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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Enwell Energy Plc | LSE:ENW | London | Ordinary Share | GB0031775819 | ORD 5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.25 | 1.67% | 15.25 | 15.00 | 15.50 | 15.50 | 14.50 | 14.50 | 26,949 | 15:02:52 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Crude Petroleum & Natural Gs | 62.19M | 26.49M | 0.0826 | 1.85 | 48.1M |
From Nov 2023 to Nov 2024
TIDMENW
RNS Number : 1401Y
Enwell Energy PLC
29 December 2023
29 December 2023
ENWELL ENERGY PLC
2023 INTERIM RESULTS
Enwell Energy plc ("Enwell Energy" or the "Company", and together with its subsidiaries, the "Group"), the AIM-quoted (AIM: ENW) oil and gas exploration and production group, today announces its unaudited results for the six month period ended 30 June 2023.
Highlights
Operational
Hot Features
Premium
-- Aggregate average daily production of 2,730 boepd (calculated
on the days when the Group's fields were actually in production)
(1H 2022: 3,026 boepd)
-- GOL-107 development well successfully completed in Q4 2023
and is undergoing long-term test production
Financial
-- Revenue of $33.1 million (1H 2022: $77.2 million) and gross
profit of $19.6 million (1H 2022: $51.5 million), down
primarily as a result of significantly lower gas prices
-- Operating profit of $17.2 million (1H 2022: $48.9 million),
down primarily as a result of significantly lower gas prices
-- Net profit of $12.5 million (1H 2022: $32.4 million)
-- Cash, cash equivalents of $33.8 million as at 30 June 2023
(1H 2022: $77.4 million), down as a result of the GBP48.1
million interim dividend paid in June 2023, and of $79.1
million as at 14 December 2023
-- Average realised gas, condensate and LPG prices in Ukraine
were significantly lower at $419/Mm(3) (UAH15,315/Mm(3)
), $46/bbl and $92/bbl respectively (1H 2022: $1,165/Mm(3)
(UAH33,524/Mm(3) ) gas, $103/bbl condensate and $165/bbl
LPG)
-- Interim dividend of 15 pence per ordinary share, GBP48.1
million in aggregate, paid in June 2023 (1H 2022: nil)
Outlook
-- The Russian invasion of Ukraine in February 2022 has had
and continues to have a significant impact on all aspects
of life in Ukraine, including the Group's business and
operations. The scale and duration of future disruption
to the Group's business is currently unknown, and there
remains significant uncertainty about the outcome of the
war in Ukraine
-- In April and May 2023, the Ukrainian authorities took a
number of regulatory actions against the Group, which included
the suspension of the VAS production licence and SC exploration
licence, and consequently all work at these licences has
been suspended
-- Subject to the resolution of the regulatory issues and
the Group's ability to operate safely, development work
planned for 2024 at the MEX-GOL and SV fields includes
planning the deepening of the MEX-109 well to explore a
deeper horizon, investigating the hydraulic fracturing
of the SV-29 well, planning a workover of the MEX-102 well
to access a shallower horizon, investigating the possible
sidetracking of the MEX-119 well to access additional reserves,
installing additional compression equipment and upgrading
the flow-line network and other field infrastructure
-- Further work on the VAS field and SC licence area will
remain suspended until there is a resolution of the regulatory
issues, including the lifting of the suspension orders
-- Currently, the Group retains approximately a quarter of
its cash outside Ukraine, which enhances the Group's ability
to navigate the current risk environment for the foreseeable
future, and provides a material buffer to any further disruptions
to the Group's operations
-- Development programme for the remainder of 2023 and 2024
expected to be funded from existing cash resources and
operational cash flow
This announcement contains inside information for the purposes of Article 7 of EU Regulation No. 596/2014, which forms part of United Kingdom domestic law by virtue of the European Union (Withdrawal) Act 2018, as amended.
For further information, please contact:
Enwell Energy plc Tel: 020 3427
3550
Chris Hopkinson, Chairman
Sergii Glazunov, Chief Executive Officer
Bruce Burrows, Finance Director
Strand Hanson Limited Tel: 020 7409
3494
Rory Murphy / Matthew Chandler
Zeus Capital Limited Tel: 020 7614
5900
Alexandra Campbell-Harris (Corporate
Finance)
Simon Johnson (Corporate Broking)
Citigate Dewe Rogerson Tel: 020 7638
9571
Ellen Wilton
Dr Gehrig Schultz, BSc Geophysical Engineering, PhD Geophysics, Member of the European Association of Geophysical Engineers, Member of the Executive Coordinating Committee of the Continental European Energy Council, and a Non-Executive Director of the Company, has reviewed and approved the technical information contained within this announcement in his capacity as a qualified person, as required under the AIM Rules for Companies.
Definitions/Glossary
bbl barrel
bbl/d barrels per day
boe barrels of oil equivalent
boepd barrels of oil equivalent per day
Company Enwell Energy plc
EUR Euro
GDP gross domestic product
Group Enwell Energy plc and its subsidiaries
km kilometre
km(2) square kilometre
LPG liquefied petroleum gas
MEX-GOL Mekhediviska-Golotvshinska
m(3) cubic metres
Mm(3) thousand cubic metres
MMboe million barrels of oil equivalent
MMscf million scf
MMscf/d million scf per day
% per cent.
QHSE quality, health, safety and environment
SC Svystunivsko-Chervonolutskyi
scf standard cubic feet measured at 20 degrees Celsius
and one atmosphere
SV Svyrydivske
$ United States Dollar
UAH Ukrainian Hryvnia
VAS Vasyschevskoye
VED Vvdenska
Chairman's Statement
I present the results for the first half of 2023 in circumstances which are very challenging for the Group. The invasion of Ukraine by Russia in February 2022 and the ongoing conflict has created a very difficult and worrying outlook for both the current and future situation in Ukraine, and I am greatly saddened by the terrible events occurring there.
The invasion has had a significant impact on all aspects of life in Ukraine, including the Group's business and operations. The overall scale and duration of future disruption to the Group's business is currently unknown, and there remains significant uncertainty about the outcome of the ongoing war in Ukraine.
Notwithstanding the continued disruption caused by the war, during 2023, the Group continued with some development activities at the MEX-GOL, SV and VAS gas and condensate fields and SC licence in north-eastern Ukraine. At the MEX-GOL field, the GOL-107 development well was completed in late October 2023, and after initial testing demonstrated gas flows from the well, albeit at lower than expected rates, the well has now been hooked up to the gas processing facilities for longer-term testing to establish its optimal operating parameters and to assess whether stimulation may improve production rates. Additionally, at the MEX-GOL field, planning has continued for the deepening of the MEX-109 well to explore a deeper horizon, a workover of the MEX-102 well to access a shallower horizon and investigating the possible sidetracking of the MEX-119 well to access additional reserves. At the SV field, the possible hydraulic fracturing of the SV-29 development well remains under consideration. Drilling of the SC-4 appraisal well on the SC licence area was completed and testing of this well demonstrated strong flow rates of gas and condensate, and planning for the installation of surface facilities and pipelines has been undertaken. At the VAS field, planning for the further development of the field continued.
Aggregate average daily production (calculated on the days when the fields were actually in production) from the MEX-GOL, SV and VAS fields during the first half of 2023 was 2,730 boepd, which is lower than the aggregate daily production rate of 3,026 boepd achieved during 2022 due to the disruption caused by the war, natural field decline and a significant decrease in commodity prices.
The significant decrease in gas prices, coupled with the lower production volumes, during the period has meant that revenues were lower at $33.1 million (1H 2022: $77.2 million). The Group's net profit was also lower at $12.5 million (1H 2022: $32.4 million), operating profit was $17.2 million (1H 2022: $48.9 million), but cash generated from operations was steady at $12.4 million (1H 2022: $12.5 million).
There is significant disruption to the fiscal and economic environment in Ukraine due to the ongoing conflict resulting in a contraction in the economy, an increase in the rate of inflation and a weakening of the Ukrainian Hryvnia against other currencies. Furthermore, it is likely that fiscal and economic uncertainties will continue in the future until an acceptable resolution of the war occurs.
The Ukrainian Government has implemented a number of reforms in the oil and gas sector in recent years, which include the deregulation of the gas supply market in late 2015, and subsequently, the simplification of the regulatory procedures applicable to oil and gas exploration and production activities in Ukraine.
The deregulation of the gas supply market, supported by electronic gas trading platforms and improved pricing transparency, has meant that Ukrainian market prices for gas broadly correlated with imported gas prices. During 2023 to date, gas prices decreased significantly, reflecting a similar trend in European gas prices. Condensate and LPG prices were also lower by comparison to the previous year.
Restructuring of Smart Holding Group
In January 2023, the Company was notified that there had been a restructuring of the ownership of the PJSC Smart-Holding Group, a member of which held a major shareholding in the Company, and which was ultimately controlled by Mr Vadym Novynskyi ("Mr Novynskyi"). Under this restructuring, which occurred with effect from 1 December 2022, Mr Novynskyi disposed of his major indirect shareholding interest in the Company to two trusts registered in Cyprus named the SMART Trust and the STEP Trust. Further information is contained in the Company's announcement dated 17 January 2023, and the TR-1 Forms published on 26 January 2023.
Regulatory Actions by Ukrainian Authorities and Suspension of VAS and SC Licences
In early December 2022, the Ukrainian Government imposed sanctions on Mr Novynskyi, as set out in the Company's announcement dated 9 December 2022.
As announced on 4 January 2023, new legislation, Law No. 2805-IX, relating to the natural resources sector was enacted in Ukraine, which came into force on 28 March 2023. This legislation is a substantial package of new procedures and reforms designed to improve the regulatory process relating to the exploration and development of natural resources in Ukraine. However, the legislation includes provisions that if the ultimate beneficial owner of a mineral or hydrocarbon licence becomes the subject of sanctions in Ukraine, then the State Geologic and Subsoil Survey of Ukraine (the "SGSS") may suspend or revoke that licence.
Following Law No. 2805-IX coming into force on 28 March 2023 , the Ukrainian authorities have taken a number of regulatory actions against certain of the Group's subsidiary companies in Ukraine.
As announced on 12 April 2023, such regulatory actions included conducting a search at the Group's Yakhnyky office, from where the MEX-GOL and SV fields are operated, and placing certain physical assets of the Ukrainian branch (representative) office of Regal Petroleum Corporation Limited ("RPC") and LLC Arkona Gas-Energy ("Arkona") (which respectively hold the MEX-GOL and SV fields and the SC exploration licence) under seizure, thereby restricting any actions that would change registration of the property rights relating to such assets. However, the use of such assets was not restricted and therefore the Company has been able to continue to operate and produce gas and condensate from the MEX-GOL and SV fields. In addition, the Ministry of Justice of Ukraine (the "MoJ") made an Order cancelling the registration entry made on behalf of a subsidiary of the Company named LLC Regal Petroleum Corporation (Ukraine) Limited in the Unified State Register of Legal Entities, Individuals-entrepreneurs and Civil Institutions of Ukraine (the "State Register") relating to the ultimate beneficial owners of such company, which were stated as being the trustees of the SMART Trust and STEP Trust, as previously notified to the Company, thereby restoring the previous entry in the State Register, Mr Novynskyi. Furthermore, the SGSS issued an Order to RPC requiring that additional information be provided and/or violations be eliminated in the disclosures relating to the ultimate beneficial owners of the MEX-GOL and SV licences respectively.
