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Regal Petroleum PLC Interim Results

13/09/2019 7:00am

UK Regulatory (RNS & others)


REGAL PETROLEUM (NEX:RPT.GB)
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Regal Petroleum PLC

13 September 2019

Press Release

13 September 2019

REGAL PETROLEUM PLC

2019 INTERIM RESULTS

Regal Petroleum plc (the "Company", and with its subsidiaries, the "Group"), the AIM-quoted (RPT) oil and gas exploration and production group with assets in Ukraine, today announces its unaudited results for the six month period ended 30 June 2019.

Highlights

 
 Operations 
 
      --   Aggregate average daily production from the MEX-GOL, SV 
            and VAS fields over the six month period to 30 June 2019 
            of 4,192 boepd, which compares with an aggregate average 
            daily production rate of 2,790 boepd during the first half 
            of 2018, an increase of approximately 50% 
      --   Reserves upgrade at VAS field announced in August 2019, 
            nearly doubling proved + probable (2P) reserves to 3.145 
            MMboe (from 1.80 MMboe) 
 
 Finance 
 
      --   Revenue for the six month period ended 30 June 2019 up 
            27% to $31.3 million (1H 2018: $24.6 million)Operating 
            profit for the period of $13.7 million (1H 2018: $44.5 
            million, including one-off item of $34.5 million) 
      --   Operating profit for the period of $13.7 million (1H 2018: 
            $44.5 million, including one-off item of $34.5 million) 
      --   Profit before tax for the first half of 2019 of $13.3 million 
            (1H 2018: $45.0 million, including one-off item of $34.5 
            million) 
      --   Cash and cash equivalents of $67.8 million at 30 June 2019 
            (31 December 2018: cash and cash equivalents of $53.2 million), 
            with cash and cash equivalents at 10 September 2019 of 
            $62.0 million 
 
 Outlook 
 
      --   Development work for the remainder of 2019 at MEX-GOL and 
            SV fields: refinement of the geological model; testing 
            and if successful, hook up of MEX-119 well; hydraulic fracturing 
            operations on MEX-120 well; commencement of SV-54 well; 
            planning for further new well in SV field; assessment and 
            workover of existing wells; installation of compression 
            equipment; and continued investment in gas processing facilities, 
            pipeline network and other infrastructure 
      --   Development work for the remainder of 2019 at VAS field: 
            completion of processing and interpretation of new 3D seismic 
            data; development of new geological model; planning for 
            a new well; installation of compression equipment; and 
            continued investment in gas processing facilities, pipeline 
            network and other infrastructure 
 

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.

For further information, please contact:

 
 Regal Petroleum plc                        Tel: 020 3427 3550 
 Chris Hopkinson, Chairman 
 Sergii Glazunov, Chief Executive Officer 
 
 Strand Hanson Limited                      Tel: 020 7409 3494 
 Rory Murphy / Richard Tulloch 
 
 Citigate Dewe Rogerson                     Tel: 020 7638 9571 
 Nick Hayns / 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 
 
 bbl           barrel 
 bbl/d         barrels per day 
 boe           barrel of oil equivalent 
 boepd         barrel of oil equivalent per day 
 HSES          health, safety, environment and security 
 LPG           liquefied petroleum gas 
 MEX-GOL       Mekhediviska-Golotvshinska 
 m(3)          cubic metre 
 Mm(3)         thousand cubic metres 
 MMboe         million barrels of oil equivalent 
 MMscf/d       million standard cubic feet per day 
 %             per cent 
 scf           standard cubic feet measured at 20 degrees 
                Celsius and one atmosphere 
 SV            Svyrydivske 
 $             United States Dollar 
 UAH           Ukrainian Hryvnia 
 VAS           Vasyschevskoye 
 VED           Vvdenska 
 

Chairman's Statement

During the first half of 2019, the Group has continued with the development of the MEX-GOL, SV and VAS gas and condensate fields in north-eastern Ukraine, with a solid operational and financial performance during the period. Drilling of the MEX-119 development well, which commenced in February 2019, has now been completed and the well will be tested in the near future, and as announced on 21 August 2019, a reassessment of reserves and resources at the VAS field as at 31 December 2018 resulted in a significant reserves upgrade.

At the MEX-GOL and SV fields, production was reasonably stable during the first half of 2019, with higher production volumes compared with the same period last year, and at the VAS field production was also steady, and significantly higher than during the first half of 2018, following the hook-up of the VAS-10 well in November 2018.

Aggregate average daily production from the MEX-GOL, SV and VAS fields during the first half of 2019 was 4,192 boepd, which compares with an aggregate daily production rate of 2,790 boepd during the first half of 2018, an increase of approximately 50]%.

The Group's financial performance for the six month period ended 30 June 2019, was positive and an improvement on the corresponding half-year period in 2018. During the first half of 2019, the Group's profit before tax was $13.3 million (1H 2018: $45.0 million, which includes a one-off item of $34.5 million), predominantly as a result of improved revenues of $31.3 million (1H 2018: $24.6 million) from higher production volumes offset by lower hydrocarbon prices. Cash generated from operations during the period was also higher at $17.6 million (1H 2018: $13.1 million).

The fiscal and economic situation in Ukraine was reasonably stable during 2019, with a better economic outlook, GDP growth, reduced inflation and stability in the Ukrainian Hryvnia exchange rates. Nevertheless, there are still fiscal and economic stresses in Ukraine and a continued weakness in the Ukrainian banking sector.

The Ukrainian Government has implemented a number of reforms in the oil and gas sector in recent years, which include the deregulation of the gas supply market in late 2015, and more recently, reductions in the subsoil tax rates relating to oil and gas production and a simplification of the regulatory procedures applicable to oil and gas exploration and production activities in Ukraine.

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 2019, gas prices trended lower, reflecting a similar trend in European gas prices, and were lower than in the same period in 2018. Similarly, condensate and LPG prices were also lower by comparison with the first half of 2018.

Board and Management Changes

In June 2019, Bruce Burrows was appointed as Finance Director of the Company, and Oleksiy Zayets was appointed as Chief Financial Officer of the Company's Ukrainian operations.

Outlook

Whilst there are still challenges in the business environment in Ukraine, the situation is improving gradually. After the steady operational performance during the first half of 2019, we are eagerly awaiting the results of the MEX-119 development well and the hydraulic fracturing operations on the MEX-120 well, which are expected in the near future. We are also looking forward to achieving further successes in the development activities planned for the remainder of 2019 and 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.

Chris Hopkinson

Chairman

12 September 2019

Chief Executive Officer's Statement

Introduction

The Group continued its good progress at the Ukrainian fields during 2019, with development activity at the MEX-GOL and SV fields including the drilling of the MEX-119 development well, which has now reached its final depth, with testing expected in the near future, the successful workover of the MEX-106 well to renew the production tubing, and hydraulic fracturing operations at the MEX-120. At the VAS field, acquisition of the remaining coverage of 3D seismic over the field was completed in early 2019 and the data acquired is being processed and interpreted. Overall production was steady during the first half of 2019, and significantly higher than in the first half of 2018.

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 2019 was as follows:-

 
   Field             Gas             Condensate             LPG              Aggregate 
                  (MMscf/d)            (bbl/d)             (bbl/d)             boepd 
              1H 2019   1H 2018   1H 2019   1H 2018   1H 2019   1 2018   1H 2019   1H 2018 
             --------  --------  --------  --------  --------  -------  --------  -------- 
 
   MEX-GOL 
   & SV        14.0       9.7       542       340       273      182      3,203     2,183 
             --------  --------  --------  --------  --------  -------  --------  -------- 
 
   VAS          4.9       3.1       81        38         -        -        989       607 
             --------  --------  --------  --------  --------  -------  --------  -------- 
 
   Total       18.9      12.8       623       378       273      182      4,192     2,790 
             --------  --------  --------  --------  --------  -------  --------  -------- 
 

Production rates were higher in the first half of 2019 when compared with the corresponding period in 2018 predominantly due to the successes of the SV-12 and VAS-10 wells in the second half of 2018.

The Group's average daily production for the period from 1 July 2019 to 10 September 2019 from the MEX-GOL and SV field was 12.8 MMscf/d of gas, 519 bbl/d of condensate and 237 bbl/d of LPG (2,935 boepd in aggregate) and from the VAS field was 4.4 MMscf/d of gas and 43 bbl/d of condensate (864 boepd in aggregate).

Operations

The fiscal and economic conditions in Ukraine have continued to improve over the recent period, with good stability in the Ukrainian Hryvnia, reductions in the subsoil tax rates and improvements in the regulatory procedures in the oil and gas sector in Ukraine, although hydrocarbon prices have been trending lower, adversely affecting the Group's realised prices for gas, condensate and LPG.

