of Directors on 17 March
2017 and delivered to the Registrar of Companies. The report of the
auditors on those accounts while unqualified contained an emphasis
of matter which drew attention to the existence of a material
uncertainty which may cast significant doubt about the Company's
ability to continue as a going concern.
This condensed consolidated interim financial information has
not been audited, but was the subject of an independent review
carried out by the Company's auditors, PricewaterhouseCoopers
LLP.
2. Basis of preparation
This condensed consolidated interim financial information for
the six months ended 30 June 2017 has been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Conduct
Authority and with IAS 34, 'Interim financial reporting' as adopted
by the European Union. The condensed consolidated interim financial
information should be read in conjunction with the annual financial
statements for the year ended 31 December 2016 which were prepared
in accordance with International Financial Reporting Standards as
adopted by the European Union. A copy of the annual financial
statements is available on the Company's corporate website
(www.jkx.co.uk) or from the Company's registered office.
The Group's business activities, together with factors likely to
affect its future development, performance and position are set out
in the operational and financial review sections of this report.
The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the financial
review section.
Going concern
The majority of the Group's revenues, profits and cash flow from
operations are currently derived from its oil and gas production in
Ukraine, rather than Russia.
The Company's Ukrainian subsidiary, Poltava Petroleum Company
('PPC') has made provision for potential liabilities arising from
separate court proceedings regarding the amount of production taxes
('Rental Fees') paid in Ukraine for certain periods since 2010,
which total approximately $37.2 million (including interest and
penalties, see Note 14 to the interim consolidated financial
information). PPC continues to contest these claims through the
Ukrainian legal system.
In addition, in 2015 and as detailed in Note 14, the Company and
its wholly-owned Ukrainian and Dutch subsidiaries commenced
international arbitration proceedings against Ukraine under the
Energy Charter Treaty and BIT seeking a repayment of Rental Fees
that PPC has paid on production of oil and gas in Ukraine since
2011, in addition to damages to the business.
In February 2017, the international arbitration tribunal ruled
that Ukraine was found not to have violated its treaty obligations
in respect of the levying of Rental Fees but awarded the Company
damages of $11.8 million plus interest, and costs of $0.3 million
in relation to subsidiary claims. No adjustment has been made in
these financial statements to recognise any possible future benefit
to the Company that may result from the tribunal award in the
Company's favour, with the tribunal ruling subject to an appeal
hearing scheduled for in the High Court later in 2017 and
ultimately to enforcement proceedings in Ukrainian courts.
Taking into account the damages awarded to the Company and the
Ukrainian court proceedings against PPC in respect of production
taxes, there is a net shortfall of $25.1 million owed by the Group
to Ukraine. Should PPC lose the claims against it in respect of
production taxes due for 2010 and 2015, and the Ukrainian
Authorities demand immediate settlement, the Group does not
currently have sufficient cash resources to settle the claims and
this would affect its ability to meet its obligations to creditors
and bondholders.
Accordingly, the Group's going concern assessment is sensitive
to the outcome of the production-related tax disputes with the
Ukrainian Government.
The Directors have concluded that it is necessary to draw
attention to the potential impact of the Group becoming liable for
additional Rental Fees in Ukraine as a result of unfavourable
outcomes in one or both of the ongoing court proceedings. It is
unclear whether either or both of these claims against PPC will be
realised and settlement enforced but they are material
uncertainties which may cast significant doubt about the Group's
ability to continue as a going concern.
However, based on the Group's cash flow forecasts, the Directors
believe that the combination of its current cash balances, expected
future production and resulting net cash flows from operations, as
well as the availability of additional courses of action with
respect to financing and/or negotiation with Ukraine for the
settlement of any successful production tax claim, mean that it is
appropriate to continue to adopt the going concern basis of
accounting in preparing the interim consolidated financial
information. The financial information does not include the
adjustments that would result if the Group was unable to continue
as a going concern.
3. Accounting policies
The accounting policies adopted are consistent with those used
in the annual financial statements for the year ended 31 December
2016 and those expected to be applied in the 31 December 2017
annual financial statements. Taxes on income in the interim period
are accrued using the tax rate that would be applicable on expected
total annual earnings. There were no new standards, interpretations
or amendments to standards issued and effective for the period
which materially impacted the Group. Management have commenced an
assessment of the impact of IFRS 9 and IFRS 15, which are both
mandatory from 1 January 2018 and expect to conclude these impact
assessments in the second half of 2017.
4. Segmental analysis
The Group has one single class of business, being the
exploration for, appraisal, development and production of oil and
gas reserves. Accordingly the reportable operating segments are
determined by the geographical location of the assets.
There are four (2016: four) reportable operating segments which
are based on the internal reports provided to the Chief Operating
Decision Maker ('CODM'). Ukraine and Russia segments are involved
with production and exploration; the 'Rest of World' are involved
in exploration, development and production and the UK is the home
of the head office and purchases material, capital assets and
services on behalf of other segments. The 'Rest of World' segment
comprises operations in Hungary and Slovakia.
Transfer prices between segments are set on an arm's length
basis in a manner similar to transactions with third parties.
Segment revenue, segment expense and segment results include
transfers between segments. Those transfers are eliminated on
consolidation.
Segment results and assets include items directly attributable
to the segment. Segment assets consist primarily of property, plant
and equipment, inventories and receivables. Capital expenditures
comprise additions to property, plant and equipment.
