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JKX Oil & Gas PLC - Final Results

RNS Number : 2777I
JKX Oil & Gas PLC
31 March 2020
 

FOR IMMEDIATE RELEASE

31 March 2020

JKX Oil & Gas plc

('JKX' or the 'Company')

FINAL RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2019

 

JKX Oil & Gas plc (LSE: JKX), announces its results for the year ended 31 December 2019.

 

2019 Highlights

§ Revenue up to $101.7m (2018:$92.9m) thanks to increased production volume in Ukraine, despite lower gas prices.

§ Profit before tax up to $30.4m (2018:$14.0m).

§ Cash generated from continuing operations up to $41.4m (2018:$37.3m).

§ Year end cash position of $20.6m (2018:$19.2m).

§ Final bond payment made February 2020, making the JKX Group debt free.

§ Average daily production up to 10,748boepd (2018:8,937boepd).

§ In Ukraine, production up more than 50% to 5,584boepd (2018:3,677boepd) due to continued execution of development plan.

§ In Russia, well workover programme completed and average production maintained at 5,158boepd (2018:5,169boepd).

 

For further information please contact:

EM Communications +44 (0) 20 7002 7860

Stuart Leasor, Jeroen van de Crommenacker

 


Chairman's statement

 

I am pleased to be writing to you for the first time as Chairman of your Company, following my appointment in September 2019.

Before discussing the outcome of the 2019 financial year I would like to recognise the challenges that we are currently facing as a result of the Covid-19 pandemic impacting the countries in which we operate. I am pleased that we have been able to take proactive measures to protect our staff, contractors, suppliers and the communities in which we operate as well as increasing the resilience of our business. Further details of our response are set out in the risk section of this report. My thoughts are with all those impacted in this difficult time.

Turning then to the Group's financial performance in 2019, as our newly appointed Chief Executive Officer, Victor Gladun, remarks in his own report the results for the full 2019 year show it to have been another successful year. There has been positive progress in many key areas including operations (production volumes increased by 20% over 2018), finance (profitability increased by over 10% compared to 2018) and portfolio rationalisation. As a consequence the Company's financial position has been further strengthened and it is now debt free, having benefitted from both improved cost control and increased production volumes and is reporting its second consecutive year of profit.

The Board continues to focus on the key areas identified in 2018 and 2019
that will be fundamental to the Company's future success:

§ Restoring a constructive relationship with the shareholders of the Company;

§ Ensuring full operational and financial alignment between all companies of the Group;

§ Operational risk management developing existing fields with proven, low risk technology;

§ Ensuring financial stability by building liquidity reserves and keeping tight control over cost; and

§ Resolving outstanding tax issues

The new Board, appointed following the 2019 Annual General Meeting, consists of a diverse selection of experienced oil and gas industry professionals expert in the Group's key focus areas. This new team has taken the months following its appointment to review the company's business, to engage with its staff and to visit its operations in Russia and Ukraine. We have been impressed by the quality and commitment exhibited, traits that will be key to your company's future success.

Outlook

The Board and management will continue to devote their full attention to our core assets. In addition the Board will actively review material opportunities in our key focus areas where we can leverage our excellent financial and operational performance in order to obtain access to interesting prospects.

As part of this strategy we have already disposed of the Group's Hungarian assets that were considered to be a distraction from the company's core areas of expertise.

Clearly recent developments in the commodities' markets are a significant and growing challenge, not just to those involved in the upstream sector, but to all involved in international business. Additionally, while our assets are robust and strongly cash generative, the situation regarding Covid-19 and its potential impact on the global economy and our operations remains uncertain and is rapidly changing. We continue to monitor the impact of these developments on our industry, our operations and - mostly importantly - our staff and contractors.

During 2020 the Board will seek to foster an active and open communication with all our shareholders in order to explain its strategy and to discuss any concerns that they may have in order to ensure that all decisions are taken in the best interests of the Company as a whole.

People

I am happy to report that our HSE performance in 2019 has been excellent, with no significant incidents recorded.

