TIDMJKX
RNS Number : 8750Z
JKX Oil & Gas PLC
20 March 2017
6 Cavendish Square, London
W1G 0PD, England, UK
Tel: +44 (0)20 7323 4464
Fax: +44 (0)20 7323 5258
Website: http://www.jkx.co.uk
FOR IMMEDIATE RELEASE 20 March 2017
JKX Oil & Gas plc
('JKX' or the 'Company')
FINAL RESULTS
FOR THE YEARED 31 DECEMBER 2016
JKX Oil & Gas plc (LSE: JKX), announces its final results
for the year ended 31 December 2016.
CEO Tom Reed said "In the face of considerable uncertainty at
the beginning of the year, our team has increased production,
re-engineered our field development plans, improved relationships
with our stakeholders, restructured and extended the significant
short-term bond liabilities and focused our Company on the
technical challenges to come.
We are actively seeking to mitigate our litigation risks and
potential liabilities with the Ukrainian Government so that our
development drilling in Ukraine can recommence.
The investment in our Rudenkivske gas field in Ukraine is
significant, and we continue to work with the Ukrainian Government
to improve the investment environment for such projects."
Key financials
-- Revenue: $73.8m (2015: $88.5m)
-- Loss from operations before exceptional charges: $3.9m (2015: $10.7m)
-- Exceptional charges: $30.8m (2015: $64.9m)
-- Loss for the year: $37.1m (2015: $81.5m)
-- Loss per share: 21.56 cents (2015: 47.32 cents)
-- Net cash generated from operating activities: $14.6m (2015: $9.1m)
-- Total cash: $14.3m (2015: $26.3m)
-- Net debt: $2.5m (2015: $8.1m)
-- Capital expenditure: $5.6m (2015: $8.7m)
Operational highlights
-- Average production increased 12% to 10,083 boepd (2015: 8,996 boepd)
-- Reconstructed and implemented Field Development Plans and formed a new team in Ukraine
-- Restarted production in Hungary after a break of more than 3 years
-- Reduced, restructured and extended the short-term bond liabilities
-- Implemented significant cost savings across the Group, in particular at London headquarters
-- Commenced resolution of the inherited legal disputes with the Ukrainian Government
Goals
-- Amicably settle all legal disputes with the Ukrainian Government
-- Accelerate the Rudenkivske field development project in Ukraine
-- Monetise assets in Russia
For further information please contact:
EM Communications +44 (0) 20 3709 5711
Stuart Leasor, Jeroen van de Crommenacker
Chairman's Statement
Just over 12 months ago, your newly-appointed Board of Directors
promised to resolve the various challenges that were facing the
business through transparent communication, by addressing key
legacy problems, by increasing efficiency and production, and by
reducing needless costs.
On its appointment in January 2016, the Board was confronted
with many issues including:
-- legal conflicts in Ukraine and with significant shareholders;
-- significant contingent liabilities in Ukraine relating to production taxes;
-- license suspensions in Ukraine;
-- bloated costs throughout the Group;
-- stagnated field development, and
-- a $30.1 million bond repayment in less than 12 months, which the Company could not afford.
To address these, in 2016, we have:
-- managed our inherited legal challenges in Ukraine and halted
legal action on shareholder disputes;
-- successfully resolved all Ukrainian licence suspensions;
-- rebuilt the Group's Field Development Plans ('FDPs') and
assembled a world-class execution team;
-- reduced and restructured the Company's bond liabilities,
which was formally approved by bondholders on 3 January 2017;
-- reduced operating costs, and
-- further strengthened the Board.
Ukrainian legal cases - international arbitration
In 2015 the Company commenced arbitration proceedings against
Ukraine on the basis of overpayment of production taxes ('Rental
Fees') plus damages.
The main arbitration case was heard in early July 2016 and a
decision from the tribunal was awarded on 6 February 2017.
Despite the Company's belief to the contrary, the international
arbitration tribunal ruled that Ukraine was found not to have
violated its treaty obligations in respect of the levying of Rental
Fees but awarded the Company damages of $11.8 million plus
interest, and costs of $0.3 million in relation to subsidiary
claims. This can be seen as only a small success against the full
claim which was valued at more than $200 million.
Ukrainian legal cases - local claims
The Group has made provision for potential liabilities arising
from separate court proceedings over the amount of Rental Fees paid
in Ukraine by its Ukrainian operating subsidiary, Poltava Petroleum
Company ('PPC'), for certain periods since 2010, which total
approximately $33.9 million (including interest and penalties). PPC
continues to contest these claims in the Ukrainian courts.
Claims relating to 2007, which were unresolved in the prior year
and amounted to $6 million, are now considered closed following a
Supreme Court of Ukraine ruling in favour of PPC.
Taking into account the damages and interest of $12.2 million
awarded to the Company by the international tribunal and the
Ukrainian court proceedings against the Group in respect of
production taxes totalling $33.9 million, there is a net shortfall
of $21.7 million owed by the Group to the Government of Ukraine.
Should PPC lose the claims in respect of production taxes due for
2010 and 2015, and the Ukrainian Authorities demand immediate
settlement, the Group does not currently have sufficient cash
resources to settle these claims and this risk, if realised, could
impact the going concern status of the Company. These risks are
fully addressed in Note 2 to the financial information.
In addition, PPC has suffered searches by the National Police of
Ukraine starting in June 2016, with two further searches in January
2017. The searches increasingly appeared to take on the form of
harassment rather than a legitimate investigation into PPC's
business operations. We continue to fully cooperate with the
enquiry and believe that PPC is in full legal compliance with all
relevant Ukrainian law and regulation. These searches have been a
significant distraction for the Board and JKX staff, and damaging
to Ukraine's investment climate. We have engaged with both the US
and UK embassies in Kiev in order to register our complaints in
this matter.
We have commenced the settlement process with the Government in
Ukraine to settle the arbitration award and the local tax issues so
that the Company can return its focus to key operational
matters.
Ukrainian production licenses secured
In January 2016, the State Geology and Mineral Resources Survey
of Ukraine suspended four of PPC's subsoil use permits. The
authority gave a list of actions that were required in order to
cancel the suspension (including a change to the minimum production
requirements under the licenses) and would normally have given the
operator sufficient time to remedy the failings. Instead PPC was
given only one month to do so.
Following successful legal action, PPC has now renewed all four
of these licenses until 2024 and also received a ruling from the
Kharkiv Administration Court of Appeal which deemed the original
suspensions to have been illegal.
Rebuilding of Field Development Plans ('FDPs')
Our reconstructed Field Development Plans have revealed that
applying modern technology and techniques in well construction and
field development design, our Rudenkivske gas field has much
greater potential than was previously considered economic. Further
details of the FDPs are provided in The Chief Executive's
statement.
Bond repayment and restructuring
Through 2016, we reduced the principal amount of outstanding
bonds from $36 million to $16 million. This was achieved through a
$10 million scheduled repayment in February and various market
purchases of bonds of a total principal amount of $10 million at
various discounts to face value.
On January 3 2017 the Bondholders approved a restructuring of
the remaining $16 million of Bonds, the detail of which is provided
in the Financial Review. The repayment of the Bonds are now well
within the operating cash flow capabilities of the Company enabling
the business to move forward with its development plans.
Reducing operating costs and overheads
Measures were taken immediately following the appointment of the
new Board in January 2016 to significantly reduce the cost burden
of the Company's London headquarters, reducing headcount and moving
all remaining staff onto one floor of the building, where we
previously occupied four floors. We have been able to extract
ourselves from the long-term lease on one of the unoccupied floors
and continue negotiations with the landlord to extract the Company
from the long-term lease agreements on the other two floors.
During 2016, headcount reductions have been made in Ukraine and
Russia of 18% and 14%, respectively. The benefits of our cost
reduction actions during 2016 will be seen in 2017 and we continue
to identify further cost-saving opportunities.
Your Board
Following the replacement of the entire Board on 28 January
2016, the composition of the Board did not comply with the UK
Corporate Governance Code in respect of the number of independent
Non Executive Directors. To address this, in April, two new
independent Non Executive Directors were appointed.
Alan Bigman and Bernie Sucher both bring extensive knowledge of
working at the highest levels in the region combined with directly
relevant experience which will be of great benefit to the Company.
As independent directors, Alan and Bernie have strengthened the
corporate governance credentials of the Company which ensures that
the interests of all shareholders are protected.
At the Company's AGM on 28 June 2016, the resolutions to accept
the appointment of Alan and Bernie were rejected by a small number
of shareholders but with enough votes to prevent the resolutions
being passed. Given the very low turnout of voting shareholders,
the fact that the vast majority of voting shareholders were in
favour of the appointments and the need for value-adding
independent directors, the Board re-appointed both Alan and Bernie
at a subsequent Board Meeting. The shareholders will be asked to
approve these appointments at the next Annual General Meeting. The
result of last year's AGM underlines that if shareholders want to
ensure a high-quality board and good governance, they must exercise
their right to vote at General Meetings.
People
The Board continues to be impressed and often humbled by the
level of dedication, talent, and perseverance shown by staff
throughout the Group, especially during a year in which we were
trying to drive such significant change. We believe that our teams
are capable of accomplishing market leadership in our field, and
much more.
The road ahead
We are working with the Ukrainian Government to amicably settle
all claims and secure support in creating an environment in which
JKX can execute its Field Development Plans, invest in gas
production and assist Ukraine to achieve energy independence.
2016 began with some major changes at the board level, and
uncertainty with regards to our future. Yet we endured that
uncertainty, increased production, improved relationships with our
stakeholders and have more focused teams with a clearer
understanding of our organisational and technical challenges. We
achieved some significant gains during 2016 but have also suffered
some setbacks. With a renewed purpose, strategic focus and the
right people in the right places, we enter 2017 with optimism.
Finally, I wish to thank all our shareholders and staff for
their support of the Company and the new Board through this year of
challenging transformation. We have achieved a significant amount
in our first 12 months, but relish the challenges and opportunities
that 2017 presents.
Paul Ostling
Chairman
Chief Executive's Statement
Your Board was appointed in January 2016 with a straightforward
strategy: remove obstacles to growth, plan development in a modern
context using modern technology, finance and execute. We wanted to
move the Company away from fighting various legal battles and back
to the business of finding and producing hydrocarbons. That
strategy translated into four main goals for the year:
1) Resolve the Ukrainian production tax liabilities and the
International Arbitration dispute, and restructure the inherited
issues of the 2013 Convertible Bond;
2) Reassess the assets and rebuild the Field Development Plans
('FDPs') from primary data utilising latest generation development
techniques and technologies;
3) Obtain financing for the FDPs; and
4) Improve operations and engineering, particularly in Ukraine,
and build a team capable of world-class, high-performance
execution.
We achieved most of our goals and made significant progress with
our plan to restore shareholder value to JKX. We did not achieve
all of our plans however. Financing particularly remains difficult
for the Company for a variety of reasons. Financing our development
plans in the most accretive way per share is a primary focus for
the team in 2017 and we will keep you posted on results.
We have set the stage for financing and growth by providing both
a clear plan and managing inherited liabilities. We have
restructured and extended the convertible bond term for an
additional three years, reached a decision in the Hague on our
inherited arbitration conflict with the Government of Ukraine,
rebuilt the Field Development Plans for Russia and Ukraine, removed
needless costs and formed a new execution team.
Whilst we now have the international arbitration result, it was
much delayed in coming and we are yet to settle that case with the
Government of Ukraine. For this and other reasons, financing the
development plan remains a work-in-progress. These are the two
major challenges outstanding after our first 12 months.
Performance
During the year:
-- average production increased 12% to 10,083 boepd (2015: 8,996 boepd);
-- Field Development Plans were reconstructed and an enhancement
program based on technical potential commenced. Results are
positive;
-- production has restarted in Hungary after three years of inactivity;
-- short term Bond liabilities were renegotiated on favourable terms;
-- the monetisation process of our Russian assets continues;
-- the Group's technical team was rebuilt and located in Ukraine; and
-- significant costs savings were implemented throughout the Group.
Despite the exceptional costs incurred by the Group's non-core
activity, I am pleased to report that the Group has maintained
positive cash flow for the year, generating $17.0m of cash from
operations. The exceptional administrative costs are detailed
further in Note 9 to the financial information and discussed in the
Financial Review.
Production
Beginning in the second quarter, the Company has calculated the
technical potential of existing well stock, matched that potential
against current production, and worked to close gaps between actual
and potential production in a continuous, systemic manner. This
approach slowed the expected natural decline in gas production
overall and increased oil production, and we expect further
positive results in 2017. This approach will be the basis for
managing well stock in our Company going forward. Further details
of work completed during the year is provided in our Regional
operations update.
Gas production in Russia was 30% higher at 36.1 MMcfd (2015:
27.7 MMcfd) due to well-27 coming on line in late 2015 and
successful workovers and maintenance throughout the year. Gas
production in Ukraine was down 11% to 18.6 MMcfd (2015: 21.1 MMcfd)
due to the suspension of development drilling since 2015 and the
natural decline in the fields, offset by enhancements. Oil
production increased by 10% due to work-over activities on the
existing well stock.
Ukraine
Average production in Ukraine was down 7% for the year at 4,001
boepd (2015: 4,325 boped). The suspension of development drilling
in Ukraine since 2015 and minimal work-over activity led to
significant declines in production. Arresting that decline and
reversing the trend required the implementation of the enhancement
program based on technical potential, a step-up of workover
activities in the second half and has seen positive results as of
this writing with a production increase of 9.9% month-on-month from
January 2016 to January 2017.
Further details of work completed during the year is provided in
our Regional Operations.
Russia
Production and cash flow remains stable with work-over and acid
treatments required on a regular basis to combat harsh conditions
in our 5000m deep, HTHP wells. We will be replacing production
strings with chrome tubing in some wells during 2017 which will
result in more stable production and an ability to open chokes due
to better control of temperature-related string expansion.
Average production from the Koshekhablskoye field was 6,082
boepd (2015: 4,670 boepd). Periodic acid treatments have been
performed during the year to maintain production rates in the four
producing wells.
Hungary
In December, a sidetrack of the Hn-2 well on our Hajdunanas
field targeted the remaining Pannonian reservoir gas and the oil
potential of the underlying Miocene volcanoclastic sequence. This
was the first drilling operation completed in Hungary since JKX
assumed operatorship in November 2014.
The Hn-2ST well tested 1.5 MMcfd from the Pannonian Pegasus
sands and 2.8 MMcfd from a lower Pannonian sand interval; the
latter being a newly discovered productive horizon in the
field.
Gas sales commenced on 2 February 2017 at an initial rate of 1.8
MMcfd, after a production and sales break of more than three
years.
Field Development Plans ('FDPs')
A crucial step to setting the Company on the path of growing
shareholder value was the generation of new Field Development
Plans. We rebuilt the development plans from primary geological and
production data and with a 'Texas' economic and engineering
perspective using the latest best practices in drilling and
completions. The results were very encouraging and these FDPs have
now given us a map from which we are able to identify exactly where
future shareholder value will come from and what resources and
personnel will be required to execute these plans.
Ukraine
Perhaps most importantly for shareholders, the reconstruction of
the Field Development Plans has revealed that using a modern, North
American development approach for the Rudenkivske field could
realise over $3bn of gas sales at today's prices. While this is
obviously easier said than done, the size of this prize more than
justifies the challenges facing our team on the surface.
The Rudenkivske field is estimated to contain 2.8 trillion cubic
feet of gas in place (2C). Utilising modern development and
completion techniques could result in the production of as much as
600 billion cubic feet of gas over the field's lifetime. Analogous
fields to Rudenkivske's structure and depositional environment in
North America were identified and their experience and empirical
data were used in the Company's planning. These North American
fields were also previously considered uneconomic, and have
recently been successfully developed using advanced well
construction and field development design.
The full field development model for the Rudenkivske field
includes 135 wells over ten years and results in plateau production
of approximately 110 million standard cubic feet per day (18,300
barrels of oil equivalent per day). Total capital investment over
the same period is currently estimated at US$660 million, much of
which could be financed from operating cash flow.
The primary risk to this development, we should state, is the
heterogeneity of the gas-bearing sand lenses and the actual net to
gross ratio between sand and shale layers. Both are below the
resolution of available seismic data. Large volume, low-viscosity
fracturing maximizes our chances of overcoming both of these
challenges, and initial wells will be studied carefully to improve
our knowledge.
In the fourth quarter, the Company began to implement an
enhancement program for the Rudenkivske field in Ukraine with the
workover of well NN16, which was completed on 6 November. Initial
peak hourly production from NN16 was 16.4 MMcfd of gas and 467
boepd of condensate on a 48/64ths" choke (3,200 boepd total) but
has since declined. Gas lift is currently being implemented at well
NN16 to restore production and increase overall recovery.
In December well NN47, located in the north of the field, tested
gas and condensate from the V-25 interval in the Visean sands - the
main focus of the FDP. The well tested an initial maximum rate of
16.9 MMcfd and 668 boepd of condensate on a 137/64th" choke prior
to declining to 11.5 MMcfd of gas and 255 boepd of condensate
within 36 hours. More information will be provided once production
rate has stabilised.
These enhancement projects, in addition to providing increased
production, are also providing valuable data that will further
refine our development plan for the field.
