TIDMZOL
RNS Number : 7715R
Zoltav Resources Inc
26 September 2017
Embargoed: 0700hrs, 26 September 2017
Zoltav Resources Inc.
("Zoltav" or the "Company")
Half Year Report for the Six Months Ended 30 June 2017
Zoltav (AIM: ZOL), the Russia-focused oil and gas exploration
and production company, announces results for the six months ended
30 June 2017. The full report is available to download from the
Investor Relations section of the Company's website at
www.zoltav.com.
Financial Highlights
-- Zoltav delivered a 33% increase in net profits to RUB 69
million (USD 1.19 million) (H1 2016: RUB 52 million or USD 0.74
million)
-- Revenue decreased by 8% to RUB 924 million (USD 15.98
million) (H1 2016: RUB 1,003 million or USD 14.28 million), due to
a 10% decline in daily production
-- Operating profit decreased by 12% to RUB 202 million (USD
3.49 million) (2016: RUB 230 million or USD 3.28 million)
-- EBITDA was broadly maintained at RUB 420 million (USD 7.26
million) (H1 2016: RUB 430 million or USD 6.12 million)
o Cost efficiencies helped improve the EBITDA margin by 2% to
45% of revenue
-- Reduced borrowing by a further RUB 150 million (USD 2.59
million) of the principal amount (RUB 1,860 million or USD 30.66 at
31 December 2016) - in line with all covenants
-- Total cash at period end was RUB 348 million (USD 5.89
million) (at 31 December 2016: RUB 294 million or USD 4.85
million)
Operational Highlights - Bortovoy Licence
-- Western Gas Plant produced an average of 7,480 boe/d (1,021
toe/d) (H1 2016: 8,270 boe/d (1,128 toe/d))
o 10% decline in production as a result of the underperformance
of Karpenskoye Well 117 and Zhdanovskoye Well 108
o Drilling programme for Western Fields reviewed and plans
implemented to restore Western Gas Plant to full capacity by year
end
o Plans include drilling of sidetracks from existing well stock,
with first two sidetracks expected to be operational by year
end
-- Company focused on further increasing efficiency at the
Western Gas Plant to partially offset the negative impact from
Wells 117 and 108
o Eliminated necessity for two planned plant shutdowns which
occurred in H1 2016
o Implemented zero-based budgeting programme resulting in a
further 30% reduction in expenses
-- Interpretation of 3D seismic data acquired over the Devonian
structure in the North Mokrousovskoye field expected to be
completed by March 2018
Operational Highlights - Koltogor Licences
-- Company considering options for the commercialisation of the
Koltogor Licences including potential partnerships
Corporate Highlights
-- Lea Verny, previously Independent Non-executive Director,
replaced Marcus Rhodes as Independent Non-executive Chairman on 22
March 2017
-- Eduard Sleyn appointed as Group CEO (non-board position) on 15 May 2017
-- Kirill Suetov appointed as Group Director of Finance (now
CFO) (non-board position) on 1 January 2017
Lea Verny, Independent Non-executive Chairman, commented:
"Zoltav's operational priorities remain that of using the
Western Gas Plant at Bortovoy to its full capacity - to which it is
expected to return by the end of 2017 - as well as driving EBITDA
and operating cash flow through operational efficiencies. That the
Company was able to achieve a materially improved net profit in the
first half, despite reduced production levels, is an encouraging
signal of what can be achieved when production is normalised by the
end of the year.
In the longer term, Zoltav believes there is substantial
potential for the development of the deeper, Devonian structures at
Bortovoy. Interpretation of 3D seismic data acquired over the
Devonian structure in the North Mokrousovskoye field is ongoing and
expected to be completed by March 2018."
Note:
- USD:RUB conversions for H1 2017 at a rate of 1:59.0855 (based
on 30 June 2017 exchange rate) and 1:57.8366 (average for H1
2017)
- USD:RUB conversions for H1 2016 at a rate of 1:64.2575 (based
on 30 June 2016 exchange rate) and 1:70.2282 (average for H1
2016)
- USD:RUB conversions for 31 December 2016 at a rate of
1:60.6569 (based on 31 December 2016 exchange rate)
Market Abuse Regulation (MAR) Disclosure
Certain information contained in this announcement would have
been deemed inside information for the purposes of Article 7 of
Regulation (EU) No 596/2014 until the release of this
announcement.
Contacts:
Zoltav Resources Inc. Tel. +44 (0)20
7830 9704
Lea Verny, Non-executive (via Vigo Communications)
Chairman
SP Angel Corporate Finance Tel. +44 (0)20
LLP (Nomad and Joint Broker) 3470 0470
John Mackay / Jeff Keating
/ Soltan Tagiev
Panmure Gordon (Joint Broker) Tel. +44 (0)20
7886 2500
Adam James / Tom Salvesen
Vigo Communications Tel. +44 (0)20
7830 9704
Ben Simons / Alexandra Roper zoltav@vigocomms.com
About Zoltav
Zoltav is an oil and gas exploration and production company
focused on Russia.
Zoltav holds the Bortovoy Licence in the Saratov region of South
Western Russia, a 3,215 square kilometre area along the northern
margin of the Pre-Caspian basin, one of the largest hydrocarbon
basins in the CIS.
The Bortovoy Licence contains a number of productive gas fields,
a processing plant and significant exploration prospectivity. It
holds Proved plus Probable reserves of 750 bcf (21.3 bcm) of gas
and 3.8 mmbbls (484 mT) of oil and condensate. In 2016, the
Bortovoy Licence produced approximately 3.3 mmboe (450 mToe).
Zoltav also holds the Koltogor E&P Licence, a 528 square
kilometre area in the Khantiy-Mansisk Autonomous Okrug of Western
Siberia, one of Russian's most prolific oil producing regions. The
Koltogor E&P Licence contains the Koltogor oil field with
Proved plus Probable reserves of 79.2 mmboe (10.8 mToe).
Additionally, Zoltav holds Koltogor E&P Licence 10, a 167
square kilometre area due west of the Koltogor E&P Licence,
containing the West Koltogor oil field.
For further information on Zoltav or to sign up for our news
alert service visit: www.zoltav.com.
Chairman's statement
I am pleased to report that Zoltav delivered a 33% increase in
net profits in the first half of 2017 to RUB 69 million (H1 2016:
RUB 52 million). This material growth in the bottom line was
achieved despite an 8% drop in revenues to RUB 924.45 million (H1
2016: RUB 1,003.39 million) as a result of a 10% decline in daily
production.
Production during the period from the Company's Bortovoy Licence
in Saratov was impacted by the performance of two wells:
Karpenskoye Well 117, from which production was stopped in early
January 2017 due to water cut; and Zhdanovskoye Well 108 which,
despite the application of acids to enhance well performance, is
currently producing at lower rates than previously estimated. As a
result, the Western Gas Plant produced an average of 7,480 boepd
(1,021 toepd) compared to 8,270 boepd (1,128 toepd) in H1 2016.
In order to partially offset the negative impact from Wells 117
and 108, the Company focused on further increasing plant
efficiency. We achieved this by eliminating the necessity for two
plant shutdowns which occurred in the equivalent period last year;
and through the implementation of a zero-based budgeting programme
that resulted in a further 30% reduction in expenses.