I also take this opportunity to welcome the appointment of Victor Gladun as CEO and more recently Dmitriy Poddubniy as CFO. With their experience of successfully managing our major operating subsidiary and the Group more generally I am sure that they will bring renewed focus to the senior executive team. I would like to thank JKX's staff for ensuring continuity and smooth operations and in particular our outgoing CFO, Ben Fraser, for his commitment and hard work over the last three years.

Although significant challenges remain, such as the new reality of lower gas prices, international disruption driven by health concerns, technical difficulties in the field and the historical tax cases (where we have had a number of successes this year) I remain optimistic about the Company, whilst being realistic about the challenges that it continues to face.

 

Charles Valceschini
Chairman


Chief Executive's statement

 

2019 was another year of achievement for JKX. Despite the collapse in commodity prices our strong production results allowed us to report healthy profit and cash flow for the second year in a row. The Group is now debt free.

Before discussing our performance in the 2019 financial year I would like to recognise the steps that are being taken by all our staff to keep their colleagues safe and the business running despite the challenges presented by the current Covid-19 pandemic. We have implemented a range of pre-emptive measures, further discussed in the risk section of this report, in recognition of the fact that our people remain our greatest asset and their continuing health our priority.

Our performance

Strong production performance has enabled us to deliver positive financial performance despite the significantly lower gas price that we have experienced in our Ukrainian market where pricing is unregulated and follows international trends. Our Group revenue has exceeded $100m for the first time since 2014 (2019: $101.7m, 2018: $92.9m) and our operational profit before exceptional items is up by over 10% year on year (2019: $23.1m, 2018: $20.7m).

Our operations

In both Ukraine and Russia we have kept our focus on operational risk management developing existing fields step by step with proven, low risk technology. Overall our fields have delivered a 20% year on year increase in Group annual production (2019: 10,748 boepd, 2018: 8,937 boepd).

This increase was underpinned by a more than 50% increase in annual production in Ukraine (2019: 5,584 boepd, 2018: 3,677 boepd) where we continue to enjoy the results of the field development plan we have been executing since late 2018. In 2019 our Ukrainian subsidiary drilled 4 new wells and completed 19 workovers as well as completing a 3D seismic survey in West Mashivska. The continuous use of the same low cost rig sourced from a local contractor for most of the drilling has meant that we have enjoyed improvements in operational performance, and the securing of a second rig with greater capacity allowed us to begin more technically challenging drilling in Rudenkivske in the third quarter of 2019.

Meanwhile in Russia we have managed to maintain production at previous levels (2019: 5,158 boepd, 2018: 5,169 boepd) while at the same time completing the successful workover of two wells using a contracted rig selected by tender in 2018. The addition of these two wells to the producing well stock more than offset the production lost due to the continuing decline of Well 20.

I am pleased to report that in early March 2020 we have agreed a sale of our Hungarian business, which was non-producing, for expected consideration of approximately $2.9m, and that we expect this disposal to be finalised shortly.

Our financial stability

The Group's financial strength has been improved by both the paying down of long term debt and by the reduction in the level of provisions maintained for the outstanding legal cases.

Thanks to the cash generated by our operations we have in February 2019 and February 2020 made the final payments to our bondholders (capital repaid 2019: $5.4m, capital repaid 2020: $5.4m). The Group is now debt free for the first time in ten years.

We have continued our efforts to resolve the long outstanding tax issues that the company has faced and I am pleased to report that four of the eight cases relating to claims for underpayment of rental fees for 2015 made against our Ukrainian subsidiary PPC have now been closed in our favour. This has allowed us to reverse the provisions in our accounts for these four cases. We are continuing to defend our position in the courts in relation to the remaining 2015 rental fee claims and are still awaiting a final ruling from the Supreme Court in relation to a claim for disputed rental fees for 2010.

During 2019 we successfully filed an application for recognition in the Ukrainian courts of an award made to JKX of approximately $12.1m made by the Hague international tribunal and in 2020 we continue to carry out the appropriate procedures for the collection of this award.

Managing our risks

The maintenance of an adequate internal control framework and appropriate risk management are essential to our success. Policies and procedures that have been implemented across the Group are subject to annual review to ensure that they remain appropriate and fit for purpose.

