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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Ades International Holding Plc | LSE:ADES | London | Ordinary Share | AEDFXA1EN018 | ORD USD1.00 (DI) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 12.35 | 12.00 | 12.70 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From May 2019 to May 2024
TIDMADES
RNS Number : 8091T
ADES International Holding
25 March 2019
For the purpose of the Transparency Directive the Home Member state of the issuer is the United Kingdom.
ADES International Holding PLC results for the year ended 31 December 2018
(London & Dubai, 25 March 2019) ADES International Holding PLC ("ADES" or "the Group"), a leading oil & gas drilling and production services provider in the Middle East and North Africa (MENA), announces its full-year results for the year ended 31 December 2018.
Summary of Financials
(USD '000) 2018 2017 % change -------------------------------- -------- -------- --------- Revenues 205,563 157,590 30.4% -------------------------------- -------- -------- --------- EBITDA 101,070 80,318 25.8% -------------------------------- -------- -------- --------- EBITDA Margin 49.2% 51.0% -1.8 pts -------------------------------- -------- -------- --------- Net Profit 75,331 44,574 69.0% -------------------------------- -------- -------- --------- Net Profit Margin 36.6% 28.3% 8.3 pts -------------------------------- -------- -------- --------- Weighted Average No. of Shares 43,082 38,554 11.7% -------------------------------- -------- -------- --------- Earnings per Share (USD) 1.75 1.16 50.9% -------------------------------- -------- -------- --------- Normalised Net Profit* 44,561 49,637 -10.2% -------------------------------- -------- -------- --------- Normalised Net Profit Margin 21.7% 31.5% -9.8 pts -------------------------------- -------- -------- --------- Net Debt 424,393 75,525 -------------------------------- -------- -------- ---------
*Normalised Net Profit - Excludes the one-off bargain purchase gain on acquisitions, transaction expenses and debt refinancing and arrangement fees from 2018 net profit and factors out IPO-related expenses from 2017 net profit.
Key financial and operational highlights
-- Revenue grew by 30.4% year-on-year to USD 205.6 million in 2018 from USD 157.6 million in 2017, primarily driven by contributions from newly acquired rigs and a higher utilisation rate. 2H2018 revenue grew by 57.9% from 1H2018.
-- EBITDA increased by 25.8% year-on-year to USD 101.1 million in 2018 from USD 80.3 million in 2017.
-- Net profit grew by 69.0% year-on-year to USD 75.3 million in 2018, equivalent to USD 1.75 per share, compared to USD 44.6 million and USD 1.16 per share in 2017.
-- Normalised net profit decreased by 10.2% year-on-year to USD 44.6 million in 2018 from USD 49.6 million in 2017 driven by higher net finance cost related to an increase in debt utilisation, as well as higher depreciation and tax expenses.
-- Number of operating rigs more than doubled in 2018 to 28 rigs compared to 12 rigs in 2017**.
-- Strong balance sheet position, with net debt of USD 424.4 million at 31 December 2018, supported by our commitment to keep our backlog at least 2x net debt. The Group's net leverage was below 2.5x on a pro-forma basis as at year-end 2018. Total debt stood at USD 555.3 million on account of higher debt utilisation.
-- Achieved over 5.3 million man hours with a Recordable Injury Frequency Rate ("RIFR") (per 200,000 working hours) of 0.57, below the IADC worldwide standard rate of 0.68 as at 31 December 2018.
-- Executed several key acquisitions including three offshore rigs from Nabors in the Kingdom of Saudi Arabia (KSA), and finalised the acquisition of 23 from 31 onshore rigs under the Weatherford transaction, with the remainder completing in early 2019.
-- Good flow of contract renewals and extensions with successful renewal of near-term expiring contracts at our Egyptian operations and Admarine 657.
-- Backlog at year end stood at c.USD 1.2 billion, compared to USD 427 million in 2017, growing almost threefold.
-- Utilisation rate for 2018 stood at 85% compared to 78% in 2017.
**The Group completed the acquisition of 23 out of 31 rigs from the Weatherford transaction - of which 13 rigs are operational, four undergoing upgrade works and six uncontracted.
Post year-end news flow, current trading and outlook
-- Expected material top-line growth in 2019 driven primarily by the full-year impact of the Nabors and Weatherford acquisitions.
-- Backlog as at end of February 2019 of c.USD 1.5 billion, reflecting recently finalised acquisitions, contract renewals and new awards, significantly underpinning our revenue and cash flow visibility for 2019.
o Acquisition of Weatherford assets - four rigs acquired in Algeria in February 2019.
o Secured two new contracts in February 2019 for new-build rigs in KSA for a tenure of seven years each, contributing a combined c. USD 150 million of additional backlog.
o Renewed six contracts in KSA in February 2019 for recently acquired rigs from Weatherford for three years each, contributing c. USD 228 million of additional backlog at signing.
-- Secured first contract for deepwater drilling services in the Egyptian Mediterranean basin in March 2019 using the Group's asset light model. This gives access to the deep drilling market amid significant gas discoveries in Egypt.
-- Expected normalisation of working capital in 2019 despite the Group's growth profile.
-- Further expansionary capital expenditures in 2019 to fund the commissioning of two new-build onshore rigs, upgrades to the Weatherford assets and finalization of the transaction's remaining rigs as well as the Group's regular maintenance cycle. Normalisation of CAPEX levels expected by 2020.
-- Examining various potential sources of financing to optimise the Group's capital structure and cost of funding for our future business plan.
-- Primarily focus on organic growth and integration, leveraging ADES' newly expanded fleet and increased exposure to the onshore and offshore oil and gas market.
-- Extracting synergies from the acquisitions during 2019 by capitalising on increased economies of scale.
Commenting on the results, Dr. Mohamed Farouk, Chief Executive Officer of ADES International said:
"2018 was a transformational year that elevated the Group to a regional champion with a good spread of tier-one IOC's and NOC's, geographies and selected markets.
We executed a number of acquisitions from Nabors and Weatherford during 2018, which in combination with organic developments delivered strong revenue growth for the year. These acquisitions have seen us grow our backlog threefold to c.USD 1.2 billion at year end 2018 and enabled us to enter 2019 with significant revenue visibility. We remain committed to complying with the highest occupational health, safety and environmental standards and are working to further develop the Group's safety procedures in line with its enlarged fleet and operational capacity.
The current year has started with a strong and growing order backlog that stood at c.USD 1.5 billion as at February 2019, new and renewed contracts in KSA and our first contract for deep-water drilling services in the Egyptian Mediterranean. Our focus in 2019 will be on extracting synergies from the acquisitions and the integration of the Weatherford assets, tendering activity and maintaining excellent customer service and asset utilisation. ADES continues to maintain a strong balance sheet which provides headroom to invest in organic development and appropriate acquisition opportunities as they arise. The Board has confidence in the year ahead and in the Group's medium-term prospects."
Conference Call
ADES' management team will present the 2018 Results and will be available for a Q&A session with analysts and investors today at 13:00 GMT. For conference call details, please email ades@instinctif.com.
Enquiries
ADES International Holding
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Investor Relations Officer
ir@adesgroup.com
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About ADES International Holding (ADES)
ADES International Holding extends oil and gas drilling and production services through its subsidiaries and is a leading service provider in the Middle East and North Africa, offering onshore contract drilling as well as workover and production services. Its 4,000 employees serve clients including major national oil companies ("NOCs") such as Saudi Aramco and Kuwait Oil Company as well as joint ventures of NOCs with global majors including BP and Eni. While maintaining a superior health, safety and environmental record, the Group currently has a fleet of 13 jack-up offshore drilling rigs, 30 onshore drilling rigs, 1 jack-up barge, and 1 mobile offshore production unit ("MOPU"), which includes a floating storage and offloading unit. For more information, visit investors.adihgroup.com.
Shareholder Information
LSE: ADES INT.HDG
Bloomberg: ADES:LN
Listed: May 2017
Shares Outstanding: 43.8 million
Forward-Looking Statements
This communication contains certain forward-looking statements. A forward-looking statement is any statement that does not relate to historical facts and events, and can be identified by the use of such words and phrases as "according to estimates", "aims", "anticipates", "assumes", "believes", "could", "estimates", "expects", "forecasts", "intends", "is of the opinion", "may", "plans", "potential", "predicts", "projects", "should", "to the knowledge of", "will", "would" or, in each case their negatives or other similar expressions, which are intended to identify a statement as forward-looking. This applies, in particular, to statements containing information on future financial results, plans, or expectations regarding business and management, future growth or profitability and general economic and regulatory conditions and other matters affecting the Group.
Forward-looking statements reflect the current views of the Group's management ("Management") on future events, which are based on the assumptions of the Management and involve known and unknown risks, uncertainties and other factors that may cause the Group's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. The occurrence or non-occurrence of an assumption could cause the Group's actual financial condition and results of operations to differ materially from, or fail to meet expectations expressed or implied by, such forward-looking statements.
The Group's business is subject to a number of risks and uncertainties that could also cause a forward-looking statement, estimate or prediction to differ materially from those expressed or implied by the forward-looking statements contained in this prospectus. The information, opinions and forward-looking statements contained in this communication speak only as at its date and are subject to change without notice. The Group does not undertake any obligation to review, update, confirm or to release publicly any revisions to any forward-looking statements to reflect events that occur or circumstances that arise in relation to the content of this communication.
Chief Executive Officer's Report
2018 was a transformational year and the Group has emerged as a powerhouse in the MENA oil and gas drilling and production services industry. Over the past 12 months, we successfully utilised our financial firepower to execute important acquisitions that saw us rapidly expand our fleet and more than double our number of operating rigs, establish a solid foothold in the onshore drilling market and increase our footprint across the MENA region, all while maintaining solid financial results.
Since our listing in 2017, we have maintained a strong focus on building a robust corporate governance framework. After a period of significant operational growth, we are actively reviewing ways of augmenting our procedures and structures so that the highest standards are maintained.
ADES also remained committed to complying with the highest occupational health, safety and environmental ("HSE") standards, reporting an RIFR of 0.57 as at year-end 2018, well below the 2018 IADC worldwide standard rate of 0.68 and underlining the success of our HSE management system in identifying, prioritising and controlling risks.
Parallel to our strong financial performance and track record of operational excellence, we were able to successfully triple our backlog at year-end 2018 to c.USD 1.2 billion. The increase was due to the significant acquisitions executed at compelling valuation metrics and adding at the time of closing approximately USD 800 million of backlog across AA- and A-rated, sovereign IOCs and NOCs. In addition, we were able to successfully renew near-term expiring contracts at our Egyptian operations. In combination, these developments strongly underpin our revenue expectations for 2019 and long-term cash flow generation for the upcoming years.
We completed our first acquisition in June 2018 that saw us secure the Nabors rigs in KSA with a combined backlog of c.USD 140 million. The acquisition doubled our offshore fleet in KSA from three to six rigs, positioning us in the ultra-shallow drilling market and making us a top offshore player. Following the acquisition of the Nabors rigs, we successfully renewed a contract with Aramco in December 2018 for one of the newly acquired rigs for a total tenure of seven years, adding c. USD 150 million in backlog.
2018 also saw us strengthen our onshore capabilities while delivering on our goal to expand our presence across attractive pre-selected markets within the Middle East and Africa. We had executed the acquisition of 23 onshore rigs - 17 of which are contracted - in Kuwait and KSA from Weatherford in November and December 2018 respectively, while in February 2019 we finalised the acquisition of four further contracted onshore rigs in Algeria. These acquisitions have given us access to the onshore gas drilling market and the Kuwaiti onshore deep drilling market as a tier one pre-qualified entity.
In February 2019, we successfully renewed the term of six drilling contracts associated with the onshore operating rigs acquired in KSA under the Weatherford acquisition, which grew our backlog a further c.USD 228 million, illustrating our ability to deliver backlog growth and revenue generation from our new onshore assets with minimal disruption. The renewals are also a testament to the confidence our clients place in us to provide a consistent, high-quality service, and highlight our ability to extract value from our recent acquisitions and retain our high-profile clientele on both existing and newly acquired rigs.
We also recently secured two new contracts for new-build rigs in KSA for a tenure of seven years each, contributing a combined c.USD 150 million of additional backlog. The commissioning of new-build rigs reflects our increasing focus on organic growth following a period of significant acquisition activity.
To preserve our achievements on-the-ground, we continue to implement our comprehensive integration programme in collaboration with a top-tier global consultant to efficiently manage the rapid growth in our operational capacity. Our end goal is the optimal utilisation of the newly acquired rigs and delivering sustainable long-term growth through tendering activities in pre-selected markets in the MENA region.
A key pillar of ADES' success has been its exemplary safety record, and we are currently working with a HSE consultant to review and develop the Group's safety procedures. These will be rolled out across our enlarged fleet.
Outlook
2018 was a transformational year that elevated the company to a regional champion with a good spread of customers, geographies and end markets. 2019 will be focused on extracting synergies from the acquisitions, tendering activity and maintaining excellent customer service and asset utilisation. We will accelerate organic growth by capitalising on our expanded fleet and through our asset-light model such as the recently secured contract for deep-water drilling in Egypt with our joint venture partners Vantage International.
Our newly acquired assets have contributed to our strengthened position in the onshore market, while in the offshore segment we are strategically located to benefit from the significant share of global growth, expected to come from the MENA region. ADES is ideally positioned to capture this anticipated growth given its ability to offer global best practice with the insight, cost structure and cultural alignment of a local player.
We have a strong balance sheet and inherently cash generative operations, which continue to provide headroom to invest in organic development and appropriate acquisition opportunities as they arise. To that end, we continue to explore various financing options to further optimise our capital structure and fund our future business plans.
We have entered the current financial year with a strong and growing order backlog that stood at c.USD 1.5 billion as at February 2019, providing high levels of confidence in delivering a significant increase in revenue by the end of the year, which is further supported by a clear CAPEX plan to continue providing a high-quality service to our clients.
Finally, I would like to thank ADES' management and employees for their continued commitment and hard work, and I look forward to another year of operational excellence and growth, strengthened profitability, and creation of long-term value for our shareholders.
Dr. Mohamed Farouk, Chief Executive Officer
Operational & Financial Review
Revenue
Consolidated revenue increased 30.4% year-on-year to USD 205.6 million in 2018. Growth came as the Group completed recertification and upgrading projects performed on Admarine 262 and Admarine 655 in KSA and Admarine III in Egypt during 1H2018, thus allowing it to ramp up utilisation rates during the second half of the year. Full-year average utilisation rates stood at 85% in 2018 versus 78% in 2017. Revenue growth during the year was also supported by contributions from the three newly acquired Nabors rigs, which were weighed toward the second half of the year.
Following the acquisition of 23 out of 31 rigs from the Weatherford transaction - of which 13 rigs are operational, four undergoing upgrade works and six uncontracted - newly acquired business including the Nabors rigs contributed 23.6% of ADES' revenue in 2018 and was heavily weighted toward the fourth quarter of the year. Newly acquired rigs along with a ramp up in utilisation helped drive a 57.9% growth in 2H2018 revenue compared to 1H2018.
