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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Enwell Energy Plc | AQSE:ENW.GB | Aquis Stock Exchange | Ordinary Share | GB0031775819 |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 20.00 | 19.00 | 21.00 | 20.329 | 20.00 | 20.329 | 12,238 | 15:29:07 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
0 | 0 | N/A | 0 |
TIDMRPT
RNS Number : 9298L
Enwell Energy PLC
16 September 2021
16 September 2021
ENWELL ENERGY PLC
2021 INTERIM RESULTS
Enwell Energy plc (the "Company", and with its subsidiaries, the "Group"), the AIM-quoted (ENW) oil and gas exploration and production group, announces its unaudited results for the six month period ended 30 June 2021.
Highlights
Operations
-- Aggregate average daily production from the MEX-GOL, SV and VAS fields of 4,917 boepd, which compares with 4,545 boepd during the first half of 2020, an increase of approximately 8%, with record levels of average daily production of 5,254 boepd achieved in Q2 2021 -- SV-25 appraisal well successfully completed and brought on production in February 2021 -- Drilling operations for SV-29 development well completed in late August 2021 and testing operations now underway -- Commencement of drilling of SC-4 appraisal well on the SC licence -- No significant disruption to the Group's operations arising from the COVID-19 pandemic to date
Finance
-- Revenue of $41.1 million (1H 2020: $24.7 million), up 66% as a result of higher production rates and much improved gas prices in the period -- Operating profit of $18.1 million (1H 2020: $5.2 million) -- Net profit for the first half of 2021 of $13.8 million (1H 2020: $1.2 million) -- Cash and cash equivalents of $62.9 million at 30 June 2021, and at 14 September 2021 of $54.4 million (31 December 2020: $61.0 million) -- Average realised gas, condensate and LPG prices in Ukraine were much higher, particularly gas prices, at $249/Mm(3) (UAH6,897/Mm(3) ), $74/bbl and $66/bbl respectively (1H 2020: $139/Mm(3) (UAH3,514/Mm(3) ) gas, $42/bbl condensate and $40/bbl LPG) -- Reduction of capital completed through the cancellation of the Company's entire share premium account which has created distributable reserves, thereby enabling the possibility of the Company making distributions to shareholders in the future
Outlook
-- Development work for the remainder of 2021 at the MEX-GOL and SV fields includes: testing of the SV-29 well, and subject thereto, hook-up to production facilities; commencement of drilling of the SV-31 development well; and undertaking an upgrade of the gas processing facilities -- Development work for the remainder of 2021 at the VAS field includes: planning for a new well to explore the VED prospect within the VAS licence area; and maintenance of the gas processing facilities, flow-line network and other field infrastructure -- Development work for the remainder of 2021 at the SC licence area includes: continuing drilling operations on the SC-4 well; acquisition of 150 km(2) of 3D seismic; and further planning for the development of the SC licence area -- Development programme for the remainder of 2021 expected to be funded from existing cash resources and operational cash flow
Sergii Glazunov, CEO, commented: "2021 has been an excellent operational year so far, with strong production from the MEX-GOL, SV and VAS fields, coupled with the significant recovery in gas prices, contributing to our much improved profitability in the period. We are looking forward to the results of the SV-29 development well and to further progressing our development programme over the remainder of the year. We are also pleased to have commenced the appraisal of the SC licence, with the spudding of the SC-4 well, our first well on this licence."
This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014, which forms part of United Kingdom domestic law by virtue of the European Union (Withdrawal) Act 2018.
For further information, please contact:
Enwell Energy plc Tel: 020 3427 3550 Chris Hopkinson, Chairman Sergii Glazunov, Chief Executive Officer Bruce Burrows, Finance Director Strand Hanson Limited Tel: 020 7409 3494 Rory Murphy / Matthew Chandler Arden Partners plc Tel: 020 7614 5900 Ruari McGirr / Elliot Mustoe (Corporate Finance) Simon Johnson (Corporate Broking) Citigate Dewe Rogerson Tel: 020 7638 9571 Elizabeth Kittle
Dmitry Sazonenko, MSc Geology, MSc Petroleum Engineering, Member of AAPG, SPE and EAGE, Director of the Company, has reviewed and approved the technical information contained within this press release in his capacity as a qualified person, as required under the AIM Rules.
Definitions/Glossary AAPG American Association of Petroleum Geologists Arkona LLC Arkona Gas-Energy bbl barrel bbl/d barrels per day boe barrels of oil equivalent boepd barrels of oil equivalent per day Company Enwell Energy plc Group Enwell Energy plc and its subsidiaries km kilometre km(2) square kilometre LPG liquefied petroleum gas MEX-GOL Mekhediviska-Golotvshinska m(3) cubic metre Mm(3) thousand cubic metres MMboe million barrels of oil equivalent MMscf million scf MMscf/d million scf per day % per cent QHSE quality, health, safety and environment SC Svystunivsko-Chervonolutskyi scf standard cubic feet measured at 20 degrees Celsius and one atmosphere SPE Society of Petroleum Engineers SPEE Society of Petroleum Evaluation Engineers SV Svyrydivske $ United States Dollar UAH Ukrainian Hryvnia VAS Vasyschevskoye VED Vvdenska WPC World Petroleum Council
Chairman's Statement
I am delighted to present the 2021 Interim Results. Having faced extraordinary times globally as a result of the COVID-19 pandemic, I am pleased to report that the Group has not been significantly affected on an operational level in the first half of 2021, and has achieved an excellent performance.
The Group has continued to make good progress with its development of the MEX-GOL, SV and VAS gas and condensate fields in north-eastern Ukraine, and has delivered a very strong financial performance during the period. Drilling of the SV-25 appraisal well was successfully completed and the well brought on production in February 2021, whilst the SV-29 development well, which was spudded in February 2021, is now being tested, and subject thereto, will be hooked-up to the gas processing facilities. On the SC licence area, the Group's first well, SC-4, was spudded in August 2021.
Aggregate average daily production from the MEX-GOL, SV and VAS fields during the first half of 2021 was 4,917 boepd, which compares favourably with an aggregate daily production rate of 4,545 boepd during the first half of 2020, an increase of approximately 8%. At the VAS field, production was steady, but lower than during the first half of 2020 after a decline in production from the VAS-10 well. Overall, average daily production in Q2 2021 hit a record quarterly level of 5,254 boepd.
The combination of higher production levels and the strong recovery in gas prices resulted in much improved profitability. During the first half of 2021, the Group's operating profit was $18.1 million (1H 2020: $5.2 million), showing a significant increase from the same period last year, and cash generated from operations during the period was also higher at $19.2 million (1H 2020: $11.0 million).
This improved level of cash generation has enabled the Group to progress its multiple work programmes across its broadened asset portfolio, with approximately $26 million invested during the 2021 year to date, with $15 million invested in 1H 2021.
The fiscal and economic environment in Ukraine remains stable (despite the effects of the COVID-19 pandemic resulting in a contraction in GDP and an increase in the rate of inflation) and, following a weakening during 2020, the Ukrainian Hryvnia exchange rate has improved in 2021 to approximately the rate of mid-2020. Nevertheless, future fiscal and economic uncertainties remain in the Ukrainian market and we continue to be vigilant.
The deregulation of the gas supply market, supported by electronic gas trading platforms and improved pricing transparency, has meant that the market gas prices in Ukraine now broadly correlate with the imported gas prices. During the first half of 2021, gas prices recovered significantly, reflecting a similar trend in European gas prices. Similarly, condensate and LPG prices were also higher by comparison with last year.
COVID-19
We continue to closely monitor the volatility in global financial markets, and the implications on the operational, economic and social environment caused by the COVID-19 pandemic. To date, there has been no significant operational disruption arising from the COVID-19 pandemic, and no material impact is currently envisaged on the Group's prospects. However, the Board and management remain acutely aware of the risks, and are taking action to mitigate them where possible, not only to protect our staff and other stakeholders, but also to minimise any potential disruption to our business. We have taken steps to continually monitor the health of our operational staff, including temperature checks for such staff at the commencement of each shift, as well as investing in technology to enable many staff to work from remote locations. We continue to reassess our medium-term forecasts based on current pricing and are highly confident we have the resources to deliver on our plans. Of course, we cannot be certain of the duration of the pandemic's impact but will remain focussed on monitoring and protecting our business through the period of uncertainty. In protecting our stakeholders interests, we are conscious of our wider obligations to the communities, and country, in which we operate. Accordingly, as previously announced, last year we acted, alongside other corporate entities in Ukraine, to directly acquire critical equipment and supplies from Chinese suppliers to donate to the Ukrainian State to assist its efforts to manage the pandemic in Ukraine.
Capital Reduction
On 25 February 2021, the Company completed a reduction of its share capital through the cancellation of its entire share premium account. This reduction of capital created distributable reserves of the Company, which enables the Company to make distributions to its shareholders in the future, subject to the Company's financial performance. However, the Company is not indicating any commitment, and does not have any current intention, to make any distributions to shareholders.
Outlook
Whilst there are still challenges, the business environment in Ukraine is relatively stable despite the COVID-19 outbreak. Following the strong operational performance during the first half of 2021, and the increased production output during the period, we are looking forward to the results of the SV-29 development well, which are expected in the near future. We are also looking forward to achieving further success in the development activities planned for the remainder of 2021 and, facilitated by the strong current gas price environment, delivering a steadily increasing production and revenue stream in the future.
In conclusion, on behalf of the Board, I would like to thank all of our staff for the continued dedication and support they have shown during the year to date and especially in the midst of the COVID-19 pandemic.
Chris Hopkinson
Chairman
15 September 2021
Chief Executive Officer's Statement
Introduction
The Group continued to make good progress at its Ukrainian fields during 2021, with development activity at the MEX-GOL and SV fields including success with the drilling of the SV-25 appraisal well, which came on production in February 2021, and completion of drilling operations on the SV-29 development well in late August 2021, which is now undergoing testing operations. In addition, work continued on preparations for the drilling of the SV-31 development well and the upgrade of the gas processing facilities, as well as work on upgrades to the flow-line network and remedial activity on existing wells.