Rest Sub
UK Ukraine Russia of World total Eliminations Total
First half 2017 $000 $000 $000 $000 $000 $000 $000
External revenue
Revenue by location
of asset
- Oil - 6,748 267 108 7,123 - 7,123
- Gas - 20,000 7,652 1,035 28,687 - 28,687
- LPG - 2,159 - - 2,159 - 2,159
* Management services/other - 9 7 - 16 16
--------------------------------- -------- -------- -------- --------- -------- ------------ --------
- 28,916 7,926 1,143 37,985 - 37,985
--------------------------------- -------- -------- -------- --------- -------- ------------ --------
Inter segment
revenue
- Management services/other 6,247 - - - 6,247 (6,247) -
--------------------------------- -------- -------- -------- --------- -------- ------------ --------
6,247 - - - 6,247 (6,247) -
-------- -------- -------- --------- -------- ------------ --------
Total revenue 6,247 28,916 7,926 1,143 44,232 (6,247) 37,985
--------------------------------- -------- -------- -------- --------- -------- ------------ --------
Loss before tax
Loss from operations (1,440) (1,737) (1,963) (65) (5,205) (93) (5,298)
Finance income 233 - 233
Finance cost (1,535) - (1,535)
Fair value movement
on derivative
liability (68) - (68)
--------------------------------- -------- -------- -------- --------- -------- ------------ --------
Loss before tax (6,575) (93) (6,668)
--------------------------------- -------- -------- -------- --------- -------- ------------ --------
Total assets 1,526 100,309 121,323 16,409 239,567 239,567
--------------------------------- -------- -------- -------- --------- -------- ------------ --------
Total liabilities (19,182) (56,233) (7,554) (4,009) (86,978) (86,978)
--------------------------------- -------- -------- -------- --------- -------- ------------ --------
First half 2016 UK Ukraine Russia Rest Sub Eliminations Total
$000 $000 $000 of World total $000 $000
$000 $000
External revenue
Revenue by location
of asset
- Oil - 5,920 289 - 6,209 - 6,209
- Gas - 18,424 9,440 - 27,864 - 27,864
- LPG - 1,288 - - 1,288 - 1,288
---------------------------- -------- -------- ------- --------- -------- ------------ --------
- 25,632 9,729 - 35,361 - 35,361
---------------------------- -------- -------- ------- --------- -------- ------------ --------
Inter segment
revenue
- Management services/other 4,094 - - - 4,094 (4,094) -
---------------------------- -------- -------- ------- --------- -------- ------------ --------
4,094 - - - 4,094 (4,094) -
Total revenue 4,094 25,632 9,729 - 39,455 (4,094) 35,361
---------------------------- -------- -------- ------- --------- -------- ------------ --------
(Loss)/profit
before tax
(Loss)/profit
from operations (5,719) 542 (59) (556) (5,792) (28) (5,820)
Finance income 898 - 898
Finance cost (2,376) - (2,376)
Fair value movement
on derivative
liability (1,289) - (1,289)
---------------------------- -------- -------- ------- --------- -------- ------------ --------
Loss before tax (8,559) (28) (8,587)
---------------------------- -------- -------- ------- --------- -------- ------------ --------
Total assets 8,667 113,555 118,479 13,659 254,360 - 254,360
---------------------------- -------- -------- ------- --------- -------- ------------ --------
Total liabilities (31,459) (33,290) (9,695) (1,588) (76,032) (76,032)
---------------------------- -------- -------- ------- --------- -------- ------------ --------
5. Property, plant and equipment and other intangible assets
During the period the Group acquired $10.4m additional assets
(2016: $2.2m) in Ukraine, Russia and Hungary, with 99% (2016: 100%)
in respect of Group's oil and gas producing and development assets
and 1% (2016: nil) being spent on intangible assets.
In Russia, a loss on disposal of oil and gas assets of $0.6m was
recognised during the period. The items disposed of were deemed
obsolete for using for operations as a result of a stock-take
completed in November 2016.
At the reporting date a review of the carrying amounts of
property, plant and equipment was undertaken to determine whether
there was any indication of a trigger that may have led to these
assets suffering an impairment loss. Following this review, no
impairment triggers were identified in relation to the Group's
assets.
6. Other receivable
The non-current receivable consists of VAT recoverable as a
result of expenditures incurred in Russia. The receivable is
expected to be recovered between two and five years (2016: two and
five years).
7. Cash
1 January Net 30 June
2017 movement 2017
$000 $000 $000
Cash 8,874 (5,296) 3,578
Short term deposits 5,193 (4,760) 433
-------------------------- --------- ---------- -------
Cash and cash equivalents 14,067 (10,056) 4,011
Restricted cash 201 17 218
-------------------------- --------- ---------- -------
Total 14,268 (10,039) 4,229
-------------------------- --------- ---------- -------
Short term deposits comprise amounts which are held on deposit,
but are readily convertible to cash.
Restricted cash
At 30 June 2017 $0.2m (31 December 2016: $0.2m) of the cash held
in Hungary at K & H Bank Zrt was restricted as under the
Hungarian Mining Act the Group is required to deposit cash to cover
compensation for any land damage and the costs of recultivation,
including environmental damage of the waste management
facilities.
8. Borrowings
30 June 30 June
31 December
2017 2016 2016
$000 $000 $000
Current
Convertible bonds due 2020 (2016:
2018) (1) 5,280 23,816 16,795
---------------------------------- ------- ------- -----------
Term-loans repayable within one
year 5,280 23,816 16,795
---------------------------------- ------- ------- -----------
Non-current
Convertible bonds due 2020 (2016:
2018) 11,033 - -
---------------------------------- ------- ------- -----------
Term-loans repayable after more
than one year 11,033 - -
---------------------------------- ------- ------- -----------
(1) At 30 June 2017 current liabilities included $5.3m that is
due to be repaid to bondholders on 19 February 2018 (33% of the
total outstanding Bond principal of $16m).
Convertible bonds due 2018 - prior to restructuring
On 19 February 2013 the Company successfully completed the
placing of $40m of guaranteed unsubordinated convertible bonds with
institutional investors which were due 2018 (prior to
restructuring) raising cash of $37.2m net of issue costs.
Prior to restructuring the Bonds had an annual coupon of 8 per
cent per annum payable semi-annually in arrears.
