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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Urals EN. | LSE:UEN | London | Ordinary Share | CY0107130912 | ORD USD0.126 (DI) |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 35.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Jul 2019 to Jul 2024
TIDMUEN
RNS Number : 3929G
Urals Energy Public Company Limited
06 June 2013
Press Release 6 June 2013
Urals Energy Public Company Limited
("Urals Energy" or the "Company")
Final Results
Urals Energy PCL (AIM:UEN), the independent exploration and production company with operations in Russia, is pleased to announce its audited financial results for the year ended 31 December 2012.
Highlights
Operational
Hot Features
Premium
-- Total production at Arcticneft reached 250,394 barrels
(2011: 254,445 barrels)
-- Total production at Petrosakh reached 487,810 barrels
(2011: 505,267 barrels)
-- Current daily production at Arcticneft is 705 BOPD -
slightly higher than an average of 686 BOPD for the twelve
months ended 31 December 2012
-- Current daily level of production at Petrosakh is 1,360
BOPD compared with an average of 1,336 BOPD for the twelve
months ended 31 December 2012
-- The license for the Okruzhnoye field was renewed until
2037
-- Well #41 at Petrosakh was put into operation, the current
level of production is stable at 150 BOPD
-- In November 2012 the Company successfully completed the
shipment of 231,594 bbls of crude oil from Arcticneft,
representing a 1.8% increase on 227,525 bbls in 2011,
loaded and exported in accordance with the Company's
operational plans
-- Measures to halt natural decline at Petrosakh have stabilised
production including the completion of successful workovers
-- New well drilling and existing well optimisation programmes
in place and being implemented
-- Board strengthened with the appointment of new directors
Financial
-- In 2012 gross profit improved by 97% to US$8.8 million
from US$4.5 million in 2011, as a result the Company
achieved a net profit of US$2.6 million for the period,
compared with a US$24.7 million loss in 2011
-- Net working capital position improved by 71% due to a
net reduction of US$4 million in current liabilities
to US$22.2 million (2011: US$26.2 million)
-- Successful implementation of cost reduction programme
resulted in 16% and 6% decrease in selling, general and
administrative expenses and cost of sales respectively
-- Significant improvement in net cash generated from operating
activities allowed the Company to pay the final loan
principal amount of US$7.3 million to Petraco Oil Company
Limited and finish 2012 with a net cash position of US$3.4
million (2011: net debt US$1.0 million). The Company
anticipates the release of Arkticneft from Petraco after
the scheduled final payment in time of November-December
2013
-- Arbitration with V. Rovneiko. On 9 January 2013 the Company
received a final decision regarding its legal dispute
with Vyatcheslav Rovneiko, which has brought to a close
the lengthy process in the London Court of International
Arbitration ("LCIA"). As a result UEN has won on all
accounts and has been awarded a total amount of US$7.5
million (including loan amount, interest and legal costs)
plus daily accumulating interest. To date Mr. Rovneiko
has shown no intent to comply with the decision of the
LCIA, which has resulted in the Company reviewing its
options in relation to collection
Post-period end and outlook
-- The plan for further drilling of 8 new wells in the Southern
part of the Okruzhnoye field was submitted to the General
Directorate of State Expertise of the Russian Federation.
The approval procedures are now at their final stage.
The Company expects to receive the approval shortly,
whereupon the drilling of well #53 will commence
-- In April 2013 the Company finalised all customs and visa
formalities, delivery of equipment and other preparation
for a passive seismic study aimed at detailed interpretation
of hydrocarbons within a specific area of Arcticneft.
The study entered into its active stage on the 27 May
and the Company expects to receive the interpreted results
at the end of Summer/ early Autumn 2013
-- Implementing new well drilling and existing well optimisation
programmes for 2013
-- Identifying upside potential in downstream and marketing
opportunities on the existing acreage
-- Actively seeking possible M&A and joint venture targets
with a view to expanding and optimising the Company's
asset portfolio
Alexei Maximov, Chief Executive, commented:
"I am pleased to report on what has been a positive period for Urals Energy, not only operationally but also in terms of further strengthening the Company's balance sheet. I reported this time last year that operationally we have been laying the foundations for maximising production from both Arcticneft and Petrosakh, and, with the various measures we have taken to stabilise production at Petrosakh, the completion and entry into production of Well #41 at Petrosakh and the implementation of new well drilling and existing well optimisation programmes, the Company has certainly started to build upon those foundations.
"The release of Petraco's charge over Petrosakh was a pivotal point in Urals Energy's recovery and for the first time in many years we are now close to a time where the Company will be free of all major debtors and able to fully leverage its existing asset base. This will enable us to proceed with our plans to increase production at both of our assets as well as dedicate time to our M&A strategy.
"We are also pleased to have strengthened the Board with three new non-executive directors who are actively assisting management and have taken on active roles in the Audit and Remuneration committees, as well as pursuing new ways to grow the Company.
"We believe that shareholders can now view the future with renewed confidence as the board anticipates the completion of the final year of recovery for the Company and the start of what it expects to be a key period of development and expansion for Urals Energy."
For further information, please contact:
Urals Energy Public Company Limited
Alexei Maximov, Chief Executive Tel: +7 495 795 0300
Officer
Sergey Uzornikov, Chief Financial www.uralsenergy.com
Officer
Allenby Capital Limited
Nominated Adviser and Broker
Nick Naylor Tel: +44 (0) 20 3328
5656
Alex Price www.allenbycapital.com
Media enquiries:
Abchurch
Henry Harrison-Topham / Quincy Allan Tel: +44 (0) 20 7398
7702
henry.ht@abchurch-group.com www.abchurch-group.com
The annual report and accounts for the year ended 31 December 2012 will today be posted to shareholders and will shortly be available from the Company's website www.uralsenergy.com in accordance with AIM Rule 20.
Chief Executive Officer's Statement
2012 Financial
Operating Environment
2012 was characterised by a stable crude oil market price at an average level of US$110 per barrel. Domestic prices for light oil products ranged from US$100 to US$135 per barrel thus securing the Company's operating cash flows at a level sufficient to maintain its operations and comply with license requirements at both fields.
The tanker from Arcticneft was shipped at the beginning of November 2012.
Operating Results
Year ended
US$'000 31 December
------------------
2012 2011
------------------------------------------------ ------- ---------
Gross revenues before excise and export duties 64,986 64,160
Net revenues after excise, export duties and
VAT 49,884 48,307
Gross profit 8,854 4,493
Operating profit/(loss) 126 (23,143)
Normalised management EBITDA (unaudited) 7,722 4,665
Total net finance benefits 2,580 62
Profit/(loss) for the year 2,621 (24,707)
------------------------------------------------ ------- ---------
Year ended
Production 31 December
------------------
2012 2011
--------------------------- -------- --------
Petrosakh bbls 487,810 505,267
Arcticneft bbls 250,394 254,445
Petrosakh BOPD (average) 1,336 1,384
Arcticneft BOPD (average) 686 697
Summary table: Gross Revenues before excise and export duties (US$'000)
Year ended
31 December
----------------------------------------------- ----------------
2012 2011
----------------------------------------------- ------- -------
Crude oil 27,335 28,447
Export sales 24,960 25,340
Domestic sales (Russian Federation) 2,375 3,107
Petroleum (refined) products - domestic sales 37,131 34,913
Other sales 520 800
Total gross revenues before excise and export
duties 64,986 64,160
----------------------------------------------- ------- -------
In 2012, total gross revenues increased by US$0.8 million as a result of a higher crude oil net back price of US$54.39 per barrel (US$52.68 per barrel in 2011) and higher average net back prices for petroleum (refined) products of US$63.11 per barrel (US$52.38 in 2011). Net back for domestic product sales is defined as gross product sales minus VAT, transportation costs, excise tax and refining costs.
In 2012 all domestic sales of crude oil and almost all petroleum (refined) products related to Petrosakh. In 2012 Arcticneft sold petroleum (refined) products with a value of US$1.5 million (US$0.4 million in 2011).
Summary table: Net backs (US$/bbl)
Year ended
31 December
----------------------------------------------- ---------------
2012 2011
----------------------------------------------- ------- ------
Crude oil 54.39 52.68
Export sales 54.76 57.55
Domestic sales (Russian Federation) 52.38 37.82
Petroleum (refined) products - domestic sales 63.11 52.38
Other sales N/A N/A
----------------------------------------------- ------- ------
Gross profit (net revenues less cost of sales) in 2012 almost doubled to US$8.8 million from a profit of US$4.5 million in 2011. The main driver of the increased profit in 2012 was higher net backs and a reduction in cost of sales.
Cost of sales in 2012 totaled US$41.0 million as compared with US$43.8 million in 2011 of which US$5.8 million and US$8.3 million respectively represented non-cash items, principally Depreciation, Amortisation and Depletion and change in a provision for unused vacation. The main driver for the fall in operating costs was the decrease in wages and salaries by US$3.0 million to US$9.4 million from US$12.4 million as a result of change in an unused vacation provision and a cost reduction programme.
Selling, general and administrative expenses decreased during 2012 by US$1.7 million from US$10.4 million in 2011 to US$8.7 million. Without the charge for the provision for doubtful accounts receivable, US$1.6 million in 2012 and US$0.7 million in 2011, selling, general and administrative expenses would have decreased during the year 2012 by US$2.6 million. This was primarily caused by the decrease in wages and salaries by US$1.2 million in the management company, optimisation of all other general and administrative expenses and by the decrease in sales volume in Petrosakh in 2012 as compared with 2011.
The net finance benefits during 2012 were US$2.6 million and net interest expense was US$0.1 million (2011: net finance benefits of US$0.1 million and net interest income of US$2.2 million).
Net profit for the year attributable to shareholders in 2012 was US$2.6 million as compared with net loss attributable to shareholders of US$24.7 million in 2011 which was primarily driven by non-cash transactions associated with the loss from disposal of the Taas-YuriakhNeftegazodobycha ("Taas") loans in 2011.
The decrease of cost of sales and of selling, general and administrative expenses in 2012 resulted in a consolidated normalised management EBITDA increase by US$3.0 million to US$7.7 million in 2012 compared with US$4.7 million in 2011, with EBITDA margins of 15.5% and 9.7% respectively.
Management EBITDA (US$'000) - Unaudited
Year ended
31 December
----------------------------------------------- -------------------
2012 2011
----------------------------------------------- -------- ---------
Profit/(loss) for the year 2,621 (24,707)
Income tax charge 85 1,626
Net interest and foreign currency (gain)/loss (2,580) (62)
Depreciation, depletion and amortisation 6,410 6,987
----------------------------------------------- -------- ---------
Total non-cash expenses 3,915 8,551
Charge of bad debt provision 1,633 706
(Release)/charge of unused vacation provision (633) 2,079
Loss from disposal of the Taas loans - 16,470
Share-based payments - 457
Release of inventory provision - (151)
Other non-recurrent losses 186 1,260
----------------------------------------------- -------- ---------
Total non-recurrent and non-cash items 1,186 20,821
Normalised EBITDA 7,722 4,665
----------------------------------------------- -------- ---------
Net debt Position
At 31 December 2012 the cash liquidity had improved following the positive cash flows from operating activity in 2012.
As at 31 December 2012 the Company had net cash of US$3.4 million (calculated as long-term and short-term borrowings less cash in bank and loans issued to related parties). As at 31 December 2011 net debt was US$1.0 million.
The Company repaid US$7.3 million in respect of the final tranche of the principal of the loan to Petraco in November 2012. As at 31 December 2012 the long-term and short-term part amounted to US$3.0 million (31 December 2011: US$10.0 million).
During 2012, the Group further impaired a loan to related party and other receivables from related party by US$1.6 million (during 2011 the Group impaired loan to related party by US$0.7 million). This amount relates to an overdue loan to a shareholder and former member of the Group's management team, Mr Rovneiko. On 9 January 2013, the Company received a final decision regarding its legal dispute with Mr Rovneiko from the London Court of International Arbitration. This decision ruled that the Company had won on all accounts. The Company has formally demanded payment from Mr Rovneiko and is committed to using all appropriate means to collect the outstanding amount, however to date Mr Rovneiko has shown no intent to comply with the decision. For accounting purposes management has reassessed the carrying value of the loan and has impaired this fully. However, this does not reduce the validity of the legal claim against Mr Rovneiko.
Operational update
Petrosakh
After several years of limited funding, Petrosakh has emerged in 2012 having made considerable strides in optimisation of its production from the Okruzhnoye field. This can be attributed primarily to the change of the management team and other necessary austerity measures aimed at increasing efficiency and production.
The following is a chronology of the main activities undertaken at Petrosakh during 2012, both before and after the period end.
