Cadogan Petroleum Plc - Half Yearly Report for the Six Months ended 30 June 2017

CADOGAN PETROLEUM PLC

Half Yearly Report for the Six Months ended 30 June 2017

(Unaudited and unreviewed)
 

Highlights

Cadogan Petroleum plc (“Cadogan” or the “Company”), an independent oil and gas exploration, development and production company with onshore gas, condensate and oil assets in Ukraine, announces its unaudited results for the six months ended 30 June 2017.

• H1 2017 has been another semester without LTI and TRI, notwithstanding an increased number of manhours worked, and a further step in our  reduction of normalized emissions.
• Production operations have continued in the Debeslavetska, Cheremkhivska and Monastyretska licences and the average net production rate has increased by 24%, from 115 boepd in H1 2016 to 143 boepd in the current reporting period.
• Two old, suspended oil wells drilled in Monastyretska licence have been successfully re-entered  and were producing an aggregated amount of 49 boepd at 30 June 2017; the wells have been rented from Ukrnafta under a profit sharing agreements.
• The application to convert the Zagoryanska exploration licence into a production licence was not approved: it was a casualty of the stalemate in the award process created by a disagreement between Central and local authorities on the distribution of the royalties; the application to convert Pirkovska exploration licences has also been caught into the same stalemate, but as it was filed one year later there are still 17 months in which to secure approval.
• Traded volumes of gas and trading margins shrank compared to H1 2016 due to increased competition. Both revenues and margins have been negatively impacted  with the result that gas trading has not contributed to the company profit over the reporting period.
• The service business has focused on internal projects (work-overs of the re-entered wells), while successfully participating in tenders for third party projects; one contract was won and the work is expected to be executed in the second half of the year
• The active pursuit of opportunities to renew and diversify the portfolio has achieved its first milestone with the acquisition of  90% of the shares of  Exploenergy, an Italian company which  has filed the applications for two exploration licences located in the prolific Po Valley, in close proximity to existing gas fields. The sellers will receive a deferred cash consideration of €50,000 for each licence payable upon an award of the licences and will be carried for their 10% interest until first gas in each licence.
• The group received $1 million of VAT refunds over the reporting period as a result of  an application filed in March 2017.
• The efforts to preserve cash through optimization of working capital has continued and as a result net cash, i.e. cash and cash equivalents less short term borrowings, slightly increased during the period to $40.3 million over the value at the end of 2016, of $39.7 million⁽¹⁾.
• The Group has recorded a loss after tax of $2 million (H1 2016: restated loss of $3.2 million)⁽²⁾

(1) The cash refund of $ 1milion of VAT credit and the lack of short term borrowing at 30 June 2017, a situation which is not representative of the normal business conditions,had a major role in this result.

(2) The group changed the functional currency of UK subsidiaries from GBP to USD as at 1 January 2016. The H1 2016 results previously issued did not include this change in functional currency. The results of H1 2016 (loss of $3.2 million previously reported as a profit of $2.0 million) have been amended to reflect this restatement and provide comparability.

Key performance indicators

The Group has monitored its performance in conducting its business with reference to a number of  key performance indicators (‘KPIs’):

• to increase oil, gas and condensate production measured on the barrels of oil equivalent produced per day (‘boepd’);
• to decrease administrative expenses;
• to increase the Group’s basic earnings per share; and
• to maintain an accident free working environment.

The Group’s performance during the first six months of 2017 against these targets is set out in the table below, together with the prior year performance data. No changes have been made to the sources of data or calculations used in the period/year. The positive trend in the HSE performances continue with zero incidents and decrease of the emissions. 

	Unit	30 June 2017	30 June 2016	31 December 2016
Average production (working interest basis) (1)	Boepd	143	115	116
Administrative expenses (2)	$million	2.7	2.5	5.6
Basic loss per share (3)	Cent	(0.9)	(1.4)	(2.6)
Lost time incidents (4) Emissions to the atmosphere (5)	Incidents t/boe	0 23.89	1 31.06	1 27.44

(1) Average production is calculated as the average daily production during the period/year.
(2) 0.3 millions of one-off costs related to the streamlining of operating structure is included in H1 2017 cost
(3) Basic loss per Ordinary share is calculated by dividing the net loss for the year attributable to equity holders of the parent company by the weighted average number of Ordinary shares during the period.
(4) Lost time incidents relate to injuries where an employee/contractor is injured and has time off work (IOGP standard).
(5) For E&P activity. Normalised to tons of CO₂ per total wellhead production, ton/boe.