The Bonds are convertible into ordinary shares of the Company at
any time from 1 April 2013 up until seven days prior to their
maturity on 19 February 2018 (prior to restructuring) at a
conversion price of 76.29 pence per Ordinary Share, unless the
Company settles the conversion notice by paying the Bondholder the
Cash Alternative Amount (see below).
Convertible bonds restructured on 3 January 2017
On 3 January 2017 a special resolution was approved by
Bondholders to change the terms and conditions of the Bonds. The
main amendments to the terms and conditions of the Bonds were as
follows:
-- the Bondholder's option to require redemption of all of the
outstanding Bonds on 19 February 2017 was deleted;
-- the final maturity date of the Bonds was extended to 19
February 2020, with the outstanding principal amount of the Bonds
being repaid in three instalments; 33% on 19 February 2018; 33 % on
19 February 2019; and 34% on the 19 February 2020;
-- the coupon rate of the Bonds was increased from 8% to
14%;
-- the covenant which limited new borrowings by the Company has
been removed; and
-- the Company are to make two payments to Bondholders in
respect of prior accretion amounts, on 19 February 2017 and on 19
February 2018 of 12.0% and 3.0%, respectively, of the principal
amount of the Bonds.
-- 19 February 2017 the Company made first payment to
Bondholders of $1.9m, 12.0% of the principal amount of the Bonds,
in respect of prior accretion amounts and in accordance with the
terms and conditions of the Bond.
The revised terms and conditions of the Bond is considered to be
a modification and therefore the difference in the amortised cost
carrying amount at the modification date is recognised through a
change in the effective interest rate at the modification date
through to the end of the revised estimated term of the Bond.
Interest, after the deduction of issue costs is charged to the
income statement using an effective rate of 17.4% (18.0% prior to
restructuring).
There is therefore no immediate impact of the restructuring of
the Bond on the Consolidated Income Statement in 2017.
The impact of the amendments to the Bond on the Consolidated
Statement of Financial Position was to decrease the carrying amount
of the total Bond liability of $18.1m (at 31 December 2016,
includes the associated derivative) by $0.7m, which will be
amortised over the estimated remaining life of the modified
Bond.
Cash Alternative Amount
At the option of the Company, the conversion notice in respect
of the Bonds can be settled in cash rather than shares, the Cash
Alternative Amount payable is based on the Volume Weighted Average
Price of the Company's shares prior to the conversion notice.
Convertible bonds repurchased and cancelled
On 19 February 2016, in accordance with the terms and conditions
of the Bonds, the Company repurchased 50 Bonds with a total
principal amount of $10m. In June, September and October 2016, the
Company repurchased and subsequently cancelled a total of 50 Bonds
with par value of $10m resulting in $1.1m gain on redemption, which
has been included in Finance income for the year ended 31 December
2016 (see Group Annual Return for the year ended 31 December 2016,
Note 21). The remaining principal amount of outstanding Bonds at 31
December 2016 was $16.0m. No Bonds have been repurchased during the
first half of 2017.
9. Derivatives
30 June 30 June
31 December
2017 2016 2016
$000 $000 $000
Current derivative financial instruments
Reclassification to/from non-current
derivative financial instruments (1,341) 1,995 1,341
----------------------------------------- ------- ------- -----------
At the end of the period/ year - 1,995 1,341
----------------------------------------- ------- ------- -----------
Non-current derivative financial
instruments
At the beginning of the year - 2,171 2,171
Reclassification from/to current
derivative financial instruments 1,341 (1,995) (1,341)
Full/partial settlement of derivative
liability (1,341) (1,465) (1,429)
Fair value loss movement during
the period/year 68 1,289 599
At the end of the period/ year 68 - -
----------------------------------------- ------- ------- -----------
Convertible bonds due 2020 - embedded derivatives
Bondholder Put Option - cancelled 3 January 2017
Bondholders had the right to require the Company to redeem the
following number of Bonds on the following date together with
accrued and unpaid interest to (but excluding) such date:
Redemption Date Maximum number of Bonds to be redeemed
---------------- --------------------------------------
19 February 2017 all outstanding Bonds
---------------- --------------------------------------
At 31 December 2016 current liabilities included $16.8m in
respect of the put option available to bondholders on 19 February
2017. On 3 January 2017, this put option was cancelled as part of
the Bond restructuring as detailed in Note 8. Bonds with a
principal amount of $10.0m were redeemed on 19 February 2016 in
addition to an early redemption premium of $0.9m in accordance with
the terms and conditions of the bond.
Company Call Option
The Company can redeem the Bonds at any time in full but not in
part at their principal amount plus one semi-annual coupon plus any
accrued interest. If the Bonds are called prior to 19 February
2018, the redemption price will also include an additional U.S.
$6,000 per Bond.
The Company can redeem the Bonds any time in full but not in
part at their principal amount plus any accrued interest if the
aggregate principal amount of the Bonds outstanding is less than
15% of the aggregate principal amount originally issued.
Fixed exchange rate
The Sterling-US Dollar exchange rate is fixed at GBP1/$1.5809
for the conversion and other features.
10. Financial instruments
Fair values of financial assets and financial liabilities -
Group
Set out below is a comparison by category of carrying amounts
and fair values of the Group's financial instruments. Fair value is
the amount at which a financial instrument could be exchanged in an
arm's length transaction. Where available, market values have been
used (this excludes short term assets and liabilities).
Book Fair Fair
Value Value Value
Book
30 June 30 June Value 31 December
31 December
2017 2017 2016 2016
$000 $000 $000 $'000
Financial assets
Cash and cash equivalent and
restricted cash (Note 7) 4,229 4,229 14,268 14,268
Trade receivables - classified
as loans and receivables 1,619 1,619 2,107 2,107
Other receivables - classified
as loans and receivables 430 430 1,019 1,019
Financial liabilities
Trade payables - carried at
amortised cost 4,549 4,549 2,562 2,562
Other payables - carried at
amortised cost 1,672 1,672 2,759 2,759
Borrowings - convertible bond
due 2020 (2016: 2018)
(Note 8) - at amortised cost
(current) 5,280 5,280 - -
Borrowings - convertible bond
due 2020 (2016: 2018)
(Note 8) - at amortised cost
(non-current) 11,033 11,033 16,795 15,955
Derivatives - fair value through
profit or loss (Note 9) 68 68 1,341 1,341
--------------------------------- --------- --------- ------------- --------------
Financial liabilities measured at amortised cost are carried at
$22.5m (31 December 2016: $22.1m). The Group's borrowings at 30
June 2017 relate entirely to the convertible bond due 2020 (31
December 2016: 2018).