-- prior to installation of a gas injection compressor in
March 2012, Petrosakh was producing 1,238 BOPD. In June
2012 Well #41 came on stream with an initial oil rate
of 180 BOPD and, for the month of June 2012, the average
production in the field was 1,358 BOPD with Well #41
producing intermittently
-- in July, encouraged by this result, management at Petrosakh
began discussing a schedule of additional workovers and
other cost-effective activities to be performed each
month, with the following actions having been completed
to-date:
* the Company has lowered the line pressure in all
in-field pipelines to offset declines in reservoir
pressure. Correspondingly the Company reduced choke
sizes in the flowing wells to increase wellhead
pressure and the differential across the choke;
* optimisation of the surface rod-pumping units
including the choice of unit and stroke length;
* conducted 9 bottom-hole hot oil circulations;
* planned injection well treatments in October 2012 to
optimise rates and injectivity profiles;
* replacement of old sucker rods and
acquisition/installation of 3 new surface rod-pumping
units; and
* continuing introduction of cyclic 2-phase injection.
As a result of these activities for July and August 2012, management at Petrosakh was able to halt the increasing decline in production and return to a stable level. In July and August 2012 oil production averaged 1,358 BOPD and on 10 September 2012 the Company reinstated gas injection to the reservoir. Consequently at the present time oil production is 1,395 BOPD relative to the approved plan of 1,380 BOPD.
The management at Petrosakh continues to demonstrate that further opportunities exist in the Okruzhnoye field to build on these production gains.
During the year to date Petrosakh has been subject to a number of rigorous state inspections that targeted all the operations, facilities and technical aspects of the technological, production, safety, environmental and labour related issues. The Company has successfully passed all of these inspections and has been shown to be in full compliance with the state regulations.
The Company plans to drill 8 new wells in the southern part of the Okruzhnoye field and the drilling plan has been submitted to the approval procedures now at their final stage. The Company expects to receive the approval shortly, whereupon the drilling of well #53 will commence.
The Company will continue optimising the existing well stock through a comprehensive programme of workovers. Management believes that additional production gains can realistically be achieved by the end of 2013. Furthermore, management also believes that opportunities exist downstream to increase margins of refined products through changes to the downstream operator's client base, thus leveraging the Company's unique position as sole provider of refined products on Sakhalin Island.
The license for the Okruzhnoye field was successfully extended and now expires at the end of 2037.
Downstream
Petrosakh continues to refine and sell 100% of its crude oil production. As was stated in the Company's interim report in 2012, Urals Energy finds itself operating in a highly competitive refined products market in which the State-owned conglomerate Rosneft holds a close to monopolistic position on Sakhalin island. Rosneft has been able to exploit this position by keeping their wholesale and retail prices for oil products unchanged since October 2012.
In the fourth quarter of 2012 Petrosakh successfully participated in tenders with State-owned companies and managed to win the contacts with the major local customers for fuel shipment during the winter period. The contracts were signed with JSC "Sakhalinenergo" (the main electricity and heating supplier on the island) and several municipal heating companies.
As a result of the active marketing work with existed and new customers, the Company managed to increase net backs on the sales of oil and oil products by 38.5% and 20.5% respectively to US$52.38 per barrel and US$63.11 per barrel.
In 2013 the passing of new Federal Excise Law provided for further indexation of excise rates for gasoline. For Euro 4 gasoline produced by Petrosakh the first increase was at the start of 2013. The increase was 25% and now represents 8,560 Rubles per ton, the next increase will be on 1 July 2013 when the excise rate will be equal to 8,960 Rubles per ton. Due to the favourable market conditions on the internal market at the end of 2012 the Company made a decision to stay on the local market with the sales of oil products for now. At the same time, Petrosakh continues preparatory works for potential export shipments of the refined products. The product pipeline testing was completed in order to seek a license for shipment and the project for the sea terminal upgrade was also finalised.
Arcticneft
Current production at Arcticneft is stable and stands at 705 BOPD. As in recent years, the tanker is planned to be loaded in late 2013.
As a result of certain liquidity limitations in 2012, the main efforts in Arcticneft during the last year were mainly focused on minimising the decline in production through extensive workovers (18 workovers were done during 2012), performing hydrodynamic studies and enhancing oil recovery using gasoline bottom hole treatment and one well was transferred to artificial lifting. These activities allowed the Company to keep the level of production at Arcticneft stable throughout 2012.
The main efforts of the Company in the current year will be focused on the following:
1. completion of the passive seismic study aimed at a detailed
interpretation of hydrocarbons within a specific area of Arcticneft
including the existing, as well as deeper horizons. Once completed,
the results will be evaluated in order to take a decision regarding
the future drilling programme; and
2. drilling 3 side-tracks, which the Company believes will allow
some additional production and will keep the production volume
of Arcticneft stable. The procurement procedures are in progress
and the Company expects delivery of the required materials
in July 2013
Petraco loan
After the payment to Petraco Oil Company Limited ("Petraco") of US$10 million following the Taas loan assignment, and in accordance with the terms of the Agreement, as announced on 9 August 2012, Petraco released its charge over the shares of CJSC Petrosakh in full.
In 2012 the Company met its obligations under the restructuring agreement and paid the final loan principal amount of US$7.3 million to Petraco. The remaining accrued interest is to be paid by the Company to Petraco by the end of November 2013, following which time Petraco is obliged to have released its remaining charge.
Outlook
Looking ahead, as part of the recovery strategy, Urals Energy aims to finish the current financial year with the repayment of its outstanding long-term debts and further strengthening of the Company's balance sheet.
The Company is planning to load up around 28,000 metric tons of crude oil for export from Arcticneft, which is scheduled for Q4 2013. Unfortunately, the expected deep exploration drilling, which was planned by our close neighbor, Arcticmorneftegaz razvedka ("AMNGR") was canceled; and so any potential increase in the Company's reserve base will be subject to additional research in the future.
The Company anticipates a tax break in 2013 for companies located in the far northern territories of Russia, which should benefit the Company's operations in Arcticneft.
The Company continues to focus on increasing production and cash generation at both Arcticneft and Petrosakh. In addition to its existing operations, the Board is actively looking at new opportunities, be it in identifying ways of utilising the upside potential in downstream and marketing opportunities on the existing acreage, or evaluating possible acquisition and joint venture targets with a view to expanding and optimising the portfolio.
The Board believes that the Company is now well positioned to complete its recovery in the current financial year and as a result, we believe that shareholders should now view the future with renewed confidence and optimism as Urals Energy now enters what the Board anticipates to be a key period of development and expansion for the Company.
Alexei Maximov
Chief Executive Officer
Consolidated Statement of Financial Position
(presented in US$ thousands)
31 December
Note 2012 2011
----------------------------------------- ----- ---------- ----------
Assets
Current assets
Cash and cash equivalents 7 5,416 7,722
Accounts receivable and prepayments 8 4,579 4,769
Inventories 9 11,130 10,019
Total current assets 21,125 22,510
----------------------------------------- ----- ---------- ----------
Non-current assets
Property, plant and equipment 10 122,300 118,267
Supplies and materials for capital
construction 2,839 2,695
Other non-current assets 11 1,100 1,147
----------------------------------------- ----- ---------- ----------
Total non-current assets 126,239 122,109
----------------------------------------- ----- ---------- ----------
Total assets 147,364 144,619
----------------------------------------- ----- ---------- ----------
Liabilities and equity
Current liabilities
Accounts payable and accrued expenses 12 4,560 4,782
Provisions 13 2,199 2,199
Income tax payable 5,070 5,128
Other taxes payable 14 6,035 5,118
Short-term borrowings and current
portion of long-term borrowings 15 3,004 7,316
Advances from customers 1,340 1,705
Total current liabilities 22,208 26,248
----------------------------------------- ----- ---------- ----------
Long-term liabilities
Long term borrowings 15 - 2,655
Long term finance lease obligations 1,673 -
Dismantlement provision 16 1,621 1,398
Deferred income tax liabilities 14 14,299 13,347
Total long-term liabilities 17,593 17,400
----------------------------------------- ----- ---------- ----------
Total liabilities 39,801 43,648
----------------------------------------- ----- ---------- ----------
Equity
Share capital 1,589 1,569
Share premium 656,855 656,875
Translation difference (26,770) (30,672)
Accumulated deficit (525,342) (527,684)
----------------------------------------- ----- ---------- ----------
Equity attributable to shareholders
of Urals Energy Public Company Limited 106,332 100,088
----------------------------------------- ----- ---------- ----------
Non-controlling interest 1,231 883
----------------------------------------- ----- ---------- ----------
Total equity 17 107,563 100,971
----------------------------------------- ----- ---------- ----------
Total liabilities and equity 147,364 144,619
----------------------------------------- ----- ---------- ----------
Approved on behalf of the Board of Directors on 5 June 2013.
A.D. Maximov S.E.Uzornikov Chief Executive Officer Chief Financial Officer
Consolidated Statement of Comprehensive Income
(presented in US$ thousands)
Year ended 31 December
--------------------------
Note 2012 2011
------------------------------------------------------------ ----- ------------ ------------
Revenues after excise taxes and export
duties 18 49,884 48,307
Cost of sales 20 (41,030) (43,814)
Gross profit 8,854 4,493
------------------------------------------------------------ ----- ------------ ------------
Selling, general and administrative
expenses 21 (8,719) (10,372)
Other operating loss (9) (794)
Loss from disposal of the Taas loans 4 - (16,470)
Operating profit/(loss) 126 (23,143)
Interest income 15 535 3,913
Interest expense 15 (585) (1,697)
Foreign currency gain/(loss) 2,630 (2,154)
Total net finance income 2,580 62
Profit/(loss) before income tax 2,706 (23,081)
Income tax charge 14 (85) (1,626)
Profit/(loss) for the year 2,621 (24,707)
------------------------------------------------------------ ----- ------------ ------------
Profit/(loss) for the year attributable
to:
* Non-controlling interest 279 (39)
* Shareholders of Urals Energy Public Company Limited 2,342 (24,668)
------------------------------------------------------------ ----- ------------ ------------
Earnings/(loss) per share from profit
attributable to
shareholders of Urals Energy Public
Company Limited: 17
- Basic earnings/(loss) per share
(in US dollar per share) 0.01 (0.10)
- Diluted earnings/(loss) per share
(in US dollar per share) 0.01 (0.10)
Weighted average shares outstanding
attributable to:
- Basic shares 252,175,453 248,984,245
- Diluted shares 253,414,431 254,236,011
Profit/(loss) for the year 2,621 (24,707)
Other comprehensive income/(loss):
- Effect of currency translation 3,971 (1,862)
Total comprehensive income/(loss)
for the year 6,592 (26,569)
------------------------------------------------------------ ----- ------------ ------------
Attributable to:
- Non-controlling interest 348 (87)
- Shareholders of Urals Energy Public
Company Limited 6,244 (26,482)
------------------------------------------------------------ ----- ------------ ------------
Consolidated Statements of Cash Flows
(presented in US$ thousands)
Year ended 31 December
-------------------------
Note 2012 2011
-------------------------------------------- ----- ----------- ------------
Cash flows from operating activities
Profit/(loss) before income tax 2,706 (23,081)
Adjustments for:
Depreciation, amortisation and depletion 20 6,410 6,987
Share-based payments 17 - 457
Interest income 15 (535) (3,913)
Interest expense 15 585 1,697
Release of provision on inventory 9 - (151)
Change in provision on claims 13 - (360)
Loss from disposal of the Taas loans 4 - 16,470
Gain on disposal of property, plant
and equipment (10) (1,230)
Charge of provision for doubtful
accounts receivable 21 1,633 706
Foreign currency (gain)/loss, net (2,630) 2,154
Other non-cash transactions (90) 2,246
Operating cash flows before changes
in working capital 8,069 1,982
(Increase)/decrease in inventories (564) 3,249
Increase in accounts receivables
and prepayments (1,085) (7,188)
Decrease in accounts payable and
accrued expenses (83) (4,087)
Decrease in advances from customers (445) (2,463)
Increase in other taxes payable 639 345
-------------------------------------------- ----- ----------- ------------
Cash generated from/(used in) operations 6,531 (8,162)
Interest received 171 62
Interest paid - (140)
Income tax paid - (201)
-------------------------------------------- ----- ----------- ------------
Net cash generated from/(used in)
operating activities 6,702 (8,441)
Cash flows from investing activities
Purchase of property, plant and
equipment and intangible assets (1,946) (2,780)
Disposal of the Taas loans 4 - 21,600
Proceeds on loans issued 178 62
Proceeds from sale of property,
plant and equipment 77 1,886
-------------------------------------------- ----- ----------- ------------
Net cash (used in)/generated from
investing activities (1,691) 20,768
Cash flows from financing activities
Repayment of borrowings (7,316) (14,000)
Finance lease principal payments (193) (289)
Cash proceeds from issuance of ordinary
shares, net - 8,750
Net cash used in financing activities (7,509) (5,539)
Effect of exchange rate changes
on cash in bank and on hand 192 (53)
-------------------------------------------- ----- ----------- ------------
Net (decrease)/increase in cash
in bank and on hand (2,306) 6,735
Cash in bank and on hand at the
beginning of the year 7,722 987
-------------------------------------------- ----- ----------- ------------
Cash in bank and on hand at the
end of the year 5,416 7,722
-------------------------------------------- ----- ----------- ------------
Consolidated Statements of Changes in Shareholders's Equity
(presented in US$ thousands)
Equity
attributable
to
Difference Shareholders
from of Urals
conversion Energy
of share Cumulative Public
Share Share capital Translation Accumulated Company Non-controlling Total
Notes capital premium into US$ Adjustment deficit Limited interest equity
Balance at 31
December 2010 1,543 656,557 (113) (28,858) (503,016) 126,113 970 127,083
--------------- ------ -------- -------- ----------- ------------ ------------ ------------- ---------------- ---------
Effect of
currency
translation - - - (1,814) - (1,814) (48) (1,862)
Loss for the
year - - - (24,668) (24,668) (39) (24,707)
-------- -------- ----------- ------------ ------------ ------------- ---------------- ---------
Total
comprehensive
loss - - - (1,814) (24,668) (26,482) (87) (26,569)
Issuance of
shares 17 26 (26) - - - - - -
Share-based
payment 17 - 457 - - - 457 - 457
Balance at 31
December 2011 1,569 656,988 (113) (30,672) (527,684) 100,088 883 100,971
--------------- ------ -------- -------- ----------- ------------ ------------ ------------- ---------------- ---------
Effect of
currency
translation - - - 3,902 - 3,902 69 3,971
Profit for the
year - - - 2,342 2,342 279 2,621
-------- -------- ----------- ------------ ------------ ------------- ---------------- ---------
Total
comprehensive
income - - - 3,902 2,342 6,244 348 6,592
Issuance of
shares 17 20 (20) - - - - - -
Balance at 31
December 2012 1,589 656,968 (113) (26,770) (525,342) 106,332 1,231 107,563
--------------- ------ -------- -------- ----------- ------------ ------------ ------------- ---------------- ---------
Notes to the Consolidated Financial Statements (presented in US$ thousands)
1 Activities
Urals Energy Public Company Limited ("Urals Energy" or the "Company" or "UEPCL") was incorporated as a limited liability company in Cyprus on 10 November 2003. Urals Energy and its subsidiaries (the "Group") are primarily engaged in oil and gas exploration and production in the Russian Federation and processing of crude oil for distribution on both the Russian and international markets.