On 2 May 2023, the MoJ made further Orders cancelling the registration entry made on behalf of three further Ukrainian subsidiaries of the Company named LLC Prom-Enerho Produkt ("PEP"), Arkona and LLC Well Investum ("Well Investum") respectively in the State Register relating to the ultimate beneficial owners of such companies, which again were stated as being the trustees of the SMART Trust and STEP Trust, thereby restoring the previous entry, Mr Novynskyi. PEP holds the VAS production licence, Arkona holds the SC exploration licence and Well Investum is a dormant company.
Following the issuance of the abovementioned Orders by the MoJ, Mr Novynskyi is registered in the State Register as the ultimate beneficial owner of each of PEP and Arkona, and is consequently recognised by the SGSS as the ultimate beneficial owner of each of the VAS production licence and SC exploration licence. As a result, on 4 May 2023, the SGSS issued orders suspending the VAS production licence and SC exploration licence for a period of 5 years effective from that date. Accordingly, the Company ceased all field and production operations on the VAS and SC licence areas.
New Auditor and Temporary Suspension from trading on AIM
In December 2022, as a result of the sanctions imposed on Mr Novynskyi, the Company's previous auditor resigned, but Zenith Audit Ltd were appointed as the Company's new auditor in September 2023. As the Company did not have an auditor prior to the appointment of Zenth Audit Ltd, it was not able to publish and post its audited 2022 Annual Report and Financial Statements to shareholders by the requisite deadline of 30 June 2023 as required by Rule 19 of the AIM Rules for Companies. As a result, trading in the Company's ordinary shares on AIM was suspended with effect from 3 July 2023 pending the Company's compliance with such requirements. However, following the publication of the Annual Report and Financial Statements for the year ended 31 December 2002 on 21 December 2023, and with the publication of these unaudited interim results for the six month period ended 30 June 2023, it is expected that the suspension from trading will be lifted shortly.
Interim Dividend
On 15 June 2023, the Company paid an interim dividend of 15 pence per ordinary share, aggregating to approximately GBP48.1 million, which was the Company's maiden dividend payment to its shareholders.
Outlook
The ongoing war in Ukraine means that there is a devastating humanitarian situation in Ukraine, as well as extreme challenges to the fiscal, economic and business environment. This has been exacerbated in respect of the Group by the regulatory actions of the Ukrainian authorities, culminating in the suspension of the VAS and SC licences.
These circumstances mean that it is extremely difficult to plan future investment and operational activities at the Group's fields but, subject to resolution of the current regulatory issues with the Ukrainian authorities, and subject to it being safe to do so, the Group is planning to undertake further limited development activities during the remainder of 2023 and beyond in order to continue the development of its fields. However, in doing so, the Group is taking and will take all measures available to protect and safeguard its personnel and business, with the safety and wellbeing of its personnel and contractors being paramount. The Group retains a pproximately a quarter of its cash reserves outside Ukraine, and this provides a material buffer to any further disruptions to the Group's operations. This has enabled the Board to reach the opinion that the Group has sufficient resources to navigate the current risk environment for the foreseeable future.
In conclusion, on behalf of the Board, I would like to thank all of our staff for the continued dedication and support they showed during this year, especially their remarkable fortitude since the invasion of Ukraine in February 2022.
Chris Hopkinson
Chairman
Chief Executive's Statement
Introduction
The war in Ukraine, coupled with regulatory actions by the Ukrainian authorities, materially disrupted the Group's development activity at its Ukrainian fields during the first half of 2023. At the MEX-GOL and SV fields, production operations and some limited field activities continued. The GOL-107 development well was completed in late October 2023 and, after initial testing of the well demonstrated gas flows, albeit at lower than expected rates, the well has now been hooked up to the gas processing facilities to undergo longer-term testing to establish its optimal operating parameters and assess whether stimulation of the well may improve flow rates.
On the SC licence area, after the SC-4 appraisal well was completed and successfully tested in October 2022, the well was suspended as a future production well. Planning for the development of the field was undertaken, which included planning for the installation of gas processing facilities and other surface infrastructure.
At the VAS field, production operations continued and planning for the further development of the field, as well as for a proposed new well to explore the VED prospect within the VAS licence area also continued.
However, as announced on 4 May 2023, as a result of regulatory actions by the Ukrainian authorities, the VAS production licence and the SC exploration licence were suspended for a period of five years.
Overall production in the first half of 2023 was lower than the corresponding period in 2022 due to the disruption to production operations caused by the war in Ukraine and natural field decline, as well as the suspension of the VAS production licence in May 2023.
Production
The average daily production of gas, condensate and LPG for the 181 days that the MEX-GOL and SV fields were producing and for the 124 days that the VAS field was producing, in each case, during the six month period ended 30 June 2023 is shown below:
Field Gas Condensate LPG Aggregate
(MMscf/d) (bbl/d) (bbl/d) boepd
1H 202 1H 202 1H 202 1H 202 1H 202 1H 202 1H 202 1H 202
3 2 3 2 3 2 3 2
------- ------- ------- ------- ------- ------- ------- -------
MEX-GOL
& SV 9.8 1 1.1 384 45 1 413 261 2,400 2,592
------- ------- ------- ------- ------- ------- ------- -------
VAS 1.7 2. 2 17 2 4 - - 330 43 4
------- ------- ------- ------- ------- ------- ------- -------
Total 11.5 1 3.3 401 475 413 261 2,730 3,026
------- ------- ------- ------- ------- ------- ------- -------
The disruptions to operations caused by the war, coupled with the regulatory actions taken by the Ukrainian authorities, have materially adversely affected the Group's average daily production in 2023 to date. Nevertheless, production is currently continuing at the MEX-GOL and SV fields at a rate of approximately 2,200 boepd.
Operations
In the period leading up to the Russian invasion of Ukraine in February 2022, there was relative fiscal and economic stability in Ukraine, as well as reductions in the subsoil tax rates and improvements in the regulatory procedures in the oil and gas sector in Ukraine. However, the war has caused significant disruption to the fiscal and economic conditions in Ukraine since then. During the first half of 2023, gas prices in Europe declined and this fed through to the Group's realised prices in Ukraine, which had adversely affected the Group's revenues and profitability during the period.
During 2023, the Group continued to refine its geological subsurface models of the MEX-GOL, SV and VAS fields, as well as the SC licence area, in order to enhance its strategy for the further development of such fields and licence area, including the timing and level of future capital investment required to exploit the hydrocarbon resources.
At the MEX-GOL field, drilling of the GOL-107 development well, targeting production from the V-20 and V-23 Visean formations, commenced in December 2022 and was completed in late October 2023, with the well having been drilled to a final depth of 5,190 metres. One interval, at a drilled depth of 5,140 - 5,143 metres, within the V-23 formation, was perforated and demonstrated gas flows, but at lower than anticipated rates. The well has now been hooked up to the gas processing facilities to undergo longer-term testing to establish its optimal operating parameters and assess whether stimulation of the well may improve flow rates.
The Group continued to operate each of the SV-2 and SV-12 wells under joint venture agreements with NJSC Ukrnafta, the majority State-owned oil and gas producer. Under the agreements, the gas and condensate produced from the respective wells is sold under an equal net profit sharing arrangement between the Group and NJSC Ukrnafta, with the Group accounting for the hydrocarbons produced and sold from the wells as revenue, and the net profit share due to NJSC Ukrnafta being treated as a lease expense in cost of sales. However, during Q4 2021, the SV-2 well experienced water ingress and consequently had to be taken off production. A workover of this well was undertaken to replace the production string and remove obstructions in the well, but this work was unsuccessful and further remedial work is being considered.
On the SC licence area, after completion and successful testing of the SC-4 well, the well was suspended as a future production well. The well is primarily an appraisal well, targeting production from the V-22 horizon, as well as exploring the V-16 and V-21 horizons, in the Visean formation. In testing, the well demonstrated stabilised flow rates of 3 MMscf/d of gas and 3 bbl/d of condensate (535 boepd in aggregate), and planning for the installation of gas processing facilities and other surface infrastructure has been undertaken.
At the VAS field, production operations continued, and planning for the further development of the field, as well as for a proposed new well to explore the VED prospect within the VAS licence area, was undertaken.
However, as announced on 4 May 2023, as a result of regulatory actions by the Ukrainian authorities, the VAS production licence and the SC exploration licence were suspended for a period of five years.
Outlook
The ongoing war in Ukraine has caused significant disruption to the country as a whole and to the Group's business activities, and until there is a satisfactory resolution to the conflict, the disruption and uncertainty are likely to continue. However, subject to resolution of the current regulatory issues with the Ukrainian authorities and it being safe to do so, during 2024, the Group plans to continue the development of its fields to the extent it is possible to do so.
At the MEX-GOL and SV fields, the development programme includes planning the deepening of the MEX-109 well to explore a deeper horizon in the Visean formation, investigating the hydraulic fracturing of the SV-29 well, planning a workover of the MEX-102 well to access a shallower horizon, investigating the possible sidetracking of the MEX-119 well to access additional reserves, installing additional compression equipment and upgrading and maintaining the flow-line network and pipelines and other field infrastructure, as well as planning for the further development of the fields.
Further work on the VAS and SC licence areas will remain suspended until there is a resolution of the regulatory issues, including the lifting of the suspension orders made in respect of those licences.
Finally, I would like to add my thanks to all of our staff for the continued hard work and dedication they have shown over the course of 2023, and to especially recognise their continuing efforts and professionalism in the face of the extremely challenging current situation in Ukraine.
Sergii Glazunov
Chief Executive Officer
Finance Review
Notwithstanding the significant disruption caused by the war in Ukraine, the Group was able to manage only a modest decline in production volumes during the first half of 2023. However, the significant decrease in gas prices in the period resulted in material reductions in revenue and profitability by comparison with the corresponding period in 2022. Nevertheless, the Group achieved a net profit for the period of $12.5 million (1H 2022: $32.4 million).
Revenue for the period, derived from the sale of the Group's Ukrainian gas, condensate and LPG production, was lower at $33.1 million (1H 2022: $77.2 million), primarily as a result of the decrease in commodity prices in the period.
Aggregate production for the first half of 2023 (calculated on the days when the Group's fields were actually in production) was down approximately 9.8% at 2,730 boepd (1H 2022: 3,026 boepd) due to the disruption to operations as a result of the war in Ukraine, natural field decline and the suspension of the VAS production licence in May 2023.
During 2023, global, and particularly European, commodity prices decreased significantly, and these decreases also occurred in Ukraine, and resulted in the 64% decline in average gas price realisations in the period at $419/Mm(3) (UAH15,315/Mm(3) ), with condensate and LPG average sales prices also down by 55% and 44% at $46/bbl and $92/bbl respectively (1H 2022: $1,165/Mm(3) (UAH33,524/Mm(3) ), $103/bbl and $165/bbl respectively).
During the period from 1 January 2023 to 14 December 2023, the average realised gas, condensate and LPG prices were $395/Mm(3) (UAH14,426/Mm(3) ), $71/bbl and $100/bbl respectively.
Gross profit for the period was lower at $19.6 million (1H 2022: $51.5 million).
Cost of sales for the period was lower at $13.6 million (1H 2022: $25.7 million).