Monetisation of Russian and Hungarian assets
Russia
The FDP for our Russian gas field resulted in increased 2P
reserves at the end of the year mainly due to the addition of
reserves attributable to a new Callovian well, which is planned for
2018. The recommended vertical well location intersects a predicted
porous reservoir within the Lower Callovian (V), Upper Callovian
(I-IV), and Oxfordian reservoirs. Good well control and seismic
data provided high confidence that at least one gas target will be
productive. Net pay maps have revealed volumes previously not
accounted for by material balance. The full potential of this well
is currently booked in resources, and will migrate to reserves
based on the results of drilling the Callovian well.
Hungary
Following the sale of a 50% interest in a small, early stage gas
discovery in June, JKX operates six Mining Plots (production
licences) in Hungary covering 200 sq km in which it has a 100%
equity interest.
A reassessment of all of our Hungarian licenses is underway and
a new FDP for the Hajdunanas field will be produced in 1H 2017. In
addition, JKX continues to seek a farm-in partner to participate in
the further development of the Group's remaining Hungarian licence
interests.
Slovakia
In the Svidnik, Medzilaborce, Snina and Pakostov exploration
licences in the Carpathian fold belt in north east Slovakia (JKX
25%), the Operator (DiscoveryGeo) had planned to drill two
prospects in 2016 but a combination of revised permitting
procedures and local activist opposition has delayed well location
permitting and construction. The Operator now hopes to spud the
first well of a larger three well programme in 2017.
Teams, operations and efficiencies
A new integrated technical team has been assembled in Kiev which
includes eight new staff with wide ranging expertise in the latest
equipment, technology and practices in engineering, geology and
operations, mainly from North America. These appointments have
greatly improved our engineering capacity and our operational teams
in Ukraine have been challenged with a new organisational
structure, guiding principles and technical/economic approach for
2017. Progress is good so far, and evolving our culture to match
our high-performance peers in North America will be a major project
for our Company in 2017.
The road ahead
2017 will be the year in which we resume development operations
in Ukraine. We have a few remaining legacy challenges to overcome
first, but the technical plans, execution team and facilities are
already in place. The prize is enormous.
In Russia we will continue to seek ways to monetize the asset,
and macroeconomics and international political conditions have
improved considerably for both Russia and Russian gas. We hope to
have more success in monetization this year.
In Hungary and Slovakia we will continue to develop our fields
on an opportunistic basis, depending on available financing, and
conduct a detailed re-assessment of our development plans there
based on our side-track results.
On the corporate level, we continue to mitigate short-term
liabilities and seek financing for operations. Progress was
significant in 2016, and we intend to finalize our corporate issues
during the course of this year.
On 6 February 2017, the international arbitration tribunal
issued its Award on the Company's claims against Ukraine and ruled
that Ukraine was found not to have violated its treaty obligations
in respect of excessive levying of production taxes, but awarded
the Company damages of approximately $11.8 million plus interest,
and costs of $0.3 million in relation to subsidiary claims. While
disappointed with the overall result, the end of this arbitration
presents us with an opportunity to settle terms with the Government
if Ukraine and agree to terms under which the Company can drop its
various legal strategies and get back to drilling for oil and
gas.
We remain involved in litigation in Ukraine and have made
provisions against potential liabilities arising from separate
court proceedings over the amount of production taxes paid, which
total approximately $33.9 million (including interest and
penalties). While we continue to contest these claims through the
Ukrainian legal system, we also feel it appropriate to fully
provide for the liabilities.
Once we have mitigated the Group's short-term litigation risks
with the Ukrainian Government, development drilling in Ukraine will
recommence and we will seek sources of capital to expand and
accelerate the drilling campaign.
The process of monetisation of our Russian asset continues,
which includes maximising cash generation and cost-cutting and the
repatriation of surplus funds. We will update shareholders as soon
as appropriate with specific progress.
The Board continues to believe that the Company has great
potential given its current geological, physical and human assets.
We have an exceptionally talented team from the board room to the
rigs, and I am personally proud to be associated with such a group
of individuals and optimistic on our future.
I wish to thank all the JKX staff for their support and
professional performance and thank our shareholders for their
ongoing confidence in our team and our strategy.
Tom Reed
Chief Executive Officer
Financial Review
When I joined the Board on January 28th 2016, there were several
financial challenges facing the Company, not least the need to
finance or restructure the 2013 Convertible Bonds (the 'Bonds') and
resolve several legal processes and associated liabilities. This
was in the context of low hydrocarbon pricing, recent depreciation
of local currencies and a need to formulate a new strategy for the
Company. In the narrative below it can be seen how we have
addressed these challenges and enter 2017 in a healthier financial
position.
Results for the year
The Group recorded a loss for the year of $37.1m (after
exceptional charges of $29.7m (net of tax effects), mainly relating
to the provision for production based taxes for 2015 and
replacement of the Board in January 2016) which is significantly
lower than the loss of $81.5m (after exceptional charges of $55.7m
(net of tax effects), mainly relating to impairment charge for oil
and gas assets and the provision for production based taxes for
2010) in 2015. The loss before exceptional items has decreased from
$25.8m to $7.5m with lower realisations in both Ukraine and Russia
(due to significant volatility and depreciation in local
currencies) and lower gas production in Ukraine, being offset by
increased production in Russia due to well-27 coming back on line
and some reductions in costs (also affected by local currency
depreciation).
Revenue
Despite production gains of 12% across the Group, significantly
lower commodity prices and the weakening of local currencies
resulted in a 16.6% fall in revenues to $73.8m (2015: $88.5m). If
we adjust 2015 revenues for the weakening in local currencies, the
fall in revenues was only $4.0m or 5% (see revenue bridge
chart).
2016 2015 Change % Change
Group revenues $m $m $m
---------------- ----- ----- -------- ----------
Ukraine 54.8 72.2 (17.4) (24.1)
---------------- ----- ----- -------- ----------
Russia 19.0 16.3 2.7 16.6
---------------- ----- ----- -------- ----------
Total 73.8 88.5 (14.7) (16.6)
---------------- ----- ----- -------- ----------
2016 2015 Change %Change
Ukrainian $m
revenues $m $m
-------------- ----- ----- -------- ---------
Gas 35.9 53.1 (17.2) (32.4)
-------------- ----- ----- -------- ---------
Oil 15.1 14.1 1.0 7.1
-------------- ----- ----- -------- ---------
Liquefied
Petroleum
Gas ('LPG') 3.8 4.6 (0.8) (17.4)
-------------- ----- ----- -------- ---------
Other - 0.4 (0.4) (100)
-------------- ----- ----- -------- ---------
Total 54.8 72.2 (17.4) (24.1)
-------------- ----- ----- -------- ---------
Realisations 2016 2015 % Change
--------------- ------- ------- ---------
Ukraine
--------------- ------- ------- ---------
Gas ($/Mcf) 5.92 7.65 (22.6)
--------------- ------- ------- ---------
Oil ($/bbl) 45.94 49.75 (7.7)
--------------- ------- ------- ---------
LPG ($/tonne) 374.81 442.59 (15.3)
--------------- ------- ------- ---------
Russia
--------------- ------- ------- ---------
Gas ($/Mcf) 1.49 1.68 (11.3)
--------------- ------- ------- ---------
Group
--------------- ------- ------- ---------
Gas ($/Mcf) 2.95 4.20 (29.8)
--------------- ------- ------- ---------
Oil ($/bbl) 45.94 49.75 (7.7)
--------------- ------- ------- ---------
LPG ($/tonne) 374.81 442.59 (15.3)
--------------- ------- ------- ---------
Average exchange
rates 2016 2015 Change % Change
------------------ ------ ------ --------- -----------
Russia (RUB/$) 66.83 61.31 (5.52) (9.0)
------------------ ------ ------ --------- -----------
Ukraine (UAH/$) 25.59 22.12 (3.47) (15.7)
------------------ ------ ------ --------- -----------
Revenues
Revenues bridge
http://www.rns-pdf.londonstockexchange.com/rns/8750Z_-2017-3-17.pdf
Ukrainian revenues
Gas sales volumes in Ukraine were 7.3% lower at 3,661 boepd
(2015: 3,948 boepd) as a result of reduced gas production to 3,099
boepd (2015: 3,503 boepd) due to the suspension of all drilling
activity in Ukraine in early 2015. The natural decline in
production was successfully mitigated by workovers and
well-intervention treatments.
In Ukraine, average gas realisations in US Dollars declined by
22.6% from $7.65/Mcf to $5.92/Mcf mainly due to the 15.7%
devaluation of the Hryvnia. Before the introduction of a new law
affecting the Ukrainian gas market on 1 October 2016, the state
regulator made periodic adjustments for Hryvnia/$ exchange rate
fluctuations which impacted gas realisations and artificially
inflated them. From 1 October 2015, these periodic adjustments
ceased and gas prices have followed market trends. Further decline
in realisations is explained by excessive quantities of imported
gas from Europe which depressed prices and reduced demand from
industrial customers. The lower gas production and realisations in
Ukraine were the key detrimental factors affecting revenue in 2016
with most other revenue components showing a positive trend.
The increase in oil production was particularly pronounced due
to a successful workover of well Ignativske-132 early in the year
which has high oil content. However, oil realisations reduced from
$49.75/bbl in 2015 to $45.94/bbl in 2016 (a fall of 7.7%) which was
in line with international price movements. Oil prices in Ukraine
were higher than Brent in the second half of 2016 due to the lack
of cheap illegal products, but this failed to compensate for the
overall price decline.
Lower gas production volumes directly affected LPG production
and sales. The $0.8m (17.4%) decline in LPG revenues was due to
lower production volumes combined with a reduction in the domestic
market price, resulting from increased competition through imported
product.
Russia revenues
Russian gas sales made up 60.8% of the Group's volumes sold
(2015: 52.1%) but the Russian sales volumes currently attract
considerably lower realisations than the Ukrainian volumes and
therefore the increased proportion of Russian gas sales led to a
29.8% decrease in the Group average gas price realised to $2.95/Mcf
(2015: $4.20/Mcf).
Production in Russia was higher by 30.2% to 6,082 boepd (2015:
4,670 boepd) due to well-27 coming on line in late 2015 following
repairs throughout that year. However this was not sufficient to
compensate for price reductions. Gas prices in Russia dropped by
11.3% to $1.49/Mcf (2015: $1.68/Mcf) due to a 9.5% reduction to the
gas sales price from 1 July 2016 obtained from our sole customer
supplemented by the devaluation of the Russian Rouble. We
negotiated a 5-year "take or pay" contract to give us more
certainty over cash flow from our customer, albeit at a lower
price. We have completed a review of the potential customer base in
Russia and conclude that, for the time being, the current contract
is the best we can achieve in terms of price and cash flow
certainty.
Loss from operations
Loss from operations before exceptional charges for the year was
$3.9m (2015: loss $10.7m) representing a $6.8m improvement. This
was the result of a decrease of $20.8m in cost of sales, a $0.7m
decrease in the Group's administrative expenses and foreign
exchange effects compensating for the $14.7m decrease in Group
revenues discussed above.
Cost of sales
The $20.8m decrease in cost of sales to $56.0m (2015: $76.8m)
comprises the following items:
-- a decrease in Russian operating costs by $0.5m, a 5.0% reduction;
-- a decrease in other Russian operating costs of $2.6m due to
additional income from insurance proceeds for well-27 than was
estimated at the end of 2015;
-- a decrease in Ukrainian operating costs by $0.5m, a 5.4% reduction;
-- a reduction in the depreciation, depletion and amortisation ('DD&A') charge of $7.5m;
-- production based taxes lower by $8.6m, predominantly related
to lower production in Ukraine;
-- a decrease in Rest of World costs of $1.5m; and
-- an increase in the doubtful debt provision in Ukraine of
$0.5m (nil in 2015). The provision was recorded due to strong
evidence that one of our customers is experiencing financial
difficulties resulting in a significant deterioration in their
credit worthiness, although we continue to use multiple avenues to
recover this debt.
The decrease in Russian operating costs of $0.5m is largely due
to lower Russian property tax charges which have decreased by
approximately $0.6m to $0.9m (2015: $1.5m) due to the reduced value
of the Russian assets subject to property tax. This was offset by
storage costs associated with chrome tubing strings ($0.6m) and
increased acid stimulation of wells needed to maintain stable
production ($0.4m). We plan to utilise the chrome tubing during
planned workovers in 2017 and will therefore see lower storage
costs in 2017.
Ukrainian operating costs decreased by $0.5m, mainly due to the
effects of Hryvnia devaluation from an average of UAH22.12/$ to an
average of UAH25.59/$ (a depreciation of 15.7%) and staff
reductions in many technical departments. This was partly offset by
an increase in local salaries of up to 50% in January 2016 after
two years without pay rises within a high-inflation
environment.
Operating costs in Rest of World decreased by $1.5m mainly due
to staff reductions in the London office. Further to completion of
new Field Development Plans, we have assembled an integrated
technical team with world-class on-shore experience which will be
critical in delivering our strategy during 2017 and beyond.
The DD&A charge reduced by $7.5m, largely as a result of a
lower asset carrying values resulting from impairments recognised
in Ukraine.
Production taxes
Production based tax expense (before exceptional items) for the
year was $17.7m (2015: $26.2m), representing a 32.4% decrease which
has been recognised in cost of sales.
In Ukraine, although the gas production rate applicable in 2015
was 55%, our subsidiary was subject to 28% as a result of an
Interim Award issued by an international arbitration tribunal which
required the Government of Ukraine to limit the collection of
production taxes ('Rental Fees') on gas produced by PPC, to a rate
of 28%. The Interim Award remained in effect until the final
ruling. In the period from January to October 2015, Rental Fees
were recorded at 55% rate but then adjusted in November 2015 to
reflect the average rate of 28%.
In December 2015, the Ukrainian Government passed legislation to
reduce the gas production tax in Ukraine from 55% to 29% with
effect from 1 January 2016. So the effective rate that we have
recognised year-on-year is very similar (28% versus 29%) but the
lower production has resulted in lower taxes.
In February 2017 the international arbitration tribunal issued
its Award on the Company's claims and awarded the Company damages
of approximately $11.8m plus interest and costs of $0.3 million in
relation to our Ukrainian subsidiary's claims. The tribunal
dismissed the main element of the Company's claim for payment of
excessive Rental Fees. The tribunal ruled that Ukraine was found
not to have violated its treaty obligations in respect of excessive
levying of such taxes.
Our subsidiary continues defending its position in the Ukrainian
courts regarding the Rental Fees levied for 2010 and 2015 but we
have now fully provided for the liabilities for both these years
following the result of the international arbitration. Due to the
need for a further process to legalise the $11.8 million award in
the Ukrainian courts, we have not recognised this as an asset at
this stage.
In December 2016, the Ukrainian Government passed legislation
reducing the royalty on oil production from a maximum of 45% to
29%, which will positively affect our performance in 2017.
In Russia, the gas and condensate mineral extraction tax ('MET')
rate applicable in 2016 was 350 Roubles/Mcm (2015: 292
Roubles/Mcm). The formula for MET is based on gas prices, gas
production as a share of total hydrocarbon output and complexity of
gas reservoirs (depletion rates, depth of the producing horizons
and geographical location of producing fields). Our Russian
subsidiary, Yuzhgazenergie LLC ('YGE'), is entitled to a 50%
discount based on the depth of our gas reservoirs.
In addition to production taxes, YGE is subject to a 2.2%
property tax which is based on the net book value of its Russian
assets as calculated for property tax purposes. This amounted to
$0.4m in 2016 (2015: $0.7m) and is included in other cost of
sales.
Exceptional charges
Exceptional charges of $26.3m in 2016 comprised the following
items:
-- $24.3m of provision for production-based taxes in respect of
2015 recognised as a result of the tribunal's dismissal of the
Company's claim for overpayment of Rental Fees (as noted
above);
-- $2.0m of non-cash impairment charge for the Group's oil and gas assets in Hungary.
Further exceptional charges of $4.5m in 2016 included mainly the
following:
-- $2.5m of severance costs and additional remuneration which
the previous board approved and paid prior to the General Meeting
in January 2016;
-- $0.5m of professional services incurred in relation to the
General Meeting and the replacement of the Board on 28 January
2016;
-- $0.7m severance costs incurred as a result of staff
reductions, mainly at the Group's London headquarters; and
-- a $0.6m onerous lease provision to cover the Group's
liability for long-term lease contracts relating to London office.
The Company has been successful in transferring the lease for one
of the three unused floors at the London office and continues to
try to exit from the remaining two leases.
Exceptional charges of $64.9m in 2015 included the following
items:
-- a non-cash impairment charge of $51.1m for the Group's oil and gas assets;
-- a provision of $10.9m recognised as a result of a judgement
against our Ukrainian subsidiary in respect of the rental fees case
related to 2010; and
-- a provision for legal costs of $3.0m (including interest) to
be reimbursed as a result of the judgement of the Supreme Court
which allowed an appeal by Eclairs Group Limited ('Eclairs') and
Glengary Overseas Limited ('Glengary') and their nominees against
the Court of Appeal's judgment that the voting restrictions placed
on them on 31 May 2013 by the Company were valid.