The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34, CY-1066, Nicosia, Cyprus. UEPCL's shares are traded on the AIM Market operated by the London Stock Exchange.
The Group comprises UEPCL and the following main subsidiaries:
Effective ownership interest
at 31 December
------------------------------- ----------------- -------------------------------
Entity Jurisdiction 2012 2011
------------------------------- ----------------- --------------- --------------
Exploration and production
ZAO Petrosakh ("Petrosakh") Sakhalin 97.2% 97.2%
ZAO Arcticneft ("Arcticneft") Nenetsky Region 100% 100%
Management company
OOO Urals Energy Moscow 100% 100%
2 Summary of Significant Accounting Policies
Basis of preparation. The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) under the historical cost convention as modified by the change in fair value of financial instruments.
These policies have been consistently applied to all the periods presented, unless otherwise stated.
The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period. Critical accounting estimates and judgements are disclosed in Note 6. Actual results could differ from the estimates.
Functional and presentation currency. The United States dollar ("US dollar or US$ or $") is the presentation currency for the Group's operations as management have used the US dollar accounts to manage the Group's financial risks and exposures, and to measure its performance. Financial statements of the Russian subsidiaries are measured in Russian Roubles, their functional currency.
The functional currency of the Company is the US Dollar as substantially all the cash flows affecting the Company are in US Dollars.
Translation to functional currency. Monetary assets and liabilities denominated in foreign currencies are retranslated into the functional currency at the rate of exchange ruling at the reporting date. Any resulting exchange differences are included in the profit or loss component of the consolidated statement of comprehensive income. Non-monetary assets and liabilities that are measured at historical cost and denominated in a foreign currency are translated into the functional currency using the rates of exchange as at the dates of the initial transactions. The US dollar to Russian Rouble exchange rates were 30.37 and 32.20 as of 31 December 2012 and 2011, respectively.
Translation to presentation currency. The Group's consolidated financial statements are presented in US dollars in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates. The results and financial position of each group entity having a functional currency different from the presentation currency are translated into the presentation currency as follows:
(i) Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position. Goodwill and fair value adjustments arising on the acquisitions are treated as assets and liabilities of the acquired entity.
(ii) Income and expenses for each statement of comprehensive income are translated to the functional currency of the Company at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions).
(iii) All resulting exchange differences are recognised as a separate component of equity.
When a subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity, the exchange differences deferred in other comprehensive income are reclassified to the profit and loss.
Consolidated financial statements. Subsidiaries are those companies and other entities (including special purpose entities) in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are deconsolidated from the date on which control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.
The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest's proportionate share of net assets of the acquiree. Non-controlling interests that are not present ownership interests are measured at fair value.
Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Company and all of its subsidiaries use uniform accounting policies consistent with the Group's policies.
Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Company. Non-controlling interest forms a separate component of the Group's equity.
Purchases and sales of non-controlling interests. The Group applies the economic entity model to account for transactions with owners of non-controlling interest. Any difference between the purchase consideration and the carrying amount of non-controlling interest acquired is recorded as a capital transaction directly in equity. The Group recognises the difference between sales consideration and carrying amount of non-controlling interest sold as a capital transaction in the consolidated statement of changes in equity.
Property, plant and equipment. Property, plant and equipment acquired as part of a business combination is recorded at fair value at the acquisition date and adjusted for accumulated depreciation, depletion and impairment. All subsequent additions are recorded at historical cost of acquisition or construction and adjusted for accumulated depreciation, depletion and impairment. Oil and gas exploration and production activities are accounted for in a manner similar to the successful efforts method. Costs of successful development and exploratory wells are capitalised. The cost of property, plant and equipment includes provisions for dismantlement, abandonment and site restoration (see Provisions below).
The Group accounts for exploration and evaluation activities in accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources. Geological and geophysical exploration costs are charged against income as incurred. Costs directly associated with an exploration well are initially capitalised as an intangible asset within oil and gas properties until the drilling of the well is complete and the results have been evaluated. These costs include employee remuneration, materials and fuel used, rig costs, delay rentals and payments made to contractors. If hydrocarbons are not found, the exploration expenditure is written off as a dry hole. If hydrocarbons are found and, subject to further appraisal activity, which may include the drilling of further wells (exploration or exploratory-type stratigraphic test wells), are likely to be capable of commercial development, the costs continue to be carried as an asset. All such carried costs are subject to technical, commercial and management review at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off. When proved reserves of oil and natural gas are determined and development is sanctioned, the relevant expenditure is transferred to the tangible part of oil and gas properties and an impairment review of the property is undertaken at that time.
Development and production assets are accumulated generally on a field-by-field basis and represent the cost of developing the commercial reserves discovered and bringing them to production together with Exploration and Evaluation (E&E) expenditures incurred in finding commercial reserves and transferred from the intangible E&E assets described above. The cost of development and production assets also include the costs of acquisitions and purchases of such assets, directly attributable overheads, finance costs capitalised and the costs of recognising provisions for future restoration and decommissioning.
Depletion of capitalised costs of proved oil and gas properties is calculated using the unit-of-production method for each field based upon proved reserves for property acquisitions and proved developed reserves for exploration and development costs. Oil and gas reserves for this purpose are determined in accordance with Society of Petroleum Engineers definitions and were last estimated by DeGolyer and MacNaughton, the Group's independent reservoir engineers in 2007. The DeGolyer and MacNaughton information from the 2007 reserves review is updated annually by management by reference to production information and the equivalent Russian ABC reserves classification. Gains or losses from retirements or sales of oil and gas properties are included in the determination of profit for the year.
Depreciation of non oil and gas property, plant and equipment is calculated using the straight-line method over their estimated remaining useful lives, as follows:
Estimated useful life
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Refinery and related equipment 19
Buildings 20
Other assets 6 to 20
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The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within 'Other operating loss' in the profit and loss section of consolidated statement of comprehensive income.
Intangible assets. The Group measures intangible assets at cost less accumulated amortisation and impairment losses. All of the Group's other intangible assets have finite useful lives and primarily include capitalised computer software and licences.
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring them to use.
Intangible assets are amortised using the straight-line method over their useful lives:
Estimated useful life
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Software licences 1-5
Capitalised internal software development
costs 3
Other licences 5 to 7
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Provisions. Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.
Provisions, including those related to dismantlement, abandonment and site restoration, are evaluated and re-estimated annually, and are included in the consolidated financial statements at each reporting date at the present value of the expenditures expected to be required to settle the obligation using pre - tax discount rates which reflect the current market assessment of the time value of money and the risks specific to the liability.
Changes in provisions resulting from the passage of time are reflected in the profit and loss section of consolidated statement of comprehensive income each year under financial items. Other changes in provisions, relating to a change in the expected pattern of settlement of the obligation, changes in the discount rate or in the estimated amount of the obligation, are treated as a change in accounting estimate in the period of the change. Changes in provisions relating to dismantlement, abandonment and site restoration are added to, or deducted from, the cost of the related asset in the current period. The amount deducted from the cost of the asset should not exceed its carrying amount. If a decrease in the liability exceeds the carrying amount of the asset, the excess is recognised immediately in profit or loss.
The provision for dismantlement liability is recorded on the consolidated statement of financial position, with a corresponding amount being recorded as part of property, plant and equipment in accordance with IAS 16.
Leases. Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are presented as finance lease obligations on the consolidated statement of financial position. The interest element of the finance cost is charged to the consolidated statement of comprehensive income over the lease period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset or the lease term.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the consolidated statement of comprehensive income on a straight-line basis over the period of the lease.
Impairment of assets. Assets that are subject to depreciation and depletion are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell or value in use. For the purposes of assessing impairment, assets are grouped by license areas, which are the lowest levels for which there are separately identifiable cash flows (cash-generating units).
Reversal of impairment. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of impairment at each reporting date.
Inventories. Inventories of extracted crude oil, oil products, materials and supplies and construction materials are valued at the lower of the weighted-average cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses. General and administrative expenditure is excluded from inventory costs and expensed in the period incurred.
Trade receivables. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, net of provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Such objective evidence may include significant financial difficulties of the debtor, an increase in the probability that the debtor will enter bankruptcy or financial reorganisation, and actual default or delinquency in payments. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The change in the amount of the provision is recognised in the profit and loss section of consolidated statement of comprehensive income.
Cash and cash equivalents. Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at amortised cost using the effective interest method. Restricted balances are excluded from cash and cash equivalents for the purposes of the consolidated statement of cash flow. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date are included in other non-current assets. Restricted cash balances are segregated from cash available for the business to use until such time as restrictions are removed.
Value added tax. Output value added tax related to sales is payable to tax authorities on the earlier of (a) collection of receivables from customers or (b) delivery of goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognised in the consolidated statement of financial position on a gross basis and disclosed separately as an asset and liability. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT.
Borrowings. Borrowings are recognised initially at the fair value of the liability, net of transaction costs incurred. In subsequent periods, borrowings are stated at amortised cost using the effective interest method; any difference between amount at initial recognition and the redemption amount is recognised as interest expense over the period of the borrowings. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.
Capitalisation of borrowing costs. Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial time to get ready for intended use or sale (qualifying assets) are capitalised as part of the costs of those assets. The commencement date for capitalisation is when (a) the Group incurs expenditures for the qualifying asset; (b) it incurs borrowing costs; and (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale.
Capitalisation of borrowing costs continues up to the date when the assets are substantially ready for their use or sale.
The Group capitalises borrowing costs that could have been avoided if it had not made capital expenditure on qualifying assets. Borrowing costs capitalised are calculated at the group's average funding cost (the weighted average interest cost is applied to the expenditures on the qualifying assets), except to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. Where this occurs, actual borrowing costs incurred less any investment income on the temporary investment of those borrowings are capitalised.
Loans receivable. The loans advanced by the Group are classified as "loans and receivables" in accordance with IAS 39 and stated at amortised cost using the effective interest method. These loans are individually tested for impairment at each reporting date.
Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with legislation enacted or substantively enacted by the end of the reporting period. The income tax charge or benefit comprises current tax and deferred tax and is recognised in profit or loss for the year except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity.
Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxes other than on income are recorded within operating expenses.
Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period, which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.
Uncertain tax positions. The Group's uncertain tax positions are reassessed by management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management's best estimate of the expenditure required to settle the obligations at the end of the reporting period.
Employee benefits. Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits (such as health services and kindergarten services) are accrued in the year in which the associated services are rendered by the employees of the Group. The Group has no legal or constructive obligation to make pension or similar benefit payments beyond the payments to the statutory defined contribution scheme.