Overall production continued its upward trend during the period, achieving record levels for the Group in Q2 2021, and being approximately 8% higher than in the first half of 2020, with a substantial boost in February 2021, once the SV-25 well came on production.
Production
The average daily production of gas, condensate and LPG from the MEX-GOL, SV and VAS fields for the six month period ended 30 June 2021 was as follows:
Field Gas Condensate LPG Aggregate (MMscf/d) (bbl/d) (bbl/d) boepd 1H 2021 1H 2020 1H 2021 1H 2020 1H 2021 1 2020 1H 2021 1H 2020 -------- -------- -------- -------- -------- ------- -------- -------- MEX-GOL & SV 19.7 17.4 694 654 331 292 4,403 3,941 -------- -------- -------- -------- -------- ------- -------- -------- VAS 2.8 3.1 28 34 - - 514 604 -------- -------- -------- -------- -------- ------- -------- -------- Total 22.5 20.5 722 688 331 292 4,917 4,545 -------- -------- -------- -------- -------- ------- -------- --------
Production rates were higher when compared with the corresponding period in 2020, predominantly due to the contributions of the SV-54 well, which commenced production in May 2020, and the SV-25 well, which commenced production in February 2021.
The Group's average daily production for the period from 1 July 2021 to 14 September 2021 from the MEX-GOL and SV field was 21.0 MMscf/d of gas, 749 bbl/d of condensate and 274 bbl/d of LPG (4,657 boepd in aggregate) and from the VAS field was 2.5 MMscf/d of gas and 23 bbl/d of condensate (480 boepd in aggregate).
Operations
Notwithstanding the impact of the COVID-19 pandemic during 2020 and 2021, over recent periods, there have been relatively stable fiscal and economic conditions in Ukraine, as well as reductions in the subsoil tax rates and improvements in the regulatory procedures in the oil and gas sector in Ukraine , and this has given the Board confidence to continue the Group's development programme at its Ukrainian fields during 2021. Furthermore, the strong recovery in gas prices in Europe has fed through to the Group's realised prices in Ukraine, providing a significant boost to the Group's revenues and profitability in the first half of 2021.
The Group has continued to refine its geological subsurface models of the MEX-GOL, SV and VAS fields, in order to enhance its strategy for the further development of the fields, including the timing and level of future capital investment required to exploit the hydrocarbon resources.
At the MEX-GOL and SV fields, the drilling of the SV-25 appraisal well was completed in February 2021, having been drilled to a final depth of 5,320 metres. One interval, at a drilled depth of 5,184 - 5,190 metres, within the V-22 Visean formation was perforated, and after successful testing, the well was hooked-up to the gas processing facilities.
The Group continues to operate each of the SV-2 and SV-12 wells under joint venture agreements with NJSC Ukrnafta, the majority State-owned oil and gas producer. Under the agreements, the gas and condensate produced from the respective wells is sold under an equal net profit sharing arrangement between the Group and NJSC Ukrnafta, with the Group accounting for the hydrocarbons produced and sold from the wells as revenue, and the net profit share due to NJSC Ukrnafta being treated as a lease expense in cost of sales. Both of these wells have proven to be strong producers since being brought back on production.
At the VAS field, a successful workover of the VAS-10 well was undertaken to access an alternative production horizon, which improved production rates from the VAS field.
In March 2019 (as set out in the announcement made on 12 March 2019), a regulatory issue arose when the State Service of Geology and Subsoil of Ukraine issued an order for suspension (the "Order") of the production licence for the VAS field. Under the applicable legislation, the Order would lead to a shut-down of production operations at the VAS field, but the Group has issued legal proceedings to challenge the Order, and has obtained a ruling suspending operation of the Order pending a hearing of the substantive issues. The Group does not believe that there are any grounds for the Order, and is continuing to pursue its challenge to the Order through the Ukrainian Courts.
Arkona Acquisition
As announced on 24 March 2020, the Group acquired the entire issued share capital of LLC Arkona Gas-Energy ("Arkona") for a total consideration of up to $8.63 million, of which $4.32 million was subject to the satisfaction of certain conditions. Following satisfaction of the requisite conditions and by agreement between the parties to the acquisition agreement, further payments totalling $2.6 million (net of an indemnity liability) have been paid, and the balance of the consideration is subject to the remaining conditions. Arkona holds a 100% interest in the Svystunivsko-Chervonolutskyi ("SC") exploration licence, which is located in the Poltava region in north-eastern Ukraine. The SC licence covers an area of 97 km(2) , and is approximately 15 km east of the SV field. The licence was granted in May 2017 with a duration of 20 years. The licence is prospective for gas and condensate, and has been the subject of exploration since the 1980s, with 5 wells having been drilled on the licence since then, although none of these wells are currently on production. As with the productive reservoirs in the SV field, the prospective reservoirs in the licence are Visean, at depths between 4,600 - 6,000 metres.
However, NJSC Ukrnafta, the majority State-owned oil and gas producer, issued legal proceedings against Arkona, in which NJSC Ukrnafta made claims of irregularities in the procedures involved in the grant of the SC licence to Arkona in May 2017. In early July 2020, the First Instance Court in Ukraine made a ruling in favour of NJSC Ukrnafta, which found that the grant of the SC licence was irregular, but this ruling was overturned by the Appellate Administrative Court in September 2020, and a final appeal to the Supreme Court of Ukraine was determined in favour of Arkona in February 2021. Further information can be found in the Company's announcements dated 3 July 2020, 31 July 2020, 30 September 2020, 23 November 2020 and 11 February 2021.
During early 2021, the Group engaged independent petroleum consultants, DeGolyer and MacNaughton, to prepare an assessment of the remaining reserves and contingent resources attributable to the SC licence as of 1 January 2021, in accordance with the March 2007 (as revised in June 2018) SPE/WPC/AAPG/SPEE Petroleum Resources Management System standard for classification and reporting. Their assessment estimated the proved and probable (2P) reserves attributable to the SC licence at 12.1 MMboe. The assessment is consistent with the Group's proposed field development plan for the SC licence, which includes the drilling of the SC-4 well and the acquisition of 150 km(2) of 3D seismic later this year, and the construction of a gas processing plant. Development is then planned to continue with the drilling of a further six wells to recover the reserves and resources in the SC licence. Due to their targeted depths, the wells are each likely to take up to 12 months to complete, and are planned to be drilled consecutively over the next eight years. Further information on DeGolyer and MacNaughton's assessment can be found in the Company's announcement dated 2 June 2021.
Outlook
During the remainder of 2021, the Group will continue to develop the MEX-GOL, SV and VAS fields, as well as moving forward with the appraisal and development of the SC licence . At the MEX-GOL and SV fields, the development programme includes completing the testing of the SV-29 development well and, subject thereto, hooking-up the well to the gas processing facilities, commencing the drilling of the SV-31 development well, investigating workover opportunities for other existing wells, and remedial and upgrade work on existing wells, the flow-line network and pipelines and other infrastructure.
In addition, preparations for upgrade works to the gas processing facilities at the MEX-GOL and SV fields are continuing, with permitting recently completed and the procurement of long-lead items progressing as planned. These works involve an upgrade of the LPG extraction circuit, an increase to the flow capacity of the facilities, and a significant increase to the liquids tank storage capacity, which are designed to improve overall plant efficiencies, improve the quality of liquids produced and boost recoveries of LPG, while reducing environmental emissions. The works are scheduled to commence later in the year, and, in total, will take approximately three and a half months to complete. In the later stages of the works, it will be necessary for the plant to be shut-in for approximately one month, during which period, production through the plant will be suspended. However, in order to mitigate the impact on production during this period, the Group has agreed with the operator of an adjacent field for the toll treatment of a material proportion of its forecast production volumes of gas and condensate. Although there will be a temporary impact on the Group's revenues during the period that the plant is shut-in, it is envisaged that the improved recovery of LPG following completion of the upgrade works will significantly boost future revenues, resulting in no overall material impact on revenues over the six month period during and immediately following the works, and a positive impact in future periods thereafter.
At the VAS field, planning for the proposed new well to explore the VED prospect within the VAS licence area is continuing, and maintenance of the gas processing facilities, pipeline network and other field infrastructure is planned.
With the resolution of the legal issues relating to the SC licence, the Group has re-commenced appraisal and development work on the SC licence, with the SC-4 appraisal well spudded in August 2021, and the acquisition of 150 km(2) of 3D seismic planned for later this year.
Ongoing legislative reforms and the general stability in the business climate in Ukraine, are encouraging and supportive of the independent oil and gas producers in Ukraine.
Finally, I would like to add my thanks to all of our staff for the continued hard work and dedication they have shown during this year, and to especially recognise their continuing efforts and professionalism during the current COVID-19 pandemic.
Sergii Glazunov
Chief Executive Officer
Finance Review
The Group's strong financial performance in the first half of 2021 was predominantly due to the Group's higher levels of production and the significant recovery in average gas realisations. This resulted in the Group making a net profit of $13.8 million (1H 2020: $1.2 million).
Revenue for the period, derived from the sale of the Group's Ukrainian gas, condensate and LPG production, was appreciably up 66% at $41.1 million (1H 2020: $24.7 million).
Gross profit for the period nearly tripled, at $21.6 million (1H 2020: $7.5 million), and the improvement in profit before tax was even more marked, increasing by a factor of almost seven, to $18.0 million (1H 2020: $2.6 million).
Average gas realisations in the period were up 79% at $249/Mm(3) (UAH6,897/Mm(3) ), with condensate and LPG sales also up by 76% and 65% at $74/bbl and $66/bbl respectively (1H 2020: $139/Mm(3) (UAH3,514/Mm(3) ), $42/bbl and $40/bbl respectively).
During the period from 1 July 2021 to 14 September 2021, the average realised gas, condensate and LPG prices were $431/Mm(3) (UAH11,602/Mm(3) ), $76/bbl and $79/bbl respectively.