Administrative expenses
Excluding the exceptional costs above, administrative expenses
have increased by $4.7m to $22.2m (2015: $17.5m) mainly due to:
-- An increase in legal and professional fees of $3.6m;
- professional services of $1.2m incurred in respect of the
updating of the Field Development Plans and implementation of new
strategy, compensated by savings of $0.3m in professional fees due
to review of the cost base and removal of unnecessary services;
- legal fees of $0.4m incurred in connection with the
restrictions imposed on the exercise of voting and other rights of
two shareholders, Eclairs and Glengary, in January 2016;
- legal and court fees of $1.4m related to the court cases in
Ukraine in respect of 2007, 2010 and 2015 Rental Fees; and
- and an increase in arbitration legal and court fees of $0.8m
due to timing of the work with the main case being held in July
2016.
-- An increase in other costs of $1.7m mainly due to a reduced
allocation of administrative staff costs to operating activities
(the reverse side of the $1.5m decrease in operating costs noted
above); and
-- A decrease of $0.6m in staff costs across the Group as a
result of review of support staff requirements.
Since our appointment we have implemented a number of steps to
identify cost efficiency possibilities and were able to
significantly reduce the costs of the Company's London
headquarters. Head office headcount has been reduced by 45% and we
now occupy one floor of the building where we previously occupied
four floors. Headcount reductions in both Ukraine and Russia were
initiated during the latter half of the year, the benefits of which
will be felt in the 2017 financial year.
Net finance charges
Finance costs have decreased by $1.9m to $4.6m (2015: $6.5m)
comprising convertible bond interest. Overall the liability
significantly reduced as a result of the redemption of $12.0m of
the Bonds in February 2016 and repurchase and subsequent
cancellation of Bonds with face value of $2.2m, $1.4m and $6.4m,
made in June, September and October 2016, respectively.
A $0.6m charge (2015: $1.9m) of the fair value movement on the
derivative liability represents the change in fair value of the
conversion option associated with the convertible bond issued in
February 2013.
Finance income of $1.8m (2015: $1.3m) comprises income from bank
deposits of $0.7m (2015: $1.3m) and a gain on the repurchase of
convertible bonds of $1.1m.
Taxation
The total tax credit for the year was $1.0m (2015: $1.2m credit)
comprising a current tax charge of $1.3m (2015: $4.8m) in respect
of Ukraine, a deferred tax credit before exceptional items of $1.2m
(2015: charge of $3.1m) and a deferred tax credit of $1.2m in
respect of exceptional items (2015: $9.2m). The fall in the current
tax charge to $1.3m reflects lower profitability in Ukraine where
the corporate tax rate for 2016 was 18% and remains at this level
for 2017.
The total deferred tax credit of $2.4m (2015: $6.1m credit)
comprises:
-- a $2.9m credit (2015: $2.1m credit) reflecting the
recognition of deferred tax assets in respect of Russian and
Hungarian tax losses carried forward to future periods; and
-- a net $0.5m charge (2015: $4.0m credit) relating to provision
for rental fees in Ukraine and other tax timing differences on our
oil and gas assets in Russia, Ukraine and Hungary.
Loss for the year
Loss for the year before exceptional charges (net of tax
effects) was $7.5m (2015: $25.8m). Basic loss per share before
exceptional items was 4.34 cents (2015: 14.97 cents). Basic loss
per share after exceptional items was 21.56 cents (2016: 47.32
cents).
Cash flows
Cash flows bridge
http://www.rns-pdf.londonstockexchange.com/rns/8750Z_1-2017-3-17.pdf
The cash flow bridge chart very clearly summarises the financial
journey of the Company over the course of 2016. Once we add
exceptional items and one-off legal costs to the $17.0m of cash
generated from operations our cash income more than doubled to
$30.0m (2015: $12.8m) due to the reduced net loss as discussed
above. With the brought forward cash balance of $25.9m, this
provided the Company with $55.9m with which to operate the business
and resolve historic liabilities.
Exceptional items totalling $3.7m comprise $2.5m of severance
costs and additional remuneration paid to the previous Board, $0.5m
of professional services incurred in relation to the General
Meeting and the replacement of the Board on 28 January 2016 and
$0.7m severance costs incurred as a result of staff reductions,
mainly at the Group's London headquarters.
Legal fees of $9.3m mainly relate to:
-- $3.9m of international arbitration costs;
-- $2.8m for the reimbursement of Eclairs' and Glengary's legal
fees in respect of prior years' shareholder disputes;
-- $1.4m in respect of the Rental Fee claims in Ukraine for 2007, 2010 and 2015;
-- $0.4m incurred in connection with the restrictions imposed on
the exercise of voting and other rights of Eclairs and Glengary in
January 2016; and
-- general corporate advice including Bond restructuring.
Group capital spend remained low at $7.4m but included a full
review of operations and capital projects and preparation of new
Field Development Plans.
Net cash outflow from financing activities of $19.8m comprises
the $10.9m redemption of the Bond in February 2016 in addition to
$9.0m used to repurchase convertible Bonds in June, September and
October 2016, which were subsequently cancelled, offset by a
movement in restricted cash of $0.1m. These repurchases and
cancellation were instrumental in enabling the Company to
renegotiate the Bond terms with Bondholders towards the end of 2016
resulting in an agreed restructuring in early January 2017, which
significantly reduced the short-term liabilities facing the Company
(see below).
No dividends were paid to shareholders in the period (2015:
nil).
Cash and cash equivalents
The resultant decrease in cash and cash equivalents in the year
before adjusting for foreign exchange effects was $11.3m (2015:
increase $1.6m). Cash movements explained above allowed liquidity
to be successfully maintained with a reduction in year-end cash
balances to $14.1m (31 December 2015: $25.9m). Given the
significant one-off cash costs described above, we look forward to
being able to invest far more of our operational cash flow into
operational activities during 2017 rather than in resolving
historic issues.
Liquidity
The Group employs a number of financial instruments to manage
the liquidity associated with the Group's operations. These include
cash and cash equivalents, together with receivables and payables
that arise directly from our operations.
Soon after our appointment, we started negotiations to
restructure $24.6m Bond liability which was due in February 2017.
Redemption of $12 million of the Bonds was settled in February
2016. As noted above, in order to reduce this liability and to
improve the Company's ability to restructure the Bonds,
repurchases, and subsequent cancellation, amounting to $2.2
million, $1.4 million and $6.4 million were made in June, September
and October 2016, respectively, utilising improved operating cash
flows within the Group. These purchases were all made at discounts
to face value.
By lowering the overall liability and reducing the number of
Bondholders with which to negotiate, in January 2017 the Company
was able to restructure the remaining $16 million of Bonds
resulting in the liability being amortised over three years
starting from February 2018 with a small accretion payment of $2.6
million being due in February 2017. The financing of the Bonds are
now within the operating cash flow capabilities of the Company and
the business can move forward with its development plans subject to
resolution of the Group's legal issues in Ukraine.
Outlook
When we announced our 2015 annual results, we concluded that our
main objective will be to restore the shareholder value in JKX. We
focused on reducing costs and implementing a robust capital
allocation policy which can ensure maximised cash flows from our
assets and improvements to the Company's profitability and
liquidity.
During 2016 we used this increased cash flow to resolve
inherited legal battles with our stakeholders and started
rebuilding relationships with those main stakeholders, including
the Ukrainian Government. This will allow us to focus on our main
activity in 2017 - to invest in oil and gas production.
We completed new Field Development Plans for Ukraine and Russia
which will unlock full technical potential using expertise and
working practices from North America. This will enable us to embark
on an investment programme to increase production volumes in
Ukraine, where we are planning to restart our drilling programme in
2017. We are currently looking at different options to raise
external financing needed to implement our new exciting
strategy.
We can also draw a line under our claim against the Ukrainian
Government for overpayment of production taxes as in February 2017
the international arbitration tribunal issued its Award on the
Company's claims and awarded the Company damages of approximately
$11.8 million plus interest, and costs of $0.3 million in relation
to subsidiary claims. We have restarted the dialogue with Ukrainian
Government to achieve the best possible outcome for all of us.
The Company is firmly committed to Ukraine having been present
there for more than 20 years with a highly experienced and
committed workforce and we will endeavour to increase the cash
generation capabilities of our resources in the country.
I would like to reiterate the statements of both our Chairman
and CEO in that it has been a challenging and exciting year at the
Company and it has been an honour to work with our many colleagues
across the Group. I look forward to addressing further challenges
with them all during 2017 and taking the Company forward.
Russell Hoare
Chief Financial Officer
Regional operations update
Group production
In 2016 Group average production was 10,083 boepd (2015: 8,996
boepd), comprising 54.7 MMcfd of gas (2015: 48.7 MMcfd) and 967 bpd
of oil and condensate (2015: 871 bpd), an overall increase in
production of 12%.
Ukraine
Novomykolaivske licences
Production
Average production from the Novomykolaivske group of fields in
2016 was 2,553 boepd (2015: 2,611 boepd) comprising 10.0 MMcfd of
gas (2015: 10.9 MMcfd) and 879 bpd of oil and condensate (2015: 794
bpd). Despite the cancellation of all development expenditure since
early 2015, oil production increased by 11% in 2016 while gas
production decreased by 8%, although the decline in gas production
has to be viewed in the context of a declining field and lack of an
effective development plan in the first half of the year. We have
implemented an enhancement program targeting the technical
potential of existing well stock which has resulted in the increase
in oil production and enabled a smaller reduction in gas production
than would otherwise have been the case. The decline in gas is
mainly attributed to a year on year natural decline of 1.5 MMcfd
observed in the Ignativske field.
Development and drilling
No drilling took place in 2016 as the new board focused on
rebuilding Field Development Plans ('FDPs') using global best
practices, including drilling, fracturing and completion techniques
from North America. Several technical advisors with a broad range
of global and regional expertise were engaged.
The FDP for Ukraine identifies a technical solution to
potentially unlock approximately 600 billion cubic feet of
recoverable gas reserves previously considered uneconomic at the
Rudenkivske gas field in addition to significant enhanced oil
recovery opportunities in existing fields.
Work commenced on the initial stages of the FDP, including the
acquisition and preparation of existing wellbores for stimulation,
and the re-start of water injection into Ignativske. Production
optimisation operations continued with the TW-100 and the recently
leased Cooper LTO-550 and ZJ-20 workover rigs and rigless
interventions.
-- As part of the re-start of the Ignativske pilot waterflood
project in the first half of last year, re-pressurisation of IG138
occurred in July. This led to the opening of the well in August and
production of 5.5 Mstb of oil in the following two months. An
electrical submersible pump was sourced for IG110 which will enable
injection to be increased to 10,000 bbls/d as part of the FDP.
-- A cement plug over the T2 and Devonian Sands was drilled out
in IG-132, which resulted in a significant increase in production.
Initial rates were over 1,100 bbls/d and total incremental
production was 96 Mstb of oil and 129 MMcf of gas.
-- In the Movchanivske North Field M171 was worked over to
deepen the gas lift, followed by M153 where additional perforations
were also added. Both of these projects were as a result of the
newly generated enhancement list and both added to oil production
quickly and with minimal investment.
-- Rigless interventions included velocity string installations
in M155, M157, M159, M162, M167, and IG106. In addition, a plunger
lift system was installed in M160. All of these installations
increased gas and condensate production quickly and with minimal
investment.
-- Successful re-entry of two old leased wells, NN16 and NN47,
was completed in the Rudenkivske field. NN16 recovered a total of
100 MMcf of gas and 1.9 Mstb of condensate from the Devonian
horizon in the southern part of the field. At the year end, NN47
had recovered a total of 37 MMcf of gas and 1.7 Mstb of condensate
from the Visean horizon in the Northern part of the field. The
success of both of these projects was due to the use of modern
perforating technologies.
-- Work started on 19R to prepare the well for fracturing in 2017 as outlined in the FDP.
-- Wireline operations have focussed on the clearance of wax and
salt build up in the production tubing of a number of wells. A
sustained programme of wax clearance has stabilised oil
production.
Production facilities
Operations at the main processing facility, the LPG plant and
the oil loading facility continued smoothly throughout the year. A
new water treatment vessel was installed at the main processing
facility. Minor piping modifications continue to enhance
production. A routine annual plant shutdown of 2 days for
maintenance was successfully completed in September.
Improvements at the oil loading terminal included an upgrade of
the fire protection system and the installation of an additional
loading point to enable loading of road tankers in addition to rail
cars.
Elyzavetivske Production Licence
Production
Average production from the Elyzavetivske field in 2016 was
1,448 boepd (2015: 1,715 boepd) comprising 8.6 MMcfd of gas (2015:
10.1 MMcfd) and 23 bpd of condensate (2015: 29 bpd), an overall 16%
decrease in production on the average for 2015. The decrease is as
a result of the pressure decline in the field.
Development and drilling
There was no drilling activity on the Elyzavetivske field during
the year although new field development plans on the Elyzavetivske
field and West Mashivska licence were completed.
Production facilities
The Elyzavetivske production facility continues to operate
efficiently and there have been no further changes.
Russia
Koshekhablskoye licence
Production
Average production from the Koshekhablskoye field in 2016 was
6,082 boepd (2105: 4,670 boepd) comprising 36.1 MMcfd of gas (2015:
27.7 MMcfd) and 65 bpd (2015: 48 bpd) of condensate, a 30% increase
on the average for 2015. This increase is due mainly to full year
of production from well-27 which came back on line in late
2015.
Licence obligations
The Group's Russian operating subsidiary Yuzhgazenergie ('YGE')
maintains a regular dialogue with Rosnedra, the licencing
authority, to ensure that the authorities are kept abreast with
progress on the field development and the associated exploration
and reserves determination commitments.
Rosnedra, is fully aware that there are certain licence
commitments under YGE's Koshekhablskoye licence which have not been
met and have issued YGE with notices to this effect. YGE is
addressing these issues and expects to resolve them in 2017.
Development and drilling
After completion of the well-27 workover at the end of 2015,
there were no additional workover activities in 2016. Routine acid
treatment has been carried out using coiled tubing on the main
producing wells.
Production from well-20 has declined from 17.5 MMcfd to 14.1
MMcfd through the year without any additional acid stimulation.
During a routine wireline operation in the middle of the year a
fish was lost in the hole which has prevented further acid
stimulation taking place, but despite this production has remained
relatively stable.
The north flank well-25 has been producing gas at rates between
5.5-12.4 MMcfd with three acid treatments in the year. Well-27 has
been producing gas at rates between 8.3-12.2 MMcfd on a monthly
average basis, having required eight acid treatments through the
year. The deep east-flank well-15 continues to produce
approximately 0.6 MMcfd on a monthly average basis.
Production facilities
There were no changes to the facilities in 2016. An unscheduled
shutdown of the plant in May was prolonged in order to complete the
annual maintenance which had originally been planned for later in
the year.
Reserves Audit
A reserves audit was carried out by Degoyler and MacNaughton in
2016 which increased total 2P reserves for the field to 80.3 MMboe
(2015: 66.1 MMboe). Proved reserves have been slightly reduced, due
to higher resolution geological modeling showing slightly less
drainage area. Probable reserve categories have increased due to
the addition of reserves attributable to a new Callovian well,
which is planned for 2018, and net pay maps revealing volumes
previously not accounted for by material balance.
Hungary
JKX now operates the following six new Mining Plots (production
licences) in Hungary covering 200 sq km and which are 100% owned by
Riverside Energy Kft, the Company's wholly-owned Hungarian
subsidiary:
Hajdunanas IV 28 sq km
Hajdunanas V 7 sq km
Tiszavasvari 41 sq km
IV
Emod V 100 sq km
Pely I 18 sq km
Jaszkiser II 6 sq km
The licence terms enable JKX to carry out appraisal and
development activity over a 30 year period.
Hajdunanas field
Production from the Hajdunanas and Gorbehaza Fields in north
east Hungary, which form the Hajdunanas IV Mining Plot, was
suspended by the previous operator in 2013.
In December, a sidetrack of the Hn-2 well was started to access
the remaining Pannonian reservoir gas and to test the oil potential
of the underlying Miocene volcanoclastic sequence, which was
previously productive in the Hn-1 well. This was the first drilling
operation completed since JKX assumed operatorship in November
2014.
The Hn-2ST well tested 1.5 MMcfd from the Pannonian Pegasus
sands and 2.8 MMcfd from a lower Pannonian sand interval. The
latter is a newly discovered productive horizon in the field.
Gas sales commenced on 2 February 2017 at an initial rate of 1.8
MMcfd, after a production and sales break of more than three years.
Production forecasting and development planning is underway and
future work may include a workover of the existing Hn-1 well to add
production from the Lower Pannonian reservoir interval.
JKX continues to seek a farm-in partner to participate in the
further development of the Hajdunanas field and the Group's other
Hungarian licence interests.
Turkeve IV Mining Plot
During the year, JKX sold its 50% beneficial interest in the
Ny-7 discovery (within the Turkeve IV Mining Plot) to the
operator.
Slovakia
Exploration
JKX holds a 25% equity interest in the Svidnik, Medzilaborce,
Snina and Pakostov exploration licences in the Carpathian fold belt
in north east Slovakia. A programme of magneto-telluric geophysical
surveys combined with seismic re-interpretation has led to the
identification of a number of shallow prospects across the
licences.
The 128 sq km Pakostov licence was applied for and approved in
2015 as protection acreage around material prospects identified in
the Medzilaborce licence. The Operator (DiscoveryGeo) had planned
to drill two of these prospects in 2016 but a combination of
revised permitting procedures and local activist opposition has
delayed well location permitting and construction. The Operator now
hopes to spud the first well of a larger three well programme in
2017.
JKX Reserves & Resources
Consultants DeGolyer & MacNaughton ('D&M') conducted an
evaluation of the Group's reserves and resources position as at 31
December 2016 and a summary is presented in the tables below.