Revenue by Country
(USD '000) 2018 2017 % change
------------- -------- -------- ---------
KSA 96,095 53,738 78.8%
------------- -------- -------- ---------
Egypt 87,227 82,298 6.0%
------------- -------- -------- ---------
Algeria 11,594 21,554 -46.2%
------------- -------- -------- ---------
Kuwait 10,647 - -
------------- -------- -------- ---------
Total 205,563 157,590 30.4%
------------- -------- -------- ---------
Revenue Contribution by Country
2018 2017 % change
--------------------------------- ----- ----- ---------
KSA 47% 34% 13 pts
--------------------------------- ----- ----- ---------
Egypt 42% 52% -10 pts
--------------------------------- ----- ----- ---------
Algeria 6% 14% -8 pts
--------------------------------- ----- ----- ---------
Kuwait 5% - 5 pts
--------------------------------- ----- ----- ---------
Revenue from Egypt was USD 87.2 million in 2018, up 6.0% versus the previous year due to higher utilisation rates along with the full-year impact of operations at Admarine 8 and Admarine 88. The country's contribution to total revenue stood at 42%, down from 52% in 2017. The Group expects Egypt's contribution to continue decreasing to below 20% in 2019 as it consolidates revenue from the Weatherford acquisitions in Kuwait and KSA and from the full-year impact of the Nabors rigs. This is in line with the Group's strategy of diversifying its revenue base across the region.
In KSA, revenue increased 78.8% year-on-year to USD 96.1 million in 2018. The country's contribution to top-line has thus increased by 13 percentage points to 47% during the year. This increase follows the acquisition of the three Nabors rigs in June 2018, two of which immediately began contributing to revenue and the third having gone upgrade works and started contributing to the top-line in 4Q2018. Additionally, ADES finalised the acquisition of 11 onshore rigs in KSA from Weatherford in December 2018, nine of which are contracted and contributed to revenue during the final month of the year.
In Algeria, where the Group currently has two onshore rigs, of which one is operational, revenue recorded USD 11.6 million in 2018, down 46.2% versus the USD 21.6 million recorded in 2017. The decrease followed the expiration of the ADES II contract, with the rig currently in the tendering process. Algeria's total contribution to revenue stood at 6% in 2018 versus 14% in the previous year.
ADES entered into the Kuwaiti market after finalising the Kuwait segment of the Weatherford transaction in November 2018, with 12 onshore rigs added to the Group's fleet. A total of eight from the 12 rigs were contracted, four of which were operational during the last two months of 2018 and contributed USD 10.6 million in revenue. The remaining four non-operational rigs were undergoing upgrade projects in 2018 and are expected to begin contributing to revenue during 1H2019. Kuwait's contribution to total revenue was 5% and is expected to increase in 2019 during which the full impact of the new assets will be reflected.
Assets by Country & Type as at 31 December 2018
Onshore Rig Offshore Rig Jack-up Barge MOPU
-------------- ------------ ------------- -------------- -----
KSA 11 6 - -
-------------- ------------ ------------- -------------- -----
Egypt - 6 1 1
-------------- ------------ ------------- -------------- -----
Algeria 2 - - -
-------------- ------------ ------------- -------------- -----
Kuwait 12 - -
-------------- ------------ ------------- -------------- -----
Other 1 1 - -
-------------- ------------ ------------- -------------- -----
Total Assets 26 13 1 1
-------------- ------------ ------------- -------------- -----
Revenue by Segment
(USD '000) 2018 2017 % change ------------------------------ -------- -------- --------- Offshore Drilling & Workover 140,010 101,360 37.8% ------------------------------ -------- -------- --------- Onshore Drilling & Workover 30,998 19,247 61.1% ------------------------------ -------- -------- --------- MOPU 25,724 25,853 -0.5% ------------------------------ -------- -------- --------- Jack-Up Barge & Projects 6,659 9,901 -32.7% ------------------------------ -------- -------- --------- Others 2,172 959 126.5% ------------------------------ -------- -------- --------- Total 205,563 157,590 30.4% ------------------------------ -------- -------- ---------
Offshore Drilling & Workover (68% of revenues in 2018)
We currently conduct our offshore drilling and workover services in Egypt and KSA, focusing on shallow/ultra-shallow water and non-harsh environments.
Offshore Drilling & Workover recorded revenue of USD 140.0 million in 2018, up 37.8% year-on-year and contributing 68% to total consolidated revenue verses 64% in 2017. Growth was driven by the increase in number of operational offshore rigs post the acquisition of the three Nabors rigs in June 2018.
Onshore Drilling & Workover (15% of revenues in 2018)
At year-end 2018, ADES was operating a fleet of 26 onshore rigs, 23 of which were acquired from Weatherford - 12 in Kuwait and 11 in KSA - for USD 215.5 million in late 2018. Consequently, revenue from Onshore Drilling & Workover operations grew 61.1% year-on-year to USD 31.0 million in 2018, contributing 15% to total consolidated revenue versus 12% in 2017.
MOPU (13% of revenues in 2018)
ADES' MOPU services were first introduced by ADES in February 2016 with Admarine I, a converted and modified jack-up rig equipped with production and process facilities and a Floating Storage and Offloading (FSO) unit. Admarine I, located in Egypt, is currently under contract with Petrozenima to process, store and offload crude oil.
MOPU services generated revenues of USD 25.7 million in 2018, remaining almost stable compared to the USD 25.9 million recorded in 2017. Contribution to total revenues decreased from 16% in 2017 to 13% in 2018 to reflect the higher contribution from the Group's Offshore and Onshore Drilling & Workover segment.
Jack-Up Barge & Projects (3% of revenues in 2018)
As part of its offshore offering, ADES owns an offshore jack-up barge, Admarine II, which is currently contracted to GUPCO in the Gulf of Suez area of Egypt. Projects revenue is primarily generated from contracting fees charged to clients for outsourcing various operating projects, such as maintenance, construction and repair services, to third-party personnel.
Revenue from the Company's Jack-Up Barge & Projects was USD 6.7 million in 2018, down 32.7% year-on-year versus the USD 9.9 million recorded in 2017. Revenues from Group's Jack-Up Barge and Projects contributed 3% to total revenue in 2018 versus 6% in 2017.
Others (1% of revenues in 2018)
Other revenue, which includes catering revenue and the rental of essential operating equipment that the client has not supplied, was USD 2.2 million in 2018, representing 1% of total revenue.
Operating Profit
Operating profit in 2018 was USD 71.2 million in 2018, up 21.3% year-on-year from USD 58.8 million in 2017.
The Group's EBITDA recorded a 25.8% year-on-year increase to USD 101.1 million in 2018, while EBITDA margin stood at 49.2% in 2018 versus 51.0% in the previous year. The decline in EBITDA margin was due to a growing contribution from drilling and workover operations in KSA - which come at a higher operational cost compared to Egypt and Algeria - as well as increased onshore activity. It is worth noting that while the Group anticipates margin contraction going forward with increased onshore activity, management believes that its effect will be relatively limited given the higher economies of scale at the general and administrative level and improved operating leverage from its enlarged operations in KSA and Algeria.
Net Finance Charges
ADES' finance cost reached USD 31.5 million in 2018, a 90.2% increase over the USD 16.6 million recorded in 2017. Higher finance costs were driven by increased debt utilisation from the Group's newly secured facilities. It is worth noting that finance costs include a one-off transaction charge of USD 4.3 million during 1H2018 and that is related to the unamortised and written-off portion of fees on a refinanced debt facility. Additionally, a USD 3.3 million charge was recorded in relation to the amortised arrangement fee for the new syndicated facilities.
Meanwhile, the Group recorded a finance income of USD 2.7 million in 2018, mainly related to a net-of-tax return from investing in Egyptian Treasury Bills. This partially offsets the increase in gross finance cost, bringing net charges to USD 28.7 million in 2018. The Group expects net finance costs to increase going forward as it further utilises its debt facilities and reflecting the full-year interest on outstanding balances.
Statutory and Normalised Net Profit
The Group recorded a net profit of USD 75.3 million in 2018, up 69.0% versus the USD 44.6 million posted in 2017. Net profit margin expanded 8.3 percentage points to 36.6%, supported by the bargain purchase gain from Nabors and Weatherford acquisition and comes despite the one-off finance charges. This is equivalent to USD 1.75 per share, compared to USD 1.16 per share in 2017.
Normalised net profit, which excludes from 2018 the one-off bargain purchase gain on acquisitions, transaction expenses and debt refinancing and arrangement fees, was USD 44.6 million in 2018, down 10.2% year-on-year from a normalised net profit of USD 49.6 million in 2017. The decrease was driven by higher net finance cost related to an increase in debt utilisation, alongside the increase in depreciation and tax expenses.
Balance Sheet
Assets
Total assets stood at USD 1.1 billion as at 31 December 2018, representing a USD 496.9 million increase from the USD 587.9 million recorded at 31 December 2017. Net fixed assets closed at USD 710.7 million as at 31 December 2018, an increase of USD 388.3 million from the previous year's close of USD 322.4 million. This increase was largely driven by the consolidation of newly acquired assets under the Weatherford transaction in Kuwait and KSA amounting to USD 215.5 million, as well as the USD 83 million related to the acquisition of the three Nabors rigs.
The newly acquired business has also driven an increase of USD 31.6 million in inventory levels from the previous year to stand at USD 52.6 million at year-end 2018, in addition to the associated increase in retention and accrued revenue balances.
Net accounts receivable increased to USD 100.8 million as at 31 December 2018, up from USD 66.0 million as at 31 December 2017. The increase was driven primarily by strong revenue growth of 30.4% in 2018 and a faster 57.8% between 2H2018 and 1H2018, associated with the increase in number of operating rigs to 28 from 12 rigs in 2017. Average collection rates in Egypt remained relatively low primarily due to one client who is yet to reach production capacity on its drilling programme, the Group remains confident of settlement of the outstanding funds.
Liabilities
ADES' total liabilities stood at USD 660.3 million as at 31 December 2018, up from USD 269.9 million recorded as at 31 December 2017. The increase was mainly driven by higher interest-bearing loans and borrowings, which climbed from USD 212.5 million as at 31 December 2017 to USD 555.3 million at year-end 2018 as the Group utilised secured facilities to fund its acquisitions. Higher liabilities were also driven by the newly acquired businesses and the consolidation of their associated employee-related liabilities, with the Group's workforce growing considerably, as well as higher supplier-related liabilities owing to the Group's larger fleet.
Net Debt increased from USD 75.5 million as at 31 December 2017 to USD 424.4 million as at 31 December 2018, mainly driven by the acquisitions.
Cash Flow
Cash Flow by Activity
(USD '000) 2018 2017 % change -------------------------------------------- ---------- --------- --------- Cash Flow from Operating Activities 26,882 48,997 -45.1% -------------------------------------------- ---------- --------- --------- Net Cash Flow Used in Investing Activities (355,079) (45,957) 672.0% -------------------------------------------- ---------- --------- --------- Net Cash Flows from Financing Activities 311,037 128,732 141.8% -------------------------------------------- ---------- --------- ---------
Cash Flow from Operating Activities
In the year ended 31 December 2018, net cash flow from operating activities was USD 26.9 million, down 45.1% compared to USD 49.0 million in the year ended 31 December 31. The decrease was primarily due to a higher number of operating rigs and an associated increase in inventory levels compared to 2017; higher retention and accrued revenue balances; and overdue receivables in Egypt. In 2019, management expects a normalisation of working capital despite the Group's growth profile.
Net Cash Flow Used in Investing Activities
Net cash flow used in investing activities recorded USD 355.1 million in the year ended 31 December 2018, an increase of USD 309.1 million compared to the USD 46.0 million recorded in the previous year. The increase was largely driven by the consolidation of newly acquired assets under the Weatherford transaction in Kuwait and KSA amounting to USD 215.5 million, as well as the USD 83 million related to the acquisition of the three Nabors rigs. Additionally, the Group invested in its fixed assets to upgrade and maintain its operational rigs, which will support future growth. In 2019, the Group expects further capital expenditure for the two new-build onshore rigs ordered for a contract in KSA; upgrade works on the Weatherford rigs to prepare them for operation; finalising the remaining segment of the Weatherford acquisition in Algeria & Iraq; and the Group's regular maintenance cycle of existing rigs. The Group expects normalisation of CAPEX levels by 2020.
Net Cash Flow from Financing Activities
Net cash flows from financing activities was USD 311.3 million in 2018, up 141.8% compared to USD 128.7 million in the year ended 31 December 31 2017. The increase was primarily attributable to debt utilisiation to fund the acquisitions in 2018. Additionally, the Group incurred arrangement & participation fees related to the new syndications as well as charges associated with the repayment of the old syndication. The Group is examining various potential sources of financing to optimise the Group's capital structure and cost of funding to finance its future business plan.
Principal Risks and Uncertainties
As in any corporation, ADES is exposed to risks and uncertainties that may adversely affect its performance. The Board and senior management agree that the principal risks and uncertainties facing the Group include political and economic situation in Egypt, Algeria, Kuwait and KSA and the rest of the Middle East and North Africa region, foreign currency supply and associated risks, changes in regulation and regulatory actions, environmental and occupational hazards, failure to maintain the Group's high quality standards and accreditations, failure to retain or renew contracts with clients, failure to recruit and retain skilled personnel and senior management, pricing pressures and decreased business activity in the oil and gas industry, among others.
Going Concern
The Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, the Directors continue to adopt the going concern basis in preparing the condensed financial statements. The Group's Financial Statements for the full year ended 31 December 2018 are available on the Group's website at investors.adihgroup.com
Statement of Directors' Responsibilities
Each of the Directors confirms that, to the best of their knowledge:
-- The preliminary financial information, which has been prepared in accordance with International Financial Reporting Standards ("IFRS"), give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and
-- The preliminary announcement includes a fair summary of the development and performance of the business and the position of the Group.
After making enquiries, the Directors considered it appropriate to adopt the going concern basis in preparing the consolidated financial statements.
A list of current directors of the Company is maintained on the Group's website at investors.adihgroup.com.
On behalf of the Board
Dr. Mohamed Farouk
Chief Executive Officer
Terms and Definitions
EBITDA - Operating profit for the year before depreciation and amortisation, employee benefit provision and other provisions and impairment of assets under construction.
Normalised Net profit- Reported net profit excluding a one-off bargain purchase gain on acquisitions, transactions expenses and prepaid transaction costs written off due to refinancing and arrangement fees related to loans utilised to finance the business acquisitions.
Backlog - means the total amount payable to the Group during the remaining term of an existing contract plus any optional client extension provided for in such contract, assuming the contracted rig will operate (and thus receive an operating day rate) for all calendar days both in the remaining term and in the optional extension period.
