TIDMRPT
RNS Number : 9298L
Enwell Energy PLC
16 September 2021
16 September 2021
ENWELL ENERGY PLC
2021 INTERIM RESULTS
Enwell Energy plc (the "Company", and with its subsidiaries, the
"Group"), the AIM-quoted (ENW) oil and gas exploration and
production group, announces its unaudited results for the six month
period ended 30 June 2021.
Highlights
Operations
-- Aggregate average daily production from the MEX-GOL, SV and
VAS fields of 4,917 boepd, which compares with 4,545 boepd
during the first half of 2020, an increase of approximately
8%, with record levels of average daily production of 5,254
boepd achieved in Q2 2021
-- SV-25 appraisal well successfully completed and brought on
production in February 2021
-- Drilling operations for SV-29 development well completed in
late August 2021 and testing operations now underway
-- Commencement of drilling of SC-4 appraisal well on the SC
licence
-- No significant disruption to the Group's operations arising
from the COVID-19 pandemic to date
Finance
-- Revenue of $41.1 million (1H 2020: $24.7 million), up 66%
as a result of higher production rates and much improved gas
prices in the period
-- Operating profit of $18.1 million (1H 2020: $5.2 million)
-- Net profit for the first half of 2021 of $13.8 million (1H
2020: $1.2 million)
-- Cash and cash equivalents of $62.9 million at 30 June 2021,
and at 14 September 2021 of $54.4 million (31 December 2020:
$61.0 million)
-- Average realised gas, condensate and LPG prices in Ukraine
were much higher, particularly gas prices, at $249/Mm(3) (UAH6,897/Mm(3)
), $74/bbl and $66/bbl respectively (1H 2020: $139/Mm(3) (UAH3,514/Mm(3)
) gas, $42/bbl condensate and $40/bbl LPG)
-- Reduction of capital completed through the cancellation of
the Company's entire share premium account which has created
distributable reserves, thereby enabling the possibility of
the Company making distributions to shareholders in the future
Outlook
-- Development work for the remainder of 2021 at the MEX-GOL
and SV fields includes: testing of the SV-29 well, and subject
thereto, hook-up to production facilities; commencement of
drilling of the SV-31 development well; and undertaking an
upgrade of the gas processing facilities
-- Development work for the remainder of 2021 at the VAS field
includes: planning for a new well to explore the VED prospect
within the VAS licence area; and maintenance of the gas processing
facilities, flow-line network and other field infrastructure
-- Development work for the remainder of 2021 at the SC licence
area includes: continuing drilling operations on the SC-4
well; acquisition of 150 km(2) of 3D seismic; and further
planning for the development of the SC licence area
-- Development programme for the remainder of 2021 expected to
be funded from existing cash resources and operational cash
flow
Sergii Glazunov, CEO, commented: "2021 has been an excellent
operational year so far, with strong production from the MEX-GOL,
SV and VAS fields, coupled with the significant recovery in gas
prices, contributing to our much improved profitability in the
period. We are looking forward to the results of the SV-29
development well and to further progressing our development
programme over the remainder of the year. We are also pleased to
have commenced the appraisal of the SC licence, with the spudding
of the SC-4 well, our first well on this licence."
This announcement contains inside information for the purposes
of Article 7 of EU Regulation 596/2014, which forms part of United
Kingdom domestic law by virtue of the European Union (Withdrawal)
Act 2018.
For further information, please contact:
Enwell Energy plc Tel: 020 3427 3550
Chris Hopkinson, Chairman
Sergii Glazunov, Chief Executive Officer
Bruce Burrows, Finance Director
Strand Hanson Limited Tel: 020 7409 3494
Rory Murphy / Matthew Chandler
Arden Partners plc Tel: 020 7614 5900
Ruari McGirr / Elliot Mustoe (Corporate
Finance)
Simon Johnson (Corporate Broking)
Citigate Dewe Rogerson Tel: 020 7638 9571
Elizabeth Kittle
Dmitry Sazonenko, MSc Geology, MSc Petroleum Engineering, Member
of AAPG, SPE and EAGE, Director of the Company, has reviewed and
approved the technical information contained within this press
release in his capacity as a qualified person, as required under
the AIM Rules.
Definitions/Glossary
AAPG American Association of Petroleum Geologists
Arkona LLC Arkona Gas-Energy
bbl barrel
bbl/d barrels per day
boe barrels of oil equivalent
boepd barrels of oil equivalent per day
Company Enwell Energy plc
Group Enwell Energy plc and its subsidiaries
km kilometre
km(2) square kilometre
LPG liquefied petroleum gas
MEX-GOL Mekhediviska-Golotvshinska
m(3) cubic metre
Mm(3) thousand cubic metres
MMboe million barrels of oil equivalent
MMscf million scf
MMscf/d million scf per day
% per cent
QHSE quality, health, safety and environment
SC Svystunivsko-Chervonolutskyi
scf standard cubic feet measured at 20 degrees
Celsius and one atmosphere
SPE Society of Petroleum Engineers
SPEE Society of Petroleum Evaluation Engineers
SV Svyrydivske
$ United States Dollar
UAH Ukrainian Hryvnia
VAS Vasyschevskoye
VED Vvdenska
WPC World Petroleum Council
Chairman's Statement
I am delighted to present the 2021 Interim Results. Having faced
extraordinary times globally as a result of the COVID-19 pandemic,
I am pleased to report that the Group has not been significantly
affected on an operational level in the first half of 2021, and has
achieved an excellent performance.
The Group has continued to make good progress with its
development of the MEX-GOL, SV and VAS gas and condensate fields in
north-eastern Ukraine, and has delivered a very strong financial
performance during the period. Drilling of the SV-25 appraisal well
was successfully completed and the well brought on production in
February 2021, whilst the SV-29 development well, which was spudded
in February 2021, is now being tested, and subject thereto, will be
hooked-up to the gas processing facilities. On the SC licence area,
the Group's first well, SC-4, was spudded in August 2021.
Aggregate average daily production from the MEX-GOL, SV and VAS
fields during the first half of 2021 was 4,917 boepd, which
compares favourably with an aggregate daily production rate of
4,545 boepd during the first half of 2020, an increase of
approximately 8%. At the VAS field, production was steady, but
lower than during the first half of 2020 after a decline in
production from the VAS-10 well. Overall, average daily production
in Q2 2021 hit a record quarterly level of 5,254 boepd.
The combination of higher production levels and the strong
recovery in gas prices resulted in much improved profitability.
During the first half of 2021, the Group's operating profit was
$18.1 million (1H 2020: $5.2 million), showing a significant
increase from the same period last year, and cash generated from
operations during the period was also higher at $19.2 million (1H
2020: $11.0 million).
This improved level of cash generation has enabled the Group to
progress its multiple work programmes across its broadened asset
portfolio, with approximately $26 million invested during the 2021
year to date, with $15 million invested in 1H 2021.
The fiscal and economic environment in Ukraine remains stable
(despite the effects of the COVID-19 pandemic resulting in a
contraction in GDP and an increase in the rate of inflation) and,
following a weakening during 2020, the Ukrainian Hryvnia exchange
rate has improved in 2021 to approximately the rate of mid-2020.
Nevertheless, future fiscal and economic uncertainties remain in
the Ukrainian market and we continue to be vigilant.
The deregulation of the gas supply market, supported by
electronic gas trading platforms and improved pricing transparency,
has meant that the market gas prices in Ukraine now broadly
correlate with the imported gas prices. During the first half of
2021, gas prices recovered significantly, reflecting a similar
trend in European gas prices. Similarly, condensate and LPG prices
were also higher by comparison with last year.
COVID-19
We continue to closely monitor the volatility in global
financial markets, and the implications on the operational,
economic and social environment caused by the COVID-19 pandemic. To
date, there has been no significant operational disruption arising
from the COVID-19 pandemic, and no material impact is currently
envisaged on the Group's prospects. However, the Board and
management remain acutely aware of the risks, and are taking action
to mitigate them where possible, not only to protect our staff and
other stakeholders, but also to minimise any potential disruption
to our business. We have taken steps to continually monitor the
health of our operational staff, including temperature checks for
such staff at the commencement of each shift, as well as investing
in technology to enable many staff to work from remote locations.
We continue to reassess our medium-term forecasts based on current
pricing and are highly confident we have the resources to deliver
on our plans. Of course, we cannot be certain of the duration of
the pandemic's impact but will remain focussed on monitoring and
protecting our business through the period of uncertainty. In
protecting our stakeholders interests, we are conscious of our
wider obligations to the communities, and country, in which we
operate. Accordingly, as previously announced, last year we acted,
alongside other corporate entities in Ukraine, to directly acquire
critical equipment and supplies from Chinese suppliers to donate to
the Ukrainian State to assist its efforts to manage the pandemic in
Ukraine.
Capital Reduction
On 25 February 2021, the Company completed a reduction of its
share capital through the cancellation of its entire share premium
account. This reduction of capital created distributable reserves
of the Company, which enables the Company to make distributions to
its shareholders in the future, subject to the Company's financial
performance. However, the Company is not indicating any commitment,
and does not have any current intention, to make any distributions
to shareholders.
Outlook
Whilst there are still challenges, the business environment in
Ukraine is relatively stable despite the COVID-19 outbreak.
Following the strong operational performance during the first half
of 2021, and the increased production output during the period, we
are looking forward to the results of the SV-29 development well,
which are expected in the near future. We are also looking forward
to achieving further success in the development activities planned
for the remainder of 2021 and, facilitated by the strong current
gas price environment, delivering a steadily increasing production
and revenue stream in the future.
In conclusion, on behalf of the Board, I would like to thank all
of our staff for the continued dedication and support they have
shown during the year to date and especially in the midst of the
COVID-19 pandemic.
Chris Hopkinson
Chairman
15 September 2021
Chief Executive Officer's Statement
Introduction
The Group continued to make good progress at its Ukrainian
fields during 2021, with development activity at the MEX-GOL and SV
fields including success with the drilling of the SV-25 appraisal
well, which came on production in February 2021, and completion of
drilling operations on the SV-29 development well in late August
2021, which is now undergoing testing operations. In addition, work
continued on preparations for the drilling of the SV-31 development
well and the upgrade of the gas processing facilities, as well as
work on upgrades to the flow-line network and remedial activity on
existing wells.
Overall production continued its upward trend during the period,
achieving record levels for the Group in Q2 2021, and being
approximately 8% higher than in the first half of 2020, with a
substantial boost in February 2021, once the SV-25 well came on
production.