At the MEX-GOL and SV fields, the Group continued to work with P.D.F. Limited to utilise their re-evaluation study of these fields, which involved analysis of all available geological, geophysical, petroleum engineering and well performance data. The continuing work included interpretation of newly reprocessed existing 3D seismic data, and utilising this data to update the geological subsurface model of the fields. This work, undertaken in conjunction with P.D.F. Limited, is enabling the Group to refine its strategies for the further development of the fields, including the timing and level of future capital investment required to exploit the hydrocarbon resources.

In early 2017, the Group entered into an agreement with NJSC Ukrnafta, the majority State-owned oil and gas producer, relating to the SV-2 well, which is a suspended well owned by NJSC Ukrnafta located within the Group's SV licence area. Under the agreement, the Group agreed to undertake a workover of the well, which was successful, and resulted in the well being brought back into production in August 2017. Pursuant to the agreement, the gas and condensate produced from the well 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 well as revenue, and the net profit share due to NJSC Ukrnafta being treated as a lease expense in cost of sales.

Following on from the success of the SV-2 well operations, in November 2017, the Group entered into a similar agreement with NJSC Ukrnafta, in relation to the SV-12 well, which is also a suspended well owned by NJSC Ukrnafta located within the SV licence area. The terms of this agreement are fundamentally consistent with the agreement relating to the SV-2 well, including the equal net profit sharing arrangement between the Group and NJSC Ukrnafta. Workover operations were undertaken on this well during the first half of 2018, which were successfully concluded in July 2018 and the well was put on production from two intervals in the B-22 Visean formation.

The MEX-119 development well, which was spudded in February 2019, is targeting production from the B-20 horizon in the Visean formation. The well has now reached its final depth of 4,822 metres, which is slightly shallower than its planned depth, after all targeted horizons were encountered. Testing operations will be undertaken in the near future, and subject to the results thereof, the well will be hooked up to the gas processing facility.

Hydraulic fracturing operations on the MEX-120 well were commenced in September 2019 and results are anticipated in the near future. In addition at the MEX-GOL and SV fields, the Group completed successful workover operations on the MEX-106 well to replace the production tubing, upgraded the gas processing facilities and pipeline network, and undertook remedial work on existing wells.

At the VAS field, the acquisition of new 3D seismic data over the remaining areas of the field was finally completed in January 2019, after the seismic contractor experienced some local access issues which delayed the acquisition field work. The data acquired is now being processed and interpreted.

However, as announced on 12 March 2019, a regulatory issue did arise 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 intends to pursue its challenge to the Order through the Ukrainian Courts. As such, operations continue as usual at the VAS field.

Reserves Update

In the first half of 2019, the Group commissioned DeGolyer and MacNaughton ("D&M") to prepare an updated assessment of the remaining reserves and resources at the VAS field as at 31 December 2018 in order to update the Group's reserves and resources since the previous reserves estimation undertaken by Senergy (GB) Limited ("Senergy") as at 1 January 2016.

The updated assessment of 1.895 MMboe of proved (1P) and 3.145 MMboe of proved + probable (2P) reserves shows a material increase in these categories of remaining reserves from the 2016 Senergy estimates, which were 0.66 MMboe and 1.80 MMboe respectively. These increases reflect a higher level of confidence in the understanding of the subsurface at the field as a result of the new data obtained since 2016.

Further details of the D&M assessment are set out in the Company's announcement dated 21 August 2019.

Outlook

During the remainder of 2019, the Group will continue to develop the MEX-GOL, SV and VAS fields. At the MEX-GOL and SV fields, the development programme includes revision of the geological model utilising the newly interpreted reprocessed seismic data, testing the MEX-119 development well, completing the hydraulic fracturing operations at the MEX-120 well, commencing a new well, SV-54, in the SV field, which is planned to be spudded later in the year, planning for a further well in the SV field, investigating workover opportunities for other existing wells, installation of compression equipment, further upgrading of the gas processing facilities and pipeline network, and remedial and upgrade work on existing wells, pipelines and other infrastructure.

At the VAS field, the processing and interpreting of the new 3D seismic data will be completed, a new geological model will be developed, and planning for a new well will be undertaken. It is also intended to undertake further evaluation of the VED area of the licence, which appears highly prospective on the current 2D seismic data and will benefit from the improved imaging of the new 3D seismic data. Work is also planned to install compression equipment, and upgrade the gas processing facilities, pipeline network and other infrastructure.

There has also been encouraging new legislation relating to the oil and gas sector in Ukraine, demonstrating the Ukrainian Government's stated intention to promote and support the domestic oil and gas production industry. These new measures include reductions in the subsoil taxes applicable to the production of hydrocarbons, which became effective for gas production from new wells drilled after 1 January 2018 and came into effect for condensate production from all wells from 1 January 2019. Furthermore, new legislation was introduced last year to simplify a number of the regulatory procedures relating to oil and gas exploration and production activities in Ukraine.

These measures, and the general improvement 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.

Sergii Glazunov

Chief Executive Officer

Finance Review

The Group maintained a solid financial performance during the first half of 2019, broadly consistent with the second half of 2018. The underlying operating performance was, however, a significant improvement on the comparative period of the first half of 2018. The performance in the first half of 2018 did however benefit significantly from a $34.5 million impairment reversal. Excluding this impairment reversal impact, the operating profit during the first half of 2019 was higher at $13.7 million (1H 2018: $10.1 million), mainly as a result of improved revenue of $31.3 million (1H 2018: $24.6 million) derived from higher production volumes offset by lower hydrocarbon prices.

Profit before tax during the period was also higher at $13.3 million (1H 2018: $10.5 million, excluding $34.5 million impairment reversal). Cash generated from operations was higher at $17.6 million (1H 2018: $13.1 million).

The market price in Ukraine for gas broadly correlates to the price of imported gas, which generally reflects trends in European gas prices, which declined during the first half of 2019.

For the six-month period ended 30 June 2019, the average realised gas, condensate and LPG prices were $256/Mm(3) (UAH6,921/Mm(3) ), $54/bbl and $52/bbl respectively (1H 2018: $280/Mm(3) (UAH7,491/Mm(3) ), $69/bbl and $73/bbl respectively).

During the period from 1 July 2019 to 10 September 2019, the average realised gas, condensate and LPG prices were $173/Mm(3) (UAH4,402/Mm(3) ), $59/bbl and $54/bbl respectively.

The subsoil tax rates applicable to gas production were stable during the period at 29% for gas produced from deposits at depths above 5,000 metres and 14% for gas produced from deposits below 5,000 metres, but reductions in the subsoil rates applicable to new wells and to condensate production have been implemented, 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 above 5,000 metres and from 14% to 6% for gas produced from deposits below 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 above 5,000 metres and from 21% to 16% for condensate produced from deposits below 5,000 metres.

In addition, with effect from 1 January 2019, a transmission tariff of UAH91.87/Mm(3) ($3.23/Mm(3) ) for use of the Ukrainian national pipeline system became applicable to oil and gas producers in Ukraine, including the Group.

In the six-month period ended 30 June 2019, cost of sales was higher at $17.3 million (1H 2018: $12.8 million), mainly due to higher lease expenses relating to the profit share in respect of the SV-12 well and the introduction of the transmission tariff, which was partially offset by the decrease in the subsoil tax relating to the production of condensate.

Despite the increased operational activity, administrative expenses for the first half of 2019 at $2.9 million were consistent with the comparative period (1H 2018: $2.9 million).

The tax charge for the six month period ended 30 June 2019 of $3.4 million (1H 2018: $6.1 million charge) comprises a current tax charge of $1.7 million (1H 2018: $2.1 million charge) and a deferred tax charge of $1.7 million (1H 2018: $4.0 million charge).

At 30 June 2019, the Group derecognised a deferred tax asset of $2.1 million due to losses expected in the foreseeable future.

A deferred tax asset relating to the development and production asset at the MEX-GOL and SV fields of $1.4 million (31 December 2018: $1.1 million) was recognised at 30 June 2019 on the tax effect of the temporary differences between the carrying value of the development and production asset at the MEX-GOL and SV fields and its tax base.

A deferred tax liability relating to the development and production asset at the VAS field of $0.3 million (31 December 2018: $0.5 million) was recognised at 30 June 2019 on the tax effect of the temporary differences between the carrying value of the development and production asset at the VAS field and its tax base.

Capital investment of $6.7 million reflects investment in the Group's oil and gas development and production assets during the period (1H 2018: $5.0 million), primarily relating to the expenditure associated with the drilling of the MEX-119 well.

Cash and cash equivalents held at 30 June 2019 were $67.8 million (31 December 2018: $53.2 million cash and cash equivalents). The Group's cash and cash equivalents balance at 10 September 2019 was $62 million, held as to $20.4 million equivalent in Ukrainian Hryvnia, $41.6 million equivalent predominantly in US Dollars, Euros and Pounds Sterling.