Enquiries:

Cadogan Petroleum Plc
Guido Michelotti Ben Harber	Chief Executive Officer Company Secretary	[phone] [phone]
Cantor Fitzgerald Europe
David Porter Sarah Wharry		[phone]

Summary

Introduction

The first semester of 2017 has been another challenging time for Ukraine. The political and military crisis related to the confrontation with Russia has remained unresolved and the overall economic situation has only marginally improved. Much needed reforms in the oil and gas industry have not yet been implemented and the areas of attention of the recent past have not been addressed: the licencing authority is still managed by an acting Chairman after two and half years, though a new  acting Chairman has in the meantime been appointed, and the disagreement between Local and Central Authorites on the royalty  distribution, which brought the licence award process to a halt, remained unresolved. In addition, Cadogan has remained subject to a punitive royalty regime on its marginal gas production⁽³⁾.

In this challenging context the Group has continued to focus on safely and efficiently producing the existing fields, on controlling its costs in order to preserve cash while continuing to look at opportunities to grow and diversify its portfolio.

(3) As of January 1, 2016 the punitive 70% subsoil use tax for gas has remained in force only for licenses operated under Joint Activity Agreements, Debeslavetska and  Cheremkhivsk production licences fall into this category.

Operations

The E&P activity has focused on using the assets in the Country as a platform for growth by increasing production from the existing fields within the Debeslavetska, Cheremkhivska and Monastyretska licences.  At the end of the reporting period gross production rate increased to 155 boepd (143 boepd net), 24% higher than in the six months ended 30 June 2016 (123 boepd gross, 115 boepd net).  Cadogan has shifted its focus of operations to the West of the country by closing its  Operating base in Poltava and relocating the local warehouse to the East into one, wholly owned premise (vs the two of the past).

The activity has primarily consisted in the re-entry of two old, suspended oil wells drilled in the Monastyretska licence. The wells, which have been rented from Ukrnafta under profit sharing agreements, have been worked-over with the objective of putting them back in production. At the end of the reporting period the first work-over had been completed and the well was pumping 49 bpd of oil. The second work-overis being completed and once completed the wells will be tested in order to gather data on their performances which will be used to update the reservoir study.

In Italy activity has focused on securing the award of the two licences under application in the Po Valley. The timeline to award is difficult to predict, but Managament remains confident  that the licences will be awarded.

Trading

H1 2017 has been another difficult semester for gas trading which has witnessed a further shrinking of both volumes and margins. The Group has lost the competitive advantage of being an early mover and it is now competing against the major European traders which have moved to Ukraine as they have seen an opportunity in the Country’s decision  to halt gas import from Russia.

Increasing competition is forcing margins down for all parties, for the benefit of Ukrainian consumers, and our margins are further squeezed as we cannot compete on a levelled field with the larger European traders on the cost of supply.

The Group has focused its efforts in significantly reducing its fixed costs by simplifying the organization of its Trading Group and on optimising working capital. The benefits of these actions will be felt  in the second part of the year.

Financial position

At 30 June 2017 the Group had cash and cash equivalents of $40.3 million, including $5.8 million of pledged cash. Part of the cash and cash equivalents in the amount of $5 million related to security of borrowings and held at a European bank in the UK. Also as at 30 June 2017 cash and cash equivalents of $0.8 million were held in the Ukrainian subsidiary of the European bank as a financial covered guarantee in favour of PJSC Ukrtransgas to fulfill the requirement of the Ukrainian legislation on gas trading. Net cash, which included cash and cash equivalents less short-term borrowings, increased to $40.3 million at 30 June 2017 compared to $39.7 million at 31 December 2016, mostly due to working capital optimisation and recovery of VAT receivables. The Directors believe that the capital available at the date of this report is sufficient for the Company and the Group to continue operations for the foreseeable future.

Outlook                                                  

Cadogan remains well positioned to pursue and exploit the opportunities  which will materialize in the E&P domain.  

In Ukraine, Cadogan has completed its transformation from a geographically dispersed to a West focused Operator and will use its  assets as a platform for growth. The short term focus will remain on increasing production and safeguarding the licences with a minimum capital deployment while looking for farm-in partners to conduct the riskier, but higher reward activities. Efforts to monetize non E&P assets such as accumulated VAT credits and inventory will also continue.

Outside of Ukraine, the Company will continue to actively pursue a reload and geographic diversification of its portfolio using its cash, lean organization and low cost structure as levers. The acquisition of Exploenergy s.r.l. has only been a first step of this strategy.

Operations Review

In H1 2017 the Group held working interests in four (2016: four) conventional gas, condensate and oil exploration and production licences in the West of Ukraine. All these assets are operated by the Group and are located in the prolific Carpathian basin, in close proximity to the Ukrainian gas distribution infrastructure. In the East, Cadogan has taken all necessary actions to convert the exploration Pirkovskoe licence which expired in 2015 into a production license and is awaiting approval. The Group’s primary focus during the period continued to be on the cost optimisation and enhancement of current production.

The application to convert the Zagoryanska exploration licence into a production licence was not approved: it was a casualty of the stalemate in the award process created by a disagreement between Central and local authorities on the distribution of the royalties.