Social costs. The Group incurs employee costs related to the provision of benefits such as health insurance. These amounts principally represent an implicit cost of employing production workers and, accordingly, are included in the cost of inventory.
Prepayments. Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as non-current upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group. Other prepayments are written off to profit or loss when the goods or services relating to the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in profit or loss.
Revenue recognition. The Group recognises revenue when the amount of revenue can be reliably measured and it is probable that economic benefits will flow to the entity, typically when crude oil or refined products are dispatched to customers and title has transferred.
Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate.
Segments. The Group operates in one business segment which is crude oil exploration and production. The Group assesses its results of operations and makes its strategic and investment decisions based on the analysis of its profitability as a whole. The Group operates within geographic segments as disclosed in note 19.
Warrants. Warrants issued that allow the holder to purchase shares of the Group's stock are recorded at fair value at issuance and recorded as liabilities unless the number of equity instruments to be issued to settle the warrants and the exercise price are fixed in the issuing entities' functional currency at the time of grant, in which case they are recorded within shareholders' equity. Changes in the fair value of warrants recorded as liabilities are recorded in the consolidated statement of comprehensive income.
Financial derivatives. The fair value of options is evaluated using market prices at the grant date if available, taking into account the terms and conditions of the options, upon which those derivative instruments were issued. If market prices are not available, the fair value of the derivative equity instruments granted is estimated using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm's length transaction between knowledgeable, willing parties.
Share capital. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is presented in the notes as a share premium.
Share-based payments. The fair value of the employee services received in exchange for the grant of options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, using market prices, taking into account the terms and vesting conditions upon which those equity instruments were granted.
Earnings per share. Earnings per share are determined by dividing the profit or loss attributable to equity holders of the Group by the weighted average number of participating shares outstanding during the reporting year.
Initial recognition of related party transactions. In the normal course of business the Group enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgment is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgment is pricing for similar types of transactions with unrelated parties and effective interest rate analyses.
3 Going Concern
A significant portion of the Group's consolidated net assets of $106.3 million (31 December 2011: $100.1 million) comprises undeveloped mineral deposits requiring significant additional investment. The Group is dependent upon external debt to fully develop the deposits and realise the value attributed to such assets.
The Group had net current liabilities of $1.1 million as of 31 December 2012 (31 December 2011: $3.7 million). The most significant creditor as of 31 December 2012 was $3.0 million loan from Petraco (31 December 2011: $10.0 million) (Note 15). Following the settlement of the Taas loans (Note 4) the Group liquidity has improved significantly.
Management have prepared monthly cash flow projections for 2013 and 2014. Judgements which are significant to management's conclusion that no material uncertainty exists about the Group's ability to continue as a going concern include future oil prices and planned production, which were required for the preparation of the cash flow projections and model. Positive overall cash flows are dependent on future oil prices (a price of $110 per barrel has been used for 2013 and for 2014). Despite the above matters, the Group still has funding and liquidity constraints, though these are less severe than in the prior years. Despite the uncertainties, based on the cash flow projections performed, management considers that the application of the going concern assumption for the preparation of these consolidated financial statements is appropriate.
4 Disposal of Taas loans
The Taas-Yuryakh Neftegazodobycha loans (the "Taas loans") represented US dollar denominated long-term loans (interest inclusive) of $37.8 million at 31 December 2010 issued by UEPCL to Taas, as part of the Taas acquisition agreement. The loans were used to pay organisation fees for a $600.0 million project finance loan facility provided by Savings Bank of Russian Federation ("Sberbank") for the development of the SRB field, financing of interest payments and repayment of third party loans at Taas. The loans bore interest of 12% and were to mature in February 2015. The loans were unsecured.
At 8 December 2011, under the terms of an assignment agreement, the Company assigned the full benefit of the Taas loans (together with all accrued interest) to Nagelfar for the total sum of $26 million. The book value of the Taas loans as at 8 December 2011 was $41 million (including the accrual of relevant interest) and transaction costs amounted $1.5 million. A loss of $16.5 million was recorded as a result of this transaction in the profit and loss section of the consolidated statement of comprehensive income in 2011. In December 2011 a payment of $21.6 million, net of the non-cash settlement of the payable to Finfund Limited of $4.4 million, was received.
5 Adoption of New or Revised standards and interpretations and New accounting pronouncements
The following new standards and interpretations became effective for the Group from 1 January 2012:
"Disclosures-Transfers of Financial Assets" - Amendments to IFRS 7 (issued in October 2010 and effective in EU from the commencement date of companies' first financial year starting after 30 June 2011). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party, yet remain on the entity's balance sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognised, but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood. The Group is currently assessing the impact of the new standard on its financial statements.
Since the Group has published its last annual consolidated financial statements, certain new standards and interpretations have been issued that are mandatory for the Group's annual accounting periods beginning on or after 1 January 2013 or later and which the Group has not early adopted:
Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters - Amendments to IFRS 1 (issued in December 2010 and effective in EU for annual periods beginning on or after 1 January 2013). The amendment regarding severe hyperinflation creates an additional exemption when an entity that has been subject to severe hyperinflation resumes presenting or presents for the first time, financial statements in accordance with IFRS. The exemption allows an entity to elect to measure certain assets and liabilities at fair value; and to use that fair value as the deemed cost in the opening IFRS statement of financial position.
The IASB has also amended IFRS 1 to eliminate references to fixed dates for one exception and one exemption, both dealing with financial assets and liabilities. The first change requires first-time adopters to apply the derecognition requirements of IFRS prospectively from the date of transition, rather than from 1 January 2004. The second amendment relates to financial assets or liabilities where the fair value is established through valuation techniques at initial recognition and allows the guidance to be applied prospectively from the date of transition to IFRS rather than from 25 October 2002 or 1 January 2004. This means that a first-time adopter may not need to determine the fair value of certain financial assets and liabilities at initial recognition for periods prior to the date of transition. IFRS 9 has also been amended to reflect these changes. The Group does not expect the amendments to have any material effect on its financial statements.
Recovery of Underlying Assets - Amendments to IAS 12 (issued in December 2010 and effective in EU for annual periods beginning on or after 1 January 2013). The amendment introduced a rebuttable presumption that an investment property carried at fair value is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. SIC-21, Income Taxes - Recovery of Revalued Non-Depreciable Assets, which addresses similar issues involving non-depreciable assets measured using the revaluation model in IAS 16, Property, Plant and Equipment, was incorporated into IAS 12 after excluding from its scope investment properties measured at fair value. The Group does not expect the amendments to have any material effect on its financial statements.
IFRS 9, Financial Instruments: Classification and Measurement. IFRS 9, issued in November 2009, replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities and in December 2011 to (i) change its effective date to annual periods beginning on or after 1 January 2015 and (ii) add transition disclosures. Key features of the standard are as follows:
-- Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.
-- An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity's business model is to hold the asset to collect the contractual cash flows, and (ii) the asset's contractual cash flows represent payments of principal and interest only (that is, it has only "basic loan features"). All other debt instruments are to be measured at fair value through profit or loss.
-- All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment.
-- Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income.
The Standard has not yet been endorsed by the EU.
IFRS 10, Consolidated Financial Statements (issued in May 2011 and effective in EU for annual periods beginning on or after 1 January 2014), replaces all of the guidance on control and consolidation in IAS 27 "Consolidated and separate financial statements" and SIC-12 "Consolidation - special purpose entities". IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine control. This definition is supported by extensive application guidance. The Group is currently assessing the impact of the new standard on its financial statements.
IFRS 11, Joint Arrangements, (issued in May 2011 and effective in EU for annual periods beginning on or after 1 January 2014), replaces IAS 31 "Interests in Joint Ventures" and SIC-13 "Jointly Controlled Entities-Non-Monetary Contributions by Ventures". Changes in the definitions have reduced the number of types of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. The Group is currently assessing the impact of the new standard on its financial statements.
IFRS 12, Disclosure of Interest in Other Entities, (issued in May 2011 and effective in EU for annual periods beginning on or after 1 January 2014), applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements currently found in IAS 28 "Investments in associates". IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity's interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgments and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on share of non-controlling interests in group activities and cash flows, summarised financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. The Group is currently assessing the impact of the new standard on its financial statements.
IFRS 13, Fair value measurement, (issued in May 2011 and effective in EU for annual periods beginning on or after 1 January 2013), aims to improve consistency and reduce complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. The Group is currently assessing the impact of the standard on its financial statements.
IAS 27, Separate Financial Statements, (revised in May 2011 and effective in EU for annual periods beginning on or after 1 January 2014), was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The guidance on control and consolidated financial statements was replaced by IFRS 10, Consolidated Financial Statements. The Group is currently assessing the impact of the amended standard on its financial statements.
IAS 28, Investments in Associates and Joint Ventures, (revised in May 2011 and effective in EU for annual periods beginning on or after 1 January 2014). The amendment of IAS 28 resulted from the Board's project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this exception, other guidance remained unchanged. The Group is currently assessing the impact of the amended standard on its financial statements.
Amendments to IAS 1, Presentation of Financial Statements (issued June 2011, effective in EU for annual periods beginning on or after 1 July 2012), changes the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to 'statement of profit or loss and other comprehensive income'. The Group expects the amended standard to change presentation of its financial statements, but have no impact on measurement of transactions and balances.
Amended IAS 19, Employee Benefits (issued in June 2011, effective in EU for periods beginning on or after 1 January 2013), makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. The Group is currently assessing the impact of the amended standard on its financial statements.
Disclosures-Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (issued in December 2011 and effective in EU for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off. The amendment will have an impact on disclosures but will have no effect on measurement and recognition of financial instruments.
Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued in December 2011 and effective in EU for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of 'currently has a legally enforceable right of set-off' and that some gross settlement systems may be considered equivalent to net settlement. The Group is considering the implications of the amendment, the impact on the Group and the timing of its adoption by the Group.
Improvements to International Financial Reporting Standards (issued in May 2012 and effective in EU for annual periods beginning 1 January 2013). The improvements consist of changes to five standards. IFRS 1 was amended to (i) clarify that an entity that resumes preparing its IFRS financial statements may either repeatedly apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an exemption from applying IAS 23 "Borrowing costs", retrospectively by first-time adopters. IAS 1 was amended to clarify that explanatory notes are not required to support the third balance sheet presented at the beginning of the preceding period when it is provided because it was materially impacted by a retrospective restatement, changes in accounting policies or reclassifications for presentation purposes, while explanatory notes will be required when an entity voluntarily decides to provide additional comparative statements. IAS 16 was amended to clarify that servicing equipment that is used for more than one period is classified as property, plant and equipment rather than inventory. IAS 32 was amended to clarify that certain tax consequences of distributions to owners should be accounted for in the income statement as was always required by IAS 12. IAS 34 was amended to bring its requirements in line with IFRS 8. IAS 34 will require disclosure of a measure of total assets and liabilities for an operating segment only if such information is regularly provided to chief operating decision maker and there has been a material change in those measures since the last annual consolidated financial statements. The Group is currently assessing the impact of the
amendments on its consolidated financial statements.
Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12 (issued in June 2012 and effective in EU for annual periods beginning 1 January 2014). The amendments clarify the transition guidance in IFRS 1 "Consolidated Financial Statements". Entities adopting IFRS 10 should assess control at the first day of the annual period in which IFRS 10 is adopted, and if the consolidation conclusion under IFRS 10 differs from IAS 27 and SIC 12, the immediately preceding comparative period (that is, year 2012 for a calendar year-end entity that adopts IFRS 10 in 2013) is restated, unless impracticable. The amendments also provide additional transition relief in IFRS 10, IFRS 11 "Joint Arrangements" and IFRS 12 "Disclosure of Interests in Other Entities", by limiting the requirement to provide adjusted comparative information only for the immediately preceding comparative period. Further, the amendments will remove the requirement to present comparative information for disclosures related to unconsolidated structured entities for periods before IFRS 12 is first applied. The Group is currently assessing the impact of the amendments on its consolidated financial statements.
Amendments to IFRS 1 "First-time adoption of International Financial Reporting Standards - Government Loans"(issued in March 2012 and effective in EU for annual periods beginning 1 January 2013). The amendments, dealing with loans received from governments at a below market rate of interest, give first-time adopters of IFRSs relief from full retrospective application of IFRSs when accounting for these loans on transition. This will give first-time adopters the same relief as existing preparers. The Group is currently assessing the impact of the amended standard on its consolidated financial statements.
Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment entities (issued on 31 October 2012, the amendments have not yet been endorsed by the EU). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity's investment activities.
IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary.
Other revised standards and interpretations: IFRIC 20 "Stripping Costs in the Production Phase of a Surface Mine", considers when and how to account for the benefits arising from the stripping activity in mining industry. The interpretation will not have an impact on the Group's consolidated financial statements.
IFRIC 21: "Levies", it is an interpretation of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (known as an obligating event). The Interpretation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy.
Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group's financial statements.