The subsoil tax rates applicable to gas production were stable during the first six months of 2023 and were as follows:
(i) when gas prices are up to $150/Mm(3) , the rate for wells
drilled prior to 1 January 2018 ("old wells") is 14.5% for
gas produced from deposits at depths shallower than 5,000
metres and 7% for gas produced from deposits deeper than 5,000
metres, and for wells drilled after 1 January 2018 ("new wells")
is 6% for gas produced from deposits at depths shallower than
5,000 metres and 3% for gas produced from deposits deeper
than 5,000 metres;
(ii) when gas prices are between $150/Mm(3) and $400/Mm(3) , the
rate for old wells is 29% for gas produced from deposits at
depths shallower than 5,000 metres and 14% for gas produced
from deposits deeper than 5,000 metres, and for new wells
is 12% for gas produced from deposits at depths shallower
than 5,000 metres and 6% for gas produced from deposits deeper
than 5,000 metres;
(iii) when gas prices are more than $400/Mm(3) , for the first $400/Mm(3)
, the rate for old wells is 29% for gas produced from deposits
at depths shallower than 5,000 metres and 14% for gas produced
from deposits deeper than 5,000 metres, and for new wells
is 12% for gas produced from deposits at depths shallower
than 5,000 metres and 6% for gas produced from deposits deeper
than 5,000 metres, and for the difference between $400/Mm(3)
and the actual price, the rate for old wells is 65% for gas
produced from deposits at depths shallower than 5,000 metres
and 31% for gas produced from deposits deeper than 5,000 metres,
and for new wells is 36% for gas produced from deposits at
depths shallower than 5,000 metres and 18% for gas produced
from deposits deeper than 5,000 metres.
The tax rates applicable to condensate production were 31% for condensate produced from deposits shallower than 5,000 metres and 16% for condensate produced from deposits deeper than 5,000 metres, for both old and new wells.
As a direct result of the war in Ukraine, including the significant decline in domestic consumption disrupting the previous supply, demand and pricing dynamics, there has been a divergence between domestic and European gas pricing, and accordingly, the methodology (linked to European prices) used to determine the reference gas price for the subsoil tax rates has had a significantly detrimental effect for domestic gas producers. In order to address this issue, the Ukrainian Parliament, in September 2022, passed legislation which modified such methodology to ensure that it operates as originally intended (with such reference price being aligned with domestic prices). This methodology had an implementation date of 1 August 2022.
In addition, the excise tax on LPG sales was suspended between 24 February 2022 and 30 September 2022, but was then reinstated, and the VAT rate applicable to condensate and LPG sales was reduced to 7% (from 20%) with effect from 18 March 2022.
Administrative expenses for the period were slightly higher at $3.7 million (1H 2022: $3.4 million). Other expenses in the period were $0.8 million (1H 2022: $5.2 million), down primarily due to the decrease in charitable donations during the period.
The tax charge for the six months ended 30 June 2023 was lower at $5.0 million (1H 2022: $10.4 million charge), and comprised a current tax charge of $3.1 million (1H 2022: $8.7 million charge) and a deferred tax charge of $1.9 million (1H 2022: $1.7 million charge).
A deferred tax asset relating to the Group's provision for decommissioning as at 30 June 2023 of $ 0.6 million (31 December 2022: $0.5 million) was recognised on the tax effect of the temporary differences of the Group's provision for decommissioning at the MEX-GOL and SV fields, and its tax base. A deferred tax liability relating to the Group's development and production assets at the MEX-GOL and SV fields as at 30 June 2023 of $ 6.2 million (31 December 2022: $3.7 million) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the MEX-GOL and SV fields, and its tax base.
A deferred tax asset relating to the Group's provision for decommissioning as at 30 June 2023 of $ 0.3 million (31 December 2022: $0.3 million) was recognised on the tax effect of the temporary differences on the Group's provision on decommissioning at the VAS field, and its tax base. A deferred tax asset relating to the Group's development and production assets at the VAS field as at 30 June 2023 of $ 0.5 million (31 December 2022: deferred tax liability of $23,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the VAS field, and its tax base.
Capital investment of $3.0 million reflects the investment in the Group's oil and gas development and production assets during the period (1H 2022: $12.0 million), primarily relating to the drilling of the GOL-107 well. This significant $9.0 million reduction in capital investment is a function of the deferral of certain aspect of the Group's development plans necessitated by the ongoing war in Ukraine.
As a result of the war, necessary payment term accommodations needed to be agreed with the Group's largest indirect off-taker pursuant to a contract facilitated by the Group's related party, LLC Smart Energy, with the consequence that trade receivables remained high at $44.9 million (1H 2022: $39.5 million). The trade receivables were all paid post period end.
Cash and cash equivalents held as at 30 June 2023 were lower at $33.8 million (1H 2022: $77.4 million), the decrease being predominantly as a result of the payment of the interim dividend of GBP48.1 million in June 2023. The Group's cash and cash equivalents balance as at 14 December 2023 was $79.1 million, held as to $58.5 million equivalent in Ukrainian Hryvnia and the balance of $20.6 million equivalent predominantly in US Dollars, Euros and Pounds Sterling.
During the first six months of 2023, the Ukrainian Hryvnia was stable against the US Dollar, at UAH36.6/$1.00 on 31 December 2022 and UAH36.6/$1.00 on 30 June 2023. The impact of this was $0.7 million of foreign exchange gain (1H 2022: $7.9 million of foreign exchange loss). Increases and decreases in the value of the Ukrainian Hryvnia against the US Dollar affect the carrying value of the Group's assets. The official exchange rate of the Ukrainian Hryvnia to the US Dollar on 14 December 2023 was UAH37.0/$1.00. This movement is not expected to have a material net impact on the Group, as its production and sales are dictated by (but not directly linked to) international commodity prices, which are expected to materially offset general cost increases that will result from such devaluation.
Cash from operations has funded the capital investment during the first six months of 2023, and the Group's current cash position and positive operating cash flow are the sources from which the Group plans to fund the development programmes for its assets over the remainder of 2023 and beyond. This is coupled with the fact that the Group is currently debt-free, and therefore has no debt covenants that may otherwise impede its ability to implement contingency plans if domestic and/or global circumstances dictate. This flexibility and ability to monitor and manage development plans and liquidity is a cornerstone of our planning, and underpins our assessments of the future. With monetary resources at the end of the period of $ 33.8 million equivalent, and annual running costs of less than $ 8 million, the Group remains in a very strong position, notwithstanding the impact of the current conflict in Ukraine, as well as any local or global shocks that may occur to the industry and/or the Group.
On 15 June 2023, the Company paid an interim dividend of 15 pence per ordinary share, approximately GBP48.1 million in aggregate, which was the Company's maiden dividend payment to its shareholders.
Bruce Burrows
Finance Director
Principal Risks and How We Manage Them
The Group has a risk evaluation methodology in place to assist in the review of the risks across all material aspects of its business. This methodology highlights external, operational and technical, financial and corporate risks and assesses the level of risk and potential consequences. It is periodically presented to the Audit Committee and the Board for review, to bring to their attention potential risks and, where possible, propose mitigating actions. Key risks recognised and mitigation factors are detailed below:-
Risk Mitigation
External risks
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War in Ukraine
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On 24 February 2022, Russia invaded The Group has assets in the areas
Ukraine and there is currently of conflict in the east of Ukraine,
a serious and ongoing war within and the war has disrupted its operations
Ukraine. This war is having a huge in those areas. The Group has been
impact on Ukraine and its population, only undertaking limited field and
with significant destruction of production operations at the MEX-GOL,
infrastructure and buildings in SV and VAS fields and SC licence
the areas of conflict, as well area. At the fields, inventories
as damage in other areas of Ukraine. of hydrocarbons are being maintained
The war is resulting in significant at minimum levels. At the sites
casualties and has caused a huge where operations are suspended,
humanitarian catastrophe and refugee there are no staff permanently on
influx into neighbouring countries. site, except for necessary security
The war is also impacting the fiscal staff. Where possible, all other
and economic environment in Ukraine, staff work remotely and have been
as well as the financial stability supplied with all necessary devices
and banking system in Ukraine, and software to facilitate remote
including restrictions on the transfer working. Additionally, the Group
of funds outside Ukraine. The war aims to maintain a significant proportion
is an escalation of the previous of its cash resources outside Ukraine.
regional conflict risk faced by The Group continues to monitor the
the business, a dispute that has situation and endeavours to protect
been going on since 2014 in parts its assets and safeguard its staff
of eastern Ukraine, and since that and contractors.
time Russia has continued to occupy
Crimea. The current war is also
having a significant adverse effect
on the Ukrainian financial markets,
hampering the ability of Ukrainian
companies and banks to obtain funding
from the international capital
and debt markets. The war has disrupted
the Group's business and operations,
causing the suspension of field
operations, albeit these recommenced
in March 2022 at the MEX-GOL and
SV fields, in July 2022 at the
SC licence area and in October
2022 at the VAS field, and has
also impacted the supply of materials
and equipment and the availability
of contractors to undertake field
operations. At present, the war
is ongoing and the scope and duration
of the war is uncertain.
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Risk relating to Ukraine
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Ukraine is an emerging market and The Group minimises this risk by
as such the Group is exposed to continuously monitoring the market
greater regulatory, economic and in Ukraine and by maintaining as
political risks than it would be strong a working relationship as
in other jurisdictions. Emerging possible with the Ukrainian regulatory
economies are generally subject authorities. The Group also maintains
to a volatile political and economic a significant proportion of its
environment, which makes them vulnerable cash holdings in international banks
to market downturns elsewhere in outside Ukraine.
the world and could adversely impact
the Group's ability to operate
in the market. Furthermore, the
war in Ukraine is impacting the
fiscal and economic environment,
the financial and banking system,
and the economic stability of Ukraine.
As a result, Ukraine will require
financial assistance and/or aid
from international financial agencies
to provide economic support and
assist with the reconstruction
of infrastructure and buildings
damaged in the war.
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Banking system in Ukraine
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The banking system in Ukraine has The creditworthiness and potential
been under great strain in recent risks relating to the banks in Ukraine
years due to the weak level of are regularly reviewed by the Group,
capital, low asset quality caused but the geopolitical and economic
by the economic situation, currency events in Ukraine over recent years
depreciation, changing regulations have significantly weakened the
and other economic pressures generally, Ukrainian banking sector. This has
and so the risks associated with been exacerbated by the current
the banks in Ukraine have been war in Ukraine. In light of this,
significant, including in relation the Group has taken and continues
to the banks with which the Group to take steps to diversify its banking
has operated bank accounts. This arrangements between a number of
situation was improving moderately banks in Ukraine. These measures
following remedial action by the are designed to spread the risks
National Bank of Ukraine, but the associated with each bank's creditworthiness,
current war has significantly affected and the Group endeavours to use
such improvements, and the National banks that have the best available
Bank of Ukraine has imposed a number creditworthiness. Nevertheless,
of restrictive measures designed and despite the recent improvements,
to protect the banking system, the Ukrainian banking sector remains
including restrictions o n the weakly capitalised and so the risks
transfer of funds outside Ukraine associated with the banks in Ukraine
(albeit that the Group aims to remain significant, including in
maintain a significant proportion relation to the banks with which
of its cash resources outside Ukraine. the Group operates bank accounts.