Fair value hierarchy
Derivatives
At the period end the Group's derivative financial instrument
related to various embedded derivatives within the convertible
bonds due 2020 (2016: 2018) (Note 9). The value of the derivative
was calculated at inception using the Monte Carlo simulation
methodology and subsequently using the Black-Scholes formula,
discounted cash flow methodology, and the Company's historic share
price and volatility, treasury rates and other estimations. As it
was derived from inputs that are not from observable market data it
was grouped into level 3 within the fair value measurement
hierarchy.
The main assumptions used in valuation of the derivative
conversion option as at 30 June 2017 were:
-- underlying share price of: GBP0.1950 (31 December 2016:
GBP0.3025);
-- GBP/US$ spot rate of 1.3025 (31 December 2016: GBP1/$1.2340
);
-- historic volatility of 59.41% (31 December 2016: 53.42%);
-- risk free rate based on the maturity which is 2.64 year US
Treasury rate of 1.486%, 1.64 year US Treasury rate of 1.347% and
0.64 year US Treasury rate of 1.238% (continuously compounded). At
31 December 2016 risk free rate was based on 1.14 years US Treasury
rate of 0.956%.
A 10% increase/decrease in Company's historic share price
volatility would have resulted in an increase in the fair value
loss for the year of $0.07m and a decrease in the fair value loss
of $0.04m respectively (31 December 2016: increase in the fair
value loss for the year of $0.04m, decrease in the fair value loss
of $0.02m, respectively), assuming that all other variables remain
constant.
Credit risk - Group
The Group has policies in place to ensure that sales of products
are made to customers with appropriate credit worthiness. The Group
limits credit risk by assessing creditworthiness of potential
counterparties before entering into transactions with them and
continuing to evaluate their creditworthiness after transactions
have been initiated. Where appropriate, the use of prepayment for
product sales limits the exposure to credit risk. There is no
difference between the carrying amount of trade and other
receivables and the maximum credit risk exposure.
The maximum financial exposure due to credit risk on the Group's
financial assets, representing the sum of cash and cash
equivalents, trade receivables and other current assets, as at 30
June 2017 was $ 6.3m (31 December 2016: $17.4m).
Capital management - Group
The Directors determine the appropriate capital structure of the
Group specifically, how much is raised from shareholders (equity)
and how much is borrowed from financial institutions (debt) in
order to finance the Group's business strategy.
The Group's policy as to the level of equity capital and
reserves is to ensure that it maintains a strong financial position
and low gearing ratio which provides financial flexibility to
continue as a going concern and to maximise shareholder value. The
capital structure of the Group consists of shareholders' equity
together with net debt. The Group's funding requirements are met
through a combination of debt, equity and operational cash
flow.
Net debt
Net debt comprises: borrowings disclosed in Note 8 and total
cash in Note 7, and excludes derivatives. Equity attributable to
the shareholders of the Company comprises issued capital, capital
reserves and retained earnings, (see Condensed consolidated
statement of changes in equity).
The capital structure of the Group is as follows:
30 June 31 December
2017 2016
$000 $000
Convertible bonds due 2020 (31 December
2016: 2018) (current and non-current,
Note 8) (16,313) (16,795)
Total cash (Note 7) 4,229 14,268
Net debt (12,084) (2,527)
---------------------------------------- -------- -----------
Total equity 152,589 156,833
---------------------------------------- -------- -----------
Following the issue of $40m of convertible bonds in February
2013, the primary capital risk to the Group was the level of
indebtedness. The convertible bond included a financial covenant
which limited the Group's indebtedness (excluding the bonds
themselves) in respect of any new borrowings (in addition to the
bond amount) to three times 12-month free cash flow based on the
most recently published consolidated financial statements. During
the year ended 31 December 2016 the Group has complied with this
financial covenant. On 3 January 2017 this indebtedness covenant
was cancelled as part of the Bond restructuring as detailed in Note
8.
Liquidity risk - Group
The treasury function is responsible for liquidity, funding and
settlement management under policies approved by the Board of
Directors. Liquidity needs are monitored using regular forecasting
of operational cash flows and financing commitments. The Group
maintains a mixture of cash and cash equivalents and committed
facilities in order to ensure sufficient funding for business
requirements.
Significant restrictions
Temporary capital controls were established by the National Bank
of Ukraine ('NBU') on 1 December 2014 in an attempt by the
Ukrainian government to safeguard the economy and protect foreign
exchange reserves in the short term.
On 4 March 2015 a number of new NBU Resolutions were implemented
with immediate effect (NBU No. 160 dated 3 March 2015; Resolution
of the NBU No. 161 dated 3 March 2015; Resolution of the NBU No.
154 dated 2 March 2015).
The Resolutions extended the currency control restrictions
implemented in Ukraine on 1 December 2014 and introduced additional
measures which have the impact of restricting the remittance of
funds to foreign investors under certain conditions and bans the
transfer of Hryvnia to purchase Ukrainian Government bonds.
The restrictions were effective until 8 June 2016 but have
subsequently been eased by the NBU resolution No. 342 on 9 June
2016. The resolution enabled the repatriation of dividends from
JKX's Ukrainian subsidiary for the years 2014 and 2015. NBU issued
the Resolution No.33 on 13 April 2017 which enabled the
repatriation of dividends for 2016.