Summary of the Group’s licences (as of 30 June 2017)
Working interest (%)	Licence	Expiry	Licence type(1)
99.8	Bitlyanska	December 2019	E&D
99.2 54.2	Debeslavetska(2) Cheremkhivska(2)	November 2026 May 2018	Production Production
99.2	Monastyretska	November 2019	E&D

(1) E&D = Exploration and Development.
(2) The Group has respectively 99.2% and 54.2% of economic benefit in conventional activities in Debeslavetska and Cheremkhivska licences through Joint Activity Agreements (“JAA”).

In addition to the above licences, the Group has a 15%, carried-through-exploration interest in the ENI-led WGI⁽¹⁾, which holds the Cheremkhivsko-Strupkivska, Debeslavetska Production, Baulinska, Filimonivska, Kurinna, Sandugeyivska and Yakovlivska licences for unconventional activities. 

(1) WGI is a Ukraine registered company in which Cadogan owns a 15% participating interest; the remaining participating interest is held by eni ukraine LLC (50.01 %) and Nadra Ukrayny (34.99 %)

Below we provide an update to the full Operations Review contained in the Annual Financial Report for 2016 published on 27 April 2017.

Bitlyanska licence

Borynya 3 well is routinely monitored as required by existing regulations for wells which are suspended. The re-evaluation of the licence is ongoing, focusing on shallow oil targets.

Monastyretska licence

Blazh 1 well continues its regular production of oil at a rate of 48 boepd. Blazh 3 well was re-entered and is currently producing at the same rate as Blazh 1. Blazh-Mon 3 well is under workover. Blazh 3 and Blazh-Mon 3 are the two wells rented from Ukrnafta.

Debeslavetska Production licence area

During the reporting period, the field produced  56 boepd gross (H1 2016: 60 boepd). Rigless activity is regularly run to mitigate the production decline.

Cheremkhivska Production licence area

Thanks to the successful debottlenecking and production optimization the field production during the reporting period increased  by some 60 %,  from 16 boepd of H1 2016 to  26 boepd of H1 2017.

Unconventional licences

The unfavourable market conditions brought the Operator to defer the drilling of the first well to 2018.

Service Company activities                                                                                          

Cadogan’s 100% owned subsidiary, Astro Service LLC, has continued to pursue opportunities to build a larger portfolio of orders, while executing the re-entry and work-over of the two rented wells (for an estimated value of 143 KUSD of intra group gross revenues).

Financial Review

Overview

Income statement

Revenues have decreased to $5.0 million in the first half of 2017 (30 June 2016: $12.3 million, 31 December 2016: $19.7 million) due to a decrease in gas trading operations, which represent $3.9 million (30 June 2016: $10.5 million, 31 December 2016: $15.6 million) of the total revenues; revenues from production more than doubled to $1.1 million (30 June 2016: $0.5 million) due to the increase of both production volumes  (+27% over H1 2016) and average realized price (+32% over H1 2016).

The service business in first half 2017 was focused on internal projects, in particular, on services to the Monastyretska licence.

Cost of sales consists of $3.8 million of purchases of gas for the trading operating segment, and $0.7 million of production royalties and taxes, depreciation and depletion of producing wells and direct staff costs for exploration and development.

Gross profit has decreased to $0.5 million (30 June 2016: $1.0 million, 31 December 2016: $1.1 million).

Other administrative expenses of $2.7 million (30 June 2016: $2.5 million, 31 December 2016: $5.6 million) comprise other staff costs, professional fees, Directors’ remuneration and depreciation charges on non-producing property, plant and equipment.

Share of loss in joint ventures of $0.4 million (30 June 2016: loss $1.4 million, 31 December 2016: loss $0.2 million) represent recognition of Cadogan’s share of losses of Westgasinvest LLC.

The reversal of impairment of other assets includes reversal of impairment of VAT provision of $0.4 million due to the received refund of VAT that was previously impaired and reversal of impairment of inventores of $0.1 million for the inventories that have been impaired in previous periods and which were sold at above cost.

Net finance costs have reduced by $0.15 million from H1 2016 mainly reflecting the reduction in gas trading.

Balance sheet

The cash position of $40.3 million as at 30 June 2017, including pledged cash of $5.8 million, has decreased from $43.3 million at 31 December 2016. Part of the cash and cash equivalents in the amount of $5 million related to security of borrowings and held at the European bank in the UK. Also as at 30 June 2017 cash and cash equivalents of $0.8 million were held in the Ukrainian subsidiary of the European bank as a financial covered guarantee in favour of PJSC Ukrtransgas to fulfill the requirement of the Ukrainian legislation on gas trading. Net cash, which included cash and cash equivalents less short-term borrowings, increased to $40.3 million at 30 June 2017 compared to $39.7 million at 31 December 2016 mainly due to optimisation of working capital, and also to the receipt of  $1 million of VAT refunds.