Since the deregulation of the gas supply market in Ukraine in October 2015, the market price for gas has broadly correlated to the price of imported gas, which generally reflects trends in European gas prices. Gas prices are also subject to seasonal variation. During the first half of 2021, there was a sustained recovery in prices (a function of a more general recovery in European commodity prices, as well as the 2020-21 winter being one of the coldest winters in a decade in Ukraine), and gas prices are continuing to maintain their high levels.
Cost of sales for the period was up 13% at $19.5 million (1H 2020: $17.2 million). There were some significant movements within this total: depreciation of property, plant and equipment was 11% lower at $5.5 million (1H 2020: $6.2 million) as a combined result of lower forecast future capital expenditure and a greater volume sold in 1H 2021, compared with 1H 2020, with 1H 2020 sales volumes benefiting from 153,722 boe sold from inventory; production taxes increased materially, by 49%, as a result of increased gas revenues, in turn a function of the much higher gas prices as noted above; a 40% increase in rent expense, a function of higher well profitability; and staff costs declined by 26% as a function of the aforementioned reduction in sales volumes (distinct from the increased production volumes) resulting in the unit of production allocation of staff costs being lower than in 1H 2020, which saw a release of such costs that had been held in inventory at year-end 2019.
The subsoil tax rates applicable to gas production were stable during the period at 29% for gas produced from deposits at depths shallower than 5,000 metres and 14% for gas produced from deposits deeper than 5,000 metres, but reductions in the subsoil rates applicable to new wells and to condensate production were applicable, under which (i) for new wells drilled after 1 January 2018, the subsoil tax rates were reduced from 29% to 12% for gas produced from deposits at depths shallower than 5,000 metres and from 14% to 6% for gas produced from deposits deeper than 5,000 metres for the period between 2018 and 2022, and (ii) with effect from 1 January 2019 and applicable to all wells, the subsoil tax rates for condensate were reduced from 45% to 31% for condensate produced from deposits shallower than 5,000 metres and from 21% to 16% for condensate produced from deposits deeper than 5,000 metres.
Administrative expenses for the period were broadly unchanged at $4.0 million (1H 2020: $3.9 million).
The 69% fall in Other operating income (net) of $0.5 million is mainly due to the 70% drop in interest income to $0.3 million as a result of the general fall in global interest rates.
Other expenses (net) in the period reduced significantly by 98%, a net effect of: a small foreign exchange loss in the period of $0.03 million compared to a profit of $0.2 million in 2020; and most materially, the de-minimis charitable donations in the period compared to the $2.1 million in 1H 2020 ( for the supply of COVID-19-related medical equipment for the Ukrainian authorities and charitable foundations) .
The tax charge for the six month period ended 30 June 2021 of $4.2million (1H 2020: $1.4 million charge) comprises a current tax charge of $4.0 million (1H 2020: $1.4 million charge) and a deferred tax charge of $0.2 million (1H 2020: $0.01 million). The current tax charge increased by 200% due to the increase in profit.
A deferred tax asset relating to the Group's provision for decommissioning at 30 June 2021 of $0.2 million (31 December 2020: $0.2 million) was recognised on the tax effect of the temporary differences of the Group's provision for decommissioning at the MEX-GOL and SV fields, and its tax base. A deferred tax liability relating to the Group's development and production assets at the MEX-GOL and SV fields at 30 June 2021 of $3.3 million (31 December 2020: $2.9 million) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the MEX-GOL and SV fields, and its tax base.
A deferred tax asset relating to the Group's provision for decommissioning at 30 June 2021 of $0.3 million (31 December 2020: $0.3 million) was recognised on the tax effect of the temporary differences on the Group's provision on decommissioning at the VAS field, and its tax base. The deferred tax liability relating to the Group's development and production assets at the VAS field at 30 June 2021 of $0.1 million (31 December 2020: $0.2 million) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the VAS field, and its tax base.
There were $10.7 million of additions to Property, Plant and Equipment, reflecting investment in the Group's oil and gas development and production assets during the period (1H 2020: $8.8 million), primarily relating to the expenditure associated with the drilling of the SV-25 and SV-29 wells.
Cash and cash equivalents held at 30 June 2021 were $62.9 million (31 December 2020: $61.0 million cash and cash equivalents). The Group's cash and cash equivalents balance at 14 September 2021 was $54.4 million, held as to $16.3 million equivalent in Ukrainian Hryvnia, and the balance of $38.1 million equivalent predominantly in US Dollars, Euros and Pounds Sterling.
Between early 2014 and 2020, the Ukrainian Hryvnia devalued significantly against the US Dollar, falling from UAH8.3/$1.00 on 1 January 2014 to UAH28.3/$1.00 on 31 December 2020, which resulted in substantial foreign exchange translation losses for the Group over that period, and in turn adversely impacted the carrying value of the MEX-GOL and SV asset due to the translation of two of the Group's subsidiaries from their functional currency of Ukrainian Hryvnia to the Group's presentation currency of US Dollars. In the first half of 2021, the Ukrainian Hryvnia has strengthened against the US Dollar with the exchange rate at 30 June 2021 being UAH27.2/$1.00. The impact of this was $3.9 million of foreign exchange gains (1H 2020: $10.8 million of foreign exchange losses). Further movements of the Ukrainian Hryvnia against the US Dollar may affect the carrying value of the Group's assets in the future.
Cash from operations has funded the capital investment during the period, and the Group's current cash position and positive operating cash flow are the sources from which the Group plans to fund the development programmes for its assets over the remainder of 2021 and beyond. This is coupled with the fact that the Group remains debt-free, and therefore has no debt covenants that may otherwise impede its ability to implement contingency plans if domestic and/or global circumstances dictate. This flexibility and ability to monitor and manage development plans and liquidity is a cornerstone of our planning, and underpins our assessments of the future. With cash resources at the end of the period in excess of $62 million, and annual running costs of less than $8 million, the Group remains in a very strong position should any local or global shocks occur to the industry and/or the Group.
On 25 February 2021, the Company completed a reduction of its share capital through the cancellation of its entire share premium account. This reduction of capital created distributable reserves of the Company, which enables the Company to make distributions to its shareholders in the future, subject to the Company's financial performance. However, the Company is not indicating any commitment, and does not have any current intention, to make any distributions to shareholders.
Bruce Burrows
Finance Director
Principal Risks and Uncertainties
The Group has a risk evaluation methodology in place to assist in the review of the risks across all material aspects of its business. This methodology highlights external, operational and technical, financial and corporate risks and assesses the level of risk and potential consequences. It is periodically presented to the Audit Committee and the Board for review, to bring to their attention potential risks and, where possible, propose mitigating actions. Key risks recognised and mitigation factors, materially unchanged from the previous period, are detailed below:
Risk Mitigation External risks ----------------------------------------------- Risk relating to Ukraine ----------------------------------------------- Ukraine is an emerging market and The Group minimises this risk by as such, the Group is exposed to continuously monitoring the market greater regulatory, economic and in Ukraine and by maintaining a political risks than it would be strong working relationship with in other jurisdictions. Emerging the Ukrainian regulatory authorities. economies are generally subject The Group also maintains a significant to a volatile political and economic proportion of its cash holdings environment, which makes them vulnerable in international banks outside Ukraine. to market downturns elsewhere in the world, and could adversely impact the Group's ability to operate in the market. ----------------------------------------------- Regional conflict ----------------------------------------------- Ukraine continues to have a strained As the Group has no assets in Crimea relationship with Russia, following or the areas of conflict in the Ukraine's agreement to join a free east of Ukraine, nor do its operations trade area with the European Union, rely on sales or costs incurred which resulted in the implementation there, the Group has not been directly of mutual trade restrictions between affected by the conflict. However, Russia and Ukraine on many key products. the Group continues to monitor the Further, the conflict in parts of situation and endeavours to procure eastern Ukraine has not been resolved its equipment from sources in other to date, and Russia continues to markets. The disputes and interruption occupy Crimea. This conflict has to the supply of gas from Russia put further pressure on relations has indirectly encouraged Ukrainian between Ukraine and Russia, and Government support for the development the political tensions have had of the domestic production of hydrocarbons an adverse effect on the Ukrainian since Ukraine imports a significant financial markets, hampering the proportion of its gas, which has ability of Ukrainian companies and resulted in legislative measures banks to obtain funding from the to improve the regulatory requirements international capital and debt markets. for hydrocarbon extraction in Ukraine. This strained relationship between Russia and Ukraine has also resulted in disputes and interruptions in the supply of gas from Russia. ----------------------------------------------- Banking system in Ukraine ----------------------------------------------- The banking system in Ukraine has The creditworthiness and potential been under great strain in recent risks relating to the banks in Ukraine years due to the weak level of capital, are regularly reviewed by the Group, low asset quality caused by the but the geopolitical and economic economic situation, currency depreciation, events since 2013 in Ukraine have changing regulations and other economic significantly weakened the Ukrainian pressures generally, and so the banking sector. In light of this, risks associated with the banks the Group has taken and continues in Ukraine have been significant, to take steps to diversify its banking including in relation to the banks arrangements between a number of with which the Group has operated banks in Ukraine. These measures bank accounts. However, following are designed to spread the risks remedial action imposed by the National associated with each bank's creditworthiness, Bank of Ukraine, Ukraine's banking and the Group endeavours to use system has improved moderately. banks that have the best available Furthermore, Ukraine has continued creditworthiness. Nevertheless, to have support and access to funding and despite some recent improvements, from the International Monetary the Ukrainian banking sector remains Fund. weakly capitalised and so the risks associated with the banks in Ukraine remain significant, including in relation to the banks with which the Group operates bank accounts.
