TIDMZOL
RNS Number : 5941D
Zoltav Resources Inc
29 October 2020
29 October 2020
Zoltav Resources Inc.
("Zoltav" or the "Company")
Half Year Report for the Six Months Ended 30 June 2020
Zoltav (AIM: ZOL), the Russia-focused oil and gas exploration
and production company, announces results for the six months ended
30 June 2020.
Financial Summary
-- Revenues declined by 12% to RUB 552 million (USD 8 million)
(H1 2019: RUB 624 million (USD 9.6 million)), due mainly to lower
gas production and lower oil and condensate prices
-- Total cost of sales was 29% lower at RUB 380.6 million (USD
5.5 million) (H1 2019: RUB 533.9 million (USD 8.2 million))
-- Operational and G&A costs decreased by 20% to RUB 106
million (USD 1.53 million) (H1 2019: RUB 133.2 million (USD 2.04
million))
-- Operating profit of RUB 87.2 million (USD 1.26 million) (H1
2019: operating loss of RUB 105 million (USD 1.61 million))
-- Profit before tax of RUB 18.7 million (USD 0.3 million) (H1
2019: loss before tax of RUB 172.6 million or USD 2.64 million)
-- Cash generated from operating activities increased by 39% to
RUB 257.5 million (USD 3.71 million) (H1 2019: RUB 185.5 million
(USD 2.84 million))
-- Total cash at the end of the period was RUB 31 million (USD
0.45 million) (H1 2019: RUB 330 million (USD 5.33 million))
o Revolving loan facility of USD 9 million announced after the
period-end in July 2020
Notes:
(1) Comparative figures stated above and throughout this report
for H1 2019 represent the verified and updated data for that
period.
(2) USD comparisons are provided in the above Financial Summary
for illustrative purposes only and are calculated using the
following exchange rates:
H1 2020: 1 USD = 69.3714 RUB
As at 30 June 2020: 1 USD = 69.9513 RUB
H1 2019: 1 USD = 65.3384 RUB
As at 30 June 2019: 1 USD = 63.0756 RUB
As at 31 December 2019: 1 USD = 61.9057 RUB
2019: 1 USD = 64.7362
Operational Summary
-- Average net daily production (sold to customers) in H1 2020 was:
o 24.3 mmcf/d (0.69 mmcm/d) of gas (H1 2019: 26 mmcf/d (0.74
mmcm/d))
o 215 bbls/d (27.5 t/d) of oil and condensate (H1 2019: 207
bbls/d (26 t/d))
-- Overall, in H1 2020, Zoltav produced:
o Natural gas: 4.4 bcf (125 mmcm) of gas or 0.7 mmboe (100 mtoe)
(H1 2019: 4.7 bcf (134 mmcm) or 0.8 mmboe (107 mtoe))
o Oil and condensate: 39,216 bbls (4,996 t) (H1 2019: 37,389
bbls (4,763 t))
-- Operations at the Western Gas Plant continued without any
shutdowns or COVID-19 related disruption:
o Additional safety and precautionary measures, such as
additional cleaning and personal protective equipment, remain in
force to reduce risk of infection
-- Sidetrack development well programme on West Bortovoy fields continued during H1 2020:
o Zhdanovskoye Well 8 - put on production in January 2020
o Karpenskoye Well 19 - completed in February 2020 but
encountered water cut and will require intervention
-- A programme of two standalone vertical development wells and
construction of a 7.2 km looping pipe on West Bortovoy fields was
initiated in H1 2020:
o Zhdanovskoye Well 106 - spudded in May 2020 and put on
production in July 2020
o Zhdanovskoye Well 105 - spudded in August 2020 and put on
production in September 2020
o Looping pipe construction started in June 2020 and completed
in July 2020 - successfully contributing to debottlenecking of
Zhdanovskoye production
-- 2019/2020 development drilling programme on West Bortovoy
expected to enable Zoltav to deliver sustainable gas production of
at least 35.3 mmcf/d (1 mmcm/d) by the end of 2020
-- Feasibility study on East Bortovoy completed in H1 2020:
o Well operations and technical analysis were completed and the
project has been successfully reviewed by an independent technical
consulting firm
o Project final investment decision is subject to financing
o Progress continues to be made on other aspects of project
development including pipeline design, procurement and
tendering
Lea Verny, Independent Non-executive Chairman, commented:
"H1 2020 was a busy period operationally, completing, in tandem,
both the substantial feasibility study programme on East Bortovoy
and continuing the development drilling programme on West
Bortovoy.
We continue to work to maximise the potential of the western
fields, with the work programme expected to enable Zoltav to
deliver sustainable gas production of at least 35.3 mmcf/d (1
mmcm/d) by the end of 2020. At the same time, we are considering
options for the potential development of the eastern fields on the
Bortovoy Licence. This project remains subject to a final
investment decision."
Enquiries:
Zoltav Resources Inc. Tel. +44 (0)20 7390
Lea Verny, Non-executive Chairman 0234
(via Vigo Communications)
SP Angel Corporate Finance LLP (Nomad Tel. +44 (0)20 3470
and Broker) 0470
John Mackay / Jeff Keating / Soltan Tagiev
Vigo Communications Tel. +44 (0)20 7390
Ben Simons / Simon Woods 0234
zoltav@vigocomms.com
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.
About Zoltav
Zoltav is an oil and gas exploration and production company
focused on Russia. The Company holds the Bortovoy Licence in the
Saratov region of South Western Russia, a 3,215 sq km 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 in the west of the Licence and a
processing plant. The Company is currently evaluating strategies to
commercialise the eastern fields of the Bortovoy Licence. For
further information on Zoltav, or to sign up for our news alert
service, visit: www.zoltav.com.
Glossary
bbls Barrels
bbls/d Barrels per day
bcf Billion cubic feet
km Kilometre
mcf Thousand cubic feet
mcm Thousand cubic metres
mmbbls Million barrels of oil
mmboe Million barrels of oil equivalent
mmcf Million cubic feet
mmcf/d Million cubic feet per day
mmcm Million cubic metres
mmcm/d Million cubic metres per day
mtoe Thousand tonnes of oil equivalent
RUB Russian Ruble
t Tonnes
t/d Tonnes per day
USD United States Dollar
US $ United States Dollar
Chairman's statement
Average production through the Western Gas Plant on the Bortovoy
Licence, Saratov during H1 2020 declined 6% when compared to the
same period last year, reflecting the natural declining production
profile of the western fields. An ongoing development drilling
programme on these fields was initiated in May 2019 and continued
throughout H1 2020. This work programme is expected to enable
Zoltav to deliver sustainable gas production of at least 35.3
mmcf/d (1 mmcm/d) by the end of 2020.