Despite the lower production volumes in the first half, EBITDA
was broadly maintained at RUB 420 million (H1 2016: RUB 430). Cost
efficiencies helped improve the EBITDA margin by 2% to 45% of
revenue.
The underperformance of the newly drilled Zhdanovskoye Well 108
resulted in the decision to suspend the drilling programme on the
Western Fields in order to evaluate new and improved geological
targets for keeping the Western Gas Plant at full capacity over the
mid to long term.
Instead, in order to return the Western Gas Plant to full
capacity in the short term, management has implemented a programme
focused on drilling sidetracks from existing wells which are
approximately 30% less expensive than new wells. This programme
will include the assembly of two well-head compressors and the
construction of a 2km looping pipeline to overcome hydraulic
resistance. Management expects the first of these sidetracks, on
Zhdanovskoye Well 30, to be operational during Q4 2017; and a
further sidetrack, on Karpenskoye Well 13, to be operational by the
end of the year.
These first two sidetracks are expected to return the Western
Gas Plant to full production capacity by the end of 2017. A third
sidetrack, on Karpenskoye Well 21, will be completed by February
2018.
The Company is currently considering different options for the
commercialisation of the Company's Koltogor Licences, in the
Khantiy-Mansisk Autonomous Okrug, including potential partnerships.
The Russian Mineral Extraction Tax (MET) incentive attached to
Bazhenov shale structures continues to make a development of the
Koltogor fields economically viable.
Looking ahead, Zoltav's operational priorities remain that of
using the Western Gas Plant at Bortovoy to its full capacity (to
which it is expected to return by the end of 2017) as well as
driving EBITDA and operating cash flow through operational
efficiencies. That the Company was able to achieve a materially
improved net profit in the first half, despite reduced production
levels, is an encouraging signal of what can be achieved when
production is normalised by the end of the year.
In the longer term, Zoltav believes there is substantial
potential for the development of the deeper, Devonian structures at
Bortovoy. A 3D seismic programme over the Devonian structure in the
North Mokrousovskoye field was substantially completed by the end
of the first half of this year and seismic interpretation is
ongoing.
Lea Verny
Non-executive Chairman
25 September 2017
Review of operations
Production
Production from Zoltav's Western Gas Plant at Bortovoy averaged
7,480 boepd (1,021 toepd) during H1 2017, a 10% decline when
compared to 8,270 boepd (1,128 toepd) in H1 2016.
Average daily production during H1 2017 was 42.6 mmcf/d (1.2
mmcm/d) of gas and 368 bbls/d (47 T/d) of oil and condensate (H1
2016: 46.6 mmcf/d (1.32 mmcm/d) of gas and 512 bbls/d (64 T/d) of
oil and condensate).
Overall in H1 2017, the Company produced:
- Natural gas: 7,711 mmcf (218.455 mmcm) or 175,340 mtoe (1,285
mboe) (H1 2016: 8,429 mmcf (238,783 mmcm) or 191,656 mtoe (1,405
mboe))
- Oil and condensate: 66,552 bbls (8,478 t) (H1 2016: 91,068 bbls (11,601 t))
The decline in production volumes during the first half was a
result of two underperforming wells. The Karpenskoye Well 117 was
shut down in early January 2017 due to water cut. The newly drilled
Zhdanovskoye Well 108 was put on production in March 2017 and
delivered materially lower gas production than anticipated, despite
acid treatment.
The shutdown of Well 117, the underperformance of Well 108 and
the cancellation of a planned well, Zhdanovskoye Well 109, had an
estimated combined negative impact on gas production in the first
half of approximately 2,506 mmcf (71 mmcm).
An enhanced focus on operational efficiency to eliminate any
impact on profitability as a result of the production decline
allowed Zoltav to avoid two planned plant shutdowns (which had
occurred in the first half of 2016). Furthermore, work on
optimisation of propane compressors and hydraulic and heat balance
resulted in additional condensate production.
The Company signed a contract with a Chinese manufacturer for
the supply of well-head compressors to assemble on the Karpenskoye
field by the end of this year, giving rise to an estimated 128,843
boe (17,567 toe) of additional production annually. Should the
first well-head compressor prove as successful as anticipated, two
further well-head compressors are expected to be ordered in
2018.
Development
Bortovoy
The underperformance of the newly drilled Zhdanovskoye Well 108
caused management to reevaluate the forward drilling programme
(including Zhdanovskoye Well 109) in order to plan new and improved
geological targets for keeping the Western Gas Plant at full
capacity over the mid to long term.
Over the short term, this will be achieved through the drilling
of sidetrack wells on existing well stock.
- The sidetrack from Zhdanovskoye Well 30 will be finished in
October 2017 with forecasted daily production of 6,001 mcf (170
mcm) or 1,000 boepd (136 toepd).
- The sidetrack from Karpenskoye Well 13 will be finished in
December 2017 with forecasted daily production of 5,648 mcf (160
mcm) or 941 boepd (128 toepd).
- The sidetrack from Karpenskoye Well 21 will be drilled for oil
and will be finished in February 2018 with forecasted daily
production of 236 bbls/d (30 T/d).
With the current development plan, management estimates the
Western Gas Plant will be returned to full capacity by the end of
this year.
A 120 sq km 3D seismic study over the Devonian structure in the
North Mokrousovskoye field was substantially completed during the
first half, slightly behind schedule. As a result, interpretation
is expected to be completed by March 2018. The outstanding 20 sq km
area does not influence the interpretation exercise and will be
completed during autumn 2017 or with the next seismic study. The
Company is planning to commission an additional 507 sq km of 3D
seismic on the Western Fields in order to further assess the
development potential of the Devonian structures.
Koltogor
The Company is currently considering different options for the
commercialisation of the Koltogor assets including
partnerships.
Group Reserves under PRMS as per latest report of DeGolyer and
MacNaughton (May 2014):
Proved
Proved Probable and probable Possible
------- --------- -------------- ---------
Bortovoy Licence
Gas bcf 352.9 396.8 749.7 640.0
Oil & liquids mmbbls 2.0 1.8 3.8 2.4
Gas, oil and
liquids mmboe 62.0 69.2 131.2 111.2
Koltogor Licences
Gas bcf 0.5 23.5 24.0 55.7
Oil mmbbls 1.6 73.5 75.1 174.0
Total mmboe 1.7 77.5 79.2 183.5
Total
Gas bcf 353.4 420.3 773.7 695.7
Oil & liquids mmbbls 3.6 75.3 78.9 176.4
Gas, oil and
liquids mmboe 63.7 146.7 210.4 294.7
The Company is planning to reevaluate reserves upon completion
of seismic studies and interpretation in late 2018/early 2019.
Conversion rates
Tonnes of crude oil produced are translated into barrels using
conversion rates reflecting oil density from each of the fields.
Crude oil and liquid hydrocarbons expressed in barrels are
translated from tonnes using a conversion rate of 7.85 barrels per
tonne. Translations of cubic feet to cubic metres are made at the
rate of 35.3 cubic feet per cubic metre. Translations of barrels of
crude oil and liquid hydrocarbons into barrels of oil equivalent
("boe") are made at the rate of 1 barrel per boe and of cubic feet
into boe at the rate of 290 cubic feet per boe.