Geological and operational risks are intrinsic to our business. We seek to maintain and improve our internal expertise and supplement this with the use of appropriate contractors and specialists to mitigate these risks. In 2019 we enjoyed predominantly positive results from our new wells and workovers but we know that this cannot be taken for granted and we continue to take a measured approach using proven, low risk technology and diversifying our geological risk across different targets.

During 2019 we have, of course, seen a significant fall in the gas price in Ukraine, in line with the rest of Europe, and at the time of writing there is considerable turbulence in the financial and commodities' markets. We have to remain focussed on control of operational and administrative costs and, as we continue development of our fields in Ukraine, we perform regular economic analysis of our planned capital projects to ensure that profitability is central to our decision making.

In recent weeks we have also seen the escalation of the Covid-19 pandemic globally. Whilst our operations have to date seen little impact we are focused on implementing measures to ensure the safety of our people and contractors and prepare the business to face potential challenges that may emerge. Further details are set out in section 'Principal risks and uncertainties' below.

Outlook

The well workover programme in Russia has been successfully completed meaning that our operations there, with increased profitability and free from further workover capex requirements in the short term, can contribute more positive cash flow to the Group. In addition to this, the agreement of the disposal of the Hungarian assets has allowed management to focus in 2020 on Ukraine where we are engaged in both further development of our existing assets and monitoring of new opportunities.

While I recognise the challenges we face, including the emerging challenges that Covid-19 may present against a backdrop of uncertainty in the oil and gas markets, I take confidence from the talents and continued dedication of our staff and our improved financial strength. I am optimistic about the ability of the Company to prosper and would like to assure all shareholders that the Board and management remain committed to continuing to deliver production growth combined with positive financial results.

 

Viktor Gladun
Director
Chief Executive Officer


Financial review

 

2019's strong operating cash flows have allowed us to pay off our outstanding bonds in February 2020, thus making us debt free - a very important milestone for us as we continue to work to improve the Group's balance sheet.

Revenue

Group revenues*

2019
($m)

2018
($m)

Change
($m)

%
Change

Ukraine

84.3

74.9

9.4

12.6%

Gas

52.3

49.2

3.1

6.3%

Oil

24.3

19.3

5

25.9%

Liquefied Petroleum Gas ('LPG')

6.6

5.6

1.0

17.9%

Other

1.1

0.8

0.3

37.5%

Russia

17.4

17.8

(0.4)

(2.2%)

Gas

16.7

17.2

(0.5)

(2.9%)

Condensate

0.7

0.6

0.1

6.7%

Other

-

0.2

(0.2)

N/A

Total

101.7

92.9

8.8

9.5%

*note this excludes Hungary that is presented as a discontinued operation in the financial statements.

 

Sales prices

2019

2018

Change

%
Change

Ukraine





Gas ($/Mcm)

206

308

(102)

(33%)

Oil ($/bbl)

61

74

(13)

(18%)

LPG ($/tonne)

449

544

(95)

(17%)

Russia





Gas ($/Mcm)

57

58

(1)

(2%)

 

Average exchange rates

2019

2018

Change

 %
Change

Russia (RUB/$)

64.6

62.9

(1.7)

(2.7)

Ukraine (UAH/$)

25.8

27.2

1.4

5.1

 

Results for the year

2019 was another profitable year for the Group. We are pleased to report profit before tax of $30.4m which compares favourably to the profit of $14.0m reported for 2018. Results for both years include net movements in respect of provisions for disputed rental fees for 2010 and 2015 in Ukraine (credit of $8.4m in 2019 and charge of $5.1m in 2018).

Total revenue for 2019 is $101.7m, 9.5% higher than the $92.9m reported in 2018 and above $100m for the first time since 2014. This was achieved despite the 33% lower gas sales prices in Ukraine thanks to the increase in total average daily Group production from 8,937 boepd in 2018 to 10,748 boepd in 2019.

We generated significant EBITDA at the same time as continuing to make substantial investment in the fields in Ukraine and Russia.