Intangible Exploration and Evaluation (“E&E”) assets of $2.8 million (30 June 2016: $2.6 million, 31 December 2016: $2.4 million) represent the carrying value of the Group’s investment in E&E assets as at 30 June 2017, which increased due to workover at Monastyretska licence. The Property, Plant and Equipment (“PP&E”) balance of $1.2 million at 30 June 2017 (30 June 2016: $1.5 million, 31 December 2016: $1.3 million) represented other PP&E of the Group. Investments in joint ventures of $1.9 million (30 June 2016: $1.2 million, 31 December 2016: $2.3 million) represent the carrying value of the Group’s investments in Westgasinvest LLC.

Trade and other receivables of $2.9 million (30 June 2016: $7.1 million, 31 December 2016: $4.1 million) include $1.9 million trading prepayments and receivables, and VAT recoverable of $0.3 million (30 June 2016: $1.5 million, 31 December 2016: $0.8 million). VAT recoverable has significantly decreased due to received refund in cash of $1 million.

Short-term borrowings as at 30 June 2017 were nil (30 June 2016: $7.5 million, 31 December 2016: $3.6 million). Borrowings are represented by a credit line drawn in UAH at a Ukrainian bank, a 100% subsidiary of a European bank. The credit line is secured by $5.8 million of cash placed at a European bank in the UK. Proceeds from VAT refund were used for the prepayment of the gas held in inventory at the end of the reporting period, thus allowing short term borrowings to be reduced to zero⁽⁴⁾. The $1.5 million of trade and other payables as of 30 June 2017 (30 June 2016: $1.3 million, 31 December 2016: $1.6 million) represent $0.8 million (30 June 2016: $0.9 million, 31 December 2016: $0.5 million) of other creditors and $0.7 million of accruals (30 June 2016: $0.4 million, 31 December 2016: $0.9 million).

(4) Short term borrowings are expected to increase as more gas is bought to be sold during the next winter season.

Cash flow statement

The Consolidated Cash Flow Statement shows operating cash outflow before movements in working capital of $2.1 million (30 June 2016: outflow $1.4 million, 31 December 2016: outflow $4.4 million). Cash inflows from movements in working capital in first half 2017 of $3.2 million represent a decrease in trade and  other receivables of $2.1 million, decrease in inventories of $1.1 million, and a decrease in trade and other  payables of $13 thousand.

The Group had capital expenditure of $0.4 million on intangible Exploration and Evaluation (“E&E”) assets for the six months ended 30 June 2017 (30 June 2016: $46 thousand , 31 December 2016: $39 thousand ) related to workovers on Monasteretska licence and nil capital expenditure (30 June 2016: $28 thousand, 31 December 2016: $119 thousand) on Property, Plant and Equipment (“PP&E”).

In 2017 the Group continued to finance its trading operations with short-term borrowings and for the six months ended 30 June 2017 proceeds were $0.7 million (30 June 2016: $1.8 million, 31 December 2016: $1.9 million) and repayments were $4.3 million (30 June 2016: $6.7 million, 31 December 2016: $10.2 million).

Commitments

There has not been any material change in the commitments and contingencies reported as at 31 December 2016 (refer to page 71 of the Annual Report).

Treasury

The Group continually monitors its exposure to currency risk. It maintains a portfolio of cash and cash equivalent balances mainly in US dollars (‘USD’) held primarily in the UK and holds these mostly in call deposits. Production revenues from the sale of hydrocarbons are received in the local currency in Ukraine (‘UAH’) and to date funds from such revenues have been held in Ukraine for further use in operations rather than being remitted to the UK. Funds are transferred to the Company’s subsidiaries in USD to fund operations, at which time the funds are converted to UAH. Some payments are made on behalf of the affiliates from the UK.

Going concern

The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Interim Financial Statements. For further detail refer to the detailed discussion of the assumptions outlined in note 2(a) to the Interim Financial Statements.

Cautionary Statement

The business review and certain other sections of this Half Yearly Report contain forward looking statements that have been made by the Directors in good faith based on the information available to them up to the time of their approval of this report. However they should be treated with caution due to inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information and no statement should be construed as a profit forecast.

Risks and uncertainties

There are a number of potential risks and uncertainties inherent in the oil and gas sector which could have a material impact on the long-term performance of the Group and which could cause the actual results to differ materially from expected and historical results. The Company has taken reasonable steps to mitigate these where possible. Full details are disclosed on pages 11 to 12 of the 2016 Annual Financial Report. There have been no changes to the risk profile during the first half of the year. The risks and uncertainties are summarised below:

Operational risks

• Health, safety, and environment
• Drilling and work-over operations
• Production and maintenance

Subsurface risks

Financial risks

• Changes in economic environment risk
• Counterparty risk
• Commodity price risk

Country risk

• Regulatory and licence issues
• Emerging market risk

Other risks

• Risk of losing key staff members
• Risk of entry into new countries

Director’s Responsibility Statement

We confirm that to the best of our knowledge:

(a)          the Interim Financial Statements has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’;

(b)          the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year);

(c)           the interim management report includes a fair review of the information required by DTR 4.2.8R  (disclosure of related parties’ transactions and changes therein); and

(d)          the condensed set of financial statements, which has been prepared in accordance with the applicable set of accounting standards, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer, or the undertakings included in the consolidation as a whole as required by DTR 4.2.4R.