Financial review
Management's continued focus on profit generation from the
Western Gas Plant at Bortovoy, combined with rigorous costs
optimisation, enabled Zoltav to generate RUB 69 million of net
profit in the first half of 2017. EBITDA slightly decreased by 2%
at RUB 420 million, as a result of a temporary decline in
production.
Revenue
The Group's revenues in H1 2017 decreased by 8% to RUB 924.45
million, compared to RUB 1,003.39 million in H1 2016.
84.8% of revenue was derived from gas sold to Mezhregiongaz, a
Gazprom subsidiary, at the transfer point on entry to the Central
Asia - Centre gas pipeline system. The gas prices are fixed in a
contract with Mezhregiongaz and are subject to indexation. The
Russian Government approved a 3.9% gas price increase from 1 July
2017 and accordingly the Company signed an addendum to its contract
with Mezhregiongaz. We anticipate that a further increase of 2% in
gas price indexation will be approved by the Russian Government in
June 2018 which will further benefit the Company.
The remaining revenue was from oil and condensate sold directly
at the Western Gas Plant through a tender process to a small number
of different buyers. The Company is diversifying its portfolio of
buyers to reduce dependence on its main purchaser (which
represented approximately 85% of oil and condensate purchases in H1
2017 compared to approximately 93% in H1 2016). This had a positive
impact on average oil and condensate sales price realisations which
were RUB 2 thousand per bbl (RUB 15.81 thousand per tonne) in H1
2017 compared to RUB 1.54 thousand per bbl (RUB 12 thousand per
tonne) in H1 2016.
Cost of sales and G&A costs
The Group's operational and G&A costs decreased by 32% to
RUB 108 million (H1 2016: RUB 158 million), mostly driven by
maintenance optimisation and staff reduction. The Company shut down
heavy compressor 1540 and redirected its associated gas flow, which
allowed it to avoid maintenance costs and turn off two out of three
power generated units which are also maintenance heavy. The
procurement team identified a Russian substitute for an expensive
foreign catalyst which was previously used in the sulphur
production unit. Furthermore, the Company significantly decreased
the administrative personnel headcount both in Moscow and Saratov,
with the senior management team fully relocated to Saratov to lead
day-to-day operations.
Total cost of sales was RUB 585.4 million (H1 2016: RUB 578.2
million). This comprised RUB 192.2 million of mineral extraction
tax (H1 2016: RUB 206.1 million), RUB 217.8 million of depreciation
and depletion of assets (H1 2016: RUB 201 million) and RUB 175.4
million of other cost of sales (H1 2016: RUB 171 million). Other
cost of sales comprised operating expenses from the Bortovoy
operating company, Diall Alliance, which rose by 3% due to a RUB
14.1 million adjustment which relates to the interpretation of
property tax incentives from the Saratov regional tax authorities
which had been accrued by the Company. The Company is seeking
clarification from the tax authorities and, in the event of a
positive decision, will reverse the adjustment. Operational
materials and supplies decreased by 19% to RUB 38.4 million,
compared with RUB 47.5 million in H1 2016.
Operating profit
Zoltav achieved an operating profit for H1 2017 of RUB 201.91
million, compared to RUB 229.5 million in H1 2016.
Finance costs of RUB 117 million (H1 2016: RUB 138 million) are
mainly represented by interest on the remaining RUB 1,710 million
Sberbank facility.
Profit before tax
Zoltav generated RUB 99.04 million of profit before tax,
compared to RUB 107.27 million in H1 2016.
Taxation
Production based tax for the period was RUB 192.2 million (H1
2016: RUB 206.1 million) which is recognised in the cost of sales.
The MET tax formula is based on multi-component gas composition,
average gas prices and reservoir complexity and maturity. The
effective MET rate applicable for the period was flat at RUB 24/mcf
or RUB 838/mcm (H1 2016: RUB 23/mcf or RUB 813/mcm).
In addition to production taxes, the Group was subject to a 2.2%
property tax which is based on the net book value of Russian assets
calculated for property tax purposes. Property tax on the major
part of the Bortovoy operating company's assets, including the
Western Gas Plant, is paid at a reduced tax rate of 0.1%, in line
with tax incentives for regional investment projects. A RUB 14.1
million adjustment was made as the Company is seeking clarification
from the tax authorities concerning the effective tax period for
using the incentive. In the event of a positive decision, the
Company will reverse the adjustment.
The income tax charge for the year was RUB 30.0 million (H1
2016: RUB 55.6 million). The significant change is explained by the
income tax asset used in the period.
Net profit
The net profit recorded was RUB 69 million, which compares to
RUB 52 million in H1 2016 due to the positive impact of lower
income tax charge.
Cash
Net cash generated from operating activities was RUB 369.60
million (H1 2016: RUB 361.76 million).
Diall Alliance successfully serviced its credit facility with
PJSC Sberbank and repaid a further RUB 150 million of the principal
amount (RUB 1,860 million at 31 December 2016) according to its
schedule. The Company remains in line with the covenants of its
credit facility agreement.
The Group has sufficient liquidity to fund its current programme
to maintain plant capacity at the Western Gas Plant.
Total cash at the end of the period was RUB 347.77 million.
Kirill Suetov
CFO
25 September 2017
Statement of Directors' responsibilities
The Directors confirm that, to the best of their knowledge,
these condensed consolidated interim financial statements have been
prepared in accordance with IAS 34 as adopted by the European
Union, and that the interim management report includes a fair
review of the information required by the Disclosure and
Transparency rules 4.2.7R and 4.2.8R, namely:
- an indication of important events that have occurred in the
first six months and their impact on the condensed consolidated
financial statements, and description of the principal risks and
uncertainties for the remaining six months of the financial year;
and
- material related party transactions in the first six months
and any material changes in related party transactions described in
the Last Annual report.
A list of Directors is maintained on the Zoltav Resources Inc.
website: www.zoltav.com.
For and on behalf of the Board:
Lea Verny
Non-executive Chairman
25 September 2017
Report on Review of Interim Financial Information
Translation of original Russian version
To the shareholders and Board of Directors of Zoltav Resources
Inc.
Introduction
We have reviewed the accompanying interim condensed consolidated
financial statements of Zoltav Resources Inc. and its subsidiaries,
which comprise the interim condensed consolidated statement of
financial position as at 30 June 2017, interim condensed
consolidated statement of comprehensive income, interim condensed
consolidated statement of changes in equity and interim condensed
consolidated statement of cash flows for the six-month period then
ended and selected explanatory notes (interim financial
information). Management of Zoltav Resources Inc. is responsible
for the preparation and presentation of this interim financial
information in accordance with IAS 34, Interim Financial Reporting.
Our responsibility is to express a conclusion on this interim
financial information based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements 2410, Review of Interim Financial
Information Performed by the Independent Auditor of the Entity. A
review of interim financial information consists of making
inquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
and consequently does not enable us to obtain assurance that we
would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the accompanying interim financial
information is not prepared, in all material respects, in
accordance with IAS 34, Interim Financial Reporting.