Production
The average daily production of gas, condensate and LPG from the
MEX-GOL, SV and VAS fields for the six month period ended 30 June
2021 was as follows:
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
1H 2021 1H 2020 1H 2021 1H 2020 1H 2021 1 2020 1H 2021 1H 2020
-------- -------- -------- -------- -------- ------- -------- --------
MEX-GOL
& SV 19.7 17.4 694 654 331 292 4,403 3,941
-------- -------- -------- -------- -------- ------- -------- --------
VAS 2.8 3.1 28 34 - - 514 604
-------- -------- -------- -------- -------- ------- -------- --------
Total 22.5 20.5 722 688 331 292 4,917 4,545
-------- -------- -------- -------- -------- ------- -------- --------
Production rates were higher when compared with the
corresponding period in 2020, predominantly due to the
contributions of the SV-54 well, which commenced production in May
2020, and the SV-25 well, which commenced production in February
2021.
The Group's average daily production for the period from 1 July
2021 to 14 September 2021 from the MEX-GOL and SV field was 21.0
MMscf/d of gas, 749 bbl/d of condensate and 274 bbl/d of LPG (4,657
boepd in aggregate) and from the VAS field was 2.5 MMscf/d of gas
and 23 bbl/d of condensate (480 boepd in aggregate).
Operations
Notwithstanding the impact of the COVID-19 pandemic during 2020
and 2021, over recent periods, there have been relatively stable
fiscal and economic conditions in Ukraine, as well as reductions in
the subsoil tax rates and improvements in the regulatory procedures
in the oil and gas sector in Ukraine , and this has given the Board
confidence to continue the Group's development programme at its
Ukrainian fields during 2021. Furthermore, the strong recovery in
gas prices in Europe has fed through to the Group's realised prices
in Ukraine, providing a significant boost to the Group's revenues
and profitability in the first half of 2021.
The Group has continued to refine its geological subsurface
models of the MEX-GOL, SV and VAS fields, in order to enhance its
strategy for the further development of the fields, including the
timing and level of future capital investment required to exploit
the hydrocarbon resources.
At the MEX-GOL and SV fields, the drilling of the SV-25
appraisal well was completed in February 2021, having been drilled
to a final depth of 5,320 metres. One interval, at a drilled depth
of 5,184 - 5,190 metres, within the V-22 Visean formation was
perforated, and after successful testing, the well was hooked-up to
the gas processing facilities.
The Group continues to operate each of the SV-2 and SV-12 wells
under joint venture agreements with NJSC Ukrnafta, the majority
State-owned oil and gas producer. Under the agreements, the gas and
condensate produced from the respective wells is sold under an
equal net profit sharing arrangement between the Group and NJSC
Ukrnafta, with the Group accounting for the hydrocarbons produced
and sold from the wells as revenue, and the net profit share due to
NJSC Ukrnafta being treated as a lease expense in cost of sales.
Both of these wells have proven to be strong producers since being
brought back on production.
At the VAS field, a successful workover of the VAS-10 well was
undertaken to access an alternative production horizon, which
improved production rates from the VAS field.
In March 2019 (as set out in the announcement made on 12 March
2019), a regulatory issue arose when the State Service of Geology
and Subsoil of Ukraine issued an order for suspension (the "Order")
of the production licence for the VAS field. Under the applicable
legislation, the Order would lead to a shut-down of production
operations at the VAS field, but the Group has issued legal
proceedings to challenge the Order, and has obtained a ruling
suspending operation of the Order pending a hearing of the
substantive issues. The Group does not believe that there are any
grounds for the Order, and is continuing to pursue its challenge to
the Order through the Ukrainian Courts.
Arkona Acquisition
As announced on 24 March 2020, the Group acquired the entire
issued share capital of LLC Arkona Gas-Energy ("Arkona") for a
total consideration of up to $8.63 million, of which $4.32 million
was subject to the satisfaction of certain conditions. Following
satisfaction of the requisite conditions and by agreement between
the parties to the acquisition agreement, further payments
totalling $2.6 million (net of an indemnity liability) have been
paid, and the balance of the consideration is subject to the
remaining conditions. Arkona holds a 100% interest in the
Svystunivsko-Chervonolutskyi ("SC") exploration licence, which is
located in the Poltava region in north-eastern Ukraine. The SC
licence covers an area of 97 km(2) , and is approximately 15 km
east of the SV field. The licence was granted in May 2017 with a
duration of 20 years. The licence is prospective for gas and
condensate, and has been the subject of exploration since the
1980s, with 5 wells having been drilled on the licence since then,
although none of these wells are currently on production. As with
the productive reservoirs in the SV field, the prospective
reservoirs in the licence are Visean, at depths between 4,600 -
6,000 metres.
However, NJSC Ukrnafta, the majority State-owned oil and gas
producer, issued legal proceedings against Arkona, in which NJSC
Ukrnafta made claims of irregularities in the procedures involved
in the grant of the SC licence to Arkona in May 2017. In early July
2020, the First Instance Court in Ukraine made a ruling in favour
of NJSC Ukrnafta, which found that the grant of the SC licence was
irregular, but this ruling was overturned by the Appellate
Administrative Court in September 2020, and a final appeal to the
Supreme Court of Ukraine was determined in favour of Arkona in
February 2021. Further information can be found in the Company's
announcements dated 3 July 2020, 31 July 2020, 30 September 2020,
23 November 2020 and 11 February 2021.
During early 2021, the Group engaged independent petroleum
consultants, DeGolyer and MacNaughton, to prepare an assessment of
the remaining reserves and contingent resources attributable to the
SC licence as of 1 January 2021, in accordance with the March 2007
(as revised in June 2018) SPE/WPC/AAPG/SPEE Petroleum Resources
Management System standard for classification and reporting. Their
assessment estimated the proved and probable (2P) reserves
attributable to the SC licence at 12.1 MMboe. The assessment is
consistent with the Group's proposed field development plan for the
SC licence, which includes the drilling of the SC-4 well and the
acquisition of 150 km(2) of 3D seismic later this year, and the
construction of a gas processing plant. Development is then planned
to continue with the drilling of a further six wells to recover the
reserves and resources in the SC licence. Due to their targeted
depths, the wells are each likely to take up to 12 months to
complete, and are planned to be drilled consecutively over the next
eight years. Further information on DeGolyer and MacNaughton's
assessment can be found in the Company's announcement dated 2 June
2021.
Outlook
During the remainder of 2021, the Group will continue to develop
the MEX-GOL, SV and VAS fields, as well as moving forward with the
appraisal and development of the SC licence . At the MEX-GOL and SV
fields, the development programme includes completing the testing
of the SV-29 development well and, subject thereto, hooking-up the
well to the gas processing facilities, commencing the drilling of
the SV-31 development well, investigating workover opportunities
for other existing wells, and remedial and upgrade work on existing
wells, the flow-line network and pipelines and other
infrastructure.
In addition, preparations for upgrade works to the gas
processing facilities at the MEX-GOL and SV fields are continuing,
with permitting recently completed and the procurement of long-lead
items progressing as planned. These works involve an upgrade of the
LPG extraction circuit, an increase to the flow capacity of the
facilities, and a significant increase to the liquids tank storage
capacity, which are designed to improve overall plant efficiencies,
improve the quality of liquids produced and boost recoveries of
LPG, while reducing environmental emissions. The works are
scheduled to commence later in the year, and, in total, will take
approximately three and a half months to complete. In the later
stages of the works, it will be necessary for the plant to be
shut-in for approximately one month, during which period,
production through the plant will be suspended. However, in order
to mitigate the impact on production during this period, the Group
has agreed with the operator of an adjacent field for the toll
treatment of a material proportion of its forecast production
volumes of gas and condensate. Although there will be a temporary
impact on the Group's revenues during the period that the plant is
shut-in, it is envisaged that the improved recovery of LPG
following completion of the upgrade works will significantly boost
future revenues, resulting in no overall material impact on
revenues over the six month period during and immediately following
the works, and a positive impact in future periods thereafter.
At the VAS field, planning for the proposed new well to explore
the VED prospect within the VAS licence area is continuing, and
maintenance of the gas processing facilities, pipeline network and
other field infrastructure is planned.
With the resolution of the legal issues relating to the SC
licence, the Group has re-commenced appraisal and development work
on the SC licence, with the SC-4 appraisal well spudded in August
2021, and the acquisition of 150 km(2) of 3D seismic planned for
later this year.
Ongoing legislative reforms and the general stability in the
business climate in Ukraine, are encouraging and supportive of the
independent oil and gas producers in Ukraine.
Finally, I would like to add my thanks to all of our staff for
the continued hard work and dedication they have shown during this
year, and to especially recognise their continuing efforts and
professionalism during the current COVID-19 pandemic.
Sergii Glazunov
Chief Executive Officer
Finance Review
The Group's strong financial performance in the first half of
2021 was predominantly due to the Group's higher levels of
production and the significant recovery in average gas
realisations. This resulted in the Group making a net profit of
$13.8 million (1H 2020: $1.2 million).
Revenue for the period, derived from the sale of the Group's
Ukrainian gas, condensate and LPG production, was appreciably up
66% at $41.1 million (1H 2020: $24.7 million).
Gross profit for the period nearly tripled, at $21.6 million (1H
2020: $7.5 million), and the improvement in profit before tax was
even more marked, increasing by a factor of almost seven, to $18.0
million (1H 2020: $2.6 million).
Average gas realisations in the period were up 79% at $249/Mm(3)
(UAH6,897/Mm(3) ), with condensate and LPG sales also up by 76% and
65% at $74/bbl and $66/bbl respectively (1H 2020: $139/Mm(3)
(UAH3,514/Mm(3) ), $42/bbl and $40/bbl respectively).
During the period from 1 July 2021 to 14 September 2021, the
average realised gas, condensate and LPG prices were $431/Mm(3)
(UAH11,602/Mm(3) ), $76/bbl and $79/bbl respectively.
Since the deregulation of the gas supply market in Ukraine in
October 2015, the market price for gas has broadly correlated to
the price of imported gas, which generally reflects trends in
European gas prices. Gas prices are also subject to seasonal
variation. During the first half of 2021, there was a sustained
recovery in prices (a function of a more general recovery in
European commodity prices, as well as the 2020-21 winter being one
of the coldest winters in a decade in Ukraine), and gas prices are
continuing to maintain their high levels.