2019's strong operating cash flows have allowed us to pay off our outstanding bonds in February 2020, thus making us debt free - a very important milestone for us as we continue to work to improve the Group's balance sheet.

Ukraine revenues

The $9.4m increase in total revenues was due to higher sales volumes offset by lower sales prices, as shown in the table.

The average gas sales price in dollar terms in 2019 was 33.1% lower than in 2018. This is in line with international market trends. Total gas sales volumes increased by 58% from 159,887 Mcm in 2018 to 257,030 Mcm in 2019, primarily due to the gas production volume having increased 54.9% from 181,482 Mcm in 2018 to 280,673 Mcm in 2019. The increase in production was a result of the on-going drilling and workover activity started in 2018 and continued throughout 2019. For more detail please refer to the Regional operations' update.    

The average oil sales price decreased from $74/bbl in 2018 to $61/bbl in 2019 and total oil sales volumes for the year increased 46.2% from 261,420 barrels in 2018 to 382,200 barrels in 2019. Oil production volume increased 36.3% from 274,087 barrels in 2018 to 373,616 barrels in 2019.

LPG sales volumes were 10,294 tonnes in 2018 compared to 13,636 tonnes in 2019, with sales prices being lower in 2019 ($449/tonne in 2019 compared to $544/tonne in 2018).

Inventory held at 31 December 2019 (14 million cubic metres of gas and 27 thousand barrels of oil) had an estimated sales value of $4.1m using average sales prices for December 2019.

A portion of production comes from wells owned by third parties, operated under service agreements with UkrGasVidobuvannya and under rental agreements with NAK Nadra Ukrayini and Ukrnafta. This production is subject to sale in the normal way, with payments being made to the well owners in accordance with the service and rental agreements.

Russia revenues

Total revenues in Russia were flat year-on-year as gas volumes were maintained at similar levels (2019: 314,446 Mcm, 2018:316,996 Mcm) despite the intensive workover programme. The benefit of the 1.4% increase in the average rouble gas sales price on 1 July 2019 was offset by the slightly weaker Rouble in 2019.

Cost of sales

Exceptional items relate to provisions for disputed rental fees. A release of $14.4m of provisions due to the closure of some of the 2015 rental fee claims in favour of our subsidiary was offset by an additional charge of $6.0m reflecting updated interest calculations in relation to the rental fee claims still provided for as set out in Note 18.

Cost of sales before exceptional items for 2019 totalled $64.8m (2018:$57.5m), including:

§ $23.5m of production taxes, which were $1.7m higher than in 2018 due to the higher production taxes incurred in Ukraine (2019:$21.8m, 2018:$20.1m) where we had higher volumes. Only $1.8m of the total production taxes relate to Russia (2018: $1.8m) where the mineral extraction tax rate for wells deeper than 5,000m has remained at 340 Roubles/Mcm.

§ $22.9m of operating costs, of which $14.7m relates to Ukraine (2018:$12.1m), $7.0m relates to Russia (2018:$8.6m) and $0.6m relates to central costs. The increase in operating costs in Ukraine is mainly due to the introduction of the gas capacity fee (2019:$1.4m, 2018:nil) and the overall increase in field activity.

§ $18.4m of depreciation, depletion and amortisation charge (2018:$14.7m) which is larger due to the higher production volumes and the recent higher levels of capital expenditure. Analysis showing production costs, production taxes and netbacks for both our Ukrainian and Russian operations is shown on pages 7 and 8.

Administrative expenses

Administrative expenses were $13.2m in 2019, comparing favourably to those of $13.9m in 2018. The decrease is mainly due to staff cost reductions resulting from a right-sizing exercise carried out during 2018 and lower legal and professional fees. In the Company's London office we exited the long-term lease of one of the office floors in May 2019 and closed a data centre.

Finance income and costs

Finance costs decreased from $2.5m in 2018 to $2.1m in 2019. This mainly consists of the bond interest which reduced from $2.1m to $1.1m due to the repayment of principal outstanding in February 2019. Finance costs also includes unwinding of discount of provisions for site restoration of $0.6m (2018: $0.4m).