T.L. Okolotina
Partner
Ernst & Young LLC
25 September 2017
Interim condensed consolidated statement of comprehensive
income
for the six months ended 30 June 2017
(in '000s of Russian rubles, unless otherwise stated)
Six months ended 30 June Six months ended 30 June
2017
Note (unaudited) 2016 (unaudited) (Restated)*
----- ------------------------- -----------------------------
Revenue 3 924,450 1,003,393
------------------------- -----------------------------
Cost of sales
Mineral extraction tax (192,212) (206,145)
Depreciation and depletion (217,809) (200,988)
Other cost of sales (175,412) (171,053)
------------------------- -----------------------------
Total cost of sales (585,433) (578,186)
------------------------- -----------------------------
Gross profit 339,017 425,207
Operating, administrative and selling expenses (108,094) (158,009)
Other income 4,000 15,000
Other expenses (33,010) (52,699)
Operating profit 201,913 229,499
Finance income 13,674 15,385
Finance costs (116,549) (137,610)
------------------------- -----------------------------
Profit before tax 99,038 107,274
Income tax expense 4 (30,043) (55,588)
------------------------- -----------------------------
Profit for the period attributable to owners of the
parent being total comprehensive income 68,995 51,686
------------------------- -----------------------------
RUB RUB
------------------------- -----------------------------
Earnings per share attributable to owners of the
parent
Basic 7 0.49 0.36
Diluted 7 0.48 0.36
* The amounts shown here do not correspond to the interim
condensed consolidated financial statements for the six months
ended 30 June 2016 due to change of presentation currency as
described in Note 2.5.
Interim condensed consolidated statement of financial
position
as at 30 June 2017
(in '000s of Russian rubles, unless otherwise stated)
As at 30 June As at 31 December
Note 2017 (unaudited) 2016
----- ----------------- ------------------
Assets
Non-current assets
Exploration and evaluation assets 4 4,882,482 4,788,314
Property, plant and equipment 5 4,092,003 4,211,254
----------------- ------------------
Total non-current assets 8,974,485 8,999,568
----------------- ------------------
Current assets
Inventories 13,926 18,830
Trade and other receivables 149,487 172,294
Other current non-financial assets 29,223 15,186
Cash and cash equivalents 11.3 347,768 294,254
----------------- ------------------
Total current assets 540,404 500,564
----------------- ------------------
Total assets 9,514,889 9,500,132
================= ==================
Equity and liabilities
Share capital 6 970,218 970,218
Share premium 5,498,009 5,498,009
Other reserves 1,429,341 1,429,341
Accumulated losses (1,287,184) (1,356,179)
Total equity 6,610,384 6,541,389
----------------- ------------------
Non-current liabilities
Borrowings 9 1,400,977 1,548,789
Provisions 10 378,586 359,153
Other payables 60,253 57,874
Deferred tax liabilities 463,931 433,888
----------------- ------------------
Total non-current liabilities 2,303,747 2,399,704
----------------- ------------------
Current liabilities
Borrowings 9 309,774 311,160
Other taxes payable 122,074 118,500
Trade and other payables 168,910 129,379
----------------- ------------------
Total current liabilities 600,758 559,039
----------------- ------------------
Total liabilities 2,904,505 2,958,743
----------------- ------------------
Total equity and liabilities 9,514,889 9,500,132
================= ==================
Interim condensed consolidated statement of cash flows
for the six months ended 30 June 2017
(in '000s of Russian rubles, unless otherwise stated)
Six months ended 30 June Six months ended 30 June
2017
Note (unaudited) 2016 (unaudited) (Restated)*
----- ------------------------- -----------------------------
Cash flows from operating activities
Profit/(loss) before tax 99,038 107,274
Adjustments for:
Depreciation and depletion 5 218,620 202,902
Finance costs 116,549 137,610
Finance income (13,674) (15,385)
Loss on disposal of property, plant and equipment 19,202 2,820
Loss on write-off of accounts receivable - 26,986
Change in the estimates of decommissioning and
environmental restoration provision 445 9,401
Other income and expenses 3,306 10,015
Operating cash inflows before working capital
changes 443,486 481,623
Decrease/(Increase) in inventories 7,619 (13,977)
Decrease in trade and other receivables and other
current non-financial assets 16,771 5,631
Decrease in trade and other payables (17,614) (18,287)
Increase in other taxes payables 3,574 9,159
------------------------- -----------------------------
Net cash from operating activities before tax and
interests paid 453,836 464,149
Interest received 14,254 16,853
Interest paid 9 (98,442) (119,247)
Income tax paid (46) -
------------------------- -----------------------------
Net cash flows from operating activities 369,602 361,755
------------------------- -----------------------------
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 5,830 -
Capital expenditure on exploration and evaluation
activities (8,317) (27,617)
Purchase of property, plant and equipment (163,700) (223,353)
Net cash used in investing activities (166,187) (250,970)
------------------------- -----------------------------
Cash flows from financing activities
Repayment of borrowings 9 (150,000) (180,000)
Net cash used in financing activities (150,000) (180,000)
------------------------- -----------------------------
Net change in cash and cash equivalents 53,415 (69,215)
Net foreign exchange difference 99 (3,280)
Cash and cash equivalents at the beginning of the
year 294,254 428,550
------------------------- -----------------------------
Cash and cash equivalents at the end of the period 347,768 356,055
========================= =============================
* The amounts shown here do not correspond to the condensed
consolidated financial statements for the six months ended 30 June
2016 due to change of presentation currency as described in Note
2.5.
Interim condensed consolidated statement of changes in
equity
for the six months ended 30 June 2017
(in '000s of Russian rubles, unless otherwise stated)
Attributable to owners of the Parent
--------------------------------------------------------------------------------
Employee
share-based
Share Share Capital compen-sation Accumulated Total
capital premium reserve reserve losses equity
--------- ----------- ----------- --------------- ------------- -----------
At 1 January
2016 (restated*) 970,218 5,498,009 1,343,566 85,775 (1,453,280) 6,444,288
--------- ----------- ----------- --------------- ------------- -----------
Profit for
the period - - - - 51,686 51,686
--------- ----------- ----------- --------------- ------------- -----------
Total comprehensive
income - - - - 51,686 51,686
--------- ----------- ----------- --------------- ------------- -----------
At 30 June
2016 (unaudited)
(restated*) 970,218 5,498,009 1,343,566 85,775 (1,401,594) 6,495,974
========= =========== =========== =============== ============= ===========
At 1 January
2017 970,218 5,498,009 1,343,566 85,775 (1,356,179) 6,541,389
--------- ----------- ----------- --------------- ------------- -----------
Profit for
the period - - - - 68,995 68,995
--------- ----------- ----------- --------------- ------------- -----------
Total comprehensive
income - - - - 68,995 68,995
--------- ----------- ----------- --------------- ------------- -----------
At 30 June
2017 (unaudited) 970,218 5,498,009 1,343,566 85,775 (1,287,184) 6,610,384
* The amounts shown here do not correspond to the condensed
consolidated financial statements for the six months ended 30 June
2016 due to change in presentation currency as described in Note
2.5.
Notes to the interim condensed consolidated financial
statements
(in '000s of Russian rubles, unless otherwise stated)
1. Background
1.1 The Company and its operations
Zoltav Group (the Group) comprises Zoltav Resources Inc. (the
Company), together with its subsidiaries:
Share of the Group in a
Name Place of incorporation Function subsidiary
---------------------------------- ------------------------ -------------------- ----------------------------------
CenGeo Holdings Limited
(hereinafter "CenGeo Holdings") Cyprus Holding company 100%
CJSC SibGeCo (hereinafter
"SibGeCo") Russia Operating company 100%
Royal Atlantic Energy (Cyprus)
Limited (hereinafter "Royal") Cyprus Holding company 100%
Diall Alliance LLC (hereinafter
"Diall") Russia Operating company 100%
Zoltav Resource LLC Russia Management company 100%
The Company was incorporated in the Cayman Islands on 18
November 2003.The principal activities of the Company and its
subsidiaries is the acquisition, exploration, development and
production of hydrocarbons in the Russian Federation. The Company's
shares are listed on the Alternative Investment Market of the
London Stock Exchange.