Cost of sales for the period was up 13% at $19.5 million (1H
2020: $17.2 million). There were some significant movements within
this total: depreciation of property, plant and equipment was 11%
lower at $5.5 million (1H 2020: $6.2 million) as a combined result
of lower forecast future capital expenditure and a greater volume
sold in 1H 2021, compared with 1H 2020, with 1H 2020 sales volumes
benefiting from 153,722 boe sold from inventory; production taxes
increased materially, by 49%, as a result of increased gas
revenues, in turn a function of the much higher gas prices as noted
above; a 40% increase in rent expense, a function of higher well
profitability; and staff costs declined by 26% as a function of the
aforementioned reduction in sales volumes (distinct from the
increased production volumes) resulting in the unit of production
allocation of staff costs being lower than in 1H 2020, which saw a
release of such costs that had been held in inventory at year-end
2019.
The subsoil tax rates applicable to gas production were stable
during the period at 29% for gas produced from deposits at depths
shallower than 5,000 metres and 14% for gas produced from deposits
deeper than 5,000 metres, but reductions in the subsoil rates
applicable to new wells and to condensate production were
applicable, under which (i) for new wells drilled after 1 January
2018, the subsoil tax rates were reduced from 29% to 12% for gas
produced from deposits at depths shallower than 5,000 metres and
from 14% to 6% for gas produced from deposits deeper than 5,000
metres for the period between 2018 and 2022, and (ii) with effect
from 1 January 2019 and applicable to all wells, the subsoil tax
rates for condensate were reduced from 45% to 31% for condensate
produced from deposits shallower than 5,000 metres and from 21% to
16% for condensate produced from deposits deeper than 5,000
metres.
Administrative expenses for the period were broadly unchanged at
$4.0 million (1H 2020: $3.9 million).
The 69% fall in Other operating income (net) of $0.5 million is
mainly due to the 70% drop in interest income to $0.3 million as a
result of the general fall in global interest rates.
Other expenses (net) in the period reduced significantly by 98%,
a net effect of: a small foreign exchange loss in the period of
$0.03 million compared to a profit of $0.2 million in 2020; and
most materially, the de-minimis charitable donations in the period
compared to the $2.1 million in 1H 2020 ( for the supply of
COVID-19-related medical equipment for the Ukrainian authorities
and charitable foundations) .
The tax charge for the six month period ended 30 June 2021 of
$4.2million (1H 2020: $1.4 million charge) comprises a current tax
charge of $4.0 million (1H 2020: $1.4 million charge) and a
deferred tax charge of $0.2 million (1H 2020: $0.01 million). The
current tax charge increased by 200% due to the increase in
profit.
A deferred tax asset relating to the Group's provision for
decommissioning at 30 June 2021 of $0.2 million (31 December 2020:
$0.2 million) was recognised on the tax effect of the temporary
differences of the Group's provision for decommissioning at the
MEX-GOL and SV fields, and its tax base. A deferred tax liability
relating to the Group's development and production assets at the
MEX-GOL and SV fields at 30 June 2021 of $3.3 million (31 December
2020: $2.9 million) was recognised on the tax effect of the
temporary differences between the carrying value of the Group's
development and production asset at the MEX-GOL and SV fields, and
its tax base.
A deferred tax asset relating to the Group's provision for
decommissioning at 30 June 2021 of $0.3 million (31 December 2020:
$0.3 million) was recognised on the tax effect of the temporary
differences on the Group's provision on decommissioning at the VAS
field, and its tax base. The deferred tax liability relating to the
Group's development and production assets at the VAS field at 30
June 2021 of $0.1 million (31 December 2020: $0.2 million) was
recognised on the tax effect of the temporary differences between
the carrying value of the Group's development and production asset
at the VAS field, and its tax base.
There were $10.7 million of additions to Property, Plant and
Equipment, reflecting investment in the Group's oil and gas
development and production assets during the period (1H 2020: $8.8
million), primarily relating to the expenditure associated with the
drilling of the SV-25 and SV-29 wells.
Cash and cash equivalents held at 30 June 2021 were $62.9
million (31 December 2020: $61.0 million cash and cash
equivalents). The Group's cash and cash equivalents balance at 14
September 2021 was $54.4 million, held as to $16.3 million
equivalent in Ukrainian Hryvnia, and the balance of $38.1 million
equivalent predominantly in US Dollars, Euros and Pounds
Sterling.
Between early 2014 and 2020, the Ukrainian Hryvnia devalued
significantly against the US Dollar, falling from UAH8.3/$1.00 on 1
January 2014 to UAH28.3/$1.00 on 31 December 2020, which resulted
in substantial foreign exchange translation losses for the Group
over that period, and in turn adversely impacted the carrying value
of the MEX-GOL and SV asset due to the translation of two of the
Group's subsidiaries from their functional currency of Ukrainian
Hryvnia to the Group's presentation currency of US Dollars. In the
first half of 2021, the Ukrainian Hryvnia has strengthened against
the US Dollar with the exchange rate at 30 June 2021 being
UAH27.2/$1.00. The impact of this was $3.9 million of foreign
exchange gains (1H 2020: $10.8 million of foreign exchange losses).
Further movements of the Ukrainian Hryvnia against the US Dollar
may affect the carrying value of the Group's assets in the
future.
Cash from operations has funded the capital investment during
the period, and the Group's current cash position and positive
operating cash flow are the sources from which the Group plans to
fund the development programmes for its assets over the remainder
of 2021 and beyond. This is coupled with the fact that the Group
remains debt-free, and therefore has no debt covenants that may
otherwise impede its ability to implement contingency plans if
domestic and/or global circumstances dictate. This flexibility and
ability to monitor and manage development plans and liquidity is a
cornerstone of our planning, and underpins our assessments of the
future. With cash resources at the end of the period in excess of
$62 million, and annual running costs of less than $8 million, the
Group remains in a very strong position should any local or global
shocks occur to the industry and/or the Group.
On 25 February 2021, the Company completed a reduction of its
share capital through the cancellation of its entire share premium
account. This reduction of capital created distributable reserves
of the Company, which enables the Company to make distributions to
its shareholders in the future, subject to the Company's financial
performance. However, the Company is not indicating any commitment,
and does not have any current intention, to make any distributions
to shareholders.
Bruce Burrows
Finance Director
Principal Risks and Uncertainties
The Group has a risk evaluation methodology in place to assist
in the review of the risks across all material aspects of its
business. This methodology highlights external, operational and
technical, financial and corporate risks and assesses the level of
risk and potential consequences. It is periodically presented to
the Audit Committee and the Board for review, to bring to their
attention potential risks and, where possible, propose mitigating
actions. Key risks recognised and mitigation factors, materially
unchanged from the previous period, are detailed below:
Risk Mitigation
External risks
-----------------------------------------------
Risk relating to Ukraine
-----------------------------------------------
Ukraine is an emerging market and The Group minimises this risk by
as such, the Group is exposed to continuously monitoring the market
greater regulatory, economic and in Ukraine and by maintaining a
political risks than it would be strong working relationship with
in other jurisdictions. Emerging the Ukrainian regulatory authorities.
economies are generally subject The Group also maintains a significant
to a volatile political and economic proportion of its cash holdings
environment, which makes them vulnerable in international banks outside Ukraine.
to market downturns elsewhere in
the world, and could adversely impact
the Group's ability to operate in
the market.
-----------------------------------------------
Regional conflict
-----------------------------------------------
Ukraine continues to have a strained As the Group has no assets in Crimea
relationship with Russia, following or the areas of conflict in the
Ukraine's agreement to join a free east of Ukraine, nor do its operations
trade area with the European Union, rely on sales or costs incurred
which resulted in the implementation there, the Group has not been directly
of mutual trade restrictions between affected by the conflict. However,
Russia and Ukraine on many key products. the Group continues to monitor the
Further, the conflict in parts of situation and endeavours to procure
eastern Ukraine has not been resolved its equipment from sources in other
to date, and Russia continues to markets. The disputes and interruption
occupy Crimea. This conflict has to the supply of gas from Russia
put further pressure on relations has indirectly encouraged Ukrainian
between Ukraine and Russia, and Government support for the development
the political tensions have had of the domestic production of hydrocarbons
an adverse effect on the Ukrainian since Ukraine imports a significant
financial markets, hampering the proportion of its gas, which has
ability of Ukrainian companies and resulted in legislative measures
banks to obtain funding from the to improve the regulatory requirements
international capital and debt markets. for hydrocarbon extraction in Ukraine.
This strained relationship between
Russia and Ukraine has also resulted
in disputes and interruptions in
the supply of gas from Russia.
-----------------------------------------------
Banking system in Ukraine
-----------------------------------------------
The banking system in Ukraine has The creditworthiness and potential
been under great strain in recent risks relating to the banks in Ukraine
years due to the weak level of capital, are regularly reviewed by the Group,
low asset quality caused by the but the geopolitical and economic
economic situation, currency depreciation, events since 2013 in Ukraine have
changing regulations and other economic significantly weakened the Ukrainian
pressures generally, and so the banking sector. In light of this,
risks associated with the banks the Group has taken and continues
in Ukraine have been significant, to take steps to diversify its banking
including in relation to the banks arrangements between a number of
with which the Group has operated banks in Ukraine. These measures
bank accounts. However, following are designed to spread the risks
remedial action imposed by the National associated with each bank's creditworthiness,
Bank of Ukraine, Ukraine's banking and the Group endeavours to use
system has improved moderately. banks that have the best available
Furthermore, Ukraine has continued creditworthiness. Nevertheless,
to have support and access to funding and despite some recent improvements,
from the International Monetary the Ukrainian banking sector remains
Fund. weakly capitalised and so the risks
associated with the banks in Ukraine
remain significant, including in
relation to the banks with which
the Group operates bank accounts.
As a consequence, the Group also
maintains a significant proportion
of its cash holdings in international
banks outside Ukraine.
-----------------------------------------------
Geopolitical environment in Ukraine
-----------------------------------------------
Although there have been some improvements The Group continually monitors the
in recent years, there has not been market and business environment
a final resolution of the political, in Ukraine and endeavours to recognise
fiscal and economic situation in approaching risks and factors that
Ukraine and its ongoing effects may affect its business. In addition,
are difficult to predict and likely the involvement of Smart Holding
to continue to affect the Ukrainian (Cyprus) Limited, as the indirect
economy and potentially the Group's majority shareholder with extensive
business. Whilst not materially experience in Ukraine, is considered
affecting the Group's production helpful to mitigate such risks.
operations, the instability has
disrupted the Group's development
and operational planning for its
assets.