Since early 2014, the Ukrainian Hryvnia has devalued significantly against the US Dollar, falling from UAH8.3/$1.00 on 1 January 2014 to UAH26.2/$1.00 on 30 June 2019, 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. However, in the first half of 2019, the exchange rate between the Ukrainian Hryvnia and the US Dollar has been reasonably stable, averaging UAH26.9/$1.00 during the period (average rate during 1H 2018: UAH26.8/$1.00). Nevertheless, further devaluation 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 year, 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 in the remainder of 2019.

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 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 it cash holdings in 
  environment, which makes them vulnerable         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                   the Group continues to monitor the 
  products. Further, the conflict                  situation and endeavours to procure 
  in parts of eastern Ukraine has                  its equipment from sources in other 
  not been resolved to date, and                   markets. The disputes and interruption 
  Russia continues to occupy Crimea.               to the supply of gas from Russia 
  This conflict has put further pressure           has indirectly encouraged Ukrainian 
  on relations between Ukraine and                 Government support for the development 
  Russia, and the political tensions               of the domestic production of hydrocarbons 
  have had an adverse effect on the                since Ukraine imports a significant 
  Ukrainian financial markets, hampering           proportion of its gas, which has 
  the ability of Ukrainian companies               resulted in legislative measures 
  and banks to obtain funding from                 to improve the regulatory requirements 
  the international capital and debt               for hydrocarbon extraction in Ukraine. 
  markets. 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                   are regularly reviewed by the Group, 
  capital, low asset quality caused                but the geopolitical and economic 
  by the economic situation, currency              events since 2013 in Ukraine have 
  depreciation, changing regulations               significantly weakened the Ukrainian 
  and other economic pressures generally,          banking sector. In light of this, 
  and so the risks associated with                 the Group has taken and continues 
  the banks in Ukraine have been                   to take steps to diversify its banking 
  significant, including in relation               arrangements between a number of 
  to the banks with which the Group                banks in Ukraine. These measures 
  has operated bank accounts. However,             are designed to spread the risks 
  following remedial action imposed                associated with each bank's creditworthiness, 
  by the National Bank of Ukraine,                 and the Group endeavours to use 
  Ukraine's banking system has improved            banks that have the best available 
  moderately. Nevertheless, Ukraine                creditworthiness. Nevertheless, 
  continues to be supported by funding             and despite some recent improvements, 
  from the International Monetary                  the Ukrainian banking sector remains 
  Fund under a 14-month Stand-By                   weakly capitalised and so the risks 
  Arrangement aggregating $3.9 billion             associated with the banks in Ukraine 
  approved in December 2018, which                 remain significant, including in 
  replaced a previous funding programme            relation to the banks with which 
  from the International Monetary                  the Group operates bank accounts. 
  Fund. An initial tranche of $1.4                 As a consequence, the Group also 
  billion has been disbursed, and                  maintains a significant proportion 
  the disbursement of further tranches             of its cash holdings in international 
  is dependent on semi-annual reviews              banks outside Ukraine. 
  of the status of fiscal, economic 
  and regulatory reforms in Ukraine. 
                                                 ----------------------------------------------- 
 Geopolitical environment in Ukraine 
                                                 ----------------------------------------------- 
 Although there have been some improvements       The Group continually monitors the 
  in recent years, there has not                   market and business environment 
  been a final resolution of the                   in Ukraine and endeavours to recognise 
  political, fiscal and economic                   approaching risks and factors that 
  situation in Ukraine and its ongoing             may affect its business. In addition, 
  effects are difficult to predict                 the involvement of Lovitia Investments 
  and likely to continue to affect                 Limited, as the indirect majority 
  the Ukrainian economy and potentially            shareholder with extensive experience 
  the Group's business. Whilst not                 in Ukraine, is considered helpful 
  materially affecting the Group's                 to mitigate such risks. 
  production operations, the instability 
  has disrupted the Group's development 
  and operational planning for its 
  assets. 
                                                 ----------------------------------------------- 
 Operational and technical risks 
                                                 ----------------------------------------------- 
 Health, Safety, Environment and 
  Security ("HSES") 
                                                 ----------------------------------------------- 
 The oil and gas industry, by its                 The Group maintains an HSES management 
  nature, conducts activities which                system and requires that management, 
  can cause health, safety, environmental          staff and contractors adhere to 
  and security incidents. Serious                  this system. The system ensures 
  incidents can not only have a financial          that the Group meets Ukraine legislative 
  impact but can also damage the                   standards in full and achieves international 
  Group's reputation and the opportunity           standards to the maximum extent 
  to undertake further projects.                   possible. 
                                                 ----------------------------------------------- 
 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                   local and international geological, 
  of uncertainties, including the                  geophysical and engineering experts 
  availability of capital, seasonal                and contractors to supplement and 
  conditions, regulatory approvals,                broaden the pool of expertise available 
  gas, oil, condensate and LPG prices,             to the Group. Detailed planning 
  development costs and drilling                   of development activities is undertaken 
  success. As a result of these uncertainties,     with the aim of managing the inherent 
  it is unknown whether potential                  risks associated with oil and gas 
  drilling locations identified on                 exploration and production, as well 
  proposed projects will ever be                   as ensuring that appropriate equipment 
  drilled or whether these or any                  and personnel are available for 
  other potential drilling locations               the operations, and that local contractors 
  will be able to produce gas, oil                 are appropriately supervised. 
  or condensate. 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                   technical consultants to undertake 
  declining production rates which                 a comprehensive review and re-evaluation 
  vary depending upon reservoir characteristics    study of the MEX-GOL and SV fields 
  and 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                   being used by the Group in the future 
  wells and efficiently developing                 development of these fields. In 
  and exploiting any reserves, and                 addition, an evaluation study was 
  finding or acquiring additional                  undertaken on the VAS field prior 
  reserves. The Group may not be                   to its acquisition in 2016 and this 
  able to develop, find or acquire                 was updated in 2019. The Group has 
  reserves at acceptable costs. The                established an ongoing relationship 
  experience gained from drilling                  with such external technical consultants 
  undertaken to date highlights such               to ensure that technical management 
  risks as the Group targets the                   and planning is of a high quality 
  appraisal and production of these                in respect of all development activities 
  hydrocarbons.                                    on the Group's fields. 
                                                 ----------------------------------------------- 
 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                   includes detailed review and consideration 
  currently producing, or new wells                of available subsurface data, utilisation 
  that are brought on-stream, problematic          of modern geological software, and 
  wells and complex geology which                  utilisation of engineering and completion 
  is difficult to drill or interpret.              techniques developed for the fields. 
  The generation of significant operational        With operational activities, the 
  cash is dependent on the successful              Group ensures that appropriate equipment 
  delivery and completion of the                   and personnel is available for the 
  development and operation of the                 operations, and that operational 
  fields.                                          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 utilisation of detailed sub-surface 
  the 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 Ukraine minimum legal requirements. 
  control or poor performance of                   Operations staff are experienced 
  the 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                   made based on the latest estimates 
  cash generated from production,                  available, and various scenarios 
  including from wells yet to be                   are run to assess the robustness 
  drilled, there is a risk that in                 of the liquidity of the Group. However, 
  the longer term, insufficient operational        as the risk to future capital funding 
  cash is generated, or that additional            is inherent in the oil and gas exploration 
  funding, should the need arise,                  and development industry and reliant 
  cannot be 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,                   The Group maintains anti-bribery 
  an emerging market, where certain                and corruption policies in relation 
  inappropriate business practices                 to all aspects of its business, 
  may, from time to time occur, such               and ensures that clear authority 
  as corrupt business practices,                   levels and robust approval processes 
  bribery, appropriation of property               are in place, with stringent controls 
  and fraud, all of which can lead                 over cash management and the tendering 
  to financial loss.                               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                   its hydrocarbon production through 
  gas, condensate and LPG production.              long-term offtake arrangements, 
  These revenues are subject to commodity          which include pricing formulae so 
  price volatility and political                   as to ensure that it achieves market 
  influence. A prolonged period of                 prices for its products, as well 
  low gas, condensate and LPG prices               utilising the electronic market 
  may impact the Group's ability                   platforms in Ukraine to achieve 
  to maintain its long-term investment             market prices for its remaining 
  programme with a consequent effect               products. However, hydrocarbon prices 
  on growth rate, which in turn may                in Ukraine are implicitly linked 
  impact the share price or any shareholder        to world hydrocarbon prices and 
  returns. Lower gas, condensate                   so the Group is subject to external 
  and LPG prices may not only decrease             price trends. 
  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 has significantly              in Ukrainian Hryvnia, and the majority 
  devalued against major world currencies,         of the capital expenditure costs 
  including the US Dollar, where                   for the current investment programme 
  it has fallen from UAH8.3/$1.00                  will be incurred in Ukrainian Hryvnia, 
  on 1 January 2014 to UAH26.2/$1.00               thus the currency of revenue and 
  on 30 June 2019, although it was                 costs are largely matched. In light 
  relatively stable during 2019.                   of the previous devaluation and 
  This devaluation was a significant               volatility of the Ukrainian Hryvnia 
  contributor to the imposition of                 against major world currencies, 
  the banking restrictions by the                  and since the Ukrainian Hryvnia 
  National Bank of Ukraine over recent             does not benefit from the range 
  years. In addition, the geopolitical             of currency hedging instruments 
  events in Ukraine over recent years,             which are available in more developed 
  are likely to continue to impact                 economies, the Group has adopted 
  the valuation of the Ukrainian                   a policy that, where possible, funds 
  Hryvnia against major world currencies.          not required for use in Ukraine 
  Further devaluation of the Ukrainian             be retained on deposit in the United 
  Hryvnia against the US Dollar will               Kingdom, principally in US Dollars. 
  affect the carrying value of the 
  Group's assets. 
                                                 ----------------------------------------------- 
 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                   title transfer until payment is 
  hydrocarbon production, resulting                received. 
  in financial 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 so the Group is subject to external 
  and more particularly the events                 price movements. The Group holds 
  that have occurred in Ukraine over               a significant proportion of its 
  recent years. This has led to extreme            cash reserves in the United Kingdom, 
  foreign exchange movements in the                mostly in US Dollars, with reputable 
  Ukrainian Hryvnia, high inflation                financial institutions. The financial 
  and interest rates, and increased                status of counterparties is carefully 
  credit risk relating to the Group's              monitored to manage counterparty 
  key counterparties.                              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                   The Group ensures compliance with 
  where the right to production can                commitments and regulations relating 
  be challenged by State and non-State             to its production licences through 
  parties. In 2010, this manifested                Group procedures and controls or, 
  itself in the form of a Ministry                 where this is not immediately feasible 
  Order instructing the Group to                   for practical or logistical considerations, 
  suspend all operations and production            seeks to enter into dialogue with 
  from its MEX-GOL and SV production               the relevant Government bodies with 
  licences, which was not resolved                 a view to agreeing a reasonable 
  until mid-2011. In 2013, new rules               time frame for achieving compliance 
  relating to the updating of production           or an alternative, mutually agreeable 
  licences led to further challenges               course of action. Work programmes 
  being 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. 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. 
                                                 ----------------------------------------------- 
 Extension of MEX-GOL and SV licences 
                                                 ----------------------------------------------- 
 The Group's production licences                  The Group monitors legislation in 
  for the MEX-GOL and SV fields currently          Ukraine which is likely to affect 
  expire in 2024. However, in the                  its licences and the obligations 
  estimation of its reserves, it                   associated therewith, and ensures 
  is assumed that licence extensions               that its licence compliance obligations 
  will be granted in accordance with               are monitored and maintained as 
  current Ukrainian legislation and                such compliance is a likely to be 
  that consequently the fields' development        a factor in the extension of the 
  will continue until the end of                   licences in 2024. 
  the fields' economic life in 2038 
  for the MEX-GOL field and 2042 
  for the SV field. Despite such 
  legislation, it is possible that 
  licence extensions will not be 
  granted, which would affect the 
  achievement of full economic field 
  development and consequently the 
  carrying value of the Group's MEX-GOL 
  and SV asset in the future. 
                                                 ----------------------------------------------- 
 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 provided 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 IAS 34 as adopted by the European Union; 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.regalpetroleum.com.