1.2 Russian business environment
The Group's operations are located in the Russian
Federation.
Russia continues economic reforms and development of its legal,
tax and regulatory frameworks as required by a market economy. The
future stability of the Russian economy is largely dependent upon
these reforms and developments and the effectiveness of economic,
financial and monetary measures undertaken by the government.
The Russian economy has been negatively impacted by a decline in
oil prices and sanctions imposed on Russia by a number of
countries. The Rouble interest rates remained high. The combination
of the above resulted in reduced access to capital, a higher cost
of capital and uncertainty regarding economic growth, which could
negatively affect the Group's future financial position, results of
operations and business prospects. Management believes it is taking
appropriate measures to support the sustainability of the Group's
business in the current circumstances.
2. Significant accounting policies
2.1 Basis of preparation
These interim condensed consolidated financial statements have
been prepared in accordance with International Accounting Standard
("IAS") 34 "Interim Financial Reporting", as adopted by the
European Union. Accordingly, these interim condensed consolidated
financial statements do not include all the information and
disclosures required for a complete set of financial statements,
and should be read in conjunction with the Group's annual
consolidated financial statements for the year ended 31 December
2016, which were prepared in accordance with International
Financial Reporting Standards, as adopted by the European
Union.
Operating results for the six-month period ended 30 June 2017
are not necessarily indicative of the results that may be expected
for the year ending 31 December 2017.
2.2 Going Concern
The consolidated financial statements have been prepared on a
going concern basis as the Directors have concluded that the Group
will continue to have access to sufficient funds in order to meet
its obligations as they fall due for at least the foreseeable
future as explained further in the Directors Report. The Group's
current liabilities exceed current assets by 60,354 as at 30 June
2017. For mitigation factors, please, see Note 12.1.
2.3 Disclosure of impact of new and future accounting standards
In the preparation of the interim condensed consolidated
financial statements, the Group followed the same accounting
policies and methods of computation as compared with those applied
in the complete consolidated financial statements for year ended 31
December 2016. In the six-month-period ended 30 June 2017 no new
standards, interpretations or amendments were adopted by the
Group.
2.4 Segment reporting
The Management of the Company analyses the segment information
based on IFRS numbers. As of June 30, 2017 the Company has one
segment - revenue from gas and oil products sales which generates
all of its revenues. The segment has all of its assets located in
the Russian Federation. Management has therefore determined that
the operations of the Group comprise one operating segment and the
Group operates in only one geographic area - the Russian
Federation. Segment financial indicators are considered based on
EBITDA and net profit results. During 6 month 2017 the Company
generated 84.8% of its revenue from Gazprom Mezhregiongaz Saratov
LLC (2016: 85.8%).
2.5 Foreign currency translation
a) Functional and presentation currency
The functional currency of the Group entities is the Russian
ruble ("RUB"), the currency of the primary economic environment in
which the Group operates.
Starting from 1 January 2016, the presentation currency was
changed from US dollar ("USD") to the RUB, which the Board
considers more representative for users of these financial
statements to better assess the performance of the Group.
A change in presentation currency is a change in accounting
policy which is accounted for retrospectively. The financial
information included in the Group's consolidated financial
statements for the six months ended 30 June 2016 previously
reported in US dollar has been restated into RUB using the
procedures outlined below:
- Assets and liabilities for each balance sheet date are
translated at the closing rate at the date of that balance
sheet;
- Share capital and other equity components are translated at historic rates;
- Income and expenses are translated at exchange rates at the
dates of the transactions (or at average exchange rates that
approximate the translation using the rate of the actual
transaction dates).
Translation has been performed using the exchange rates set by
the Central Bank of the Russian Federation.
b) Transactions and balances
Transactions in foreign currencies are initially recorded by the
Group's entities at their respective functional currency spot rates
at the date the transaction first qualifies for recognition.
Monetary assets and liabilities denominated in foreign
currencies are translated at the functional currency spot rates of
exchange at the reporting date.
Differences arising on the settlement or translation of monetary
items are recognised in profit or loss with the exception of
monetary items that are designated as part of the hedge of the
Group's net investment of a foreign operation. These are recognised
in statement of comprehensive income ("OCI") until the net
investment is disposed of, at which time the cumulative amount is
reclassified to profit or loss. Tax charges and credits
attributable to exchange differences on those monetary items are
also recorded in OCI.
Non-monetary items that are measured in terms of historical cost
in a foreign currency are translated using the exchange rates at
the dates of the initial transactions. Non-monetary items measured
at fair value in a foreign currency are translated using the
exchange rates at the date when the fair value is determined. The
gain or loss arising on translation of non-monetary items measured
at fair value is treated in line with the recognition of the gain
or loss on the change in fair value of the item (i.e., translation
differences on items whose fair value gain or loss is recognised in
OCI or profit or loss are also recognised in OCI or profit or loss,
respectively).
c) Group companies
Loans between Group entities and related foreign exchange gains
or losses are eliminated upon consolidation.
Any goodwill arising on the acquisition of a foreign operation
and any fair value adjustments to the carrying amounts of assets
and liabilities on the acquisition are treated as assets and
liabilities of foreign operation and translated at the spot rate of
exchange at the reporting date.
The period-end exchange rates and the average exchange rates for
the respective reporting periods are indicated below.
30 June 31 December
2017 2016
-------- ------------
RUB/USD as at reporting date 59.0855 60.6569
2017 2016
-------- ------------
RUB/USD average for the six
months ended 30 June 57.9862 70.2583
2.6 Assets and liabilities not measured at fair value but for which fair value is disclosed
Fair values analysed by level in the fair value hierarchy of
assets and liabilities of the Group not measured at fair value are
as follows:
30 June 2017 31 December 2016
---------------------------------- -----------------------
Fair value Carrying Carrying
(unaudited) value (unaudited) Fair value value
------------- ------------------- ----------- ----------
Financial assets
Trade and other
receivables 149,487 149,487 172,294 172,294
Total assets 149,487 149,487 172,294 172,294
============= =================== =========== ==========
Financial liabilities
Borrowings 1,743,080 1,710,751 1,855,173 1,859,949
Trade and other
payables 168,910 168,910 129,379 129,379
Other non-current
payables 59,947 60,253 57,758 57,874
------------- ------------------- ----------- ----------
Total liabilities 1,971,937 1,939,914 2,042,310 2,047,202
============= =================== =========== ==========
The fair value of borrowings and other non-current payables are
based on cash flows discounted using a market rate. For borrowings:
a rate of 10.74% (2016: 11.93%) is used, for long-term payables: a
rate of 7.95% (2016: 8.26%) is used. The fair values are within
level 2 of the fair value hierarchy.
3. Revenue
The Group's operations comprise one class of business being oil
and gas exploration, development and production and all revenues
are from one geographic region, the Saratov Region in the Russian
Federation. Companies incorporated outside of Russia provide
support to the operations in Russia.