Finance income of $0.9m (2018: $0.9m) comprises income from bank deposits.

Taxation

The total tax charge for 2019 is $10.2m (2018: $2.2m) comprising a current tax charge of $6.6m (2018: $5.5m) which relates to Ukraine and a deferred tax charge of $3.6m (2018: credit $3.2m). The increase in current tax charge reflects a higher profitability in Ukraine. The deferred tax relates to movements in various deferred tax assets and liabilities in Ukraine and Russia as set out in Note 26 to the financial statements.

Discontinued operation

The discontinued operation is the Hungarian business. The related gain reported reflects both the running costs incurred during 2019 and the part reversal of a previous impairment charge following the sale of the business currently expected to be valued at approximately $2.9m that was agreed in March 2020.

Capital Expenditure

We continue to balance the need to improve liquidity while also recognising the need for long-term investment. Of the $28.8m oil and gas capital expenditure incurred during the year (2018:$11.3m), $19.9m relates to Ukraine where field development continued as planned. $8.9m relates to Russia, where the well workover programme was completed.

Cash flows

During the year the Group's available cash balances in continuing operations remained approximately at the same level ($20.6m at 31 December 2019 compared to $19.2m at 31 December 2018) while at the same time decreasing its borrowings from $11.0m to $5.7m and investing significant capital expenditure in our operations in 2019. This was achieved as a result of strong operating cash flow of $41.4m (2018:$37.3m) from continuing operations, almost all of it generated in Ukraine. Use of cash during the year is as shown in the cash bridge below. Net cash outflow from financing activities in the period mainly relates to the $5.3m payment to the bondholders in February 2019. No dividends were paid to shareholders in the period (2018: nil).

Cash flows ($m)

31 Dec 2018 Cash balance

Cash from continuing operations


Interest
paid

Income
tax
paid

Capex
additions
Group


Bond
repayment

Interest received
and other

31 Dec 2019
Cash balance

19.2

41.4

(1.1)

(7.1)

(27.4)

(5.3)

0.9

20.6

 

Liquidity outlook

After a final payment of $5.8m to bond holders in February 2020 the Group is now debt free. Our subsidiary in Ukraine still has a 24 month UAH280m ($11.8m) revolving credit line and a UAH50m ($2.1m) overdraft facility with Tascombank, neither of which are currently being used. Both facilities have been renewed until December 2021 and can be drawn down subject to credit approvals by the bank. In addition to our continued focus on cost control, other options available to us to improve our liquidity include the execution of forward sales in Ukraine and deferring capital expenditure if required. We are not burdened by significant field development commitments in the short or long term.

We continue to maintain provisions in respect of 2010 and 2015 rental fee claims ($15.9m and $25.4m respectively). While we still wait for 2010 case resolution, there has been progress with some of the 2015 cases with four having been closed in our favour. The provision has been adjusted accordingly with a $14.4m release offsetting the increase in provision due to interest calculation (see Note 18 to the consolidated financial statements for detail). The Group's expectation is that a final hearing with respect to the 2010 rental fee claim will take place in 2020 and the full provision for it has therefore been reported under current liabilities. It is expected that the final hearings in respect of the remaining 2015 rental fee claims will take place in 2021. The $25.4m provision for the 2015 rental fee claims therefore has been reported under non-current liabilities.

The international arbitration award, directing the State of Ukraine to pay $11.8m plus interest and $0.3m costs to JKX as described in the 2018 Annual Report, has now been successfully legally recognised in Ukraine and JKX has filed for collection. No possible future benefit that may result from this award will be reflected in the accounts until there is further clarity on the process for, and likely success of, enforcing collection.

Both our Ukrainian and Russian operations remain cash flow positive, generating sufficient cash to cover the Group's costs and investment programmes and, provided we do not encounter extended periods of severe operational disruption as a result of Covid-19, the Group's cash flows are forecast to be sufficient to meet potential rental fees should they arise without the need to access the conditional Tascom facilities or pursue other options to maintain liquidity. Thanks to the successful completion of its workover programme in 2019, our Russian subsidiary is now well placed to contribute increased cash flows to the Group.