-----------------------------------------------
Climate change
-----------------------------------------------
Any near and medium-term continued The Group's plans and actions include:
warming of the Planet can have potentially assessing, reducing and/or mitigating
increasing negative social, economic its emissions in its operations;
and environmental consequences, and identifying climate change-related
generally globally and regionally, risks and assessing the degree to
and specifically in relation to which they can affect its business,
the Group. The potential impacts including financial implications.
include: loss of market; and increased The Group's Health, Safety and Environment
costs of operation through increasing Committee, which was established
regulatory oversight and controls, in 2020, is specifically tasked
including potential effective or with overseeing measuring, benchmarking
actual loss of licence to operate. and mitigating the Group's environmental
As a diligent operator aware and and climate impact, which will be
responsive to its good stewardship reported on in future periods. At
responsibilities, the Group not this stage, the Group does not consider
only needs to monitor and modify climate change to have any material
its business plans and operations implications on the Group's financial
to react to changes, but also to statements, including the accounting
ensure its environmental footprint estimates.
is as minimal as it can practicably
be in managing the hydrocarbon resources
the Group produces.
-----------------------------------------------
Operational and technical risks
-----------------------------------------------
Quality, Health, Safety and Environment
("QHSE")
-----------------------------------------------
The oil and gas industry, by its The Group maintains QHSE policies
nature, conducts activities which and requires that management, staff
can cause health, safety, environmental and contractors adhere to these
and security incidents. Serious policies. The policies ensure that
incidents can not only have a financial the Group meets Ukrainian legislative
impact but can also damage the Group's standards in full and achieves international
reputation and the opportunity to standards to the maximum extent
undertake further projects. As evidenced possible. As a consequence of the
by recent events, pandemics also COVID-19 pandemic, including the
pose a risk to operations, by potential threat of any resurgences in the
illness and threat to life of employees scale and impact of the virus, or
and contractors, and the associated new viruses, the Group is re-visiting
disruptions in staffing levels, processes and controls intended
operations and supply chains. to ensure protection of all our
stakeholders and minimise any disruption
to our business. Whilst possible
to only a limited extent in field
operations, the Group has invested
in technology that will allow many
staff to work just as effectively
from remote locations.
-----------------------------------------------
Industry risks
-----------------------------------------------
The Group is exposed to risks which The Group has well qualified and
are generally associated with the experienced technical management
oil and gas industry. For example, staff to plan and supervise operational
the Group's ability to pursue and activities. In addition, the Group
develop its projects and development engages with suitably qualified
programmes depends on a number of local and international geological,
uncertainties, including the availability geophysical and engineering experts
of capital, seasonal conditions, and contractors to supplement and
regulatory approvals, gas, oil, broaden the pool of expertise available
condensate and LPG prices, development to the Group. Detailed planning
costs and drilling success. As a of development activities is undertaken
result of these uncertainties, it with the aim of managing the inherent
is unknown whether potential drilling risks associated with oil and gas
locations identified on proposed exploration and production, as well
projects will ever be drilled or as ensuring that appropriate equipment
whether these or any other potential and personnel are available for
drilling locations will be able the operations, and that local contractors
to produce gas, oil or condensate. are appropriately supervised.
In addition, drilling activities
are subject to many risks, including
the risk that commercially productive
reservoirs will not be discovered.
Drilling for hydrocarbons can be
unprofitable, not only due to dry
holes, but also as a result of productive
wells that do not produce sufficiently
to be economic. In addition, drilling
and production operations are highly
technical and complex activities
and may be curtailed, delayed or
cancelled as a result of a variety
of factors.
-----------------------------------------------
Production of hydrocarbons
-----------------------------------------------
Producing gas and condensate reservoirs In 2016, the Group engaged external
are generally characterised by declining technical consultants to undertake
production rates which vary depending a comprehensive review and re-evaluation
upon reservoir characteristics and study of the MEX-GOL and SV fields
other factors. Future production in order to gain an improved understanding
of the Group's gas and condensate of the geological aspects of the
reserves, and therefore the Group's fields and reservoir engineering,
cash flow and income, are highly drilling and completion techniques,
dependent on the Group's success and the results of this study and
in operating existing producing further planned technical work is
wells, drilling new production wells being used by the Group in the future
and efficiently developing and exploiting development of these fields. The
any reserves, and finding or acquiring Group has established an ongoing
additional reserves. The Group may relationship with such external
not be able to develop, find or technical consultants to ensure
acquire reserves at acceptable costs. that technical management and planning
The experience gained from drilling is of a high quality in respect
undertaken to date highlights such of all development activities on
risks as the Group targets the appraisal the Group's fields.
and production of these hydrocarbons.
-----------------------------------------------
Risks relating to further development
and operation of the Group's gas
and condensate fields in Ukraine
-----------------------------------------------
The planned development and operation The Group's technical management
of the Group's gas and condensate staff, in consultation with its
fields in Ukraine is susceptible external technical consultants,
to appraisal, development and operational carefully plan and supervise development
risk. This could include, but is and operational activities with
not restricted to, delays in delivery the aim of managing the risks associated
of equipment in Ukraine, failure with the further development of
of key equipment, lower than expected the Group's fields in Ukraine. This
production from wells that are currently includes detailed review and consideration
producing, or new wells that are of available subsurface data, utilisation
brought on-stream, problematic wells of modern geological software, and
and complex geology which is difficult utilisation of engineering and completion
to drill or interpret. The generation techniques developed for the fields.
of significant operational cash With operational activities, the
is dependent on the successful delivery Group ensures that appropriate equipment
and completion of the development and personnel is available for the
and operation of the fields. operations, and that operational
contractors are appropriately supervised.
In addition, the Group performs
a review of its oil and gas assets
for impairment on an annual basis,
and considers whether an assessment
of its oil and gas assets by a suitably
qualified independent assessor is
appropriate or required.
-----------------------------------------------
Drilling and workover operations
-----------------------------------------------
Due to the depth and nature of the The utilisation of detailed sub-surface
reservoirs in the Group's fields, analysis, careful well planning
the technical difficulty of drilling and engineering design in designing
or re-entering wells in the Group's work programmes, along with appropriate
fields is high, and this and the procurement procedures and competent
equipment limitations within Ukraine, on-site management, aims to minimise
can result in unsuccessful or lower these risks.
than expected outcomes for wells.
-----------------------------------------------
Maintenance of facilities
-----------------------------------------------
There is a risk that production The Group's facilities are operated
or transportation facilities can and maintained at standards above
fail due to non-adequate maintenance, the Ukrainian minimum legal requirements.
control or poor performance of the Operations staff are experienced
Group's suppliers. and receive supplemental training
to ensure that facilities are properly
operated and maintained. Service
providers are rigorously reviewed
at the tender stage and are monitored
during the contract period.
-----------------------------------------------
Financial risks
-----------------------------------------------
Exposure to cash flow and liquidity
risk
-----------------------------------------------
There is a risk that insufficient The Group maintains adequate cash
funds are available to meet the reserves and closely monitors forecasted
Group's development obligations and actual cash flow, as well as
to commercialise the Group's oil short and longer-term funding requirements.
and gas assets. Since a significant The Group does not currently have
proportion of the future capital any loans outstanding, internal
requirements of the Group is expected financial projections are regularly
to be derived from operational cash made based on the latest estimates
generated from production, including available, and various scenarios
from wells yet to be drilled, there are run to assess the robustness
is a risk that in the longer term, of the liquidity of the Group. However,
insufficient operational cash is as the risk to future capital funding
generated, or that additional funding, is inherent in the oil and gas exploration
should the need arise, cannot be and development industry and reliant
secured. in part on future development success,
it is difficult for the Group to
take any other measures to further
mitigate this risk, other than tailoring
its development activities to its
available capital funding from time
to time.
-----------------------------------------------
Ensuring appropriate business practices
-----------------------------------------------
The Group operates in Ukraine, an The Group maintains anti-bribery
emerging market, where certain inappropriate and corruption policies in relation
business practices may, from time to all aspects of its business,
to time occur, such as corrupt business and ensures that clear authority
practices, bribery, appropriation levels and robust approval processes
of property and fraud, all of which are in place, with stringent controls
can lead to financial loss. over cash management and the tendering
and procurement processes. In addition,
office and site protection is maintained
to protect the Group's assets.
-----------------------------------------------
Hydrocarbon price risk
-----------------------------------------------
The Group derives its revenue principally The Group sells a proportion of
from the sale of its Ukrainian gas, its hydrocarbon production through
condensate and LPG production. These offtake arrangements, which include
revenues are subject to commodity pricing formulae so as to ensure
price volatility and political influence. that it achieves market prices for
A prolonged period of low gas, condensate its products, as well as utilising
and LPG prices may impact the Group's the electronic market platforms
ability to maintain its long-term in Ukraine to achieve market prices
investment programme with a consequent for its remaining products. However,
effect on growth rate, which in hydrocarbon prices in Ukraine are
turn may impact the share price implicitly linked to world hydrocarbon
or any shareholder returns. Lower prices and so the Group is subject
gas, condensate and LPG prices may to external price trends.
not only decrease the Group's revenues
per unit, but may also reduce the
amount of gas, condensate and LPG
which the Group can produce economically,
as would increases in costs associated
with hydrocarbon production, such
as subsoil taxes and royalties.
The overall economics of the Group's
key assets (being the net present
value of the future cash flows from
its Ukrainian projects) are far
more sensitive to long term gas,
condensate and LPG prices than short-term
price volatility. However, short-term
volatility does affect liquidity
risk, as, in the early stage of
the projects, income from production
revenues is offset by capital investment.
-----------------------------------------------
Currency risk
-----------------------------------------------
Since the beginning of 2014 , the The Group's sales proceeds are received
Ukrainian Hryvnia significantly in Ukrainian Hryvnia, and the majority
devalued against major world currencies, of the capital expenditure costs
including the US Dollar, where it for the current investment programme
has fallen from UAH8.3/$1.00 on will be incurred in Ukrainian Hryvnia,
1 January 2014 to UAH27.2/$1.00 thus the currency of revenue and
on 30 June 2021 This devaluation costs are largely matched. In light
has been a significant contributor of the previous devaluation and
to the imposition of the banking volatility of the Ukrainian Hryvnia
restrictions by the National Bank against major world currencies,
of Ukraine over recent years. In and since the Ukrainian Hryvnia
addition, the geopolitical events does not benefit from the range
in Ukraine over recent years, are of currency hedging instruments
likely to continue to impact the which are available in more developed
valuation of the Ukrainian Hryvnia economies, the Group has adopted
against major world currencies. a policy that, where possible, funds
Further devaluation, and volatility, not required for use in Ukraine
of the Ukrainian Hryvnia against be retained on deposit in the United
the US Dollar will affect the carrying Kingdom and Europe, principally
value of the Group's assets. in US Dollars.