This Half Yearly Report consisting of pages 1 to 20 has been approved by the Board and signed on its behalf by:

Guido Michelotti
Chief Executive Officer
28 August 2017

Consolidated Income Statement

Six months ended 30 June 2017

		Six months ended 30 June		Year ended 31 December
		2017 $’000	2016 $’000	2016 $’000
	Notes	(Unaudited)	(Unaudited) Restated (note 2d)	(Audited)
CONTINUING OPERATIONS
Revenue	3	4,967	12,295	19,692
Cost of sales	3	(4,496)	(11,262)	(18,623)
Gross profit		471	1,033	1,069
Administrative expenses		(2,697)	(2,523)	(5,603)
Impairment of oil and gas assets		-	-	(90)
Reversal of impairment/(Impairment) of other assets		503	(12)	(82)
Share of losses in joint ventures	6	(359)	(1,360)	(143)
Net foreign exchange (losses)/gains		(34)	42	38
Other operating income/(costs)		174	(76)	(9)
Operating loss		(1,942)	(2,896)	(4,820)
Gain on acquisition		-	-	99
Finance costs		(51)	(216)	(1,087)
Loss before tax		(1,993)	(3,112)	(5,808)
Tax charge		-	(113)	(110)
Loss for the period/year		(1,993)	(3,225)	(5,918)
Attributable to:
Owners of the Company	4	(1,991)	(3,223)	(5,912)
Non-controlling interest		(2)	(2)	(6)
Loss per Ordinary share		Cents	cents	Cents
Basic	4	(0.9)	(1.4)	(2.6)

Consolidated Statement of Comprehensive Income

Six months ended 30 June 2017

		Six months ended 30 June		Year ended 31 December
		2017 $’000	2016 $’000	2016 $’000
		(Unaudited)	(Unaudited) Restated (note 2d)	(Audited)
Loss for the period/year		(1,993)	(3,225)	(5,918)
Other comprehensive loss
Items that may be reclassified subsequently to profit or loss
Unrealised currency translation differences		423	271	(987)
Other comprehensive loss		423	271	(987)
Total comprehensive loss for the period/year		(1,570)	(2,954)	(6,905)
Attributable to:
Owners of the Company		(1,568)	(2,952)	(6,899)
Non-controlling interest		(2)	(2)	(6)
		(1,570)	(2,954)	(6,905)

Consolidated Statement of Financial Position

Six months ended 30 June 2017

				Six months ended 30 June			Year ended 31 December
				2017 $’000		2016 $’000	2016 $’000
		Notes		(Unaudited)		(Unaudited) Restated (note 2d)	(Audited)
	ASSETS
	Non-current assets
	Intangible exploration and evaluation assets		5		2,819	2,568	2,354
	Property, plant and equipment				1,169	1,485	1,312
	Investments in joint ventures		6		1,964	1,221	2,323
					5,952	5,274	5,989
	Current assets
	Inventories		7		1,015	2,331	1,879
	Trade and other receivables		8		2,861	7,143	4,146
	Cash and cash equivalents				40,344	48,051	43,300
					44,220	57,525	49,325
	Total assets				50,172	62,799	55,314
	LIABILITIES
	Non-current liabilities
	Deferred tax liabilities				-	-	-
	Long-term provisions				(705)	(698)	(670)
					(705)	(698)	(670)
	Current liabilities
	Short-term borrowings		9		-	(7,483)	(3,574)
	Trade and other payables		10		(1,520)	(1,346)	(1,640)
	Current provisions				(1,393)	(1,196)	(1,306)
					(2,913)	(10,025)	(6,520)
	Total liabilities				(3,618)	(10,723)	(7,190)
	Net assets				46,554	52,076	48,124
	EQUITY
	Share capital				13,337	13,337	13,337
	Retained earnings				192,436	197,117	194,427
	Cumulative translation reserves				(161,076)	(160,241)	(161,499)
	Other reserves				1,589	1,589	1,589
	Equity attributable to equity holders of the parent				46,286	51,802	47,854
	Non-controlling interest				268	274	270
	Total equity				46,554	52,076	48,124