Western Gas Plant operations continued safely and efficiently
throughout H1 2020 with no shutdowns. Additional measures to
mitigate the risk of COVID-19 infection remain in force.
During H1 2020, the Company also completed a substantial
feasibility study on the East Bortovoy fields, which began in 2019.
Technical analysis has now also been completed and the project has
been successfully reviewed by an independent technical consulting
firm. A project final investment decision is subject to successful
negotiations of binding terms for project finance from major
Russian banks and the ability to secure a necessary equity
contribution to support the project finance. Management remains in
discussions with prospective providers of project finance.
Meanwhile, significant progress continues to be made across a range
of other areas of East Bortovoy project development which, in the
event of a positive final investment decision in due course, is
expected to improve project implementation timelines.
I commend the entire geological and operational teams on the
substantial work programmes which have been undertaken across the
Bortovoy Licence since 2019.
Lea Verny
Non-executive Chairman
29 October 2020
Review of operations
Production
Average production through the Western Gas Plant on the Bortovoy
Licence, Saratov during H1 2020 was 4,257 boepd (581 toepd), a 6%
decline when compared to the same period last year (H1 2019: 4,552
boepd (621 toepd)), reflecting the natural production decline.
Average net daily production (sold to customers) during H1 2020
was 24.3 mmcf/d (0.69 mmcm/d) of gas and 215 bbls/d (27.5 t/d) of
oil and condensate (H1 2019: 26 mmcf/d (0.74 mmcm/d) of gas and 207
bbls/d (26 t/d) of oil and condensate).
Overall, in H1 2020, the Company produced:
-- Natural gas: 4.4 bcf (125 mmcm) or 0.7 mmboe (100 mtoe) (H1
2019: 4.7 bcf (134 mmcm) or 0.8 mmboe (107 mtoe))
-- Oil and condensate: 39,216 bbls (4,996 t) (H1 2019: 37,389 bbls (4,763 t))
The Western Gas Plant continued to operate efficiently
throughout H1 2020 with no shutdowns. Operations at the plant have
continued throughout the COVID-19 global pandemic without
interruption. Additional measures to mitigate the risk of infection
remain in force, including additional cleaning and personal
protective equipment.
Development
West Bortovoy
The well stock producing from the two currently producing
Permian fields (Zhdanovskoye and Karpenskoye) consists of 15 gas
wells and one oil well working via artificial lift. A development
drilling programme, initiated in May 2019, continued throughout H1
2020.
Two sidetrack wells were completed during H1 2020:
-- Zhdanovskoye Well 8 was spudded in November 2019 and was put on production in January 2020
-- Karpenskoye Well 19 was spudded in January 2020 and was
completed in February 2020. The well encountered water cut and will
require intervention
The two successful sidetrack wells in the 2019/20 programme on
the Zhdanovskoye field were contributing around 40% of gas
production and approximately two-thirds of liquid products at the
end of H1 2020. The two unsuccessful sidetrack wells in the 2019/20
programme on the Karpenskoye field will require additional
investment in order to have the potential to be put on production
in the future. The Company is continuing to test a range of squeeze
treatment technologies to isolate water in these wells although it
should be noted that such intervention carries a relatively low
success rate.
A programme of two standalone vertical wells, together with a
7.2 km looping pipe to avoid bottlenecking, were initiated in H1
2020:
o Zhdanovskoye Well 106 was spudded in May 2020, was put on
production in July 2020, and is now contributing approximately 5.3
mmcf/d (0.15 mmcm/d)
o Zhdanovskoye Well 105 was spudded in August 2020, was put on
production in September 2020 and is now contributing 12.7 mmcf/d
(0.36 mmcm/d)
With the impact of several successful development wells and a
7.2 km looping pipe coming into operation during or after the
period, the Company expects to deliver sustainable gas production
of at least 35.3 mmcf/d (1 mmcm/d) by the end of 2020.
East Bortovoy
During H1 2020, the Company completed a substantial feasibility
study on the East Bortovoy fields, which began in 2019. The final
field operations, including the retesting of Nepriyakhinskoye Well
1 and further well re-entries on the Pavlovskoye field to obtain
geological data and confirm the technical condition of the wells,
were completed in the period.
Technical analysis has now also been completed and the project
has been successfully reviewed by an independent technical
consulting firm. A project final investment decision is subject to
successful negotiations of binding terms for project finance from
major Russian banks and the ability to secure a necessary equity
contribution to support the project finance. Management remains in
discussions with prospective providers of project finance.
Meanwhile, significant progress continues to be made on other
aspects of project development. This includes the pipeline design
to connect the East Bortovoy fields to the Western Gas Plant, for
which the development documentation for the first phase has been
submitted to Glavgosexpertiza, the applicable government agency for
such construction projects; and the initiation of tender and
procurement processes for a range of equipment and contractors.
Should the Company ultimately take a positive final investment
decision, subject to financing, the progress which is being made on
pre-selecting suppliers and contractors, and other aspects of
project development, is expected to improve project implementation
timelines.
Koltogor
The Koltogor Licences in the Khantiy Mansisk Autonomous Okrug,
Western Siberia are not currently a focus of investment, however,
management continues to seek out potential routes to monetise these
licences.
Tigran Tagvoryan
Chief Executive Officer
29 October 2020
Group Reserves under PRMS as per latest report of DeGolyer and
MacNaughton (May 2014):
Proved and
Proved Probable 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
Note on 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
Revenue
The Group's revenues in H1 2020 decreased by 12% to RUB 552
million, compared to RUB 624 million in H1 2019.
88.5% of revenues were 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 1.4% gas price increase and
accordingly the Company signed an addendum to its contract with
Mezhregiongaz.
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. Oil and condensate prices were RUB 1,583/bbl
(RUB 12,428/t) in H1 2020 compared to RUB 2,804/bbl (RUB 22,015/t)
in H1 2019, reflecting the impact of the COVID-19 global pandemic
on oil prices.
Cost of sales and G&A costs
The Group's operational and G&A costs decreased by 20% to
RUB 106 million (USD 1.53 million) (H1 2019: RUB 133.2 million (USD
2.04 million)).
Total cost of sales was RUB 380.6 million (H1 2019: RUB 533.9
million). This comprised RUB 124 million of mineral extraction tax
(H1 2019: RUB 133 million), RUB 71 million of depreciation and
depletion of assets (H1 2019: RUB 211 million) and RUB 185 million
of other cost of sales (H1 2019: RUB 189 million).
Other expenses decreased to RUB 9 million (H1 2019: RUB 71
million).