-----------------------------------------------
Counterparty and credit risk
-----------------------------------------------
The challenging political and economic The Group monitors the financial
environment in Ukraine means that position and credit quality of its
businesses can be subject to significant contractual counterparties and seeks
financial strain, which can mean to manage the risk associated with
that the Group is exposed to increased counterparties by contracting with
counterparty risk if counterparties creditworthy contractors and customers.
fail or default in their contractual Hydrocarbon production is sold on
obligations to the Group, including terms that limit supply credit and/or
in relation to the sale of its hydrocarbon title transfer until payment is
production, resulting in financial received .
loss to the Group.
-----------------------------------------------
Financial markets and economic outlook
-----------------------------------------------
The performance of the Group is The Group's sales proceeds are received
influenced by global economic conditions in Ukrainian Hryvnia and a significant
and, in particular, the conditions proportion of investment expenditure
prevailing in the United Kingdom is made in Ukrainian Hryvnia , which
and Ukraine. The economies in these minimises risks related to foreign
regions have been subject to volatile exchange volatility. However, hydrocarbon
pressures in recent periods, with prices in Ukraine are implicitly
the global economy having experienced linked to world hydrocarbon prices
a long period of difficulties, and and so the Group is subject to external
more particularly the events that price movements. The Group holds
have occurred in Ukraine over recent a significant proportion of its
years. This has led to extreme foreign cash reserves in the United Kingdom
exchange movements in the Ukrainian and Europe, mostly in US Dollars,
Hryvnia , high inflation and interest with reputable financial institutions.
rates, and increased credit risk The financial status of counterparties
relating to the Group's key counterparties. is carefully monitored to manage
counterparty risks. Nevertheless,
the risks that the Group faces as
a result of these risks cannot be
predicted and many of these are
outside of the Group's control.
-----------------------------------------------
Corporate risks
-----------------------------------------------
Ukraine production licences
-----------------------------------------------
The Group operates in a region where The Group ensures compliance with
the right to production can be challenged commitments and regulations relating
by State and non-State parties. to its production licences through
In 2010, this manifested itself Group procedures and controls or,
in the form of a Ministry Order where this is not immediately feasible
instructing the Group to suspend for practical or logistical considerations,
all operations and production from seeks to enter into dialogue with
its MEX-GOL and SV production licences, the relevant Government bodies with
which was not resolved until mid-2011. a view to agreeing a reasonable
In 2013, new rules relating to the time frame for achieving compliance
updating of production licences or an alternative, mutually agreeable
led to further challenges being course of action. Work programmes
raised by the Ukrainian authorities are designed to ensure that all
to the production licences held licence obligations are met and
by independent oil and gas producers continual interaction with Government
in Ukraine, including the Group, bodies is maintained in relation
which may result in requirements to licence obligations and commitments.
for remediation work, financial
penalties and/or the suspension
of such licences, which, in turn,
may adversely affect the Group's
operations and financial position.
In March 2019, a Ministry Order
was issued instructing the Group
to suspend all operations and production
from its VAS production licence.
The Group is challenging this Order
through legal proceedings, during
which production from the licence
is continuing, but this matter remains
unresolved. In 2020, LLC Arkona
Gas-Energy ("Arkona") faced a challenge
from NJSC Ukrnafta concerning the
validity of its SC exploration licence
, which was ultimately resolved
in Arkona's favour by a decision
of the Supreme Court of Ukraine
in February 2021. All such challenges
affecting the Group have thus far
been successfully defended through
the Ukrainian legal system. However,
the business environment is such
that these types of challenges may
arise at any time in relation to
the Group's operations, licence
history, compliance with licence
commitments and/or local regulations.
In addition, these licences carry
ongoing compliance obligations,
which if not met, may lead to the
loss of a licence.
-----------------------------------------------
Risks relating to key personnel
-----------------------------------------------
The Group's success depends upon The Group periodically reviews the
skilled management as well as technical compensation and contractual terms
expertise and administrative staff. of its staff. In addition, the Group
The loss of service of critical has developed relationships with
members from the Group's team could a number of technical and other
have an adverse effect on the business. professional experts and advisers,
who are used to provide specialist
services as required.
-----------------------------------------------
Directors' Responsibility Statement
The Directors confirm that, to the best of their knowledge:
a) the unaudited condensed interim consolidated financial
statements have been prepared in accordance with UK-adopted
International Accounting Standard 34, 'Interim Financial Reporting'
("IAS 34") and the AIM Rules for Companies; and
b) these unaudited interim results include:
(i) a fair review of the information required (i.e. an
indication of important events and their impact and a description
of the principal risks and uncertainties for the remaining six
months of the financial year); and
(ii) a fair review of the information required on related party transactions.
A list of current Directors is maintained on the Group's
website, www.enwell-energy.com.
Condensed Interim Consolidated Income Statement
6 months
6 months ended ended
30 Jun 2 1 30 Jun 20
(unaudited) (unaudited)
Note $000 $000
Revenue 3 41,050 24,708
Cost of sales 4 (19,452) (17,203)
------------------------------------ ----- --------------- ------------
Gross profit 21,598 7,505
Administrative expenses (3,953) (3,852)
Other operating income, (net) 5 469 1,500
Operating profit 18,114 5,153
Net impairment losses on financial
assets (1 9 ) (29)
Other expenses, (net) 6 (39) (1,925)
Finance income 87 -
Finance costs ( 197 ) (604)
Profit before taxation 17,94 6 2,595
Income tax expense 7 (4,15 7 ) (1,366)
------------------------------------ ----- --------------- ------------
Profit for the period 13,7 89 1,229
------------------------------------ ----- --------------- ------------
Earnings per share (cents)
Basic and diluted 8 4 .3c 0 . 4 c
------------------------------------ ----- --------------- ------------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Comprehensive
Income
6 months ended 6 months
ended
30 Jun 2 30 Jun 20
1
(unaudited) (unaudited)
$000 $000
Profit for the period 13,7 89 1,229
Other comprehensive income:
Items that may be subsequently reclassified
to profit or loss:
Equity - foreign currency translation 3,9 27 (10,841)
--------------------------------------------- --------------- ------------
Total other comprehensive income/(loss) 3,9 27 (10,841)
Total comprehensive income/(loss) for
the period 17 , 716 (9,612)
--------------------------------------------- --------------- ------------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Balance Sheet
30 Jun 2 31 Dec 20
1
(unaudited) (audited)
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 10 73,501 65 , 662
Intangible assets 11 12,698 12 , 232
Right-of-use assets 1,143 512
Corporation tax receivable - 9
Deferred tax asset 7 270 167
87,612 7 8 , 582
Current assets
Inventories 1,700 1 , 541
Trade and other receivables 12 12,740 4 , 847
Cash and cash equivalents 15 62,857 6 0 , 993
-------------------------------- ----- ------------ ------------
77,297 67 , 381
Total assets 164,909 1 45 , 963
-------------------------------- ----- ------------ ------------
Liabilities
Current liabilities
( 6 , 641
Trade and other payables (7,264) )
Lease liabilities (447) ( 245 )
( 1 , 062
Corporation tax payable (2,242) )
-------------------------------- ----- ------------ ------------
( 7 , 948
(9,953) )
-------------------------------- ----- ------------ ------------
Net current assets 67,344 59 , 433
-------------------------------- ----- ------------ ------------
Non-current liabilities
( 6 , 819
Provision for decommissioning 13 (7,111) )
Lease liabilities (755) ( 371 )
Defined benefit liability (545) ( 530 )
Deferred tax liability 7 (3,100) (2, 705 )
Other non-current liabilities 14 (114) (1,975)
(1 2 , 400
(11,625) )
( 20 , 348
Total liabilities (21,578) )
-------------------------------- ----- ------------ ------------
Net assets 143,331 1 25 , 615
-------------------------------- ----- ------------ ------------
Equity
Called up share capital 28,115 28,115
Share premium account 9 - 555,090
( 105 , 22
Foreign exchange reserve (101,295) 2)
Other reserves 4,273 4,273
Retained earnings/(accumulated (35 6 , 641
losses) 9 212,238 )
-------------------------------- ----- ------------ ------------
Total equity 143,331 1 25 , 615
-------------------------------- ----- ------------ ------------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Changes in
Equity
Merger Retained
reserve Capital Foreign earnings/
Called up Share premium contributions exchange (accumulated Total
share capital account reserve reserve* losses) equity
$000 $000 $000 $000 $000 $000 $000
As at 1 January ( 105 (35 6 , 1 25
202 1 (audited) 28,115 555,090 (3,204) 7,477 , 222 ) 641 ) , 615
Profit for the
period - - - - - 13,789 13,789
Other
comprehensive
income
- exchange
differences - - - - 3,927 - 3,927
------------------- --------------- -------------- --------- --------------- ---------- -------------- --------
Total
comprehensive
income - - - - 3,927 13,789 17,716
Transactions with
owners
in their capacity
as owners:
Cancellation of
share premium
account - (555,090) - - - 555,090 -
As at 30 June 202
1 (unaudited) 28,115 - (3,204) 7,477 (101,295) 212,238 143,331
------------------- --------------- -------------- --------- --------------- ---------- -------------- --------
Capital Foreign
Called up Share premium Merger contributions exchange Accumulated Total
share capital account reserve reserve reserve* losses equity
$000 $000 $000 $000 $000 $000 $000
As at 1 January 20
20 (audited) 28,115 555,090 (3,204) 7,477 (90,172) (359,756) 137,550
Profit for the
period - - - - - 1,229 1,229
Other comprehensive
income
- exchange
differences - - - - (10,841) - (10,841)
-------------------- --------------- -------------- --------- --------------- ---------- ------------ ---------
Total comprehensive
income - - - - (10,841) 1,229 (9,612)
As at 30 June 20 20
(unaudited) 28,115 555,090 (3,204) 7,477 (101,013) (358,527) 127,938
-------------------- --------------- -------------- --------- --------------- ---------- ------------ ---------
* Predominantly as a result of exchange differences on
retranslation, where the subsidiaries ' functional currency is not
US Dollars
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Cash Flows
6 months 6 months
ended ended
30 Jun 2 30 Jun 20
1
(unaudited) (unaudited)
Note $000 $000
Operating activities
Cash generated from operations 16 19,1 4 8 11,03 0
Charitable donations (23) (2,057)
Equipment rental income 15 17
Income tax paid (2,897) (2,856)
Interest received 261 1,066
-------------------------------------------- ----- ------------ ------------
Net cash inflow from operating activities 16,50 4 7,20 0
-------------------------------------------- ----- ------------ ------------
Investing activities
Purchase of property, plant and equipment (13,092) (8,096)
Purchase of intangible assets (2,233) (4,428)
Proceeds from return of prepayments 250 -
for shares
Proceeds from sale of property, plant
and equipment 9 1
Net cash outflow from investing activities (15,066) (12,523)
-------------------------------------------- ----- ------------ ------------
Financing activities
Principal elements of lease payments (330) (282)
Net cash outflow from financing activities (330) (282)
Net increase in cash and cash equivalents 1,10 8 (5, 605 )
Cash and cash equivalents at beginning
of the period 15 60,993 62,474
Effect of foreign exchange rate changes 75 6 (2, 641 )
Cash and cash equivalents at end of
the period 15 62,857 54,228
-------------------------------------------- ----- ------------ ------------
The Notes set out below are an integral part of these unaudited
condensed interim consolidated financial statements.