Prior to the easing of restrictions, Cash and short-term
deposits held in Ukraine were subject to local exchange control
regulations which restricted exporting capital from Ukraine.
Following the easing of these restrictions, no cash or short term
deposits included within this consolidated financial information is
restricted.
The following tables set out details of the expected contractual
maturity of non-derivative financial liabilities. The tables
include both interest and principal cash flows on an undiscounted
basis. To the extent that interest flows are floating rate, the
undiscounted amount is derived from interest rate curves at the
reporting date.
The maturity analysis for financial liabilities was as
follows:
3 months
Within - 1-2 2-3
3 months 1 year years years
Group - 30 June 2017 $000 $000 $000 $000
Maturity of financial liabilities
Trade payables 4,549 - - -
Other payables 1,672 - - -
Borrowings - Convertible bonds
due 2020 1,120 6,880 6,781 6,201
---------------------------------- --------- -------- ------ ------
Within
3
months
Group - 31 December 2016 $000
Maturity of financial liabilities
Trade payables 2,562
Other payables 2,759
Borrowings - Convertible bonds due 2018(1) 16,795
------------------------------------------- -------
Prior to restructuring of the Bonds on 3 January 2017. See Note
8
Interest rate risk profile of financial assets and liabilities -
Group
Fixed rate interest is charged on the Group's convertible bond
(see Note 8). The interest rate profile of the other financial
assets and liabilities of the Group as at 30 June is as follows
(excluding short-term assets and liabilities, non-interest
bearing):
2017 2016
Within Within
1 Year 1 Year
Group - period ended 30 June $000 $000
Floating rate
Short term deposits (Note 7) 433 8,229
Other receivables 430 314
Other payables 1,672 3,300
----------------------------- ------- -------
Floating rate financial assets comprise cash deposits placed on
money markets at call, seven day and monthly rates.
11. Share capital
Equity share capital, denominated in Sterling, was as
follows:
30 June 30 June 30 June
2017 2017 2017 2016 2016 2016
Number GBP000 $000 Number GBP000 $000
Allotted, called
up and fully paid
--------------------- ----------- -------- ------- ----------- -------- ------
Balance at 1 January
and 30 June 172,125,916 17,212 26,666 172,125,916 17,212 26,666
--------------------- ----------- -------- ------- ----------- -------- ------
Of which the following are shares held in treasury:
Treasury shares
held at
1 January and
30 June 402,771 40 77 402,771 40 77
---------------- ------- -------
Treasury shares and Employee Benefit Trust
The Company did not purchase any treasury shares during the
period (2016: nil). There were no treasury shares used in the
period (2016: nil) to settle share options.
JKX Employee Benefit Trust was established in 2013 and acquired
5,000,000 shares in JKX Oil & Gas plc for the purpose of making
awards under the Group's employee share schemes and these shares
have been classified in the statement of financial position as
treasury shares within equity.
None of these shares were used during the period (2016: nil) to
settle share options. At the period end JKX Employee Benefit Trust
held 5,000,000 shares in JKX Oil & Gas plc.
There are no shares reserved for issue under options or
contracts.
12. Provisions
Remuneration Onerous Production
and severance lease based
costs provision taxes
provision (2) (1)
(3)
$000 $000 $000 Total
Current provisions $000
------------------------------- -------------------------- ---------- ---------- ------
At 1 January 2017 - 589 33,921 34,510
Foreign currency translation - 28 1,453 1,481
Amount provided / (utilised)in
the period/year 1,440 (184) 1,824 3,080
------------------------------- -------------------------- ---------- ---------- ------
At 30 June 2017 1,440 433 37,198 39,071
------------------------------- -------------------------- ---------- ---------- ------
1. The provision for production based taxes, which had been
recognised as a charge in the 2016 and 2015 Consolidated income
statements, is in respect of a claim against PPC for additional
Rental Fees for the period January to December 2015 and August to
December 2010 respectively. Both claims are being contested in the
Ukrainian courts (see Note 14). The amount is denominated in
Ukrainian Hryvnia ('UAH') and is stated above at its US$-equivalent
amount using exchange rate at 30 June 2017 of UAH26.10/$ (31
December 2016: UAH 27.19/$). The provision is based on the total
value of the claims plus interest and penalties. The Board believes
that the claims are without merit under Ukrainian law and the
Company will continue to contest it vigorously. No contingent
liabilities exist in respect of Ukrainian production taxes (31
December 2016: nil).
2. The onerous lease provision covers the Group's liability for
onerous lease contracts relating to London office. Following
reduction in London office staff, two out of the four floors of the
occupied building became surplus to requirements. Provision has
been determined as the present value of the unavoidable costs
relating to rents and rates to the end of the lease terms, net of
the expected sub-lease income, discounted at 6%. The remaining life
of the leases at 30 June 2017 is 4.5 years (31 December 2016: 5
years).
3. Provision for severance costs to the Chief Executive Officer
and Chief Financial Officer who were both removed from the Board of
Directors following the Company's AGM on 30 June 2017.
Non-current provisions
30 June 30 June
31 December
2017 2016 2016
$000 $000 $000
Provision for site restoration 4,601 4,310 4,264
------------------------------- ------- ------- -----------
13. Exceptional items
During the period exceptional items as detailed below have been
included in cost of sales and administrative expenses in the income
statement:
Cost Administrative
of sales expenses
(1) (1)
$000 $000
------------------------------------------- ---------------------- --------------
Production based taxes - amount provided
in the period 1,824 -
Onerous lease provision - amount utilised
in the period - (184)
Remuneration and severance costs provision
- amount provided in the period - 1,440
------------------------------------------- ---------------------- --------------
1,824 1,256
------------------------------------------- ---------------------- --------------
(1) Please see Note 12 for details
Exceptional items -information at 30 June 2016
Exceptional item - remuneration and severance costs
Exceptional charges of $3.1million comprise the following:
-- $2.5 million of severance costs and additional remuneration
which the previous Board approved and paid prior to the General
Meeting on 28 January 2016;
-- $0.5 million of professional advisory fees incurred in
relation to the General Meeting and the replacement of the Board on
28 January 2016;
-- $0.1 million severance costs incurred as a result of staff
reductions at the Group's London headquarters.