Operating profit
Zoltav achieved an operating profit for H1 2020 of RUB 87.2
million, compared to an operating loss of RUB 105 million in H1
2019. This was achieved mainly due to decreased depreciation,
higher revenue from sales of electricity generated and the positive
exchange rate impact.
EBITDA increased by 48% to RUB 158 million (H1 2019: RUB
107).
Finance costs of RUB 69 million (H1 2019: RUB 76 million) are
mainly represented by decreased interest on the refinanced debt of
RUB 1.32 billion with PromSvyazbank.
Profit before tax
Zoltav generated RUB 18.7 million of profit before tax, compared
to losses before tax of RUB 172.6 million in H1 2019.
Taxation
Production based tax for the period was RUB 124 million (H1
2019: RUB 133 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 is of RUB 27/mcf or
RUB 945/mcm (H1 2019: RUB 27/mcf or RUB 956/mcm).
The income tax charge for the period was RUB 48 million (H1
2019: RUB 12 million income tax benefit).
Net loss
Zoltav generated a significantly reduced net loss of RUB 29
million (H1 2019: RUB 160 million).
Cash
Net cash generated from operating activities was RUB 257.5.4
million (H1 2019: RUB 185.5 million).
The Bortovoy Licence operating subsidiary, Diall Alliance,
successfully serviced its credit facility with Promsvyazbank and
repaid a further RUB 144 million during the period. The loan
facility contains a technical covenant requiring 75 mmcm of natural
gas production per quarter. The covenant does not contain any
penalties and provides legal grounds for the bank to have a formal
discussion with the Company's management regarding a breach. The
Company breached the production covenant for H1 2020 due to the
delay in the development drilling programme on West Bortovoy. The
bank accepted the Company's explanation on the covenant breach.
Total cash at the end of the period was RUB 31 million (H1 2019:
RUB 330 million).
On 14 July 2020, the Company announced that it has entered into
a loan agreement with ARA Capital Holdings Limited under which ARA
Capital Holdings Limited has provided a revolving loan facility for
up to US $9,000,000 (the "Loan"). ARA Capital Holdings Limited is
the parent company of ARA Capital Limited - both entities combined
own 44.1 percent of the issued share capital of the Company.
The Loan has been made available for drawdown in two instalments
of:
(1) US$ 2,000,000, which is provided unconditionally and has
been drawn down by the Company; and
(2) US $7,000,000, which is secured against the shares of Royal
Atlantic Energy (Cyprus) Limited (of which Diall Alliance, which
holds and operates the Bortovoy Licence, is a wholly owned
subsidiary) and has been drawn down by the Company.
The Loan is currently due for repayment by 31 December 2020
unless otherwise extended or converted into equity by mutual
agreement, and, in the case of conversion, subject to shareholder
approval. The Loan is interest-free save for in the event of a
failure to repay on time, in which circumstances the Loan will
accrue interest at a rate of 15 percent per annum.
Proceeds from the Loan are being used for general working
capital purposes and in support of operational activities,
including the development drilling programme ongoing at West
Bortovoy and the East Bortovoy project.
Tigran Tagvoryan
Chief Executive Officer
29 October 2020
Interim condensed consolidated statement of comprehensive income
for the six months ended 30 June 2020
(in '000s of Russian rubles, unless otherwise stated)
Six months ended 30 June Six months ended 30 June
2020 2019
Note (unaudited) (unaudited)
----- ------------------------- -------------------------
Revenue from contracts with customers 3 552,334 624,418
Cost of sales 4 (380,621) (533,865)
------------------------- -------------------------
Gross profit 171,713 90,553
Administrative and selling expenses (106,038) (133,160)
Other income 30,768 9,398
Other expenses (9,245) (71,236)
Operating profit/(loss) 87,198 (104,445)
Finance income 471 7,723
Finance costs (68,964) (75,892)
------------------------- -------------------------
Profit /(loss) before tax 18,705 (172,614)
Income tax expense / benefit 5 (48,136) 12,086
------------------------- -------------------------
Total comprehensive loss for the period (29,431) (160,528)
========================= =========================
RUB RUB
------------------------- -------------------------
Loss per share attributable to owners
of the parent
Basic 9 (0.21) (1.13)
Diluted 9 (0.21) (1.13)
The accompanying notes are an integral part of these
consolidated financial statements.
Tigran Tagvoryan
Chief Executive Officer
29 October 2020
Interim condensed consolidated statement of financial position
as at 30 June 2020
(in '000s of Russian rubles, unless otherwise stated)
As at 30 June As at 31 December
Note 2020 (unaudited) 2019
----- ------------------ ------------------
Assets
Non-current assets
Exploration and evaluation assets 6 3,610,922 3,510,216
Property, plant and equipment 7 1,377,185 1,110,275
Right-of-use assets 13,879 15,043
------------------ ------------------
Total non-current assets 5,001,986 4,635,534
------------------ ------------------
Current assets
Inventories 24,741 24,556
Trade and other receivables 92,780 159,811
Other current non-financial assets 28,880 43,550
Cash and cash equivalents 13.3 31,191 3,629
------------------ ------------------
Total current assets 177,592 231,546
------------------ ------------------
Total assets 5,179,578 4,867,080
================== ==================
Equity and liabilities
Share capital 8 970,218 970,218
Share premium 5,498,009 5,498,009
Other reserves 1,343,566 1,343,566
Accumulated losses (5,361,292) (5,331,861)
------------------ ------------------
Total equity 2,450,500 5,361,540
------------------ ------------------
Non-current liabilities
Decommission provision 12 640,076 591,558
Other payables - 73,841
Lease liabilities 19,796 21,634
Deferred tax liabilities 106,884 63,297
------------------ ------------------
Total non-current liabilities 766,756 750,330
------------------ ------------------
Current liabilities
Trade and other payables 417,925 262,849
Contract liabilities 2,535 4,431
Other taxes payables 116,169 79,467
Borrowings 11 1,387,154 1,256,457
Lease liabilities 4,469 4,081
Income tax payable 34,069 29,533
------------------ ------------------
Total current liabilities 1,962,321 1,636,818
------------------ ------------------
Total liabilities 2,729,077 2,387,148
------------------ ------------------
Total equity and liabilities 5,179,577 4,867,080
================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
Interim condensed consolidated statement of cash flows for the
six months ended 30 June 2020
(in '000s of Russian rubles, unless otherwise stated)
Six months ended 30 June Six months ended 30 June
2020 2019
Note (unaudited) (unaudited)
----- ------------------------- -------------------------
Cash flows from operating activities
Profit/(loss) before tax 18,705 (172,614)
Adjustments for:
Depreciation and depletion 7 76,101 217,335
Finance costs 68,964 75,892
Finance income (471) (7,723)
Loss on disposal of property, plant and equipment, net
of income from sale of property, plant
and equipment 811 28,287
Expected credit loss 886 616
Change in the estimates of decommissioning and
environmental restoration provision 5,243 38,639
Other income and expenses (22,140) 460
------------------------- -------------------------
Operating cash inflows before working capital changes 148,099 180,892
Change in inventories 2,352 2,918
Change in trade and other receivables and other current
non-financial assets (112,266) 71,867
Change in trade and other payables and contract
liabilities 37,075 11,626
Change in other taxes payable 36,702 (37,648)
------------------------- -------------------------
Net cash flows from operating activities before income
tax and interests 111,962 229,655
Interest received 193,552 8,768
Interest paid 11 (48,013) (52,294)
Income tax paid (13) (607)
------------------------- -------------------------
Net cash flows from operating activities 257,488 185,522
------------------------- -------------------------
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 80 193
Capital expenditure on exploration and evaluation
activities (53,749) (114,095)
Purchase of property, plant and equipment (324,801) (62,493)
------------------------- -------------------------
Net cash used in investing activities (378,470) (176,395)
------------------------- -------------------------
Cash flows from financing activities
Payment of principal portion of lease liabilities (2,112) (1,399)
Proceeds from borrowings 11 327,839 1,320,000
Repayment of borrowings 11 (196,000) (1,257,548)
------------------------- -------------------------
Net cash flows used in financing activities (129,727) 61,053
------------------------- -------------------------
Net change in cash and cash equivalents 8,745 70,180
Net foreign exchange difference 18,817 (603)
Cash and cash equivalents at the beginning of the year 3,629 260,636
------------------------- -------------------------
Cash and cash equivalents at the end of the year 31,191 330,213
========================= =========================
The accompanying notes are an integral part of these
consolidated financial statements.