As a consequence, the Group also maintains a significant proportion of its cash holdings in international banks outside Ukraine. ----------------------------------------------- Geopolitical environment in Ukraine ----------------------------------------------- Although there have been some improvements The Group continually monitors the in recent years, there has not been market and business environment a final resolution of the political, in Ukraine and endeavours to recognise fiscal and economic situation in approaching risks and factors that Ukraine and its ongoing effects may affect its business. In addition, are difficult to predict and likely the involvement of Smart Holding to continue to affect the Ukrainian (Cyprus) Limited, as the indirect economy and potentially the Group's majority shareholder with extensive business. Whilst not materially experience in Ukraine, is considered affecting the Group's production helpful to mitigate such risks. operations, the instability has disrupted the Group's development and operational planning for its assets. ----------------------------------------------- Climate change ----------------------------------------------- Any near and medium-term continued The Group's plans and actions include: warming of the Planet can have potentially assessing, reducing and/or mitigating increasing negative social, economic its emissions in its operations; and environmental consequences, and identifying climate change-related generally globally and regionally, risks and assessing the degree to and specifically in relation to which they can affect its business, the Group. The potential impacts including financial implications. include: loss of market; and increased The Group's Health, Safety and Environment costs of operation through increasing Committee, which was established regulatory oversight and controls, in 2020, is specifically tasked including potential effective or with overseeing measuring, benchmarking actual loss of licence to operate. and mitigating the Group's environmental As a diligent operator aware and and climate impact, which will be responsive to its good stewardship reported on in future periods. At responsibilities, the Group not this stage, the Group does not consider only needs to monitor and modify climate change to have any material its business plans and operations implications on the Group's financial to react to changes, but also to statements, including the accounting ensure its environmental footprint estimates. is as minimal as it can practicably be in managing the hydrocarbon resources the Group produces. ----------------------------------------------- Operational and technical risks ----------------------------------------------- Quality, Health, Safety and Environment ("QHSE") ----------------------------------------------- The oil and gas industry, by its The Group maintains QHSE policies nature, conducts activities which and requires that management, staff can cause health, safety, environmental and contractors adhere to these and security incidents. Serious policies. The policies ensure that incidents can not only have a financial the Group meets Ukrainian legislative impact but can also damage the Group's standards in full and achieves international reputation and the opportunity to standards to the maximum extent undertake further projects. As evidenced possible. As a consequence of the by recent events, pandemics also COVID-19 pandemic, including the pose a risk to operations, by potential threat of any resurgences in the illness and threat to life of employees scale and impact of the virus, or and contractors, and the associated new viruses, the Group is re-visiting disruptions in staffing levels, processes and controls intended operations and supply chains. to ensure protection of all our stakeholders and minimise any disruption to our business. Whilst possible to only a limited extent in field operations, the Group has invested in technology that will allow many staff to work just as effectively from remote locations. ----------------------------------------------- Industry risks ----------------------------------------------- The Group is exposed to risks which The Group has well qualified and are generally associated with the experienced technical management oil and gas industry. For example, staff to plan and supervise operational the Group's ability to pursue and activities. In addition, the Group develop its projects and development engages with suitably qualified programmes depends on a number of local and international geological, uncertainties, including the availability geophysical and engineering experts of capital, seasonal conditions, and contractors to supplement and regulatory approvals, gas, oil, broaden the pool of expertise available condensate and LPG prices, development to the Group. Detailed planning costs and drilling success. As a of development activities is undertaken result of these uncertainties, it with the aim of managing the inherent is unknown whether potential drilling risks associated with oil and gas locations identified on proposed exploration and production, as well projects will ever be drilled or as ensuring that appropriate equipment whether these or any other potential and personnel are available for drilling locations will be able the operations, and that local contractors to produce gas, oil or condensate. are appropriately supervised. In addition, drilling activities are subject to many risks, including the risk that commercially productive reservoirs will not be discovered. Drilling for hydrocarbons can be unprofitable, not only due to dry holes, but also as a result of productive wells that do not produce sufficiently to be economic. In addition, drilling and production operations are highly technical and complex activities and may be curtailed, delayed or cancelled as a result of a variety of factors. ----------------------------------------------- Production of hydrocarbons ----------------------------------------------- Producing gas and condensate reservoirs In 2016, the Group engaged external are generally characterised by declining technical consultants to undertake production rates which vary depending a comprehensive review and re-evaluation upon reservoir characteristics and study of the MEX-GOL and SV fields other factors. Future production in order to gain an improved understanding of the Group's gas and condensate of the geological aspects of the reserves, and therefore the Group's fields and reservoir engineering, cash flow and income, are highly drilling and completion techniques, dependent on the Group's success and the results of this study and in operating existing producing further planned technical work is wells, drilling new production wells being used by the Group in the future and efficiently developing and exploiting development of these fields. The any reserves, and finding or acquiring Group has established an ongoing additional reserves. The Group may relationship with such external not be able to develop, find or technical consultants to ensure acquire reserves at acceptable costs. that technical management and planning The experience gained from drilling is of a high quality in respect undertaken to date highlights such of all development activities on risks as the Group targets the appraisal the Group's fields. and production of these hydrocarbons. ----------------------------------------------- Risks relating to further development and operation of the Group's gas and condensate fields in Ukraine ----------------------------------------------- The planned development and operation The Group's technical management of the Group's gas and condensate staff, in consultation with its
fields in Ukraine is susceptible external technical consultants, to appraisal, development and operational carefully plan and supervise development risk. This could include, but is and operational activities with not restricted to, delays in delivery the aim of managing the risks associated of equipment in Ukraine, failure with the further development of of key equipment, lower than expected the Group's fields in Ukraine. This production from wells that are currently includes detailed review and consideration producing, or new wells that are of available subsurface data, utilisation brought on-stream, problematic wells of modern geological software, and and complex geology which is difficult utilisation of engineering and completion to drill or interpret. The generation techniques developed for the fields. of significant operational cash With operational activities, the is dependent on the successful delivery Group ensures that appropriate equipment and completion of the development and personnel is available for the and operation of the fields. operations, and that operational contractors are appropriately supervised. In addition, the Group performs a review of its oil and gas assets for impairment on an annual basis, and considers whether an assessment of its oil and gas assets by a suitably qualified independent assessor is appropriate or required. ----------------------------------------------- Drilling and workover operations ----------------------------------------------- Due to the depth and nature of the The utilisation of detailed sub-surface reservoirs in the Group's fields, analysis, careful well planning the technical difficulty of drilling and engineering design in designing or re-entering wells in the Group's work programmes, along with appropriate fields is high, and this and the procurement procedures and competent equipment limitations within Ukraine, on-site management, aims to minimise can result in unsuccessful or lower these risks. than expected outcomes for wells. ----------------------------------------------- Maintenance of facilities ----------------------------------------------- There is a risk that production The Group's facilities are operated or transportation facilities can and maintained at standards above fail due to non-adequate maintenance, the Ukrainian minimum legal requirements. control or poor performance of the Operations staff are experienced Group's suppliers. and receive supplemental training to ensure that facilities are properly operated and maintained. Service providers are rigorously reviewed at the tender stage and are monitored during the contract period. ----------------------------------------------- Financial risks ----------------------------------------------- Exposure to cash flow and liquidity risk ----------------------------------------------- There is a risk that insufficient The Group maintains adequate cash funds are available to meet the reserves and closely monitors forecasted Group's development obligations and actual cash flow, as well as to commercialise the Group's oil short and longer-term funding requirements. and gas assets. Since a significant The Group does not currently have proportion of the future capital any loans outstanding, internal requirements of the Group is expected financial projections are regularly to be derived from operational cash made based on the latest estimates generated from production, including available, and various scenarios from wells yet to be drilled, there are run to assess the robustness is a risk that in the longer term, of the liquidity of the Group. However, insufficient operational cash is as the risk to future capital funding generated, or that additional funding, is inherent in the oil and gas exploration should the need arise, cannot be and development industry and reliant secured. in part on future development success, it is difficult for the Group to take any other measures to further mitigate this risk, other than tailoring its development activities to its available capital funding from time to time. ----------------------------------------------- Ensuring appropriate business practices ----------------------------------------------- The Group operates in Ukraine, an The Group maintains anti-bribery emerging market, where certain inappropriate and corruption policies in relation business practices may, from time to all aspects of its business, to time occur, such as corrupt business and ensures that clear authority practices, bribery, appropriation levels and robust approval processes of property and fraud, all of which are in place, with stringent controls can lead to financial loss. over cash management and the tendering and procurement processes. In addition, office and site protection is maintained to protect the Group's assets. ----------------------------------------------- Hydrocarbon price risk ----------------------------------------------- The Group derives its revenue principally The Group sells a proportion of from the sale of its Ukrainian gas, its hydrocarbon production through condensate and LPG production. These offtake arrangements, which include revenues are subject to commodity pricing formulae so as to ensure price volatility and political influence. that it achieves market prices for A prolonged period of low gas, condensate its products, as well as utilising and LPG prices may impact the Group's the electronic market platforms ability to maintain its long-term in Ukraine to achieve market prices investment programme with a consequent for its remaining products. However, effect on growth rate, which in hydrocarbon prices in Ukraine are turn may impact the share price implicitly linked to world hydrocarbon or any shareholder returns. Lower prices and so the Group is subject gas, condensate and LPG prices may to external price trends. not only decrease the Group's revenues per unit, but may also reduce the amount of gas, condensate and LPG which the Group can produce economically, as would increases in costs associated with hydrocarbon production, such as subsoil taxes and royalties. The overall economics of the Group's key assets (being the net present value of the future cash flows from its Ukrainian projects) are far more sensitive to long term gas, condensate and LPG prices than short-term price volatility. However, short-term volatility does affect liquidity risk, as, in the early stage of the projects, income from production revenues is offset by capital investment. ----------------------------------------------- Currency risk ----------------------------------------------- Since the beginning of 2014 , the The Group's sales proceeds are received Ukrainian Hryvnia significantly in Ukrainian Hryvnia, and the majority devalued against major world currencies, of the capital expenditure costs including the US Dollar, where it for the current investment programme has fallen from UAH8.3/$1.00 on will be incurred in Ukrainian Hryvnia, 1 January 2014 to UAH27.2/$1.00 thus the currency of revenue and on 30 June 2021 This devaluation costs are largely matched. In light has been a significant contributor of the previous devaluation and to the imposition of the banking volatility of the Ukrainian Hryvnia restrictions by the National Bank against major world currencies,