6 Critical Accounting Estimates and Judgements in Applying Accounting Policies
The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include:
Tax legislation. Russian tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities. Please see Note 22 for more details.
Initial recognition of related party transactions. In the normal course of business the Company enters into transactions involving various financial instruments with its related parties. IAS 39, Financial Instruments: recognition and measurement, requires initial recognition of financial instruments based on their fair values. Judgement was applied in determining if transactions are priced at market or nonmarket interest rates, where there is no active market for such transactions. This judgment was based on the pricing for similar types of transactions with unrelated parties and effective interest rate analyses.
Estimation of oil and gas reserves. Engineering estimates of hydrocarbon reserves are inherently uncertain and are subject to future revisions. Accounting measures such as depreciation, depletion and amortisation charges, impairment assessments and asset retirement obligations that are based on the estimates of proved reserves are subject to change based on future changes to estimates of oil and gas reserves.
Proved reserves are defined as the estimated quantities of hydrocarbons which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic conditions. Proved reserves are estimated by reference to available reservoir and well information, including production and pressure trends for producing reservoirs. Furthermore, estimates of proved reserves only include volumes for which access to market is assured with reasonable certainty. All proved reserves estimates are subject to revision, either upward or downward, based on new information, such as from development drilling and production activities or from changes in economic factors, including product prices, contract terms or development plans. In some cases, substantial new investment in additional wells and related support facilities and equipment will be required to recover such proved reserves. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change over time as additional information becomes available.
The Group last obtained an independent reserve engineers report as at 31 December 2007. Management believes that these reserves have not changed, other than through production, as the amount of subsequent additional drilling has been minimal.
In general, estimates of reserves for undeveloped or partially developed fields are subject to greater uncertainty over their future life than estimates of reserves for fields that are substantially developed and depleted. As those fields are further developed, new information may lead to further revisions in reserve estimates. Reserves have a direct impact on certain amounts reported in the consolidated financial statements, most notably depreciation, depletion and amortisation as well as impairment expenses. Depreciation rates on production assets using the units-of-production method for each field are based on proved developed reserves for development costs, and total proved reserves for costs associated with the acquisition of proved properties. Assuming all variables are held constant, an increase in proved developed reserves for each field decreases depreciation, depletion and amortisation expenses. Conversely, a decrease in the estimated proved developed reserves increases depreciation, depletion and amortisation expenses. Moreover, estimated proved reserves are used to calculate future cash flows from oil and gas properties, which serve as an indicator in determining whether or not property impairment is present. The possibility exists for changes or revisions in estimated reserves to have a significant effect on depreciation, depletion and amortisation charges and, therefore, reported net profit/(loss) for the year.
Deferred income tax asset recognition. The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded in the statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on the medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances. Key assumptions in the business plan are an average oil price of $110 for 2013 and $90 in real terms for future sales.
Impairment provision for receivables. The impairment provision for receivables (including loans issued) is based on management's assessment of the probability of collection of individual receivables. Significant financial difficulties of the debtor/lender, probability that the debtor/lender will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the receivable is potentially impaired. Actual results could differ from these estimates if there is deterioration in a debtor's/lender's creditworthiness or actual defaults are higher than the estimates.
When there is no expectation of recovering additional cash for an amount receivable, the expected amount receivable is written off against the associated provision.
Future cash flows of receivables that are evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently.
Asset retirement obligations. Management makes provision for the future costs of decommissioning hydrocarbon production facilities, pipelines and related support equipment based on the best estimates of future cost and economic lives of those assets. Estimating future asset retirement obligations is complex and requires management to make estimates and judgments with respect to removal obligations that will occur many years in the future. Changes in the measurement of existing obligations can result from changes in estimated timing, future costs or discount rates used in valuation.
Useful lives of non-oil and gas properties. Items of non-oil and gas properties are stated at cost less accumulated depreciation. The estimation of the useful life of an asset is a matter of management judgement based upon experience with similar assets. In determining the useful life of an asset, management considers the expected usage, estimated technical obsolescence, physical wear and tear and the physical environment in which the asset is operated. Changes in any of these conditions or estimates may result in adjustments to future depreciation rates. Useful lives applied to oil and gas properties may exceed the licence term where management considers that licences will be renewed. Assumptions related to renewal of licences can involve significant judgment of management.
7 Cash and cash equivalents
31 December
--------------
2012 2011
------------------------------------------ ------ ------
Cash at bank and on hand 1,216 722
Short-term bank deposits with maturities
of 3 months or less 4,200 7,000
------------------------------------------ ------ ------
Total cash and cash equivalents 5,416 7,722
------------------------------------------ ------ ------
Based on Fitch's rating, the credit quality of BNP Paribas in which the Group mostly held its cash and cash equivalents as at 31 December 2012 and 2011 is A+.
8 Accounts Receivable and Prepayments
Year ended 31 December
------------------------------------------- -------------------------
2012 2011
------------------------------------------- ------------ -----------
Loans issued to related parties (Note 24) 422 362
Trade accounts and notes receivable 801 1,183
Total financial assets 1,223 1,545
------------------------------------------- ------------ -----------
Recoverable and prepaid taxes including
VAT 817 944
Prepaid expenses 606 645
Advances to suppliers 955 1,582
Other 978 53
Total accounts receivable and prepayments 4,579 4,769
------------------------------------------- ------------ -----------
Included in total accounts receivable and prepayments are $1.1 million and $1.0 million at 31 December 2012 and 2011, respectively, denominated in US dollars. Substantially all remaining amounts are denominated in Russian Roubles.
Trade accounts receivable arise primarily from sales to ongoing customers with standard payment terms. The category 'Other' primarily relates to prepaid amounts to customs and tax authorities, which will be returned to the Group either in cash or through an off-set against future payments.
Changes in the provision for impairment of trade and other receivables related to the recognition of a provision against receivables from related parties are as follows:
Year ended 31 December
------------------------------------------ -------------------------
2012 2011
------------------------------------------ ------------ -----------
At 1 January 5,894 5,250
Accrual of additional provision against
related party (Note 21) 1,633 706
Accrual of provision against third party
accounts receivable - -
Using of provision against third party
accounts receivable - (65)
Effect of currency translation - 3
At 31 December 7,527 5,894
------------------------------------------ ------------ -----------
The carrying values of trade and other receivables approximate their fair value. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables mentioned above. The Group does not hold any collateral as security for trade and other receivables (see Note 23 for credit risk disclosures).
Trade and other receivables that are less than three months past due are generally not considered for impairment unless other indicators of impairment exist, such as indication of significant financial difficulty or bankruptcy. Trade and other receivables of $0.1 million and $0.1 million at 31 December 2012 and 2011, respectively were past due but not impaired. The ageing analysis of these past due but not impaired trade and other receivables are as follows:
31 December
--------------
2012 2011
--------------------------------- ------ ------
Up to 90 days past-due - -
91 to 360 days past-due - -
Over 360 days past-due 122 88
--------------------------------- ------ ------
Total past due but not impaired 122 88
--------------------------------- ------ ------
The main part of past due receivables related to the members of independent customers for whom there are no recent history of defaults and was subsequently repaid.
9 Inventories
31 December
----------------
2012 2011
------------------------ ------- -------
Crude oil 3,486 4,046
Oil products 2,934 1,941
Materials and supplies 4,710 4,032
------------------------ ------- -------
Total inventories 11,130 10,019
------------------------ ------- -------
Inventory provision
Year ended 31 December
-------------------------- --------------------------
2012 2011
-------------------------- ------------ ------------
At 1 January - 1,012
Release of provision - (151)
Utilisation of provision - (861)
At 31 December - -
-------------------------- ------------ ------------
The release of inventory provision in 2011 was triggered by the fact that the Company has made an updated analysis of market value of inventories, previously impaired in 2009.
10 Property, Plant and Equipment
Oil and gas Refinery and Assets under
Cost at properties related equipment Buildings Other Assets construction Total
------------------- ------------------- ------------------ ---------- ------------- ------------------- --------
1 January 2011 155,952 8,600 928 6,014 5,590 177,084
Translation
difference (8,480) (459) (49) (302) (368) (9,658)
Additions 1,162 - - 158 2,232 3,552
Capitalised
borrowing costs - - - - 34 34
Transfers 1,248 - - - (1,248) -
Disposals (669) - - (382) (236) (1,287)
31 December 2011 149,213 8,141 879 5,488 6,004 169,725
Translation
difference 9,042 489 54 330 347 10,262
Additions 2,141 - - 280 899 3,320
Capitalised
borrowing costs - - - - 19 19
Transfers 1,454 - - - (1,454) -
Disposals - - - (255) - (255)
31 December 2012 161,850 8,630 933 5,843 5,815 183,071
------------------- ------------------- ------------------ ---------- ------------- ------------------- --------
Additions to assets under construction included capitalised depreciation in the amount of $147 thousand (for the year ended 31 December 2011: $155 thousand).
The average capitalisation rate for the year ended 31 December 2012 is 5.5% (for the year ended 31 December 2011: 5.5%).
Accumulated Depreciation, Amortisation and Oil and gas Refinery and Assets under Depletion at properties related equipment Buildings Other Assets construction Total ------------------- ------------------- ------------------ ---------- ------------- ------------------ --------- 1 January 2011 (42,283) (2,358) (537) (3,089) (48,267) Translation difference 2,735 167 33 194 - 3,129 Depreciation (5,728) (469) (48) (706) - (6,951) Disposals 251 - - 380 - 631 31 December 2011 (45,025) (2,660) (552) (3,221) - (51,458) Translation difference (2,831) (170) (34) (197) - (3,232) Depreciation (5,397) (444) (48) (380) - (6,269) Disposals - - - 188 - 188 31 December 2012 (53,253) (3,274) (634) (3,610) - (60,771) ------------------- ------------------- ------------------ ---------- ------------- ------------------ --------- Net Book Value a 31 December 2011 104,188 5,481 327 2,267 6,004 118,267 31 December 2012 108,597 5,356 299 2,233 5,815 122,300 ------------------- ------------------- ------------------ ---------- ------------- ------------------ ---------
Included within oil and gas properties at 31 December 2012 and 2011 were exploration and evaluation assets:
Cost at Cost at
31 December Translation 31 December
2011 Additions difference 2012
---------------------------- ------------- ---------- ------------ -------------
Exploration and evaluation
assets
Arcticneft 16,006 - 961 16,967
Petrosakh 29,136 - 1,749 30,885
---------------------------- ------------- ---------- ------------ -------------
Total cost of exploration
and evaluation assets 45,142 - 2,710 47,852
---------------------------- ------------- ---------- ------------ -------------
Cost at Cost at
31 December Translation 31 December
2010 Additions difference 2011
---------------------------- ------------- ---------- ------------ -------------
Exploration and evaluation
assets
Arcticneft 16,909 - (903) 16,006
Petrosakh 30,783 - (1,647) 29,136
---------------------------- ------------- ---------- ------------ -------------
Total cost of exploration
and evaluation assets 47,692 - (2,550) 45,142
---------------------------- ------------- ---------- ------------ -------------
The Group's oil fields are situated in the Russian Federation on land owned by the Russian government. The Group holds production mining licenses and pays production taxes to extract oil and gas from the fields. The licenses expire between 2037 and 2067, but may be extended. Management intends to renew the licences as the properties are expected to remain productive subsequent to the license expiration date.
Estimated costs of dismantling oil and gas production facilities, including abandonment and site restoration costs, amount to $0.1 million and $0.1 million at 31 December 2012 and 2011, respectively, are included in the cost of oil and gas properties. The Group has estimated its liability based on current environmental legislation using estimated costs when the expenses are expected to be incurred.
The Group leases property, plant and equipment (included within oil and gas properties) under a number of finance lease agreements. The Group classified these leases as finance lease based on contract terms that include transfer of ownership rights at the end of contract.
As at 31 December 2012 cost of the leased assets amounted to $2,369 thousand (2011: $574 thousand). Accumulated depreciation for the leased assets as at 31 December 2012 amounted to $361 thousand (2011: $325 thousand).
Future minimum lease payments were as follows:
31 December 2012
------------- ---------------------------------
Present value
Minimum lease Future finance of minimum lease
payments charges payments
------------- -------------- -----------------
Financial lease obligations
payable
Not later than 1 year 306 218 88
Later than 1 year and not
later than 5 years 1,224 751 473
Above 5 years 1,987 787 1,200
------------- -------------- -----------------
Total 3,517 1,756 1,761
31 December 2011
------------- ---------------------------------
Present value
Minimum lease Future finance of minimum lease
payments charges payments
------------- -------------- -----------------
Financial lease obligations
payable
Not later than 1 year 372 42 330
------------- -------------- -----------------
Total 372 42 330
11 Other Non-Current Assets
Year ended 31 December
------------------------------------------- -------------------------
2012 2011
------------------------------------------- ------------ -----------
Loans issued to related parties (Note 24) 519 851
Advances to contractors and suppliers for
construction in process 504 110
Intangible assets 77 186
Total other non-current assets 1,100 1,147
------------------------------------------- ------------ -----------
At 31 December 2012 and 2011 loans receivable represent US dollar denominated long-term loans (interest inclusive) issued by UEPCL to OOO Komineftegeophysica (Note 24).