14. Taxation
No UK tax liability has arisen during the six months ended 30
June 2017 (2016: $nil) due to the availability of tax losses. The
current tax charged in the period relates to Ukrainian corporation
tax which has arisen in the Group's subsidiary, Poltava Petroleum
Company. Taxes charged on production of hydrocarbons in Ukraine,
Russia and Hungary are included in cost of sales.
Factors that may affect future tax charges
A significant proportion of the Group's income will be generated
overseas. Profits made overseas will not be able to be offset by
costs elsewhere in the Group. This could lead to a higher than
expected tax rate for the Group.
Changes to the UK corporation tax rates were substantively
enacted as part of Finance Bill 2015 and Finance Bill 2016. These
include reductions to the main rate to reduce the rate to 19% from
1 April 2017 and to 17% from 1 April 2020. The impact of the rate
reduction is not expected to have a material impact on UK current
taxation.
The corporation tax rate in Ukraine for 2017 is 18% (2016:
18%).
Taxation in Ukraine - production taxes
Since Poltava Petroleum Company's ('PPC's') inception in 1994
the Company has operated in a regime where conflicting laws have
existed, including in relation to effective taxes on oil and gas
production.
In order to avoid any confusion over the level of taxes due, in
1994, PPC entered into a licence agreement with the Ukrainian State
Committee on Geology and the Utilisation of Mineral Resources ('the
Licence Agreement') which set out expressly in the Licence
Agreement that PPC would pay royalties on production at a rate of
only 5.5% of sales value for the duration of the Licence
Agreement.
Pursuant to the Licence Agreement, PPC was granted an
exploration licence and four 20-year production licences, each in
respect of a particular field. In 2004, PPC's production licences
were renewed and extended until 2024, Subsoil Use Agreements were
signed and attached to the licences and operations continued as
before.
The Company and PPC have continued to invest in Ukraine on the
basis that PPC would pay a royalty on sales at a rate of 5.5%.
In December 1994, a new fee on the production of oil and gas
(known as a 'Rental Payment' or 'Rental Fee') was introduced
through Ukrainian regulations. On 30 December 1995, JKX, together
with its Ukrainian subsidiaries (including PPC), was issued with a
Joint Decision of the Ministry of Economy, the Ministry of Finance
and the State Committee for the Oil and Gas ('the Exemption
Letter'), which established a zero rent payment rate for oil and
natural gas produced in Ukraine by PPC for the duration of the
Licence Agreement for Exploration and Exploitation of the Fields.
Based on the Exemption Letter PPC did not expect to pay any Rental
Fees.
Rental Fees paid since 2011
In 2011, new laws were enacted which established new mechanisms
for the determination of the Rental Fee. Notwithstanding the
Exemption Letter, in January 2011 PPC began to pay the Rental Fee
in order to avoid further issues with the Ukrainian authorities but
without prejudice to its right to challenge the validity of the
demands.
Since 2011, the Rental Fees paid by PPC have amounted to more
than $180 million. These charges have been recorded in cost of
sales in each of the accounting periods to which they relate.
International arbitration proceedings
In 2015, the Company and its wholly-owned Ukrainian and Dutch
subsidiaries commenced arbitration proceedings against Ukraine
under the Energy Charter Treaty, the bilateral investment treaties
between Ukraine and the United Kingdom and the Netherlands,
respectively. In these proceedings, the Company sought repayment of
more than $180 million in Rental Fees that PPC paid on production
of oil and gas in Ukraine since 2011, in addition to damages to the
business.
During 2015 Rental Fees in Ukraine were increased to 55% and
capital control restrictions were introduced. On 14 January 2015,
an Emergency Arbitrator issued an Award ordering Ukraine not to
collect Rental Fees from PPC in excess of 28% on gas produced by
PPC, pending the outcome of the application to a full tribunal for
the Interim Award. On 23 July 2015 an international arbitration
tribunal issued an Interim Award requiring the Government of
Ukraine to limit the collection of Rental Fees on gas produced by
PPC to a rate of 28%.
The Interim Award was to remain in effect until final judgement
is rendered on the main arbitration case, which was heard in early
July 2016. A decision from the tribunal was awarded on 6 February
2017.
The tribunal ruled that Ukraine was found not to have violated
its treaty obligations in respect of the levying of Rental Fees but
awarded the Company damages of $11.8 million plus interest, and
costs of $0.3 million in relation to subsidiary claims.
In March 2017 the Company received a notice by Ukraine's
Ministry of Justice to the High Court of the United Kingdom naming
JKX as a defendant in an application seeking to set aside the
arbitration award for damages against Ukraine and in favour of JKX.
The High Court will consider the appeal in October 2017.
Rental Fee demands
The Group currently has two claims (2016: two) for additional
Rental Fees being contested through the Ukrainian court process.
These arise from disputes over the amount of Rental Fees paid by
PPC for certain periods since 2010 (2016: 2010), which in total
amount to approximately $37.2 million (31 December 2016: $33.9
million) (including interest and penalties), as detailed below. All
amounts are being claimed in Ukrainian Hryvnia ('UAH') and are
stated below at their US$-equivalent amounts using the period end
rate of $1:UAH26.1 (2016: $1:UAH 27.2).