Total remaining 2P reserves
at 31 December 2016
31-Dec-15 Revisions Production 31-Dec-16
----------- ---------- ---------- ----------- ----------
TOTAL
Oil MMbbl 3.9 0.3 (0.4) 3.9
Gas Bcf 551 101.6 (20.0) 632.6
Oil + Gas
MMboe 95.8 17.2 (3.7) 109.3
----------- ---------- ---------- ----------- ----------
UKRAINE
Oil MMbbl 3.3 0.1 (0.3) 3.1
Gas Bcf 158.4 4.0 (6.8) 155.6
Oil + Gas
MMboe 29.7 0.8 (1.5) 29.1
----------- ---------- ---------- ----------- ----------
RUSSIA
Oil MMbbl 0.7 0.1 (0.0) 0.8
Gas Bcf 392.5 97.7 (13.2) 476.9
Oil + Gas
MMboe 66.1 16.4 (2.2) 80.3
----------- ---------- ---------- ----------- ----------
P+P (2P) Reserves
Proved and Probable (2P) Group reserves increased from 95.8
MMboe at year end 2015 to 109.3 MMboe at 31 December 2016. The
changes are shown on a field-by-field basis in the table below:
MMboe Dec-15 Production Revisions Dec-16
-------------------- ------- ----------- ---------- -------
Ukraine
-------------------- ------- ----------- ---------- -------
Ignativske 3.0 (0.5) 1.4 3.9
-------------------- ------- ----------- ---------- -------
Movchanivske 1.6 (0.2) (0.8) 0.6
-------------------- ------- ----------- ---------- -------
Novomykolaivske 0.8 (0.1) 0.1 0.7
-------------------- ------- ----------- ---------- -------
Rudenkovskoye 20.6 (0.0) 1.6 22.2
Zaplavska 0.5 - (0.5) 0
-------------------- ------- ----------- ---------- -------
sub-total Novo-Nik
production
licences 26.4 (0.9) 1.9 27.4
Elyzavetivske 3.2 (0.5) (1.0) 1.7
-------------------- ------- ----------- ---------- -------
Total Ukraine 29.7 (1.5) 0.8 29.1
-------------------- ------- ----------- ---------- -------
Russia
-------------------- ------- ----------- ---------- -------
Koshekhablskoye 66.1 (2.2) 16.4 80.3
-------------------- ------- ----------- ---------- -------
Total 95.8 (3.7) 17.2 109.3
-------------------- ------- ----------- ---------- -------
JKX P+P+P (3P) Reserves
D&M also carried out a full assessment of the upside
potential in each field, the "Possible" reserves. These reserves
have been calculated independently by D&M and are outlined
below.
MMboe P+P+P
---------------------- ------
Ukraine
---------------------- ------
Ignativske 5.6
---------------------- ------
Movchanivske 0.7
---------------------- ------
Novomykolaivske 0.8
---------------------- ------
Rudenkovskoye 38.7
Zaplavska 0.0
---------------------- ------
sub-total Novo-Nik
production licences 45.8
Elyzavetivske 3.5
---------------------- ------
Total Ukraine 49.3
---------------------- ------
Russia
---------------------- ------
Koshekhablskoye 120.0
---------------------- ------
Hungary
---------------------- ------
Hajdunanas 0.2
---------------------- ------
Total 169.5
---------------------- ------
JKX Contingent Resources
These contingent resources disclosed below are those volumes of
hydrocarbons which are potentially recoverable from known
accumulations but which are not currently considered to be
commercially recoverable. The categories of 1C, 2C or 3C are used
to reflect the range of uncertainty. These contingent resources are
tabulated below.
MMboe 1C (low) 2C (best) 3C (high)
----------------- --------- ---------- ----------
Ignativske 12.0 17.5 50.1
------------------ --------- ---------- ----------
Movchanivske 0.0 1.3 2.8
------------------ --------- ---------- ----------
Novomykolaivske 0.0 0.0 0.1
------------------ --------- ---------- ----------
Rudenkovskoye 9.3 101.4 381.8
Zaplavska 0.0 0.4 1.4
sub-total
Novo-Nik
production
licences 21.3 120.6 436.2
------------------ --------- ---------- ----------
Elyzavetivske 0.0 6.2 20.8
------------------ --------- ---------- ----------
Total Ukraine 21.3 126.8 457.0
------------------ --------- ---------- ----------
Koshekhablskoye 24.1 74.8 107.5
------------------ --------- ---------- ----------
Hajdunanas 0.0 0.0 0.0
Tiszavasvari
6 0.2 0.3 0.7
------------------ --------- ---------- ----------
Total 45.7 201.8 565.2
------------------ --------- ---------- ----------
Principal Risks and Uncertainties
The Board has completed a robust assessment of the most
significant risks and uncertainties which could impact the business
model, long-term performance, solvency or liquidity, and the
results are summarised below.
The principal risks set out below are not set out in any order
of priority, are likely to change and do not comprise all the risks
and uncertainties that the Group faces.
How do we manage it?
What is the risk
---------------------------------------- -----------------------------------
EXTERNAL RISKS - WITHIN OUR
CONTROL
---------------------------------------- -----------------------------------
Tax legislation The Board continues
Description: The Group is to receive regular legal
exposed to changes in local advice regarding the
tax laws, particularly in cases against PPC in
Ukraine. respect of the 2010
Claims and 2015 Claims.
Governments in emerging markets
sometimes bring in new tax The Company intends
laws which are effective to begin a dialogue
immediately but are subject with the Government
to varying interpretations of Ukraine in order
and changes, which may be to satisfy the terms
applied retrospectively. of the international
arbitration award and
Other risks include a weak to reach a mutually
judicial system that is susceptible beneficial outcome.
to outside influence, and
can take an extended period The Group maintains
for the courts to reach final a transparent and open
judgment. relationship with local,
regional and national
Impact: If Management's interpretation tax authorities in Ukraine
of tax legislation does not and Russia.
align with that of the tax
authorities, the tax authorities In respect of the 2010
may challenge transactions Claims and 2015 Claims,
which could result in additional provisions of $10.6
taxes, penalties and fines million and $23.3 million,
which could have a material respectively, have been
adverse effect on the Group's recognised in these
financial position and results financial statements
of operations. to reflect the Company's
estimate of the potential
JKX's Ukrainian operating liability.
subsidiary, Poltava Petroleum
Company ('PPC'), has at times Except for the $33.9
sought clarification of their million provision in
status regarding a number respect of the 2010
of production related taxes. and 2015 Claims, the
PPC continues to defend itself Group's financial statements
in court against action initiated do not include any other
by the tax authorities regarding adjustments to reflect
production related taxes the possible future
for August to December 2010 effects on the recoverability,
('2010 Claims') and for January and classification of
to December 2015 ('2015 Claims'). assets or the amounts
In addition, in February or classifications of
2017, the Company was awarded liabilities that may
approximately $11.8 million result from these tax
in damages plus interest uncertainties.
and costs of $0.3 million
by an international arbitration
tribunal pursuant to a claim
made against Ukraine under
the Energy Charter Treaty
to recover Rental Fees and
damages incurred since 2011.
---------------------------------------- -----------------------------------
Geopolitical - Ukraine
---------------------------------------- -----------------------------------
74% of the Group's revenues To date, our operations
and most of its profits and have not been directly
cash flow from operations impacted by the unrest
are derived from its activities in Ukraine or the military
in Ukraine. conflict in the east.
Recent geopolitical tensions The Company also takes
with Russia, political instability all reasonable measures
and ongoing military action to reduce and limit
in parts of Ukraine have our commercial exposure
negatively impacted its economy, in Ukraine through the
financial markets and relations use of careful selection
with the Russian Federation. of contracting parties,
advanced payments and
Any continuing or escalating careful cash management.
military action in eastern
Ukraine could have a further The Field Development
adverse effect on the economy. Plan and future investment
program in JKX's Ukrainian
Impact: If the country does assets has been designed
not peacefully resolve the with contingencies to
current conflict as well implement should these
as secure additional financing, geopolitical risks increase
there is a risk it may default and/or begin to impact
on its obligations and/or operations.
introduce new decrees to
increase government funds
from independent companies
in Ukraine. Changes in law
or the regulatory environment
and the possibility of immediate
implementation could have
a sudden material adverse
effect on the Group's operations
and financial position, which
would reduce the Group's
profits and cash flows.
---------------------------------------- -----------------------------------
Geopolitical - Group
---------------------------------------- -----------------------------------
Description: Most of the A key priority for the
Group's operations and more Group is to maintain
than 97% of our oil and gas transparent working
assets are located in Ukraine relationships with all
and Russia and the oil, gas key stakeholders in
and condensate that we produce our significant assets
is sold into their domestic in Ukraine and Russia
markets. and to improve the methods
of regular dialogue
Both countries display emerging and ongoing communications
market characteristics where locally.
the right to production can
be challenged by State and Our strategy is to employ
non-State parties. The business skilled local staff
environment is such that working in the countries
a challenge may arise at of operation and to
any time in relation to the engage established legal,
Group's operations, licence tax and accounting advisers
history, compliance with to assist in compliance.
licence commitments and/or
local regulations. The Group endeavours
to comply with all regulations
In addition, local legislation via Group procedures
constantly evolves as the and controls or, where
governments attempt to manage this is not immediately
the economies and business feasible for practical
practices regarding taxation, or logistical considerations,
banking operations and foreign seeks to enter into
currency transactions. The dialogue with the relevant
constantly evolving legislation Government bodies.
can create uncertainty for
local operations if guidance
or interpretation is not
clear.
Impact: The Group's operations
and financial position may
be adversely affected by
interruption, inspections
and challenges from local
authorities, which could
lead to remediation work,
time-consuming negotiations
and suspension of production
licences.
---------------------------------------- -----------------------------------
Commodity prices JKX's policy is not
Description: JKX is exposed to hedge commodity price
to international oil and exposure on oil, gas,
gas price movements and political LPG or condensate.
developments in Russia which JKX attempts to maximise
may affect the regulated stability and predictability
gas price. Change in prices of prices under long
will have a direct effect term contracts with
on the Group's trading results. reputable customers.
This minimises exposure
Ukraine has the ability to to abrupt price movements,
purchase gas from Europe, ensuring sales are as
which has more closely aligned closely matched as possible,
Ukrainian gas prices with in terms of timing and
those across Europe, which volume, to production.
have almost halved since
the beginning of 2015. A In 2016, most of the
prolonged period of low gas oil and gas production
prices in Ukraine would impact in Ukraine is sold by
the Group's liquidity. way of auctions, conducted
with a frequency aimed
In Russia, from 1 July 2016 to achieve as close
the regulated maximum industrial as practicable the aforementioned
price has increased by 1.95% matching principle.
however, following a renegotiation
of its gas sales contract, In Russia, all gas produced
YGE has agreed a reduction is sold to a local gas
of 9.5% to the price at which trading company through
it sells its gas to its sole a gas sales contract
buyer. which remains in place
through 2017. The Company
Oil prices recovered slightly continues to seek to
from recent historic lows engage other buyers
in 2016 and are predicted of its gas in Russia
to remain lower for longer to improve realisations.
by many market commentators.
The Company sells the oil
it produces at prices determined
by the global oil market.
Impact: A period of low oil
and/or gas prices could lead
to impairments of the Group's
oil and gas assets and may
impact the Group's ability
to support its long-term
capital investment programme
(see Liquidity Risk below)
and reduce shareholder returns
including dividends and share
price.
---------------------------------------- -----------------------------------
Foreign exchange exposure The Group attempts to
Description: The Group operates match, as far as practicable,
internationally and is exposed receipts and payments
to foreign exchange risk in the same currency
arising from various currency and also follow a range
exposures, primarily with of commercial policies
respect to Ukrainian Hryvnia to minimise exposures
and the Russian Rouble. to foreign exchange
gains and losses. These
The US Dollar is the currency include minimising exposure
which influences the majority to the Hryvnia denominated
of the Group's revenues and sales, which continue
capital costs. to account for more
than 70% of Group revenues,
Although a proportion of and the Rouble-based
costs are incurred in US operating and capital
Dollars, most operating costs costs.
are influenced by the local
currencies of the countries All our gas sales and
where the Group operates, most of our costs in
principally Ukrainian Hryvnia Russia are denominated
and Russian Rouble. in Roubles which mitigates
the Group's exposure
During 2016, the average to any Rouble/US Dollar
Hryvnia and Rouble exchange fluctuations,
rate devalued by 9% and 16%
respectively, against the The Group's normal policy
US Dollar. is not to hedge foreign
exchange risk but to
As a result, the Group's continually monitor
operating costs in US$ terms internal and external
including the cost of production, guidance on expected
operating and general admin future currency exchange
costs decreased however the movements and manage
Group reported a foreign the currency of the
exchange gain of $0.4m in Group's major cash flows
the income statement as a and holdings to minimise
result of the devaluation our potential exposure.
of the Hryvnia and the strengthening
of the Rouble.
The strengthening of the
Rouble increased the carrying
value of the assets held
in Russia resulting in the
Group's net assets increasing
by $19.6m and increased the
value of Group revenues and
costs which are reported
in US$.
Impact: Appreciation of the
Ukrainian Hryvnia or depreciation
of the Russian Rouble against
the US Dollar or prolonged
periods of exchange rate
volatility may adversely
affect the Group's business
results.
---------------------------------------- -----------------------------------
OPERATIONAL RISKS - NOT WITHIN
OUR CONTROL
---------------------------------------- -----------------------------------
Reservoir performance There is daily monitoring
Description: The hydrocarbon and reporting of the
reservoirs that we operate well performance at
in Ukraine and Russia generate all our fields in Ukraine
the cash flow that underpins and Russia. Production
the Group's growth. These data is analysed by
reservoirs may not perform our in-house technical
as expected, exposing the expertise. This supports
Group to lower profits and well intervention planning
less cash to fund planned and further field development.
development.
Our subsurface specialists
Production from our mature and industry-recognised
fields at the Novomykolaivske personnel are part of
Complex in Ukraine require the daily monitoring
a high level of maintenance and reservoir management
and intervention to maintain process of our fields
production at recent levels. in Ukraine and Russia.
In Russia, acidization of JKX's in-house team
wells and other well maintenance of drilling, engineering
procedures to increase stabilised and subsurface experts
production continued through continue to be closely
the year. In 2015, well integrity involved in the remediation
issues arose requiring two work in Russia, well
out of the five producing prioritisation on mature
wells to be shut-in. One fields in Ukraine and
of the wells, well-05, remains our other field development
shut-in. plans.
Impact: Accurate reservoir In 2016, the Board engaged
performance forecasts from several North American
fields in Ukraine and Russia technical advisers with
are critical in achieving a broad range of global
the desired economic returns and regional expertise
and to determine the availability to support JKX's technical
and allocation of funds for teams in reconstructing
future investment into the the Group's Field Development
exploration for, or development Plans and associated
of, other oil and gas reserves expected reservoir performance.
and resources. If reservoir
performance is lower than
forecast, sufficient finance
may not be available for
planned investment in other
development projects which
will result in lower production,
profits and cash flows.
---------------------------------------- -----------------------------------
Environmental, asset Health, safety and the
integrity or safety incidents environment is a priority
Description: We are exposed of the Board who are
to a wide range of significant involved in the planning
health, safety, security and implementation of
and environmental risks influenced continuous improvement
by the geographic range, initiatives. A London-based
operational diversity and HSECQ Manager reports
technical complexity of our directly to the Chief
oil and gas exploration and Executive Officer.
production activities.
The Group HSECQ Manager
Impact: Technical failure, is responsible for maintaining
non-compliance with existing a strong culture of
standards and procedures, health, safety and environmental
accidents, natural disasters awareness in all our
and other adverse conditions operational and business
where we operate, could lead activities. The HSECQ
to injury, loss of life, Manager reports to the
damage to the environment, Board on a monthly basis
loss of containment of hydrocarbons with details of Group
and other hazardous material, performance.
as well as the risk of fires
and explosions. Failure to Operations in Ukraine,
manage these risks effectively Russia and Hungary all
could result in loss of certain have a dedicated HSECQ
facilities, with the associated Team of local personnel
loss of production, or costs led by an HSECQ Manager
associated with mitigation, who reports to the HSECQ
recovery, compensation and Director for that particular
fines. region.
Poor performance in mitigating All locations have HSE
these risks could also result Management Systems modelled
in damaging publicity for on the ISO 9000 series,
the Group. OHSAS 18001 and ISO
14001.
Appropriate insurances
are maintained at Group
level by reputable insurers
to manage the Group's
financial exposure to
any unexpected adverse
events arising out of
the normal operations.
---------------------------------------- -----------------------------------
Bribery and corruption We prohibit bribery
Description: The UK Bribery and corruption in any
Act places onerous requirements form by all employees
on UK companies to demonstrate and by those working
the effectiveness of their for and/or connected
anti-bribery measures. with the business.
Impact: Failing to implement Our Group Compliance
adequate systems to prevent Manager is responsible
bribery and corruption could for anti-bribery and
result in prosecution of corruption matters and,
the Company and its officers. with the support of
the Board, implements
an Annual Compliance
Plan. Progress against
the Plan is reported
and discussed at every
Audit Committee meeting.
The compliance programme
focusses on training,
monitoring, risk management,
due diligence and regular
review of policies and
procedures.