12 Accounts Payable and Accrued Expenses
Year ended 31 December
----------------------------------------------- -------------------------
2012 2011
----------------------------------------------- ------------ -----------
Trade payables 522 503
Accounts payable for construction in process 144 96
Wages and salaries 1,696 2,325
Short-term finance lease obligations 88 330
Other payable and accrued expenses 2,110 1,528
----------------------------------------------- ------------ -----------
Total accounts payable and accrued expenses 4,560 4,782
----------------------------------------------- ------------ -----------
Total accounts payable and accrued expenses in the amount of $1.3 million and $1.0 million at 31 December 2012 and 2011, respectively, are denominated in US dollars. Substantially all remaining amounts are denominated in Russian Roubles.
Other payable and accrued expenses include accounts payable relate to supply of goods under agency agreement made in prior years in the amount of $1.2 million and $1.1 million at 31 December 2012 and 2011 respectively.
13 Provisions
Provision on claims Total
---------------------- -------------------- ------
1 January 2011 2,559 2,559
---------------------- -------------------- ------
Release of provision (360) (360)
31 December 2011 2,199 2,199
---------------------- -------------------- ------
Charge/(release)
of provision - -
31 December 2012 2,199 2,199
---------------------- -------------------- ------
Provision on claims (Note 24)
On 2 June 2010 the Company was notified that Finfund Limited has exercised its rights to acquire 13,000,000 existing Urals shares with a nominal value of US$0.0063 from entities beneficially owned by two directors (being Leonid Y. Dyachenko and Aleksey V. Ogarev) and another significant shareholder (being Vyacheslav V. Rovneiko) (together the "Shareholders") pursuant to a share pledge agreement dated 26 November 2007 (the "Share Pledge Agreement").
The Share Pledge Agreement was entered into by entities beneficially owned by the Shareholders and secured various obligations of the Company under the terms of the Share Pledge Agreement relating to the acquisition by Urals of Taas-Yuriakh Neftegazodobycha (the "Acquisition"). Such obligations included certain pledge fees which Finfund Limited claimed were owed by the Company. Based on Finfund Limited's alleged defaults by the Company in respect of such pledge fees, Finfund Limited chose in 2010 to exercise its rights under the Share Pledge Agreement to acquire 13,000,000 shares in the Company from entities beneficially owned by the Shareholders (the "Pledged Shares"). The Shares beneficially owned and transferred to Finfund Limited as a result of such exercise of its rights against each Shareholder are as follows:
Name Number of Pledged Shares ---------------------------------------- ------------------------- Vyacheslav V. Rovneiko 8,010,000 Leonid Y. Dyachenko (Executive Chairman) 3,422,000 Aleksey V. Ogarev (Executive Director) 1,568,000 ---------------------------------------- ------------------------- Total 13,000,000 ---------------------------------------- -------------------------
As a consequence of the exercise of Finfund Limited's rights, as described above, any liability owed by Urals to Finfund Limited was reduced by the value of the shares transferred, estimated to equal $2.2 million. The Company has recorded a provision for the potential reimbursement of this sum
to the shareholders. The Company has recorded this provision based on the historical value of 13,000,000 shares. The provision is equal to $2.2 million as of 31 December 2012 (as of 31 December 2011: $2.2 million).
14 Taxes
Income taxes for the years ended 31 December 2012 and 2011 comprised the following:
Year ended 31 December
----------------------- -------------------------
2012 2011
----------------------- ----------- ------------
Current tax benefit (63) (110)
Deferred tax expense 148 1,736
Income tax charge 85 1,626
----------------------- ----------- ------------
Below is a reconciliation of profit before taxation to income tax charge:
Year ended 31 December
--------------------------------------------------- -------------------------
2012 2011
--------------------------------------------------- ---------- -------------
Profit/(loss) before income tax 2,706 (23,081)
Theoretical tax charge/(benefit) at the statutory
rate of 20% 541 (4,616)
Income tax overprovided in previous years (353) -
(Recognition)/write-off of statutory tax
loss carry forward (237) 1,078
Unrecognised tax loss carry forward for the
year - 1,254
Effects of different tax rate (257) 1,384
Other non-deductible expenses, net of non-taxable
income 391 2,526
Income tax charge 85 1,626
--------------------------------------------------- ---------- -------------
Effective tax rate 3.1% -7.0%
--------------------------------------------------- ---------- -------------
The movements in deferred tax assets and liabilities during the years ended 31 December 2012 were as follows:
Charged to the profit
and loss section of
Recognised in equity consolidated statement
for translation of comprehensive
31 December 2012 differences income 31 December 2011
------------------------ ----------------- ----------------------- ----------------------- -----------------
Deferred income tax
liabilities
Property, plant and
equipment (17,931) (1,036) 591 (17,486)
Inventories (719) (42) 24 (701)
Deferred income tax
assets
Dismantlement provision 319 17 22 280
Payables 127 16 (268) 379
Tax losses 3,905 241 (517) 4,181
Net deferred income tax
liabilities (14,299) (804) (148) (13,347)
------------------------ ----------------- ----------------------- ----------------------- -----------------
Charged to the profit
and loss section of
Recognised in equity consolidated
for translation statement of
31 December 2011 differences comprehensive income 31 December 2010
------------------------ ----------------- ----------------------- ----------------------- -----------------
Deferred income tax
liabilities
Property, plant and
equipment (17,486) 978 285 (18,749)
Inventories (701) 70 (857) 86
Deferred income tax
assets
Receivables - - 1 (1)
Dismantlement provision 280 (18) 52 246
Payables 379 (6) 385 -
Tax losses 4,181 (197) (1,078) 5,456
Other - (51) (524) 575
Net deferred income tax
liabilities (13,347) 776 (1,736) (12,387)
------------------------ ----------------- ----------------------- ----------------------- -----------------
The amount of deferred tax assets and liabilities that will be settled in 2013 is not significant.
The Company is subject to corporation tax on taxable profits at the rate of 10%. Under certain conditions interest expense or interest income may be subject to defence contribution at the rate of 10%. In such cases 50% of the same interest will be exempt from corporation tax thus having an effective tax rate burden of approximately 15%. In certain cases dividends received from abroad may be subject to defence contribution at the rate of 15%.
Most of the individual operating entities are taxed in the Russian Federation at the rate of 20%.
In the context of the Group's current structure, tax losses and current tax assets of different group companies may not be offset against current tax liabilities and taxable profits of other group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity. At 31 December 2012 and 2011, deferred tax assets of $25.0 million and $23.6 million, respectively, have not been recognised for deductible temporary differences for which it is not probable that sufficient taxable profit will be available to allow the benefit of that deferred tax assets to be utilised. Accumulated tax losses were $144.5 million and $139.0 million at 31 December 2012 and 2011, respectively. The $144.5 million of the accumulated tax losses at 31 December 2012 expire in 2014-2022 years and of the remaining $139.0 million of the accumulated tax losses at 31 December 2011 expire in 2014-2021 years.
Other taxes payable at 31 December 2012 and 2011 were as follows:
31 December
--------------------------- --------------
2012 2011
--------------------------- ------ ------
Unified production tax 2,723 1,990
VAT 2,022 2,223
Other taxes payable 1,290 905
Total other taxes payable 6,035 5,118
--------------------------- ------ ------
15 Borrowings
Long-term and short-term borrowings. Long-term and short-term borrowings were as follows at 31 December 2012 and 2011:
31 December
----------------------------- ------------------
2012 2011
----------------------------- -------- --------
Long-term borrowings
Petraco
* Principal - -
* Interest - 2,655
Total long-term borrowings - 2,655
Short-term borrowings
Petraco
* Principal 7,316
* Interest 3,004 -
Total short-term borrowings 3,004 7,316
Total borrowings 3,004 9,971
----------------------------- -------- --------
Petraco. In April 2010 the Company reached an agreement (subsequently amended on 18 November 2010) with Petraco relating to the restructuring of the Petraco facility (the "Restructuring Agreement"). The principal terms of the Restructuring Agreement are as follows:
Total indebtedness owed by the Company to Petraco, as at 31 March 2010, was $34.3 million, made up as follows:
- capital amount outstanding (the "Capital Outstanding") of $30.7 million; and - accrued interest outstanding (the "Accrued Interest") of $3.6 million.
As at 1 April 2010, the Capital Outstanding and Accrued Interest were added together and carried forward as principal ("Principal"). After 1 April 2010 interest was accrued on the Principal and was not compounded. All accrued interest from 1 April 2010 was paid once the Principal has been repaid and all payments made by the Company according to the payment schedule set out below was applied against the Principal outstanding. Interest will be charged on the Principal at a rate of 6 month LIBOR plus 5% per annum, non-compounding.
As part of the restructuring agreement the Company converted $2 million of the Capital Outstanding into 8,693,006 ordinary shares of the Company (recorded in the consolidated statement of changes in shareholders' equity) and gave an option to Petraco to acquire additional new ordinary shares in the amount of 12,576,688 for GBP 0.26 per share. The fair value of the option is not material. This option is considered as non dilutive instrument.
In June 2010 Company pledged 100% of the shares it currently holds in Arcticneft and 97.2% of shares it currently holds in Petrosakh to Petraco as security against the restructured Petraco facility. In August 2012 Petraco released its charge over the shares of Petrosakh in full.
In the year ended 31 December 2011 the debt in the amount of $8 million was paid as a result of the non-cash settlement transactions with trade receivables due to crude oil sales to Petraco.
As of 31 December 2012 the repayment schedule was as follows:
Payment date (as amended on 18 Amount to be paid by UEPCL to
November 2010) Petraco
------------------------------- ----------------------------------------------------------------------
31 December 2013 Repayment of outstanding interest
$3.0 million
------------------------------- ----------------------------------------------------------------------
Weighted average interest rate. The Group's weighted average interest rates on borrowings were 5.5% and 5.5% at 31 December 2012 and 2011, respectively.
Interest income and expense. Interest income and expense for the years ended 31 December 2012 and 2011, respectively, comprised the following:
Year ended 31 December
-------------------------
2012 2011
------------------------------------------- ---------- -------------
Interest income
Interest on loan issued to TYNGD - 3,159
Related party loans issued (Note 24) 535 754
------------------------------------------- ---------- -------------
Total interest income 535 3,913
------------------------------------------- ---------- -------------
Interest on loan from Petraco Oil Company
Limited (375) (1,283)
* accrued (394) (1,317)
* capitalised into PP&E 19 34
Finance leases (22) (108)
Change in dismantlement provision due
to passage of time (Note 16) (188) (166)
Other - (140)
Total interest expense (585) (1,697)
Net finance income (50) 2,216
------------------------------------------- ---------- -------------
16 Dismantlement Provision
The dismantlement provision represents the net present value of the estimated future obligation for dismantlement, abandonment and site restoration costs which are expected to be incurred at the end of the production lives of the oil and gas fields, which vary from 10 to 40 years depending on the field and type of assets. The discount rate used to calculate the net present value of the dismantling liability was 13.0%.
Year ended 31
December
----------------------------------- ----------------
2012 2011
----------------------------------- ------- -------
Opening dismantlement provision 1,398 1,232
Translation difference 87 (88)
Changes in estimates (52) 88
Change due to passage of time 188 166
----------------------------------- ------- -------
Closing dismantlement provision 1,621 1,398
----------------------------------- ------- -------
As further discussed in Note 22, environmental regulations and their enforcement are being developed by governmental authorities. Consequently, the ultimate dismantlement, abandonment and site restoration obligation may differ from the estimated amounts, and this difference could be significant.
17 Equity
At 31 December 2012 authorised share capital was $1,890 thousand divided into 300 million shares of $0.0063 each.
Difference
Number from conversion
of shares of share
(thousand Share Share capital to
of shares) capital premium USD
-------------------------------- ------------ --------- --------- -----------------
Balance at 1 January 2011 245,192 1,543 656,557 (113)
Shares issued under restricted
stock plans 4,059 26 (26) -
Share-based payment under
restricted stock - - 457 -
Balance at 31 December 2011 249,251 1,569 656,988 (113)
Shares issued under restricted
stock plans 3,195 20 (20) -
Share-based payment under
restricted stock - - -
-------------------------------- ------------ --------- --------- -----------------
Balance at 31 December 2012 252,446 1,589 656,968 (113)
-------------------------------- ------------ --------- --------- -----------------
The Share premium is not available for distribution by way of dividend.