In addition, Ukraine continues As a consequence, the Group also
to be supported by funding from maintains a significant proportion
the International Monetary Fund, of its cash holdings in international
and has requested further funding banks outside Ukraine.
support from the International
Monetary Fund.
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Geopolitical environment in Ukraine
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Although there were some improvements The Group continually monitors the
in recent years, there has not market and business environment
been a final resolution of the in Ukraine and endeavours to recognise
political, fiscal and economic approaching risks and factors that
situation in Ukraine, and the current may affect its business. However,
war has had a severe detrimental the war in Ukraine creates material
effect on the economic situation challenges in planning future investment
in Ukraine. The ongoing effects and operations. The Group is limiting
of this are difficult to predict its operational activities to minimise
and likely to continue to affect risk to its staff and contractors,
the Ukrainian economy and potentially and to limit its financial exposure.
the Group's business. This situation
is currently affecting the Group's
production and field operations,
and the ongoing instability is
disrupting the Group's development
and operational planning for its
assets.
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Climate change
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Any near and medium-term continued The Group's plans include: assessing,
warming of the planet can have reducing and/or mitigating its emissions
potentially increasing negative in its operations ; and identifying
social, economic and environmental climate change-related risks and
consequences, generally, globally assessing the degree to which they
and regionally, and specifically can affect its business, including
in relation to the Group. The potential financial implications. The HSE
impacts include: loss of market; Committee is specifically tasked
and increased costs of operations with overseeing, measuring, benchmarking
through increasing regulatory oversight and mitigating the Group's environmental
and controls, including potential and climate impact, which will be
effective or actual loss of licences reported on in future periods. At
to operate. As a diligent operator this stage, the Group does not consider
aware of and responsive to its climate change to have any material
good stewardship responsibilities, implications on the Group's financial
the Group not only needs to monitor statements, including accounting
and modify its business plans and estimates.
operations to react to changes,
but also to ensure its environmental
footprint is as minimal as it can
practicably be in managing the
hydrocarbon resources the Group
produces.
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Operational and technical risks
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Quality, Health, Safety and Environment
("QHSE")
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The oil and gas industry, by its The Group maintains QHSE policies
nature, conducts activities which and requires that management, staff
can cause health, safety, environmental and contractors adhere to these
and security incidents. Serious policies. The policies ensure that
incidents can not only have a financial the Group meets Ukrainian legislative
impact but can also damage the standards in full and achieves international
Group's reputation and the opportunity standards to the maximum extent
to undertake further projects. possible. As a result of the COVID-19
The war in Ukraine poses significant pandemic the Group has implemented
risks to field operations, by way processes and controls intended
of potential threat to the lives to ensure protection of all our
of employees and contractors, and stakeholders and minimise any disruption
damage to equipment and infrastructure. to our business. As a consequence
of the current war in Ukraine, operations
at the MEX-GOL, SV and VAS fields
and SC licence area have been suspended
for periods, and currently only
limited field and production operations
are continuing at the MEX-GOL and
SV fields. Only essential staff
are located at site, and all other
staff are working remotely, either
from areas away from the conflict
areas or outside Ukraine. The Group
has invested in technology that
allows many staff to work just as
effectively from remote locations.
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Industry risks
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The Group is exposed to risks which The Group has well qualified and
are generally associated with the experienced technical management
oil and gas industry. For example, staff to plan and supervise operational
the Group's ability to pursue and activities. In addition, the Group
develop its projects and undertake engages with suitably qualified
development programmes depends local and international geological,
on a number of uncertainties, including geophysical and engineering experts
the availability of capital, seasonal and contractors to supplement and
conditions, regulatory approvals, broaden the pool of expertise available
gas, oil, condensate and LPG prices, to the Group. Detailed planning
development costs and drilling of development activities is undertaken
success. As a result of these uncertainties, with the aim of managing the inherent
it is unknown whether potential risks associated with oil and gas
drilling locations identified on exploration and production, as well
proposed projects will ever be as ensuring that appropriate equipment
drilled or whether these or any and personnel are available for
other potential drilling locations the operations, and that local contractors
will be able to produce gas, oil are appropriately supervised.
or condensate. In addition, drilling
activities are subject to many
risks, including the risk that
commercially productive reservoirs
will not be discovered. Drilling
for hydrocarbons can be unprofitable,
not only due to dry holes, but
also as a result of productive
wells that do not produce sufficiently
to be economic. In addition, drilling
and production operations are highly
technical and complex activities
and may be curtailed, delayed or
cancelled as a result of a variety
of factors.
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Production of hydrocarbons
-----------------------------------------------
Producing gas and condensate reservoirs In recent years, the Group has engaged
are generally characterised by external technical consultants to
declining production rates which undertake a comprehensive review
vary depending upon reservoir characteristics and re-evaluation study of the MEX-GOL
and other factors. Future production and SV fields in order to gain an
of the Group's gas and condensate improved understanding of the geological
reserves, and therefore the Group's aspects of the fields and reservoir
cash flow and income, are highly engineering, drilling and completion
dependent on the Group's success techniques, and the results of this
in operating existing producing study and further planned technical
wells, drilling new production work are being used by the Group
wells and efficiently developing in the future development of these
and exploiting any reserves, and fields. The Group has established
finding or acquiring additional an ongoing relationship with such
reserves. The Group may not be external technical consultants to
able to develop, find or acquire ensure that technical management
reserves at acceptable costs. The and planning is of a high quality
experience gained from drilling in respect of all development activities
undertaken to date highlights such on the Group's fields.
risks as the Group targets the
appraisal and production of these
hydrocarbons.
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Risks relating to the further
development and operation of the
Group's gas and condensate fields
in Ukraine
-----------------------------------------------
The planned development and operation The Group's technical management
of the Group's gas and condensate staff, in consultation with its
fields in Ukraine is susceptible external technical consultants,
to appraisal, development and operational carefully plan and supervise development
risk. This could include, but is and operational activities with
not restricted to, delays in the the aim of managing the risks associated
delivery of equipment in Ukraine, with the further development of
failure of key equipment, lower the Group's fields in Ukraine. This
than expected production from wells includes detailed review and consideration
that are currently producing, or of available subsurface data, utilisation
new wells that are brought on-stream, of modern geological software, and
problematic wells and complex geology utilisation of engineering and completion
which is difficult to drill or techniques developed for the fields.
interpret. The generation of significant With regards to operational activities,
operational cash is dependent on the Group ensures that appropriate
the successful delivery and completion equipment and personnel are available
of the development and operation for the operations, and that operational
of the fields. The war in Ukraine contractors are appropriately supervised.
is impacting planning and implementation In addition, the Group performs
of development and operations at a review of indicators of impairment
the Group's fields. of its oil and gas assets on an
annual basis, and considers whether
an assessment of its oil and gas
assets by a suitably qualified independent
assessor is appropriate or required.
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Drilling and workover operations
-----------------------------------------------
Due to the depth and nature of The utilisation of detailed sub-surface
the reservoirs in the Group's fields, analysis, careful well planning
the technical difficulty of drilling and engineering design in designing
or re-entering wells in the Group's work programmes, along with appropriate
fields is high, and this and the procurement procedures and competent
equipment limitations within Ukraine, on-site management, aims to minimise
can result in unsuccessful or lower these risks.
than expected outcomes for wells.
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Maintenance of facilities
-----------------------------------------------
There is a risk that production The Group's facilities are operated
or transportation facilities can and maintained at standards above
fail due to non-adequate maintenance, the Ukrainian minimum legal requirements.
control or poor performance of Operations staff are experienced
the Group's suppliers. and receive supplemental training
to ensure that facilities are properly
operated and maintained. Service
providers are rigorously reviewed
at the tender stage and are monitored
during the contract period.
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Financial risks
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Exposure to cash flow and liquidity
risk
-----------------------------------------------
There is a risk that insufficient The Group maintains adequate cash
funds are available to meet the reserves and closely monitors forecasted
Group's development obligations and actual cash flow, as well as
to commercialise the Group's oil short and longer-term funding requirements.
and gas assets. Since a significant T he Group aims to maintain a significant
proportion of the future capital proportion of its cash resources
requirements of the Group is expected outside Ukraine. The Group does
to be derived from operational not currently have any loans outstanding,
cash generated from production, internal financial projections are
including from wells yet to be regularly made based on the latest
drilled, there is a risk that in estimates available, and various
the longer term insufficient operational scenarios are run to assess the
cash is generated, or that additional robustness of the Group's liquidity.
funding, should the need arise, However, as the risk to future capital
cannot be secured. The war in Ukraine funding is inherent in the oil and
has disrupted production operations gas exploration and development
at the Group's fields, and consequently industry and reliant in part on
reduced anticipated cash flows future development success, it is
from those fields, and this has difficult for the Group to take
increased the risk regarding sufficiency any other measures to further mitigate
of capital for development. In this risk, other than tailoring
addition, the conflict may disrupt its development activities to its
the sales market for hydrocarbons available capital funding from time
that are produced. Currently, however, to time. The Group aims to maintain
hydrocarbon prices are very high, as diverse a range of banking relationships
which is ameliorating the potential as possible to reduce the risks
reduction in cash flows, and the associated with limited accessibility
Group's sales counterparties are to banking services which may exist
meeting their financial obligations. from time to time.
In addition to the risk of operational
cash shortfalls, there is a risk
that even with robust cash flows
and cash balances, the Group, from
time to time, can suffer from non-Ukrainian
operational banking appetite for
businesses such as the Group's
business, which can ultimately
manifest itself in having a restricted
access to banking services.
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Ensuring appropriate business
practices
-----------------------------------------------
The Group operates in Ukraine, The Group maintains anti-bribery
an emerging market, where certain and corruption policies in relation
inappropriate business practices to all aspects of its business,
may, from time to time occur, such and ensures that clear authority
as corrupt business practices, levels and robust approval processes
bribery, appropriation of property are in place, with stringent controls
and fraud, all of which can lead over cash management and the tendering
to financial loss. and procurement processes. In addition,
office and site protection is maintained
to protect the Group's assets.
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Hydrocarbon price risk
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The Group derives its revenue principally The Group sells a proportion of
from the sale of its Ukrainian Its hydrocarbon production through
gas, condensate and LPG production. offtake arrangements, which include
These revenues are subject to commodity pricing formulae so as to ensure
price volatility and political that it achieves market prices for
influence. A prolonged period of its products, as well utilising
low gas, condensate and LPG prices the electronic market platforms
may impact the Group's ability in Ukraine to achieve market prices
to maintain its long-term investment for its remaining products. However,
programme with a consequent effect hydrocarbon prices in Ukraine are
on its growth rate, which in turn implicitly linked to world hydrocarbon
may impact the Company's share prices and so the Group is subject
price or any shareholder returns. to external price trends. In January
Lower gas, condensate and LPG prices 2022, the Ukrainian Government imposed
may not only decrease the Group's temporary partial gas price regulations
revenues per unit, but may also until 30 April 2022, designed to
reduce the amount of gas, condensate support the production of certain
and LPG which the Group can produce designated food products. Whilst
economically, as would increases an unhelpful interference in the
in costs associated with hydrocarbon functioning of the deregulated gas
production, such as subsoil taxes supply market in Ukraine, in its
and royalties. The overall economics stated form and duration, this temporary
of the Group's key assets (being scheme is not a material risk to
the net present value of the future the Company and its cash generation,
cash flows from its Ukrainian projects) and has now expired.
are far more sensitive to long
term gas, condensate and LPG prices
than short-term price volatility.