Revenue is primarily from the sale of three products:
Six months ended
30 June
2017
2016 (unaudited)
(unaudited) (restated)
------------- -----------------
Gas sales 784,255 857,230
Oil sales 66,275 78,890
Condensate sales 72,116 62,380
Sulphur sales 1,804 4,893
------------- -----------------
Total sales 924,450 1,003,393
============= =================
All gas sales are made to one customer, Gazprom Mezhregiongaz
Saratov LLC, under a long-term contract effective until 31 December
2020 with terms reviewed annually. Condensate and oil are sold to
local buyers. The sales of all products are denominated in RUB.
4. Income Tax
The Group calculates the period income tax expense using the tax
rate that would be applicable to the expected total annual
earnings. The major components of income tax expense in the interim
condensed consolidated statement of comprehensive income are:
Six months ended
30 June
2017
2016 (unaudited)
(unaudited) (restated)
------------- -----------------
Deferred tax expense 30,043 55,588
Current tax expense 46 -
------------- -----------------
Total 30,043 55,588
============= =================
Origination and reversal of temporary differences in the period
mainly relates to the property, plant and equipment, exploration
and evaluation assets and provisions.
Reconciliation between expected and actual taxation charge is
provided below.
Six months ended
30 June
------------------------------------
2016 (unaudited)
2017 (unaudited) (Restated)
----------------- -----------------
Profit before income tax 99,038 107,274
----------------- -----------------
Theoretical tax charge at applicable
income tax rate of 20% (2016:
20%) (19,808) (21,455)
Effect of different foreign tax
rates (4,545) (17,157)
Effect of unrecognised tax loss (4,584) (15,783)
Tax effect of expenses not deductible
for tax purposes (1,106) (1,193)
----------------- -----------------
Total income tax expense (30,043) (55,588)
================= =================
The Group's income was subject to tax at the following tax
rates:
2016 2015
------ ------
The Russian Federation 20.0% 20.0%
The Republic of Cyprus 12.5% 12.5%
Cayman Islands 0% 0%
The Group is subject to Cayman income tax, otherwise the
majority of the Group's operations are located in the Russian
Federation. Thus 20% tax rate is used for theoretical tax charge
calculations. Effective tax rate changed due to significant
decrease of expenses on Zoltav Resources Inc., which are subject to
0% tax rate.
5. Exploration and evaluation assets
Drilling,
seismic and other Decommi-ssioning Construction work
Sub-soil licences costs asset in progress Total
------------------ --------------------- ----------------- -------------------- -----------
Balance at 1 January
2016 2,101,062 2,556,215 32,870 219 4,690,366
Additions 80,865 1,371 - - 82,236
Reclassification - - - - -
Transfer to
property, plant and
equipment - (1,217) - - (1,217)
Change in the
estimates of
decommissioning
provision - - 24,008 - 24,008
Balance at 30 June
2016 (unaudited)
(restated) 2,181,927 2,556,369 56,878 219 4,795,393
================== ===================== ================= ==================== ===========
Balance at 1 January
2017 2,188,024 2,578,476 21,595 219 4,788,314
Additions 7,298 85,085 - - 92,383
Reclassification - 219 - (219) -
Transfer to - - - - -
property, plant and
equipment
Change in the
estimates of
decommissioning
provision - - 1,785 - 1,785
Balance at 30 June
2017 (unaudited) 2,195,322 2,663,780 23,380 - 4,882,482
================== ===================== ================= ==================== ===========
The additions during six months 2017 are mostly represented by
seismic works at North Mokrousovskoye field (during six months
2016: exploration and production license acquisition at West
Koltogor oil field).
In management's opinion, as at 30 June 2017 there were no
non-compliance issues in respect of the licences that would have an
adverse effect on the financial position or the operating results
of the Group.
6. Property, plant and equipment
Other Construction
Oil and Motor equipment work
gas assets vehicles and furniture in progress Total
------------- ---------- --------------- ------------- -------------
Cost at 1 January
2016 4,542,928 17,245 7,711 257,826 4,825,710
Additions 47,246 - 180 154,372 201,798
Reclassification 190,132 - - (190,132) -
Transfer from exploration
and evaluation
assets 1,217 - - - 1,217
Transfer to inventory - - - (419) (419)
Change in the estimates
of decommissioning
provision 42,854 - - 319 43,173
Disposals (6,017) - - (1,043) (7,060)
Cost at 30 June
2016 (unaudited)
(restated) 4,818,360 17,245 7,891 220,923 5,064,419
------------- ---------- --------------- ------------- -------------
Cost at 1 January
2017 4,825,462 17,245 7,955 249,924 5,100,586
Additions 9,162 3,742 82 112,677 125,663
Reclassification 260,404 - - (260,404) -
Transfer from exploration - - - - -
and evaluation
assets
Transfer to inventory (947) - - (2,591) (3,538)
Change in the estimates
of decommissioning
provision 2,261 - - 15 2,276
Disposals (27,963) (6,616) - (6,034) (40,613)
Cost at 30 June
2017 (unaudited) 5,068,379 14,371 8,037 93,587 5,184,374
------------- ---------- --------------- ------------- -------------
Accumulated depreciation
and impairment
Balance at 1 January
2016 (473,797) (9,475) (4,168) - (487,440)
Depreciation and
depletion (199,034) (3,539) (329) - (202,902)
Disposals 4,240 - - - 4,240
Balance at 30 June
2016 (unaudited)
(restated) (668,591) (13,014) (4,497) - (686,102)
------------- ---------- --------------- ------------- -------------
Balance at 1 January
2017 (868,540) (16,116) (4,676) - (889,332)
Depreciation and
depletion (215,534) (2,809) (277) - (218,620)
Disposals 9,878 5,703 - - 15,581
Balance at 30 June
2017 (unaudited) (1,074,196) (13,222) (4,953) - (1,092,371)
------------- ---------- --------------- ------------- -------------
Net book value
at 1 January 2016 4,069,131 7,770 3,543 257,826 4,338,270
------------- ---------- --------------- ------------- -------------
Net book value
at 30 June 2016
(unaudited) (restated) 4,149,769 4,231 3,394 220,923 4,378,317
============= ========== =============== ============= =============
Net book value
at 1 January 2017 3,956,922 1,129 3,279 249,924 4,211,254
------------- ---------- --------------- ------------- -------------
Net book value
at 30 June 2017
(unaudited) 3,994,183 1,149 3,084 93,587 4,092,003
============= ========== =============== ============= =============
7. Share capital
Number Nominal Nominal
of ordinary value, value,
At 30 June 2017, 2016 shares USD'000 RUB'000
------------------------- ------------- --------- ----------
Authorised (par value
of USD 0.20 each) 250,000,000 50,000 1,708,672
Issued and fully paid
(par value of USD 0.20
each) 141,955,386 28,391 970,218
8. Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to owners of the Company by the weighted average
number of ordinary shares in issue during the year.
Diluted earnings per share is calculated by adjusting the
weighted average number of ordinary shares outstanding to assume
conversion of all dilutive potential ordinary shares. The Company
has share options and warrants as dilutive potential ordinary
shares.