Interim condensed consolidated statement of changes in equity
for the six months ended 30 June 2020
(in '000s of Russian rubles, unless otherwise stated)
Share Share Other Accumulated Total
Note capital premium reserve losses equity
------ --------- ---------- ---------- ------------ ----------
At 1 January 2019 970,218 5,498,009 1,343,566 (2,562,988) 5,271,411
--------- ---------- ---------- ------------ ----------
Loss for the period - - - (160,528) (160,528)
--------- ---------- ---------- ------------ ----------
Total comprehensive
loss - - - (160,528) (160,528)
--------- ---------- ---------- ------------ ----------
At 30 June 2019
(unaudited) 970,218 5,498,009 1,343,566 (2,610,781) 5,201,012
========= ========== ========== ============ ==========
At 1 January 2020 970,218 5,498,009 1,343,566 (5,331,861) 2,479,932
--------- ---------- ---------- ------------ ----------
Loss for the period - - - (29,431) (29,431)
--------- ---------- ---------- ------------ ----------
Total comprehensive
loss - - - (29,431) (29,431)
--------- ---------- ---------- ------------ ----------
At 30 June 20
20 (unaudited) 970,218 5,498,009 1,343,566 (5,361,292) 2,450,501
========= ========== ========== ============ ==========
The accompanying notes are an integral part of these
consolidated financial statements.
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 Company in a
subsidiary as of 31 December
2019
Name Place of incorporation Function and 2018
---------------------------------- ------------------------ -------------------- ----------------------------------
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 primarily 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 sanctions
imposed on Russia by a number of countries. This 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.
The effect of COVID-19 is described in Note 16.
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
2019, 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 2020
are not necessarily indicative of the results that may be expected
for the year ending 31 December 2020.
2.2 Going concern
As of 30 June 2020 the Group's current liabilities exceed its
current assets by 1,784,729 (31 December 2019: 1,405,272). The net
working capital deficit was mainly caused by the fact that the
Group breached a covenant, stipulated in the loan agreement (see
Note 11). In accordance with a loan agreement terms, in case of a
covenant breach the bank can demand for a settlement of a full
amount due ahead of schedule, stated in the loan agreement. This
circumstance constitutes a significant liquidity risk for the Group
which causes a material uncertainty and casts significant doubt on
the Group's ability to continue as a going concern, and therefore
the Group may be unable to realise its assets and discharge its
liabilities in the normal course of business.
In assessing whether the going concern basis for preparing the
financial statements is still appropriate given the above
circumstances, the management has considered the following
factors:
-- As of the date of these interim condensed consolidated
financial statements issue the bank has not demanded settlement of
a full amount due ahead of schedule. The Group expects that no
ahead of schedule settlement will take place and all loan
repayments will be made in accordance with the loan agreement
schedule. The management of the Group is in constant contact with
the bank, providing it with all necessary explanations and
supporting documentation;
-- During 2020 the Group received a loan amounting to USD 9
million. The loan is due on 31 December 2020, the Group plans to
extend the term at least up to 31 December 2021. The Group
considers the possibility of amendment is high;
-- The Group generated net cash inflow from operating activities
for the six-month period ended 30 June 2020 and budgeted net cash
inflow from operating activities for 2020.
Considering the above factors and plans of the Group, management
believes that a going concern basis for preparing these
consolidated financial statements is appropriate.
2.3 Disclosure of impact of new and future accounting
standards
Adoption of new and amended standards
The accounting policies adopted in the preparation of the
interim condensed consolidated financial
statements are consistent with those followed in the preparation
of the Group's annual consolidated
financial statements for the year ended 31 December 2019, except
for the adoption of new standards effective as of 1 January 2020.
The Group has not early adopted any standard, interpretation or
amendment that has been issued but is not yet effective.
Several amendments and interpretations apply for the first time
in 2020, but do not have an impact on the interim condensed
consolidated financial statements of the Group.
New accounting pronouncements
The new and amended standards and interpretations that are
issued, but not yet effective, up to the date of issuance of the
Group's financial statements are disclosed below. The Group intends
to adopt these new and amended standards and interpretations, if
applicable, when they become effective.