However, short-term volatility
does affect liquidity risk, as,
in the early stage of the projects,
income from production revenues
is offset by capital investment.
In addition, t he war in Ukraine
may disrupt the sales market for
hydrocarbons, although, currently,
hydrocarbon prices are very high,
and the Group's sales counterparties
are meeting their financial obligations.
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Currency risk
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Since the beginning of 2014 , the The Group's sales proceeds are received
Ukrainian Hryvnia significantly in Ukrainian Hryvnia, and the majority
devalued against major world currencies, of the capital expenditure costs
including the US Dollar, where for the current investment programme
it has fallen from UAH8.3/$1.00 will be incurred in Ukrainian Hryvnia,
on 1 January 2014 to UAH 36.6 /$1.00 thus the currency of revenue and
on 31 December 2022, and UAH 37.0 costs are largely matched. In light
/$1.00 on 14 December 2023. This of the previous devaluation and
devaluation has been a significant volatility of the Ukrainian Hryvnia
contributor to the imposition of against major world currencies,
banking restrictions by the National and since the Ukrainian Hryvnia
Bank of Ukraine over recent years. does not benefit from the range
In addition, the geopolitical events of currency hedging instruments
in Ukraine over recent years and which are available in more developed
the current war in Ukraine are economies, the Group has adopted
likely to continue to impact the a policy that, where possible, funds
valuation of the Ukrainian Hryvnia not required for use in Ukraine
against major world currencies. be retained on deposit in the United
Further devaluation of the Ukrainian Kingdom and Europe, principally
Hryvnia against the US Dollar will in US Dollars.
affect the carrying value of the
Group's assets.
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Counterparty and credit risk
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The challenging political and economic The Group monitors the financial
environment in Ukraine and current position and credit quality of its
war means that businesses can be contractual counterparties and seeks
subject to significant financial to manage the risk associated with
strain, which can mean that the counterparties by contracting with
Group is exposed to increased counterparty creditworthy contractors and customers.
risk if counterparties fail or Hydrocarbon production is sold on
default in their contractual obligations terms that limit supply credit and/or
to the Group, including in relation title transfer until payment is
to the sale of its hydrocarbon received .
production, resulting in financial
loss to the Group.
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Financial markets and economic
outlook
-----------------------------------------------
The performance of the Group is The Group's sales proceeds are received
influenced by global economic conditions in Ukrainian Hryvnia and a significant
and, in particular, the conditions proportion of investment expenditure
prevailing in the United Kingdom is made in Ukrainian Hryvnia , which
and Ukraine. The economies in these minimises risks related to foreign
regions have been subject to volatile exchange volatility. However, hydrocarbon
pressures in recent periods, with prices in Ukraine are implicitly
the global economy having experienced linked to world hydrocarbon prices
a long period of difficulty, the and so the Group is subject to external
COVID pandemic, and more particularly price movements. The Group holds
the current war in Ukraine. This a significant proportion of its
has led to extreme foreign exchange cash reserves in the United Kingdom
movements in the Ukrainian Hryvnia and Europe, mostly in US Dollars,
, high inflation and interest rates, with reputable financial institutions.
and increased credit risk relating The financial status of counterparties
to the Group's key counterparties. is carefully monitored to manage
counterparty risks. Nevertheless,
the overall exposure that the Group
faces as a result of these risks
cannot be predicted and many of
these are outside of the Group's
control.
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Corporate risks
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Ukrainian production licences
-----------------------------------------------
The Group operates in a region The Group ensures compliance with
where the right to production can commitments and regulations relating
be challenged by State and non-State to its production licences through
parties. During 2010, this manifested Group procedures and controls or,
itself in the form of a Ministry where this is not immediately feasible
Order instructing the Group to for practical or logistical considerations,
suspend all operations and production seeks to enter into dialogue with
from its MEX-GOL and SV production the relevant Government bodies with
licences, which was not resolved a view to agreeing a reasonable
until mid-2011. In 2013, new rules time frame for achieving compliance
relating to the updating of production or an alternative, mutually agreeable
licences led to further challenges course of action. Work programmes
being raised by the Ukrainian authorities are designed to ensure that all
to the production licences held licence obligations are met and
by independent oil and gas producers continual interaction with Government
in Ukraine, including the Group. bodies is maintained in relation
In March 2019, a Ministry Order to licence obligations and commitments.
was issued instructing the Group
to suspend all operations and production
from its VAS production licence,
which was not resolved until March
2023. In 2020, LLC Arkona Gas-Energy
("Arkona") faced a challenge from
PJSC Ukrnafta concerning the validity
of its SC production licence ,
which was ultimately resolved in
Arkona's favour by a decision of
the Supreme Court of Ukraine in
February 2021. During 2023, the
Ukrainian authorities have taken
a number of regulatory actions
against the Group, which have culminated
in Ministry Orders being made in
May 2023 to suspend all operations
and production at the VAS production
licence and SC exploration licence.
Excepting the current suspension
O rders made in respect of the
VAS production licence and SC exploration
licence, all such challenges affecting
the Group have been successfully
defended through the Ukrainian
legal system. In July 2023, new
legislation was introduced in Ukraine,
which will come into force in September
2024, and which requires that branches
(or representative offices) of
foreign companies operating in
Ukraine register their ultimate
beneficial owners in Ukrainian
Registries. Regal Petroleum Corporation
Ltd ("RPC"), which holds the MEX-GOL
and SV licences, operates such
a branch and will therefore be
required to register its ultimate
beneficial owners from the implementation
of this law, which raises a potential
risk that such registration will
not be accepted by the Ukrainian
authorities, and possibly result
in regulatory action against RPC
and/or its licences and assets,
including suspension of the MEX-GOL
and SV licences. T he business
environment is such that these
types of challenges may arise at
any time in relation to the Group's
operations, licence history, compliance
with licence commitments and/or
local regulations. In addition,
production licences in Ukraine
are issued with and/or carry ongoing
compliance obligations, which if
not met, may lead to the loss of
a licence.
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Risks relating to key personnel
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The Group's success depends upon The Group periodically reviews the
skilled management as well as technical compensation and contractual terms
expertise and administrative staff. of its staff. In addition, the Group
The loss of service of critical has developed relationships with
members from the Group's team could a number of technical and other
have an adverse effect on the business. professional experts and advisers,
The current war in Ukraine has who are used to provide specialist
meant that, as far as possible, services as required. As a result
the Group's staff have needed to of the war, o nly essential staff
move away from areas of conflict are located at site, and all other
and work remotely. staff are working remotely, either
from areas away from the conflict
areas or outside Ukraine. The Group
has invested in technology that
allows many staff to work just as
effectively from remote locations.
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Directors' Responsibility Statement
The Directors confirm that, to the best of their knowledge:
a) the unaudited condensed interim consolidated financial statements
have been prepared in accordance with UK-adopted International
Accounting Standard 34, 'Interim Financial Reporting' ("IAS
34") and the AIM Rules for Companies; and
b) these unaudited interim results include:
(i) a fair review of the information required (i.e. an indication
of important events and their impact and a description of
the principal risks and uncertainties for the remaining six
months of the financial year); and
(ii) a fair review of the information required on related party
transactions.
A list of current Directors is maintained on the Group's website, www.enwell-energy.com.
Condensed Interim Consolidated Income Statement
6 months
6 months ended ended
30 Jun 2 3 30 Jun 2
2
(unaudited) (unaudited)
Note $000 $000
Revenue 3 33,137 77,228
Cost of sales 4 (13,577) (25,690)
------------------------------------ ----- --------------- ------------
Gross profit 19,560 51,538
Administrative expenses (3,684) (3,428)
Other operating income , (net) 5 1,279 824
Operating profit 17,155 48,934
Net impairment losses on financial
assets (184) (679)
Other expenses, (net) 6 780 (5,227)
Finance costs (359) (248)
Profit before taxation 17,392 42,780
Income tax expense 7 (4,918) (10,408)
------------------------------------ ----- --------------- ------------
Profit for the period 12,474 32,372
------------------------------------ ----- --------------- ------------
Earnings per share (cents)
Basic and diluted 8 3.9c 10.1c
------------------------------------ ----- --------------- ------------
The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Comprehensive Income
6 months 6 months
ended ended
30 Jun 23 30 Jun 2
2
(unaudited) (unaudited)
$000 $000
Profit for the period 12,474 32,372
Other comprehensive income:
Items that may be subsequently reclassified
to profit or loss:
Equity - foreign currency translation 698 (7,943)
--------------------------------------------- ------------ ------------
Total other comprehensive (loss)/ income 698 (7,943)
Total comprehensive income for the period 13,172 24,429
--------------------------------------------- ------------ ------------
The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.
Condensed Interim Consolidated Balance Sheet
30 Jun 2 31 Dec 2
3 2
(unaudited) (audited)
Note $000 $000
Assets
Non-current assets
Property, plant and equipment 9 81,092 74,256
Intangible assets 10 8,771 8,994
Right-of-use assets 282 364
Prepayments for fixed assets 926 5,385
Deferred tax asset 7 799 287
91,870 89, 286
Current assets
Inventories 2,706 3,358
Trade and other receivables 1 1 64,489 60,438
Cash and cash equivalents 1 4 33,831 88,652
101,026 152,448
Total assets 192,896 241,734
------------------------------- ----- ------------ ----------
Liabilities
Current liabilities
Trade and other payables (24,595) (27,529)
Lease liabilities (150) (229)
Corporation tax payable (1,165) (2,447)
------------------------------- ----- ------------ ----------
(25,910) (30,205)
------------------------------- ----- ------------ ----------
Net current assets 75,116 122,243
------------------------------- ----- ------------ ----------
Non-current liabilities
Provision for decommissioning 1 2 (7,130) (6,964)
Lease liabilities (241) (258)
Defined benefit liability (317) (323)
Deferred tax liability 7 (5,613) (3,232)
Other non-current liabilities 1 3 (81) (93)
(13,382) (10,870)
Total liabilities (39,292) (41,075)
------------------------------- ----- ------------ ----------
Net assets 153,604 200,659
------------------------------- ----- ------------ ----------
Equity
Called up share capital 28,115 28,115
Foreign exchange reserve (141,007) (141,705)
Other reserve (3,204) (3,204)
Capital contribution reserve 7,477 7,477
Retained earnings 262,223 309,976
------------------------------- ----- ------------ ----------
Total equity 153,604 200,659
------------------------------- ----- ------------ ----------
The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Changes in Equity
Called Merger Capital Foreign
up share Share premium reserve contributions exchange Retained Total
capital account reserve reserve* earnings equity
$000 $000 $000 $000 $000 $000 $000
As at 1 January 202 3
(audited) 28,115 - (3,204) 7,477 (141,705) 309,976 200,659
Profit for the period - - - - - 12,474 12,474
Other comprehensive income
- exchange differences - - - - 698 - 698
--------------------------- ---------- -------------- --------- --------------- ---------- ---------- ---------
Total comprehensive income - - - - 698 12,474 13,172
Distributed dividends - - - - - (60,227) (60,227)
As at 30 June 202 3
(unaudited) 28,115 - (3,204) 7,477 (141,007) 262,223 153,604
--------------------------- ---------- -------------- --------- --------------- ---------- ---------- ---------
Merger Capital Foreign
Called up Share premium reserve contributions exchange Retained Total
share capital account reserve reserve* earnings equity
$000 $000 $000 $000 $000 $000 $000
As at 1 January 202 2 ( 10 3 1 78
(audited) 28,115 - (3,204) 7,477 , 611 ) 249, 740 , 517
Profit for the period - - - - - 32,372 32,372
Other comprehensive
income
- exchange
differences - - - - (7,943) - (7,943)
----------------------- --------------- -------------- --------- --------------- ---------- ---------- --------
Total comprehensive
income - - - - (7,943) 32,372 24,429
As at 30 June 202 2
(unaudited) 28,115 - (3,204) 7,477 (111,554) 282,112 202,946
----------------------- --------------- -------------- --------- --------------- ---------- ---------- --------
* Predominantly as a result of exchange differences on retranslation, where the subsidiaries ' functional currency is not US Dollars
The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.