Consolidated Statement of Cash Flows

Six months ended 30 June 2017

				Six months ended 30 June				Year ended 31 December
				2017 $’000		2016 $’000		2016 $’000
				(Unaudited)		(Unaudited) Restated (note 2d)		(Audited)
	Operating loss				(1,942)		(2,896)		(4,820)
	Adjustments for:
	Depreciation of property, plant and equipment				69		94		138
	Impairment of oil and gas assets				-		-		90
	Share of losses in joint ventures				359		1,360		143
	Impairment of receivables				4		-		59
	(Reversal of impairment) / impairment of inventories				(152)		4		92
	(Reversal of impairment) / impairment of VAT recoverable				(389)		3		(69)
	Loss on disposal of property, plant and equipment				-		-		13
	Effect of foreign exchange rate changes				(34)		55		(38)
	Operating cash flows before movements in working capital				(2,085)		(1,380)		(4,391)
	Decrease in inventories				1,125		997		1,047
	Decrease in receivables				2,077		8,591		9,321
	(Decrease)/Increase in payables and provisions				(13)		(3,331)		(2,014)
	Cash from operations				1,104		4,877		3,963
	Interest paid				(108)		(1,158)		(1,591)
	Interest on receivables received				-		-		230
	Income taxes paid				(109)		-		(8)
	Net cash inflow from operating activities				887		3,719		2,594
	Investing activities
	Investments in joint ventures			-			(400)		(2,337)
	Purchases of property, plant and equipment			-			(28)		(119)
	Purchases of intangible exploration and evaluation assets			(374)			(46)		(39)
	Proceeds from sale of property, plant and equipment			-			-		29
	Net cash inflow from acquisition of subsidiaries			-			-		2,041
	Interest received			79			300		156
	Net cash used in investing activities			(295)			(174)		(269)
	Financing activities
	Proceeds from short-term borrowings			699			1,839		1,908
	Repayment of short-term borrowings			(4,316)			(6,684)		(10,232)
	Net cash used in financing activities			(3,617)			(4,845)		(8,324)
	Net decrease in cash and cash equivalents			(3,025)			(1,300)		(5,999)
	Effect of foreign exchange rate changes			69			(56)		(108)
	Cash and cash equivalents at beginning of period/year			43,300			49,407		49,407
	Cash and cash equivalents at end of period/year			40,344			48,051		43,300

Consolidated Statement of Changes in Equity

Six months ended 30 June 2017

	Share capital $’000	Retained earnings $’000	Cumulative  translation reserves $’000	Other reserves Reorganisation $’000	Equity attributable to owners of the Company $’000	Non-controlling  interest $’000	Total $’000
As at 1 January 2016	13,337	200,339	(160,512)	1,589	54,753	276	55,029
Net loss for the period	-	(3,223)	-	-	(3,223)	(2)	(3,225)
Exchange translation differences on foreign operations	-	-	271	-	271	-	271
As at 30 June 2016 (as restated)	13,337	197,117	(160,241)	1,589	51,802	274	52,076
Net loss for the period	-	(2,690)	-	-	(2,690)	(4)	(2,694)
Exchange translation differences on foreign operations	-	-	(1,258)	-	(1,258)	-	(1,258)
As at 31 December 2016	13,337	194,427	(161,499)	1,589	47,854	270	48,124
Net loss for the period	-	(1,991)	-	-	(1,991)	(2)	(1,993)
Exchange translation differences on foreign operations	-	-	423	-	423	-	423
As at 30 June 2017	13,337	192,436	(161,076)	1,589	46,286	268	46,554

Notes to the Condensed Financial Statements

Six months ended 30 June 2017

1. General information

Cadogan Petroleum plc (the ‘Company’, together with its subsidiaries the ‘Group’), is incorporated in England and Wales under the Companies Act. The address of the registered office is 6th Floor, 60 Gracechurch Street, London EC3V 0HR. The nature of the Group’s operations and its principal activities are set out in the Operations Review on pages 5 to 6 and the Financial Review on pages 7 to 8.

This Half Yearly Report has not been audited or reviewed in accordance with the Auditing Practices Board guidance on ‘Review of Interim Financial Information’.  

A copy of this Half Yearly Report has been published and may be found on the Company’s website at www.cadoganpetroleum.com.

2. Basis of preparation  

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (‘IASB’) and as adopted by the European Union (‘EU’).  These Condensed Financial Statements have been prepared in accordance with IAS 34 Interim Financial Reporting, as issued by the IASB.

The same accounting policies and methods of computation are followed in the condensed financial statements as were followed in the most recent annual financial statements of the Group, which were included in the Annual Report issued on 27 April 2017.

The Group has not early adopted any amendment, standard or interpretation that has been issued but is not yet effective. It is expected that where applicable, these standards and amendments will be adopted on each respective effective date.

The Group has adopted the standards, amendments and interpretations effective for annual periods beginning on or after 1 January 2017. The adoption of these standards and amendments did not have a material effect on the financial statements of the Group.

(a) Going concern

The Directors have continued to use the going concern basis in preparing these condensed financial statements. The Group’s business activities, together with the factors likely to affect future development, performance and position are set out in the Operations Review. The financial position of the Group, its cash flow and liquidity position are described in the Financial Review.