Effective
for annual
periods beginning
Standards issued but not yet effective in the European on
Union or after
1 January
Definition of a Business - Amendments to IFRS 3 2020
Interest Rate Benchmark Reform - Amendments to 1 January
IFRS 9, IAS 39 and IFRS 7 2020
Definition of Material - Amendments to IAS 1 and 1 January
IAS 8 2020
1 January
The Conceptual Framework for Financial Reporting 2020
1 January
IFRS 17 Insurance Contracts 2021
IFRS 17 Insurance Contracts
In May 2017, the IASB issued IFRS 17 Insurance Contracts (IFRS
17), a comprehensive new accounting standard for insurance
contracts covering recognition and measurement, presentation and
disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance
Contracts (IFRS 4) that was issued in 2005. IFRS 17 applies to all
types of insurance contracts (i.e., life, non-life, direct
insurance and re-insurance), regardless of the type of entities
that issue them, as well as to certain guarantees and financial
instruments with discretionary participation features. A few scope
exceptions will apply. The overall objective of IFRS 17 is to
provide an accounting model for insurance contracts that is more
useful and consistent for insurers. In contrast to the requirements
in IFRS 4, which are largely based on grandfathering previous local
accounting policies, IFRS 17 provides a comprehensive model for
insurance contracts, covering all relevant accounting aspects. The
core of IFRS 17 is the general model, supplemented by:
-- A specific adaptation for contracts with direct participation
features (the variable fee approach)
-- A simplified approach (the premium allocation approach) mainly for short-duration contracts
IFRS 17 is effective for reporting periods beginning on or after
1 January 2021, with comparative figures required. Early
application is permitted, provided the entity also applies IFRS 9
and IFRS 15 on or before the date it first applies IFRS 17. This
standard is not applicable to the Group.
Amendments to IFRS 3: Definition of a Business
In October 2018, the IASB issued amendments to the definition of
a business in IFRS 3 Business Combinations to help entities
determine whether an acquired set of activities and assets is a
business or not. They clarify the minimum requirements for a
business, remove the assessment of whether market participants are
capable of replacing any missing elements, add guidance to help
entities assess whether an acquired process is substantive, narrow
the definitions of a business and of outputs, and introduce an
optional fair value concentration test. New illustrative examples
were provided along with the amendments.
Since the amendments apply prospectively to transactions or
other events that occur on or after the date of first application,
the Group will not be affected by these amendments on the date of
transition.
Amendments to IAS 1 and IAS 8: Definition of Material
In October 2018, the IASB issued amendments to IAS 1
Presentation of Financial Statements and
IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors to align the definition of 'material' across the standards
and to clarify certain aspects of the definition. The new
definition states that, 'Information is material if omitting,
misstating or obscuring it could reasonably be expected to
influence decisions that the primary users of general purpose
financial statements make on the basis of those financial
statements, which provide financial information about a specific
reporting entity.
The amendments to the definition of material is not expected to
have a significant impact on the Group's consolidated financial
statements.
2.4 Segment reporting
Segment reporting follows the Group's internal reporting
structure.
Operating segments are defined as components of the Group where
separate financial information is available and reported regularly
to the chief operating decision maker ("CODM"), which is determined
to be the Board of Directors of the Company. The Board of Directors
decides how to allocate resources and assesses operational and
financial performance using the information provided.
The CODM receives monthly IFRS-based financial information for
the Group and its development and operating entities. The Group has
other entities that engage as either head office or in a corporate
capacity, or as holding companies. Management has concluded that,
due to the application of aggregation criteria, separate financial
information for segments is not required. No geographic segmental
information is presented, as all of the companies' operating
activities are based 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.
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.
The presentation currency is RUB, which the Board considers more
representative for users of these consolidated financial statements
to better assess the performance of the Group.
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.
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.
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
2020 2019
-------- ------------
RUB/USD as at reporting date 69.9513 69.4706
2020 2019
-------- ------------
RUB/USD average for the six months
ended 30 June 69.3714 65.3384
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 2020 31 December 2019
---------------------------------- -----------------------
Fair value Carrying Carrying
(unaudited) value (unaudited) Fair value value
------------- ------------------- ----------- ----------
Financial assets
Trade and other receivables 92,780 92,780 159,811 159,811
------------- ------------------- ----------- ----------
Total assets 92,780 92,780 159,811 159,811
============= =================== =========== ==========
Financial liabilities
Borrowings 1,326,008 1,387,154 1,243,576 1,256,457
Trade and other payables 417,925 417,925 262,849 262,849
Other non-current
payables - - 73,745 73,841
------------- ------------------- ----------- ----------
Total liabilities 1,743,933 1,805,079 1,580,170 1,593,147
============= =================== =========== ==========
The fair value of borrowings and other non-current payables is
based on cash flows discounted using a market rate of 7.34% (2019:
8.33%). The fair values of borrowings and other non-current
payables are within level 2 of the fair value hierarchy. The fair
value of trade and other receivables is within level 3
hierarchy.
3. Revenue from contracts with customers
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 from contracts with customers comprises sale of the
following products:
Six months ended 30 June
----------------------------
2020 2019
(unaudited) (unaudited)
------------- -------------
Gas sales 488,914 515,679
Condensate sales 39,458 49,502
Oil sales 22,626 55,354
Sulphur sales 1,336 3,883
------------- -------------
Total revenue from contracts with customers 552,334 624,418
============= =============
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. Cost of sales
Six months ended 30 June
----------------------------
2020 2019
(unaudited) (unaudited)
------------- -------------
Mineral extraction tax 124,035 133,464
Depreciation and depletion 71,181 211,208
Wages and salaries 54,919 48,577
Materials and supplies 35,519 46,161
Other taxes and charges 28,640 28,338
Repair and maintenance 27,838 27,821
Compensation benefits to operating personnel 13,042 14,021
Other 25,447 24,275
------------- -------------
Total cost of sales 380,621 533,865
============= =============
5. Income tax (expense)/benefit
The tax charge for the year comprises:
Six months ended 30 June
----------------------------
2020 2019
(unaudited) (unaudited)
------------- -------------
Deferred tax (expense)/benefit (43,587) 18,087
Current tax expense (13) (607)
Tax risk provisions (4,536) (5,394)
------------- -------------
Total income tax (expense)/benefit (48,136) 12,086
============= =============
Reconciliation between theoretical and actual taxation charge is
provided below.
Six months ended 30 June
------------------------------------
2020 (unaudited) 2019 (unaudited)
----------------- -----------------
Profit/(loss) income tax 18,705 (172,614)
----------------- -----------------
Theoretical tax (charge)/benefit at
applicable income tax rate of 20% (H1
2019: 20%) (3,741) 34,523
Effect of different foreign tax rates (3,069) (2,144)
Effect of unrecognised deferred tax
assets (34,069) (9,888)
Tax effect of expenses not deductible
for tax purposes (2,721) (5,011)
Tax risk provisions (4,536) (5,394)
----------------- -----------------
Total income tax (expense)/benefit (48,136) 12,086
================= =================
The Group's income was subject to tax at the following tax
rates:
Six months Six months
ended 30 ended 30
June 2020 June 2019
----------- -----------
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.