Condensed Interim Consolidated Statement of Cash Flows
6 months 6 months
ended ended
30 Jun 2 30 Jun 2
3 2
(unaudited) (unaudited)
Note $000 $000
Operating activities
1
Cash generated from operations 5 12 , 353 12 , 501
Charitable donations (2) (4 , 996)
Equipment rental income 133 -
Income tax paid (4 , 233) (9 , 143)
Interest received 1,585 536
-------------------------------------------- ----- ------------ ------------
Net cash (outflow)/inflow from operating ( 1 , 102
activities 9 , 836 )
-------------------------------------------- ----- ------------ ------------
Investing activities
( 3 , 393 ( 12 , 074
Purchase of property, plant and equipment ) )
Proceeds from disposal of other short-term
investments - 4 , 762
( 1,338
Purchase of intangible assets ) (23)
Proceeds from return of prepayments
for shares - -
Proceeds from sale of property, plant
and equipment 1 2
( 4 , 730 ( 7 , 333
Net cash outflow from investing activities ) )
-------------------------------------------- ----- ------------ ------------
Financing activities
Payment of dividends (59,623) -
Payment of principal portion of lease
liabilities ( 137 ) (239)
( 59,760
Net cash outflow from financing activities ) (239) Net (decrease)/increase in cash and ( 54 , 654 ( 8 , 674 cash equivalents ) ) Cash and cash equivalents at beginning of the period 14 8 8 , 652 87 , 780 ECL* of cash and cash equivalents 25 (223) Effect of foreign exchange rate changes ( 192 ) (1,513) Cash and cash equivalents at end of 1 the period 4 33 , 831 77 , 370 -------------------------------------------- ----- ------------ ------------
*ECL - Expected credit losses
The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.
Notes to the U naudited Condensed Interim Consolidated Financial Statements
1. General Information and Operational Environment
Enwell Energy plc (the "Company") and its subsidiaries (together the "Group") is a gas, condensate and LPG production group.
Enwell Energy plc is a public limited company incorporated in England and Wales under the Companies Act 2006, whose shares are quoted on the AIM Market of London Stock Exchange plc. The Company's registered office is at 16 Old Queen Street, London SW1H 9HP, United Kingdom and its registered number is 4462555.
As at 30 June 2023, the Company's immediate parent company was Smart Energy (CY) Limited, which was 100% owned by Smart Holding (Cyprus) Limited, which was 100% owned by Proteas Trustees Ltd as trustee of the STEP Trust, and Proteas Trustee Services Ltd, Afroditi Loukaidou, Elena Iona and Charoula Sofokleous as trustees of the SMART Trust. Accordingly, the Company was ultimately controlled by Proteas Trustees Ltd as trustee of the STEP Trust, and Proteas Trustee Services Ltd, Afroditi Loukaidou, Elena Iona and Charoula Sofokleous as trustees of the SMART Trust.
The Group's gas, condensate and LPG extraction and production facilities are located in Ukraine.
Impact of the ongoing war in Ukraine
On 24 February 2022, Russia commenced a military invasion of Ukraine, and since then there has been an ongoing war in Ukraine. Shortly after the invasion, the Ukrainian Government imposed martial law, and the corresponding introduction of related temporary restrictions that impact, amongst other areas, the economic environment and business operations in Ukraine. The war has caused significant economic challenges in Ukraine, which has led to a deterioration of Ukrainian State finances, volatility of financial markets, illiquidity on capital markets, higher inflation and a depreciation of the national currency against major foreign currencies.
The war is continuing, causing very significant numbers of military and civilian casualties and significant dislocation of the Ukrainian population. The Russian army has occupied territories in the east and south of Ukraine, including the majority of the Kherson, Zaporizhzhia, Luhansk and Donetsk regions. Russian attacks have targeted and destroyed civilian infrastructure over wide areas of Ukraine, including hospitals and residential complexes.
On 3 June 2022, the National Bank of Ukraine ("NBU") increased the key policy interest rate to 25%, which was aimed at suspending price increases and strengthening the Ukrainian Hryvnia exchange rate. The NBU has also introduced temporary restrictions on foreign currency trades and limited the ability to perform cross-border payments for non-critical imports and repayment of debt to foreign creditors, apart from international institutions. Such measures have meant that commercial interbank quotes have remained close to the official NBU exchange rate. Despite the uncertainty and instability in the general situation within Ukraine, the banking system remains relatively stable, with sufficient liquidity even as martial law continues, and banking services are available to both legal entities and individual bank customers.
The Ukrainian Government has taken action to limit the negative effects of the war on the Ukrainian economic environment during the period of martial law and beyond, including but not limited to:
-- the temporary easing of the tax regime until the end of martial
law, including the suspension of tax audits and the cancellation
of some penalties for violating the tax law;
-- gasoline, heavy distillates, liquefied gas, oil and petroleum
are subject to VAT at a reduced rate of 7%, and the excise tax
rate for the imported fuel group of products' is set at zero;
-- a number of measures were taken to limit prices for energy resources,
including prohibiting export of gas, setting a level of electricity
price on transactions a day ahead and intraday markets; and
-- the increase in the subsoil tax rate on natural gas production
during martial law, which action introduced a differentiated
subsoil tax rate on the production of natural gas depending on
sale prices for natural gas
Additional financial support was received from a number of international institutions, including from the International Monetary Fund and European Bank for Reconstruction and Development, to support the economy and the population. Such financial support is critical for Ukraine to continue to service its debts in the foreseeable future.
Given the fast-moving nature of the situation in Ukraine and the unpredictability of the outcome, it is impracticable to assess the full impact of the war on the economic environment.
Overall, the final resolution and the ongoing effects of the war and political and economic situation in Ukraine are difficult to predict, but they may have further severe effects on the Ukrainian economy and the Group's business.
As at 14 December 2023, the official NBU exchange rate of the Ukrainian Hryvnia against the US Dollar was UAH37.0/$1.00, compared with UAH36.57/$1.00 as at 30 June 2023.
Further details of risks relating to Ukraine can be found within the Principal Risks and Uncertainties section earlier in this announcement.
2. Accounting Judgements and Estimates
Basis of preparation
These unaudited condensed interim consolidated financial statements for the six month period ended 30 June 202 3 have been prepared in accordance with UK-adopted International Accounting Standard 34, 'Interim Financial Reporting' ("IAS 34") and the AIM Rules for Companies. The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period.
These unaudited condensed interim consolidated financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 202 2 were approved by the Board of Directors on 20 December 2023 and subsequently filed with the Registrar of Companies. The Auditors' Report on those accounts was not qualified and did not contain any statement under section 498 of the Companies Act 2006.
The unaudited condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2022, which were prepared in accordance with UK-adopted International Accounting Standards.
The accounting policies and methods of computation and presentation used are consistent with those used in the Group's Annual Report and Financial Statements for the year ended 31 December 2022, with the exception of the new or revised standards and interpretations set out below.
New and amended standards adopted by the Group
The following new standards, amendments to standards and interpretations became effective for the Group on 1 January 2023 or afterwards (t hese standards, amendments to standards and interpretations did not have a material impact on this unaudited interim condensed consolidated financial information):
-- IFRS 17 Insurance Contracts;
-- Amendments to IFRS 1 Presentation of Financial Statements:
Classification of Liabilities as Current or Non-current;
-- Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure
of Accounting Policies;
-- Amendments to IAS 8: Definition of Accounting Estimates;
-- Amendments to IAS 12: Deferred Tax related to Assets and Liabilities
arising from a Single Transaction.
There are no other amended standards which the Group considers to have a material impact on these financial statements.
Going Concern
The Group's business activities, together with the factors likely to affect its future operations, performance and position are set out in the Chairman's Statement, Chief Executive's Statement and Finance Review. The financial position of the Group, its cash flows and liquidity position are set out in these consolidated financial statements.
On 24 February 2022, Russia commenced a military invasion of Ukraine. This was quickly followed by the enactment of martial law by the Ukrainian President's Decree, approved by the Parliament of Ukraine, and the corresponding introduction of related temporary restrictions that impact the economic environment and business operations in Ukraine.
The production assets of the Group are located in the central and eastern part of the country (Poltava and Kharkiv regions) which are controlled by the Ukrainian Government. Following a brief period of suspension, production and field operations, as well as construction work on upgrades to the gas processing facilities, at the MEX-GOL and SV fields recommenced. As of the date of approval of these financial statements, no assets of the Group have been damaged, and the Group continues to operate its MEX-GOL and SV assets in the Poltava region, while its SC asset in the Poltava region and all production and field operations at the VAS asset located in the Kharkiv region are suspended. No military activities have occurred at the Group's field locations. The Gas Transmission System Operator of Ukraine has maintained complete operational and technological control over the operations of the Ukrainian Gas Transmission System. However, as of the date of approval of these financial statements, the war has had, and continues to have, a material impact on the production and sales levels of the business and execution of the Group's 2023 budget.
The Group has no debt and funds its operations from its own cash resources. Cash and cash equivalents were $79.1 million as at 14 December 2023. The Directors maintain a significant level of flexibility to modify the Group's development plans as may be required to preserve cash resources for liquidity management. Absent the potential impact of the war in Ukraine, the Directors are satisfied that the Group and the Company are a going concern and will continue their operations for the foreseeable future.
In assessing the impact of the war on the ability of the Group and the Company to continue as a going concern, the Directors have analysed a number of possible scenarios of economic and military developments and the impact on the expected cash flows of the Group and Company for 2023 and 2024. This includes considering a possible (but in the view of the Directors, highly unlikely) worst case scenario in which the Group has zero production as a result of possible future military conflict dictating field operations being completely shut-in, and all other non-production related costs being maintained at current levels with no reduction or mitigating actions as would otherwise be possible. Even in this worst-case scenario, the Directors are satisfied that the Group and the Company have sufficient liquid resources to be able to meet their liabilities as they fall due and to be able to continue as a going concern for the foreseeable future.
The Company's corporate strategy for the near term is to:
-- continue production from MEX-GOL and SV licences, generating
cash to cover Group costs and add to existing cash resources,
whilst moderating development plans to reduce cash spend exposure
whilst the war and operational/political issues continue;
-- vigorously pursue legal initiatives to protect the Group's
assets, restore all licences and production, and seek compensation
for losses incurred to date and as may be incurred in the
future; and
-- tightly manage costs to ensure cash resources are maintained
at levels capable of sustaining the business through the uncertainty
that lies ahead.