GCC - Gulf Cooperation Council.
MENA - The Middle East and North Africa.
MOPU - Mobile Operating Production Unit.
Recordable Injury Frequency Rate (RIFR) - The number of fatalities, lost time injuries, cases or substitute work and other injuries requiring medical treatment by a medical professional per 200,000 working hours.
KSA -The Kingdom of Saudi Arabia.
Utilisation Rate -refers to our measure of the extent to which our assets under contract and available in the operational area are generating revenue under client contracts. We calculate our utilisation rate for each rig by dividing Utilisation Days by Potential Utilisation days under a contract. Utilisation rates are principally dependent on our ability to maintain the relevant equipment in working order and our ability to obtain replacement and other spare parts. Because our measure of utilisation does not include rigs that are stacked or being refurbished or mobilised, our reported utilisation rate does not reflect the overall utilisation of our fleet, only of our operational, contracted rigs.
Gross Debt - Total interest-bearing loans and borrowings.
Net Debt - Total gross debt minus cash and cash equivalents.
ADES International Holding PLC (formerly "ADES International Holding Ltd")
and its Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 December 2018
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2018
USD Notes 2018 2017
---------------------------------------- ------ ---------------------- ------------------
Revenue from contract with customers 6 205,563,390 157,590,031
Cost of revenue 7 (107,506,253) (78,323,458)
---------------------- ------------------
GROSS PROFIT 98,057,137 79,266,573
General and administrative expenses 8 (23,971,369) (19,032,975)
End of service provision 20 (1,309,036) (623,817)
Provision for impairment of trade
receivables 14 (1,250,607) (579,115)
Other provisions (280,017) (274,647)
---------------------- ------------------
OPERATING PROFIT 71,246,108 58,756,019
Finance costs 9 (31,472,519) (16,550,209)
Finance income 12 2,738,844 7,015,552
Bargain purchase gain 5 44,377,441 -
Business acquisition transaction (5,617,088) -
costs
Other income 912,550 2,461,500
Other taxes 28 (295,960) (387,648)
Provision for impairment of dividends
receivable - (245,000)
IPO expenses - (5,063,369)
Other expenses (2,515,532) (1,395,025)
---------------------- ------------------
PROFIT FOR THE YEAR BEFORE INCOME
TAX 79,373,844 44,591,820
10,
Income tax expense 28 (3,788,784) (17,881)
---------------------- ------------------
PROFIT FOR THE YEAR 75,585,060 44,573,939
OTHER COMPREHENSIVE INCOME - -
TOTAL COMPREHENSIVE INCOME 75,585,060 44,573,939
====================== ==================
Attributable to:
Equity holders of the Parent 75,330,838 44,573,939
Non-controlling interests 254,222 -
---------------------- ------------------
75,585,060 44,573,939
====================== ==================
Earnings per share - basic and diluted
attributable to equity holders of
the Parent (USD per share) 23 1.75 1.16
====================== ==================
The accompanying notes 1 to 29 form an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 December 2018
USD Notes 2018 2017
--------------------------------------- ------ -------------- ------------
ASSETS
Non-current assets
Property and equipment 16 710,704,139 322,441,975
Intangible assets 17 456,189 544,540
Investment in a joint venture 11 2,184,382 -
Available for sale investment 11 - 1,950,000
Other non-current assets 1,202,586 -
-------------- ------------
Total non-current assets 714,547,296 324,936,515
-------------- ------------
Current assets
Inventories 13 52,508,041 20,919,477
Trade receivables 14 100,757,512 65,987,303
Contract assets 14 36,369,649 -
from related parties 24 377,345 305,616
Prepayments and other receivables 15 49,352,692 38,773,075
Bank balances and cash 12 130,875,239 136,964,417
-------------- ------------
Total current assets 370,240,478 262,949,888
-------------- ------------
Total assets 1,084,787,774 587,886,403
============== ============
EQUITY AND LIABILITIES
Equity
Share capital 21 43,793,882 42,203,030
Share premium 21 178,746,337 158,224,346
Merger reserve 1, 22 (6,520,807) (6,520,807)
Legal reserve 22 6,400,000 6,400,000
Retained earnings 193,033,967 117,703,129
-------------- ------------
Equity attributable to equity holders
of the Parent 415,453,379 318,009,698
Non-controlling interests 8,987,787 -
-------------- ------------
Total equity 424,441,166 318,009,698
-------------- ------------
Liabilities
Non-current liabilities
Interest-bearing loans and borrowings 19 510,010,564 155,155,414
Finance lease liability 27 5,391,573 -
Provisions 20 12,331,933 620,083
-------------- ------------
Total non-current liabilities 527,734,070 155,775,497
-------------- ------------
Current liabilities
Trade and other payables 18 85,423,424 52,664,243
Interest-bearing loans and borrowings 19 45,258,354 57,333,621
Provisions 20 1,874,654 1,836,000
Due to related parties 24 56,106 2,267,344
-------------- ------------
Total current liabilities 132,612,538 114,101,208
-------------- ------------
Total liabilities 660,346,608 269,876,705
-------------- ------------
TOTAL EQUITY AND LIABILITIES 1,084,787,774 587,886,403
============== ============
The accompanying notes 1 to 29 form an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2018
Share
Share Share application Merger Legal Retained Non-controlling Total
USD capital premium money reserve reserve earnings Total interests Equity
--------------- ---------------------- ----------------------- ------------------- --------------------- ------------------- ------------------------- ------------------------ -------------------- ------------------------
Balance at 1
January 2018 42,203,030 158,224,346 - (6,520,807) 6,400,000 117,703,129 318,009,698 - 318,009,698
Profit for the
year - - - - - 75,330,838 75,330,838 254,222 75,585,060
Other - - - - - - - - -
comprehensive
income for
the year
---------------------- ----------------------- ------------------- --------------------- ------------------- ------------------------- ------------------------ -------------------- ------------------------
Total
comprehensive
income for
the year - - - - - 75,330,838 75,330,838 254,222 75,585,060
Share capital
issued (Note
5,
21) 1,590,852 - - - - - 1,590,852 - 1,590,852
Share premium
(Note 5, 21) - 20,521,991 - - - - 20,521,991 - 20,521,991
Acquisition of
a subsidiary
(Note
5) - - - - - - - 8,733,565 8,733,565
---------------------- ----------------------- ------------------- --------------------- ------------------- ------------------------- ------------------------ -------------------- ------------------------
Balance at 31
December 2018 43,793,882 178,746,337 - (6,520,807) 6,400,000 193,033,967 415,453,379 8,987,787 424,441,166
====================== ======================= =================== ===================== =================== ========================= ======================== ==================== ========================
As at 1
January 2017 1,000,000 - 30,900,000 (6,520,807) 4,481,408 75,047,782 104,908,383 - 104,908,383
Profit for the
year - - - - - 44,573,939 44,573,939 - 44,573,939
Other - - - - - - - - -
comprehensive
income for
the year
---------------------- ----------------------- ------------------- --------------------- ------------------- ------------------------- ------------------------ -------------------- ------------------------
Total
comprehensive
income for
the year - - - - - 44,573,939 44,573,939 - 44,573,939
Transfer to
legal reserve
(Note
22) - - - - 1,918,592 (1,918,592) - - -
Share
application
money (Note
21) 30,900,000 - (30,900,000) - - - - - -
Share capital
issued (Note
21) 10,303,030 - - - - - 10,303,030 - 10,303,030
Share premium
(Note 21) - 158,224,346 - - - - 158,224,346 - 158,224,346
---------------------- ----------------------- ------------------- --------------------- ------------------- ------------------------- ------------------------ -------------------- ------------------------
Balance at 31
December 2017 42,203,030 158,224,346 - (6,520,807) 6,400,000 117,703,129 318,009,698 - 318,009,698
====================== ======================= =================== ===================== =================== ========================= ======================== ==================== ========================
The accompanying notes 1 to 29 form an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2018
USD Notes 2018 2017
------------------------------------------ ------ -------------------------- ----------------------
OPERATING ACTIVITIES
Profit for the year before income
tax 79,373,844 44,591,820
Adjustments for:
Depreciation of property and equipment 16 28,112,799 20,618,505
Amortisation of intangible assets 17 122,547 45,202
Provision for impairment of trade
receivables and contract assets 14 1,250,607 579,115
End of services provision 20 1,309,036 623,817
Other provisions 20 280,017 274,647
Interest on loans and borrowings 9 31,472,519 16,550,209
Finance income 12 (2,738,844) (7,015,552)
Other income (678,168) (2,461,500)
Bargain purchase gain 5 (44,377,441) -
Share of results of investment in
a joint venture 11 (234,382) -
-------------------------- ----------------------
Cash from operations before working
capital changes 93,892,534 73,806,263
Inventories (23,448,817) (680,906)
Trade receivables (24,482,911) (15,777,305)
Contract assets (36,369,649) -
Due from related parties (71,729) (28,499)
Prepayments and other receivables 13,605,596 (6,620,912)
Trade and other payables 9,349,066 2,177,099
Due to related parties (2,211,238) (1,814,188)
-------------------------- ----------------------
Cash flows from operations 30,262,852 51,061,552
Income tax paid 10 (3,036,313) (586,662)
Provisions paid 20 (344,160) (1,477,664)
-------------------------- ----------------------
Net cash flows from operating activities 26,882,379 48,997,226
-------------------------- ----------------------
INVESTING ACTIVITIES
Purchase of intangible assets 17 (12,788) (21,579)
Purchase of property and equipment (69,365,505) (52,951,929)
Acquisitions of subsidiaries and
new rigs 5 (277,639,472) -
Interest received 2,738,844 7,015,552
Movement in escrow account 12 (10,800,000) -
-------------------------- ----------------------
Net cash flows used in investing
activities (355,078,921) (45,957,956)
-------------------------- ----------------------
FINANCING ACTIVITIES
Proceeds from interest-bearing loans
and borrowings* 602,871,261 36,581,041
Repayment of interest-bearing loans
and borrowings (238,038,447) (59,825,925)
Proceeds from increase in share capital - 10,303,030
Payments of loan transaction costs* (33,566,505) -
Proceeds from share premium - 158,224,346
Interest paid (19,958,945) (16,550,209)
-------------------------- ----------------------
Net cash flows from financing activities 311,307,364 128,732,283
-------------------------- ----------------------
Net (decrease)/ increase in cash
and cash equivalents (16,889,178) 131,771,553
-------------------------- ----------------------
Cash and cash equivalents at the
beginning of the year 12 136,964,417 5,192,864
-------------------------- ----------------------
CASH AND CASH EQUIVALENTS AT THE OF THE YEAR 12 120,075,239 136,964,417
========================== ======================
The accompanying notes 1 to 29 form an integral part of these consolidated financial statements.
* Net of "proceeds from interest-bearing loans and borrowings" and "payments of loan transaction costs" represents "borrowings drawn during the year" amounting to USD 569,304,756 as disclosed in Note 19.
1 BACKGROUND
ADES International Holding PLC (the "Company" or the "Parent") was incorporated and registered in the Dubai International Financial Centre (DIFC) on 22 May 2016 with registered number 2175 under the Companies Law - DIFC Law No. 2 of 2009 (and any regulations thereunder) as a private company limited by shares. The Company's shares are listed on the Main Market of the London Stock Exchange. The Company's name has changed from ADES International Holding Ltd to ADES International Holding PLC during 2018. The Company's registered office is at level 5, Index tower, Dubai International Financial Centre, PO Box 507118, Dubai, United Arab Emirates. The principal business activity of the Company is to act as a holding company and managing office. The Company and its subsidiaries (see below) constitute the Group (the "Group"). The Company is owned by ADES Investments Holding Ltd., a company incorporated on 22 May 2016 under the Companies Law, DIFC Law no. 2 of 2009.
The Group is a leading oil and gas drilling and production services provider in the Middle East and Africa. The Group services primarily include offshore and onshore contract drilling and production services. The Group currently operates in Egypt, Algeria, Kuwait and the Kingdom of Saudi Arabia. The Group's offshore services include drilling and workover services and Mobile Offshore Production Unit (MOPU) production services, as well as accommodation, catering and other barge-based support services. The Group's onshore services primarily encompass drilling and work over services. The Group also provides projects services (outsourcing various operating projects for clients, such as maintenance and repair services).
The Consolidated financial statements of the Group include:
Country % equity interest
of incorporation
------------------------------- ------------------- ------------------------
Name Principal activities 2018 2017
------------------------------- ---------------------------- ------------------- ------- ---------------
Oil and gas drilling
Advanced Energy Systems and production
(ADES) (S.A.E)** services Egypt 100% 100%
Precision Drilling Company*** Holding company Cyprus 100% -
Kuwait Advanced Drilling Leasing of rigs Cayman 100% -
Services
Prime innovations for Trading Egypt 100% -
Trade S.A.E
ADES International for Leasing of rigs Cayman 100% -
Drilling
Advanced Transport Services Leasing of transportation
equipment Cayman 100% -
Advanced Drilling Services Trading Cayman 100% -
-------------------------------- --------------------------- ------------------- ------- ---------------
** Advanced Energy Systems (ADES) (S.A.E) has branches in the Kingdom of Saudi Arabia and Algeria.
*** Precision Drilling Company holds 47.5% interest in United Precision Drilling Company W.L.L, a Kuwait entity which handles the operations of the rigs in Kuwait.
In 2016, pursuant to a reorganisation plan (the "Reorganisation") the ultimate shareholders of the Subsidiary:
(i) established the Company as a new holding company with share capital of USD 1,000,000 and made an additional capital contribution of USD 30,900,000 for additional shares that were allotted on 23 March 2017. No such reorganisations took place in 2018 and 2017.
(ii) transferred their shareholdings in Advanced Energy System (ADES) (S.A.E.) to the Company for a total consideration of USD 38,520,807 comprising of cash of USD 29,710,961 and the assumption of shareholder obligation of USD 8,809,846.
2 SIGNIFICANT ACCOUNTING POLICIES 2.1 BASIS OF PREPARATION
The Consolidated financial statements have been prepared under the historical cost basis.
These financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and applicable requirements of United Arab Emirates laws and in compliance with the applicable provisions of the Companies Law pursuant to DIFC Law No. 5 of 2018.
The consolidated financial statements are presented in United States Dollars ("USD"), which is the Company's functional and presentation currency.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 December 2018. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has:
(a) Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee)
(b) Exposure, or rights, to variable returns from its involvement with the investee, and (c) The ability to use its power over the investee to affect its returns
Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
(a) The contractual arrangement with the other vote holders of the investee (b) Rights arising from other contractual arrangements (c) The Group's voting rights and potential voting rights
The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the consolidated financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Subsidiaries are fully consolidated from the date of acquisition or incorporation, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The Consolidated financial statements of the subsidiaries are prepared for the same reporting period as the Group, using consistent accounting policies.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:
- Derecognises the assets (including goodwill) and liabilities of the subsidiary - Derecognises the carrying amount of any non-controlling interests - Derecognises the cumulative translation differences recorded in equity - Recognises the fair value of the consideration received - Recognises the fair value of any investment retained - Recognises any surplus or deficit in profit or loss
- Reclassifies the parent's share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities
Business combinations and acquisition of non-controlling interests
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.