Notes to the U naudited Condensed Interim Consolidated Financial
Statements
1. General Information and Operational Environment
Enwell Energy plc (formerly Regal Petroleum plc) (the "Company")
and its subsidiaries (together the "Group") is a gas, condensate
and LPG production group.
Enwell Energy plc is a public limited company incorporated in
England and Wales under the Companies Act 2006, whose shares are
quoted on the AIM Market of London Stock Exchange plc. The
Company's registered office is at 16 Old Queen Street, London SW1H
9HP, United Kingdom and its registered number is 4462555.
As at 30 June 2021, the Company's majority shareholder, with
82.65% of the issued share capital, and immediate parent company
was Smart Energy (CY) Ltd (formerly named Pelidona Services Ltd),
which is 100% owned by Smart Holding (Cyprus) Ltd (formerly named
Lovitia Investments Ltd), which is 100% owned by Mr Vadym
Novynskyi. Accordingly, the Company is ultimately controlled by Mr
Vadym Novynskyi.
The Group's gas, condensate and LPG extraction and production
facilities are located in Ukraine. The ongoing political and
economic instability in Ukraine, which commenced in late 2013, has
led to a deterioration of Ukrainian State finances, volatility of
financial markets, illiquidity in capital markets, higher inflation
and a depreciation of the national currency against major foreign
currencies, although there have been some gradual improvements
lately.
In recent years, the Ukrainian economy demonstrated growth amid
overall macroeconomic stabilisation supported by structural
reforms, a rise in domestic investment, revival in household
consumption, increase in industrial production, construction
activity and improved environment on external markets.
During 2021, the Ukrainian economy has experienced moderate
growth in industrial output , leveling the consequences of the
COVID-19 outbreak, which started in March 2020. The National Bank
of Ukraine ("NBU") follows an interest rate policy consistent with
inflation targets and keeps the Ukrainian Hryvnia floating. The
annualised inflation rate in Ukraine was 9.5% in the first half of
2021 (compared with 2.0% in the first half of 2020 and 5.0% over
the 2020 year), with the NBU increasing the key policy rate from
6.0% effective 12 June 2020 to 7.5% effective 18 June 2021,
adhering to its inflation targeting policy .
As at the date of this report, the official NBU exchange rate of
the Ukrainian Hryvnia against the US Dollar was UAH26.64/$1.00,
compared with UAH27.18/$1.00 as at 30 June 2021 and UAH28.27/$1.00
as at 31 December 2020. In 2019, the NBU cancelled some of the
currency control restrictions, such as the required share of
foreign currency proceeds subject to mandatory sale and the amount
of dividend payments allowed to non-residents, which were
implemented in 2014 - 2015.
Further details of risks relating to Ukraine can be found within
the Principal Risks and Uncertainties section earlier in this
announcement.
Going concern
As a consequence of the COVID-19 pandemic, the Group has
implemented processes and controls intended to ensure protection of
all its stakeholders and minimise any disruption to its business.
The Group is closely monitoring the current volatility in global
financial markets, and the implications on the operational,
economic and social environment within which the Group works caused
by the COVID-19 pandemic. To date, there has been no significant
operational disruption arising from the COVID-19 pandemic, and no
material impact is currently envisaged on the Group's prospects.
However, the Board and management remain acutely aware of the
risks, and continue to take action to mitigate them where possible,
not only to protect the Group's staff and stakeholders but also to
minimise disruption to the Group's business. The Group continues to
reassess its medium-term forecasts based on current pricing and is
highly confident that it has the resources to continue to deliver
on its plans. It is not possible to forecast the duration of the
pandemic's impact but the Group will remain focussed on monitoring
and protecting its business throughout the period of
uncertainty.
The Directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for the
foreseeable future regarded as at least 12 months from the date of
these unaudited condensed interim consolidated financial
statements. Accordingly, the going concern basis has been adopted
in preparing these unaudited condensed interim consolidated
financial statements for the six months ended 30 June 2021.
2. Accounting Judgements and Estimates
Basis of preparation
These unaudited condensed interim consolidated financial
statements for the six month period ended 30 June 2021 have been
prepared in accordance with UK-adopted International Accounting
Standard 34, 'Interim Financial Reporting' ("IAS 34") and the AIM
Rules for Companies. The accounting policies adopted are consistent
with those of the previous financial year and corresponding interim
reporting period.
These unaudited condensed interim consolidated financial
statements do not comprise statutory accounts within the meaning of
section 434 of the Companies Act 2006. Statutory accounts for the
year ended 31 December 2020 were approved by the Board of Directors
on 30 March 2021 and subsequently filed with the Registrar of
Companies. The Auditors' Report on those accounts was not qualified
and did not contain any statement under section 498 of the
Companies Act 2006.
The unaudited condensed interim consolidated financial
statements should be read in conjunction with the annual
consolidated financial statements for the year ended 31 December
2020, which were prepared in accordance with international
accounting standards in conformity with the requirements of the
Companies Act 2006.
In the year to 31 December 2021, the annual financial statements
will be prepared in accordance with IFRS as adopted by the UK
Endorsement Board, and this change in basis of preparation is
required by UK company law for the purposes of financial reporting
as a result of the UK's exit from the European Union on 31 January
2020 and the cessation of the transition period on 31 December
2020.
This change does not constitute a change in accounting policy
but rather a change in the framework which is required to ground
the use of IFRS in company law.
There is no impact on recognition, measurement or disclosure
between the two frameworks in the period reported.
The accounting policies and methods of computation and
presentation used are consistent with those used in the Group's
Annual Report and Financial Statements for the year ended 31
December 2020, with the exception of the following new or revised
standards and interpretations:
New and amended standards adopted by the Group
The following new standards, amendments to standards and
interpretations became effective for the Group on 1 January 2021 or
after (t hese standards, amendments to standards and
interpretations did not have a material impact on this unaudited
interim condensed consolidated financial information):
-- IFRS 17 'Insurance Contracts' (issued on 18 May 2017 and effective
for annual periods beginning on or after 1 January 2021);
-- Interest rate benchmark (IBOR) reform - phase 2 amendments
to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (issued on 27
August 2020 and effective for annual periods beginning on
or after 1 January 2021);
There are no other amended standards which the Group considers
to have a material impact on these financial statements:
Significant accounting judgements and estimates
The preparation of the unaudited condensed interim consolidated
financial statements requires management to make judgements,
estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets and liabilities, income
and expenses. Actual results may differ from these estimates.
In preparing these unaudited condensed interim consolidated
financial statements, the significant judgements made by management
in applying the Group's accounting policies and the key sources of
estimation uncertainty were consistent with those that applied to
the consolidated financial statements for the year ended 31
December 2020 with certain updates described below.
Estimates
Recoverability of Development and Production Assets in
Ukraine
According to the Group's accounting policies, costs capitalised
as assets are assessed for impairment at each balance sheet date if
impairment indicators exist. In assessing whether an impairment
loss has occurred, the carrying value of the asset or
cash-generating unit ("CGU") is compared to its recoverable amount.
The recoverable amount is the greater of fair value less costs to
dispose and value in use and is determined for an individual asset,
unless the asset does not generate cash inflows that are largely
independent of those from other assets or groups of assets. If the
recoverable amount of an asset is estimated to be less than its
carrying amount, the carrying amount of the asset is reduced to its
recoverable amount and the respective impairment loss is recognised
as an expense immediately. A previously recognised impairment loss
is reversed only if there has been a change in the estimates used
to determine the asset's recoverable amount since the last
impairment loss was recognised. If that is the case, the carrying
amount of the asset is increased to its recoverable amount, but so
that the increased carrying amount does not exceed the carrying
amount that would have been determined, net of depreciation, had no
impairment loss been recognised for the asset in prior years. Such
reversals are recognised as income immediately.
MEX-GOL, SV, SC and VAS gas and condensate fields
As at 30 June 2021, no impairment indicators were identified by
the Group, and therefore no impairment test was performed for the
MEX-GOL, SV, SC and VAS gas and condensate fields.
Depreciation of Development and Production Assets
Development and production assets held in property, plant and
equipment are depreciated on a unit of production basis at a rate
calculated by reference to proven and probable reserves at the end
of the period plus the production in the period, and incorporating
the estimated future cost of developing and extracting those
reserves. Future development costs are estimated using assumptions
about the number of wells required to produce those reserves, the
cost of the wells, future production facilities and operating
costs, together with assumptions on oil and gas realisations, and
are revised annually. The reserves estimates used are determined
using estimates of gas in place, recovery factors, future
hydrocarbon prices and also take into consideration the Group's
latest development plan for the associated development and
production asset.
Provision for Decommissioning
The Group has decommissioning obligations in respect of its
Ukrainian assets. The full extent to which the provision is
required depends on the legal requirements at the time of
decommissioning, the costs and timing of any decommissioning works
and the discount rate applied to such costs.
A detailed assessment of gross decommissioning cost was
undertaken on a well-by-well basis using local data on day rates
and equipment costs. The discount rate applied on the
decommissioning cost provision at 30 June 2021 was 4.13% (31
December 2020: 3.70%). The discount rate is calculated in real
terms based on the yield to maturity of Ukrainian Government bonds
denominated in the currency in which the liability is expected to
be settled and with the settlement date that approximates the
timing of settlement of decommissioning obligations.
The change in estimate applied to calculate the provision as at
30 June 2021 resulted from the revision of the estimated costs of
decommissioning (increase of $218,000 in provision) and the
increase in the discount rate applied (decrease of $452,000 in
provision). The increase in discount rate at 30 June 2021 resulted
from the increase in Ukrainian Eurobonds yield and the respective
increase of country risk premium. The costs are expected to be
incurred by 2038 on the MEX-GOL field, by 2042 on the SV field, and
by 2028 on the VAS field, which is the end of the estimated
economic life of the respective fields.