of Ukraine over recent years. In and since the Ukrainian Hryvnia addition, the geopolitical events does not benefit from the range in Ukraine over recent years, are of currency hedging instruments likely to continue to impact the which are available in more developed valuation of the Ukrainian Hryvnia economies, the Group has adopted against major world currencies. a policy that, where possible, funds Further devaluation, and volatility, not required for use in Ukraine of the Ukrainian Hryvnia against be retained on deposit in the United the US Dollar will affect the carrying Kingdom and Europe, principally value of the Group's assets. in US Dollars. ----------------------------------------------- Counterparty and credit risk ----------------------------------------------- The challenging political and economic The Group monitors the financial environment in Ukraine means that position and credit quality of its businesses can be subject to significant contractual counterparties and seeks financial strain, which can mean to manage the risk associated with that the Group is exposed to increased counterparties by contracting with counterparty risk if counterparties creditworthy contractors and customers. fail or default in their contractual Hydrocarbon production is sold on obligations to the Group, including terms that limit supply credit and/or in relation to the sale of its hydrocarbon title transfer until payment is production, resulting in financial received . loss to the Group. ----------------------------------------------- Financial markets and economic outlook ----------------------------------------------- The performance of the Group is The Group's sales proceeds are received influenced by global economic conditions in Ukrainian Hryvnia and a significant and, in particular, the conditions proportion of investment expenditure prevailing in the United Kingdom is made in Ukrainian Hryvnia , which and Ukraine. The economies in these minimises risks related to foreign regions have been subject to volatile exchange volatility. However, hydrocarbon pressures in recent periods, with prices in Ukraine are implicitly the global economy having experienced linked to world hydrocarbon prices a long period of difficulties, and and so the Group is subject to external more particularly the events that price movements. The Group holds have occurred in Ukraine over recent a significant proportion of its years. This has led to extreme foreign cash reserves in the United Kingdom exchange movements in the Ukrainian and Europe, mostly in US Dollars, Hryvnia , high inflation and interest with reputable financial institutions. rates, and increased credit risk The financial status of counterparties relating to the Group's key counterparties. is carefully monitored to manage counterparty risks. Nevertheless, the risks that the Group faces as a result of these risks cannot be predicted and many of these are outside of the Group's control. ----------------------------------------------- Corporate risks ----------------------------------------------- Ukraine production licences ----------------------------------------------- The Group operates in a region where The Group ensures compliance with the right to production can be challenged commitments and regulations relating by State and non-State parties. to its production licences through In 2010, this manifested itself Group procedures and controls or, in the form of a Ministry Order where this is not immediately feasible instructing the Group to suspend for practical or logistical considerations, all operations and production from seeks to enter into dialogue with its MEX-GOL and SV production licences, the relevant Government bodies with which was not resolved until mid-2011. a view to agreeing a reasonable In 2013, new rules relating to the time frame for achieving compliance updating of production licences or an alternative, mutually agreeable led to further challenges being course of action. Work programmes raised by the Ukrainian authorities are designed to ensure that all to the production licences held licence obligations are met and by independent oil and gas producers continual interaction with Government in Ukraine, including the Group, bodies is maintained in relation which may result in requirements to licence obligations and commitments. for remediation work, financial penalties and/or the suspension of such licences, which, in turn, may adversely affect the Group's operations and financial position. In March 2019, a Ministry Order was issued instructing the Group to suspend all operations and production from its VAS production licence. The Group is challenging this Order through legal proceedings, during which production from the licence is continuing, but this matter remains unresolved. In 2020, LLC Arkona Gas-Energy ("Arkona") faced a challenge from NJSC Ukrnafta concerning the validity of its SC exploration licence , which was ultimately resolved in Arkona's favour by a decision of the Supreme Court of Ukraine in February 2021. All such challenges affecting the Group have thus far been successfully defended through the Ukrainian legal system. However, the business environment is such that these types of challenges may arise at any time in relation to the Group's operations, licence history, compliance with licence commitments and/or local regulations. In addition, these licences carry ongoing compliance obligations, which if not met, may lead to the loss of a licence. ----------------------------------------------- Risks relating to key personnel ----------------------------------------------- The Group's success depends upon The Group periodically reviews the skilled management as well as technical compensation and contractual terms expertise and administrative staff. of its staff. In addition, the Group The loss of service of critical has developed relationships with members from the Group's team could a number of technical and other have an adverse effect on the business. professional experts and advisers, who are used to provide specialist services as required. -----------------------------------------------
Directors' Responsibility Statement
The Directors confirm that, to the best of their knowledge:
a) the unaudited condensed interim consolidated financial statements have been prepared in accordance with UK-adopted International Accounting Standard 34, 'Interim Financial Reporting' ("IAS 34") and the AIM Rules for Companies; and
b) these unaudited interim results include:
(i) a fair review of the information required (i.e. an indication of important events and their impact and a description of the principal risks and uncertainties for the remaining six months of the financial year); and
(ii) a fair review of the information required on related party transactions.
A list of current Directors is maintained on the Group's website, www.enwell-energy.com.
Condensed Interim Consolidated Income Statement
6 months 6 months ended ended 30 Jun 2 1 30 Jun 20 (unaudited) (unaudited) Note $000 $000 Revenue 3 41,050 24,708 Cost of sales 4 (19,452) (17,203) ------------------------------------ ----- --------------- ------------ Gross profit 21,598 7,505 Administrative expenses (3,953) (3,852) Other operating income, (net) 5 469 1,500 Operating profit 18,114 5,153 Net impairment losses on financial assets (1 9 ) (29) Other expenses, (net) 6 (39) (1,925) Finance income 87 - Finance costs ( 197 ) (604) Profit before taxation 17,94 6 2,595 Income tax expense 7 (4,15 7 ) (1,366)
------------------------------------ ----- --------------- ------------ Profit for the period 13,7 89 1,229 ------------------------------------ ----- --------------- ------------ Earnings per share (cents) Basic and diluted 8 4 .3c 0 . 4 c ------------------------------------ ----- --------------- ------------
The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Comprehensive Income
6 months ended 6 months ended 30 Jun 2 30 Jun 20 1 (unaudited) (unaudited) $000 $000 Profit for the period 13,7 89 1,229 Other comprehensive income: Items that may be subsequently reclassified to profit or loss: Equity - foreign currency translation 3,9 27 (10,841) --------------------------------------------- --------------- ------------ Total other comprehensive income/(loss) 3,9 27 (10,841) Total comprehensive income/(loss) for the period 17 , 716 (9,612) --------------------------------------------- --------------- ------------
The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.
Condensed Interim Consolidated Balance Sheet
30 Jun 2 31 Dec 20 1 (unaudited) (audited) Note $000 $000 Assets Non-current assets Property, plant and equipment 10 73,501 65 , 662 Intangible assets 11 12,698 12 , 232 Right-of-use assets 1,143 512 Corporation tax receivable - 9 Deferred tax asset 7 270 167 87,612 7 8 , 582 Current assets Inventories 1,700 1 , 541 Trade and other receivables 12 12,740 4 , 847 Cash and cash equivalents 15 62,857 6 0 , 993 -------------------------------- ----- ------------ ------------ 77,297 67 , 381 Total assets 164,909 1 45 , 963 -------------------------------- ----- ------------ ------------ Liabilities Current liabilities ( 6 , 641 Trade and other payables (7,264) ) Lease liabilities (447) ( 245 ) ( 1 , 062 Corporation tax payable (2,242) ) -------------------------------- ----- ------------ ------------ ( 7 , 948 (9,953) ) -------------------------------- ----- ------------ ------------ Net current assets 67,344 59 , 433 -------------------------------- ----- ------------ ------------ Non-current liabilities ( 6 , 819 Provision for decommissioning 13 (7,111) ) Lease liabilities (755) ( 371 ) Defined benefit liability (545) ( 530 ) Deferred tax liability 7 (3,100) (2, 705 ) Other non-current liabilities 14 (114) (1,975) (1 2 , 400 (11,625) ) ( 20 , 348 Total liabilities (21,578) ) -------------------------------- ----- ------------ ------------ Net assets 143,331 1 25 , 615 -------------------------------- ----- ------------ ------------ Equity Called up share capital 28,115 28,115 Share premium account 9 - 555,090 ( 105 , 22 Foreign exchange reserve (101,295) 2) Other reserves 4,273 4,273 Retained earnings/(accumulated (35 6 , 641 losses) 9 212,238 ) -------------------------------- ----- ------------ ------------ Total equity 143,331 1 25 , 615 -------------------------------- ----- ------------ ------------
The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Changes in Equity
Merger Retained reserve Capital Foreign earnings/ Called up Share premium contributions exchange (accumulated Total share capital account reserve reserve* losses) equity $000 $000 $000 $000 $000 $000 $000 As at 1 January ( 105 (35 6 , 1 25 202 1 (audited) 28,115 555,090 (3,204) 7,477 , 222 ) 641 ) , 615 Profit for the period - - - - - 13,789 13,789 Other comprehensive income - exchange differences - - - - 3,927 - 3,927 ------------------- --------------- -------------- --------- --------------- ---------- -------------- -------- Total comprehensive income - - - - 3,927 13,789 17,716 Transactions with owners in their capacity as owners: Cancellation of share premium account - (555,090) - - - 555,090 - As at 30 June 202 1 (unaudited) 28,115 - (3,204) 7,477 (101,295) 212,238 143,331 ------------------- --------------- -------------- --------- --------------- ---------- -------------- -------- Capital Foreign Called up Share premium Merger contributions exchange Accumulated Total share capital account reserve reserve reserve* losses equity $000 $000 $000 $000 $000 $000 $000 As at 1 January 20 20 (audited) 28,115 555,090 (3,204) 7,477 (90,172) (359,756) 137,550 Profit for the period - - - - - 1,229 1,229 Other comprehensive income - exchange differences - - - - (10,841) - (10,841) -------------------- --------------- -------------- --------- --------------- ---------- ------------ --------- Total comprehensive income - - - - (10,841) 1,229 (9,612) As at 30 June 20 20 (unaudited) 28,115 555,090 (3,204) 7,477 (101,013) (358,527) 127,938 -------------------- --------------- -------------- --------- --------------- ---------- ------------ ---------
* Predominantly as a result of exchange differences on retranslation, where the subsidiaries ' functional currency is not US Dollars
The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Cash Flows
6 months 6 months ended ended 30 Jun 2 30 Jun 20 1 (unaudited) (unaudited) Note $000 $000 Operating activities Cash generated from operations 16 19,1 4 8 11,03 0 Charitable donations (23) (2,057) Equipment rental income 15 17 Income tax paid (2,897) (2,856) Interest received 261 1,066 -------------------------------------------- ----- ------------ ------------ Net cash inflow from operating activities 16,50 4 7,20 0 -------------------------------------------- ----- ------------ ------------ Investing activities Purchase of property, plant and equipment (13,092) (8,096) Purchase of intangible assets (2,233) (4,428) Proceeds from return of prepayments 250 - for shares Proceeds from sale of property, plant and equipment 9 1 Net cash outflow from investing activities (15,066) (12,523) -------------------------------------------- ----- ------------ ------------ Financing activities Principal elements of lease payments (330) (282) Net cash outflow from financing activities (330) (282) Net increase in cash and cash equivalents 1,10 8 (5, 605 ) Cash and cash equivalents at beginning of the period 15 60,993 62,474 Effect of foreign exchange rate changes 75 6 (2, 641 ) Cash and cash equivalents at end of the period 15 62,857 54,228 -------------------------------------------- ----- ------------ ------------
The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.