 
 
 

Press Release

Condensed Interim Consolidated Income Statement

 
                                                  6 months      6 months 
                                                     ended         ended 
                                                 30 Jun 19     30 Jun 18 
                                               (unaudited)   (unaudited) 
                                        Note          $000          $000 
 
 Revenue                                   4        31,273        24,643 
 Cost of sales                             5      (17,347)      (12,753) 
-------------------------------------  -----  ------------  ------------ 
 Gross profit                                       13,926        11,890 
 Administrative expenses                           (2,857)       (2,893) 
 Reversal of impairment of property, 
  plant and equipment                                    -        34,469 
 Other operating gains, (net)                        2,619         1,063 
 Operating profit                                   13,688        44,529 
 Finance income                                        516           541 
 Finance costs                                       (220)          (72) 
 Net impairment gains on financial 
  assets                                                11            34 
 Loss on disposal of subsidiary            1         (115)             - 
 Other losses, (net)                                 (625)          (54) 
 Profit before taxation                             13,255        44,978 
 Income tax expense                        6       (3,368)       (6,119) 
-------------------------------------  -----  ------------  ------------ 
 Profit for the period                               9,887        38,859 
-------------------------------------  -----  ------------  ------------ 
 
   Earnings per share (cents) 
 Basic and diluted                         7          3.1c         12.1c 
-------------------------------------  -----  ------------  ------------ 
 

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 19     30 Jun 18 
                                                        (unaudited)   (unaudited) 
                                                               $000          $000 
 
 Profit for the period                                        9,887        38,859 
 
 Other comprehensive income: 
 Items that may be subsequently reclassified 
  to profit or loss: 
 Equity - foreign currency translation                        4,919         2,731 
 Items that will not be subsequently reclassified 
  to profit or loss: 
 Re-measurements of post-employment benefit 
  obligations                                                     -             - 
--------------------------------------------------  ---------------  ------------ 
 Total other comprehensive income                             4,919         2,731 
 Total comprehensive income for the period                   14,806        41,590 
--------------------------------------------------  ---------------  ------------ 
 

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.

Condensed Interim Consolidated Balance Sheet

 
                                           30 Jun 19   31 Dec 18 
                                         (unaudited)   (audited) 
                                  Note          $000        $000 
 
 Assets 
 Non-current assets 
 Property, plant and equipment     8          56,390      50,192 
 Intangible assets                 9           4,930       4,880 
 Right-of-use assets               3           1,075           - 
 Corporation tax receivable                       19          27 
 Deferred tax asset                6           1,364       3,283 
                                              63,778      58,382 
 
 Current assets 
 Inventories                                   2,527       1,605 
 Trade and other receivables       10          4,644      10,130 
 Cash and cash equivalents         12         67,809      53,222 
-------------------------------  -----  ------------  ---------- 
                                              74,980      64,957 
 Total assets                                138,758     123,339 
-------------------------------  -----  ------------  ---------- 
 
 Liabilities 
 Current liabilities 
 Trade and other payables                    (4,208)     (4,836) 
 Lease liabilities                 3           (405)           - 
 Corporation tax payable                       (245)     (1,297) 
-------------------------------  -----  ------------  ---------- 
                                             (4,858)     (6,133) 
-------------------------------  -----  ------------  ---------- 
 Net current assets                           70,122      58,824 
-------------------------------  -----  ------------  ---------- 
 
 Non-current liabilities 
 Provision for decommissioning     11        (4,542)     (3,137) 
 Lease liabilities                 3           (681)           - 
 Defined benefit liability                     (490)       (468) 
 Deferred tax liability            6           (284)       (504) 
                                             (5,997)     (4,109) 
 
 Total liabilities                          (10,855)    (10,242) 
-------------------------------  -----  ------------  ---------- 
 
 Net assets                                  127,903     113,097 
-------------------------------  -----  ------------  ---------- 
 
 Equity 
 Called up share capital                      28,115      28,115 
 Share premium account                       555,090     555,090 
 Foreign exchange reserve                   (97,342)   (102,261) 
 Other reserves                                4,273       4,273 
 Accumulated losses                        (362,233)   (372,120) 
-------------------------------  -----  ------------  ---------- 
 Total equity                                127,903     113,097 
-------------------------------  -----  ------------  ---------- 
 

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

 
                     Called up          Share     Merger         Capital        Foreign 
                         share        premium    reserve   contributions       exchange     Accumulated 
                       capital        account                    reserve       reserve*          losses   Total equity 
                          $000           $000       $000            $000           $000            $000           $000 
 
 As at 1 
  January 2019 
  (audited)             28,115        555,090    (3,204)           7,477      (102,261)       (372,120)        113,097 
 Profit for the 
  period                     -              -          -               -              -           9,887          9,887 
 Other 
 comprehensive 
 income 
  - exchange 
   differences               -              -          -               -          4,919               -          4,919 
---------------  -------------  -------------  ---------  --------------  -------------  --------------  ------------- 
 Total 
  comprehensive 
  income                     -              -          -               -          4,919           9,887         14,806 
 As at 30 June 
  2019 
  (unaudited)           28,115        555,090    (3,204)           7,477       (97,342)       (362,233)        127,903 
---------------  -------------  -------------  ---------  --------------  -------------  --------------  ------------- 
 