Restricted Stock Plan. In February 2006, the Group's Board of Directors approved a Restricted Stock Plan (the "Plan") authorising the Compensation Committee of the Board of Directors to issue restricted stock of up to five percent of the outstanding shares of the Group. Restricted stock grants entitle the holder to shares of stock for no consideration upon vesting. There are no performance conditions beyond continued employment with the Group. The Plan which was authorised in 2006 expired in 2008. Additionally, of the restricted stock of 3,075,393 shares initially granted in 2007, 93,901 and 75,275 granted shares were cancelled as a result of retirement of certain employees of the Company during years 2008 and 2007.
In March 2008, the Group granted an additional 2,281,677 shares of restricted stock of which nil and 16,966 granted shares were cancelled as a result of retirement of certain employees of the Company during 2010 and 2009 correspondingly.
In September 2010 the Group substantially granted an additional 9,584,742 shares of restricted stock of which nil and 864,198 granted shares were cancelled as a result of retirement of certain employees of the Company during 2011.
During the years ended 31 December 2012 and 2011, nil and $0.5 million, respectively, of expense related to share-based payments were recognised in the consolidated statements of comprehensive income.
At 31 December 2012 and 31 December 2011, restricted stock grants for 14,037,685 shares and 10,842,771 shares were fully issued.
January January January January
Date of Grant 2009 2010 2011 2012 Total
Unvested Restricted
Stock Granted as of
31 December 2011 354,096 354,095 260,180 3,194,914 4,163,285
Vesting in 2012 - - - (3,194,914) (3,194,914)
---------------------------- -------- -------- --------- ------------ ------------
Total Restricted Stock
Granted as of 31 December
2012 354,096 354,095 260,180 - 968,371
---------------------------- -------- -------- --------- ------------ ------------
During the reporting period, the Group issued 3,194,914 shares as a result of normal vesting of previously issued restricted stock grants.
The fair value of stock granted is evaluated using market prices at the grant date if available. If market prices are not available, the fair value is estimated using a valuation technique to estimate what the price would have been on the measurement date in an arm's length transaction between knowledgeable, willing parties.
Profit/(loss) per share. Basic profit/(loss) per share is calculated by dividing the profit/(loss) attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.
The weighted average number of ordinary shares issued was calculated as following:
Year ended 31 December
------------------------------
2012 2011
---------------------------------------- -------------- --------------
Balance at 1 January 249,251,146 245,192,034
Shares issued during private placement - -
Shares issued under restricted stock
plans 2,924,307 3,792,211
Early vested shares under restricted - -
stock plans
Weighted average number of ordinary
shares in issue 252,175,453 248,984,245
---------------------------------------- -------------- --------------
Year ended 31 December
-------------------------
2012 2011
------------------------------------------------- ----------- ------------
Profit/(loss) attributable to equity holders
of the Company 2,342 (24,668)
Weighted average shares outstanding (thousands)
attributable to:
- Basic shares 252,175 248,984
- Diluted shares 253,414 254,236
------------------------------------------------- ----------- ------------
Basic earnings/(loss) per share (in US dollar
per share) 0.01 (0.10)
Diluted earnings/(loss) per share (in US dollar
per share) 0.01 (0.10)
------------------------------------------------- ----------- ------------
The Company has two categories of potential ordinary shares: warrants and restricted stock plan. Warrants in the year ended 31 December 2012 have no dilutive effect since the average market price of ordinary shares during the year ended 31 December 2012 was less than the exercise price of the warrants. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding and the profit attributable equity holders of the Company to assume conversion of all 968,371 dilutive (antidilutive) potential ordinary shares (2011: 5,251,766 shares).
18 Revenues
Year ended 31
December
------------------------------------------------- --------------------
2012 2011
------------------------------------------------- --------- ---------
Crude oil
Export sales 24,960 25,340
Domestic sales (Russian Federation) 2,375 3,107
Petroleum (refined) products - domestic sales 37,131 34,913
Other sales 520 800
------------------------------------------------- --------- ---------
Total proceeds from sales 64,986 64,160
------------------------------------------------- --------- ---------
Less: excise taxes (3,329) (3,723)
Less: export duties (11,773) (12,130)
------------------------------------------------- --------- ---------
Revenues after excise taxes and export duties 49,884 48,307
------------------------------------------------- --------- ---------
Substantially all of the Group's export sales are made to third party traders with title passing at the Russian border. Accordingly, management does not monitor the ultimate consumers of its export sales.
19 Segment information
Operating segments are defined as components of the Group where separate financial information is available and reported regularly to the chief operating decision maker (hereinafter referred to as "CODM", represented by the Board of Directors of the Company), which decides how to allocate resources and assesses operational and financial performance using the information provided.
The CODM receives monthly IFRS based financial information for its production entities. There were two production entities in both 2012 and 2011. Management has determined that the operations of these production entities are sufficiently homogenous for these to be aggregated for the purpose of IFRS 8. The Group has other entities that engage as either head office / corporate or as holding companies. Consequently, management has concluded that due to the above aggregation criteria there is only one reportable segment.
Geographical information. The Group operates in two major geographical areas of the world. In the Russian Federation, its home country, the Group is mainly engaged in the exploration, development, extraction and sales of crude oil, and refining and sale of oil products. Activities outside the Russian Federation are restricted to sales activities where title passes upon tanker loading. Sales are made to Europe (sales of crude oil). Information on the geographical location of the Group's revenues is set out below.
For the year ended 31 December 2012:
Russian Europe Total
Federation
------------------------------ ------------ ------- -------
Crude oil 2,375 24,960 27,335
Petroleum (refined) products 37,131 - 37,131
Other sales 520 - 520
------------------------------ ------------ ------- -------
Total proceeds from sales 40,026 24,960 64,986
------------------------------ ------------ ------- -------
For the year ended 31 December 2011:
Russian Europe Total
Federation
------------------------------ ------------ ------- -------
Crude oil 3,107 25,340 28,447
Petroleum (refined) products 34,913 - 34,913
Other sales 800 - 800
------------------------------ ------------ ------- -------
Total proceeds from sales 38,820 25,340 64,160
------------------------------ ------------ ------- -------
Revenue from external customers is based on the geographical location of customers although all revenues are generated by assets in the Russian Federation. Substantially all of the Group's assets are located in the Russian Federation.
Major customers. For the year 2012, the Group has one major customer to whom individual revenues represent 38 percent of total external revenues (2011: one major customer that represented 39 percent).
20 Cost of Sales
Year ended 31
December
------------------------------------------------- ----------------
2012 2011
------------------------------------------------- ------- -------
Unified production tax 15,766 15,181
Wages and salaries (including payroll taxes
of $2.0 million and $2.6 million for the years
ended 31 December 2012 and 2011, respectively) 9,370 12,411
Depreciation, depletion and amortisation 6,410 6,987
Materials 5,827 6,035
Oil treating, storage and other services 1,758 1,093
Rent, utilities and repair services 1,341 1,277
Other taxes 499 605
Release of provision on inventory (Note 9) - (151)
Other 177 151
Change in finished goods (118) 225
Total cost of sales 41,030 43,814
------------------------------------------------- ------- -------
21 Selling, General and Administrative Expenses
Year ended 31
December
------------------------------------------------------ ----------------
2012 2011
------------------------------------------------------ ------- -------
Wages and salaries 2,577 3,755
Charge of provision for doubtful accounts receivable 1,633 706
Transport and storage services 1,303 1,649
Office rent and other expenses 833 1,007
Professional consultancy fees 710 903
Loading services 445 498
Trip expenses and communication services 444 393
Audit fees 220 442
Share based payments - 457
Other expenses 554 562
------------------------------------------------------ ------- -------
Total selling, general and administrative expenses 8,719 10,372
------------------------------------------------------ ------- -------
The professional services stated above include fees of $8 thousand (for the year ended 31 December 2011: $8 thousand) for tax consultancy services, $4 thousand (for the year ended 31 December 2011: $4 thousand) for other assurance services and $2 thousand (for the year ended 31 December 2011: $2 thousand) for other non-assurance services charged by the Company's statutory audit firm.
Directors' fees for the years ended 31 December 2012 and 2011 were nil and nil, respectively, and do not include amounts related to share-based payments provided to the Group's directors (Note 17).
22 Contingencies, Commitments and Operating Risks
Operating environment. The Russian Federation displays certain characteristics of an emerging market. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory and political developments.
The future economic development of the Russian Federation is dependent upon external factors and internal measures undertaken by the government to sustain growth, and to change the tax, legal and regulatory environment. Management believes it is taking all necessary measures to support the sustainability and development of the Group's business in the current business and economic environment.
Oilfield licenses. The Group is subject to periodic reviews of its activities by governmental authorities with respect to the requirements of its oil field licenses. Management of the Group correspond with governmental authorities to agree on remedial actions, if necessary, to resolve any findings resulting from these reviews. Failure to comply with the terms of a license could result in fines, penalties or license limitations, suspension or revocations. Management believes any issues of non-compliance will be resolved through negotiations or corrective actions without any materially adverse effect on the financial position or the operating results of the Group. Management believes that proved reserves should include quantities that are expected to be produced after the expiry dates of the Group's production licenses. These licenses expire between 2037 and 2067.
The principal licenses of the Group and their expiry dates are:
Field License holder License expiry date ----------------- --------------- -------------------- Okruzhnoye Petrosakh December 2037 Peschanozerskoye Arcticneft December 2067 ----------------- --------------- --------------------
Management believes the licenses may be extended at the initiative of the Group and management intends to extend such licenses for properties expected to produce subsequent to their license expiry dates.
Taxation. Russian tax and customs legislation which was enacted or substantively enacted at the end of the reporting period, is subject to varying interpretations when being applied to the transactions and activities of the Group. Consequently, tax positions taken by management and the formal documentation supporting the tax positions may be successfully challenged by relevant authorities. Russian tax administration is gradually strengthening, including the fact that there is a higher risk of review of tax transactions without a clear business purpose or with tax incompliant counterparties. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.
Russian transfer pricing legislation enacted during the current period is effective prospectively to new transactions from 1 January 2012. It introduces significant reporting and documentation requirements. The transfer pricing legislation that is applicable to transactions on or prior to 31 December 2011, also provides the possibility for tax authorities to make transfer pricing adjustments and to impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20%. Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, all cross-border transactions (irrespective of whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. Significant difficulties exist in interpreting and applying transfer pricing legislation in practice. Any prior existing court decisions may provide guidance, but are not legally binding for decisions by other, or higher level, courts in the future.
Tax liabilities arising from transactions between companies are determined using actual transaction prices. It is possible, with the evolution of the interpretation of the transfer pricing rules, that such transfer prices could be challenged. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the entity.
The Group includes companies incorporated outside of Russia. The tax liabilities of the Group are determined on the assumption that these companies are not subject to Russian profits tax, because they do not have a permanent establishment in Russia. This interpretation of relevant legislation may be challenged but the impact of any such challenge cannot be reliably estimated currently; however, it may be significant to the financial position and/or the overall operations of the entity.
As Russian tax legislation does not provide definitive guidance in certain areas, the Group adopts, from time to time, interpretations of such uncertain areas that reduce the overall tax rate of the Group. While management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that outflow of resources will be required should such tax positions and interpretations be challenged by the relevant authorities. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group.
Management regularly reviews the Group's taxation compliance with applicable legislation, laws and decrees as well as interpretations published by the authorities in the jurisdictions in which the Group has operations. However, from time to time potential exposures and contingencies are identified and at any point in time a number of open matters exist, management believes that its tax positions are sustainable. Management estimates that possible tax exposures that are more than remote but for which no liability is required to be recognised under IFRS, could be up to $5.5 million. These exposures primarily relate to the fact that tax authorities may challenge deductibility of certain expenses and application of certain tax regimes. This estimation is provided for the IFRS requirement for disclosure of possible taxes and should not be considered as an estimate of the Group's future tax liability.
Insurance policies. The Group insured all of its major assets, including oil in stock, plant and equipment, transport and machinery with a total limit of $0.1 million. Also, a liability insurance policy covering property, plant and equipment, hazardous objects, including environmental liability, was put in place with a total limit of $6.5 million and directors and officers liability with total limit of $24.2 million. Staff and personal insurance includes casualty, medical and travel insurance for losses of $0.1 million. The associated expenses are included within selling, general and administrative expenses in the consolidated statement of comprehensive income.
Restoration, rehabilitation and environmental costs. The Group companies have operated in the upstream and refining oil industry in the Russian Federation for many years, and their activities have had an impact on the environment. The enforcement of environmental regulations in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations related thereto. The outcome of environmental liabilities under proposed or future legislation, or as a result of stricter enforcement of existing legislation, cannot reasonably be estimated at present, but could be material. Under the current levels of enforcement of existing legislation, management believes there are no significant liabilities in addition to amounts which are already accrued and which would have a material adverse effect on the financial position of the Group.
Legal proceedings. From time to time and in the normal course of business, claims against the Group may be received. On the basis of its own estimates and both internal and external professional advice, management is of the opinion that no material losses will be incurred in respect of claims in excess of provisions that have been made in these consolidated financial statements.