-- August - December 2010: approximately $11.3 million (31
December 2016: $10.6 million) (including $6.8m (31 December 2016:
$6.1) million of interest and penalties). On 11 March 2014 PPC won
the case in the Poltava Court. The tax office appealed and the
Kharkiv Appellate Administrative Court reversed the earlier
decision. PPC then lost an appeal in the High Administrative Court
of Ukraine and the Supreme Court rejected PPC's application for the
appeal. PPC has discovered that there were in fact certain
procedures that were not followed regarding the tax notifications
that formed the basis of the original claims against PPC. Certain
documentation was found to be missing from the files of the tax
authorities. In April 2017 the Poltava Circuit Administrative Court
found in favour of PPC and cancelled the tax notification decisions
on the grounds that due process had not been followed. On 1 June
2017 the Kharkiv Appellate Administrative Court upheld the judgment
of the Poltava Circuit Administrative Court. The tax authorities
filed a cassation complaint and the case is currently being
transferred from the Kharkiv Appellate Administrative Court to the
High Administrative Court of Ukraine (the HACU). If the HACU
rejects the claim of the tax authorities, it would render the basis
for the 2010 claims invalid.
As part of these proceedings, property, plant and equipment that
cost UAH158m (31 December 2016: UAH158m (approximately $6.1million
(31 December 2016: $5.8 million) at the period end rate of
$1:UAH26.1 (31 December 2016: $1: UAH27.2) was required to be
pledged as security against the non-settlement of the 2010 Rental
Fee claim that may arise in the event that the Ukrainian
authorities are successful. The net book value of the property,
plant and equipment is $22.0 million based on the historical
exchange rates at the dates of acquisition which were between
$1:UAH5 and $1:UAH8.
-- January - December 2015: approximately $25.9 million (31
December 2016: $23.3 million) (including $11.4 million (31 December
2016: $10.8 million) of interest and penalties). Following the
commencement of international arbitration proceedings at the
beginning of 2015 (see above), from July 2015 PPC reverted to
paying a 28% Rental Fee for gas production (instead of the revised
official rate of 55%) as a result of the awards granted under the
arbitration. PPC also declared part of its Rental Fee payments at
55% for the first 6 months of 2015 as overpayments and consequently
stopped paying the Rental Fee for gas in order to align the total
payments made in 2015 with the 28% rate awarded made under the
arbitration proceedings. The Ukrainian tax authorities have issued
PPC with claims for the difference between 28% and 55%. PPC is in
the process of court hearings in respect of the claim, although the
Company considers such claims to be in direct violation of the
Interim Award received from the arbitration tribunal, noted above.
In addition, in April 2016, the tax authorities issued PPC with a
separate demand for $0.1 million of penalties and interest on
unpaid Rental Fees for the period of August-October 2015. PPC also
filed lawsuits against the tax authorities to cancel the
application of such additional penalties and interest.
Following the tribunal's dismissal of the Company's claim for
overpayment of Rental Fees, an exceptional charge of $24.3 million
was charged to the Consolidated income statement in 2016 relating
to the January - December 2015 claim. Following recognition of
further interest and penalties during 6 months of 2017, which are
presented as an exceptional charge, the provision recorded at 30
June 2017 is $25.9million.
No adjustment has been made to recognise any possible future
benefit to the Company that may result from the tribunal award in
the Company's favour for damages of $11.8 million plus interest,
and costs of $0.3 million.
In the prior year there was a claim of approximately $6 million
(including $3 million of interest and penalties) relating to the
period January - March 2007. In 2016 the Supreme Court of Ukraine
ruled in favour of the Company in respect of this claim and a
second parallel case related to this claim was won by PPC with the
High Administrative Court of Ukraine.
15. Loss per share
The calculation of loss per ordinary share for the six months
ended 30 June 2017 is based on the weighted average number of
shares in issue during the period of 172,125,916 (2016:
172,125,916; 31 December 2016: 172,125,916) and the loss for the
relevant period.
In accordance with IAS 33 (Earnings per share) the effects of
antidilutive potential have not been included when calculating
dilutive loss per share for the periods ended 30 June 2017 and 31
December 2016. 13,266,244 (31 December 2016: 13,925,410)
potentially dilutive ordinary shares associated with the
convertible bonds (Note 8) have been excluded as they are
antidilutive in 2017 however they could be dilutive in future
periods.
There were 1,059,650 outstanding share options at 30 June 2017
(31 December 2016: 2,168,450), of which 1,059,650 (31 December
2016: 1,341,750) had a potentially dilutive effect. All of the
Group's equity derivatives were anti-dilutive for the period ended
30 June 2017.
The diluted loss per share for the six months ended 30 June 2017
is based on 172,125,916 (30 June 2016: 172,125,916; 31 December
2016: 172,125,916) ordinary shares calculated as follows:
30 June 30 June
31 December
2017 2016 2016
Loss $'000 $'000 $'000
Loss for the purpose of basic and
diluted earnings per share (loss
for the period/year attributable
to the owners of the parent):
-Before exceptional item (4,967) (7,034) (7,462)
-After exceptional item (7,683) (10,089) (37,115)
---------------------------------- ------- -------------- -----------
30 June 30 June 31 December
Number of shares 2017 2016 2016
Basic weighted average number of
shares 172,125,916 172,125,916 172,125,916
Weighted average of dilutive potential
ordinary shares:
-Share options - - -
-Convertible bonds 2020 (see Note - - -
8)
--------------------------------------- ----------- ----------- -----------
Weighted average number of shares
for diluted earnings per share 172,125,916 172,125,916 172,125,916
--------------------------------------- ----------- ----------- -----------
16. Dividends
No interim dividend for the six months to 30 June 2017 is being
paid or proposed (2016: nil).