 
                     Called up          Share                    Capital        Foreign 
                         share        premium     Merger   contributions       exchange     Accumulated 
                       capital        account    reserve         reserve       reserve*          losses   Total equity 
                          $000           $000       $000            $000           $000            $000           $000 
 
 As at 1 
  January 2018 
  (audited)             28,115        555,090    (3,204)           7,477      (100,932)       (426,178)         60,368 
 Change in 
  accounting 
  policy                     -              -          -               -              -           (106)          (106) 
 Restated total 
  equity at the 
  beginning of 
  the financial 
  year                  28,115        555,090    (3,204)           7,477      (100,932)       (426,284)         60,262 
 Profit for the 
  period                     -              -          -               -              -          38,859         38,859 
 Other 
 comprehensive 
 income 
  - exchange 
   differences               -              -          -               -          2,731               -          2,731 
---------------  -------------  -------------  ---------  --------------  -------------  --------------  ------------- 
 Total 
  comprehensive 
  income                     -              -          -               -          2,731          38,859         41,590 
 As at 30 June 
  2018 
  (unaudited)           28,115        555,090    (3,204)           7,477       (98,201)       (387,425)        101,852 
---------------  -------------  -------------  ---------  --------------  -------------  --------------  ------------- 
 

* Predominantly as result of exchange differences on retranslation, where the subsidiaries functional currency is not US Dollar

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 ended   6 months ended 
                                                                       30 Jun 19        30 Jun 18 
                                                                     (unaudited)      (unaudited) 
                                                           Note             $000             $000 
 
 Operating activities 
 Cash generated from operations                              13           17,596           13,103 
 Equipment rental income                                                      15                - 
 Income tax paid                                                         (2,811)          (2,267) 
 Interest received                                                         2,636            1,079 
--------------------------------------------------------  -----  ---------------  --------------- 
 Net cash inflow from operating activities                                17,436           11,915 
--------------------------------------------------------  -----  ---------------  --------------- 
 
 Investing activities 
 Disposal of subsidiary                                                      (7)                - 
 Purchase of property, plant and equipment                               (4,105)          (2,995) 
 Purchase of intangible assets                                              (19)             (25) 
 Proceeds from sale of property, plant and equipment                          16               15 
 Proceeds from disposal of other short-term investments                        -           16,000 
--------------------------------------------------------  -----  ---------------  --------------- 
 Net cash (outflow)/inflow from investing activities                     (4,115)           12,995 
--------------------------------------------------------  -----  ---------------  --------------- 
 
 Financing activities 
 Principal elements of lease payments                                      (197)                - 
 Net cash outflow from financing activities                                (197)                - 
 
 Net increase in cash and cash equivalents                                13,124           24,910 
 Cash and cash equivalents at beginning of the period        12           53,222           14,249 
 Change in accounting policies                                                 -              (9) 
 ECL of cash and cash equivalents                                           (31)                - 
 Effect of foreign exchange rate changes                                   1,494              886 
 Cash and cash equivalents at end of the period              12           67,809           40,036 
--------------------------------------------------------  -----  ---------------  --------------- 
 

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

   1.    General Information and Operational Environment 

Regal Petroleum plc (the "Company") and its subsidiaries (together the "Group") is a gas, condensate and LPG production group.

Regal Petroleum plc is a company quoted on the AIM Market of the London Stock Exchange and incorporated in England and Wales under the Companies Act 2006. The Company's registered office is at 16 Old Queen Street, London SW1H 9HP, United Kingdom and its registered number is 4462555.

As at 31 December 2018, Pelidona Services Limited held 173,128,587 ordinary shares (54.00%) in the issued share capital of the Company. On 20 June 2019, Pelidona Services Limited increased its shareholding interest in the Company to 264,996,769 ordinary shares (82.65%). As at 30 June 2019, the Company's immediate parent company was Pelidona Services Limited, which is 100% owned by Lovitia Investments Limited, which is 100% owned by Mr V Novynskyi. Accordingly, the Company is ultimately controlled by Mr V Novynskyi.

On 4 March 2019, the Group disposed of its 100% shareholding in Refin LLC to a company under common control for consideration of approximately $9,250. The carrying amount of this subsidiary company at the date of disposal was $125,000, and so the disposal resulted in recognition of a loss on disposal of $115,000.

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 recently.

The Ukrainian economy is showing signs of stabilisation after the previous years of political and economic tensions. The year-on-year inflation rate in Ukraine decreased to 3.6% during the first half 2019 (as compared to 9.8% in 2018), while GDP grew at 2.5% in the first six months of 2019 (after 3.3% growth in 2018).

The National Bank of Ukraine ("NBU") continued its inflation targeting policy and periodically raised its key policy rate from 12.5% in May 2017 to 17% in July 2019. This has helped restrain inflation below 10%, although the cost of domestic funding has increased significantly. The NBU adhered to a floating Ukrainian Hryvnia exchange rate, which finished the first half 2019 at UAH26.17/$1.00, compared to UAH26.19/$1.00 as at 30 June 2018 (31 December 2018: UAH27.69/$1.00).

Among the key mitigating factors enabling the recent relative stability of the Ukrainian Hryvnia were the agreement on a new International Monetary Fund ("IMF") programme, strong revenues of agricultural exporters, tight Ukrainian Hryvnia liquidity and a growth in remittances from labour migrants.

In December 2018, the IMF approved a 14-month Stand-By Arrangement ("SBA") for Ukraine, totalling $3.9 billion which replaced the previous Extended Fund Facility Programme. The first tranche under the SBA of $1.4 billion was received in December 2018, and further disbursements will be considered until November 2019, depending on Ukraine's success in fulfilling the terms of the Memorandum on Economic and Financial Policies agreed with the IMF.

In 2019-2020, Ukraine faces major public debt repayments, which will require the arrangement of substantial domestic and external financing in an increasingly challenging financing environment for emerging markets. Despite certain improvements in 2018-2019, the outcome of these matters and the ongoing effects of the political and economic situation are difficult to predict, but they may have further severe effects on the Ukrainian economy and the Group's business.

Further details of risks relating to Ukraine can be found within the Principal Risks and Uncertainties section earlier in this announcement.

Having considered the Principal Risks and Uncertainties section of this announcement, 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 this announcement. Accordingly, the going concern basis has been adopted in preparing these unaudited condensed interim consolidated financial statements for the period ended 30 June 2019.

The unaudited condensed interim consolidated financial statements for the six month period ended 30 June 2019 have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' as adopted by the European Union. The unaudited condensed interim consolidated financial statements do not include all the notes of the type normally included in annual financial statements. Accordingly, this report should be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2018, which have been prepared in accordance with International Financial Reporting Standards (hereinafter "IFRSs") as adopted by the European Union.

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 2018 were approved by the Board of Directors on 29 April 2019 and subsequently filed with the Registrar of Companies. The Auditor's Report on those accounts was not qualified and did not contain any statement under section 498 of the Companies Act 2006.

The Auditor has carried out a review of the unaudited condensed interim consolidated financial statements for the six month period ended 30 June 2019 and its report is shown at the end of this announcement.

   2.    Accounting Judgements and Estimates 

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 2018, with the exception of the following new or revised standards and interpretations:

New and amended standards adopted by the Group

A number of new or amended standards became applicable for the current reporting period. The Group had to change its accounting policies as a result of the adoption of IFRS 16 Leases.

The impact of the adoption of the leasing standard and the new accounting policies are disclosed in Note 3 below. The other standards did not have any impact on the Group's accounting policies and did not require retrospective adjustments.

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 2018 with certain updates described below.

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 and SV gas and condensate fields

At 30 June 2019, the Group performed an assessment of external and internal indicators to ascertain whether there was any indication of potential impairment of the recoverable amount of the oil and gas development production asset at the MEX-GOL and SV fields. Based on this assessment, the Group concluded that no external or internal impairment indicators existed as at 30 June 2019, and accordingly no impairment testing was required as at that date.

VAS gas and condensate field

Following the successful outcome of the recent drilling project and the subsequent revision of the field development plan for the VAS field in 2019, the Group considered it appropriate to undertake a reassessment of the reserves and resources at the VAS field. Accordingly, the Group engaged independent petroleum consultants DeGolyer and MacNaughton ("D&M") to prepare an updated estimate of remaining reserves and resources as of 31 December 2018. The revised field development plan for this field prepared in 2019 assumes an increase in the number of new wells from one to three wells. The final report issued by D&M in August 2019 provided an estimate of the Group's proved plus probable ("2P") reserves of 3.1 MMboe. The report represents a significant increase in the remaining reserves and resources in this field since the previous estimation undertaken by Senergy (GB) Limited as at 1 January 2016 (1.8 MMboe). The increase in 2P reserves caused the revision of the expected economic life of the field from 2024 to 2028. Further details of this reserves update are set out in the Company's announcement made on 21 August 2019.