6. Exploration and evaluation assets
Exploration and evaluation works
Sub-soil capitalised, including
licences seismic works Total
---------- --------------------------------------------- ----------
Balance at 1 January 2019 1,037,510 2,440,003 3,477,513
Additions - 151,679 151,679
Transfer from property, plant and equipment - 6,604 6,604
Change in the estimates of decommissioning
provision - 2,450 2,450
Amortization (109)) (829) (938)
---------- --------------------------------------------- ----------
Balance at 30 June 2019 (unaudited) 1,037,401 2,599,907 3,637,308
Balance at 1 January 2020 1,035,967 2,474,249 3,510,216
Additions - 97,427 97,427
Transfer from property, plant and equipment - 2,482 2,482
Change in the estimates of decommissioning
provision - 1,342 1,342
Amortization (109) (436) (545)
---------- --------------------------------------------- ----------
Balance at 30 June 2020 1,035,858 2,575,064 3,610,922
========== ============================================= ==========
In management's opinion, as at 30 June 2020 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.
The impairment is described in Note 7.
7. Property, plant and equipment
Construction
Oil and Motor Other equipment work in
gas assets vehicles and furniture progress Total
------------ ---------- ---------------- ------------- ------------
Cost at 1 January
2019 5,303,261 16,886 9,821 61,221 5,391,189
Additions 4,001 3,104 417 102,844 110,366
Reclassification 8,690 - - (8,690) -
Transfer to exploration
and evaluation assets - - - (6,604) (6,604)
Transfer to current
assets - - - (1,226) (1,226)
Change in the estimates
of decommissioning
provision 53,846 - - - 53,846
Disposals (55,089) (144) - - (55,233)
------------ ---------- ---------------- ------------- ------------
Cost at 30 June
2019 (unaudited) 5,314,709 19,846 10,238 147,545 5,492,338
Cost at 1 January
2019 5,456,559 17,662 11,346 307,460 5,793,027
Additions 23,278 27 383 311,099 334,787
Reclassification 133,130 - - 133,130 -
Transfer to exploration
and evaluation assets - - - (2,482) (2,482)
Transfer to current
assets - - - (2,682) (2,682)
Change in the estimates
of decommissioning
provision 11,970 - - - 11,970
Disposals (8,636) - - - (8,636)
------------ ---------- ---------------- ------------- ------------
Cost at 30 June
2020 (unaudited) 5,616,301 17,689 11,729 480,265 6,125,984
------------ ---------- ---------------- ------------- ------------
Accumulated depreciation,
depletion and impairment
Balance at 1 January
2019 (1,704,913) (14,032) (5,408) - (1,724,353)
Depreciation and
depletion (212,237) (1,845) (402) - (214,484)
Disposals 26,609 144 - - 26,753
------------ ---------- ---------------- ------------- ------------
Balance at 30 June
2019 (unaudited) (1,890,541) (15,733) (5,810) - (1,912,084)
Balance at 1 January
2020 (4,497,073) (16,668) (8,680) (160,331) (4,682,752)
Depreciation and
depletion (72,703) (753) (336) - (73,792)
Disposals 7,745 - - - 7,745
------------ ---------- ---------------- ------------- ------------
Balance at 30 June
2020 (unaudited
) (4,562,031) (17,421) (9,016) (160,331) (4,748,799)
------------ ---------- ---------------- ------------- ------------
Net book value at
1 January 2019 3,598,348 2,854 4,413 61,221 3,666,836
============ ========== ================ ============= ============
Net book value at
30 June 2019 (unaudited) 3,424,168 4,113 4,428 147,545 3,580,254
============ ========== ================ ============= ============
Net book value at
1 January 2020 959,486 994 2,666 147,129 1,110,275
============ ========== ================ ============= ============
Net book value at
30 June 2020 (unaudited) 1,054,270 268 2,713 319,934 1,377,185
============ ========== ================ ============= ============
Impairment
In 2019 the Group determined its development strategy of
Bortovoy licen e field. The main focus of this strategy became the
exploration of the Eastern part of Bortovoy licen e field, while no
further development of the Western part of Bortovoy licen e field
is planned. This and a drop in gas volumes extraction in 2019
became a trigger to analyse the Western part of Bortovoy gas field
for impairment. As a result of this analysis the impairment of the
Western part of Bortovoy gas field cash-generating unit (CGU) was
recognised. The impairment was allocated between Exploration and
evaluation assets, Property, plant and equipment and Right-of-use
assets of the CGU.
In assessing the impairment amount, the carrying value of the
CGU is compared with its recoverable amount. The recoverable amount
used in assessing the impairment charges described below is fair
value less costs of disposal (FVLCD). The Company generally
estimates FVLCD using the income approach, specifically the
discounted cash flow ("DCF") method. Discounted cash flows of the
Western part of Bortovoy licen e field were built based on the
long-term business plan the Group. The period: 2020-2027.
As of 31 December 2019 the recoverable amount of the Western
part of Bortovoy licence field comprised 722,096. The future cash
flows were discounted to their present values using a discount rate
of 15.23% (pre-tax), that reflects current market assessments of
the time value of money and the risks specific to the asset.
Increasing the discount rate by 1% would result in an additional
impairment charge of 18,486.
The following key assumptions were used to determine the
recoverable amount of the Western part of Bortovoy licence
field:
-- Volumes of gas extractions for the period 2020-2027: 1,588 mln of m(3) ;
-- Inflation in the Russian Federation for the period 2021-2027: within 3.7-3.6%;
-- Capital expenditure for the period 2020-2027 in nominal prices: 1,219,366.
8. Share capital
Number of
At 30 June 2020, 31 December ordinary Nominal value, Nominal
2019 shares, pieces USD'000 value, 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
9. 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. As of 31
December 2018 share options have an antidilutive effect on the loss
per share. As of 31 December 2018 all share options have expired
and do not have any effect on the loss per share as of 30 June
2020.
Six months ended 30 June
----------------------------
2020 2019
(unaudited) (unaudited)
------------- -------------
Loss attributable to owners of the Company
- basic and diluted (29,431) (160,528)
Number of Number of
shares shares
------------ ------------
Weighted average number of shares for
calculating basic earnings per share 141,955,386 141,955,386
Weighted average number of shares for
calculating diluted earnings per share 141,955,386 141,955,386
RUB RUB
------- -------
Basic loss per share (0.21) (1.13)
Diluted loss per share (0.21) (1.13)
10. Share-based payments
All share options expired as of 31 December 2018.