17. Reconciliation of loss from operations to net cash generated
from operations
Six months Six months
to 30 to 30 Year
June June to
31 December
2017 2016 2016
$000 $000 $000
Loss from operations (5,298) (5,820) (34,754)
Depreciation, depletion and amortisation 10,520 11,168 19,764
Impairment of property, plant and
equipment/intangible assets - - 2,000
Exceptional item - increase in production
based taxes provision 1,824 - 24,340
Exceptional item - increase in remuneration
and severance costs provision 1,440 - -
Exceptional item - (decrease)/increase
in onerous lease provision (184) - 594
Foreign exchange loss on exceptional
items 1,482 - -
Loss on disposal of property, plant
and equipment 578 24 311
Share-based payment (credit)/charge (63) 23 48
-------------------------------------------- ---------- ---------- -------------
Cash generated from operations before
changes in working capital 10,299 5,395 12,303
Changes in working capital (6,272) 2,433 4,735
-------------------------------------------- ---------- ---------- -------------
Net cash generated from operations 4,027 7,828 17,038
-------------------------------------------- ---------- ---------- -------------
18. Capital commitments
Under the work programmes for the Group's exploration and
development licenses the Group had committed $1.0m to future
capital expenditure on drilling rigs and facilities as at 30 June
2017 (30 June 2016: $0.8m; 31 December 2016: $3.3m).
19. Related-party transactions
Key management compensation amounted to $0.9m for the six months
ended 30 June 2017 (2016: $4.5m). Administrative expenses also
include an exceptional item of $1.4m with regards to severance
costs to the Chief Executive Officer and Chief Financial Officer
who were both removed from the Board of Directors following the
Company's AGM on 30 June 2017. 2016 remuneration and severance
costs of $2.5m comprised payments to the previous Board members
made on 28 January 2016 (see Note 13) in addition to bonus payments
made to the previous Board of $1.4m in respect of the year ended 31
December 2015, also paid in January 2016.
Vladimir Tatarchuk and Vladimir Rusinov were appointed to the
Board on 28 January 2016 and were thought to have a beneficial
interest in Convertible Bonds with principal amount of $3.4m at 30
June 2017 (31 December 2016: $3.4m), which are held by Proxima.
During the first half of 2017, in accordance with the terms and
conditions of the restructured Bonds, redemptions of Proxima's
bonds of principal amount $0.4 m were made in respect of prior
accretion amounts (31 December 2016: $1.4m under the Bondholder Put
Option) (see Note 8 and 9) and Bond interest payments of $0.1m (31
December 2016: $0.3m) were made to Proxima in relation to their
Bond holding.
Since the Annual General Meeting on 30 June 2017 Vladimir
Rusinov has no longer been a member of the Board of Directors.
Glossary
2P reserves Proved plus probable
3P reserves Proved, probable and possible
P50 Reserves and/or resources estimates that have a 50 per cent
probability of being met or exceeded
AFE Authorisation For Expenditure
AIFR All Injury Frequency Rate
Bcf Billion cubic feet
Bcm Billion cubic metres
Bcpd Barrel of condensate per day
Boe Barrel of oil equivalent
Boepd Barrel of oil equivalent per day
Bopd Barrel of oil per day
Bpd Barrel per day
Bwpd Barrels of water per day
Cfpd Cubic feet per day
EPF Early Production Facility
GPF Gas Processing Facility
HHN Riverside Energy Kft
Hryvnia The lawful currency of Ukraine
HSECQ Health, Safety, Environment, Community and Quality
KPI Key Performance Indicator
LIBOR London InterBank Offered Rate
LPG Liquefied Petroleum Gas
LTI Lost Time Injuries
Mbbl Thousand barrels
Mboe Thousand barrels of oil equivalent
Mcf Thousand cubic feet
MMcfd Million cubic feet per day
MMbbl Million barrels
MMboe Million barrels of oil equivalent
PPC Poltava Petroleum Company
Roubles The lawful currency of Russia
Sq. km Square kilometre
TD Total depth
$ United States Dollars
UAH Ukrainian Hryvnia
US United States
VAT Value Added Tax
YGE Yuzhgazenergie LLC
Conversion factors 6,000 standard cubic feet of gas = 1 boe
Directors and advisors
Directors
Paul Ostling
Vladimir Tatarchuk
Alan Bigman
Bernie Sucher
Company Secretary
Nadia Cansun
Registered office
6 Cavendish Square, London
W1G 0PD
Registered in England Number: 3050645
Registrars
Equiniti
Aspect House, Spencer Road
Lancing, West Sussex BN99 6DA
Principal bankers
Bank of Scotland plc
The Mound, Edinburgh EH1 1YZ
Independent auditors
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
1 Embankment Place, London WC2N 6RH
Stockbrokers
Stockdale Securities Limited
Beaufort House, 15 St. Botolph Street
London, EC3A 7BB
Public relations
EM Communications
25 Southampton Buildings
London, WC2A 1AL
We welcome visits to our website www.jkx.co.uk
Cautionary statement about
forward looking statements
The half yearly financial report contains certain forward
looking statements with respect to the financial position, results
of operations and business of the Group. Examples of forward
looking statements include those regarding oil and gas reserves
estimates, anticipated production or construction commencement
dates, costs, outputs, demand, trends in commodity prices, growth
opportunities and productive lives of assets or similar factors.
The words "anticipate", "estimate", "plan", "believe", "expect",
"may", "should", "will", "continue", or similar expressions,
commonly identify such forward looking statements.
Forward looking statements involve known and unknown risks,
uncertainties, assumptions and other factors that are beyond the
Group's control. For example, future oil and gas reserves will be
based in part on long-term price assumptions that may vary
significantly from current levels. These may materially affect the
timing and feasibility of particular developments. Other factors
include the ability to produce and transport products profitably,
demand for products, the effect of foreign currency exchange rates
on market prices and operating costs, activities by governmental
authorities, such as changes in taxation or regulation, and
political uncertainty.
Given these risks, uncertainties and assumptions, actual results
could be materially different from any future results expressed or
implied by these forward looking statements which speak only as at
the date of this report. Except as required by applicable
regulations or by law, the Group does not undertake any obligation
to publicly update or revise any forward looking statements,
whether as a result of new information or future events. The Group
cannot guarantee that its forward looking statements will not
differ materially from actual results.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR SDAFUFFWSELW
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August 01, 2017 02:01 ET (06:01 GMT)
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