Other capital commitments. At 31 December 2012, the Group had no significant contractual commitments for capital expenditures.
23 Financial Risk Management
The accounting policies for financial instruments have been applied to the line items below:
At 31 December
----------------------------
2012 2011
------------------------------------------------- --------------- -----------
Financial assets
Loans and receivables: current assets
Loans issued to related parties 422 362
Cash and cash equivalents 5,416 7,722
Trade and other accounts receivable 801 1,183
------------------------------------------------- --------------- -----------
Total loans and receivables: current assets 6,639 9,267
Loans and receivables: non-current assets
Loans receivable: non-current - -
Loans issued to related parties: non-current 519 851
------------------------------------------------- --------------- -----------
Total loans and receivables: non-current
assets 519 851
Financial liabilities
Measured at amortised cost: current liabilities
Trade and other payables 2,864 2,457
Short-term borrowings and current portion
of long-term borrowings 3,004 7,316
------------------------------------------------- --------------- -----------
Total current liabilities measured at
amortised cost 5,868 9,773
Measured at amortised cost: non-current
liabilities
Long-term finance lease obligations 1,673 -
Long-term borrowings - 2,655
Total long-term liabilities measured at
amortised cost 1,673 2,655
------------------------------------------------- --------------- -----------
Financial risk management objectives and policies. In the ordinary course of business, the Group is exposed to market risks from fluctuating prices on commodities purchased and sold, credit risk, liquidity risk, currency exchange rates and interest rates. Depending on the degree of price volatility, such fluctuations in market price may create volatility in the Group's financial results. As an entity focused upon the exploration and development of oil and gas properties, the Group's overriding strategy is to maintain a strong financial position by securing access to capital to meet its capital investment needs.
The Group's principal risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to these limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities.
Market risk. Market risk is the risk that changes in market prices and rates, such as foreign exchange rates, interest rates, commodity prices and equity prices, will affect the Group's financial results or the value of its holdings of financial instruments. The primary objective of mitigating these market risks is to manage and control market risk exposures. The Group is exposed to market price movements relating to changes in commodity prices such as crude oil, gas condensate, petroleum products and natural gas (commodity price risk), foreign currency exchange rates, interest rates, equity prices and other indices that could adversely affect the value of the Group's financial assets, liabilities or expected future cash flows.
(a) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from various exposures in the normal course of business, primarily with respect to the US dollar. Foreign exchange risk arises primarily from commercial transactions, and recognised assets and liabilities when such transactions, assets and liabilities are denominated in a currency other than the functional currency. The Group's overall strategy is to have no significant net exposure in currencies other than the Russian rouble or the US dollar. The carrying amounts of the Group's financial instruments are denominated in the following currencies (all amounts expressed in thousands of US dollars at the appropriate 31 December 2012 and 2011 exchange rates):
Russian US
At 31 December 2012 rouble dollar Total
------------------------------------------- -------- -------- --------
Financial assets
Non-current
Loans issued to related parties - 519 519
Current
Loans issued to related parties - 422 422
Cash and cash equivalents 481 4,935 5,416
Accounts receivable 801 - 801
Financial liabilities
Non-current
Long-term finance lease obligations (1,673) (1,673)
Long-term borrowings - - -
Current
Accounts payable and accrued expenses (2,021) (843) (2,864)
Short-term borrowings and current portion
of long-term borrowings - (3,004) (3,004)
Net exposure at 31 December 2012 (2,412) 2,029 (383)
Russian US
At 31 December 2011 rouble dollar Total
------------------------------------------- -------- -------- --------
Financial assets
Non-current
Loans issued to related parties - 851 851
Current
Loans issued to related parties - 362 362
Cash and cash equivalents 428 7,294 7,722
Accounts receivable 1,183 - 1,183
Financial liabilities
Non-current
Long-term borrowings - (2,655) (2,655)
Current
Accounts payable and accrued expenses (1,753) (704) (2,457)
Short-term borrowings and current portion
of long-term borrowings - (7,316) (7,316)
Net exposure at 31 December 2011 (142) (2,168) (2,310)
In accordance with IFRS requirements, the Group has provided information about market risk and potential exposure to hypothetical loss from its use of financial instruments through sensitivity analysis disclosures. The sensitivity analysis depicted in the table below reflects the hypothetical income (loss) that would occur assuming a 15% change in exchange rates and no changes in the portfolio of instruments and other variables held at 31 December 2012 and 2011, respectively.
Year ended 31 December
Effect on pre-tax profit Increase in exchange 2012 2011
rate
$/RUS 15% 304 (21)
The effect of a corresponding 15% decrease in exchange rate is approximately equal and opposite.
(b) Commodity price risk
The Group's overall commercial trading strategy in crude oil and related products is centrally managed. Changes in commodity prices could negatively or positively affect the Group's results of operations.
The Group sells all its crude oil and petroleum products under spot contracts. Crude oil sold internationally is based on benchmark reference crude oil prices of Brent dated, plus or minus a discount for quality and on a transaction-by-transaction basis for volumes sold domestically. As a result, the Group's revenues from the sales of liquid hydrocarbons are subject to commodity price volatility based on fluctuations or changes in the crude oil benchmark reference prices. Presently, the Group does not use commodity derivative instruments for trading purposes to mitigate price volatility.
(c) Cash flow and fair value interest rate risk
At 31 December 2012 and 2011, the Group's interest rate profiles for interest-bearing financial liabilities were:
31 December
2012 2011
At fixed rate 1,761 330
At floating rate - 7,316
Total interest bearing financial liabilities 1,761 7,646
The Group's financial results are sensitive to changes in interest rates on the floating rate portion of the Group's debt portfolio. If the weighted average interest rates applicable to floating rate debt were to increase by 100 basis points for the years in question, assuming all other variables remain constant, it is estimated that the Group's profit before taxation for the years ended 31 December 2012 and 2011 would decrease by the amounts shown below.
Year ended 31 December
Effect on pre-tax profit 2012 2011
Increase by 100 basis point - 241
The effect of a corresponding 100 basis points decrease in interest rates is approximately equal and opposite.
To the degree possible, the Group centralises the cash requirements and surpluses of controlled subsidiaries and the majority of their external financing requirements, and applies, on its consolidated net debt position, a funding policy to optimise its financing costs and manage the impact of interest-rate changes on its financial results in line with market conditions.
Credit risk. Credit risk refers to the risk exposure that a potential financial loss to the Group may occur if a counterparty defaults on its contractual obligations.
Credit risk is managed on a Group level and arises from cash and cash equivalents, including short-term deposits with banks, loans issued as well as credit exposures to customers, including outstanding trade receivables and committed transactions. Cash and cash equivalents are deposited only with banks that are considered by the Group at the time of deposit to minimal risk of default. Based on Fitch's rating, the credit quality of BNP Paribas in which the Group mostly held its cash and cash equivalents as at 31 December 2012 and 2011 is A+.
The Group's domestic trade and other receivables consist of a large number of customers, spread across diverse industries mainly on Sakhalin Island. All of the Group's export crude oil sales are made to one customer, Petraco, with whom the Group was trading for the past several years (see Note 18). A majority of domestic sales of petroleum products are made on a prepayment basis. Although the Group does not require collateral in respect of trade and other receivables, it has developed standard credit payment terms and constantly monitors the status of trade receivables and the creditworthiness of the customers. The maximum exposure to credit risk is represented by the carrying amount of each financial asset exposed to credit risk. As the majority of customers pay in advance (including Petraco currently) credit risk related to trade debtors is not considered to be significant.
Liquidity risk. Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity has been to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.
The Group prepares various financial and operational plans (monthly, quarterly and annually) to ensure that the Group has sufficient cash on demand to meet expected operational and administrative expenses.
The following tables summarise the maturity profile of the Group's financial liabilities based on contractual undiscounted payments, including interest payments:
Between Between
Less than 1 and 2 and After
At 31 December 2012 1 year 2 years 5 years 5 years Total
Debt at floating rate
- Principal amount of
the borrowings - - - - -
Non-interest bearing
debt - Interest payable 3,004 - - - 3,004
Debt at fixed rate -
Leasing obligations 306 306 918 1,987 3,517
Accounts payable and
accrued expenses 2,864 - - - ,864
Total financial liabilities 6,174 306 918 1,987 9,385
Between Between
Less than 1 and 2 and After
At 31 December 2011 1 year 2 years 5 years 5 years Total
Debt at floating rate
- Principal amount of
the borrowings 7,316 - - - 7,316
Non-interest bearing
debt - Interest payable - 2,915 - - 2,915
Accounts payable and
accrued expenses 2,457 - - - 2,457
Total financial liabilities 9,773 2,915 - - 12,688
Capital management. The primary objectives of the Group's capital management policy is to ensure a strong capital base to fund and sustain its business operations through prudent investment decisions and to maintain investor, market and creditor confidence to support its business activities.
The capital as defined by management at 31 December 2012 and 2011 was as follows:
2012 2011
Total borrowings 3,004 9,971
Less cash in bank and on hand (5,416) (7,722)
Net debt (2,412) 2,249
Total equity 107,563 100,971
Debt to equity ratio (0.02) 0.02
Management considers capital to represent net debt and total equity. Management does not use a specific target debt to equity or gearing ratio when managing the business.
For the capital management, the Group manages and monitors its liquidity on a corporate-wide basis to ensure adequate funding to sufficiently meet group operational requirements. The Group controls all external debts at the Parent level, and all financing to Group entities for the operating and investing activity is facilitated through inter-company loan arrangements, except for the specific project financing, which are taken on the subsidiary level.
There were no changes to the Group's approach to capital management during the year.
24 Balances and transactions with Related Parties
Parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24 Related Party Disclosures. Key management personnel are considered to be related parties. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Substantially all related party balances at 31 December 2012 and 2011 relate to balances with a shareholder and former director of the Company.
Year ended 31
December
2012 2011
Transactions with related parties
Interest income (Note 15) 535 754
Impairment of loans issued to a shareholder
and interest receivable from a shareholder
(Note 8) 459 706
Impairment of other receivables from a shareholder
(Note 8) 1,174 -
Balances with related parties
Loans issued to other related parties 578 755
Interest receivable from other related parties 363 458
Total of loans and interest receivable from
related parties (Note 8, Note 11) 941 1,213
Provision on claims (Note 13) 2,199 2,199
As of 31 December 2012 and 31 December 2011 the Group has an impairment provision against a loan to a related party of $6.3 million and $5.9 million, respectively. This amount relates to a loan to a shareholder and former member of management of the Group, Mr. Rovneiko. This loan is overdue. For accounting purposes management reassessed the carrying value of the loan and impaired this fully. However, this does not reduce the validity of the legal claim against this related party. Management formally demanded repayment of the full amount by 20 May 2011. By 20 May 2011 management did not receive any response from the related party. Considering that according to the loan agreement all disputes shall finally be resolved by arbitration under the Rules of Arbitration of the London Court of International Arbitration (the LCIA) the Company filed a claim to the LCIA in June 2011. This arbitration has confirmed the Company's legal rights, vindicated its position and issued a final award that the sum in the amount of US$6.3 million (including loan amount and interest) and legal cost in the amount of US$1.3 million must be repaid to Urals Energy together with a daily accumulating interest. As of 31 December 2012 the Group has an impairment provision against other receivables from the shareholder of $1.2 million. The Company has formally demanded payment from Mr Rovneiko and is committed to using all appropriate means to collect the outstanding amount.
Loans receivable include amounts due by OOO Komineftegeophysica in the amount of $0.9 million (2011: $1.2 million), where shareholders of the Group hold the majority of shares. The loans bear interest 10%. Loans in the amount of $0.4 million were short term in nature. Loans in the amount of $0.3 million mature on 31 December 2014, in the amount of $0.2 million mature on 31 December 2015. These loans are not secured.
Compensation to senior management. The Group's senior management team compensation totaled $1.4 million and $2.6 million for the periods ended 31 December 2012 and 2011, respectively, including salary, bonuses and severance payments of nil and $0.3, respectively. Stock compensation of nil and $0.5 million, respectively, is included in the senior management team compensation.
25 Events After the Reporting Period
Further to the negotiations of the Republic of Cyprus with the European Commission, the European Central Bank and the International Monetary Fund (Troika) for the purpose of obtaining financing, on 25 March 2013 the Eurogroup has agreed with the Cyprus government a bailout or financial assistance to be provided to Cyprus with a package of measures that included the split of Laiki bank into a good (depositors with amounts up to EUR100k) and bad bank (depositors with amounts over EUR100k); and a conversion of certain percentage of uninsured deposits (amounts over EUR100.000) on Bank of Cyprus depositors into equity instruments. In addition the corporate tax rate may increase from 10% to 12,5%.
These measures are not expected to have any adverse impact on the Company's operations; and the Company did not hold any material bank deposits, at 26 March 2013, in the above two Cypriot banks and as such no loss will arise from these measures.
- Ends -
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR EALKSEDPDEFF
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