The consolidated financial statements have been prepared on a going concern basis (see Note 2 to the consolidated financial statements) which highlights a material uncertainty over going concern as a result of Covid-19. However, whilst the impact of the pandemic is uncertain, as it is for almost every business, for the first time in several years the group has a suitably stable financial position from which to better manage challenges that may arise and also then take advantage of opportunities in our key markets.

 

Ben Fraser
Chief Financial Officer

 


Operations review

 

Group production

In 2019 group average production was 10,748 boepd (2018: 8,937 boepd), an overall increase in production of 20%. The increase in production year-on-year was a result of the ongoing drilling and workover programme in Ukraine.


boepd

Workovers*

Sidetracks

New wells

Cash generating unit

2019

2018

2019

2018

2019

2018

2019

2018

Novomykolaivske complex

4,127

2,414

17

18

0

2

2

0

Elyzavetivske licence

1,457

1,263

2

2

0

0

2

1

Total Ukraine

5,584

3,677

19

20

0

2

4

1

Russia

5,158

5,169

2

0

0

0

0

0

Hungary

6

91

0

0

0

0

0

0

Total Group

10,748

8,937

21

20

0

2

4

1

* Includes abandonments.

 

Gas and oil production increased year-on-year in both cash generating units in Ukraine and stayed flat in Russia.


Gas, Mcmd

Oil, bopd

boepd

Cash generating unit

2019

2018

2019

2018

2019

2018

Novomykolaivske complex

527

286

1,025

731

4,127

2,414

Elyzavetivske licence

242

211

33

20

1,457

1,263

Total Ukraine

769

497

1,058

751

5,584

3,677

Russia

867

868

59

58

5,158

5,169

Hungary

1

14

1

7

6

91

Total Group

1,637

1,379

1,118

816

10,748

8,937

 

Ukraine

Novomykolaivske complex production and operations


boepd

Workovers

Sidetracks

New wells

Field name

2019

2018

2019

2018

2019

2018

2019

2018

Ignativske

3,069

1,395

7

6

0

1

1

0

Molchanivske

355

346

5

2

0

1

0

0

Novomykolaivske

398

286

1

2

0

0

1

0

Rudenkivske

305

387

4

8

0

0

0

0

Novomykolaivske complex

4,127

2,414

17

18

0

2

2

0

 

The increase in Novomykolaivske complex production year-on-year was mostly attributed to production from the IG103 sidetrack drilled at the end of 2018 and a new well, IG142, drilled in 2019 in the Ignativske field. The increase in oil production in the Novmykolaivske complex was mostly attributed to a new well, NN81, drilled in the Novomykolaiske field.

Outlook

Following the success of IG103 sidetrack and IG142 in the Devonian reservoir of the Ignativske field there are follow-up wells planned to this reservoir in 2020. One of these is a new well, IG143, which is targeting a separate fault block to the west of IG103 ST.

Following the success of NN81 in 2019 finding a new oil reservoir in the V16 there are follow-up wells planned to target the V16 both in the Ignativske and Novomykolaivske licenses.

In Rudenkivske, the completion of R101 sidetrack is on-going and is expected to be completed in April 2020. Meanwhile a subsurface study is being carried out by an external contractor in order to refine the field development plan for the Devonian in Rudenkivkse. Once this study is complete in Q2 2020 the results will be used to plan a well to the Devonian in Rudenkivske.

Elyzavetivske licence production and operations


boepd

Workovers

New wells


2019

2018

2019

2018

2019

2018

Elyzavetivske

996

1,177

0

1

0

1

West Mashivska

462

86

2

1

2

0

Elyzavetivske Licence

1,458

1,263

2

2

2

1

 

The increase in production from the Elyzavetivske license was mainly the result of the successful completion of the first new well in the West Mashivske field, WM3 which is producing from the A8 reservoir. A second well in the West Mashivske field was also completed and is producing from the G8 reservoir.

Outlook

In 2020 methods of increasing production from the G8 in WM4 will be investigated. Compression is also being investigated for the Elizavetivske plant which would benefit both the wells in the Elizavetivske and West Mashivske fields.