At 30 June 2019, the Group performed an assessment of external and internal indicators to ascertain whether there was any indication of potential impairment of the recoverable amount of the oil and gas development production asset at the VAS field. Based on this assessment, the Group concluded that no external or internal impairment indicators existed as at 30 June 2019, and accordingly no impairment testing was required as at that date.

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. Additionally, the latest development plan and therefore the inputs used to determine the depreciation charge, assume that the current licences for the MEX-GOL and SV fields, which are due to expire in July 2024, can be extended until the end of the economic life of the fields.

In light of the revision of the field development plan for the VAS field and the re-assessment of the 2P reserves at this field performed in 2019 by D&M as described above, the Group has revised the estimate of 2P reserves and future cost of developing and extracting those reserves used for the depletion and amortisation calculation. The effect of the change in estimates made in the current reporting period was appropriately recognised in profit or loss in the period of the change and amounted to a decrease of $84,600 in the depletion charge of property, plant and equipment (the depletion charge decreased by $942,600 due to the increase in 2P reserves and increased by $858,000 due to the increase in future capital expenditure) and a decrease of $162,000 in amortisation of mineral reserves for the first half of 2019.

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 2019 was 5.09% (31 December 2018: 8.14%). 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 2019 resulted from the revision of the estimated costs of decommissioning (increase of $101,000 in provision), the decrease in the discount rate applied (increase of $1,397,000 in provision) and the extension of the economic life of the VAS field as a result of the revision of the field development plan in 2019 (decrease of $581,000 in provision). The decrease in discount rate at 30 June 2019 resulted from the decrease in Ukrainian Eurobonds yield and the respective decrease 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 (31 December 2018: by 2038 on the MEX-GOL field, by 2042 on the SV field and 2024 on the VAS field respectively), which is the end of the estimated economic life of the respective fields. If the costs on the MEX-GOL and SV fields were to be incurred at the current expiry of the production licences in 2024, the provision for decommissioning at 30 June 2019 would be $7,978,000 (31 December 2018: $6,268,000).

Changes in presentation

Where necessary, corresponding figures have been adjusted to conform to changes in the presentation in the current period.

   3.    Changes in accounting policies 

This note explains the impact of the adoption of IFRS 16 Leases on the Group's financial statements and also discloses the new accounting policies that have been applied from 1 January 2019.

The Group has adopted IFRS 16 retrospectively from 1 January 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019.

Adjustments recognised on adoption of IFRS 16

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 19.8% for contracts in UAH and 7.4% for contracts in USD.

 
                                                                                        2019 
                                                                                        $000 
 
 Operating lease commitments disclosed as at 31 December 2018                          1,884 
 Discounted using the lessee's incremental borrowing rate of at the date of initial 
  application                                                                          (667) 
 (Less): short-term leases recognised on a straight-line basis as expense               (85) 
 (Less): low-value leases recognised on a straight-line basis as expense                (10) 
------------------------------------------------------------------------------------  ------ 
 Lease liability recognised as at 1 January 2019                                       1,122 
------------------------------------------------------------------------------------  ------ 
 Of which are: 
     Current lease liabilities                                                           371 
     Non-current lease liabilities                                                       751 
------------------------------------------------------------------------------------  ------ 
 
 

The associated right-of-use assets for property leases were measured on a retrospective basis as if the new rules had always been applied. Other right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

The recognised right-of-use assets relate to the following types of assets:

 
             30 Jun 19  1 Jan 19 
                  $000      $000 
 
Properties         538       595 
Land               325       311 
Wells              212       216 
                 1,075     1,122 
 

The change in accounting policy affected the following items in the balance sheet on 1 January 2019:

   --           right-of-use assets - increase by $1,122,000 
   --           lease liabilities - increase by $1,122,000. 

Practical expedients applied

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

 
  --   the use of a single discount rate to a portfolio of leases 
        with reasonably similar characteristics; 
  --   reliance on previous assessments on whether leases are onerous; 
  --   the accounting for operating leases with a remaining lease 
        term of less than 12 months as at 1 January 2019 as short-term 
        leases; 
  --   the exclusion of initial direct costs for the measurement 
        of the right-of-use asset at the date of initial application; 
        and 
  --   the use of hindsight in determining the lease term where 
        the contract contains options to extend or terminate the 
        lease. 
 

The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.

The Group's leasing activities and how these are accounted for

The Group leases various wells, offices, equipment and land. Rental contracts are typically made for fixed periods of 1 to 25 years but may have extension options as described in (ii) below. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Until the 2018 financial year, leases of property, plant and equipment were classified as either finance or operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.

From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

 
  --   fixed payments (including in-substance fixed payments), 
        less any lease incentives receivable; 
  --   variable lease payment that are based on an index or a rate; 
  --   amounts expected to be payable by the lessee under residual 
        value guarantees; 
  --   the exercise price of a purchase option if the lessee is 
        reasonably certain to exercise that option; and 
  --   payments of penalties for terminating the lease, if the 
        lease term reflects the lessee exercising that option. 
 

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

Right-of-use assets are measured at cost comprising the following:

 
  --   the amount of the initial measurement of lease liability; 
  --   any lease payments made at or before the commencement date 
        less any lease incentives received; 
  --   any initial direct costs; and 
  --   restoration costs. 
 

Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.

   (i)       Variable lease payments 

Estimation uncertainty arising from variable lease payments

Some property leases contain variable payment terms that are linked to the volume of production. For wells, up to 100 per cent of lease payments are on the basis of variable payment terms. Variable payment terms are used for a variety of reasons, including minimising the fixed costs base for wells under reconstruction. Variable lease payments that depend on the volume of production are recognised in profit or loss in the period in which the condition that triggers those payments occurs.

    (ii)     Extension and termination options 

Extension and termination options are included in a number of property and equipment leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor.

Critical judgements in determining the lease term

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee.

(iii) Residual value guarantees

The Group does not provide residual value guarantees in relation to equipment leases.

   4.    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, amortisation and reversal of impairment of non-current assets.

6 months ended 30 June 2019 (unaudited)

 
                                  Ukraine   United Kingdom     Total 
                                     $000             $000      $000 
 
 Revenue 
 Gas sales                         23,347                -    23,347 
 Condensate sales                   6,127                -     6,127 
 Liquefied Petroleum Gas sales      1,799                -     1,799 
-------------------------------  --------  ---------------  -------- 
 Total revenue                     31,273                -    31,273 
 
 Segment result                    19,723          (1,107)    18,616 
 Depreciation and amortisation    (4,928)                -   (4,928) 
 Operating profit                                             13,688 
-------------------------------  --------  ---------------  -------- 
 
 Segment assets                   114,564           24,203   138,767 
 
 Capital additions*                 6,722                -     6,722 
 

6 months ended 30 June 2018 (unaudited)

 
                                                            Ukraine   United Kingdom     Total 
                                                               $000             $000      $000 
 
 Revenue 
 Gas sales                                                   18,497                -    18,497 
 Condensate sales                                             4,789                -     4,789 
 Liquefied Petroleum Gas sales                                1,357                -     1,357 
---------------------------------------------------------  --------  ---------------  -------- 
 Total revenue                                               24,643                -    24,643 
 
 Segment result                                              14,076            (829)    13,247 
 Depreciation and amortisation                              (3,187)                -   (3,187) 
 Reversal of impairment of property, plant and equipment     34,469                -    34,469 
---------------------------------------------------------  --------  ---------------  -------- 
 Operating profit                                                                       44,529 
---------------------------------------------------------  --------  ---------------  -------- 
 
 Segment assets                                              80,197           31,684   111,881 
 
 Capital additions*                                           5,311                -     5,311 
 

12 months ended 31 December 2018 (audited)

 
                                                          Ukraine  United Kingdom    Total 
                                                             2018            2018     2018 
                                                             $000            $000     $000 
 
Revenue 
Gas sales                                                  49,668               -   49,668 
Condensate sales                                           12,772               -   12,772 
Liquefied Petroleum Gas sales                               3,658               -    3,658 
--------------------------------------------------------  -------  --------------  ------- 
Total revenue                                              66,098               -   66,098 
 
Segment result                                             41,311         (1,509)   39,802 
Depreciation and amortisation                             (7,901)               -  (7,901) 
Reversal of impairment of property, plant and equipment    34,469               -   34,469 
--------------------------------------------------------  -------  --------------  ------- 
Operating profit                                                                    66,370 
--------------------------------------------------------  -------  --------------  ------- 
 
Segment assets                                             95,782          27,557  123,339 
 
Capital additions*                                          9,552               -    9,552 
 

*Comprises additions to property, plant and equipment and intangible assets (Notes 8 and 9).