The Group’s cash balance at 30 June 2017 was $40.3 million (31 December 2016: $43.3 million), including pledged cash of $5.8 million (2016: $10.9 million).

The Group’s forecasts and projections, taking into account reasonably possible changes in operational performance, and the price of hydrocarbons sold to Ukrainian customers, show that there are reasonable expectations that the Group will be able to operate on funds currently held and those generated internally, for the foreseeable future.

The Group continues to pursue its farm-out strategy on Bitlyanska licence with the objective of managing  risks and mitigating capital deployment.

After making enquiries and considering the uncertainties described above, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and consider the going concern basis of accounting to be appropriate and, thus, they continue to adopt the going concern basis of accounting in preparing the financial statements. In making its statement the Directors have considered the recent political and economic uncertainty in Ukraine.

(b) Foreign currencies

The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). The functional currency of the Company is US dollar. For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in US dollars, which is the presentation currency for the consolidated financial statements.

The relevant exchange rates used were as follows:

1 US$ = £		Six months ended 30 June		Year ended 31 Dec 2016
		2017	2016
	Closing rate	1.3004	1.3393	1.2346
	Average rate	1.2589	1.4339	1.3557
1 US$ = UAH		Six months ended 30 June		Year ended 31 Dec 2016
		2017	2016
	Closing rate	26.1819	25.0649	27.4770
	Average rate	26.9720	25.7136	25.8169

(c) Dividend

The Directors do not recommend the payment of a dividend for the period (30 June 2016: $nil; 31 December 2016: $nil).

(d) Restatement of period ended 30 June 2016

The Group changed the functional currency of its UK subsidiaries from GBP to USD as at 1 January 2016, as disclosed in the Annual Report for the year ended 31 December 2016.  The Group’s H1 2016 results did not reflect this change in functional currency and have been restated accordingly in these H1 2017 results.  The impact of the restatement related to unrealised foreign exchange was as follows:

	As previously reported	As restated
	$’000	$’000
Profit / (losses) after tax	1,975	(3,225)
Retained earnings	202,317	197,117
Cumulative translation reserve	(165,441)	(160,241)

The change had no impact on net assets.

3. Segment information

Segment information is presented on the basis of management’s perspective and relates to the parts of the Group that are defined as operating segments. Operating segments are identified on the basis of internal assessment provided to the Group’s chief operating decision maker (“CODM”). The Group has identified its executive management team as its CODM and the internal assessment used by the top management team to oversee operations and make decisions on allocating resources serve as the basis of information presented.

Segment information is analysed on the basis of the type of activity, products sold or services provided.

The majority of the Group’s operations are located within Ukraine.

Segment information is analysed on the basis of the types of goods supplied by the Group’s operating divisions.

The Group’s reportable segments under IFRS 8 are therefore as follows:

Exploration and Production

• E&P activities on the production licences for natural gas, oil and condensate

Service

• Drilling services to exploration and production companies

• Construction services to exploration and production companies

Trading

• Import of natural gas from European countries

• Local purchase and sales of natural gas operations with physical delivery of natural gas

The accounting policies of the reportable segments are the same as the Group’s accounting policies. Sales between segments are carried out at market prices. The segment result represents profit under IFRS before unallocated corporate expenses. Unallocated corporate expenses include management and Board remuneration and expenses incurred in respect of the maintenance of Kiev office premises. This is the measure reported to the CODM for the purposes of resource allocation and assessment of segment performance.

The Group does not present information on segment assets and liabilities as the CODM does not review such information for decision-making purposes.

As of 30 June 2017 and for the six months then ended the Group’s segmental information was as follows:

	Exploration and Production	Service(1)	Trading	Consolidated
	$’000	$’000	$’000	$’000
Sales of hydrocarbons	832	-	4,135	4,967
Sales between segments	188	-	(188)	-
Total revenue	1,020		3,947	4,967
Other cost of sales	(704)	-	(3,774)	(4,478)
Depreciation	(5)	(13)	-	(18)
Other administrative expenses	(198)	(13)	(143)	(354)
Finance cost, net(2)	-	-	(88)	(88)
Segment results	113	(26)	(58)	29
Unallocated other administrative expenses	-	-	-	(2,360)
Share of losses in joint ventures	-	-	-	(359)
Net foreign exchange gains	-	-	-	(34)
Other income, net	-	-	-	731
Loss before tax				(1,993)

(1) In first half 2017 the Service business was focused on internal projects, in particular, providing ervices to Monastyretska licence.
(2) Finance cost includes $108 thousand of interest on short-term borrowings and $20 thousand of interet on cash deposits used for trading.