Further subsurface work will be carried out in order to determine whether there are any opportunities for further drilling in the West Mashivske field.

Russia

Koshekhablskoye licence production and operations


boepd

Worovers

Well name

2019

2018

2019

2018

Well 5

263

0

1

0

Well 18

78

0

1

0

Well 20

1,353

1,733

0

0

Well 25

1,735

1,693

0

0

Well 27

1,672

1,665

0

0

Koshekhablskoye field*

5,158

5,169

2

0

* Includes Well 15 production.

 

In 2019 both Well 5 and Well 18 were successfully worked over and sidetracked. Well 5 production was significantly less than expected whereas production from Well 18 met expectations after only one acid job. The rig has since been demobilised.

 


Principal risks and uncertainties

 

The Board has completed a robust assessment of the most significant risks and uncertainties which could impact the business model, long-term performance, solvency or liquidity, and the results are below.

The principal risks set out on the following page are not set out in any order of priority, are likely to change and do not comprise all the risks and uncertainties that the Group faces.

What is the risk?

How do we manage it?

Liquidity, funding, and portfolio management.

Description: As for any other exploration and production company, our fields are prone to natural production decline. Our ability to ensure long-term sustainable production depends on having sufficient funds to invest in our development and efficient allocation of capital on investment projects or acquisitions.

It is important to maintain sufficient liquidity to allow for operational, technical, commercial, legal, and other contingencies.

Having sufficient funds to invest in development projects or other growth opportunities is subject to not only cash flow generated by existing operations, but also access to external capital (such as equity or debt financing) or ability to carry out corporate transactions (such as mergers, acquisitions, or divestitures).

Impact: Inability to build or maintain sufficient liquidity may result in increased risk of having insufficient funds on hand to address unanticipated cash outflows, need to suspend planned payments to third parties, or other unplanned actions to urgently build sufficient liquidity.

Poor capital allocation decisions, inability to access external sources of capital or execute corporate transactions may result in long-term decline in production and cash flow from existing operations and further reduced ability to engage in new development projects.

Although the group has been debt free since February 2020 this risk remains.

 

Liquidity is accumulated by deferring high-risk investment projects and minimizing costs. Projects are analysed and ranked across the Group and capital is allocated accordingly. All significant investment decisions are subject to Board approval and taken with due consideration to funding availability. These decisions are taken within the context of the longer term field development plans.

In addition in December 2019 PPC, our subsidiary in Ukraine, has renewed a 24 month UAH280m ($11.8m) revolving credit line and a UAH50m ($2.1m) overdraft facility with Tascombank, neither of which are currently being used. We are confident that this facility can be renewed again for 2022. Other liquidity tools include the ability to make forward sales in Ukraine.

Four of the 2015 rental fee cases have been closed in PPC's favour. Furthermore we have improved our understanding of the 2010 and the remaining 2015 rental fee claims and ensured that we have the resources to meet these potential liabilities if necessary. In particular, careful consideration has been given to the earliest dates that courts may conclude that PPC may be required to settle any or all of the various claims in the event that court hearings proceed without undue delay. The Group's expectation is that a final hearing with respect to the 2010 rental fee claim will take place in 2020 and that final hearings in respect of the remaining active 2015 rental fee claims will take place in 2020 and 2021.

Geopolitical and fiscal.

Description: The Group's oil and gas operations are located in Ukraine and Russia and the oil, gas and condensate that we produce is sold into their domestic markets.

There are geopolitical risks related to these countries and the relationship between them.

Some of such risks may be related to changes in taxes, capital controls, laws and regulations, political situation, or investor sentiment.

Both countries have relatively weak judicial systems that are susceptible to outside influence, and it can take an extended period for the courts to reach final judgment.

Both countries display emerging market characteristics where the right to production can be challenged by State and non-State parties. The business environment is such that a challenge may arise at any time in relation to the Group's operations, licence history, compliance with licence commitments and/or local regulations.

Local legislation constantly evolves as the governments attempt to manage the economies and business practices regarding taxation, banking operations and foreign currency transactions. The constantly evolving legislation can create uncertainty for local operations if guidance or interpretation is not clear.