Notes to the U naudited Condensed Interim Consolidated Financial Statements
1. General Information and Operational Environment
Enwell Energy plc (formerly Regal Petroleum plc) (the "Company") and its subsidiaries (together the "Group") is a gas, condensate and LPG production group.
Enwell Energy plc is a public limited company incorporated in England and Wales under the Companies Act 2006, whose shares are quoted on the AIM Market of London Stock Exchange plc. The Company's registered office is at 16 Old Queen Street, London SW1H 9HP, United Kingdom and its registered number is 4462555.
As at 30 June 2021, the Company's majority shareholder, with 82.65% of the issued share capital, and immediate parent company was Smart Energy (CY) Ltd (formerly named Pelidona Services Ltd), which is 100% owned by Smart Holding (Cyprus) Ltd (formerly named Lovitia Investments Ltd), which is 100% owned by Mr Vadym Novynskyi. Accordingly, the Company is ultimately controlled by Mr Vadym Novynskyi.
The Group's gas, condensate and LPG extraction and production facilities are located in Ukraine. The ongoing political and economic instability in Ukraine, which commenced in late 2013, has led to a deterioration of Ukrainian State finances, volatility of financial markets, illiquidity in capital markets, higher inflation and a depreciation of the national currency against major foreign currencies, although there have been some gradual improvements lately.
In recent years, the Ukrainian economy demonstrated growth amid overall macroeconomic stabilisation supported by structural reforms, a rise in domestic investment, revival in household consumption, increase in industrial production, construction activity and improved environment on external markets.
During 2021, the Ukrainian economy has experienced moderate growth in industrial output , leveling the consequences of the COVID-19 outbreak, which started in March 2020. The National Bank of Ukraine ("NBU") follows an interest rate policy consistent with inflation targets and keeps the Ukrainian Hryvnia floating. The annualised inflation rate in Ukraine was 9.5% in the first half of 2021 (compared with 2.0% in the first half of 2020 and 5.0% over the 2020 year), with the NBU increasing the key policy rate from 6.0% effective 12 June 2020 to 7.5% effective 18 June 2021, adhering to its inflation targeting policy .
As at the date of this report, the official NBU exchange rate of the Ukrainian Hryvnia against the US Dollar was UAH26.64/$1.00, compared with UAH27.18/$1.00 as at 30 June 2021 and UAH28.27/$1.00 as at 31 December 2020. In 2019, the NBU cancelled some of the currency control restrictions, such as the required share of foreign currency proceeds subject to mandatory sale and the amount of dividend payments allowed to non-residents, which were implemented in 2014 - 2015.
Further details of risks relating to Ukraine can be found within the Principal Risks and Uncertainties section earlier in this announcement.
Going concern
As a consequence of the COVID-19 pandemic, the Group has implemented processes and controls intended to ensure protection of all its stakeholders and minimise any disruption to its business. The Group is closely monitoring the current volatility in global financial markets, and the implications on the operational, economic and social environment within which the Group works caused by the COVID-19 pandemic. To date, there has been no significant operational disruption arising from the COVID-19 pandemic, and no material impact is currently envisaged on the Group's prospects. However, the Board and management remain acutely aware of the risks, and continue to take action to mitigate them where possible, not only to protect the Group's staff and stakeholders but also to minimise disruption to the Group's business. The Group continues to reassess its medium-term forecasts based on current pricing and is highly confident that it has the resources to continue to deliver on its plans. It is not possible to forecast the duration of the pandemic's impact but the Group will remain focussed on monitoring and protecting its business throughout the period of uncertainty.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future regarded as at least 12 months from the date of these unaudited condensed interim consolidated financial statements. Accordingly, the going concern basis has been adopted in preparing these unaudited condensed interim consolidated financial statements for the six months ended 30 June 2021.
2. Accounting Judgements and Estimates
Basis of preparation
These unaudited condensed interim consolidated financial statements for the six month period ended 30 June 2021 have been prepared in accordance with UK-adopted International Accounting Standard 34, 'Interim Financial Reporting' ("IAS 34") and the AIM Rules for Companies. The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period.
These unaudited condensed interim consolidated financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2020 were approved by the Board of Directors on 30 March 2021 and subsequently filed with the Registrar of Companies. The Auditors' Report on those accounts was not qualified and did not contain any statement under section 498 of the Companies Act 2006.
The unaudited condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2020, which were prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006.
In the year to 31 December 2021, the annual financial statements will be prepared in accordance with IFRS as adopted by the UK Endorsement Board, and this change in basis of preparation is required by UK company law for the purposes of financial reporting as a result of the UK's exit from the European Union on 31 January 2020 and the cessation of the transition period on 31 December 2020.
This change does not constitute a change in accounting policy but rather a change in the framework which is required to ground the use of IFRS in company law.
There is no impact on recognition, measurement or disclosure between the two frameworks in the period reported.
The accounting policies and methods of computation and presentation used are consistent with those used in the Group's Annual Report and Financial Statements for the year ended 31 December 2020, with the exception of the following new or revised standards and interpretations:
New and amended standards adopted by the Group
The following new standards, amendments to standards and interpretations became effective for the Group on 1 January 2021 or after (t hese standards, amendments to standards and interpretations did not have a material impact on this unaudited interim condensed consolidated financial information):
-- IFRS 17 'Insurance Contracts' (issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021); -- Interest rate benchmark (IBOR) reform - phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (issued on 27 August 2020 and effective for annual periods beginning on or after 1 January 2021);
There are no other amended standards which the Group considers to have a material impact on these financial statements:
Significant accounting judgements and estimates
The preparation of the unaudited condensed interim consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.
In preparing these unaudited condensed interim consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were consistent with those that applied to the consolidated financial statements for the year ended 31 December 2020 with certain updates described below.
Estimates
Recoverability of Development and Production Assets in Ukraine
According to the Group's accounting policies, costs capitalised as assets are assessed for impairment at each balance sheet date if impairment indicators exist. In assessing whether an impairment loss has occurred, the carrying value of the asset or cash-generating unit ("CGU") is compared to its recoverable amount. The recoverable amount is the greater of fair value less costs to dispose and value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the respective impairment loss is recognised as an expense immediately. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversals are recognised as income immediately.
MEX-GOL, SV, SC and VAS gas and condensate fields
As at 30 June 2021, no impairment indicators were identified by the Group, and therefore no impairment test was performed for the MEX-GOL, SV, SC and VAS gas and condensate fields.
Depreciation of Development and Production Assets
Development and production assets held in property, plant and equipment are depreciated on a unit of production basis at a rate calculated by reference to proven and probable reserves at the end of the period plus the production in the period, and incorporating the estimated future cost of developing and extracting those reserves. Future development costs are estimated using assumptions about the number of wells required to produce those reserves, the cost of the wells, future production facilities and operating costs, together with assumptions on oil and gas realisations, and are revised annually. The reserves estimates used are determined using estimates of gas in place, recovery factors, future hydrocarbon prices and also take into consideration the Group's latest development plan for the associated development and production asset.
Provision for Decommissioning
The Group has decommissioning obligations in respect of its Ukrainian assets. The full extent to which the provision is required depends on the legal requirements at the time of decommissioning, the costs and timing of any decommissioning works and the discount rate applied to such costs.
A detailed assessment of gross decommissioning cost was undertaken on a well-by-well basis using local data on day rates and equipment costs. The discount rate applied on the decommissioning cost provision at 30 June 2021 was 4.13% (31 December 2020: 3.70%). The discount rate is calculated in real terms based on the yield to maturity of Ukrainian Government bonds denominated in the currency in which the liability is expected to be settled and with the settlement date that approximates the timing of settlement of decommissioning obligations.
The change in estimate applied to calculate the provision as at 30 June 2021 resulted from the revision of the estimated costs of decommissioning (increase of $218,000 in provision) and the increase in the discount rate applied (decrease of $452,000 in provision). The increase in discount rate at 30 June 2021 resulted from the increase in Ukrainian Eurobonds yield and the respective increase of country risk premium. The costs are expected to be incurred by 2038 on the MEX-GOL field, by 2042 on the SV field, and by 2028 on the VAS field, which is the end of the estimated economic life of the respective fields.