Contingent consideration, resulting from business combinations, is valued at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value recognised in the statement of profit or loss in accordance with IFRS 9. Other contingent consideration that is not within the scope of IFRS 9 is measured at fair value at each reporting date with changes in fair value recognised in profit or loss.
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.
A contingent liability recognised in a business combination is initially measured at its fair value. Subsequently, it is measured at the higher of the amount that would be recognised in accordance with the requirements for provisions in IAS 37 Provisions, Contingent Liabilities and Contingent Assets or the amount initially recognised less (when appropriate) cumulative amortisation recognised in accordance with the requirements for revenue recognition.
Business combination involving entities under common control
Transactions involving entities under common control where transaction does not have any substance, the Group adopts the pooling of interest method. Under the pooling of interest method, the carrying value of assets and liabilities are used to account for these transactions. No goodwill is recognised as a result of the combination. The only goodwill recognised is any existing goodwill relating to either of the combining entities. Any difference between the consideration paid and the carrying value of net assets acquired is reflected as "Reserve" within equity.
A number of factors are considered in evaluating whether the transaction has substance including the following:
-- the purpose of transaction;
-- the involvement of outside parties in the transaction, such as non-controlling interests or other third parties;
-- whether or not the transactions are conducted at fair values; -- the existing activities of the entities involved in the transaction; and
-- whether or not it is bringing entities together into a "reporting entity" that did not exist before.
Periods prior to business combination involving entities under common control are not restated.
Interest in a joint venture
A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
Associates and joint ventures (continued)
The considerations made in determining joint control are similar to those necessary to determine control over subsidiaries.
The Group's investment in joint venture are accounted for using the equity method. Under the equity method, the investment in joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group's share of net assets of the joint venture since the acquisition date. Goodwill relating to the joint venture is included in the carrying amount of the investment and is not tested for impairment separately.
The statement of profit or loss reflects the Group's share of the results of operations of joint venture. Any change in OCI of those investees is presented as part of the Group's OCI. In addition, when there has been a change recognised directly in the equity of the joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the interest in the joint venture.
The aggregate of the Group's share of profit or loss of a joint venture is shown on the face of the statement of profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the joint venture.
The financial statements of the joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.
After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value, and then recognises the loss as 'Share of profit of an associate and a joint venture' in the statement of profit or loss.
Upon loss of joint control over the joint venture, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the joint venture upon loss of joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss.
2.2 CHANGES IN THE ACCOUNTING POLICIES AND DISCLOSURES
(a) New and amended standards and interpretations
The Group applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2018. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
Although these new standards and amendments applied for the first time in 2018, they did not have a material impact on the consolidated financial statements of the Group. The nature and the impact of each new standard or amendment is described below:
IFRS 15 Revenue from Contracts with Customers
IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related interpretations and it applies, with limited exceptions, to all revenue arising from contracts with its customers. IFRS 15 establishes a five-step model to account for revenue arising from contracts with customers and requires that revenue be recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.
IFRS 15 requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract.
The Group has adopted IFRS 15 with effect from 1 January 2018 using the modified retrospective method of adoption with effect of initially applying this standard recognised at the date of initial application. Accordingly, the information presented for 2017 has not been restated, and has been presented as previously reported under accounting policies disclosed in consolidated financial statements of the Group as per IAS 18 and related interpretations. The adoption of IFRS 15 did not have any material impact on the Group except for the recognition of contract assets for those revenues that are earned but not billed to the customers. Therefore, upon adoption of IFRS 15, the Group reclassified USD 12,975,535 from other receivables to Contract assets as at 1 January 2018.
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.
The Group has applied IFRS 9 with the initial application date of 1 January 2018. The Group has opted exemption not to restate comparative information with respect to reclassification and measurement (including impairment) requirements. Accordingly, the information presented for 2017 is under accounting policies disclosed in annual financial statements of the Company as per IAS 39 and related interpretations.
IFRS 9 resulted in changes in accounting policies with no change to the amounts recognised, and therefore no transition adjustment is presented.
(a) Classification and measurement
IFRS 9 retains most of the existing requirements of IAS 39 for the classification and measurement of financial liabilities, though, it has removed held to maturity, loans and receivables and available-for-sale classification under IAS 39 for financial assets.
Adoption of IFRS 9 has not had a significant effect on the Group's accounting policies related to financial liabilities. The impact of IFRS 9 on the classification and measurement of financial assets of the Company is set out below.
Except for certain trade receivables and contract assets, under IFRS 9, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit and loss, transaction costs. On initial recognition, a financial asset is classified and measured under IFRS 9 as follows:
-- Amortised costs -- FVOCI, debt instruments -- FVOCI, equity instruments -- FVTPL
The classification is based on two criteria:
-- The business model for managing the assets; and
-- Whether the instruments' contractual cash flows represent 'solely payments of principal and interest' on the principal amount outstanding (the 'SPPI criterion').
The assessment of the business model was made as of 1 January 2018, the date of initial application. Accordingly, the trade receivables and contract assets, due from related parties and cash and bank balances have been classified as at amortised cost on adoption of IFRS 9.
As at 31 December 2017, the Group classified its instrument in Egyptian Chinese Drilling Company (ECDC) as available for sale investment in its 2017 consolidated financial statements. The Group has changed its classification to equity instruments at fair value through other comprehensive income. However, during the year, the Group acquired joint control over ECDC (refer to note 11), which resulted in the change of classification of this asset to investment in a joint venture.
There were no changes to the carrying values of the above financial assets on transition to new classification and measurement per IFRS 9.
(b) Impairment
The adoption of IFRS 9 has fundamentally changed the Group's accounting for impairment losses for financial assets by replacing incurred loss approach under IAS 39 with a forward-looking expected credit loss (ECL) approach.
ECL are based on the difference between contractual cash flows due in accordance with the contract and all the cash flows that the Company expect to receive. The shortfall is then discounted at an approximation to the asset's original effective interest rate.
For Trade and other receivables and contract assets, the Group has applied the standard's simplified approach and has calculated the ECLs based on lifetime expected credit losses. The Group has established a provision matrix that is based on the Group's historical credit loss experience, adjusted for forward-looking factors specific to the debtors and economic environment.
The Group considers a financial asset in default when contractual payments are past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is likely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. The adoption of the ECL requirements of IFRS 9 did not result in any significant changes in impairment allowances.
(c) Hedge accounting
IFRS 9 does not change the general principles of how an entity accounts for effective hedges. The Company do not have hedge instruments and hence the adoption of IFRS 9 did not have any impact on the Group's consolidated financial statements.
Several other amendments and interpretations became effective as of 1 January 2018 and apply for the first time in 2018, but do not have an impact on the consolidated financial statements of the Group. These amendments and interpretations are summarised below:
-- Clarifications to IFRS 15 Revenue from Contracts with Customers -- IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration -- Amendments to IAS 40 Transfers of Investment Property -- Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions -- Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
-- Amendments to IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment-by-investment choice
-- Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards - Deletion of short-term exemptions for first-time adopters.
(b) Standards, amendments and interpretations in issue but not effective
The standards and interpretations that are issued, but not yet effective are disclosed below. These standards and interpretations will become effective for annual periods beginning on or after the dates as respectively mentioned there against. The Group intends to adopt these standards, if applicable, when they become effective.
-- Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (effective date not decided)
-- IFRS 16 Leases (effective date: 1 January 2019) -- IFRS 17 Insurance Contracts (effective date: 1 January 2021) -- IAS 19 Plan Amendment, Curtailment or Settlement (effective date: 1 January 2019)
-- Amendments to IFRS 9: Prepayment Features with Negative Compensation (effective date: 1 January 2019)
-- Amendments to IAS 28: Long-term interests in associates and joint ventures (effective date: 1 January 2019)
-- Annual Improvements 2015-2017 Cycle (effective date: 1 January 2019) -- IFRS 3 Business Combinations -- IFRS 11 Joint Arrangements -- IAS 12 Income Taxes -- IAS 23 Borrowing Costs
-- IFRIC Interpretation 23 Uncertainty over Income Tax Treatment (effective date: 1 January 2019)
These standards, interpretations and improvements are not expected to a have a material impact on the consolidated financial statements of the Group, except for IFRS16 Leases for which management is in the process of carrying out impact analysis. Management anticipates that all of the above Standards and Interpretations will be adopted by the Group to the extent applicable to them from their effective dates.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS 17 - Leases and related IFRIC 4, SIC 15 and SIC 27. It introduces a single, on-balance sheet lease accounting model for lessees. At the commencement date of a lease, the lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There is a recognition exemption for short-term leases, which will be recognised on a straight-line basis as expense in profit or loss and leases of low value assets. Lessees shall remeasure the lease liability and adjust the right-of-use asset on occurrence of certain events such as change in the lease term, future lease payments resulting from a change in an index or rate used to determine those payments.
The standard is effective for annual periods beginning on or after 1 January 2019 and requires to make more extensive disclosures than under IAS 17. Early adoption is permitted. The Group plans to apply IFRS 16 initially on 1 January 2019, using a modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information.
As at 31 December 2018, the Group has non-cancellable operating lease commitments of USD 218,556 as disclosed in note 27. A preliminary assessment indicates that these arrangements will meet the definition of a lease under IFRS 16, and hence the Group will recognise a right-of-use asset and liability in respect of all these leases unless they qualify as short-term leases or that are considered of low value upon the application of IFRS 16. The nature of expenses related to those leases will also change because IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. Further, the classification of cash flows will be affected as the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows, respectively; operating lease payments are currently presented as operating cash flows.
The Group is in the process of finalizing the analysis of the impact of IFRS 16 at the date of issuance of these consolidated financial statements. In summary, the application of IFRS 16 is expected to result in the Group recognizing on its statement of financial position right-of-use assets with corresponding lease liabilities using an appropriate incremental borrowing rate. The Group does not expect that the application of IFRS 16 will have a significant impact on its equity on transition.
2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Current versus non-current classification
The Group presents assets and liabilities in the consolidated statement of financial position based on current/non-current classification. An asset is current when it is:
-- Expected to be realised or intended to be sold or consumed in the normal operating cycle; -- Held primarily for the purpose of trading; -- Expected to be realised within twelve months after the reporting period; or
-- Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least
twelve months after the reporting period.
All other assets are classified as non-current.
A liability is current when:
-- It is expected to be settled in the normal operating cycle; -- It is held primarily for the purpose of trading; -- It is due to be settled within twelve months after the reporting period;
Or
-- There is no unconditional right to defer the settlement of the liability for at least twelve months after the
reporting period.
The Group classifies all other liabilities as non-current.
Revenue recognition
The Group recognises revenue from contracts with customers based on a five-step model as set out in IFRS 15.
Step 1. Identify contract(s) with a customer: A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations and sets out the criteria for every contract that must be met.
Step 2. Identify performance obligations in the contract: A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer.
Step 3 Determine the transaction price: The transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
Step 4. Allocate the transaction price to the performance obligations in the contract: For a contract that has more than one performance obligation, the Group allocates the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the Group expects to be entitled in exchange for satisfying each performance obligation.
Step 5. Recognise revenue when (or as) the Group satisfies a performance obligation.
The Group satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:
a) The Group's performance does not create an asset with an alternate use to the Group and the Group has as an enforceable right to payment for performance completed to date.
b) The Group's performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
c) The customer simultaneously receives and consumes the benefits provided by the Group's performance as the Group performs.
For performance obligations where one of the above conditions are not met, revenue is recognised at the point in time at which the performance obligation is satisfied.
When the Group satisfies a performance obligation by delivering the promised goods or services it creates a contract-based asset on the amount of consideration earned by the performance. Where the amount of consideration received from a customer exceeds the amount of revenue recognised this gives rise to a contract liability.
Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes and duty. The Group assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent.
Revenue is recognised to the extent it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably.
Based on the assessment of the customer contracts, the Group has identified one performance obligation for each of its contracts and therefore revenue is recognized over time. Some of the customer contracts may include mobilization and demobilisation activities for which revenue, along with the related cost are amortised over the period of contract life from the date of the completion of mobilization activities.
Dividends
Revenue is recognised when the Group's right to receive the payment is established, which is generally when shareholders approve the dividend.
Interest income
Interest income is recognised as the interest accrues using the effective interest rate method, under which the rate used exactly discounts, estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.
Contract balances
Contract assets
A contract asset is the right to consideration in exchange of goods or services transferred to the customer. If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for earned consideration that is conditional.
Trade receivables
A receivable represents the Group's right to an amount of consideration that is unconditional (i.e., only the passage of time is required before the payment of the consideration is due). Refer to the accounting policies of financial assets in section financial instruments - initial recognition and subsequent measurement.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed in the period in which they incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.
Cash and cash equivalents
Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand and short-term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in value.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits, as defined above.
Income tax
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. The Group is not subject to income tax in accordance with the Egyptian tax law (Egypt) and DIFC law (UAE). The Subsidiary's Branches are subject to income tax in accordance to Kingdom of Saudi Arabia Law and Algeria Law.
Deferred tax
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax liabilities are recognised for all taxable temporary differences, except:
-- When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss
-- In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future
Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except:
-- When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss
-- In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
Foreign currencies
The Group's consolidated financial statements are presented in USD, which is also the Company's functional currency. For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. The Group uses the direct method of consolidation and on disposal of a foreign operation, the gain or loss that is reclassified to profit or loss reflects the amount that arises from using this method.
Transactions and balances
Transactions in foreign currencies are initially recorded by the Group's entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition.
Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date.
Differences arising on settlement or translation of monetary items are recognised in profit or loss with the exception of monetary items that are designated as part of the hedge of the Group's net investment in a foreign operation. These are recognised in OCI until the net investment is disposed of, at which time, the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in OCI.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of the gain or loss on the change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in OCI or profit or loss are also recognised in OCI or profit or loss, respectively).
In determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which the Group initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, the Group determines the transaction date for each payment or receipt of advance consideration.
Inventories
Inventories are initially measured at cost and subsequently at lower of cost using weighted average method or net realisable value.
Property and equipment
Assets under construction, property and equipment are stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such cost includes the cost of replacing parts of the property and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in the profit or loss as incurred.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
Years
Rigs 27
Mobile Offshore Production Unit (MOPU) 5
Furniture and fixtures 10
Drilling pipes 5
Tools 10
Office premises 20
Computers and equipment 5
Motor vehicles 5
Leasehold improvements 5
Rigs include overhaul, environment and safety costs that are capitalised and depreciated over 5 years. No depreciation is charged on assets under construction. The useful lives and depreciation method are reviewed annually to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from these assets. Any change in estimated useful life is applied prospectively effective from the beginning of year. Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of property and equipment. All other expenditure is recognised in the consolidated statement of profit or loss as the expense is incurred.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of property and equipment may not be recoverable.