Employees are expected
to report actual, attempted
or suspected bribery
to their line managers
or through our independently
managed confidential
reporting process, which
is available to all
staff as well as third
parties.
---------------------------------------- -----------------------------------
Directors' Responsibilities Statement on the Annual Report
The responsibility statement below has been prepared in
connection with the Company's full annual report for the year ended
31 December 2016. Certain parts thereof are not included within
this announcement.
Each of the Directors confirm that, to the best of their
knowledge:
-- the Group and parent company financial statements, which have
been prepared in accordance with IFRSs as adopted by the EU, give a
true and fair view of the assets, liabilities, financial position
and loss of the Group;
-- the Annual Report includes a fair review of the development
and performance of the business and the position of the Group,
together with a description of the principal risks and
uncertainties that it faces;
-- the Annual Report and financial statements, taken as a whole
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group and parent company's
performance, business model and strategy;
-- so far as the Director is aware, there is no relevant audit
information of which the Company's auditors are unaware; and
-- he or she has taken all the steps that he or she ought to
have taken as a Director in order to make himself or herself aware
of any relevant audit information and to establish that the
Company's auditors are aware of that information.
The responsibility statement was approved by the Board of
directors on 17 March 2017 and is signed on its behalf by:
Tom Reed Russell Hoare
Chief Executive Officer Chief Financial Officer
Consolidated income statement
for the year ended 31 December
Note 2016 2015
$000 $000
-------------------------------------------- ---- --------- ---------
Revenue 3 73,848 88,535
-------------------------------------------- ---- --------- ---------
Cost of sales
-------------------------------------------- ---- --------- ---------
Exceptional item -production based
taxes 7 (24,340) (10,854)
Exceptional item - provision for impairment
of oil and gas assets 4 (2,000) (51,055)
Other production based taxes (17,737) (26,255)
Other cost of sales (38,290) (50,517)
-------------------------------------------- ---- --------- ---------
Total cost of sales (82,367) (138,681)
-------------------------------------------- ---- --------- ---------
Gross loss (8,519) (50,146)
-------------------------------------------- ---- --------- ---------
Exceptional items 9 (4,484) (2,988)
Other administrative expenses (22,182) (17,525)
-------------------------------------------- ---- --------- ---------
Total administrative expenses (26,666) (20,513)
-------------------------------------------- ---- --------- ---------
Gain/(loss) on foreign exchange 431 (4,919)
-------------------------------------------- ---- --------- ---------
Loss from operations before exceptional
items (3,930) (10,681)
-------------------------------------------- ---- --------- ---------
Loss from operations after exceptional
items (34,754) (75,578)
-------------------------------------------- ---- --------- ---------
Finance income 1,836 1,289
Finance costs (4,636) (6,500)
Fair value movement on derivative
liability 6 (599) (1,921)
-------------------------------------------- ---- --------- ---------
Loss before tax (38,153) (82,710)
Taxation - current 8 (1,341) (4,827)
Taxation - deferred
- before the exceptional items 8 1,209 (3,132)
- on the exceptional items 8 1,170 9,206
-------------------------------------------- ---- --------- ---------
Total taxation 8 1,038 1,247
-------------------------------------------- ---- --------- ---------
Loss for the year attributable to
equity shareholders of the parent
company (37,115) (81,463)
-------------------------------------------- ---- --------- ---------
Basic loss per 10p ordinary share
(in cents)
- before exceptional items 10 (4.34) (14.97)
- after exceptional items 10 (21.56) (47.32)
Diluted loss per 10p ordinary share
(in cents)
- before exceptional items 10 (4.34) (14.97)
- after exceptional items 10 (21.56) (47.32)
-------------------------------------------- ---- --------- ---------
Consolidated statement of comprehensive income
for the year ended 31 December
2016 2015
$000 $000
----------------------------------------------- --------- ---------
Loss for the year (37,115) (81,463)
----------------------------------------------- --------- ---------
Comprehensive income/(loss) to be reclassified
to profit or loss in subsequent periods
when specific conditions are met
Currency translation differences 19,634 (26,277)
----------------------------------------------- --------- ---------
Other comprehensive income/(loss) for
the year, net of tax 19,634 (26,277)
----------------------------------------------- --------- ---------
Total comprehensive loss attributable
to:
----------------------------------------------- --------- ---------
Equity shareholders of the parent (17,481) (107,740)
----------------------------------------------- --------- ---------
Consolidated statement of financial position
as at 31 December
Note 2016 2015
$000 $000
------------------------------ ---- ---------- ---------
ASSETS
Non-current assets
Property, plant and equipment 4(a) 194,510 194,649
Intangible assets 4b) 7,706 7,812
Other receivable 3,277 3,534
Deferred tax assets 18,724 15,603
------------------------------ ---- ---------- ---------
224,217 221,598
------------------------------ ---- ---------- ---------
Current assets
Inventories 4,585 3,689
Trade and other receivables 4,174 11,695
Restricted cash 201 312
Cash and cash equivalents 14,067 25,943
------------------------------ ---- ---------- ---------
23,027 41,639
------------------------------ ---- ---------- ---------
Total assets 247,244 263,237
------------------------------ ---- ---------- ---------
LIABILITIES
Current liabilities
Trade and other payables (15,687) (18,977)
Borrowings 5 (16,795) (10,856)
Provisions 7 (34,510) (10,854)
Derivatives 6 (1,341) -
------------------------------ ---- ---------- ---------
(68,333) (40,687)
------------------------------ ---- ---------- ---------
Non-current liabilities
Provisions 7 (4,264) (4,135)
Other payables (3,277) (3,534)
Borrowings 5 - (23,494)
Derivatives 6 - (2,171)
Deferred tax liabilities (14,537) (14,950)
------------------------------ ---- ---------- ---------
(22,078) (48,284)
------------------------------ ---- ---------- ---------
Total liabilities (90,411) (88,971)
------------------------------ ---- ---------- ---------
Net assets 156,833 174,266
------------------------------ ---- ---------- ---------
EQUITY
Share capital 26,666 26,666
Share premium 97,476 97,476
Other reserves (159,911) (179,545)
Retained earnings 192,602 229,669
------------------------------ ---- ---------- ---------
Total equity 156,833 174,266
------------------------------ ---- ---------- ---------
Consolidated statement of changes in equity
Share Share Retained Other Total
capital premium Earnings reserves equity
$000 $000 $000 $000 $000
----------------------------- -------- -------- ---------- ---------- ---------
At 1 January 2015 26,666 97,476 310,474 (153,268) 281,348
Loss for the year - - (81,463) - (81,463)
Exchange differences arising
on translation of overseas
operations - - - (26,277) (26,277)
----------------------------- -------- -------- ---------- ---------- ---------
Total comprehensive loss
attributable to equity
shareholders of the parent - - (81,463) (26,277) (107,740)
----------------------------- -------- -------- ---------- ---------- ---------
Transactions with equity
shareholders of the parent
Share-based payment charge - - 658 - 658
----------------------------- -------- -------- ---------- ---------- ---------
Total transactions with
equity shareholders of
the parent - - 658 - 658
----------------------------- -------- -------- ---------- ---------- ---------
At 31 December 2015 26,666 97,476 229,669 (179,545) 174,266
----------------------------- -------- -------- ---------- ---------- ---------
At 1 January 2016 26,666 97,476 229,669 (179,545) 174,266
Loss for the year - - (37,115) - (37,115)
Exchange differences arising
on translation of overseas
operations - - - 19,634 19,634
----------------------------- -------- -------- ---------- ---------- ---------
Total comprehensive loss
attributable to equity
shareholders of the parent - - (37,115) 19,634 (17,481)
----------------------------- -------- -------- ---------- ---------- ---------
Transactions with equity
shareholders of the parent
Share-based payment charge - - 48 - 48
----------------------------- -------- -------- ---------- ---------- ---------
Total transactions with
equity shareholders of
the parent - - 48 - 48
----------------------------- -------- -------- ---------- ---------- ---------
At 31 December 2016 26,666 97,476 192,602 (159,911) 156,833
----------------------------- -------- -------- ---------- ---------- ---------
Consolidated statement of cash flows
for the year ended 31 December
2016 2015
$000 $000
--------------------------------------------- --------- -------
Cash flows from operating activities
Cash generated from operations 17,038 12,797
Interest paid (2,392) (3,040)
Income tax paid (10) (696)
------------------------------------------------- --------- -------
Net cash generated from operating activities 14,636 9,061
------------------------------------------------- --------- -------
Cash flows from investing activities
Decrease in held-to-maturity investments - 2,700
Interest received 753 1,612
Proceeds from sale of property, plant
and equipment 550 -
Purchase of intangible assets (90) (612)
Purchase of property, plant and equipment (7,366) (5,630)
------------------------------------------------- --------- -------
Net cash used in investing activities (6,153) (1,930)
------------------------------------------------- --------- -------
Cash flows from financing activities
Restricted cash 111 247
Repayment of borrowings (10,856) (5,738)
Repurchase of convertible bonds (9,036) -
------------------------------------------------- --------- -------
Net cash used in financing activities (19,781) (5,491)
------------------------------------------------- --------- -------
(Decrease)/increase in cash and cash
equivalents in the year (11,298) 1,640
Cash and cash equivalents at 1 January 25,943 25,384
Effect of exchange rates on cash and
cash equivalents (578) (1,081)
------------------------------------------------- --------- -------
Cash and cash equivalents at 31 December 14,067 25,943
------------------------------------------------- --------- -------
1. General information
The consolidated financial information for JKX Oil & Gas plc
(the 'Company') and its subsidiaries (together 'the Group') set out
in this preliminary announcement has been derived from the audited
consolidated financial statements of the Group for the year ended
31 December 2016 (the 'financial statements'). The auditors have
reported on the 2016 financial statements and their reports were
unqualified and did not contain statements under s498(2) or (3)
Companies Act 2006. The auditors' report on the 2016 financial
statements, whilst unqualified, contained an emphasis of matter
which drew attention to the existence of a material uncertainty
which may cast significant doubt about the Company's ability to
continue as a going concern, for further details see Note 2. The
auditors' report on the 2015 accounts also contained an emphasis of
matter which drew attention to the existence of a material
uncertainty which may cast significant doubt about the Company's
ability to continue as a going concern.
The 2016 Annual Report was approved by the Board of Directors on
17 March 2017, and will be mailed to shareholders in April 2017.
The financial information in this statement is audited but does not
have the status of statutory accounts within the meaning of Section
434 of the Companies Act 2006.
Full accounts for JKX Oil and Gas plc for the year ended 31
December 2015 have been delivered to the Registrar of Companies.
The auditors' report on the full financial statements for the year
to 31 December 2015 was unqualified and did not contain statements
under Section 498 (1) (regarding adequacy of accounting records and
returns), or under Section 498 (3) (regarding provision of
necessary information and explanations) of the United Kingdom
Companies Act 2006.
2. Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards ('IFRSs') as adopted
for use in the European Union. The accounting policies used by JKX
Oil and Gas plc (the 'Group',) are consistent with those set out in
the 2015 Annual Report. A full list of accounting policies will be
presented in the 2016 Annual Report.
Going concern
The majority of the Group's revenues, profits and cash flow from
operations are currently derived from its oil and gas production in
Ukraine, rather than Russia.
The Company's Ukrainian subsidiary, Poltava Petroleum Company
('PPC') has made provision for potential liabilities arising from
separate court proceedings regarding the amount of production taxes
('Rental Fees') paid in Ukraine for certain periods since 2010,
which total approximately $33.9 million (including interest and
penalties, see Note 8). PPC continues to contest these claims
through the Ukrainian legal system.
In addition, in 2015 and as detailed in Note 8, the Company and
its wholly-owned Ukrainian and Dutch subsidiaries commenced
international arbitration proceedings against Ukraine under the
Energy Charter Treaty and BIT seeking a repayment of Rental Fees
that PPC has paid on production of oil and gas in Ukraine since
2011, in addition to damages to the business.
In February 2017, the international arbitration tribunal ruled
that Ukraine was found not to have violated its treaty obligations
in respect of the levying of Rental Fees but awarded the Company
damages of $11.8 million plus interest, and costs of $0.3 million
in relation to subsidiary claims. No adjustment has been made in
these financial statements to recognise any possible future benefit
to the Company that may result from the tribunal award in the
Company's favour for damages of $11.8 million plus interest, and
costs of $0.3 million, with the tribunal ruling subject to
enforcement proceedings in Ukrainian courts.
Taking into account the damages awarded to the Company and the
Ukrainian court proceedings against PPC in respect of production
taxes, there is a net shortfall of $21.7 million owed by the Group
to Ukraine. Should PPC lose the claims against it in respect of
production taxes due for 2010 and 2015, and the Ukrainian
Authorities demand immediate settlement, the Group does not
currently have sufficient cash resources to settle the claims and
this would affect its ability to meet its obligations to creditors
and bondholders.
Accordingly, the Group's going concern assessment is sensitive
to the outcome of the production-related tax disputes with the
Ukrainian Government.
The Directors have concluded that it is necessary to draw
attention to the potential impact of the Group becoming liable for
additional Rental Fees in Ukraine as a result of unfavourable
outcomes in one or both of the ongoing court proceedings. It is
unclear whether either or both of these claims against PPC will be
realised and settlement enforced but they are material
uncertainties which may cast significant doubt about the Group's
ability to continue as a going concern.
However, based on the Group's cash flow forecasts, the Directors
believe that the combination of its current cash balances, expected
future production and resulting net cash flows from operations, as
well as the availability of additional courses of action with
respect to financing and/or negotiation with Ukraine for the
settlement of any successful production tax claim, mean that it is
appropriate to continue to adopt the going concern basis of
accounting in preparing these financial statements. These financial
statements do not include the adjustments that would result if the
Group was unable to continue as a going concern.
3. Segmental analysis
The Group has one single class of business, being the
exploration for, evaluation, development and production of oil and
gas reserves. Accordingly the reportable operating segments are
determined by the geographical location of the assets.
There are four (2015: four) reportable operating segments which
are based on the internal reports provided to the Chief Operating
Decision Maker ('CODM'). Ukraine and Russia segments are involved
with production and exploration; the 'Rest of World' are involved
in exploration, development and production and the UK includes the
head office and purchases material, capital assets and services on
behalf of other segments. The 'Rest of World' segment comprises
operations in Hungary and Slovakia.
Transfer prices between segments are set on an arm's length
basis in a manner similar to transactions with third parties.
Segment revenue, segment expense and segment results include
transfers between segments. Those transfers are eliminated on
consolidation.
Segment results and assets include items directly attributable
to the segment. Segment assets consist primarily of property, plant
and equipment, inventories and receivables. Capital expenditures
comprise additions to property, plant and equipment and intangible
assets.