3. Segmental Information
In line with the Group's internal reporting framework and management structure, the key strategic and operating decisions are made by the Board of Directors, who review internal monthly management reports, budgets and forecast information as part of this process. Accordingly, the Board of Directors is deemed to be the Chief Operating Decision Maker within the Group.
The Group's only class of business activity is oil and gas exploration, development and production. The Group's operations are located in Ukraine, with its head office in the United Kingdom. These geographical regions are the basis on which the Group reports its segment information. The segment results as presented represent operating profit before depreciation and amortisation.
6 months ended 30 June 2021 (unaudited)
United Ukraine Kingdom Total $000 $000 $000 Revenue Gas sales 28,514 - 28,514 Condensate sales 9,760 - 9,760 Liquefied Petroleum Gas sales 2,776 - 2,776 ------------------------------- --------- --------- -------- Total revenue 41,050 - 41,050 24,0 Segment result 25,6 41 (1,547) 94 Depreciation and amortisation (5,980) - (5,980) Operating profit 18, 114 ------------------------------- --------- --------- -------- 164, Segment assets 127, 927 36,982 909 1 1 , 1 1 , Capital additions* 035 - 035
6 months ended 30 June 20 20 (unaudited)
United Ukraine Kingdom Total $000 $000 $000 Revenue Gas sales 17,974 - 17,974 Condensate sales 5,232 - 5,232 Liquefied Petroleum Gas sales 1,502 - 1,502 ------------------------------- -------- --------- -------- Total revenue 24,708 - 24,708 Segment result 11,109 827 11,936 Depreciation and amortisation (6,783) - (6,783) ------------------------------- -------- --------- -------- Operating profit 5,153 ------------------------------- -------- --------- -------- Segment assets 106,494 38,037 144,531 Capital additions* 17,102 - 17,102
*Comprises additions to property, plant and equipment and intangible assets (Notes 10 and 11).
There are no inter-segment sales within the Group and all products are sold in the geographical region in which they are produced. The Group is not significantly impacted by seasonality.
4. Cost of Sales 6 months ended 6 months 30 Jun 2 ended 1 30 Jun 20 (unaudited) (unaudited) $000 $000 Production taxes 7,273 4,875 Depreciation of property, plant and equipment 5,529 6,176 Rent expenses 2,964 2,121 Staff costs 1,368 1,837 Cost of inventories recognised as an expense 910 624 Transmission tariff for Ukrainian gas system 436 421 Amortisation of mineral reserves 236 253 Other expenses 736 896 19, 452 17,203 5. Other operating income/(expenses), (net) 6 months ended 6 months 30 Jun 2 ended 1 30 Jun 20 (unaudited) (unaudited) $000 $000 Interest income on cash and cash equivalents 312 1,023 Reversal of accruals 167 263 Contractor penalties applied - 15
Other operating (losses)/income, net ( 10 ) 199 4 69 1,500 6. Other income/(expenses), (net) 6 months ended 6 months 30 Jun 2 ended 1 30 Jun 20 (unaudited) (unaudited) $000 $000 Net foreign exchange (losses)/gains (26) 194 Charitable donations (23) (2,057) Other income/(expenses), (net) 10 (62) (39) (1,925) 7. Taxation
The income tax charge of $4,157,000 for the six month period ended 30 June 2021 relates to a urrent tax charge of $4,003,000 and a deferred tax charge of $154,000 (1H 2020: current tax charge of $1,356,000 and deferred tax charge of $10,000).
The movement in the period was as follows:
6 months ended 6 months ended 30 Jun 2 30 Jun 20 1 (unaudited) (unaudited) $000 $000 Deferred tax (liability)/asset recognised relating to development and production assets at MEX-GOL-SV fields and provision for decommissioning At beginning of the period (2,705) (2,141) Charged to Income Statement - current period (249) (170) Effect of exchange difference (146) 115 -------------------------------------------- At end of the period (3,100) (2,196) -------------------------------------------- --------------- ------------ Deferred tax asset/( liability ) recognised relating to development and production assets at VAS field and provision for decommissioning At beginning of the period 167 (147) Credited to Income Statement - current period 95 160 Effect of exchange difference 8 12 --------------------------------------------- At end of the period 270 25 --------------------------------------------- ---- ------
Taxes on income in the interim periods are accrued using the tax rate that would be applicable to the expected total annual profit or loss. The effective tax rate for the six month period ended 30 June 2021 was 23% (1H 2020: 53%).
The deferred tax asset relating to the Group's provision for decommissioning at 30 June 2021 of $248,000 (31 December 2020: $170,000) was recognised on the tax effect of the temporary differences of the Group's provision for decommissioning at the MEX-GOL and SV fields, and its tax base. The deferred tax liability relating to the Group's development and production assets at the MEX-GOL and SV fields at 30 June 2021 of $3,348,000 (31 December 2020: $2,875,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the MEX-GOL and SV fields, and its tax base.
The deferred tax asset relating to the Group's provision for decommissioning at 30 June 2021 of $342,000 (31 December 2020: $323,000) was recognised on the tax effect of the temporary differences on the Group's provision on decommissioning at the VAS field, and its tax base. The deferred tax liability relating to the Group's development and production assets at the VAS field at 30 June 2021 of $72,000 (31 December 2020: $156,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the VAS field, and its tax base.
8. Earnings per Share
The calculation of basic and diluted earnings per ordinary share has been based on the profit for the six month period ended 30 June 2021 and 30 June 2020 and 320,637,836 ordinary shares, being the average number of shares in issue for the period. There are no dilutive instruments.
9. Reduction of Capital
On 25 February 2021, the Company completed a reduction of its share capital through the cancellation of its entire share premium account, thereby creating distributable reserves, which enables the Company to make distributions to its shareholders in the future, subject to the Company's financial performance. However, the Company is not indicating any commitment, and does not have any current intention, to make any distributions to shareholders.
10. Property, Plant and Equipment 6 months ended 30 Jun 21 6 months ended 30 Jun 20 (unaudited) (unaudited) Oil and Oil and Other Total Oil and Oil and Other Total gas gas fixed gas gas fixed development exploration assets development exploration assets and and and and production evaluation production evaluation assets assets assets assets Ukraine Ukraine $000 $000 $000 $000 $000 $000 $000 $000 Cost At beginning of the period 135 ,966 2,362 2,217 140,545 143,127 2,571 2,103 147,801 Additions 10,604 80 55 10,739 8,199 172 386 8,757 Change in decommissioning provision (107) - - (107) (903) - - (903) Disposals (36) - (70) (106) (117) - (2) (119) Exchange differences 5,850 97 75 6,022 (16,216) (279) (375) (16,870) At end of the period 152,277 2,539 2,277 157,093 134,090 2,464 2,112 138,666 Accumulated depreciation and impairment At beginning of the period 73,816 - 1,067 74,883 76,802 - 947 77,749 Charge for the period 5,447 - 158 5,605 5,268 - 201 5,469 Disposals (7) - (9) (16) (31) - (2) (33) Exchange differences 3,072 - 48 3,120 (8,590) - (183) (8,773) At end of the period 82,328 - 1,264 83,592 73,449 - 963 74,412 Net book value at the beginning of the period 62,150 2,362 1,150 65,662 66,325 2,571 1,156 70,052 ------------------ ------------ ------------ ------- ------------ ------------ ------------ ------- ------------- Net book value at end of the period 69,949 2,539 1,013 73,501 60,641 2,464 1,149 64,254 ------------------ ------------ ------------ ------- ------------ ------------ ------------ ------- -------------
At 30 June 2021, the Group performed an assessment of external and internal indicators to ascertain whether there was any indication of potential impairment. Based on the analysis performed, the Group concluded that no external or internal impairment indicators existed as at 30 June 2021, and accordingly no impairment testing was required as at that date.
11. Intangible Assets 6 months ended 30 Jun 2 1 6 months ended 30 Jun 20 (unaudited) (unaudited) Exploration Exploration and and Mineral evaluation Other Mineral evaluation Other reserve intangible intangible reserve intangible intangible rights assets assets Total rights assets assets Total $000 $000 $000 $000 $000 $000 $000 $000 Cost At beginning of the period 6,570 8,286 616 15,472 7,843 - 572 8,415 Additions - 63 233 296 - 8,331 101 8,432 Disposals - - (137) (137) - - (53) (53) Exchange differences 265 335 26 626 (884) 16 (52) (920) --------------- --------- ------------- ------------ ------- --------- -------------- ------------ ---------
At end of the period 6,835 8,684 738 16,257 6,959 8,347 568 15,874 --------------- --------- ------------- ------------ ------- --------- -------------- ------------ --------- Accumulated amortisation and impairment At beginning of the period 2,855 - 385 3,240 2,851 - 367 3,218 Amortisation charge for the period 236 - 105 341 253 - 78 331 Disposals - - (136) (136) - - (53) (53) Exchange differences 99 - 15 114 (274) - (28) (302) --------------- --------- ------------- ------------ ------- --------- -------------- ------------ --------- At end of the period 3,190 - 369 3,559 2,830 - 364 3,194 --------------- --------- ------------- ------------ ------- --------- -------------- ------------ --------- Net book value at beginning of the period 3,715 8,286 231 12,232 4,992 - 205 5,197 --------------- --------- ------------- ------------ ------- --------- -------------- ------------ --------- Net book value at end of the period 3,645 8,684 369 12,698 4,129 8,347 204 12,680 --------------- --------- ------------- ------------ ------- --------- -------------- ------------ ---------
Intangible assets consist mainly of the hydrocarbon production licence relating to the VAS gas and condensate field which is held by one of the Group's subsidiaries, LLC Prom-Enerho Produkt, and a recently acquired hydrocarbon exploration licence named Svystunivsko-Chervonolutski ("SC"), which is held by LLC Arkona Gas-Energy. The Group amortises the hydrocarbon production licence relating to the VAS gas and condensate field using the straight-line method over the term of the economic life of the VAS field until 2028. The SC hydrocarbon exploration licence is not amortised due to it being at an exploration and evaluation stage.