Six months ended
30 June
2017
2016 (unaudited)
(unaudited) (restated)
------------- -----------------
Profit attributable to owners
of the Company -
Basic and diluted 68,995 51,686
Number Number
of of
shares shares
------------- -------------
Weighted average number of shares
for calculating basic earnings
per share 141,955,386 141,955,386
Effect of dilutive potential
ordinary shares - share options 1,952,500 1,952,500
Weighted average number of shares
for calculating diluted earnings
per share 143,907,886 143,907,886
RUB (unaudited) RUB (unaudited)
---------------- ----------------
Basic earnings per share 0.49 0.36
Diluted earnings per share 0.48 0.36
9. Share-based payments
At 30 June 2017, the Company had a total of 1,952,500
outstanding share options (31 December 2016: 1,952,500).
10. Borrowings
2017 2016 (restated)
----------- ----------------
Non-revolving credit facility - current liability, as at 1 January 1,859,949 2,218,549
Including current liability 311,160 373,378
Interest accrued 99,244 118,691
Interest paid (98,442) (119,247)
Repayment (150,000) (180,000)
Non-revolving credit facility, as at 30 June (unaudited) 1,710,751 2,037,993
=========== ================
Including current liability 309,774 341,628
In 2014, the Group entered into non-revolving credit facility
agreement with Sberbank of Russia OJSC with a maximum facility
amount of 2,400,000. Contractual currency is RUB. The facility was
drawn down in full in 2014. The maturity date is 30 April 2021,
being the 7-year anniversary of the facility entered into. The
Group is obliged to repay the principal amount of the loan in 24
tranches commencing on 11 May 2015 and on a quarterly basis from
then on with a final repayment tranche payable on the maturity
date. The interest rate is 10.98% per annum. Sberbank may
unilaterally amend the interest rate in the event of increases in
the refinancing rate of the Central Bank of Russia. The Group paid
an upfront commission on the facility of 1% of the facility amount
(24,000) and there is a drawdown charge of 0.25% per year on the
balance of the facility not drawn by the Group within the
established timeframe. The Group has the option to prepay the loan
in whole or in part at any time, subject to the payment of a fee.
The Group provided certain warranties and representations to
Sberbank in the agreement. The agreement contains certain loan
covenants and events of default which are customary for a facility
of this type. In December 2015 the Group signed an amendment
altering covenants. The Group is in compliance with all covenants
as of 30 June 2017 and 31 December 2016. The loan is secured by the
Group, such security being granted pursuant to various pledge and
mortgage deeds entered into by the Group on or about the date of
the Sberbank Facility. The carrying value of property, plant and
equipment pledged as of 30 June 2017 amounted to 2,768,339 (31
December 2016: 2,901,916).
The outstanding principal amount of the facility as of 30 June
2017 was 1,710,000 (31 December 2016: 1,860,000). The credit
facility debt is measured at amortised cost, using the effective
interest method.
11. Decommissioning and environmental restoration provision
The decommissioning and environmental restoration provision
represents the net present value of the estimated future
obligations for abandonment and site restoration costs which are
expected to be incurred at the end of the production lives of the
gas and oil fields which is estimated to be within 20 years.
2017 2016 (restated)
------------------- ----------------
Provision as at 1 January 359,153 358,000
Additions - 2,274
Unwinding of discount 14,927 18,281
Change in estimate of decommissioning and environmental restoration provision 4,506 76,582
Provision as at 30 June (unaudited) 378,586 455,137
=================== ================
This provision has been created based on the Group's internal
estimates. Assumptions based on the current economic environment
have been made which the directors believe are a reasonable basis
upon which to estimate the future liability. These estimates are
reviewed regularly to take into account any material changes to the
assumptions. However, actual decommissioning costs will ultimately
depend upon future market prices for the necessary dismantlement
works required, which will reflect market conditions at the
relevant time. Furthermore, the timing is likely to depend on when
the fields cease to produce at economically viable rates. This in
turn will depend upon future oil prices and future operating costs,
which are inherently uncertain.
The provision reflects two liabilities: one is to dismantle the
property, plant and equipment assets and the other is to restore
the environment. The decommissioning part of the provision is
reversed when an oil well is abandoned and corresponding
capitalised costs are expensed. The environmental part of the
provision is reversed when the expenses on restoration are actually
incurred.
The provision is reversed when the corresponding capitalised
costs directly attributable to an exploration and evaluation asset
are expensed as it is determined that a commercial discovery has
not been achieved and the restoration of the corresponding
environment has been completed.
The Group reviews the application of inflation rates used for
the provision estimation each half-year end. The inflation rate
used in the estimation of the provision as of 30 June 2017 was 4.5%
in 2017, decreasing to 3.6% in 2036 (as of 31 December 2016: 5.8%
in 2017, decreasing to 4.0% in 2036). The discount rates used to
determine the decommissioning and environmental restoration
provision are based on Russian government bond rates. As of 30 June
2017 discount rate varies from 7.9% to 8.1% (as of 31 December
2016: from 8.53% to 8.57%) depending on expected period of
abandonment and site restoration for each gas and oil fields.
12. Financial instruments and financial risk management
The Group has exposure to the following risks from its use of
financial instruments:
- Liquidity risk;
- Market risk;
- Credit risk.
This note presents information about the Group's exposure to
each of the above risks, the Group's objectives, policies and
processes for measuring and managing risk, and the Group's
management of capital. Further quantitative disclosures are
included throughout this consolidated financial statements.
The Group's risk management policies deal with identifying and
analysing the risks faced by the Group, setting appropriate risk
limits and controls, and monitoring risks and adherence to limits.
Risk management policies and systems are reviewed regularly to
reflect changes in market conditions and the Group's activities.
The Group, through its internal policies, aims to develop a
disciplined and constructive control environment in which all
employees understand their roles and obligations.
12.1 Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its financial obligations as they fall due. The Group monitors
the risk of cash shortfalls by means of current liquidity planning.
The Group's approach to managing liquidity is to ensure, as far as
possible, that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the
Group's reputation. This approach is used to analyse payment dates
associated with financial assets, and also to forecast cash flows
from operating activities. The contractual maturities of financial
liabilities are presented including estimated interest
payments.
The Group's current liabilities exceed current assets by 60,354
as at 30 June 2017. Starting from 1 July 2017, the Group budgeted
flat sales, together with further reduction of administrative and
operating expenses, that will lead to EBITDA generation sufficient
to cover the liquidity gap. For additional liquidity risk
mitigation the Group holds a preferential term sheet and draft
credit agreement for 100,000 limit line with a Russian bank.
With all the above the Group management considers the liquidity
risk as low.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted
payments:
Less than Over
Contractual amount 1 year 1-3 years 3 years
------------------- ---------- ----------- ---------
Financial liabilities as at 30 June 2017 (unaudited)
Borrowings 2,119,767 472,709 1,211,956 435,102
Trade and other payables 250,599 168,910 - 81,689
------------------- ---------- ----------- ---------
Total 2,370,366 641,619 1,211,956 516,791
=================== ========== =========== =========
Less than Over
Contractual amount 1 year 1-3 years 3 years
------------------- ---------- ----------- ---------
Financial liabilities as at 31 December 2016
Borrowings 2,357,003 487,329 1,124,968 744,706
Trade and other payables 211,068 129,379 - 81,689
------------------- ---------- ----------- ---------
Total 2,568,071 616,708 1,124,968 826,395
=================== ========== =========== =========
12.2 Market risk
Market risk includes interest risk and foreign currency exchange
rate risk.
a) Interest risk
The Group has exposure to interest risk since the Group's
subsidiary, Diall Alliance LLC, entered into a non-revolving credit
facility agreement with Sberbank and, according to the terms of the
agreement, Sberbank may unilaterally amend the interest rate in the
event of increases in refinancing rates of the Central Bank of
Russia. Sberbank had not amended the interest rate by the reporting
date.
b) Foreign currency exchange rate risk
The Group does not have any significant exposure to foreign
currency risk, as no significant sales, purchases or borrowings are
denominated in a currency other than the functional currency.