Whenever the carrying amount of property and equipment exceeds their recoverable amount, an impairment loss is recognised in the consolidated statement of profit or loss. The recoverable amount is the higher of fair value less costs to sell of property and equipment and the value in use. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. While value in use is the present value of estimated future cash flows expected to arise from the continuing use of property and equipment and from its disposal at the end of its useful life.
Reversal of impairment losses recognised in the prior years are recorded when there is an indication that the impairment losses recognised for the property and equipment no longer exist or have reduced.
An item of property and equipment is derecognised upon disposal or when no further economic benefits are expected from its use or disposal. Any gain or loss arising on de recognition is included in the consolidated statement of profit or loss.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. After initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reflected in the consolidated profit and loss in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year end. Intangible assets are amortised using the straight-line method over their estimated useful lives (5 years).
Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss.
The classification of financial assets at initial recognition depends on the financial asset's contractual cash flow characteristics and the Group's business model for managing them. With the exception of trade receivables and contract assets that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables and contract assets that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15.
In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are 'solely payments of principal and interest (SPPI) on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level.
The Group's business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset.
Subsequent measurement
For purposes of subsequent measurement, financial assets are classified in four categories:
-- Financial assets at amortised cost (debt instruments)
-- Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments)
-- Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments)
-- Financial assets at fair value through profit or loss
The Group's financial assets at amortised cost include trade and other receivables, due from related parties and cash and bank balances. The Group does not have financial assets at fair value through OCI or through profit or loss.
Financial assets at amortised cost (debt instruments)
This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met:
-- The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and
-- The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
Derecognition of financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group's consolidated statement of financial position) when:
-- The rights to receive cash flows from the asset have expired; or
-- The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a 'pass-through' arrangement and either (a) the Group has transferred substantially all the risks and rewards of the asset, or
-- The Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass- through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Impairment of financial assets
The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
The Group considers a financial asset in default when contractual payments are 90 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.
All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
The Group's financial liabilities include trade and other payables, due to related party balances and loans and borrowings including bank overdrafts.
Subsequent measurement
The measurement of financial liabilities depends on their classification, as described below:
(i) Trade and other payables
Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not.
(ii) Loans and borrowings
This is the category most relevant to the Group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process.
Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss. This category generally applies to interest-bearing loans and borrowings.
(iii) Other financial liabilities
Other financial liabilities are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.
Derecognition of financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.
Impairment of non-financial assets
The Group assesses at each reporting date whether there is an indication that a non-financial asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating units (CGU) fair value less costs to sell and its 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. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. Impairment losses of continuing operations are recognised in the consolidated statement of profit or loss in those expense categories consistent with the function of the impaired asset.
An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset's or cash-generating unit's recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor 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 reversal is recognised in the consolidated statement of profit or loss.
Leases
The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset (or assets), even if that asset (or those assets) is not explicitly specified in an arrangement.
Group as a lessee
A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Group is classified as a finance lease.
Finance leases are capitalised at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the statement of profit or loss.
A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the statement of profit or loss on a straight-line basis over the lease term.
Group as a lessor
Leases in which the Group does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and the amount can be reliably estimated. When the Group expects some or all of a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statement of profit or loss net of any reimbursement. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation at the end of the reporting period, using a rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Provisions are reviewed at each statement of financial position date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.
Contingencies
Contingent liabilities are not recognised in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable.
Legal reserve
According to one of the subsidiaries' articles of association, 5% of the net profit for the prior year of the Subsidiary is transferred to a legal reserve until this reserve reaches 20% of the issued capital. The reserve is used upon a decision from the general assembly meeting based on the proposal of the Board of Directors of the Subsidiary.
Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. For assets traded in an active market, fair value is determined by reference to quoted market bid prices. The fair value of interest-bearing items is estimated based on discounted cash flows using interest rates for items with similar terms and risk characteristics. For unquoted assets, fair value is determined by reference to the market value of a similar asset or is based on the expected discounted cash flows. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the Consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
-- Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities
-- Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable
-- Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable
Cash dividend and non-cash distribution to equity holders of the Parent
The Group recognises a liability to make cash or non-cash distributions to equity holders of the Parent when the distribution is authorised and the distribution is no longer at the discretion of the Group. A distribution is authorised when it is approved by the shareholders. A corresponding amount is recognised directly in equity. Non-cash distributions are measured at the fair value of the assets to be distributed with fair value remeasurement recognised directly in equity. Upon distribution of non-cash assets, any difference between the carrying amount of the liability and the carrying amount of the assets distributed is recognised in the consolidated statement of profit or loss.
3 SIGNIFICANT ACCOUNTING ESTIMATES, JUDGEMENTS AND ASSUMPTIONS
Judgments
The preparation of the Group's consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.
In the process of applying the Group's accounting policies, management has made certain judgments, estimates and assumptions in relation to the accounts receivable, customer credit periods and doubtful debts provisions, creditors' payment period, useful lives and impairment of property and equipment, income taxes and various other policy matters. These judgments have the most significant effects on the amounts recognised in the consolidated financial statements.
Property lease classification - Group as lessee
The Group has entered into commercial property lease on its office premises. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, that it obtained all the significant risks and rewards of ownership of this property and accounts for the contracts as finance lease.
Consolidation of an entity in which the Group holds less than a majority of voting right
The Group considers that it controls United Precision Drilling Company W.L.L ("UPDC") even though it owns less than 50% of the voting rights. This is mainly because (a) the Group has a substantive right to direct conclusion of revenue contracts, capital expenditures and operational management; (b) the Group has a significantly higher exposure to variability of returns than its voting rights; (c) the Group is the owner of all drilling rigs and equipment and charters the drilling rigs to UPDC on exclusive basis. Management also considered that non-controlling interest in UPDC is not material as compared to the consolidated financial position.
Estimates and assumptions
Impairment of trade receivables and contract assets
The Group recognises an allowance for expected credit losses (ECLs). The Group applies a simplified approach in calculating ECLs with respect to trade receivables and contract assets. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. At the consolidated statement of financial position date, gross trade receivables and contract assets were USD 142,071,534 (2017: USD 69,681,069) and the provision for impairment in trade receivables and contract assets was USD 4,944,373 (2017: USD 3,693,766). Any difference between the amounts actually collected in future periods and the amounts expected will be recognised in the consolidated statement of comprehensive income.
Taxes
The Group is exposed to income taxes in certain jurisdictions. Significant judgement is required to determine the total provision for taxes. Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective counties in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences in interpretation may arise for a wide variety of issues depending on the conditions prevailing in the respective domicile of the Group companies. At the consolidated statement of financial position date, income tax payable was USD 3,040,753 (2017: USD 2,288,282).
Impairment of non-financial assets
The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. The non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. When value in use calculations are undertaken, management estimates the expected future cash flows from the asset or cash-generating unit and chooses a suitable discount rate in order to calculate the present value of those cash flows.
Useful lives of property, plant and equipment
The Group's management determines the estimated useful lives of its property, plant and equipment for calculating depreciation. This estimate is determined after considering the expected usage of the asset or physical wear and tear. Management reviews the residual value and useful lives annually and future depreciation charge would be adjusted where the management believes the useful lives differ from previous estimates. In 2017, the management revised estimated useful life of rigs from 15 years to 27 years based on the technical assessment effective from 1 January 2017, which resulted in a decrease of depreciation charge by the amount of USD 8,605,090 in 2017.
Impairment of inventories
Inventories are held at the lower of cost and net realisable value. When inventories become old or obsolete, an estimate is made of their net realisable value. At the consolidated statement of financial position date, gross inventories were USD 52,508,041 (2017: USD 20,919,477) with no provisions for slow moving items. Any difference between the amounts actually realised in future periods and the amounts expected will be recognised in the consolidated statement of comprehensive income.
Impairment of dividends receivable
The Group has dividends receivable from Egyptian Chinese Drilling Company (refer to note 11) which is classified as investment in joint venture. As at 31 December 2018, the Group provided provision for impairment in dividends receivable for USD 245,000 (2017: 245,000). Any difference between the amounts actually collected in future periods and the amounts expected will be recognised in the consolidated statement of comprehensive income.
4 SEGMENT INFORMATION
Management has determined the operating segments based on the reports reviewed by the Chief Executive Officer (CEO) that are used to make strategic decisions. As operationally, the Group is only in the oil and gas production and drilling services, the CEO considers the business from a geographic perspective and has identified five geographical segments (2017: four geographical segments). Management monitors the operating results of its segments separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on profit or loss before intersegment charges and therefore the below information for each segment is after eliminating intersegment charges.
Segment
USD Egypt Algeria KSA Kuwait UAE Total
-------------- ---------------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------
For the year
ended 31
December 2018
Revenue 87,226,592 11,594,020 96,094,909 10,647,869 - 205,563,390
---------------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------
Gross profit 70,433,886 4,899,927 17,243,693 5,479,631 - 98,057,137
---------------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------
Finance cost 13,762,066 (11,978) 189,485 33,644 17,499,302 31,472,519
Finance
income (706,400) - - - (2,032,444) (2,738,844)
Income tax
expense - 217,148 3,571,636 - - 3,788,784
---------------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------
Profit 53,634,499 3,430,195 3,699,236 15,148,174 (581,266) 75,330,838
---------------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------
Total Assets
as at 31
December
2018 715,814,123 13,652,773 80,769,965 187,009,318 87,541,595 1,084,787,774
---------------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------
Total
Liabilities
as
at 31
December
2018 173,980,206 2,186,122 19,613,735 26,533,772 438,032,773 660,346,608
====================== ===================== ======================= ======================== ===================== ========================
Other segment
information:
Capital
expenditure 13,163,279 - 196,259,073 136,671,743 - 346,094,095
Intangible
assets
expenditure 34,197 - - - - 34,197
---------------------- --------------------- ----------------------- ------------------------ --------------------- ------------------------
Total 13,197,476 - 196,259,073 136,671,743 - 346,128,292
====================== ===================== ======================= ======================== ===================== ========================
Depreciation
and
amortization 27,588,551 296,488 22,184 328,123 - 28,235,346
====================== ===================== ======================= ======================== ===================== ========================
USD Egypt Algeria KSA UAE Total
-------------- ---------------------- --------------------- ----------------------- ------------------------ ---------------------
For the year
ended 31
December 2017
Revenue 82,298,101 21,553,917 53,738,013 - 157,590,031
---------------------- --------------------- ----------------------- ------------------------ ---------------------
Gross profit 66,856,413 1,862,965 10,547,195 - 79,266,573
---------------------- --------------------- ----------------------- ------------------------ ---------------------
Finance costs 16,550,209 - - - 16,550,209
Finance
income - - - (7,015,552) (7,015,552)
Income tax
(credit)
expense - (2,005,247) 2,023,128 - 17,881
---------------------- --------------------- ----------------------- ------------------------ ---------------------
Profit 39,507,786 1,498,558 2,339,436 1,228,159 44,573,939
====================== ===================== ======================= ======================== =====================
Total assets
as at 31
December
2017 427,916,290 8,279,182 21,713,922 129,977,009 587,886,403
====================== ===================== ======================= ======================== =====================
Total
liabilities
as
at 31
December
2017 255,812,927 4,447,760 9,391,481 224,537 269,876,705
====================== ===================== ======================= ======================== =====================
Other segment
information:
Capital
expenditure* 21,481,129 - 31,470,800 - 52,951,929
---------------------- --------------------- ----------------------- ------------------------ ---------------------
Intangible
assets
additions 21,579 - - - 21,579
---------------------- --------------------- ----------------------- ------------------------ ---------------------
Total 21,502,708 - 31,470,800 - 52,973,508
====================== ===================== ======================= ======================== =====================
Depreciation
and
amortisation 17,457,917 865,290 2,340,500 - 20,663,707
====================== ===================== ======================= ======================== =====================
*The comparative figures for capital expenditure have been reclassified in order to conform to the presentation for the current year.
5 BUSINESS COMBINATIONS
As part of the Group's strategy to expand its fleet and operations, the Group has acquired the assets and entities which are accounted for as business combinations. These business combinations resulted in a bargain purchase transactions because the fair value of assets acquired and liabilities assumed exceeded the total fair value of the consideration paid and the fair value of non- controlling interests.
A. Acquisition of three rigs from Nabors Drilling International II Limited
On 12 June 2018, the Group acquired three jack-up drilling rigs, located in the Kingdom of Saudi Arabia, in their entirety, including all spare parts, equipment and inventory, from Nabors Drilling International II Limited (Nabors). The Group acquired these rigs to expand its operations in the Kingdom of Saudi Arabia. The acquisition has been accounted for using the acquisition method.
Identifiable net assets acquired
The provisional fair values of the identifiable net assets of these rigs as at the date of acquisition were:
Provisional fair
values recognized
USD on acquisition
------------------------------------------------------ -------------------
Property and equipment 91,527,842
Inventories 4,572,158
-------------------
Total identifiable net assets at fair values
(provisional)* 96,100,000
-------------------
Gain from bargain purchase (11,737,157)
-------------------
Purchase consideration 84,362,843
===================
Analysis of purchase consideration
Cash paid 62,250,000
Allotment of shares** 22,112,843
-------------------
84,362,843
===================
Analysis of cash flow on acquisition
-------------------
Net cash paid (included in cash flows from investing
activities) 62,250,000
===================
*Additional clarifications and analysis is required to determine the acquisition date fair value of property and equipment. Thus, the property and equipment may be subsequently adjusted, with a corresponding adjustment to gain from bargain purchase prior to 12 June 2019 (one year after the transaction).
**In accordance with the purchase and sale agreement, the Group issued 1,590,852 fully paid shares to Nabors, valued at the price as quoted on the London Stock Exchange on 12 June 2018.
From the date of acquisition, the assets contributed USD 27,866,791 of revenue from continuing operations of the Group. It is impracticable to disclose the revenue and profit or loss of the rigs acquired from Nabors for the current reporting period as if the combination had taken place at the beginning of the year, as the acquired assets and entities did not represent a reporting entity and the historical information is not available. The Group acquired the business comprised of the rigs and the related items, rather than the entire entity from Nabors. The amount of profit contributed by these assets from the date of acquisition is also not disclosed, as these rigs do not represent a separate reporting entity and it impracticable to prepare the profit and loss for the rigs.
B. Acquisition of the rigs and subsidiaries from Weatherford Drilling International
On 31 October 2018 and 30 November 2018, the Group acquired the assets from Weatherford Drilling International in Kuwait and The Kingdom of Saudi Arabia (KSA), respectively. The acquisitions have been accounted for using the acquisition method.