11. Borrowings
2020 2019
------ ------------
Non-revolving credit facility with Sberbank PJSC -
liability, as at 1 January - 1,262,898
Including current liability - 570,400
Interest accrued - 40,352
Interest paid - (45,702)
Repayment - (1,257,548)
Non-revolving credit facility with Sberbank PJSC -
as at 30 June (unaudited) - -
====== ============
Including current liability - -
In 2014, the Group entered into a non-revolving credit facility
agreement with Sberbank of Russia PJSC with a maximum facility
amount of 2,400,000. The contractual currency is RUB. The facility
was drawn down in full in 2014. The maturity date is 30 April 2021.
During 2019 the Group repaid the loan ahead of schedule.
On 13 May 2019 the Group signed a credit line agreement with
Promsvyasbank PJSC. The credit line limit is 1,320,000. The purpose
of the credit line was the refinancing of the loan from Sberbank
PJSC and financing of current activities. The interest rate equals
Russian Key rate plus 1.7%. Payment terms depend on the amount of
the credit line used, and the final payment is no later than 29
April 2024. Under the agreement the Group has pledged its property,
plant and equipment items amounting to 600,398 to secure the loan.
The agreement contains certain loan covenants. The Group was not in
compliance with a few covenants as 30 June 2020 and reclassified
the long-term portion of the loan amounted 816,000 to
short-term.
2020 2019
---------- ----------
Credit facility with Promsvyazbank PJSC -
liability, as at 1 January 1,256,457 -
Including current liability 1,256,457 -
Interest accrued 43,924 70,824
Interest paid (46,108) (62,367)
Proceeds - 1,320,000
Repayment (144,000) (72,000)
---------- ----------
Credit facility Promsvyazbank PJSC -
liability, as at 30 June (unaudited) 1,110,273 1,256,457
========== ==========
Including current liability 1,110,273 1,256,457
On 14 July 2020, the Company announced that it has entered into
a loan agreement with ARA Capital Holdings Limited under which ARA
Capital Holdings Limited has provided a revolving loan facility for
up to US $9,000,000 (the "Loan"). ARA Capital Holdings Limited is
the parent company of ARA Capital Limited - both entities combined
own 44.1 percent of the issued share capital of the Company.
The Loan has been made available for drawdown in two instalments
of:
(1) US$ 2,000,000, which is provided unconditionally and has
been drawn down by the Company; and
(2) US $7,000,000, which is secured against the shares of Royal
Atlantic Energy (Cyprus) Limited (of which Diall Alliance, which
holds and operates the Bortovoy Licence, is a wholly owned
subsidiary) and has been drawn down by the Company.
The Loan is currently due for repayment by 31 December 2020
unless otherwise extended or converted into equity by mutual
agreement, and, in the case of conversion, subject to shareholder
approval. The Loan is interest-free save for in the event of a
failure to repay on time, in which circumstances the Loan will
accrue interest at a rate of 15 percent per annum.
Proceeds from the Loan are being used for general working
capital purposes and in support of operational activities,
including the development drilling programme ongoing at West
Bortovoy and the East Bortovoy project. In the event the Company
takes a positive final investment decision on the East Bortovoy
project in due course, it is currently envisaged that the Loan
would be restructured in order to facilitate any required equity
contribution or a part thereof. The Loan may be drawn down in a
single or several tranches.
The amount of the draw down facility as of 30 June 2020 was RUB
230,839,290 (US$ 3,3 million)
2020 2019
-------- -----
Credit facility with ARA Capital Holdings Limited -
liability, as at 1 January - -
Including current liability - -
Interest accrued - -
Interest paid - -
Proceeds 230,839 -
Repayment - -
-------- -----
Credit facility ARA Capital Holdings Limited -
liability, as at 30 June (unaudited) 230,839 -
======== =====
Including current liability 230,839 -
Also during 2020, the Group received loans from third parties in
rubles in the total amount of 97,000. The terms of the agreements
provide for repayment of loans at the end of the term. The final
maturity date for these loans is 1 March 2021.
2020 2019
--------- -----
Credit facility with third parties -
liability, as at 1 January - -
Including current liability - -
Interest accrued 1,752 -
Interest paid (710) -
Proceeds 97,000 -
Repayment (52,000) -
--------- -----
Credit facility third parties -
liability, as at 30 June (unaudited) 46,042 -
========= =====
Including current liability 46,042 -
12. Decommission 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.
2019 2019
-------- --------
Provision as at 1 January 591,558 390,428
Additions 10,982 -
Unwinding of discount 18,981 16,567
Change in estimate of decommissioning and environmental restoration provision 18,555 94,935
Provision as at 30 June (unaudited) 640,076 501,930
======== ========
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 2020 was
4.20% in 2020, decreasing to 4.00% in 2036 (as of 31 December 2019:
4.20% in 2020, decreasing to 4.10% 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
2020, the discount rate varies from 5.92% to 6.44% (as of 31
December 2019: from 6.34% to 6.52%) depending on expected period of
abandonment and site restoration for each gas and oil fields.
13. 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 these 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.
13.1 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 its current assets by
1,784,729 as at 30 June 2020. The implications are described in
Note 2.2.
The table below summarises the maturity profile of the Group's
financial liabilities based on contractual undiscounted
payments:
Total Less than 1 year 1-3 years Over 3 years
---------- ----------------- ---------- -------------
Financial liabilities as at 30 June 2020
Borrowings 1,439,709 1,439,709 - -
Trade and other payables 417,925 417,925 - -
Lease liabilities 32,030 6,577 12,512 12,941
---------- ----------------- ---------- -------------
Total 1,889,664 1,864,211 12,512 12,941
========== ================= ========== =============
Total Less than 1 year 1-3 years Over 3 years
---------- ----------------- ---------- -------------
Financial liabilities as at 31 December 2019
Borrowings 1,333,854 1,333,854 - -
Trade and other payables 344,538 262,849 81,689 -
Lease liabilities 34,680 6,382 12,603 15,695
---------- ----------------- ---------- -------------
Total 1,570,195 751,385 818,810 -
========== ================= ========== =============
13.2 Market risk
Market risk includes interest risk and foreign currency exchange
rate risk.
a) Interest risk
As of 30 June 2020 the Group is exposed to interest rate risk
because it has a loan with a variable interest rate denominated in
RUB in the amount of 1,110,273 interest rate on which is key rate
of the Central Bank of Russia + 1.5%.
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 are denominated in
RUB. As a result there is no exposure at the operating
subsidiaries' level to foreign currency exchange risk
movements.
13.3 Credit risk
Credit risk is the risk that a counterparty will not meet its
obligations under a financial instrument or customer contract,
leading to a financial loss. The Group is exposed to credit risk
from its operating activities (primarily trade receivables) and
from its financing activities, including deposits with banks and
financial institutions, foreign exchange transactions and other
financial instruments.