The Group's operations are carried in the Russian Federation,
where all of its revenue, costs and financing from both Sberbank
and intra-group lending are denominated in RUB. As a result there
is no exposure at the operating subsidiary level to foreign
currency exchange risk movements.
12.3 Credit risk
Credit risk arises principally from the Group's financial
investments, trade and other receivables and cash and cash
equivalents. It is the risk that the value of the Group's
investments will not be recovered and the risk that the
counterparty fails to discharge its obligation in respect of the
Group's trade and other receivables and cash balances. The maximum
exposure to credit risk equals the carrying value of these items in
the financial statements.
The Group is largely dependent on one customer (Gazprom
Mezhregiongaz Saratov LLC) for a significant portion of revenues.
Gazprom Mezhregiongaz Saratov LLC accounted for 84.8% and 85.9%, of
the Group's total revenue during six months 2017 and2016,
respectively. The loss or the insolvency of this customer for any
reason, or reduced sales of the Group's principal product, could
significantly reduce the Group's ongoing revenue and/or
profitability, and could materially and adversely affect the
Group's financial condition. The credit rating assigned to Gazprom
by Standard & Poor's is BB+. To manage credit risk and exposure
to the loss of the key customer, the Group has entered into a
long-term contract with Gazprom Mezhregiongaz Saratov LLC,
effective till 31 December 2020. As for the smaller customers, the
Group imposes minimum credit standards that the customers must meet
before and during the sales transaction process.
Credit risk related to cash and cash equivalents is reduced by
placing funds with banks with acceptable credit ratings.
To limit exposure to credit risk on cash and cash equivalents
management's policy is to hold cash and cash equivalents in
reputable financial institutions. During six months 2017 cash was
held mainly with Bank Otkritie, Sberbank and Gazprom Bank. As of 30
June 2017 the Group hold cash and cash equivalents in the amount of
339,000 at Bank Otkritie. Due to sanation procedures at Bank
Otkritie, started by the Central Bank of Russia in August 2017, the
Group fully withdrew cash and cash equivalents from this bank
without losses and transferred them to Gazprombank (Moody's rating
Ba2).
30 June
2017
31 December
(unaudited) 2016
------------- ------------
Ba2.ru, Moody's 5,206 291,683
Ba3.ru, Moody's 339,000 -
Other 3,562 2,571
------------- ------------
Total cash and cash equivalents 347,768 294,254
============= ============
12.4 Capital management
The Group considers its capital and reserves attributable to
equity shareholders to be the Group's capital. In managing its
capital, the Group's primary long-term objective is to provide a
return for its equity shareholders through capital growth. Going
forward, the Group may seek additional investment funds and also
maintain a gearing ratio that balances risks and returns at an
acceptable level, while maintaining a sufficient funding base to
enable the Group to meet its working capital needs. Details of the
Group's capital are disclosed in the interim statement of changes
in equity.
There have been no significant changes to management's
objectives, policies or processes in the period, nor has there been
any change in what the Group considers to be capital.
The Group companies are in compliance with externally imposed
capital requirements as of 30 June 2017 and 31 December 2016.
13. Commitments and contingencies
13.1 Capital commitments
Capital expenditure contracted for at the end of the reporting
period but not yet incurred at 30 June 2017 was 90,998, net of VAT
(31 December 2016: 249,723, net of VAT).
13.2 Insurance
The insurance industry in the Russian Federation is in a
developing state and many forms of insurance protection common in
other parts of the world are not generally available. The Group's
insurance currently includes cover for damage to or loss of assets,
third-party liability coverage (including employer's liability
insurance), in each case subject to excesses, exclusions and
limitations. However, there can be no assurance that such insurance
will be adequate to cover losses or exposure to liability, or that
the Group will continue to be able to obtain insurance to cover
such risks. Until the Group obtains adequate insurance coverage
there is a risk that the loss or destruction of certain assets
could have a material adverse effect on the Group's operations and
financial position.
13.3 Litigation
The Group has been involved in a number of court proceedings
(both as a plaintiff and as a defendant) arising in the normal
course of business. In the opinion of management there are no
current legal proceedings or other claims outstanding which could
have a material adverse effect on the results of operations,
financial position or cash flows of the Group and which have not
been accrued or disclosed in these financial statements.
As at 31 December 2016, the Group was engaged in litigation
proceedings as a defendant. During six months 2017 all litigations
were terminated. No provision for litigations was accrued as at 30
June 2017 (31 December 2016: 3,454).
13.4 Taxation contingencies
Russian tax, currency and customs law allows for various
interpretations and is subject to frequent changes. Management's
interpretation of legislation as applied to the Company's
transactions and activities may be challenged by regional or
federal authorities.
2017-2016 saw continued implementation of mechanisms aimed at
countering the use of low tax jurisdictions and aggressive tax
planning structures introduced in 2015. In addition, the procedure
for determining thin capitalization went through significant
changes in 2016.
These changes and recent trends in applying and interpreting
certain provisions of Russian tax law indicate that the tax
authorities may take a tougher stance in interpreting legislation
and reviewing tax returns. The tax authorities may thus challenge
transactions and accounting methods that they have never challenged
before. As a result, significant taxes, penalties and fines may be
accrued. It is not possible to determine the amounts of
constructive claims or evaluate the probability of a negative
outcome. Tax audits may cover a period of three calendar years
immediately preceding the audited year. Under certain
circumstances, the tax authorities may review earlier tax
periods.
The Group estimates its possible tax risks other than remote tax
risks that are determined by management as not likely to result in
additional taxes approximate 8,940 (31 December 2016: 0). No
provision for such risks was accrued.
13.5 Environmental matters
The Group's operations are in the upstream oil and gas industry
in the Russian Federation and its activities may have an impact on
the environment. The enforcement of environmental regulations in
the Russian Federation is evolving and the enforcement stance of
government authorities is continually being reconsidered. The Group
periodically evaluates its obligations related thereto. The outcome
of environmental liabilities under proposed or future legislation,
or as a result of stricter interpretation and enforcement of
existing legislation, cannot reasonably be estimated at present,
but could be material.
Under the current levels of enforcement of existing legislation,
management believes there are no significant liabilities in
addition to amounts already accrued as a part of the
decommissioning provision and which would have a material adverse
effect on the financial position or results of the Group.
14. Related party transactions
During the period there were no operations with related parties,
except for key management remunerations.
The remuneration of key management comprised of salary and
bonuses in the amount 13,585 (6 months 2016: 38,557).
15. Events after the reporting date
There were no events after the reporting date that require
disclosures in Group's interim condensed consolidated financial
statements.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR DBGDCXDDBGRU
(END) Dow Jones Newswires
September 26, 2017 02:01 ET (06:01 GMT)
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