The Group acquired the following in Kuwait:
i) Kuwait Assets: 12 onshore rigs and related equipment, drilling contracts, other vendor contracts, certain employees, inventories to be used in the drilling business, the business intellectual property and records related to the drilling business and rig moving equipment; and
ii) 100% interest in PDC Cyprus Holding ("PDC") (pre-qualified shareholder of UPDC for Kuwait Oil Company tender process) which has a 47.5% interest in UPDC, a Kuwait entity which handles the operations of the rigs in Kuwait including the employees and the drilling contracts.
The Group acquired 11 onshore rigs in KSA and related equipment, drilling contracts, other vendor contracts, certain employees, inventories to be used in the drilling business, the business intellectual property and records related to the drilling business.
Identifiable net assets acquired
The provisional fair value of the identifiable assets and liabilities as at the acquisition were:
Provisional fair Provisional fair
values recognized values recognized
on acquisition on acquisition
USD (KSA) (Kuwait)
----------------------------------------------- ------------------- -------------------
Property and equipment 94,861,942 130,364,292
Inventories 20,313,058 8,139,747
Accounts receivable and prepayments - 36,925,705
Due from related parties - 6,699,193
Bank balances and cash - 110,528
------------------- -------------------
Total assets (provisional)* 115,175,000 182,239,465
------------------- -------------------
Employees' end of service benefits - 10,505,611
Accounts payable and accruals - 11,335,812
Due to related parties - 6,699,193
------------------- -------------------
Total liabilities (provisional)* - 28,540,616
------------------- -------------------
Total identifiable net assets at fair
value (provisional)* 115,175,000 153,698,849
Non-controlling interest (52.5% of
net assets) ** - (8,733,565)
Bargain purchase gain arising on acquisitions (22,675,000) (9,965,284)
------------------- -------------------
Purchase considerations 92,500,000 135,000,000
=================== ===================
The gross amount of trade receivables is USD 11,537,905 which approximates to its fair value. It is expected that the full contractual amounts can be collected and management estimated that no allowance for ECL is required.
USD KSA Kuwait ------------------------------------------------ ------------- -------------- Analysis of cash flow on acquisition (included in cash flows from investing activities) Net cash acquired with the subsidiary - 110,528 Cash paid (i) (92,500,000) (123,000,000) Net cash out flows on acquisition (92,500,000) (122,889,472)
(i) Outstanding consideration payable for Kuwait assets amounting to USD 12,000,000 is included in trade and other payables (Note 18).
*Additional clarifications and analysis is required to determine the acquisition date fair value of the assets and liabilities acquired. Thus, the assets and liabilities may be subsequently adjusted, with a corresponding adjustment to gain from bargain purchase prior to 31 October 2019 (Kuwait assets) and 30 November 2019 (KSA assets) (one year after the transaction).
**This represents share of non-controlling interests over the net assets of UPDC as of the acquisition date.
From the date of acquisition, the acquired assets and entities contributed USD 20,681,056 of revenue from continuing operations of the Group, and UPDC reported the profit of USD 484,232. It is impracticable to disclose the revenue and profit or loss of the combined businesses for the current reporting period, as if the combination had taken place at the beginning of the year, as the acquired assets and entities did not represent a reporting entity and the historical information is not available. The Group acquired the business comprised of the rigs along with the related items and UPDC rather than all the entities owning these businesses from the seller.
6 REVENUE FROM CONTRACT WITH CUSTOMERS
USD 2018 2017
------------------- ------------ ------------
Units operations 196,286,916 147,841,157
Catering services 3,006,326 2,450,360
Projects income* 4,683,478 6,752,850
Others 1,586,670 545,664
------------ ------------
205,563,390 157,590,031
============ ============
*Projects income represents services relating to outsourcing various operating projects for clients such as manpower, well platform installation, maintenance and repair services.
The disaggregation of revenue in accordance with IFRS 15 is in line with the segments disclosed in Note 4 above as the management monitors the revenue geographically and the only operational revenue stream is mainly drilling services (units operations) and the revenue is recognised over the time of service.
7 COST OF REVENUE
USD 2018 2017
------------------------ ------------ -----------
Project direct costs 2,596,283 5,681,202
Maintenance costs 14,743,854 7,307,833
Staff costs 35,326,884 25,677,414
Rental equipment 2,288,103 2,744,852
Insurance 4,843,389 3,637,194
Depreciation (Note 16) 27,849,382 20,426,233
Other costs 19,858,358 12,848,730
------------ -----------
107,506,253 78,323,458
============ ===========
8 GENERAL AND ADMINISTRATIVE EXPENSE
USD 2018 2017
------------------------------------------ ----------- -----------
Staff costs 12,194,853 10,137,211
Depreciation and amortisation (Notes 16,
17) 385,964 237,474
Professional fees 2,215,480 2,117,751
Business travel expenses 1,816,136 1,250,543
Free zone expenses 2,065,073 1,606,634
Rental expenses 1,022,968 877,701
Other expenses 4,270,895 2,805,661
23,971,369 19,032,975
=========== ===========
9 FINANCE COSTS
USD 2018 2017
---------------------------------------------- ----------- -----------
Interest on bank credit facilities and loans 23,736,620 16,550,209
Prepaid transaction costs written off due
to refinancing 4,399,432 -
Arrangement fees related to financing the
acquired business 3,336,467 -
----------- -----------
31,472,519 16,550,209
=========== ===========
10 INCOME TAX
USD 2018 2017
--------------------------------------------------- ------------ ------------
Consolidated statement of profit or loss:
Current income tax expense* 3,788,784 17,881
============ ============
Consolidated statement of financial position:
Current liabilities:
Balance at 1 January 2,288,282 2,857,063
Charge for the year 3,840,581 2,400,216
Release during the year (51,797) (2,382,335)
Paid during the year (3,036,313) (586,662)
Balance at 31 December (Note 18) 3,040,753 2,288,282
============ ============
Profit before income tax 79,373,843 43,406,020
Tax calculated at domestic tax rates applicable
to profits in the primary jurisdiction of
0% (2017: 0%) - -
Effect of different tax rates in countries
in which the Group operates 1,643,938 951,750
Non-deductible expenses 217,148 262,666
Prior year adjustments** - (2,382,335)
Withholding taxes 1,979,495 1,185,800
Other (51,797) -
Income tax expense recognised in the consolidated
statement of comprehensive income 3,788,784) 17,881
============ ============
*Current income tax expense includes withholding taxes on intercompany rentals in the Kingdom of Saudi Arabia amounting to USD 1,979,495 (2017: USD 1,185,800).
**Prior year adjustments represent tax provision recorded in Algeria during 2016 which is released during 2017 based on the tax filings and tax assessment.
The effective tax rate is 5% (2017: 3%, excluding the credit in respect of prior year adjustments).
The Group operates in jurisdictions which are subject to tax at higher rates than the statutory corporate tax rate of 0%, which is applicable to profits in Algeria and Kingdom of Saudi Arabia where applicable tax rate is 26% and 20% respectively.
Egyptian corporations are normally subject to corporate income tax at a statutory rate of 22.5% however the Company has been registered in a Free Zone in Alexandria under the Investment Law No 8 of 1997 which allows exemption from corporate income tax.
11 INVESTMENT IN A JOINT VENTURE
The Group holds 48.75% equity interest in Egyptian Chinese Drilling Company (ECDC) amounting to USD 2,184,382 (2017: USD 1,950,000). The Group acquired the investment on 30 March 2015 from AMAK Drilling and Petroleum Services Co. (a related party) at par value. ECDC is a Joint Stock Company operating in storing and renting machinery and all needed equipment to the petroleum industry.
As at 31 December 2017, the Group has treated this investment as available for sale since it has no representation on the Board. On 5 July 2018, the Shareholders entered into a Shareholders Agreement whereby the Group obtained a joint control over ECDC. While the legal formalities for the change in the articles of association is in progress as of 31 December 2018, as per the Shareholders Agreement the investment became investment in a joint venture effective 5 July 2018. The investment in joint venture is accounted for using equity method of accounting effective from the date of change.
The Group recognised dividends of USD 1,225,000 from Egyptian Chinese Drilling Company during the year ended 31 December 2015 which is outstanding as at 31 December 2018 and 2017 (Note 15).
Summarised financial information of the joint venture and reconciliation with the carrying amount of the investment in the consolidated financial statements are set out below:
Summarised statement of financial position as at 31 December 2018:
USD 2018
----------------------------------------------------------- -------------
Non-current assets 8,331,562
Current assets 15,126,615
Non-current liabilities (2,057,094)
Current liabilities (16,920,300)
-------------
Net assets at provisional fair value 4,480,783
=============
The Group's share in net assets at provisional fair value
equity - 48.75%* 2,184,382
Summarised statement of comprehensive income as of 31 December 2018:
USD 2018
------------------------------------------------------- -------------
Revenues 14,406,829
Cost of revenues (11,451,747)
Other income 36,498
General and administrative expenses (2,116,591)
Other provisions (1,150,000)
-------------
Operating profit (275,011)
=============
Finance costs (57,150)
Foreign exchange gain 13,581
Non-operating income 1,434,825
Profit for the year 1,116,245
-------------
Profit for the period from 5 July 2018 to 31 December
2018 480,783
-------------
Group's share of profit for the period - 48.75%** 234,382
=============
* The summarised statement of the financial positions prepared based on the provisional fair values of the assets and liabilities of ECDC on 5 July 2018. Additional clarifications and analysis is required to determine the fair values of the assets and liabilities of ECDC at the date of the change from financial instrument to the joint venture which may result in adjustments to the net equity of ECDC, with corresponding adjustment to the investment. The Group has one year starting from 5 July 2018 to determine the final fair values. Any such material adjustments will be reflected in the next period financial statements of the Group.
** The amount represents 48.75% Group's share in the net profit of the joint venture from 5 July 2018 to 31 December 2018.
The joint venture had no other contingent liabilities or commitments as at 31 December 2018 (2017: USD 82,761). The joint venture cannot distribute its profits without the consent from the two venture partners.
12 BANK BALANCES AND CASH
USD 2018 2017
--------------------------------------------- ------------------------ ------------
Cash on hand 31,399 8,931
Bank balances 99,808,981 9,942,280
Treasury bills - 127,013,206
Time deposits 31,034,859 -
------------------------ ------------
130,875,239 136,964,417
Escrow account held to acquire new assets (10,800,000) -
------------------------ ------------
Cash and cash equivalents for the purpose
of statement of cash flows 120,075,239 136,964,417
======================== ============
Bank balances and cash comprise of balances
in the following currencies:
United States Dollar (USD) 90,062,113 9,469,067
Saudi Riyal (SAR) 6,610,718 178,817
Egyptian Pound (EGP) 2,417,859 121,869
United Arab Emirates Dirham (AED) 531 1,012
Great British Pound (GBP) 6,111 54
Euro (EUR) 247 64
Algerian Dinar (DZD) 254,620 180,335
Kuwaiti Dinar (KWD) 488,181 (7)
Time deposits (USD)* 31,034,859 -
T-bill's (EGP)** - 127,013,206
------------------------ ------------
130,875,239 136,964,417
======================== ============
*Time deposits represent short-term investment with a local bank in the United Arab Emirates. Time deposits have original maturities of less than 90 days and earns average interest of 2.05% per annum. The finance income reported in the consolidated statement of comprehensive income for the year 2018 amounted to USD 706,400.
** Treasury bills represent short-term investment with original maturity of less than 90 days. As at 31 December 2018, the Group had investment in treasury bills amounting to Nil (2017: 127,013,206). The investment in treasury bills matured in January 2018. The finance income reported in the consolidated statement of comprehensive income for the year 2018 amounted to USD 2,032,444 (2017: USD 7,015,552).
13 INVENTORIES
USD 2018 2017
--------------------- ----------- -----------
Offshore rigs 22,450,959 19,160,806
Onshore rigs 13,028,737 538,002
Warehouse and yards 17,028,345 1,220,669
52,508,041 20,919,477
=========== ===========
14 TRADE RECEIVABLES AND CONTRACT ASSETS
Trade receivables
USD 2018 2017
----------------------------------------------- ------------ ------------
Trade receivables 105,701,885 69,681,069
Provision for impairment in trade receivables (4,944,373) (3,693,766)
------------ ------------
100,757,512 65,987,303
============ ============
Trade receivables are non-interest bearing and are generally on 30 to 90 days terms after which trade receivables are considered to be past due. Unimpaired trade receivables are expected to be fully recoverable on the past experience. It is not the practice of the Group to obtain collateral over receivables and the vast majority are, therefore, unsecured. As at 31 December 2018, there was no impairment of contract assets and hence no ECL has been recorded. The Contract assets have increased as at 31 December 2018 due to the expansion of the operations arising from the acquisition of new businesses during the year as explained in Note 5.
Contract assets
As at 31 December 2018, the Group has contract assets of USD 36,369,649 (2017: Nil). As at 31 December 2017, this was classified as accrued revenues (Note 15). Also, refer to Note 2.2 (a) for the details of the accounting policy.
The movement in the provision for impairment of trade receivables is as follows:
USD 2018 2017
--------------------- ---------- ----------
As at 1 January 3,693,766 3,114,651
Charge for the year 1,250,607 579,115
---------- ----------
As at 31 December 4,944,373 3,693,766
========== ==========
As at 31 December, the aging analysis of un-impaired trade receivables is as follows:
Past due but not impaired
-------------------------------------------------------------
Neither past 30 - 60 61 - 90
USD due nor impaired <30 days days days >90 days Total
2018 36,620,688 7,110,821 3,744,240 6,837,607 46,444,156 100,757,512
================== ========== ========== ========== =========== ============
2017 25,138,781 5,889,514 4,474,001 8,539,624 21,945,383 65,987,303
================== ========== ========== ========== =========== ============
As at 31 December 2018, the largest portion of overdue balances over 90 days is from one customer of the Group, which is a governmental entity. Management believes that the customer will reach certain milestones in 2019 and will be able to fulfil its obligations. The application of forward looking information has no material impact on the ECL provision.
15 PREPAYMENTS AND OTHER RECEIVABLES
USD 2017 2016
--------------------------------------------------- ----------- -----------
Accrued revenue* - 12,975,535
Invoice retention 25,933,047 6,525,863
Margin LG (Note 27) 5,635,765 3,602,290
Advances to contractors and suppliers 5,437,050 6,027,286
Insurance with customers 3,890,082 3,911,475
Dividends receivable 1,225,000 1,225,000
Provision for impairment in dividends receivables (245,000) (245,000)
Other receivables and deposits 7,476,748 4,750,626
----------- -----------
49,352,692 38,773,075
=========== ===========
*Accrued revenue represents services rendered but not yet billed at the reporting date. As at 31 December 2018, the accrued revenue is presented as contract assets in Note 14.