Customer credit risk is managed by each business unit subject to
the Group's established policy, procedures and control relating to
customer credit risk management. Credit quality of a customer is
assessed based on a credit rating scorecard and individual credit
limits are defined in accordance with this assessment. Outstanding
customer receivables are regularly monitored.
The Group is largely dependent on one customer (Gazprom
Mezhregiongaz Saratov LLC) for a significant portion of earned
revenues. Gazprom Mezhregiongaz Saratov LLC accounted for 88.5% and
81.6% of the Group's total revenue during the first six months of
2020 and 2019 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 BBB-. 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 of the date of these
consolidated financial statements issue the Group is in a process
of prolongation the contract for another 7 years. As for the
smaller customers, the Group imposes minimum credit standards that
the customers must meet before and during the sales transaction
process.
An impairment analysis is performed at each reporting date using
a provision matrix to measure expected credit losses. The provision
rates are based on days past due for groupings of various customer
segments with similar loss patterns (i.e., by product type,
customer type and rating). The calculation reflects the
probability-weighted outcome, the time value of money and
reasonable and supportable information that is available at the
reporting date about past events, current conditions and forecasts
of future economic conditions. Generally, trade receivables are
written-off if past due for more than one year and are not subject
to enforcement activity. The Group does not hold collateral as
security.
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 with low credit risk. During the
first six months of 2020 cash was held mainly with Promsvyasbank
PJSC, Bank Dom.RF, Alfa Bank and Sberbank. Banks are regularly
evaluated by International and Russian agencies and are considered
reliable banks with low credit risk (ratings at the reporting date
are presented below).
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.
30 June 2019
(unaudited 31 December
) 2019
------------- ------------
Ba1.ru, Moody's 63 108
Ba2.ru, Moody's 85 89
Ba 3.ru, Moody's 17,197 1,869
Ba3.ru, Moody's 13,353 1,101
Other 493 462
------------- ------------
Total cash and cash equivalents 31,191 3,629
============= ============
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 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 2020 and 31 December 2019.
14. Commitments and contingencies
14.1 Capital commitments
Capital expenditure contracted for at the end of the reporting
period but not yet incurred at 30 June 2020 was 226,232, net of VAT
(31 December 2019: 292,279, net of VAT).
14.2 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.
14.3 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.
The Group's contractor has commenced an action against the Group
claiming the payment of 6,085 as a result of a breach of payment
terms under the agreement. The Group has assessed the risk of
repayment as possible. No provision for this claim has been
recognised in the financial statements.
14.4 Taxation
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 Group's
transactions and activities may be challenged by regional or
federal authorities.
The Group operates in a number of foreign jurisdictions besides
Russian Federation. The Group includes companies established
outside the Russian Federation that are subject to taxation at
rates and in accordance with the laws of jurisdictions in which the
companies of the Group are recognised as tax residents. Tax
liabilities of foreign companies of the Group are determined on the
basis that foreign companies of the Group are not tax residents of
the Russian Federation, nor do they have a permanent representative
office in the Russian Federation and are therefore not subject to
income tax under Russian law, except for income tax deductions at
the source.
In 2020, there was further implementation of mechanisms aimed at
avoiding tax evasion using low-tax jurisdictions and aggressive tax
planning structures. In particular, these changes included the
definition of the concept of beneficial ownership, the tax
residence of legal entities at the place of actual activities, as
well as the approach to taxation of controlled foreign companies in
the Russian Federation.
The Russian tax authorities continue to actively cooperate with
the tax authorities of foreign countries in the international
exchange of tax information, which makes the activities of
companies on an international scale more transparent and requires
detailed study in terms of confirming the economic purpose of the
organization of the international structure in the framework of tax
control procedures.
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.
In addition, tax authorities have the right to charge additional
tax liabilities and penalties on the basis of the rules established
by transfer pricing legislation, if the price/profitability in
controlled transactions differs from the market level. The list of
controlled transactions mainly includes transactions concluded
between related parties. Requirements for tax control of prices and
preparation of transfer pricing documentation apply to cross-border
transactions between related parties (without applying any
threshold), individual transactions in the field of foreign trade
in goods of world exchange trade and transactions with companies
located in low-tax jurisdictions, as well as transactions between
related parties in the domestic market in some cases.
Tax authorities may carry out a price/profitability check in
controlled transactions and, in case of disagreement with the
prices applied by the Group in these transactions, may additionally
charge additional tax liabilities if the Group is unable to justify
the market nature of pricing in these transactions by providing
transfer pricing documentation (national documentation) in
accordance with the requirements of the legislation.
Management believes that it has provided adequately for tax
liabilities based on its interpretations of applicable tax
legislation, official pronouncements and court decisions. However,
the interpretations of the relevant authorities could differ and
the impact on these consolidated financial statements if the
authorities were successful in enforcing their interpretations
could be significant.
14.5 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.
15. Related party transactions
During the period there were no operations with related parties,
except for key management remunerations. Key management comprises
members of the Board of Directors.
The remuneration of key management comprised of salary and
bonuses in the amount 4,574 (6 months 2019: 4,253).
16. Events after the reporting date
The coronavirus (COVID-19) pandemic in 2020 has caused financial
and economic tension in the world markets, and a decrease in
consumption expenditure and business activities. A drop in demand
in oil, natural gas and crude products together with a higher
supply of oil due to the cancellation of the OPEC+ oil production
agreement have caused a fall in hydrocarbon world prices. The stock
exchange, currency and commodity markets have shown significant
volatility since March 2020.
Many countries as well as the Russian Federation have imposed
quarantine measures. Social distancing and isolation measures have
resulted in discontinued operations in retail, transport, travel
and tourism, foodservice and many other areas.
The impact of the pandemic on economics in countries
individually and globally has had no historical analogies ever when
governments took measures to save the economies. Various forecasts
of changes in the macroeconomic indicators both in the short- and
long-term horizon, the extent of the impact of the pandemic on
businesses including the estimation of how long the crisis and
recovery from it will last, display different views.
The Group considers the influence of the events on the Group's
operations as limited taking into consideration the following
factors:
-- systemic nature and position of the industry where the Group operates (gas extraction);
-- the means and volume of use of the Group's production assets have not changed;
-- absence of currency risk (the majority of the Group's
revenues and expenditures as well as monetary assets and
liabilities are denominated in RUB);
-- absence of direct adverse effect on the main operational
activities of the Group from the regulatory changes aimed at
preventing the spread of COVID-19.
However, the uncertainty about the future operating environment
of the Group and of its counterparties remains. Another risk is a
possible long nature of the pandemic, the duration and effect of
which cannot be reliably estimated now.
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END
IR GRBDGGBDDGGC
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October 29, 2020 03:13 ET (07:13 GMT)
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