As at 30 June 2021, the Group performed an assessment of external and internal indicators to ascertain whether there was any indication of potential impairment of intangible assets. Based on the analysis performed, the Group concluded that no external or internal impairment indicators existed as at 30 June 2021, and accordingly no impairment testing was required as at that date.
12. Trade and Other Receivables 30 Jun 31 Dec 20 2 1 (unaudited) (audited) $000 $000 Trade receivables 7,869 1 , 936 Other financial receivables 547 1, 053 Less credit loss allowance (143) (1 33 ) ----------------------------------- ------------- ----------- Total financial receivables 8,273 2 , 856 Prepayments and accrued income 3,934 1 , 387 Other receivables 533 604 Total trade and other receivables 12,740 4 , 847
Due to the short-term nature of the current trade and other financial receivables, their carrying amount is assumed to be the same as their fair value. All trade and other financial receivables, except those provided for, are considered to be of high credit quality.
The majority of the trade receivables are from a related party, LLC Smart Energy, that purchases all of the Group's gas production. The applicable payment terms, which were revised in the period, are payment for one third of the monthly volume of gas by the 15(th) of the month following the month of delivery, and payment of the remaining balance by the end of that month (1H 2020: payment for one third of the estimated monthly volume of gas by the 20(th) of the month of delivery, and payment of the remaining balance by the 10(th) of the month following the month of delivery). The trade receivables were paid in full after the end of the period.
Prepayments and accrued income mainly consist of prepayments of $1,019,000 relating to the development of the SV field and $1,144,000 relating to the development of the MEX-GOL field (31 December 2020: $926,000 relating to the development of the SV field).
13. Provision for Decommissioning 6 months ended 6 months ended 30 Jun 21 30 Jun 20 (unaudited) (unaudited) $000 $000 At beginning of the period 6,819 7,447 Amounts provided 127 - Unwinding of discount 122 94 Change in estimate (234) (903) Effect of exchange difference 277 (789) ------------------------------- --------------- --------------- At end of the period 7,111 5,849
The provision for decommissioning is based on the net present value of the Group's estimated liability for the removal of the Ukrainian production facilities and well site restoration at the end of production life.
The non-current provision of $7,111,000 (31 December 2020: $6,819,000) represents a provision for the decommissioning of the Group's MEX-GOL, SV and VAS production facilities, including site restoration. None of the provision was utilised during the reporting period.
As described in Note 2, the change in estimates applied to calculate the provision as at 30 June 2021 resulted from the revision of the estimated costs of decommissioning (increase of $218,000 in provision) and the increase in the discount rate applied (decrease of $452,000 in provision).
14. Other non-current liabilities
Other non-current liabilities as at 30 June 2021, consist of the long-term obligations for the Ukrainian State special purpose fund of $114,000 measured at amortised cost using an interest rate of 20% (as at 31 December 2020: the long-term portion of the deferred consideration for the acquisition of LLC Arkona Gas-Energy of $1,851,861 and the long-term obligations for the Ukrainian State special purpose fund of $124,000). This long-term portion of the deferred consideration for the acquisition of LLC Arkona Gas-Energy of $1,851,861 was transferred, as current, to trade and other payables as at 30 June 2021. The final payments relating to the acquisition of LLC Arkona Gas-Energy are due to be paid in March 2022, subject to such payments becoming payable in accordance with the terms and conditions of the acquisition agreement.
15. Financial Instruments
The Group's financial instruments comprise cash and cash equivalents and various items such as debtors and creditors that arise directly from its operations. The Group has bank accounts denominated in British Pounds, US Dollars, Euros, and Ukrainian Hryvnia. The Group does not have any borrowings. The main future risks arising from the Group's financial instruments are currency risk, interest rate risk, liquidity risk and credit risk.
The Group's financial assets and financial liabilities, measured at amortised cost, which approximates their fair value, comprise the following:
30 Jun 21 31 Dec 20 (unaudited) (audited) $000 $000 Financial assets Cash and cash equivalents 62,857 60,993 Trade and other receivables 8,273 2,856 71,130 63,849 Financial Liabilities Lease liabilities 1,202 616 Trade payables 1,303 843 Other financial liabilities 1,966 4,336 --------------- 4,471 5,795
At 30 June 2021, the Group held cash and cash equivalents in the following currencies:
30 Jun 21 (unaudited) 31 Dec 20 (audited) $000 $000 US Dollars 36,145 40,187 Ukrainian Hryvnia 26,453 20,569 British Pounds 252 232 Euros 7 5 62,857 60,993 ------------------- ---------------------- ------------
All of the cash and cash equivalents held in Ukrainian Hryvnia are held in banks within Ukraine, and all other cash and cash equivalents are held in banks within Europe, Ukraine and the United Kingdom.
16. Reconciliation of Operating Profit to Operating Cash Flow 6 months ended 6 months ended 30 Jun 21 30 Jun 20 (unaudited) (unaudited) $000 $000 Operating profit 18,114 5,153 Depreciation and amortisation 6,164 6,783 Less interest income recorded within operating profit (312) (1,023) Fines and penalties received (1) (1) Loss from write off of non-current assets 90 81 Gain on sales of current assets, net (12) (5) Decrease in provisions ( 4 ) (1 75 ) (Increase)/decrease in inventory (93) 2,106 Increase in receivables (5,426) (1,032) Increase/(decrease) in payables 628 (857) ------------------------------------------- --------------- --------------- Cash generated from operations 19,148 11,03 0 ------------------------------------------- --------------- --------------- 17. Contingencies and Commitments
Amounts related to works contracted but not yet undertaken in relation to the Group's 2021 investment programme at the MEX-GOL, SV and VAS gas and condensate fields in Ukraine, but not recorded in the unaudited condensed interim consolidated financial statements at 30 June 2021, were $3,283,000 (31 December 2020: $9,052,165).
Since 2010, the Group has been in dispute with the Ukrainian tax authorities in respect of VAT receivables on imported leased equipment, with a disputed liability of up to UAH8,487,000 ($324,000) inclusive of penalties and other associated costs. There is a level of ambiguity in the interpretation of the relevant tax legislation, and the position adopted by the Group has been challenged by the Ukrainian tax authorities, which has led to legal proceedings to resolve the issue. The Group had been successful in three court cases in respect of this dispute in ourts of different levels. On 20 September 2016, a hearing was held in the Supreme Court of Ukraine of an appeal of the Ukrainian tax authorities against the decision of the Higher Administrative Court of Ukraine, in which the appeal of the Ukrainian tax authorities was upheld. As a result of this appeal decision, all decisions of the lower courts were cancelled, and the case was remitted to the first instance court for a new trial. On 1 December 2016 and 7 March 2017, the Group received positive decisions in the first and second instance courts, but further legal proceedings may arise. Since the Group had been successful in previous court cases in respect of this dispute in ourts of different levels, the date of the next legal proceedings has not been set and as the management believes that adequate defences exist to the claim, no liability has been recognised in these unaudited condensed interim consolidated financial statements for the six months ended 30 June 2021 (31 December 2020: nil).
On 12 March 2019, the Group announced the publication of an Order for suspension (the "Order") by the State Service of Geology and Subsoil of Ukraine affecting the production licence for its VAS gas and condensate field. The Group is confident there are no violations of the terms of the licence or in relation to the operational activities of the Group that would justify the Order or the suspension of the licence. The Group has issued legal proceedings in the Ukrainian Courts to challenge the validity of the Order, and in these proceedings, on 18 March 2019 the Court made a ruling on interim measures to suspend the Order pending hearings of the substantive issues of the case to be held subsequently. The effect of this ruling is that the suspension of operational activities at the VAS licence is deferred until the result of the legal proceedings is determined. These legal proceedings are continuing through the Ukrainian Court system and the ultimate outcome is not yet known. However, the Group considers that the Order is groundless and that the outcome of the legal proceedings challenging the Order will ultimately be in favour of the Group, and consequently, the Group does not expect any negative effect on its operations in respect of this matter.
18. Related Party Disclosures
Key management personnel of the Group are considered to comprise only the Directors. Remuneration of the Directors for the six month period ended 30 June 2021 was $617,000 (six month period ended 30 June 2020: $532,000, and year ended 31 December 2020: $1,026,000).
During the period, Group companies entered into the following transactions with related parties which are not members of the Group:
6 months ended 6 months ended 30 Jun 21 30 Jun 20 (unaudited) (unaudited) $000 $000 Sale of goods/services 28,417 17,752 Purchase of goods/services 585 461 Amounts owed by related parties 7,732 1,490 Amounts owed to related parties 825 347
All related party transactions were with subsidiaries of the ultimate Parent Company, and primarily relate to the sale of gas to LLC Smart Energy, the rental of office facilities and vehicles and the sale of equipment. The amounts outstanding were unsecured and have been or will be settled in cash.
As of 30 June 2021, the Company's immediate parent company was Smart Energy (CY) Ltd (formerly named Pelidona Services Ltd), which is 100% owned by Smart Holding (Cyprus) Ltd (formerly named Lovitia Investments Ltd), which is 100% owned by Mr Vadym Novynskyi. Accordingly, the Company was ultimately controlled by Mr Vadym Novynskyi.
Until April 2021, the Group operated bank accounts in Ukraine with a related party bank, Unex Bank, which was ultimately controlled by Mr Vadym Novynskyi. There were the following transactions and balances with Unex Bank during the reporting period:
6 months ended 6 months ended 30 Jun 21 30 Jun 20 (unaudited) (unaudited) $000 $000 Bank charges 1 1 Closing cash balance - 13
As at 30 June 2021, Unex Bank is not considered to be a related party of the Group, following the completion of the sale by Mr Vadym Novynskyi of the entire issued share capital of Unex Bank to an unrelated third party.
At the date of this announcement, none of the Company's controlling parties prepares consolidated financial statements available for public use.
19. Events occurring after the Reporting Period
The Group's first well at the SC licence, SC-4, was spudded in August 2021.
In September 2021, the Group made an early payment of 25% of the third tranche of the consideration for the acquisition of LLC Arkona Gas-Energy, totalling $539,375.
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