3. Segmental Information
In line with the Group's internal reporting framework and
management structure, the key strategic and operating decisions are
made by the Board of Directors, who review internal monthly
management reports, budgets and forecast information as part of
this process. Accordingly, the Board of Directors is deemed to be
the Chief Operating Decision Maker within the Group.
The Group's only class of business activity is oil and gas
exploration, development and production. The Group's operations are
located in Ukraine, with its head office in the United Kingdom.
These geographical regions are the basis on which the Group reports
its segment information. The segment results as presented represent
operating profit before depreciation and amortisation.
6 months ended 30 June 2021 (unaudited)
United
Ukraine Kingdom Total
$000 $000 $000
Revenue
Gas sales 28,514 - 28,514
Condensate sales 9,760 - 9,760
Liquefied Petroleum Gas sales 2,776 - 2,776
------------------------------- --------- --------- --------
Total revenue 41,050 - 41,050
24,0
Segment result 25,6 41 (1,547) 94
Depreciation and amortisation (5,980) - (5,980)
Operating profit 18, 114
------------------------------- --------- --------- --------
164,
Segment assets 127, 927 36,982 909
1 1 , 1 1 ,
Capital additions* 035 - 035
6 months ended 30 June 20 20 (unaudited)
United
Ukraine Kingdom Total
$000 $000 $000
Revenue
Gas sales 17,974 - 17,974
Condensate sales 5,232 - 5,232
Liquefied Petroleum Gas sales 1,502 - 1,502
------------------------------- -------- --------- --------
Total revenue 24,708 - 24,708
Segment result 11,109 827 11,936
Depreciation and amortisation (6,783) - (6,783)
------------------------------- -------- --------- --------
Operating profit 5,153
------------------------------- -------- --------- --------
Segment assets 106,494 38,037 144,531
Capital additions* 17,102 - 17,102
*Comprises additions to property, plant and equipment and
intangible assets (Notes 10 and 11).
There are no inter-segment sales within the Group and all
products are sold in the geographical region in which they are
produced. The Group is not significantly impacted by
seasonality.
4. Cost of Sales
6 months ended 6 months
30 Jun 2 ended
1 30 Jun 20
(unaudited) (unaudited)
$000 $000
Production taxes 7,273 4,875
Depreciation of property, plant and equipment 5,529 6,176
Rent expenses 2,964 2,121
Staff costs 1,368 1,837
Cost of inventories recognised as an
expense 910 624
Transmission tariff for Ukrainian gas
system 436 421
Amortisation of mineral reserves 236 253
Other expenses 736 896
19, 452 17,203
5. Other operating income/(expenses), (net)
6 months ended 6 months
30 Jun 2 ended
1 30 Jun 20
(unaudited) (unaudited)
$000 $000
Interest income on cash and cash equivalents 312 1,023
Reversal of accruals 167 263
Contractor penalties applied - 15
Other operating (losses)/income, net ( 10 ) 199
4 69 1,500
6. Other income/(expenses), (net)
6 months ended 6 months
30 Jun 2 ended
1 30 Jun 20
(unaudited) (unaudited)
$000 $000
Net foreign exchange (losses)/gains (26) 194
Charitable donations (23) (2,057)
Other income/(expenses), (net) 10 (62)
(39) (1,925)
7. Taxation
The income tax charge of $4,157,000 for the six month period
ended 30 June 2021 relates to a urrent tax charge of $4,003,000 and
a deferred tax charge of $154,000 (1H 2020: current tax charge of
$1,356,000 and deferred tax charge of $10,000).
The movement in the period was as follows:
6 months ended 6 months
ended
30 Jun 2 30 Jun 20
1
(unaudited) (unaudited)
$000 $000
Deferred tax (liability)/asset recognised
relating to development and production
assets at MEX-GOL-SV fields and provision
for decommissioning
At beginning of the period (2,705) (2,141)
Charged to Income Statement - current
period (249) (170)
Effect of exchange difference (146) 115
--------------------------------------------
At end of the period (3,100) (2,196)
-------------------------------------------- --------------- ------------
Deferred tax asset/( liability ) recognised
relating to development and production
assets at VAS field and provision for
decommissioning
At beginning of the period 167 (147)
Credited to Income Statement - current
period 95 160
Effect of exchange difference 8 12
---------------------------------------------
At end of the period 270 25
--------------------------------------------- ---- ------
Taxes on income in the interim periods are accrued using the tax
rate that would be applicable to the expected total annual profit
or loss. The effective tax rate for the six month period ended 30
June 2021 was 23% (1H 2020: 53%).
The deferred tax asset relating to the Group's provision for
decommissioning at 30 June 2021 of $248,000 (31 December 2020:
$170,000) was recognised on the tax effect of the temporary
differences of the Group's provision for decommissioning at the
MEX-GOL and SV fields, and its tax base. The deferred tax liability
relating to the Group's development and production assets at the
MEX-GOL and SV fields at 30 June 2021 of $3,348,000 (31 December
2020: $2,875,000) was recognised on the tax effect of the temporary
differences between the carrying value of the Group's development
and production asset at the MEX-GOL and SV fields, and its tax
base.
The deferred tax asset relating to the Group's provision for
decommissioning at 30 June 2021 of $342,000 (31 December 2020:
$323,000) was recognised on the tax effect of the temporary
differences on the Group's provision on decommissioning at the VAS
field, and its tax base. The deferred tax liability relating to the
Group's development and production assets at the VAS field at 30
June 2021 of $72,000 (31 December 2020: $156,000) was recognised on
the tax effect of the temporary differences between the carrying
value of the Group's development and production asset at the VAS
field, and its tax base.
8. Earnings per Share
The calculation of basic and diluted earnings per ordinary share
has been based on the profit for the six month period ended 30 June
2021 and 30 June 2020 and 320,637,836 ordinary shares, being the
average number of shares in issue for the period. There are no
dilutive instruments.
9. Reduction of Capital
On 25 February 2021, the Company completed a reduction of its
share capital through the cancellation of its entire share premium
account, thereby creating distributable reserves, which enables the
Company to make distributions to its shareholders in the future,
subject to the Company's financial performance. However, the
Company is not indicating any commitment, and does not have any
current intention, to make any distributions to shareholders.
10. Property, Plant and Equipment
6 months ended 30 Jun 21 6 months ended 30 Jun 20
(unaudited) (unaudited)
Oil and Oil and Other Total Oil and Oil and Other Total
gas gas fixed gas gas fixed
development exploration assets development exploration assets
and and and and
production evaluation production evaluation
assets assets assets assets
Ukraine Ukraine
$000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning of
the
period 135 ,966 2,362 2,217 140,545 143,127 2,571 2,103 147,801
Additions 10,604 80 55 10,739 8,199 172 386 8,757
Change in
decommissioning
provision (107) - - (107) (903) - - (903)
Disposals (36) - (70) (106) (117) - (2) (119)
Exchange
differences 5,850 97 75 6,022 (16,216) (279) (375) (16,870)
At end of the
period 152,277 2,539 2,277 157,093 134,090 2,464 2,112 138,666
Accumulated
depreciation
and impairment
At beginning of
the
period 73,816 - 1,067 74,883 76,802 - 947 77,749
Charge for the
period 5,447 - 158 5,605 5,268 - 201 5,469
Disposals (7) - (9) (16) (31) - (2) (33)
Exchange
differences 3,072 - 48 3,120 (8,590) - (183) (8,773)
At end of the
period 82,328 - 1,264 83,592 73,449 - 963 74,412
Net book value at
the beginning of
the period 62,150 2,362 1,150 65,662 66,325 2,571 1,156 70,052
------------------ ------------ ------------ ------- ------------ ------------ ------------ ------- -------------
Net book value at
end of the
period 69,949 2,539 1,013 73,501 60,641 2,464 1,149 64,254
------------------ ------------ ------------ ------- ------------ ------------ ------------ ------- -------------
At 30 June 2021, the Group performed an assessment of external
and internal indicators to ascertain whether there was any
indication of potential impairment. Based on the analysis
performed, the Group concluded that no external or internal
impairment indicators existed as at 30 June 2021, and accordingly
no impairment testing was required as at that date.
11. Intangible Assets
6 months ended 30 Jun 2 1 6 months ended 30 Jun 20
(unaudited) (unaudited)
Exploration Exploration
and and
Mineral evaluation Other Mineral evaluation Other
reserve intangible intangible reserve intangible intangible
rights assets assets Total rights assets assets Total
$000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning
of the
period 6,570 8,286 616 15,472 7,843 - 572 8,415
Additions - 63 233 296 - 8,331 101 8,432
Disposals - - (137) (137) - - (53) (53)
Exchange
differences 265 335 26 626 (884) 16 (52) (920)
--------------- --------- ------------- ------------ ------- --------- -------------- ------------ ---------
At end of
the period 6,835 8,684 738 16,257 6,959 8,347 568 15,874
--------------- --------- ------------- ------------ ------- --------- -------------- ------------ ---------
Accumulated
amortisation
and
impairment
At beginning
of the
period 2,855 - 385 3,240 2,851 - 367 3,218
Amortisation
charge for
the period 236 - 105 341 253 - 78 331
Disposals - - (136) (136) - - (53) (53)
Exchange
differences 99 - 15 114 (274) - (28) (302)
--------------- --------- ------------- ------------ ------- --------- -------------- ------------ ---------
At end of
the period 3,190 - 369 3,559 2,830 - 364 3,194
--------------- --------- ------------- ------------ ------- --------- -------------- ------------ ---------
Net book
value at
beginning
of the
period 3,715 8,286 231 12,232 4,992 - 205 5,197
--------------- --------- ------------- ------------ ------- --------- -------------- ------------ ---------
Net book
value at
end of the
period 3,645 8,684 369 12,698 4,129 8,347 204 12,680
--------------- --------- ------------- ------------ ------- --------- -------------- ------------ ---------
Intangible assets consist mainly of the hydrocarbon production
licence relating to the VAS gas and condensate field which is held
by one of the Group's subsidiaries, LLC Prom-Enerho Produkt, and a
recently acquired hydrocarbon exploration licence named
Svystunivsko-Chervonolutski ("SC"), which is held by LLC Arkona
Gas-Energy. The Group amortises the hydrocarbon production licence
relating to the VAS gas and condensate field using the
straight-line method over the term of the economic life of the VAS
field until 2028. The SC hydrocarbon exploration licence is not
amortised due to it being at an exploration and evaluation
stage.