As of 30 June 2016 and for the six months then ended the Group’s segmental information was as follows:

	Exploration and Production	Service	Trading	Consolidated
	$’000	$’000	$’000	$’000
Sales of hydrocarbons	108	-	10,915	11,023
Other revenue	-	1,272	-	1,272
Sales between segments	451	-	(451)	-
Total revenue	559	1,272	10,464	12,295
Other cost of sales	(427)	(644)	(10,097)	(11,168)
Depreciation	(55)	(39)	-	(94)
Other administrative expenses	(193)	(22)	(215)	(430)
Finance cost, net	-	-	(290)(1)	(290)
Segment results	(116)	567	(138)	313
Unallocated other administrative expenses				(2,093)
Share of losses in joint ventures				(1,360)
Net foreign exchange gain(2)				42
Other losses, net				(14)
Loss before tax				(3,112)

(1) Finance cost includes $1,141 thousand of interest on short-term borrowings, $823 thousand of interest income on receivables and $28 thousand of interet on cash deposits used for trading.
(2) The group changed its functional currency from GBP to USD as at 1 January 2016. Results of H1 2016 (loss of $3.2 million) have been amended to reflect this change and make such a comparison correct.

4. Reversal of impairment of other assets

Reversal of impairment of other assets includes reversal of impairment of VAT provision of $0.4 million due to the received refund of VAT that was previously impaired and reversal of impairment of inventores of $0.1 million for the inventories that have been impaired in previous periods and were sold higher than the cost.

5. Finance cost, net

	Six months ended 30 June		Year ended 31 December
	2017	2016	2016
	$’000	$’000	$’000
Interest on short-term borrowings	(108)	(1 141)	(1 414)
Interest on tax provision	(17)	-	(33)
Total interest expenses on financial liabilities	(125)	(1 141)	(1 447)
interest income on receivbles	-	823	230
Investment revenue	59	69	125
Interest income on cash deposit in Ukraine	20	28	31
Total interest income on ecommiss assets	79	920	386
Unwinding of discount on ecommissioning provision (note 24)	(5)	5	(26)
	(51)	(216)	(1 087)

6. Loss per ordinary share

Profit per ordinary share is calculated by dividing the net loss for the period/year attributable to Ordinary equity holders of the parent by the weighted average number of Ordinary shares outstanding during the period/year. The calculation of the basic loss per share is based on the following data:

	Six months ended 30 June		Year ended 31 December
Loss attributable to owners of the Company	2017 $’000	2016 $’000	2016 $’000

   

Loss for the purposes of basic loss per share being net loss attributable to owners of the Company	(1,991)	(3,223)	(5,912)
	Number	Number	Number
Number of shares	‘000	‘000	‘000
Weighted average number of Ordinary shares for the purposes of basic loss per share	231 092	231,092	231,092
	Cent	Cent	Cent
Loss per Ordinary share
Basic	(0.9)	(1.4)	(2.6)

7. Intangible exploration and evaluation assets

As of 30 June 2017 the intangible assets balance has increased in comparison to 31 December 2016 due to work overs on Monastyretska licence.

8. Investments in joint ventures

Share of losses in joint ventures represents the recognition of Cadogan share of losses of Westgasinvest LLC.

9. Inventories

The Group had significant volumes of natural gas as at 31 December 2016 which have been sold during the six months ended 30 June 2017 that resulted in a reduction of the natural gas balance from $0.9 million to $0.1 million. No other substantial changes in inventories balances occurred.

10. Trade and other receivables

			Six months ended 30 June		Year ended 31 December
			2017 $’000	2016 $’000	2016 $’000
Trading receivables			1,405	2,662	2,163
Trading prepayments			445	53	777
VAT recoverable			277	1,466	829
Prepayments			269	148	1
Receivable from joint-ventures			-	2,412	58
Other receivables			465	402	318
			2,861	7,143	4,146

The Directors consider that the carrying amount of the other receivables approximates their fair value.

Management expects to realise VAT recoverable through the activities of the business segments.

11. Short-term borrowings

In 2017 the Group continued to use short-term borrowings as a financing facility for its trading activities. Borrowings are represented by a credit line drawn in UAH at a Ukrainian bank, a 100% subsidiary of a European bank. The credit line is secured by $5 million of cash balance placed at a European bank in the UK.

During the six months ended 30 June 2017 the Group repaid the credit line in full using the proceeds from VAT refund using proceeds from VAT refund and the outstanding amount as at 30 June 2017 was nil (30 June 2016: $7.5 million, 31 December 2016: $3.6 million). Interest is paid monthly and as at 30 June 2017 the accrued interest is nil (30 June 2016: $0.2 million, 31 December 2016: $0.04 million).

12. Trade and other payables

The $1.5 million of trade and other payables as of 30 June 2017 (30 June 2016: $1.3 million, 31 December 2016: $1,6 million) represent $0.8 million (30 June 2016: $0.9 million, 31 December 2016: $0.8 million) of other creditors and $0.7 million of accruals (30 June 2016: $0.4 million, 31 December 2015: $0.8 million).

13. Commitments and contingencies

There have been no significant changes to the commitments and contingencies reported on page 71 of the Annual Report.

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