In respect of the Group's operations, staff and assets in Ukraine, the potential short and long-term impact of the future development of the war is inherently uncertain. Accordingly, this creates a material uncertainty related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern because of the potential impact on its ability to continue its operations for the foreseeable future and realise its assets in the normal course of business. The financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.
The Company is a UK-based investment holding company. The Company had cash and cash equivalents of $20.6 million as at 14 December 2023, all of which are held outside of Ukraine, in US Dollars, Pounds Sterling and Euros. The Directors are satisfied that the Company is a going concern and will be able to continue its operations for the foreseeable future, and there is no material uncertainty in respect of its ability to do so.
Significant accounting judgements and estimates
The preparation of the unaudited condensed interim consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.
In preparing these unaudited condensed interim consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were consistent with those that applied to the consolidated financial statements for the year ended 31 December 2022 with certain updates described below.
Estimates
Depreciation of Development and Production Assets
Development and production assets held in property, plant and equipment are depreciated on a unit of production basis at a rate calculated by reference to proven and probable reserves at the end of the period plus the production in the period, and incorporating the estimated future cost of developing and extracting those reserves. Future development costs are estimated using assumptions about the number of wells required to produce those reserves, the cost of the wells, future production facilities and operating costs, together with assumptions on oil and gas realisations, and are revised annually. The reserves estimates used are determined using estimates of gas in place, recovery factors, future hydrocarbon prices and also take into consideration the Group's latest development plan for the associated development and production asset. The latest development plan and therefore the inputs used to determine the depreciation charge for the MEX-GOL, SV and VAS fields continue until the end of the economic life of the fields, which is assessed to be 2038, 2042 and 2028 respectively, based on the assessment contained in the DeGolyer & MacNaughton reserves report for these fields. The licences for the MEX-GOL and SV fields have recently been extended until 2044. Were the estimated reserves at the beginning of the year to differ by 10% from previous assumptions, the impact on depreciation for the period ended 30 June 2023 would be to increase it by $616,000 or decrease it by $277,000 (31 December 2022: increase by $1,394,000 or decrease by $626,000).
3. Segmental Information
In line with the Group's internal reporting framework and management structure, the key strategic and operating decisions are made by the Board of Directors, who review internal monthly management reports, budgets and forecast information as part of this process. Accordingly, the Board of Directors is deemed to be the Chief Operating Decision Maker within the Group.
The Group's only class of business activity is oil and gas exploration, development and production. The Group's operations are located in Ukraine, with its head office in the United Kingdom. These geographical regions are the basis on which the Group reports its segment information. The segment results as presented represent operating profit before depreciation and amortisation.
6 months ended 30 June 2023 (unaudited)
United
Ukraine Kingdom Total
$000 $000 $000
Revenue
24 ,
Gas sales 24 , 568 - 568
Condensate sales 3 , 736 - 3 , 736
Liquefied Petroleum Gas sales 4 , 833 - 4 , 833
---------------------------------------------- ---------- --------- --------
33 ,
Total revenue 33 , 137 - 137
( 146 20 ,
Segment result 20 , 781 ) 635
Depreciation and amortisation of non-current (3 ,
assets (3 , 480) - 480)
Operating profit 17 155
---------------------------------------------- ---------- --------- --------
170 , 22 , 192 ,
Segment assets 674 222 896
10 ,
Capital additions* 10 , 171 - 171
*Comprises additions to property, plant and equipment and intangible assets (Notes 9 and 1 0 ).
Year ended 31 December 20 2 2 (audited)
United
Ukraine Kingdom Total
2022 2022 2022
$000 $000 $000
Revenue
Gas sales 109,461 - 109,461
Condensate sales 12,744 - 12,744
Liquefied Petroleum Gas sales 11,175 - 11,175
------------------------------- -------- --------- --------
Total revenue 133,380 - 133,380
Segment result 84,750 (1,140) 83,610
Depreciation and amortisation
of non-current assets (7,837) - (7,837)
Operating profit 75,773
Segment assets 158,982 82,752 241,734
Capital additions* 19,807 - 19,807
6 months ended 30 June 20 2 2 (unaudited)
United
Ukraine Kingdom Total
$000 $000 $000
Revenue
Gas sales 64,106 - 64,106
Condensate sales 8,081 - 8,081
Liquefied Petroleum Gas sales 5,041 - 5,041
---------------------------------------------- ---------- --------- ----------
Total revenue 77,228 - 77,228
Segment result 53 , 588 (922) 52 , 666
Depreciation and amortisation of non-current
assets (3 , 732) - (3 , 732)
Operating profit 48 934
---------------------------------------------- ---------- --------- ----------
224 ,
Segment assets 165 , 139 59 , 088 227
Capital additions* 9 , 724 - 9 , 724
*Comprises additions to property, plant and equipment and intangible assets (Notes 9 and 1 0 ).
There are no inter-segment sales within the Group and all products are sold in the geographical region in which they are produced. The Group is not significantly impacted by seasonality.
4. Cost of Sales
6 months 6 months ended
ended 30 Jun 2 2
30 Jun 2
3
(unaudited) (unaudited)
$000 $000
Production taxes 5,772 12,931
Depreciation of property, plant and
equipment 3,163 3,251
Rent expenses 1,470 5,440
Staff costs 1,255 1,217
Cost of inventories recognised as an
expense 837 694
Transmission tariff for Ukrainian gas
system 174 267
Amortisation of mineral reserves 180 227
Other expenses 726 1,663
13,577 25,6 90
5. Other operating income/(expenses), (net)
6 months 6 months ended
ended 30 Jun 2 2
30 Jun 2
3
(unaudited) (unaudited)
$000 $000
Interest income on cash and cash equivalents 1,585 536
Reversal of accruals 331 236
Contractor penalties applied 1 110
Other operating (losses)/income, net (639) ( 5 8)
1,279 824
6. Other income/(expenses), (net)
6 months 6 months ended
ended 30 Jun 2 2
30 Jun 2
3
(unaudited) (unaudited)
$000 $000
Charitable donations (2) (4,996)
Net foreign exchange gains/(losses) 712 (2)
Other income/(expenses), (net) 70 (229)
(780) (5,227)
7. Taxation
The income tax charge of $4,918,000 for the six month period ended 30 June 2023 relates to a urrent tax charge of $3,049,000 and a deferred tax charge of $1,869,000 (1H 2022: current tax charge of $8,682,000 and deferred tax charge of $1,726,000).
The movement in the period was as follows:
6 months 6 months
ended ended
30 Jun 2 30 Jun 2
3 2
(unaudited) (unaudited)
$000 $000
Deferred tax (liability)/asset recognised
relating to development and production
assets at MEX-GOL-SV fields and provision
for decommissioning
At beginning of the period (3,232) (5,197)
Charged to Income Statement - current
period (2,381) (1,740)
Effect of exchange difference - 818
--------------------------------------------
At end of the period (5,613) (6,119)
-------------------------------------------- ------------ ------------
Deferred tax asset/( liability ) recognised
relating to development and production
assets at VAS field and provision for
decommissioning
At beginning of the period 287 361
Credited to Income Statement - current
period 512 14
Effect of exchange difference - -
---------------------------------------------
At end of the period 799 375
--------------------------------------------- ---- ----
Taxes on income in the interim periods are accrued using the tax rate that would be applicable to the expected total annual profit or loss. The effective tax rate for the six month period ended 30 June 2023 was 25% (1H 2022: 25%).
The deferred tax asset relating to the Group's provision for decommissioning at 30 June 2023 of $595,000 (31 December 2022: $449,000) was recognised on the tax effect of the temporary differences of the Group's provision for decommissioning at the MEX-GOL and SV fields, and its tax base. The deferred tax liability relating to the Group's development and production assets at the MEX-GOL and SV fields at 30 June 2023 of $6,208,000 (31 December 2022: $3,681,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the MEX-GOL and SV fields, and its tax base.
The deferred tax asset relating to the Group's provision for decommissioning at 30 June 2023 of $317,000 (31 December 2022: $310,000) was recognised on the tax effect of the temporary differences on the Group's provision on decommissioning at the VAS field, and its tax base. The deferred tax asset relating to the Group's development and production assets at the VAS field at 30 June 2023 of $482,000 (31 December 2022: The deferred tax liability of $23,000) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the VAS field, and its tax base.
8. Earnings per Share
The calculation of basic and diluted earnings per ordinary share has been based on the profit for the six month periods ended 30 June 2023 and 30 June 2022 and 320,637,836 ordinary shares, being the average number of shares in issue for the periods. There are no dilutive instruments.
9. Property, Plant and Equipment
6 months ended 30 Jun 23 6 months ended 30 Jun 2 2
(unaudited) (unaudited)
Oil and Oil and Other Total Oil and Oil and Other Total
gas gas fixed gas gas fixed
development exploration assets development exploration assets
and and and and
production evaluation production evaluation
assets assets assets assets
Ukraine Ukraine
$000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning of
the
period 135,255 13,093 1,968 150,316 1 63,170 10,110 2,631 175,911
Additions 8,905 1,125 124 10,154 6,469 3,027 185 9,681
Change in
decommissioning
provision - - - - (4,250) (63) - (4,313)
Disposals (204) - (28) (232) (57) - (25) (82)
Exchange
differences - - - - (12,166) (463) 857 (11,772)
At end of the
period 143,956 14,218 2,064 160,238 153,166 12,611 3,648 169,425
Accumulated
depreciation
and impairment
At beginning of
the
period 73,108 1,677 1,275 76,060 87,070 - 1,423 88,493
Charge for the
period 3,047 - 135 3,182 3,362 - 158 3,520
Disposals (86) - (10) (96) (21) - (22) (43)
Exchange
differences - - - - (5,939) - (93) (6,032)
At end of the
period 76,069 - 1,400 79,146 84,472 - 1,466 85,938
Net book value
at
the beginning
of
the period 62,147 11,416 693 74,256 76,100 10,110 1,208 87,418
----------------- ------------ ------------ -------- -------- ------------ ------------ -------- ---------
Net book value
at
end of the
period 67,887 12,541 664 81,092 68,694 12,611 2,182 83,487
----------------- ------------ ------------ -------- -------- ------------ ------------ -------- ---------
At 30 June 2023, an impairment indicator was identified by the Group, and impairment tests were performed for the MEX-GOL, SV, SC and VAS fields. These reviews concluded that no impairment to carrying value had occurred on any Group asset.