16 PROPERTY AND EQUIPMENT
Furniture Drilling Assets Office Computer Leasehold
USD Rigs * and fixtures pipes Tools under construction Premises and equipment Motor vehicles improvements Total
--------------- ----------------------- --------------------- --------------------- ---------------------- ---------------------------- ------------------ ------------------- ------------------- ------------------- --------------------------
31 December
2018
Cost:
As at 1
January
2018 316,529,474 1,154,408 8,075,026 21,977,187 41,115,141 - 666,495 249,765 232,453 389,999,949
Additions 211,176,298 26,727 5,062,203 5,105,794 188,287,047 6,622,148 91,803 - 24,351 416,396,371
Transfers 104,090,963 6,870 - 589,463 (104,706,985) - 19,689 - - -
Transfer to
intangible
Assets - - - - (21,408) - - - - (21,408)
----------------------- --------------------- --------------------- ---------------------- ---------------------------- ------------------ ------------------- ------------------- ------------------- --------------------------
As at 31
December
2018 631,796,735 1,188,005 13,137,229 27,672,444 124,673,795 6,622,148 777,987 249,765 256,804 806,374,912
----------------------- --------------------- --------------------- ---------------------- ---------------------------- ------------------ ------------------- ------------------- ------------------- --------------------------
Accumulated
depreciation
and
impairment:
As at 1
January
2018 (58,139,451) (367,329) (1,653,630) (6,071,696) (765,291) - (333,381) (145,520) (81,676) (67,557,974)
Depreciation
charge
for the year (24,283,150) (108,922) (1,615,005) (1,919,994) - - (110,164) (38,617) (36,947) (28,112,799)
----------------------- --------------------- --------------------- ---------------------- ---------------------------- ------------------ ------------------- ------------------- ------------------- --------------------------
As of 31
December
2018 (82,422,601) (476,251) (3,268,635) (7,991,690) (765,291) - (443,545) (184,137) (118,623) (95,670,773)
----------------------- --------------------- --------------------- ---------------------- ---------------------------- ------------------ ------------------- ------------------- ------------------- --------------------------
Net book
value:
As of 31
December
2018 549,374,134 711,754 9,868,594 19,680,754 123,908,504 6,622,148 334,442 65,628 138,181 710,704,139
======================= ===================== ===================== ====================== ============================ ================== =================== =================== =================== ==========================
16 PROPERTY AND EQUIPMENT (cont'd)
Furniture Drilling Assets Computer Leasehold
USD Rigs * and fixtures pipes Tools under construction and equipment Motor vehicles improvements Total
--------------- ------------------------ -------------------- -------------------- --------------------- ----------------------- ------------------ ------------------ ----------------- -----------------------
31 December
2017
Cost:
As at 1
January 2017 268,524,908 957,088 4,007,526 12,425,178 50,893,103 473,311 249,765 70,039 337,600,918
Additions 41,453 97,175 - 799,461 51,820,656 193,184 - - 52,951,929
Transfers 47,963,113 100,145 4,067,500 8,752,548 (61,045,720) - - 162,414 -
Transfer to
intangible
Assets - - - - (552,898) - - - (552,898)
As at 31
December
2017 316,529,474 1,154,408 8,075,026 21,977,187 41,115,141 666,495 249,765 232,453 389,999,949
------------------------ -------------------- -------------------- --------------------- ----------------------- ------------------ ------------------ ----------------- -----------------------
As at 1
January 2017 268,524,908 957,088 4,007,526 12,425,178 50,893,103 473,311 249,765 70,039 337,600,918
Accumulated
depreciation
and
impairment:
As at 1
January 2017 (39,436,649) (271,041) (852,125) (5,184,627) (765,291) (253,165) (106,533) (70,038) (46,939,469)
Depreciation
charge
for the year (18,702,802) (96,288) (801,505) (887,069) - (80,216) (38,987) (11,638) (20,618,505)
As of 31
December
2017 (58,139,451) (367,329) (1,653,630) (6,071,696) (765,291) (333,381) (145,520) (81,676) (67,557,974)
------------------------ -------------------- -------------------- --------------------- ----------------------- ------------------ ------------------ ----------------- -----------------------
Net book
value:
As of 31
December
2017 258,390,023 787,079 6,421,396 15,905,491 40,349,850 333,114 104,245 150,777 322,441,975
======================== ==================== ==================== ===================== ======================= ================== ================== ================= =======================
Capitalised borrowing costs
The amount of borrowing costs capitalised during the year ended 31 December 2017 was USD 2,608,790 (2016: USD 1,408,530).
16 PROPERTY AND EQUIPMENT (cont'd)
Depreciation charge is allocated as follows:
USD 2018 2017
Cost of revenue (Note 7) 27,849,382 20,426,233
General and administrative expenses 263,417 192,272
----------- -----------
Total depreciation charge 28,112,799 20,618,505
=========== ===========
Assets under construction
Assets under construction represent the amounts that are incurred for the purpose of upgrading and refurbishing property and equipment until it is ready to be used in the operation. Assets under construction will be transferred to 'Rigs' or 'Tools' of the property and equipment after completion.
*Some of the rigs are pledged to the lenders (banks) against loans and borrowings (Note 19).
17 INTANGIBLE ASSETS
USD 2018 2017
------------------------------------ -------- --------
Cost:
As at 1 January 742,457 167,980
Additions 12,788 21,579
Transfer from property & equipment 21,408 552,898
-------- --------
As at 31 December 776,653 742,457
-------- --------
Accumulated amortisation:
As at 1 January 197,917 152,715
Amortisation charge for the year 122,547 45,202
-------- --------
As at 31 December 320,464 197,917
-------- --------
Net carrying amount
As at 31 December 456,189 544,540
======== ========
Intangible assets represent computer software and the related licenses.
18 TRADE AND OTHER PAYABLES
USD 2018 2017
------------------------------------------- ----------- -----------
Local trade payables 32,833,885 26,945,291
Foreign trade payables 4,241,609 3,779,363
Notes payable 333,519 446,289
Accrued expenses 14,995,275 8,948,534
Accrued interests 7,811,987 1,751,724
Income tax payable (Note 10) 3,040,753 2,288,282
Deferred consideration payable related to
business acquisitions (Note 5) 12,000,000 -
Finance lease liability (Note 27) 567,960 -
Dividends payable* (Note 24) - 7,149,034
Other payables 9,598,436 1,355,726
----------- -----------
85,423,424 52,664,243
=========== ===========
* Dividends payable represent dividends of a subsidiary which was declared and partially paid prior to the reorganisation. The balance was settled in the current year.
19 INTEREST-BEARING LOANS AND BORROWINGS
USD 2018 2017
----------------------------------- -------------- ------------------------
Balance as at 1 January 212,489,035 235,733,919
Borrowings drawn during the year 569,304,756 36,581,041
Borrowings repaid during the year (238,038,216) (59,825,925)
Amortised arrangement fees 11,513,574 -
-------------- ------------------------
Balance as at 31 December 555,269,149 212,489,035
============== ========================
Maturing within 12 months 45,258,354 57,333,621
Maturing after 12 months 510,010,564 155,155,414
-------------- ------------------------
Balance as at 31 December 555,268,918 212,489,035
============== ========================
2018 2017
Type Interest rate % Latest maturity USD USD
------------------------- ----------------------------- -------------------- ----------- ----------------------
Current interest-bearing loans and borrowings
Loan 1 Syndication
Tranche A 4.5% + 3 Month LIBOR 5 years - 16,000,000
Tranche C 4.5% + 3 Month LIBOR 5 years - 5,000,000
Tranche D 4.5% + 3 Month LIBOR 5 years - 3,800,000
Loan 2 Syndication
Tranche A 5.5% + 3 Month LIBOR 5 years - 11,111,111
Credit facility 1 4.50% + 3 Month LIBOR 1 year / renewable - 12,306,542
Credit facility 2 1.25% + Corridor Renewable (186) (206)
Credit facility 3 1.25% + Corridor Renewable - 2,542,374
Credit facility 4 2.50% + Corridor Renewable - 6,573,800
Credit facility 5 4.50% + 3 Month LIBOR or Renewable 2,999,955 -
Loan 3 Syndication
Tranche A 5.0% + 6 Month LIBOR 5 years 21,500,000 -
Tranche C 5.0% + 6 Month LIBOR 5 years 17,568,851 -
Murabaha facility 5.0% + 6 Month LIBOR 5 years 3,189,734 -
Total current interest-bearing loans and borrowings 45,258,354 57,333,621
2018 2017
Type Interest rate % Latest maturity USD USD
------------------------ ------------------------- ----------------- ----------------------- ---------------------
Non-current interest-bearing loans and borrowings
Loan 1 Syndication
Tranche A 4.5% + 3 Month LIBOR 5 years - 45,533,610
Tranche B 4.5% + 3 Month LIBOR 5 years - 40,000,000
Tranche C 4.5% + 3 Month LIBOR 5 years - 15,000,000
Tranche D 4.5% + 3 Month LIBOR 5 years - 17,399,507
Loan 2 Syndication
Tranche A 5.5% + 3 Month LIBOR 5 years - 33,333,827
Tranche B 5.5% + 3 Month LIBOR 5 years - 3,888,470
-
Loan 3 Syndication
Tranche A 5.0% + 6 Month LIBOR 5 years 155,039,448 -
Tranche B 5.0% + 6 Month LIBOR 5 years 41,500,000 -
Tranche C 5.0% + 6 Month LIBOR 5 years 145,862,324 -
Murabaha facility 5.0% + 6 Month LIBOR 5 years 29,779,091 -
Ijara loan -
Tranche A 5.0% + 6 Month LIBOR 7 years 67,829,701 -
Tranche B 5.0% + 6 Month LIBOR 7 years 70,000,000 -
------------------ ------------------
Total non-current interest-bearing loans and
borrowings 510,010,564 155,155,414
-------------------- --------------------
Total interest-bearing loans and borrowings 555,268,918 212,489,035
The Group has secured interest-bearing loans and borrowings as follows:
Bank credit facilities
Credit facility 5 is granted by the Al Ahli Bank of Kuwait (ABK) with an overdraft facility limit amounting to USD 3,000,000 which is secured by promissory note.
Loan 3 - Syndication
On 22 March 2018, the Group has signed a syndication loan agreement arranged by Merrill Lynch International and EBRD with total amount of USD 450 million divided over eleven banks. The loan is divided into four tranches, the purpose and the use of each facility is described as follows:
a) Tranche A
For refinancing existing financial indebtedness in full (including the payment of the fees, costs and expenses incurred under or in connection with the transaction documents). Tranche A was utilised during the current year to settle Loan 1 and Loan 2.
b) Tranche B
New working capital purposes and to refinance certain existing working capital facilities. Tranche A was utilised during the current year.
c) Tranche C
Capital expenditure for the acquisition of the new rigs and mobile offshore production units. Tranche C is partially utilised as of 31 December 2018.
d) "Murabaha Facility"
Capital expenditure for the acquisition of the new rigs and mobile offshore production units. Tranche D is partially utilised as of 31 December 2018.
Tranche A, Tranche C and Murabaha Facility are medium-term loans over 5 years which include 18 months grace period and are paid semi-annually in un-equal instalments starting from 22 September 2019 and the last instalment will be on 22 March 2023. Tranche B will be settled with bullet repayment on 22 March 2023.
The syndicated loan is secured by the following:
-- rigs Admarine II, Admarine IV, Admarine V, Admarine VI, Admarine VIII, Admarine 88, Admarine 261, Admarine 262 and Admarine 266;
-- ADES International for Drilling share pledge owning entity of rig ADES III and Kuwait Advanced Drilling Services (KADS) share pledge (owning entity of rigs ADES 155, ADES 180, ADES 776, ADES 808, ADES 809, ADES 870, ADES 871, ADES 878, ADES 102, ADES 160, ADES 171 and ADES 172); and
Ijara Loan
On 22 May 2018, the Group has signed "Musharakah" agreement and "Ijara" agreement with Alinma Bank to finance the acquisition of the new rigs and related capital expenditure. The Musharakah facility amount is USD 200 million, of which 70% is financed by Alinma Bank and 30% by the Group. On 11 June 2018, the Group obtained USD 70 million from Alinma Bank within the framework of "Musharakah" facility to finance the acquisition of three rigs from Nabors (Note 5) and subsequent capital expenditures.
On 18 July 2018, the Group obtained USD 70 million from Alinma Bank within the framework of "Musharakah" facility to finance the acquisitions of three rigs from Weatherford Drilling International (Note 5).
Both loans are medium-term loans over 7 years which includes 2 year grace period and is paid semi-annually in equal instalments starting from 10 June 2020 and the last instalment will be on 10 June 2024.
Ijara loan is secured by the rigs purchased from Nabors Drilling International II Limited (Jackup rig Admarine 656, Jackup rig Admarine 656 and Jackup rig Admarine 657) and rigs purchased from Weatherford Drilling International (ADES 40, ADES 158, ADES 174, ADES 799 and ADES 889) (Note 5).
20 PROVISIONS
*Accrued /
As at acquired during Paid during As at
USD 1 January the year the year 31 December
2018
Provision for end of
service benefits * 620,083 11,814,647 102,797 12,331,933
Other tax provisions
** 1,836,000 280,017 241,363 1,874,654
---------- ---------------- ----------- ------------
2,456,083 12,094,664 344,160 14,206,587
========== ================ =========== ============
2017
Provision for end of
service benefits 101,368 623,817 105,102 620,083
Other tax provisions 2,933,915 274,647 1,372,562 1,836,000
---------- ---------------- ----------- ------------
3,035,283 898,464 1,477,664 2,456,083
========== ================ =========== ============
* Provisions for end of service benefits accrued during the year included USD 1,309,036 accrued during the year and USD 10,505,611 due to acquisition of a subsidiary (see note 5). The total balance is presented as non-current in the statement of financial position.
** Other tax provisions mainly represent provision made for employee's taxes and withholding taxes which are borne by the Group. The total balance is presented as current in the statement of financial position.
21 SHARE CAPITAL
Share capital of the Group comprise:
USD 2018 2017
---------------------------------- ------------- -------------- --------------
Authorised shares* 1,500,000,000 1,500,000,000
Issued shares 43,793,882 42,203,030
Shares par value 1.00 1.00
-------------- --------------
Issued and paid up capital** 43,793,882 42,203,030
============== ==============
Share premium*** 178,746,337 158,224,346
============== ==============
The shareholding structure as at
31 December 2018 is:
Shareholding
% No. of Value
Shareholders shares USD
---------------------------------- ------------- -------------- --------------
ADES Investment Holding Ltd 63 27,446,772 27,446,772
Individual shareholders 37 16,347,110 16,347,110
------------- -------------- --------------
100 43,793,882 43,793,882
============= ============== ==============
The shareholding structure as at
31 December 2017 is:
Shareholding
% No. of Value
Shareholders shares USD
---------------------------------- ------------- ----------- -----------
ADES Investment Holding Ltd 65 27,446,772 27,446,772
Individual shareholders 35 14,756,258 14,756,258
------------- ----------- -----------
100 42,203,030 42,203,030
============= =========== ===========
*As at 31 December 2018 and 2017, the authorised share capital of the Company was USD 1,500,000,000 comprising of 1,500,000,000 shares.