As at 30 June 2021, the Group performed an assessment of
external and internal indicators to ascertain whether there was any
indication of potential impairment of intangible assets. Based on
the analysis performed, the Group concluded that no external or
internal impairment indicators existed as at 30 June 2021, and
accordingly no impairment testing was required as at that date.
12. Trade and Other Receivables
30 Jun 31 Dec 20
2 1
(unaudited) (audited)
$000 $000
Trade receivables 7,869 1 , 936
Other financial receivables 547 1, 053
Less credit loss allowance (143) (1 33 )
----------------------------------- ------------- -----------
Total financial receivables 8,273 2 , 856
Prepayments and accrued income 3,934 1 , 387
Other receivables 533 604
Total trade and other receivables 12,740 4 , 847
Due to the short-term nature of the current trade and other
financial receivables, their carrying amount is assumed to be the
same as their fair value. All trade and other financial
receivables, except those provided for, are considered to be of
high credit quality.
The majority of the trade receivables are from a related party,
LLC Smart Energy, that purchases all of the Group's gas production.
The applicable payment terms, which were revised in the period, are
payment for one third of the monthly volume of gas by the 15(th) of
the month following the month of delivery, and payment of the
remaining balance by the end of that month (1H 2020: payment for
one third of the estimated monthly volume of gas by the 20(th) of
the month of delivery, and payment of the remaining balance by the
10(th) of the month following the month of delivery). The trade
receivables were paid in full after the end of the period.
Prepayments and accrued income mainly consist of prepayments of
$1,019,000 relating to the development of the SV field and
$1,144,000 relating to the development of the MEX-GOL field (31
December 2020: $926,000 relating to the development of the SV
field).
13. Provision for Decommissioning
6 months ended 6 months ended
30 Jun 21 30 Jun 20
(unaudited) (unaudited)
$000 $000
At beginning of the period 6,819 7,447
Amounts provided 127 -
Unwinding of discount 122 94
Change in estimate (234) (903)
Effect of exchange difference 277 (789)
------------------------------- --------------- ---------------
At end of the period 7,111 5,849
The provision for decommissioning is based on the net present
value of the Group's estimated liability for the removal of the
Ukrainian production facilities and well site restoration at the
end of production life.
The non-current provision of $7,111,000 (31 December 2020:
$6,819,000) represents a provision for the decommissioning of the
Group's MEX-GOL, SV and VAS production facilities, including site
restoration. None of the provision was utilised during the
reporting period.
As described in Note 2, the change in estimates applied to
calculate the provision as at 30 June 2021 resulted from the
revision of the estimated costs of decommissioning (increase of
$218,000 in provision) and the increase in the discount rate
applied (decrease of $452,000 in provision).
14. Other non-current liabilities
Other non-current liabilities as at 30 June 2021, consist of the
long-term obligations for the Ukrainian State special purpose fund
of $114,000 measured at amortised cost using an interest rate of
20% (as at 31 December 2020: the long-term portion of the deferred
consideration for the acquisition of LLC Arkona Gas-Energy of
$1,851,861 and the long-term obligations for the Ukrainian State
special purpose fund of $124,000). This long-term portion of the
deferred consideration for the acquisition of LLC Arkona Gas-Energy
of $1,851,861 was transferred, as current, to trade and other
payables as at 30 June 2021. The final payments relating to the
acquisition of LLC Arkona Gas-Energy are due to be paid in March
2022, subject to such payments becoming payable in accordance with
the terms and conditions of the acquisition agreement.
15. Financial Instruments
The Group's financial instruments comprise cash and cash
equivalents and various items such as debtors and creditors that
arise directly from its operations. The Group has bank accounts
denominated in British Pounds, US Dollars, Euros, and Ukrainian
Hryvnia. The Group does not have any borrowings. The main future
risks arising from the Group's financial instruments are currency
risk, interest rate risk, liquidity risk and credit risk.
The Group's financial assets and financial liabilities, measured
at amortised cost, which approximates their fair value, comprise
the following:
30 Jun 21 31 Dec 20
(unaudited) (audited)
$000 $000
Financial assets
Cash and cash equivalents 62,857 60,993
Trade and other receivables 8,273 2,856
71,130 63,849
Financial Liabilities
Lease liabilities 1,202 616
Trade payables 1,303 843
Other financial liabilities 1,966 4,336
---------------
4,471 5,795
At 30 June 2021, the Group held cash and cash equivalents in the
following currencies:
30 Jun 21 (unaudited) 31 Dec 20
(audited)
$000 $000
US Dollars 36,145 40,187
Ukrainian Hryvnia 26,453 20,569
British Pounds 252 232
Euros 7 5
62,857 60,993
------------------- ---------------------- ------------
All of the cash and cash equivalents held in Ukrainian Hryvnia
are held in banks within Ukraine, and all other cash and cash
equivalents are held in banks within Europe, Ukraine and the United
Kingdom.
16. Reconciliation of Operating Profit to Operating Cash Flow
6 months ended 6 months ended
30 Jun 21 30 Jun 20
(unaudited) (unaudited)
$000 $000
Operating profit 18,114 5,153
Depreciation and amortisation 6,164 6,783
Less interest income recorded within
operating profit (312) (1,023)
Fines and penalties received (1) (1)
Loss from write off of non-current assets 90 81
Gain on sales of current assets, net (12) (5)
Decrease in provisions ( 4 ) (1 75 )
(Increase)/decrease in inventory (93) 2,106
Increase in receivables (5,426) (1,032)
Increase/(decrease) in payables 628 (857)
------------------------------------------- --------------- ---------------
Cash generated from operations 19,148 11,03 0
------------------------------------------- --------------- ---------------
17. Contingencies and Commitments
Amounts related to works contracted but not yet undertaken in
relation to the Group's 2021 investment programme at the MEX-GOL,
SV and VAS gas and condensate fields in Ukraine, but not recorded
in the unaudited condensed interim consolidated financial
statements at 30 June 2021, were $3,283,000 (31 December 2020:
$9,052,165).
Since 2010, the Group has been in dispute with the Ukrainian tax
authorities in respect of VAT receivables on imported leased
equipment, with a disputed liability of up to UAH8,487,000
($324,000) inclusive of penalties and other associated costs. There
is a level of ambiguity in the interpretation of the relevant tax
legislation, and the position adopted by the Group has been
challenged by the Ukrainian tax authorities, which has led to legal
proceedings to resolve the issue. The Group had been successful in
three court cases in respect of this dispute in ourts of different
levels. On 20 September 2016, a hearing was held in the Supreme
Court of Ukraine of an appeal of the Ukrainian tax authorities
against the decision of the Higher Administrative Court of Ukraine,
in which the appeal of the Ukrainian tax authorities was upheld. As
a result of this appeal decision, all decisions of the lower courts
were cancelled, and the case was remitted to the first instance
court for a new trial. On 1 December 2016 and 7 March 2017, the
Group received positive decisions in the first and second instance
courts, but further legal proceedings may arise. Since the Group
had been successful in previous court cases in respect of this
dispute in ourts of different levels, the date of the next legal
proceedings has not been set and as the management believes that
adequate defences exist to the claim, no liability has been
recognised in these unaudited condensed interim consolidated
financial statements for the six months ended 30 June 2021 (31
December 2020: nil).
On 12 March 2019, the Group announced the publication of an
Order for suspension (the "Order") by the State Service of Geology
and Subsoil of Ukraine affecting the production licence for its VAS
gas and condensate field. The Group is confident there are no
violations of the terms of the licence or in relation to the
operational activities of the Group that would justify the Order or
the suspension of the licence. The Group has issued legal
proceedings in the Ukrainian Courts to challenge the validity of
the Order, and in these proceedings, on 18 March 2019 the Court
made a ruling on interim measures to suspend the Order pending
hearings of the substantive issues of the case to be held
subsequently. The effect of this ruling is that the suspension of
operational activities at the VAS licence is deferred until the
result of the legal proceedings is determined. These legal
proceedings are continuing through the Ukrainian Court system and
the ultimate outcome is not yet known. However, the Group considers
that the Order is groundless and that the outcome of the legal
proceedings challenging the Order will ultimately be in favour of
the Group, and consequently, the Group does not expect any negative
effect on its operations in respect of this matter.
18. Related Party Disclosures
Key management personnel of the Group are considered to comprise
only the Directors. Remuneration of the Directors for the six month
period ended 30 June 2021 was $617,000 (six month period ended 30
June 2020: $532,000, and year ended 31 December 2020:
$1,026,000).
During the period, Group companies entered into the following
transactions with related parties which are not members of the
Group:
6 months ended 6 months ended
30 Jun 21 30 Jun 20
(unaudited) (unaudited)
$000 $000
Sale of goods/services 28,417 17,752
Purchase of goods/services 585 461
Amounts owed by related parties 7,732 1,490
Amounts owed to related parties 825 347
All related party transactions were with subsidiaries of the
ultimate Parent Company, and primarily relate to the sale of gas to
LLC Smart Energy, the rental of office facilities and vehicles and
the sale of equipment. The amounts outstanding were unsecured and
have been or will be settled in cash.
As of 30 June 2021, the Company's immediate parent company was
Smart Energy (CY) Ltd (formerly named Pelidona Services Ltd), which
is 100% owned by Smart Holding (Cyprus) Ltd (formerly named Lovitia
Investments Ltd), which is 100% owned by Mr Vadym Novynskyi.
Accordingly, the Company was ultimately controlled by Mr Vadym
Novynskyi.
Until April 2021, the Group operated bank accounts in Ukraine
with a related party bank, Unex Bank, which was ultimately
controlled by Mr Vadym Novynskyi. There were the following
transactions and balances with Unex Bank during the reporting
period:
6 months ended 6 months ended
30 Jun 21 30 Jun 20
(unaudited) (unaudited)
$000 $000
Bank charges 1 1
Closing cash balance - 13
As at 30 June 2021, Unex Bank is not considered to be a related
party of the Group, following the completion of the sale by Mr
Vadym Novynskyi of the entire issued share capital of Unex Bank to
an unrelated third party.
At the date of this announcement, none of the Company's
controlling parties prepares consolidated financial statements
available for public use.
19. Events occurring after the Reporting Period
The Group's first well at the SC licence, SC-4, was spudded in
August 2021.
In September 2021, the Group made an early payment of 25% of the
third tranche of the consideration for the acquisition of LLC
Arkona Gas-Energy, totalling $539,375.
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END
IR DBGDCSGBDGBU
(END) Dow Jones Newswires
September 16, 2021 02:00 ET (06:00 GMT)
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