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.

During the first half of 2019, the Group continued selling all of its gas production to its related party, LLC Smart Energy ("Smart Energy"). Smart Energy has oil and gas operations in Ukraine and is part of the PJSC Smart-Holding Group, which is ultimately controlled by Mr Vadym Novynskyi, who, through an indirect 82.65% majority shareholding, ultimately controls the Group. This arrangement began in 2017 as a consequence of the Ukrainian Government introducing a number of new provisions into the Ukrainian Tax Code over recent years, including transfer pricing regulations for companies operating in Ukraine. The introduction of those regulations meant that there was an increased regulatory burden on affected companies in Ukraine who must prepare and submit reporting information to the Ukrainian Tax Authorities. Due to the corporate structure of the Group, a substantial proportion of its gas production is produced by a non-Ukrainian subsidiary of the Group, which operates in Ukraine as a branch, or representative office as it is classified in Ukraine. Under the tax regulations, this places additional regulatory obligations on each of the Group's potential customers who may be less inclined to purchase the Group's gas and/or may seek discounts on sales prices. As a result, Smart Energy agreed to purchase all of the Group's gas production and to assume responsibility for the regulatory obligations under the Ukrainian tax regulations. Furthermore, Smart Energy agreed to combine the Group's gas production with its own gas production, and to sell such gas as combined volumes, which has resulted in higher sales prices due to the larger sales volumes. In order to cover Smart Energy's sales, administration and regulatory compliance costs, the Group agreed to sell its gas to Smart Energy at a discount of 0.5% to the gas sales prices achieved by Smart Energy, who sell the combined volumes in line with market prices. Due to changes in the regulatory regime in Ukraine, which has increased the burden of administration and regulatory compliance obligations involved in the sale of gas, and in order to ensure that the Group is compliant with current transfer pricing regulations in Ukraine, the Group and Smart Energy have agreed to increase the discount on the price at which the Group sells its gas to Smart Energy from 0.5% to 2%. The terms of sale for the Group's gas to Smart Energy are (i) payment for one third of the estimated monthly volume of gas by the 20(th) of the month of delivery, and (ii) payment of the remaining balance by the 10(th) of the month following the month of delivery.

   5.    Cost of Sales 
 
                                                6 months ended  6 months ended 
                                                     30 Jun 19       30 Jun 18 
                                                   (unaudited)     (unaudited) 
                                                          $000            $000 
 
Production taxes                                         6,660           6,106 
Depreciation of property, plant and equipment            4,297           2,677 
Rent expenses                                            3,256           1,323 
Staff costs                                              1,161             987 
Cost of inventories recognised as an expense               688             717 
Transmission tariff for Ukrainian gas system               336               - 
Amortisation of mineral reserves                           244             409 
Other expenses                                             705             534 
                                                        17,347          12,753 
 

New legislation relating to the oil and gas sector in Ukraine has been introduced over the last year, and in this regard, with effect from 1 January 2019, the subsoil tax rates applicable to condensate production were reduced from 45% to 31% for condensate produced from deposits above 5,000 metres and from 21% to 16% for condensate produced from deposits below 5,000 metres.

From 1 January 2019, a transmission tariff for use of the Ukrainian gas system of UAH91.87 per 1000 m(3) of gas was introduced.

   6.    Taxation 

The income tax charge of $3,368,000 for the six month period ended 30 June 2019 relates to a urrent tax charge of $1,684,000 and a deferred tax charge of $1,684,000 (six month period ended 30 June 2018: current tax charge of $2,102,000 and deferred tax charge of $4,017,000).

The movement in the period was as follows:

 
                                                          6 months ended   6 months ended 
                                                               30 Jun 19        30 Jun 18 
                                                             (unaudited)      (unaudited) 
                                                                    $000             $000 
 Deferred tax asset recognised on tax losses 
 At beginning of the period                                        2,134            2,567 
 (Charged)/credited to Income Statement - current year           (2,134)            4,669 
 At end of the period                                                  -            7,236 
-------------------------------------------------------  ---------------  --------------- 
 
 
 Deferred tax asset/(liability) recognised relating to development and production assets at 
  MEX-GOL-SV fields and provision for decommissioning 
 At beginning of the period                                                                    1,149     6,694 
 Credited/(charged) to Income Statement - current period                                         209   (8,801) 
 Effect of exchange difference                                                                     6       488 
-------------------------------------------------------------------------------------------- 
 At end of the period                                                                          1,364   (1,619) 
--------------------------------------------------------------------------------------------  ------  -------- 
 
 
 Deferred tax liability recognised relating to development and production assets at VAS field 
  and provision for decommissioning 
 At beginning of the period                                                                      (504)   (820) 
 Credited to Income Statement - current period                                                     241     115 
 Effect of exchange difference                                                                    (21)    (56) 
---------------------------------------------------------------------------------------------- 
 At end of the period                                                                            (284)   (761) 
----------------------------------------------------------------------------------------------  ------  ------ 
 

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.

At 30 June 2019, the Group derecognised a deferred tax asset of $2,134,000 due to losses expected in the foreseeable future. There was a further $101 million (31 December 2018: $85 million) of unrecognised UK tax losses carried forward for which no deferred tax asset has been recognised. These losses can be carried forward indefinitely, subject to certain rules regarding capital transactions and changes in the trade of the Company.

The deferred tax asset relating to the Group's provision for decommissioning at 30 June 2019 of $208,000 (31 December 2018: $161,000) 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 asset relating to the Group's development and production assets at the MEX-GOL and SV fields at 30 June 2019 of $1,156,000 (31 December 2018: $988,000) 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 2019 of $293,000 (31 December 2018: $271,000) 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 2019 of $577,000 (31 December 2018: $775,000) 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.

UK Corporation tax change

A change to the UK corporation tax rate was announced in the Chancellor's Budget on 16 March 2016. The change announced is to reduce the corporation tax rate to 17% from 1 April 2020. Changes to reduce the UK corporation tax rate to 19% from 1 April 2017 and to 18% from 1 April 2020 were substantively enacted on 26 October 2015. The changes to reduce the UK corporation tax rate to 17% from 1 April 2020 were substantively enacted on 6 September 2016 and the effect of these changes are included in these unaudited condensed interim consolidated financial statements.

   7.    Profit 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 2019 and 30 June 2018 and 320,637,836 ordinary shares, being the average number of shares in issue for the period. There are no dilutive instruments.

   8.    Property, Plant and Equipment 
 
                                    6 months ended 30 Jun 19                         6 months ended 30 Jun 18 
                                           (unaudited)                                      (unaudited) 
                                                                               ------------------------------------- 
                          Oil and gas         Oil and gas                             Oil and gas 
                      development and     exploration and    Other                development and    Other 
                    production assets   evaluation assets    fixed              production assets    fixed 
                              Ukraine                       assets      Total             Ukraine   assets     Total 
                                 $000                $000     $000       $000                $000     $000      $000 
  Cost 
  At beginning of 
   the period                 104,809               1,259    1,293    107,361             101,927    1,104   103,031 
  Additions                     5,791                 796       68      6,655               4,959      303     5,262 
  Change in 
   decommissioning 
   provision                    1,058                   -        -      1,058               (393)        -     (393) 
  Disposals                      (51)                   -        -       (51)                (11)     (25)      (36) 
  Exchange 
   differences                  6,292                 117       45      6,454               7,622       43     7,665 
  At end of the 
   period                     117,899               2,172    1,406    121,477             114,104    1,425   115,529 
 
  Accumulated 
  depreciation and 
  impairment 
  At beginning of 
   the period                  56,567                   -      602     57,169              87,591      478    88,069 
  Charge for the 
   period                       4,388                   -      103      4,491               2,677       79     2,756 
  Reversal of 
   impairment                       -                   -        -          -            (36,117)        -  (36,117) 
  Impairment 
   charged 
   for individual 
   assets                           -                   -        -          -               1,648        -     1,648 
  Disposals                      (17)                   -      (4)       (21)                 (2)     (17)      (19) 
  Exchange 
   differences                  3,409                   -       39      3,448               6,257       34     6,291 
  At end of the 
   period                      64,347                   -      740     65,087              62,054      574    62,628 
  Net book value 
   at the 
   beginning of 
   the period                  48,242               1,259      691     50,192              14,336      626    14,962 
------------------  -----------------  ------------------  -------  ---------  ------------------  -------  -------- 
  Net book value 
   at end of the 
   period                      53,552               2,172      666     56,390              52,050      851    52,901 
------------------  -----------------  ------------------  -------  ---------  ------------------  -------  -------- 
 

As described in Note 2, as at 30 June 2019, the Group concluded that no external or internal impairment indicators existed as at 30 June 2019, and accordingly no impairment testing was required as at that date.