**In 2018, the Group issued 1,590,852 shares to Nabors as part of the consideration paid for the business acquisition (Note 5).
*** Share premium represents the excess of fair value received over the par value of shares issued as a result of business combinations (Note 5) and IPO (Note 1).
22 RESERVES
Legal reserve
As required by Egyptian Companies' Law and one of the Subsidiary's Articles of Association, 5% of the net profit for the year is transferred to legal reserve. Advanced Energy System (ADES) (S.A.E.) has resolved to discontinue further transfers as the reserve totals 20% of issued share capital. As of 31 December 2018, the balance of legal reserve amounted to USD 6,400,000 (2017: USD 6,400,000).
Merger reserve
As disclosed in Note 1, pursuant to a reorganisation plan, the shareholders reorganised the Group by establishing the Company as a new holding company. Merger reserve represents the difference between the consideration paid to the shareholders under the reorganisation plan and the nominal value of the shares of Advanced Energy System (ADES) (S.A.E.). Prior to the reorganisation, the merger reserve comprise of the share capital and share application money of Advanced Energy System (ADES) (S.A.E.).
23 EARNINGS PER SHARE
Basic earnings per share (EPS) amounts are calculated by dividing the profit for the year attributable to the ordinary equity holders of the Parent by the weighted average number of ordinary shares outstanding during the year.
Diluted EPS is calculated by adjusting the weighted average number of ordinary shares outstanding assuming conversion of all dilutive potential ordinary shares. As at 31 December 2018, there were no potential dilutive shares and hence the basic and diluted EPS is same.
The information necessary to calculate basic and diluted earnings per share is as follows:
USD 2018 2017
--------------------------------------------- ----------- -----------
Profit attributable to the ordinary equity
holders of the Parent for
basic and diluted EPS 75,330,838 44,573,939
----------- -----------
Weighted average number of ordinary shares
-
basic and diluted 43,082,201 38,553,620
----------- -----------
Earnings per share - basic and diluted (USD
per share) 1.75 1.16
=========== ===========
24 RELATED PARTIES TRANSACTIONS AND BALANCES
Related party transactions
During the year, the following were the significant related party transactions recorded in the consolidated statement of comprehensive income or consolidated statement of financial position:
During the year, the Group transferred funds to and on behalf of a related party, AMAK for Drilling & Petroleum Services Co. (other related party), amounting to USD 11,265,899 for settlement of dividends payable and fixed assets purchased in 2018 and prior years. Also, AMAK for Drilling & Petroleum Services Co. made payments on behalf of the Group amounting to USD 301,000.
Assets purchased from AMAK, a related party, amounted to USD 7,400,000 (2017: USD 5,000,000).
Related party balances
Significant related party balances included in the consolidated statement of financial position are as follows:
2018 2017
------------------ ----------------------
USD Due from Due to Due from Due to
---------------------------------- --------- ------- ---------- ----------
Ultimate Shareholders
Sky Investment Holding Ltd. 60,000 - 60,000 -
Intro Investment Holding Ltd. 90,502 - 74,998 -
Shareholder
ADES Investment Holding Ltd 46,364 - - 211,629
Joint venture
Egyptian Chinese Drilling Co.
(S.A.E.) 170,618 - 170,618 -
Other related parties
TBS Holding 3,027 - - -
Advansys Project 1,308 - - -
Advansys Holding 5,299 - - -
AMAK for Drilling & Petroleum
Services Co. 55,078 - 2,054,687
ADVANSYS FOR ENG.SERV. & CONS 1,028 - 1,028
Intro for Trading & Contracting 227 - - -
Co.
377,345 56,106 305,616 2,267,344
========= ======= ========== ==========
Compensation of key management personnel
The remuneration of key management personnel during the year was as follows:
USD 2018 2017
----------------------- ---------- ----------
Short-term benefits* 3,285,000 1,890,000
========== ==========
* There is no long term benefits for the key management personnel.
Terms and conditions of transactions with related parties
Outstanding balances at the year-end are unsecured, interest free and settled in cash. There have been no guarantees provided or received for any related party receivables or payables. For the year ended 31 December 2018, the Group has not recorded any impairment of receivables relating to amounts owed by related parties (2017: USD Nil). This assessment is undertaken each financial year by examining the financial position of the related party and the market in which the related party operates.
25 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
Overview
The Group's principal financial liabilities comprise trade and other payables, due to related parties, interest bearing loans and borrowings. The main purpose of these financial liabilities is to finance the Group's operations and to provide support to its operations. The Group's principal financial assets include cash in hand and at banks, including highly liquid investments with maturity less than 90 days, trade receivables and contract assets, due from related parties and other receivables that arrive directly from its operations.
The Group is exposed to market risk, credit risk and liquidity risk. The Board of Directors of the Company oversees the management of these risks. The Board of Directors of the Company are supported by senior management that advises on financial risks and the appropriate financial risk governance framework for the Group. The Group's senior management provides assurance to the Board of Directors of the Group's financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with Group policies and Group risk appetite. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below.
The Group has exposure to the following risks from its use of financial instruments:
a) Credit risk, b) Market risk: i. Interest rate risk
ii. Foreign currency risk
c) Liquidity risk.
This note presents information about the Group's exposure to each of the above risks, the Group's objectives, policies and processes for measuring and managing risk, and the Group's management of capital. The Group's current financial risk management framework is a combination of formally documented risk management policies in certain areas and informal risk management policies in other areas.
Credit risk
Credit risk is the risk that counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities (primarily for trade receivables, contract assets and due from related parties) and from its financing activities, including letter of guarantees with banks foreign exchange transactions and other financial instruments. As at 31 December 2018, the top three debtors of the Group represent 84% (2017: 84%).
Trade receivables and contract assets
Customer credit risk is managed by the Group's established policy, procedures and controls relating to customer credit risk management. Credit quality of the customer is assessed based on a credit rating policy and individual credit limits are defined in accordance with this assessment. Outstanding customer receivables are regularly monitored.
The requirement for impairment is analysed at each reporting date on an individual basis for major clients. Additionally, a large number of minor receivables are grouped into homogenous groups and assessed for impairment collectively. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets. The Group does not hold collateral as security. The Group evaluates the concentration of risk with respect to trade receivables and contract assets as low, as its wide number of customers operates in highly independent markets. In addition, instalment dues are monitored on an ongoing basis.
Other financial assets and bank balances
Credit risk from balances with banks and financial institutions is managed by the Group's treasury department in accordance with the Group's policy. Counterparty credit limits are reviewed by the Group's Board of Directors on an annual basis, and may be updated throughout the year subject to approval of the Group's senior management. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty's failure to make payments. The Group's exposure to credit risk for the components of the consolidated statement of financial position is the carrying amounts of these assets. The Group limits its exposure to credit risk by only placing balances with international banks and reputable local banks. Management does not expect any counterparty in failing to meet its obligations.
Due from related parties
Due from related parties relates to transactions arising in the normal course of business with minimal credit risk, with a maximum exposure equal to the carrying amount of these balances.
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices, such as interest rate risk and currency risk. Financial instruments affected by market risk include: loans and borrowings. The Group neither designate hedge accounting or hold or issue derivative financial instruments.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group's exposure to the risk of changes in market interest rates relates primarily to the Group's long-term debt obligations with floating interest rates.
Interest rate sensitivity
The following table demonstrates the sensitivity to a reasonably possible change in interest rates on loans and borrowings. With all other variables held constant, the Group's profit is affected through the impact on floating rate borrowings (net of impact of time deposits), as follows:
Effect on profit
Increase/decrease before income
USD in basis points tax
------------- ------------------ -----------------
31 December
2018
USD +100 (2,465,056)
USD -100 2,465,056
31 December
2017
USD +100 (985,126)
USD -100 985,126
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group's exposure to the risk of changes in foreign exchange rates relates primarily to the Group's operating activities (when revenue or expense is denominated in a different currency from the Group's functional currency).
The following tables demonstrate the sensitivity to a reasonably possible change in USD exchange rates, with all other variables held constant. The impact on the Group's profit is due to changes in the value of monetary assets and liabilities. The Group's exposure to foreign currency changes for all other currencies is not material.
Effect on profit
Change in USD before income
USD rate tax USD
------------- -------------- -----------------
31 December
2018
USD +10% 519,417
USD -10% (519,417)
31 December
2017
USD +10% 1,250,162
USD -10% (1,250,162)
Liquidity risk
The cash flows, funding requirements and liquidity of the Group are monitored by Group management. The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of banks overdraft and bank loans. The Group assessed the concentration of risk with respect to refinancing its debt and concluded it to be low. Access to sources of funding is sufficiently available.
The table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted payments.
Financial liabilities
Less than
3 3 to 12 1 to 5 Over
USD months months years 5 years Total
------------------------------ ----------- ------------ ------------ ----------- ------------
As at 31 December 2018
Interest-bearing loans
and borrowings - 82,827,165 621,780,202 16,660,874 721,268,241
Trade and other payables 40,883,796 41,498,876 - - 82,382,672
Due to related parties - 56,106 - - 56,106
Finance lease liability 300,000 850,000 4,000,000 3,767,074 8,917,074
----------- ------------ ------------ ----------- ------------
Total undiscounted financial
liabilities 41,183,796 125,232,147 625,780,202 20,427,948 812,624,093
=========== ============ ============ =========== ============
As at 31 December 2017
Interest-bearing loans
and borrowings 12,666,983 35,941,765 175,584,530 - 224,193,278
Trade and other payables 44,802,928 7,861,315 - - 52,664,243
Due to related parties 2,267,344 - - - 2,267,344
----------- ------------ ------------ ----------- ------------
Total undiscounted financial
liabilities 59,737,255 43,803,080 175,584,530 - 279,124,865
=========== ============ ============ =========== ============
Capital management
Capital includes share capital, share premium, reserves and retained earnings.
The primary objective of the Group's capital management is to ensure that it will be able to continue as a going concern while maintaining a strong credit rating and healthy capital ratios in order to support its business and maximise shareholder value. The Group's strategy remains unchanged since inception. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the requirements of the financial covenants. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders or return capital to shareholders. The Group monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt. The Group's policy is to keep the gearing ratio between 30% and 80%. However, in 2017 the gearing ratio was only 19% due to the funds raised from the IPO during the year, The Gearing ratio for 2018 is 50%.
USD 2018 2017
Interest - bearing loans and borrowings
(Note 19) 555,268,918 212,489,035
Bank balances and cash (Note 12) (130,875,239) (136,964,417)
-------------- --------------
Net debt 424,393,679 75,524,618
Total equity 424,441,166 318,009,698
-------------- --------------
Total capital 848,834,845 393,534,316
============== ==============
Gearing ratio 50% 19%
26 FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments comprise financial assets and financial liabilities. Financial assets of the Group include bank balances and cash, trade receivables and contract assets, due from related parties and other receivables. Financial liabilities of the Group include trade payables, due to related parties, loans and borrowings and other payables. The fair values of the financial assets and liabilities are not materially different from their carrying value unless stated otherwise.
27 CONTINGENT LIABILITIES AND COMMITMENTS
Contingent liabilities
USD 2018 2017
---------------------- ----------- -----------
Letter of guarantees 25,708,373 21,301,884
=========== ===========
Contingent liabilities represent letters of guarantee issued in favour of General Authority for Investment, Petrobel Group, Egyptian General Petroleum Corporation, Petro Gulf of Suez, Suze Abu Zenima Petroleum Company (Petro Zenima) and Association Sonatrach - First Calgary Petroleum. The cover margin on such guarantees amounted to USD 5,635,765 (31 December 2017: USD 3,602,290).
Operating lease commitments
The Group has entered into operating leases on certain motor vehicles and items of machinery, with lease terms between three and five years. The Group has the option, under some of its leases, to lease the assets for additional terms of three to five years.
Future minimum lease payments under non-cancellable operating leases as at 31 December are as follows:
USD 2018 2017
--------------------------------------------- -------- --------
Within one year 191,700 364,506
After one year but not more than five years 26,856 218,556
-------- --------
218,556 583,062
======== ========
Finance lease commitments
The Group has finance lease for its office premises. The Group's obligations under finance leases are secured by the lessor's title to the leased assets. Future minimum lease payments under finance leases and hire purchase contracts, together with the present value of the net minimum lease payments are, as follows:
USD 2018
----------------------------------------------------- ----------
Within one year 1,150,000
After one year but not more than five years 4,000,000
More than five years 3,767,074
----------
Total minimum lease payments 8,917,074
Less amounts representing finance charges 2,957,541
----------
Present value of minimum lease payments 5,959,533
==========
Finance lease liability - current portion (Note 18) 567,960
Finance lease liability - non-current portion 5,391,573
----------
Present value of minimum lease payments 5,959,533
==========
Capital commitments
On 11 July 2018, the Group entered into Sale and Purchase agreements with Weatherford Drilling International (WDI). The transaction pertains to the acquisition of Kuwait assets, KSA assets, Algeria assets and Iraq assets for a total consideration. While the acquisition of the Kuwait assets was completed in 2018 (Note 5), the acquisition of Algeria assets and Iraq assets were not completed as of 31 December 2018. The purchase price consideration is USD 60,000,0000 and USD 12,000,0000 for Algeria assets and Iraq assets, respectively.
28 COMPARATIVE INFORMATION
USD As previously Reclassifications Reclassified
reported 2017 balances 2018
------------------------------ ------------------ ------------------ ---------------
Income statement expenses:
Other taxes 1,573,448 (1,185,800) 387,648
Income tax (credit)/ expense (1,167,919) 1,185,800 17,881
Current liabilities:
Trade and other payables
Income tax payable 1,118,662 1,169,620 2,288,282
Accrued expenses 10,118,154 (1,169,620) 8,948,534
The reclassifications are made to improve the quality of the information presented. The third year consolidated statement of financial position is not presented as these reclassifications have no material impact on the third year numbers.
29 SUBSEQUENT EVENTS
On 15 January 2019, the Group formed a joint venture with Vantage Drilling International through its affiliate Vantage Driller Co II, and incorporated Advantage Drilling Services SAE in Egypt. Through this joint venture, the Group intends to pursue expansion into deep water drillship services in Egypt.
On 27 February 2019, the Group acquired four contracted onshore rigs from Weatherford International in Algeria. The transaction is a part of the previously signed definitive agreement with Weatherford to acquire thirty-one onshore drilling rigs.
In March 2019, the Group entered into a short-term exploration contract with Dana Gas Egypt Limited for deep water drilling services in Egypt.
Click on, or paste the following link into your web browser, to view the associated PDF document.
http://www.rns-pdf.londonstockexchange.com/rns/8091T_1-2019-3-25.pdf
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
FR UVURRKWAOURR
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March 25, 2019 03:01 ET (07:01 GMT)
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