2016 UK Ukraine Russia Rest Sub Eliminations Total
$000 $000 $000 of World Total $000 $000
$000 $000
------------------------- --------- --------- --------- -------- --------- ------------ -------------
External revenue
Revenue by location
of asset:
- Oil - 15,092 665 - 15,757 - 15,757
- Gas - 35,945 18,343 - 54,288 - 54,288
- Liquefied petroleum
gas - 3,776 - - 3,776 - 3,776
- Management
services/other - 23 4 - 27 - 27
------------------------- --------- --------- --------- -------- --------- ------------ -------------
- 54,836 19,012 - 73,848 - 73,848
------------------------- --------- --------- --------- -------- --------- ------------ -------------
Inter segment revenue:
- Management
services/other 9,168 - - - 9,168 (9,168) -
------------------------- --------- --------- --------- -------- --------- ------------ -------------
9,168 - - - 9,168 (9,168) -
------------------------- --------- --------- --------- -------- --------- ------------ -------------
Total revenue 9,168 54,836 19,012 - 83,016 (9,168) 73,848
------------------------- --------- --------- --------- -------- --------- ------------ -------------
Loss before tax:
Loss from operations (11,083) (18,984) (741) (3,807) (34,615) (139) (34,754)
Finance income 1,836 - 1,836
Finance cost (4,636) - (4,636)
Fair value movement
on derivative liability (599) - (599)
------------------------- --------- --------- --------- -------- --------- ------------ -------------
(38,014) (139) (38,153)
------------------------- --------- --------- --------- -------- --------- ------------ -------------
Assets
Property, plant
and equipment 204 93,010 97,894 3,402 194,510 - 194,510
Intangible assets - - - 7,706 7,706 - 7,706
Other receivable - - 3,277 - 3,277 - 3,277
Deferred tax - 3,556 12,578 2,590 18,724 - 18,724
Inventories - 1,884 2,701 - 4,585 - 4,585
Trade and other
receivables 914 338 2,621 301 4,174 - 4,174
Restricted cash - - - 201 201 - 201
Cash and cash equivalents 6,146 5,480 1,899 542 14,067 - 14,067
------------------------- --------- --------- --------- -------- --------- ------------ -------------
Total assets 7,264 104,268 120,970 14,742 247,244 - 247,244
------------------------- --------- --------- --------- -------- --------- ------------ -------------
Total liabilities (22,677) (55,093) (7,453) (5,188) (90,411) - (90,411)
------------------------- --------- --------- --------- -------- --------- ------------ -------------
Non cash expense
(other than depreciation
and impairment) - - 265 257 522 - 522
Exceptional item
- provision for
impairment of oil
and gas assets - - - 2,000 2,000 - 2,000
Exceptional item
- production based
taxes - 24,340 - - 24,340 - 24,340
Exceptional items
- administrative
expenses 4,454 - - 30 4,484 - 4,484
Increase in property,
plant and equipment
and intangible assets 10 4,051 250 1,339 5,650 - 5,650
Depreciation, depletion
and amortisation 381 12,028 7,355 - 19,764 - 19,764
------------------------- --------- --------- --------- -------- --------- ------------ -------------
2015 UK Ukraine Russia Rest Sub Eliminations Total
$000 $000 $000 of World Total $000 $000
$000 $000
----------------------------- --------- --------- --------- -------- --------- ------------ ---------
External revenue
Revenue by location
of asset:
- Oil - 14,106 526 - 14,632 - 14,632
- Gas - 53,112 15,625 - 68,737 - 68,737
- Liquefied petroleum
gas - 4,585 - - 4,585 - 4,585
- Management services/other - 411 170 - 581 - 581
----------------------------- --------- --------- --------- -------- --------- ------------ ---------
- 72,214 16,321 - 88,535 - 88,535
----------------------------- --------- --------- --------- -------- --------- ------------ ---------
Inter segment revenue:
- Management services/other 11,459 - - - 11,459 (11,459) -
----------------------------- --------- --------- --------- -------- --------- ------------ ---------
11,459 - - - 11,459 (11,459) -
Total revenue 11,459 72,214 16,321 - 99,994 (11,459) 88,535
----------------------------- --------- --------- --------- -------- --------- ------------ ---------
Loss before tax:
Loss from operations (8,704) (53,796) (9,292) (3,705) (75,497) (81) (75,578)
Finance income 1,289 - 1,289
Finance cost (6,500) - (6,500)
Fair value movement
on derivative liability (1,921) - (1,921)
----------------------------- --------- --------- --------- -------- --------- ------------ ---------
(82,629) (81) (82,710)
----------------------------- --------- --------- --------- -------- --------- ------------ ---------
Assets
Property, plant
and equipment 828 100,634 88,178 5,009 194,649 - 194,649
Intangible assets - - - 7,812 7,812 - 7,812
Other receivable - - 3,534 - 3,534 - 3,534
Deferred tax - 4,713 10,890 - 15,603 - 15,603
Inventories - 2,022 1,667 - 3,689 - 3,689
Trade and other
receivables 904 2,733 7,352 706 11,695 - 11,695
Restricted cash 6 - - 306 312 - 312
Cash and cash equivalents 19,298 6,054 187 404 25,943 - 25,943
Total assets 21,036 116,156 111,808 14,237 263,237 - 263,237
----------------------------- --------- --------- --------- -------- --------- ------------ ---------
Total liabilities (45,322) (31,138) (10,220) (2,291) (88,971) - (88,971)
----------------------------- --------- --------- --------- -------- --------- ------------ ---------
Non cash expense
(other than depreciation
and impairment) 300 173 4,821 283 5,577 - 5,577
Exceptional item
- provision for
impairment of oil
and gas assets - 49,549 - 1,506 51,055 - 51,055
Exceptional item
- production based
taxes - 10,854 - - 10,854 - 10,854
Exceptional item
- legal costs 2,988 - - - 2,988 - 2,988
Increase in property,
plant and equipment
and intangible assets 41 2,830 5,150 687 8,708 - 8,708
Depreciation, depletion
and amortisation 537 21,603 5,451 - 27,591 - 27,591
----------------------------- --------- --------- --------- -------- --------- ------------ ---------
2016 2015
Major customers $000 $000
------------------------------------------------------------------------------------ ------------ ---------
1 Ukraine - 20,168
2 Russia 19,008 16,151
------------------------------------------------------------------------------------ ------------ ---------
There is 1 customer in Russia that exceed 10% of the Group's
total revenues (2015: 2, one in Ukraine and one in Russia).
4. (a) Property, plant and equipment
Oil and gas assets
------------------------------ --------------------------------- ------- -------
2016 Oil and Oil and
gas fields Gas gas fields
Ukraine field Hungary Other Total
$000 Russia $000 assets $000
$000 $000
------------------------------ ----------- ------- ----------- ------- -------
Group
Cost
At 1 January 560,186 177,469 36,289 20,315 794,259
Additions during the
year 3,947 84 1,249 277 5,557
Foreign exchange equity
adjustment - 35,770 - 240 36,010
Disposal of property,
plant and equipment (110) (142) (567) (2,536) (3,355)
------------------------------ ----------- ------- ----------- ------- -------
At 31 December 564,023 213,181 36,971 18,296 832,471
------------------------------ ----------- ------- ----------- ------- -------
Accumulated depreciation,
depletion and amortisation
and provision for impairment
At 1 January 459,551 89,291 32,687 18,081 599,610
Depreciation on disposals
of property, plant and
equipment (110) (54) - (2,265) (2,429)
Exceptional item - provision
for impairment of oil
and gas assets - - 2,000 - 2,000
Foreign exchange equity
adjustment - 18,837 - 179 19,016
Depreciation charge
for the year 11,572 7,219 - 973 19,764
------------------------------ ----------- ------- ----------- ------- -------
At 31 December 471,013 115,293 34,687 16,968 637,961
------------------------------ ----------- ------- ----------- ------- -------
Carrying amount
------------------------------ ----------- ------- ----------- ------- -------
At 1 January 100,635 88,178 3,602 2,234 194,649
------------------------------ ----------- ------- ----------- ------- -------
At 31 December 93,010 97,888 2,284 1,328 194,510
------------------------------ ----------- ------- ----------- ------- -------
Oil and gas fields in Russia have no items under construction
(2015: $3.7m).
Oil and gas assets
----------------------------------
2015 Oil and Oil and
gas fields Gas gas fields
Ukraine field Hungary Other Total
$000 Russia $000 assets $000
$000 $000
------------------------------ ----------- -------- ----------- ------- --------
Group
Cost
At 1 January 557,509 223,518 36,214 20,567 837,808
Additions during the
year 2,677 5,094 75 249 8,095
Foreign exchange equity
adjustment - (50,984) - (331) (51,315)
Disposal of property,
plant and equipment - (159) - (170) (329)
------------------------------ ----------- -------- ----------- ------- --------
At 31 December 560,186 177,469 36,289 20,315 794,259
------------------------------ ----------- -------- ----------- ------- --------
Accumulated depreciation,
depletion and amortisation
and provision for impairment
At 1 January 388,996 108,143 31,181 17,014 545,334
Depreciation on disposals
of property, plant and
equipment - (83) - (124) (207)
Exceptional item - provision
for impairment of oil
and gas assets 49,549 - 1,506 - 51,055
Foreign exchange equity
adjustment - (23,914) - (249) (24,163)
Depreciation charge
for the year 21,006 5,145 - 1,440 27,591
------------------------------ ----------- -------- ----------- ------- --------
At 31 December 459,551 89,291 32,687 18,081 599,610
------------------------------ ----------- -------- ----------- ------- --------
Carrying amount
------------------------------ ----------- -------- ----------- ------- --------
At 1 January 168,513 115,375 5,033 3,553 292,474
------------------------------ ----------- -------- ----------- ------- --------
At 31 December 100,635 88,178 3,602 2,234 194,649
------------------------------ ----------- -------- ----------- ------- --------
Exceptional item - provision for impairment of oil and gas
assets
During 2015 impairment triggers were noted in respect of our oil
and gas assets in Ukraine and Hungary. Impairment tests were
completed resulting in impairments of $51.1m comprised of $49.6m in
respect of our Ukrainian oil and gas fields and $1.5m in respect of
our Hungarian oil and gas fields (see Note 4 (b)).
Full impairment disclosures for each of the impairment tests are
made in Notes 4 (c), (d), (e) and (f).
4. (b) Intangible assets: exploration and evaluation
expenditure
2016 Ukraine Hungary Rest Total
$000 $000 of World $000
$000
----------------------------- ------- ------- --------- ------
Group
Cost:
At 1 January 1,308 814 13,353 15,475
Additions during the year - - 90 90
Effect of exchange rates on
intangible assets - - (196) (196)
----------------------------- ------- ------- --------- ------
At 31 December 1,308 814 13,247 15,369
----------------------------- ------- ------- --------- ------
Provision against oil and
gas assets
----------------------------- ------- ------- --------- ------
At 1 January and 31 December 1,308 - 6,355 7,663
----------------------------- ------- ------- --------- ------
Carrying amount
At 1 January - 814 6,998 7,812
----------------------------- ------- ------- --------- ------
At 31 December - 814 6,892 7,706
----------------------------- ------- ------- --------- ------
2015 Ukraine Hungary Rest Total
$000 $000 of World $000
$000
----------------------------- ------- ------- --------- ------
Group
Cost:
At 1 January 1,308 768 13,519 15,595
Additions during the year - 46 566 612
Effect of exchange rates on
intangible assets - - (732) (732)
----------------------------- ------- ------- --------- ------
At 31 December 1,308 814 13,353 15,475
----------------------------- ------- ------- --------- ------
Provision against oil and
gas assets
----------------------------- ------- ------- --------- ------
At 1 January and 31 December 1,308 - 6,355 7,663
----------------------------- ------- ------- --------- ------
Carrying amount
At 1 January - 768 7,164 7,932
----------------------------- ------- ------- --------- ------
At 31 December - 814 6,998 7,812
----------------------------- ------- ------- --------- ------
4. (c) Impairment test for property, plant and equipment
A review was undertaken at the reporting date of the carrying
amounts of property, plant and equipment to determine whether there
was any indication of a trigger that may have led to these assets
suffering an impairment loss. Following this review impairment
triggers were noted in relation to the Russian assets (see Note 4
(e)) and the Hungarian assets (see Note 4 (f)). In respect of the
Group's Ukrainian assets, impairment triggers were noted in 2015
and a full impairment review was completed, however no impairment
triggers were noted in 2016 (see Note 4 (d)).
As there is no readily available market for the Group's oil and
gas properties, fair value is derived as the net present value of
the estimated future cash flows arising from the continued use of
the assets, incorporating assumptions that a typical market
participant would take into account.
The value in use of an oil and gas property is generally lower
than its Fair Value Less Costs of Disposal ('FVLCD') as value in
use reflects only those cash flows expected to be derived from the
asset in its current condition. FVLCD includes appraisal and
development expenditure that a market participant would consider
likely to enhance the productive capacity of an asset and optimise
future cash flows. Consequently, the Group determines recoverable
amount based on FVLCD using a Discounted Cash Flow ('DCF')
methodology.
The DCF was derived by estimating discounted after tax cash
flows for each CGU based on estimates that a typical market
participant would use in valuing such assets.
The impairment tests compared the recoverable amount of the
respective CGUs noted below to the respective carrying values of
their associated assets. The estimates of FVLCD meet the definition
of level three fair value measurements as they are determined from
unobservable inputs.
4. (d) Impairment test for the Ukrainian oil and gas assets -
2015 information
Change in spelling of Ukrainian production licences
For the 2016 financial statements, all of the names of the
Company's Ukrainian production licences have been changed to their
Ukrainian language spelling. A list of the changes made from the
previous years' financial statement is as follows:
2016 financial statements Previous years' financial statements
Rudenkivske Rudenkovskoye
Ignativske Ignatovskoye
Movchanivske Molchanovskoye
Novomykolaivske Novo-Nikolaevskoye
Zaplavska Zaplavskoye
Elyzavetivske Elizavetovskoye
2015
During 2015, the geopolitical situation in Ukraine, the economic
impact of the devaluation of the Ukrainian Hryvnia and the
uncertainty about the political, fiscal and economic outlook
increased the Company's post tax discount rate used in its DCF
calculations for impairment testing on the Ukrainian assets. The
post tax discount rate increased from 17.2% to 20.0%. Together with
the continued decline in international oil and gas prices during
2015, these constituted an impairment trigger and accordingly an
impairment test was undertaken.
Poltava Petroleum Company ('PPC'), a wholly owned subsidiary of
JKX, holds 100% interest in five production licences (Ignativske,
Movchanivske, Rudenkivske, Novomykolaivske, Elyzavetivske) and one
exploration licence (Zaplavska) in the Poltava region of
Ukraine.
The Ignativske, Movchanivske, Rudenkivske, Novomykolaivske
production licences contain one or more distinct fields which,
together with the Zaplavska exploration licence, form the
Novomykolaivske Complex ('NNC').
The Elyzavetivske production licence is located 45km from the
Novomykolaivske Complex and has its own gas production
facilities.
Ukrainian Cash Generating Units ('CGUs')
In respect of the Group's Ukraine assets the NNC forms a single
CGU as these contain oil and gas fields which are serviced by a
single processing facility and do not have separately identifiable
cash inflows. In addition they have commonality of facilities,
personnel and services.
The Elyzavetivske licence also has its own separate processing
facilities and separately identifiable cash flows and therefore is
a distinct CGU for the purpose of the impairment test. During 2015
an extension to the Elyzavetivske production licence was awarded to
PPC which included the West Mashivska field. Due to the proximity
of the West Mashivska field to the Elyzavetivske plant, production
will be tied back to the Elyzavetivske processing facilities and
therefore forms part of this CGU.
In accordance with IAS 36, the impairment review was undertaken
in US$ being the currency in which future cash flows from NNC and
Elyzavetivske will be generated.
Key Assumptions 2015 - NNC and Elyzavetivske
The key assumptions used in the impairment testing were:
-- Production profiles: these were based on the latest available
information provided by independent reserve engineers, DeGolyer
& MacNaughton, as at 31 December 2014 adjusted for 2015
production volumes and data and reassessed internally. Such
information included 3P reserves for NNC and Elyzavetivske
(including the West Mashivska extension) of 28.4 MMboe and 5.0
MMboe, respectively.
-- Economic life of field: it was assumed that the title to the
licences is retained and that the NNC licence term will be
successfully extended beyond its current 2024 expiration date
through to the economic life of the field (expected to be around
2032). The economic life of the Elyzavetivske field is currently
expected to be around 2023.
-- Gas prices: during 2015 Ukraine acquired the ability to
purchase gas from Europe rather than being completely dependent on
Russia for imports. As such, Ukrainian gas prices are expected to
be more aligned with European gas prices in future but also
influenced by Russian-Ukrainian border price and international oil
prices. The gas price used for 2016 is based on current and
forecast gas prices realised by PPC. For the following six years a
forward gas price curve was used with gas prices increasing at 2.8%
thereafter.
-- Oil prices: the Company used a forward price curve for the
next six years and an increase of 2.8% per annum thereafter.
-- Production taxes: the Company has assumed production tax
rates of 29% for gas and 45% for oil which were introduced by the
government on 1 January 2016.
-- Capital and operating costs: these were based on current
operating and capital costs in Ukraine for both projects. Estimates
were provided by third parties and supported by estimates from our
own specialists, where necessary.
Post tax nominal discount rate of 20%. This was based on a
Capital Asset Pricing Model analysis consistent with that used in
previous impairment reviews.
Based on the key assumptions set out above:
-- the NNC's oil and gas assets were impaired by $49.6m after
significant erosion of the headroom from the prior year due to the
increase in discount rate applied, the international oil and gas
price decline and the new expectation that prices will remain lower
for longer.
-- Elyzavetivske's recoverable amount (including the West
Mashivska extension) exceeds its carrying value by $34.9m and
therefore Elyzavetivske's oil and gas assets were not impaired.
Any impairment is dependent on judgement used in determining the
most appropriate basis for the assumptions and estimates made by
management, particularly in relation to the key assumptions
described above. Sensitivity analysis to likely and potential
changes in key assumptions has therefore been provided below.
The impact on the impairment calculation of applying different
assumptions to gas prices, production volumes, production tax
rates, future capital expenditure and post-tax discount rates, all
other inputs remaining equal, would be as follows:
Sensitivity analysis 2015 for the NNC and Elyzavetivske
Elyzavetivske
NNC Increase/(decrease)
Increase/(decrease) in impairment
in impairment headroom
of $49.6m of $34.9m
for NNC CGU for Elyzavetivske
$m CGU $m
---------------------- ------------------- -------------------- --------------------
Impact if gas
price: increased by 20% (37.6) 13.1
reduced by 20% 37.6 (13.1)
------------------------------------------ -------------------- --------------------
Impact if gas
production volumes: increased by 10% (24.0) 6.7
decreased by 10% 24.0 (6.7)
------------------------------------------ -------------------- --------------------
Impact if future
capital expenditure: increased by 20% 27.5 (3.9)
decreased by 20% (27.5) 3.9
------------------------------------------ -------------------- --------------------
increased by 2
Impact if post-tax percentage points
discount rate: to 22.0% 9.5 (1.8)
decreased by 2
percentage points
to 18.0% (11.0) 2.0
------------------------------------------ -------------------- --------------------
4. (e) Impairment test for Yuzhgazenergie LLC ('YGE'),
Russia
Following the 2007 acquisition of YGE in Russia, a technical and
environmental re-evaluation of YGE's Koshekhablskoye gas field
redevelopment was undertaken by the Group. The re-evaluation
resulted in a revised development plan and production profile. The
development plan and production profile have continued to be
refined since that time.
For purposes of testing for impairment triggers of YGE's
non-current assets, the Company took account of developments since
the last test for impairment in 2014, based on the assessment of
FVLCD.