Additions to the oil and gas development and production assets in the amount of $4,649,000 relate to the drilling costs of the MEX-119 well on MEX-GOL field.

During the first half 2019, the Group completed the acquisition of new 3D seismic over the VAS field which will assist in the evaluation of the VAS licence, and particularly the VED area of the licence. Since no commercially viable reserves have been identified in the VED area as yet, the costs of the seismic over this area were capitalised within property, plant and equipment as exploration and evaluation assets.

   9.    Intangible Assets 
 
                                 6 months ended 30 Jun 19                         6 months ended 30 Jun 18 
                                        (unaudited)                                      (unaudited) 
                          Mineral reserve     Other intangible             Mineral reserve     Other intangible 
                                   rights               assets  Total               rights               assets  Total 
                                     $000                 $000   $000                 $000                 $000   $000 
  Cost 
  At beginning of 
   the period                       6,709                  330  7,039                6,618                  257  6,875 
  Additions                             -                   67     67                    -                   49     49 
  Exchange 
   differences                        390                   21    411                  475                   20    495 
--------------------  -------------------  -------------------  -----  -------------------  -------------------  ----- 
  At end of the 
   period                           7,099                  418  7,517                7,093                  326  7,419 
--------------------  -------------------  -------------------  -----  -------------------  -------------------  ----- 
 
  Accumulated amortisation 
   and impairment 
  At beginning of 
   the period                       1,965                  194  2,159                1,161                  124  1,285 
  Amortisation 
   charge for the 
   period                             244                   57    301                  409                   41    450 
  Exchange 
   differences                        121                    6    127                   90                   11    101 
--------------------  -------------------  -------------------  -----  -------------------  -------------------  ----- 
  At end of the 
   period                           2,330                  257  2,587                1,660                  176  1,836 
--------------------  -------------------  -------------------  -----  -------------------  -------------------  ----- 
  Net book value at 
   beginning of the 
   period                           4,744                  136  4,880                5,457                  133  5,590 
--------------------  -------------------  -------------------  -----  -------------------  -------------------  ----- 
  Net book value at 
   end of the period                4,769                  161  4,930                5,433                  150  5,583 
--------------------  -------------------  -------------------  -----  -------------------  -------------------  ----- 
 
 

Intangible assets consist mainly of the hydrocarbon production licence relating to the VAS gas and condensate field which is held by LLC Prom-Enerho Produkt. The Group amortises this intangible asset using the straight-line method over the term of the economic life of the VAS field until 2028. The economic life of the VAS field was extended as a result of the new assessment of 2P reserves, as described in Note 2.

At 30 June 2019, 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 this assessment, the Group concluded that no external or internal impairment indicators existed as at 30 June 2019, and accordingly no impairment testing was required as at that date.

   10.   Trade and Other Receivables 
 
                                       30 Jun 19   31 Dec 18 
                                     (unaudited)   (audited) 
                                            $000        $000 
 
Trade receivables                          1,909       5,012 
Other financial receivables                  263         202 
Less credit loss allowance                  (99)        (99) 
----------------------------------  ------------  ---------- 
Total financial receivables                2,073       5,115 
 
Prepayments and accrued income             2,340       4,771 
Other receivables                            231         244 
Total trade and other receivables          4,644      10,130 
 

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 (see Note 4). The applicable payment terms are 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 prepayment of $693,000 relating to the development of the MEX-GOL field and $579,000 relating to the development of the VAS field (31 December 2018: $3,988,000 relating to the development of the MEX-GOL field).

   11.   Provision for Decommissioning 
 
                                6 months ended  6 months ended 
                                     30 Jun 19       30 Jun 18 
                                   (unaudited)     (unaudited) 
                                          $000            $000 
 
At beginning of the period               3,137           3,027 
Amounts provided                           141              91 
Unwinding of discount                      128              72 
Change in estimate                         917           (484) 
Effect of exchange difference              219             210 
------------------------------  --------------  -------------- 
At end of the period                     4,542           2,916 
 

The provision for decommissioning is based on the net present value of the Group's estimated liability for the removal of the Ukraine production facilities and well site restoration at the end of production life.

The non-current provision of $4,542,000 (31 December 2018: $3,137,000) 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 2019 resulted from the revision of the estimated costs of decommissioning (increase of $101,000 in provision), the decrease in the discount rate applied (increase of $1,397,000 in provision) and the extension of the economic life of the VAS field as a result of the revision of the field development plan in 2019 (decrease of $581,000 in provision).

   12.   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 19    31 Dec 18 
                                 (unaudited)    (audited) 
                                        $000         $000 
 Financial assets 
 Cash and cash equivalents            67,809       53,222 
 Trade and other receivables           2,073        5,115 
                                              ----------- 
                                      69,882       58,337 
 Financial Liabilities 
 Lease liabilities                     1,086            - 
 Trade payables                          178          105 
 Accruals                              1,052        1,284 
                                              ----------- 
                                       2,316        1,389 
 
 

All assets and liabilities of the Group where fair value is disclosed are of level 2 value hierarchy and valued using current cost accounting techniques.

At 30 June 2019, the Group held cash and cash equivalents in the following currencies:

 
                      30 Jun 19 (unaudited)     31 Dec 18 
                                                (audited) 
                                       $000          $000 
 
 US Dollars                          39,237        27,699 
 Ukrainian Hryvnia                   28,269        25,264 
 British Pounds                         215           215 
 Euros                                   88            44 
                                     67,809        53,222 
-------------------  ----------------------  ------------ 
 
 

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 and the United Kingdom.

   13.   Reconciliation of Operating Profit to Operating Cash Flow 
 
                                                            6 months ended   6 months ended 
                                                                 30 Jun 19        30 Jun 18 
                                                               (unaudited)      (unaudited) 
                                                                      $000             $000 
 
 Operating profit                                                   13,688           44,529 
 
 Reversal of impairment of property, plant and equipment                 -         (34,469) 
 Depreciation and amortisation                                       4,928            3,187 
 Less interest income recorded within operating profit             (2,792)            (873) 
 Provision for VAT repayment                                           405                - 
 Fines and penalties received                                         (15)                - 
 Loss from credit loss allowance                                        41               11 
 Loss from write off of non-current assets                               -                2 
 Reversal of loss allowance on other financial assets                 (11)             (38) 
 Gain on sales of current assets, net                                 (18)             (71) 
 Decrease in provisions                                                (9)              (4) 
 Decrease/(increase) in inventory                                    (742)              153 
 Decrease in receivables                                             3,251              256 
 (Decrease)/increase in payables                                   (1,130)              420 
---------------------------------------------------------  ---------------  --------------- 
 Cash generated from operations                                     17,596           13,103 
---------------------------------------------------------  ---------------  --------------- 
 
   14.   Contingencies and Commitments 

Amounts related to works contracted but not yet undertaken in relation to the Group's 2019 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 2019, were $2,368,000 (31 December 2018: $2,607,000).

During 2010 - 2019, 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 Group 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 2019 (31 December 2018: 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.

In the first half 2019, a review of the Group's VAT compliance by HM Revenue & Customs resulted in the disallowance of VAT reclaims of GBP296,190 and interest of GBP22,942, which is equivalent to approximately $405,000.

   15.   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 2019 was $369,000 (six month period ended 30 June 2018: $468,000, and year ended 31 December 2018: $810,000).

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 19        30 Jun 18 
                                       (unaudited)      (unaudited) 
                                              $000             $000 
 
 Sale of goods/services                     23,185           18,514 
 Purchase of goods/services                    444              230 
 Amounts owed by related partied             1,683            2,580 
 Amounts owed to related parties               157               61 
---------------------------------  ---------------  --------------- 
 

All related party transactions were with subsidiaries of the ultimate parent company, and primarily relate to the sale of gas to LLC Smart Energy (Note 4), 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 2019, the Company's immediate parent company was Pelidona Services Limited, which is 100% owned by Lovitia Investments Limited, which is 100% owned by Mr V Novynskyi. Accordingly, the Company was ultimately controlled by Mr V Novynskyi.

The Group operates bank accounts in Ukraine with a related party bank, Unex Bank, which is ultimately controlled by Mr V Novynskyi. There were the following transactions and balances with Unex Bank during the period:

 
                         6 months ended   6 months ended 
                              30 Jun 19        30 Jun 18 
                            (unaudited)      (unaudited) 
                                   $000             $000 
 
 Interest income                      -                1 
 Bank charges                         1               20 
 Closing cash balance                 -               26 
 
 

At the date of this announcement, none of the Company's controlling parties prepares consolidated financial statements available for public use.

   16.   Events occurring after the Reporting Period 

There were no significant events to report.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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