10. Intangible Assets
6 months ended 30 Jun 2 3 6 months ended 30 Jun 2 2
(unaudited) (unaudited)
------------------------------------------------ --------------------------------------------------
Mineral Exploration Other Total Mineral Exploration Other Total
reserve and intangible reserve and intangible
rights evaluation assets rights evaluation assets
intangible intangible
assets assets
$000 $000 $000 $000 $000 $000 $000 $000
Cost
At beginning
of the period 5,080 6,433 860 12,373 6,810 8,651 752 16,213
Additions - - 17 17 - - 43 43
Disposals - - (23) (23) - - - -
Exchange
differences - - - - (460) (590) (50) (1,100)
--------------- --------- ------------- ------------- ------- --------- -------------- ------------- --------
At end of the
period 5,080 6,433 854 12,367 6,350 8,061 745 15,156
--------------- --------- ------------- ------------- ------- --------- -------------- ------------- --------
Accumulated
amortisation
and
impairment
At beginning
of the period 2,925 - 454 3,379 3,439 - 434 3,873
Amortisation
charge for
the
period 180 - 59 239 224 - 113 337
Disposals - - (22) (22) - - - -
Exchange
differences - - - - (232) - (28) (260)
--------------- --------- ------------- ------------- ------- --------- -------------- ------------- --------
At end of the
period 3,105 - 491 3,596 3,431 - 519 3,950
--------------- --------- ------------- ------------- ------- --------- -------------- ------------- --------
Net book value
at beginning
of the period 2,155 6,433 406 8,994 3,371 8,651 318 12,340
--------------- --------- ------------- ------------- ------- --------- -------------- ------------- --------
Net book value
at end of the
period 1,975 6,433 363 8,771 2,919 8,061 226 11,206
--------------- --------- ------------- ------------- ------- --------- -------------- ------------- --------
Intangible assets consist mainly of the hydrocarbon production licence relating to the VAS gas and condensate field, which is held by LLC Prom-Enerho Produkt, and the SC hydrocarbon exploration licence, which is held by LLC Arkona Gas-Energy. The Group amortises the hydrocarbon production licence relating to the VAS gas and condensate field using the straight-line method over the term of the economic life of the VAS field until 2028. The SC hydrocarbon exploration licence is not amortised due to it being at an exploration and evaluation stage.
As at 30 June 2023, an impairment indicator was identified by the Group, and impairment tests were performed for the MEX-GOL, SV, SC and VAS fields. These reviews concluded that no impairment to carrying value had occurred on any Group asset.
11. Trade and Other Receivables
30 Jun 31 Dec 2
2 3 2
(unaudited) (audited)
$000 $000
Trade receivables 50,933 46,188
Other financial receivables 399 284
Financial aids 11,199 11,316
Less credit loss allowance (514) (433)
----------------------------------- -------------- -----------
Total financial receivables 62 , 017 57,355
Prepayments and accrued income 231 509
Other receivables 2, 241 2,574
Total trade and other receivables 64,489 60,438
Due to the short-term nature of the current trade and other financial receivables, their carrying amount is assumed to be the same as their fair value. All trade and other financial receivables, except those provided for, are considered to be of high credit quality.
The majority of the trade receivables are from a related party, LLC Smart Energy, that purchased all of the Group's gas production. The applicable payment terms, which were revised in the period, were payment for 35% of the monthly volume of gas by the 15th of the month following the month of delivery, and payment of the remaining balance by the end of that month (1H 2022: payment terms are payment for all of the monthly volume of gas by the 10(th) of the month following the month of delivery). This arrangement has now been terminated, and all outstanding sums have been received from LLC Smart Energy.
12. Provision for Decommissioning
6 months ended 6 months ended
30 Jun 23 30 Jun 22
(unaudited) (unaudited)
$000 $000
At beginning of the period 6,964 5,467
Amounts provided - -
Unwinding of discount 16 6 160
Change in estimate - (4,313)
Effect of exchange difference - (321)
------------------------------- ---------------- ---------------
At end of the period 7,130 993
The provision for decommissioning is based on the net present value of the Group's estimated liability for the removal of the Ukrainian production facilities and well site restoration at the end of production life.
The non-current provision of $ 7,130 ,000 (31 December 202 2 : $6,964,000) represents a provision for the decommissioning of the Group's MEX-GOL, SV , VAS and SC production and exploration facilities, including site restoration. None of the provision was utilised during the reporting period.
13. Other non-current liabilities
Other non-current liabilities as at 30 June 2023 and 31 December 2022 consist of the long-term obligations for the Ukrainian State special purpose fund measured at amortised cost using an interest rate of 20%.
14. Financial Instruments
The Group's financial instruments comprise cash and cash equivalents and various items such as debtors and creditors that arise directly from its operations. The Group has bank accounts denominated in British Pounds, US Dollars, Euros, and Ukrainian Hryvnia. The Group does not have any borrowings. The main future risks arising from the Group's financial instruments are currency risk, interest rate risk, liquidity risk and credit risk.
The Group's financial assets and financial liabilities, measured at amortised cost, which approximates their fair value, comprise the following:
30 Jun 23 31 Dec 22
(unaudited) (audited)
$000 $000
Financial assets
Cash and cash equivalents 33,831 88,652
Trade and other receivables 62,017 46,039
95,848 134,691
Financial liabilities
Lease liabilities 391 487
Trade and other payables 2,160 1,079
Other financial liabilities 20,087 20,422
-----------
22,638 21,988
At 30 June 2023, the Group held cash and cash equivalents in the following currencies:
30 Jun 2 3 31 Dec 22
(unaudited)
(audited)
$000 $000
US Dollars 21,273 81,274
Ukrainian Hryvnia 12,052 6,882
British Pounds 237 223
Euros 268 273
------------------- ------------- ------------
33,831 88,652
All of the cash and cash equivalents held in Ukrainian Hryvnia are held in banks within Ukraine, and all other cash and cash equivalents are held in banks within Europe, Ukraine and the United Kingdom.
15. Reconciliation of Operating Profit to Operating Cash Flow
6 months 6 months ended
ended
30 Jun 23 30 Jun 22
(unaudited) (unaudited)
$000 $000
Operating profit 17,155 48,934
Depreciation and amortisation 3,589 3,882
Less interest income recorded within
operating profit (1,585) (536)
Fines and penalties received (1) (110)
Net (gain)/loss on sale of non-current
assets (3) (1)
Decrease in provisions 25 (228)
Increase in inventory 709 (497)
Increase in receivables (3,583) (36,354)
(Decrease)/increase in payables (3,953) (2,589)
---------------------------------------- ------------ ---------------
Cash generated from operations 12,353 12,501
16. Contingencies and Commitments
Amounts related to works contracted but not yet undertaken in relation to the Group's 2023 investment programme at the MEX-GOL, SV, VAS and SC gas and condensate fields in Ukraine, but not recorded in the unaudited condensed interim consolidated financial statements at 30 June 2023, were $145,000 related to Oil and Gas Exploration and Evaluation assets and $2,344,000 related to Oil and Gas Development and Production assets (31 December 2022: $156,000 and $8,607,000 respectively).
Since 2010, the Group has been in dispute with the Ukrainian tax authorities in respect of VAT receivables on imported leased equipment, with a disputed liability of up to UAH 8,487,000 ($302,000) inclusive of penalties and other associated costs. There is a level of ambiguity in the interpretation of the relevant tax legislation, and the position adopted by the Group has been challenged by the Ukrainian tax authorities, which has led to legal proceedings to resolve the issue. The Group had been successful in three court cases in respect of this dispute in courts of different levels. On 20 September 2016, a hearing was held in the Supreme Court of Ukraine of an appeal of the Ukrainian tax authorities against the decision of the Higher Administrative Court of Ukraine, in which the appeal of the Ukrainian tax authorities was upheld. As a result of this appeal decision, all decisions of the lower courts were cancelled, and the case was remitted to the first instance court for a new trial. On 1 December 2016 and 7 March 2017 respectively, the Group received positive decisions in the first and second instance courts, but no appointment of hearings has been settled yet. No liability has been recognised in these consolidated financial statements for the year ended 30 June 2023 (31 December 2022: nil), as the Group has been successful in previous court cases in respect of this dispute in courts of different levels, the date of the next legal proceedings has not been set and as management believes that adequate defences exist to the claim.
In March 2019, the State Geologic and Subsoil Survey of Ukraine published an Order for suspension dated 11 March 2019 (the "VAS Order") in respect of the VAS production licence held by LLC Prom-Enerho Produkt ("PEP"). PEP disputed the VAS Order and issued legal proceedings in the Ukrainian Courts to challenge the VAS Order, and these legal proceedings progressed through the various levels of the Ukrainian Court system, with PEP being successful at each level. The proceedings ultimately reached the Supreme Court of Ukraine, which, by a decision dated 23 February 2023 upheld PEP's appeal and cancelled the VAS Order. The Supreme Court is the final appellate court in the legal proceedings and therefore this decision is final.
In September 2021, an entity named JV Boryslav Oil Company ("Boryslav"), which is 25.0999% owned by PJSC Ukrnafta ("Ukrnafta"), issued legal proceedings, claiming that irregular procedures were followed in the grant of the SC exploration licence, against the State Geologic and Subsoil Survey of Ukraine, the State Commission of Ukraine for Mineral Resources and LLC Arkona Gas-Energy ("Arkona"), as defendants, with Ukrnafta named as a third party. In this claim, the First Instance Court in Ukraine made a ruling in January 2022 in favour of Boryslav, and on 2 November 2022, the Appellate Administrative Court also made a ruling in favour of Boryslav to uphold the decision of the First Instance Court. Arkona appealed the decision of the Appellate Administrative Court to the Supreme Court, and on 3 May 2023, the Supreme Court published its decision to allow Arkona's appeal and overturn the ruling made by the Appellate Administrative Court. The Supreme Court represents the final appellate court in these legal proceedings, and accordingly, the decision of the Supreme Court is final.
17. Related Party Disclosures
Key management personnel of the Group are considered to comprise only the Directors. Remuneration of the Directors for the six month period ended 30 June 202 3 was $ 407 ,000 (1H 202 2 : $ 583 ,000, and year ended 31 December 2022: $1,325,000).
During the period, Group companies entered into the following transactions with related parties which are not members of the Group:
6 months ended 6 months ended
30 Jun 23 30 Jun 22
(unaudited) (unaudited)
$000 $000
Sale of goods/services 19,410 63,182
Purchase of goods/services 348 515
Amounts owed by related parties 55,719 39,059
Amounts owed to related parties 185 627
All related party transactions were with subsidiaries of the ultimate Parent Company, and primarily relate to the sale of gas to LLC Smart Energy, the rental of office facilities and vehicles and the sale of equipment. The amounts outstanding were unsecured and have been or will be settled in cash.
At the date of this announcement, none of the Company's controlling parties prepares consolidated financial statements available for public use.
18. Events occurring after the Reporting Period
The ongoing war in Ukraine means that the fiscal, economic and humanitarian situation in Ukraine is unstable and extremely challenging and the final resolution and consequences of the ongoing war are hard to predict, but they may have a further serious impact on the Ukrainian economy and business of the Group. Management continues to identify and mitigate, where possible, the impact on the Group, but the majority of these factors are beyond their control, including the duration and severity of war, as well as the further actions of various governments and diplomacy.
In July 2023, new legislation was introduced in Ukraine, which will come into force in September 2024, and which requires that branches (or representative offices) of foreign companies operating in Ukraine register their ultimate beneficial owners in Ukrainian Registries. Regal Petroleum Corporation Ltd ("RPC"), which holds the MEX-GOL and SV licences, operates such a branch and will therefore be required to register its ultimate beneficial owners from the implementation of this law, which raises a potential risk that such registration will not be accepted by the Ukrainian authorities, and possibly result in regulatory action against RPC and/or its licences and assets, including suspension of the MEX-GOL and SV licences.
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December 29, 2023 02:00 ET (07:00 GMT)
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