In Russia, the regulated maximum industrial gas price in Russia
was increased by 1.95% from 1 July 2016 however, following a
renegotiation of the gas sales contract, the Company agreed a
reduction of 9.5% to the price at which it sells its gas to its
sole gas customer in Russia in return for a longer-term "take or
pay" agreement. This price reduction had not been anticipated in
previous impairment reviews.
The Company is seeking to engage other buyers of its gas in
southern Russia to improve gas realisations there and broaden its
customer base.
This revision to our estimate of the future Russian gas prices
constituted an impairment trigger. Accordingly an impairment test
was undertaken.
In accordance with IAS 36, the impairment review was been
undertaken in Russian Roubles, which is the functional currency of
YGE.
Key Assumptions - YGE
The key assumptions used in the impairment testing were:
-- Production profiles: these were based on the latest available
information provided by independent reserve engineers, DeGolyer
& MacNaughton, at 31 December 2016. Such information included
2P reserves for YGE of 79.5 MMboe.
-- Economic life of field: it was assumed that YGE will be
successful in extending the licence term beyond its current 2026
expiration to the economic life of the field (expected to be around
2048). The discounted cash flow methodology used has not taken
account of any opportunities that may exist to extract reserves in
a shorter timeframe by investing to increase the current plant
capacity.
-- Gas prices: for 2017 these were based on the gas sales
agreement that the Company had negotiated with its sole gas
customer for the forecast gas production in 2017. The gas price is
expected to remain at the same level through to 1 July 2017.
-- Gas prices: from 1 July 2017 and annually thereafter, the gas
prices have been increased by Rouble inflation of between 3.1% and
4.0% through to 2023, and estimated Russian inflation of 5.1%
thereafter.
-- Capital and operating costs: these were based on current
operating and capital costs in Russia, project estimates provided
by third parties and supported by estimates from our own
specialists, where necessary.
-- Post tax nominal Rouble discount rate of 13.2%. This was
based on a Capital Asset Pricing Model analysis consistent with
that used in previous impairment reviews.
Based on the key assumptions set out above YGE's recoverable
amount exceeds it carrying amount by $14.7m and therefore YGE's
Koshekhablskoye gas field was not impaired.
Any impairment is dependent on judgement used in determining the
most appropriate basis for the assumptions and estimates made by
management, particularly in relation to the key assumptions
described above. Sensitivity analysis to likely and potential
changes in key assumptions has therefore been reviewed below.
The impact on the impairment calculation of applying different
assumptions to gas prices, production, future capital expenditure
and post-tax discount rates, all other inputs remaining equal,
would be as follows:
Sensitivity Analysis
Increase/(decrease)
in impairment
headroom of
$14.7m for
Yuzhgazenergie
CGU
$m
---------------------- -------------------------- -------------------
Impact if Adygean growth rates increased
gas price: by 10% annually 13
growth rates reduced
by 10% annually (13)
------------------------------------------------- -------------------
Impact if production
volumes: Increased by 10% 24
Decreased by 10% (25)
------------------------------------------------- -------------------
Impact if future
capital expenditure: Increased by 20% (12)
Decreased by 20% 12
------------------------------------------------- -------------------
Impact if post-tax Increased by 1 percentage
discount rate: point to 14.2% (9)
Decreased by 1 percentage
point to 12.2% 10
------------------------------------------------- -------------------
4. (f) Impairment test for Hungarian oil and gas assets
Hungarian property plant and equipment - Folyópart Energia Kft
('FEN')
The Company now holds a 100% interest in six development
licences (Mining Plots) through its wholly owned Hungarian
subsidiary, Folyópart Energia Kft. The Hajdunanas IV Mining Plot
('HMP') (previously Hernad I licence) contains two suspended wells
which experienced an unexpected decline in production rates in
2013.
In December 2016, well Hn-2ST (sidetrack) was successfully
completed on the HMP. This is the first drilling operation
completed since JKX assumed operatorship in November 2014. The
Hn-2ST (sidetrack) did not encounter any productive oil horizons,
which had been included in the pre-drill estimates of contingent
resources. The results from the Hn-2ST (sidetrack) therefore
constituted an impairment trigger and a full impairment review was
completed in respect of HMP.
Hungarian Cash Generating Unit ('CGUs')
HMP forms a single CGU which is serviced by a single processing
facility and commonality of facilities, personnel and services. In
accordance with IAS 36, the impairment review for HMP has been
undertaken in US$ being the currency in which future cash flows
from HMP will be generated.
Key Assumptions 2016 - HMP
The key assumptions used in the impairment testing in 2016
were:
-- Production profiles: these were based on the latest available
test and production data from the recent sidetrack Hn-2ST which was
provided to independent reserve engineers. Using the independent
reserves engineers' assessment, the Company included internally
assessed 2P reserves of 0.16 MMboe;
-- Oil and gas prices: these were based on current prices being
realised and short term price curves derived from expectations in
the Hungarian oil and gas market.
-- Capital and operating costs: these were based on project
estimates provided by third parties and the partner and operator of
our Hungarian assets.
-- The post tax discount rate of 10% was applied based on a
Capital Asset Pricing Model analysis for the Group's Hungarian
assets.
Based on the key assumptions set out above HMP's carrying amount
exceeded its recoverable amount exceeds by $2.0m and therefore
HMP's assets were impaired due to the reduction in the estimated
recoverable oil and gas volumes from this field.
Any impairment is dependent on judgement used in determining the
most appropriate basis for the assumptions and estimates made by
management, particularly in relation to the key assumptions
described above. Sensitivity analysis to likely and potential
changes in key assumptions has therefore been reviewed below.
The impact on the impairment calculation of applying different
assumptions to production, oil and gas prices and future capital
and operating costs, all other inputs remaining equal, would be as
follows:
HMP
(Increase)/decrease
in impairment
of $2.0m
for HMP CGU
$m
------------------------- ----------------- --------------------
Impact if oil and
gas prices: increased by 10% 0.5
decreased by 10% (0.5)
------------------------------------------- --------------------
Impact if oil and
gas production volumes: increased by 10% 0.5
decreased by 10% (0.5)
------------------------------------------- --------------------
Impact if future
capital and operating
costs: increased by 10% (0.4)
decreased by 10% 0.4
------------------------------------------- --------------------
Impairment test for Hungarian oil and gas assets - 2015
disclosures
Hungarian property plant and equipment - Turkeve
Through its wholly owned Dutch subsidiary, JKX Hungary B.V., the
Company held a 50% beneficial interest in part of the Turkeve IV
Mining Plot of 10 sq. km ('Turkeve') surrounding the Ny-7 well
which encountered gas. During 2016, JKX sold its 50% beneficial
interest in the Ny-7 discovery (within the Turkeve IV Mining Plot)
to the operator.
Hungarian intangible assets: exploration and evaluation
expenditure - Tiszavasvári-IV Mining Plot (previously
Tiszavasvári-6)
The Tiszavasvári-IV Mining Plot contains the Tiszavasvári-6
discovery well ('TZ-6'), which, due to the early stage of
appraisal, is classified as an exploration and appraisal asset and
recognised within intangible assets.
During 2014 and 2015, there was a sharp decline in international
oil and gas prices. In 2015 this constituted an impairment trigger
and accordingly an impairment test was undertaken. In 2014, the
absence of a firm work programme at year end to develop the
Hungarian reserves, and the reclassification of the estimated
reserves at the Group's Hungarian oil and gas fields to contingent
resources also constituted an impairment trigger.
Hungarian Cash Generating Units ('CGUs')
HMP forms a single CGU which is serviced by a single processing
facility and commonality of facilities, personnel and services.
The development of the Turkeve Ny-7 field and the TZ-6 discovery
require their own distinct processing facilities. Once these
discoveries are developed, they will have separately identifiable
cash flows and therefore are two separate CGUs for the impairment
test of the Hungarian oil and gas assets.
In accordance with IAS 36, the impairment reviews for the
Hungarian assets were undertaken in US$ being the currency in which
future cash flows from HMP, Turkeve and TZ-6 will be generated.
Key Assumptions 2015 - HMP, Turkeve and TZ-6
The key assumptions used in the impairment testing in 2015
were:
-- Production profiles: these were based on the latest available
information provided by our reserve engineers which included
contingent resources of 0.6 MMboe for HMP, 0.1 MMboe (net to JKX)
for Turkeve and 3.7 MMboe for TZ-6.
-- Oil and gas prices: these were based on current prices being
realised and short term price curves derived from expectations in
the Hungarian oil and gas market.
-- Capital and operating costs: these were based on project
estimates provided by third parties and the partner and operator of
our Hungarian assets.
-- The post tax discount rate of 10% was applied. This was based
on a Capital Asset Pricing Model analysis for our Hungarian
assets.
Accordingly the impairment review is dependent on judgement used
in determining the most appropriate basis for the assumptions and
estimates made by management, particularly in relation to the key
assumptions described above. Sensitivity analysis to likely and
potential changes in key assumptions has therefore been provided
below.
Based on the key assumptions set out above:
-- HMP recoverable amount exceeds its carrying value by $1.3m at
31 December 2015 and therefore the oil and gas assets related to
HMP were not impaired;
-- Turkeve was impaired by $1.5m at 31 December 2015 after
significant erosion of the headroom from the prior year due to
international oil and gas price decline, the new expectation that
prices are to remain lower for longer and the reduction in
contingent resources from 0.3 MMboe to 0.1 MMboe due to a
reassessment of field development options; and
-- TZ-6 recoverable amount exceeds its carrying value by $1.0m
at 31 December 2015 and therefore oil and gas assets relating to
TZ-6 were not impaired.
In respect of the 2015 impairment review, the impact on the
impairment calculation of applying different assumptions to
production, oil and gas prices and future capital and operating
costs, all other inputs remaining equal, would be as follows:
HMP Turkeve TZ-6
Increase/(decrease) Increase/(decrease) Increase/(decrease)
in impairment in impairment in impairment
headroom of $1.5m headroom
of $1.3m for Turkeve of $1.0m
for HMP CGU for TZ-6
CGU $m CGU
$m $m
----------------------- ---------- -------------------- -------------------- --------------------
Impact if oil and increased
gas prices: by 20% 2.2 (0.5) 1.0
decreased
by 20% (2.2) 0.3 (0.8)
---------------------------------- -------------------- -------------------- --------------------
Impact if oil and
gas production increased
volumes: by 10% 1.2 (0.2) 0.5
decreased
by 10% (1.1) 0.2 (0.5)
---------------------------------- -------------------- -------------------- --------------------
Impact if future
capital and operating increased
costs: by 20% (1.9) 0.2 (0.9)
decreased
by 20% 1.9 (0.2) 0.9
---------------------------------- -------------------- -------------------- --------------------
5. Borrowings
2016 2015
$000 $000
------------------------------------- ------ ------
Current
Convertible bonds due 2018 16,795 10,856
------------------------------------- ------ ------
Term-loans repayable within one year 16,795 10,856
------------------------------------- ------ ------
Non-Current
Convertible bonds due 2018 - 23,494
------------------------------------- ------ ------
Term-loans repayable after more than
one year - 23,494
------------------------------------- ------ ------
Convertible bonds due 2018
On 19 February 2013 the Company successfully completed the
placing of $40m of guaranteed unsubordinated convertible bonds with
institutional investors which are due 2018 raising cash of $37.2m
net of issue costs.
The Bonds have an annual coupon of 8 per cent per annum payable
semi-annually in arrears. The Bonds are convertible into ordinary
shares of the Company at any time from 1 April 2013 up until seven
days prior to their maturity on 19 February 2018 at a conversion
price of 76.29 pence per Ordinary Share, unless the Company settles
the conversion notice by paying the Bondholder the Cash Alternative
Amount (see below).
Interest, after the deduction of issue costs and the inclusion
of the redemption premium, will be charged to the income statement
using an effective rate of 18.0%.
Cash Alternative Amount
At the option of the Company, the conversion notice in respect
of the Bonds can be settled in cash rather than shares, the Cash
Alternative Amount payable is based on the Volume Weighted Average
Price of the Company's shares prior to the conversion notice.
Convertible bonds repurchased and cancelled
On 19 February 2016, in accordance with the terms and conditions
of the Bonds, the Company repurchased 50 bonds with a total
principal amount of $10m (19 February 2015: 20 Bonds, principal
amount $4m). In June, September and October 2016, the Company
repurchased and subsequently cancelled a total of 50 Bonds with par
value of $10m resulting in $1.1m gain on redemption, which has been
included in Finance income for the year. The remaining principal
amount of outstanding Bonds at 31 December 2016 was $16.0m (2015:
$36.0m)
Convertible bonds restructured on 3 January 2017
On 3 January 2017 a special resolution was approved by
Bondholders to change the terms and conditions of the Bonds. The
main amendments to the terms and conditions of the Bonds were as
follows:
-- the Bondholder's option to require redemption of all of the
outstanding Bonds on 19 February 2017 was deleted;
-- the final maturity date of the Bonds was extended to 19
February 2020, with the outstanding principal amount of the Bonds
being repaid in three instalments; 33% on 19 February 2018; 33 % on
19 February 2019; and 34% on the 19 February 2020;
-- the coupon rate of the Bonds was increased from 8% to
14%;
-- the covenant which limited new borrowings by the Company has
been removed; and
-- the Company will make two payments to Bondholders in respect
of prior accretion amounts, on 19 February 2017 and on 19 February
2018 of 12.0% and 3.0%, respectively, of the principal amount of
the Bonds;
The revised terms and conditions of the Bond is considered to be
a modification and therefore the difference in the amortised cost
carrying amount at the modification date will be recognised through
a change in the effective interest rate at the modification date
through to the end of the revised estimated term of the Bond. There
is therefore no immediate impact of the restructuring of the Bond
on the Consolidated Income Statement in 2017.
The impact of the amendments to the Bond on the Consolidated
Statement of Financial Position was to decrease the carrying amount
of the total Bond liability of $18.1m (including the associated
derivative) by $0.8m, which will be amortised over the estimated
remaining life of the modified Bond.
6. Derivatives
2016 2015
$000 $000
--------------------------------------------- ------- ------
Current derivative financial instruments
Reclassification from non-current derivative
financial instruments 1,341 -
--------------------------------------------- ------- ------
At the end of the year 1,341 -
--------------------------------------------- ------- ------
Non-current derivative financial instruments
At the beginning of the year 2,171 1,037
Partial settlement of derivative liability (1,429) (787)
Fair value loss movement during the year 599 1,921
Reclassification to current derivative
financial instruments (1,341) -
--------------------------------------------- ------- ------
At the end of the year - 2,171
--------------------------------------------- ------- ------
Convertible bonds due 2018 - embedded derivatives
Coupon Makewhole
Upon conversion of a Bond prior to the 19 February 2015 the
Company was required to pay an amount of interest equal to the
aggregate interest which would have been payable on the principal
amount of the Bond if such Bond had been outstanding until 19
February 2015.
Bondholder Put Option
Bondholders have the right to require the Company to redeem the
following number of Bonds on the following future dates together
with accrued and unpaid interest to (but excluding) such dates:
Redemption Maximum number
Date of Bonds to
be redeemed
----------- ---------------
19 February all outstanding
2017 Bonds
----------- ---------------
Current liabilities include $16.8m (2015: $10.9m) in respect of
the put option available to bondholders on 19 February 2017 (2015:
19 February 2016). On 3 January 2017, this put option was cancelled
as part of the Bond restructuring as detailed in Note 5. Bonds with
a principal amount of $10.0m were redeemed on 19 February 2016 (19
February 2015: $4.0m) in addition to an early redemption premium of
$0.9m (19 February 2015: $0.2m) in accordance with the terms and
conditions of the bond.
Company Call Option
The Company can redeem the Bonds early in full but not in part
at their principal amount together with accrued interest at any
time on or after 19 February 2017 if the Volume Weighted Average
Price of the Company's shares over a specified period equal or
exceed 130 per cent of the principal amount of the Bonds; or if the
aggregate principal amount of the bonds outstanding is less than
15% of the aggregate principal amount originally issued.
Fixed exchange rate
The Sterling-US Dollar exchange rate is fixed at GBP1/$1.5809
for the conversion and other features.
Convertible Bond restructuring
On 3 January 2017, the Bondholders approved a restructuring of
the terms and conditions of outstanding Convertible bonds. See Note
5 for details.
7. Provisions
Onerous Production
lease based
provision taxes
(2) (1) Total
$000 $000 $000
----------------------------- ---------- ---------- -------
At 1 January 2016 - 10,854 10,854
Foreign currency translation (5) (1,273) (1,278)
Amount provided in the year 594 24,340 24,934
----------------------------- ---------- ---------- -------
At 31 December 2016 589 33,921 34,510
----------------------------- ---------- ---------- -------
1. The provision for production based taxes, which has been
recognised as a charge in the 2016 Consolidated income statement,
is in respect of a claim against PPC for additional Rental Fees for
the period January to December 2015 (2015: for the period from
August to December 2010). Both claims are being contested in the
Ukrainian courts (see Note 8). The amount is denominated in
Ukrainian Hryvnia ('UAH') and is stated above at its US$-equivalent
amount using the 2016 year end rate of UAH27.19/$ (2015: UAH
24.0/$). The provision is based on the total value of the claims
plus interest and penalties. The Board believes that the claims are
without merit under Ukrainian law and the Company will continue to
contest it vigorously. No contingent liabilities exist in respect
of Ukrainian production taxes (2015: $30.0m).
2. See Note 9 for details.
Non-current provisions Ukraine Russia Hungary Total
$000 $000 $000 $000
------------------------------- -------- ------ ------- ------
Provision for site restoration
At 1 January 2016 1,477 2,078 580 4,135
Foreign exchange adjustment - (145) (5) (150)
Revision in estimates 20 - - 20
Unwinding of discount 46 213 - 259
------------------------------- -------- ------ ------- ------
At 31 December 2016 1,543 2,146 575 4,264
------------------------------- -------- ------ ------- ------
The provision in respect of Ukraine represents the present value
of the well and site restoration costs that are expected to be
incurred up to 2034 (2015: 2034). The Russia provision results from
the decommissioning of 12 wells (2015:12) and removal of plant as
required by the license obligation. Decommissioning is due to take
place from 2017 to 2048 (2015: 2016 to 2048). The provisions are
made using the Group's internal estimates that management believe
form a reasonable basis for the expected future costs of
decommissioning.
8. Taxation
Analysis of tax on loss 2016 2015
$000 $000
------------------------ ------- -------
Current tax
UK - current tax - -
Overseas - current year 1,341 4,827
------------------------ ------- -------
Current tax total 1,341 4,827
------------------------ ------- -------
Deferred tax
Overseas - prior year (1,767) -
Overseas - current year (612) (6,074)
------------------------ ------- -------
Deferred tax total (2,379) (6,074)
------------------------ ------- -------
Total taxation (1,038) (1,247)
------------------------ ------- -------
Factors that affect the total tax charge
The total tax credit for the year of $1.0m (2015: $1.2m credit)
is higher (2015: higher) than the average rate of UK corporation
tax of 20% (2015: 20.25%). The differences are explained below:
Total tax reconciliation 2016 2015
$000 $000
--------------------------------------------- -------- --------
Loss before tax (38,153) (82,710)
--------------------------------------------- -------- --------
Tax calculated at 20.00% (2015: 20.25%) (7,631) (16,749)
Other fixed asset differences
Net change in unrecognised losses carried
forward 3,485 5,341
Differences relating to prior years (1,767) -
Permanent foreign exchange differences 3,327 10,769
Effect of tax rates in foreign jurisdictions 271 (256)
Rental fee provision 3,211 -
Other non-deductible expenses 191 1,839
Recognition of prior year losses (2,125) (2,191)
--------------------------------------------- -------- --------
Total tax charge (1,038) (1,247)
--------------------------------------------- -------- --------
The total tax credit for the year was $1.0m (2015: $1.2m credit)
comprising a current tax charge of $1.3m (2015: $4.8) in respect of
Ukraine, a deferred tax credit before exceptional items of $1.2m
(2015: charge of $3.1m) and a deferred tax credit of $1.2m in
respect of exceptional items (2015: $9.2m). The fall in current tax
charge to $1.3m reflects lower profitability in Ukraine. In
Ukraine, the corporate tax rate for 2016 was 18% and remains at
this level for 2017. The total deferred tax credit of $2.4m (2015:
$6.1m credit) comprises: a $2.9m credit reflecting the recognition
of deferred tax assets in respect of Russian and Hungarian tax
losses carried forward to future periods; and a net $0.5m charge
(2015: $4.0m) relating to provision for Rental Fees in Ukraine and
other tax timing differences on our oil and gas assets in Russia,
Ukraine and Hungary.
Taxes charged on production of hydrocarbons in Ukraine and
Hungary are included in cost of sales. The standard rate of
corporation tax in the UK changed from 21% to 20% with effect from
1 April 2015. Accordingly, the Company's profits for this
accounting year are taxed at an effective rate of 20%.
Factors that may affect future tax charges
A significant proportion of the Group's income will be generated
overseas. Profits made overseas will not be able to be offset by
costs elsewhere in the Group. This could lead to a higher than
expected tax rate for the Group.
The main rate of UK corporation tax reduces to 19% from 1 April
2017. In the March 2016 Budget a reduction in the main rate of UK
corporation tax to 17% in 2020 was announced, which has not been
substantively enacted. The impact of the rate reduction is not
expected to have a material impact on UK current taxation.
The corporation tax rate in Ukraine for 2016 was 18% (2015:
18%).
Taxation in Ukraine - production taxes
Since Poltava Petroleum Company's ('PPC's') inception in 1994
the Company has operated in a regime where conflicting laws have
existed, including in relation to effective taxes on oil and gas
production.
In order to avoid any confusion over the level of taxes due, in
1994, PPC entered into a licence agreement with the Ukrainian State
Committee on Geology and the Utilisation of Mineral Resources ('the
Licence Agreement') which set out expressly in the Licence
Agreement that PPC would pay royalties on production at a rate of
only 5.5% of sales value for the duration of the Licence
Agreement.
Pursuant to the Licence Agreement, PPC was granted an
exploration licence and four 20-year production licences, each in
respect of a particular field. In 2004, PPC's production licences
were renewed and extended until 2024, Subsoil Use Agreements were
signed and attached to the licences and operations continued as
before.
The Company and PPC have continued to invest in Ukraine on the
basis that PPC would pay a royalty on sales at a rate of 5.5%.
In December 1994, a new fee on the production of oil and gas
(known as a 'Rental Payment' or 'Rental Fee') was introduced
through Ukrainian regulations. On 30 December 1995, JKX, together
with its Ukrainian subsidiaries (including PPC), was issued with a
Joint Decision of the Ministry of Economy, the Ministry of Finance
and the State Committee for the Oil and Gas ('the Exemption
Letter'), which established a zero rent payment rate for oil and
natural gas produced in Ukraine by PPC for the duration of the
Licence Agreement for Exploration and Exploitation of the Fields.
Based on the Exemption Letter PPC did not expect to pay any Rental
Fees.
Rental Fees paid since 2011
In 2011, new laws were enacted which established new mechanisms
for the determination of the Rental Fee. Notwithstanding the
Exemption Letter, in January 2011 PPC began to pay the Rental Fee
in order to avoid further issues with the Ukrainian authorities but
without prejudice to its right to challenge the validity of the
demands.
Since 2011, the Rental Fees paid by PPC have amounted to more
than $180 million. These charges have been recorded in cost of
sales in each of the accounting periods to which they relate.
International arbitration proceedings
In 2015, the Company and its wholly-owned Ukrainian and Dutch
subsidiaries commenced arbitration proceedings against Ukraine
under the Energy Charter Treaty, the bilateral investment treaties
between Ukraine and the United Kingdom and the Netherlands,
respectively. In these proceedings, the Company sought a repayment
of $169 million in Rental Fees that PPC has paid on production of
oil and gas in Ukraine since 2011, in addition to damages to the
business.
During 2015 Rental Fees in Ukraine were increased to 55% and
capital control restrictions were introduced. On 14 January 2015,
an Emergency Arbitrator issued an Award ordering Ukraine not to
collect Rental Fees from PPC in excess of 28% on gas produced by
PPC, pending the outcome of the application to a full tribunal for
the Interim Award. On 23 July 2015 an international arbitration
tribunal issued an Interim Award (replacing the Emergency Award)
requiring the Government of Ukraine to limit the collection of
Rental Fees on gas produced by PPC to a rate of 28%.
The Interim Award was to remain in effect until final judgement
is rendered on the main arbitration case, which was heard in early
July 2016. A decision from the tribunal was awarded on 6 February
2017.
The tribunal ruled that Ukraine was found not to have violated
its treaty obligations in respect of the levying of Rental Fees but
awarded the Company damages of $11.8 million plus interest, and
costs of $0.3 million in relation to subsidiary claims.
Rental Fee demands
The Group currently has two claims (2015: three) for additional
Rental Fees being contested through the Ukrainian court process.
These arise from disputes over the amount of Rental Fees paid by
PPC for certain periods since 2010 (2015: 2007), which in total
amount to approximately $34.2 million (31 December 2015: $41
million) (including interest and penalties), as detailed below. All
amounts are being claimed in Ukrainian Hryvnia ('UAH') and are
stated below at their US$-equivalent amounts using the year end
rate of $1:UAH27.2 (2015: $1:UAH 24.0).
-- August - December 2010: approximately $10.6 million (2015:
$10.9 million) (including $6.1 million (2015: $5.0 million) of
interest and penalties). On 11 March 2014 PPC won the case in the
Poltava Court. The tax office appealed and the Kharkov Court of
Appeal reversed the earlier decision. PPC lost an appeal to the
High Administrative Court of Ukraine and lost four appeals to the
Supreme Court of Ukraine. It is currently engaged in appeal
processes in the High Administrative Court and is considering the
basis of a further appeal to the Supreme Court. The Board intends
to continue to pursue a successful decision in this case.
As part of these proceedings, property, plant and equipment that
cost UAH158m (approximately $5.8million (2015: $6.3 million) at the
year end rate of $1:UAH27.2 (2015: $1:UAH24.9) was required to be
pledged as security against the non-settlement of the 2010 Rental
Fee claim that may arise in the event that the Ukrainian
authorities are successful. The net book value of the property,
plant and equipment is $22.0 million based on the historical
exchange rates at the dates of acquisition which were between
$1:UAH5 and $1:UAH8.
-- January - December 2015: approximately $23.3 million (2015:
$24 million) (including $10.8 million (2015: $9 million) of
interest and penalties). Following the commencement of
international arbitration proceedings at the beginning of 2015 (see
above), from July 2015 PPC reverted to paying a 28% Rental Fee for
gas production (instead of the revised official rate of 55%) as a
result of the awards granted under the arbitration. PPC also
declared part of its Rental Fee payments at 55% for the first 6
months of 2015 as overpayments and consequently stopped paying the
Rental Fee for gas in order to align the total payments made in
2015 with the 28% rate awarded made under the arbitration
proceedings. The Ukrainian tax authorities have issued PPC with
claims for the difference between 28% and 55%. PPC is in the
process of court hearings in respect of the claim, although the
Company considers such claims to be in direct violation of the
Interim Award received from the arbitration tribunal, noted above.
In addition, in April 2016, the tax authorities issued PPC with a
separate demand for $0.1 million of penalties and interest on
unpaid Rental Fees for the period of August-October 2015. PPC also
filed lawsuits against the tax authorities to cancel the
application of such additional penalties and interest.
The Interim Award for PPC to pay Rental Fees at 28% for 2015 was
to remain in effect until final judgement is rendered on the main
arbitration case. Following the tribunal's dismissal of the
Company's claim for overpayment of Rental Fees, an exceptional
charge of $24.3 million has been charged to the Consolidated income
statement in the year (2015: $10.9 million) relating to the January
- December 2015 claim
A provision totalling $33.9 million is recognised at 31 December
2016 (2015: $10.9 million) in respect of the claim for the periods
from August-December 2010 and from January- December 2015.
No adjustment has been made to recognise any possible future
benefit to the Company that may result from the tribunal award in
the Company's favour for damages of $11.8 million plus interest,
and costs of $0.3 million.
In the prior year there was a claim of approximately $6 million
(including $3 million of interest and penalties) relating to the
period January - March 2007. During the period the Supreme Court of
Ukraine ruled in favour of the Company in respect of this claim and
a second parallel case related to this claim was won by PPC with
the High Administration Court of Ukraine.
9. Exceptional item - administrative expenses
During the year, the exceptional items as detailed below have
been included in administrative expenses in the income
statement:
2016 2015
$000 $000
---------------------------------------------- ------- -------
Exceptional item - onerous lease provision
(1) (see Note 7) (594) -
Exceptional item - lease costs (2) (209) -
Exceptional item - remuneration and severance
costs (3) (3,681) -
Exceptional item - legal costs (4) - (2,988)
---------------------------------------------- ------- -------
(4,484) (2,988)
---------------------------------------------- ------- -------
1. The onerous lease provision covers the Group's liability for
onerous lease contracts relating to London office. Following
reduction in London office staff, three out of the four floors of
the occupied building became surplus to requirements. Provision has
been determined as the present value of the unavoidable costs
relating to rents and rates to the end of the lease terms, net of
the expected sub-lease income, discounted at 6%. The remaining life
of the leases at 31 December 2016 is 5 years.
2. Represents rent and rate costs for the 4 months to 31
December 2016 relating to three floors of the London office
building.
3. Exceptional charges of $3.7million comprise the following:
$2.5 million of severance costs and additional remuneration
which the previous Board approved and paid prior to the General
Meeting on 28 January 2016;
$0.5 million of professional advisory fees incurred in relation
to the General Meeting and the replacement of the Board on 28
January 2016;
$0.7 million severance costs incurred as a result of staff
reductions mainly at the Group's London headquarters.
4. The Company has been involved in Court proceedings since July 2013 with two shareholders.
The shareholders appealed to the Supreme Court contesting the
Appeal Court ruling made in May 2014 in favour of the Company. In
December 2015 the Supreme Court overturned the Appeal Court ruling
and therefore the Company was required to settle the appropriate
portion of the legal expenses incurred by the two shareholders
during the process. The amount recognised in the income statement
2015 represents their legal costs that the Company paid in
2016.
10. Loss per share
The calculation of the basic and diluted loss per share
attributable to the owners of the parent is based on the weighted
average number of shares in issue during the year of 172,125,916
(2015: 172,125,916) and the loss for the relevant year.
Loss before exceptional item in 2016 of $7,461,522 (2015 loss:
$25,772,141) is calculated from the 2016 loss of $ 37,115,477
(2015: $81,463,000) and adding back exceptional items of $
30,823,955 (2015: 64,896,496) less the related deferred tax on the
exceptional items of $ 1,170,000 (2015: $9,205,637).
The diluted earnings per share for the year is based on
172,125,916 (2015: 172,125,916) ordinary shares calculated as
follows:
2016 2015
$000 $000
-------------------------------------------- -------- --------
Loss
Loss for the purpose of basic and diluted
earnings per share (loss for the year
attributable to the owners of the parent):
Before exceptional item (7,462) (25,772)
After exceptional item (37,115) (81,463)
-------------------------------------------- -------- --------
Number of shares 2016 2015
---------------------------------------- ----------- -----------
Basic weighted average number of shares 172,125,916 172,125,916
Dilutive potential ordinary shares:
Share options - -
---------------------------------------- ----------- -----------
Weighted average number of shares for
diluted earnings per share 172,125,916 172,125,916
---------------------------------------- ----------- -----------
In accordance with IAS 33 (Earnings per share) the effects of
antidilutive potential have not been included when calculating
dilutive loss per share for the year end 31 December 2016 (2015:
nil). 13,925,410 (2015: 29,849,048) potentially dilutive ordinary
shares associated with the convertible bonds (Note 6) have been
excluded as they are antidilutive in 2016, however they could be
dilutive in future periods.
There were 3,101,400 (2015: 12,740,100) outstanding share
options at 31 December 2016, of which 1,341,750 (2015: 7,141,100)
had a potentially dilutive effect. All of the Group's equity
derivatives were anti-dilutive for the year ended 31 December
2016.
11. Events after the reporting date
Convertible Bond restructuring
On 3 January 2017, the Bondholders approved a restructuring of
the terms and conditions of outstanding Convertible Bonds. See Note
5 for details.
Tribunal Award
In 2015 the Company commenced arbitration proceedings against
Ukraine on the basis of overpayment of production taxes ('Rental
Fees') plus damages, as explained more fully in Note 8. The main
arbitration case was heard in July 2016.
On 6 February 2017 the international arbitration tribunal ruled
that Ukraine was found not to have violated its treaty obligations
in respect of the levying of Rental Fees but awarded the Company
damages of $11.8m plus interest, and costs of $0.3m in relation to
subsidiary claims.
No adjustment has been made to recognise any possible future
benefit to the Company that may result from the tribunal award.
Following the tribunal decision, a provision totalling of $23.6m
was recognised at 31 December 2016 in respect of Rental Fees for
the period from January- December 2015 (see Notes 7 and 8 for
details).
Glossary
2P reserves Proved plus probable
3P reserves Proved, probable and possible
P50 Reserves and/or resources estimates that
have a 50 per cent probability of being met or exceeded
AFE Authorisation For Expenditure
AIFR All Injury Frequency Rate
Bcf Billion cubic feet
Bcm Billion cubic metres
bcpd Barrel of condensate per day
boe Barrel of oil equivalent
boepd Barrel of oil equivalent per day
bopd Barrel of oil per day
bpd Barrel per day
bwpd Barrels of water per day
cfpd Cubic feet per day
EPF Early Production Facility
FEN Folyópart Energia Kft
GPF Gas Processing Facility
HHN HHE North Kft
Hryvnia The lawful currency of Ukraine
HSECQ Health, Safety, Environment, Community and Quality
HTHP High Temperature High Pressure
KPI Key Performance Indicator
LIBOR London InterBank Offered Rate
LPG Liquefied Petroleum Gas
LTI Lost Time Injuries
Mbbl Thousand barrels
Mboe Thousand barrels of oil equivalent
Mcf Thousand cubic feet
Mcm Thousand cubic metres
MMcfd Million cubic feet per day
MMbbl Million barrels
MMboe Million barrels of oil equivalent
PPC Poltava Petroleum Company
Roubles The lawful currency of Russia
RR Russian Roubles
sq.km Square kilometre
TD Total depth
$ United States Dollars
UAH Ukrainian Hryvnia
US United States
VAT Value Added Tax
YGE Yuzhgazenergie LLC
Conversion factors 6,000 standard cubic feet of gas = 1 boe
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR JRMLTMBABBLR
(END) Dow Jones Newswires
March 20, 2017 03:00 ET (07:00 GMT)
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