Geopolitical tensions between Ukraine and Russia, political instability and military action in parts of Ukraine have negatively impacted its economy, financial markets and relations with the Russian Federation. Any continuing or escalating military action in eastern Ukraine could have a further adverse effect on the economy.

Impact: If Management's interpretation of tax legislation does not align with that of the tax authorities, the tax authorities may challenge transactions which could result in additional taxes, penalties and fines which could have a material adverse effect on the Group's financial position and results of operations.

PPC has at times sought clarification of their status regarding a number of rental fees. PPC continues to defend itself in court against action initiated by the tax authorities regarding rental fees for August to December 2010 and for January to December 2015. In addition, in February 2017, the Company was awarded approximately $11.8m in damages plus interest and costs of $0.3m by an international arbitration tribunal pursuant to a claim made against Ukraine under the Energy Charter Treaty. This award has been recognised in Ukraine and the Group is following procedures for its collection.

 

The Group's operations and financial position may be adversely affected by interruption, inspections and challenges from local authorities, which could lead to remediation work, time-consuming negotiations and suspension of production licences.

In respect of the 2010 rental fee claims and 2015 rental fee claims, provisions of $15.9m and $25.4m respectively, have been recognised in these financial statements to reflect the Company's estimate of the potential liability. Except for this $41.3m provision, the Group's financial statements do not include any other adjustments to reflect the possible future effects on the recoverability, and classification of assets or the amounts or classifications of liabilities that may result from these tax uncertainties.

The Company continues to work through the proper processes for enforcement of collection of the international arbitration award. A key priority for the Group is to maintain transparent working relationships with all key stakeholders in our significant assets in Ukraine and Russia and to improve the methods of regular dialogue and on-going communications locally.

Our strategy is to employ skilled local staff working in the countries of operation and to engage established legal, tax and accounting advisers to assist in compliance, when necessary. The Group endeavours to comply with all regulations via Group procedures and controls or, where this is not immediately feasible for practical or logistical considerations, seeks to enter into dialogue with the relevant Government bodies.

Reservoir and operational performance.           

Description: Subsurface and operational risks are inherent to our business. The reservoir performance cannot be predicted with certainty, and operations required for hydrocarbon production are subject to risks of interruption or failure.

Production from our mature fields at the Novomykolaivske Complex in Ukraine require a high level of maintenance and intervention to minimize the production decline. In Russia, acidization of deep, high pressure and high temperature wells and other well maintenance procedures to stabilise production are required, increasing risk of failure.

Impact: Accurate reservoir performance forecasts from fields in Ukraine and Russia are critical in achieving the desired economic returns and to determine the availability and allocation of funds for future investment into the exploration for, or development of, other oil and gas reserves and resources.

If reservoir performance is lower than forecast, sufficient finance may not be available for planned investment in other development projects which will result in lower production, profits and cash flows.

Inability to ensure continuous operation of wells, flowlines, production facilities and successful execution of drilling, workover, repair, enhancement interventions may result in lower production, profits and cash flows.

 

There is daily monitoring and reporting of the well and plant performance at all our fields. Production data is analysed by our in-house technical expertise. This supports well intervention planning and further field development.

Our subsurface and operations specialists and industry-recognised personnel are part of the daily monitoring and reservoir management process of our field and assets.

Production forecasts generated for future development opportunities are risked to take account of geological uncertainty. Operational risks are taken into account by adding a percentage of contingency to the duration and cost of the planned development action. The percentage of contingency added is based on both historical experience and perceived difficulty of the development action.

Financial discipline and governance.

Description: The Group has a presence in four countries with major operations in Russia, Ukraine, and the United Kingdom. Such complex structure requires complex governance and control procedures to be in place to ensure appropriate level of financial discipline and controls, as well as delegation of authority along the corporate and management structure.

From 2015 to 2019 the Group underwent several major Board and management changes, changes of advisors and contractors, as well as significant reduction of staff across its operations. These changes require additional efforts to ensure proper implementation of governance, controls, and financial discipline procedures.

Impact: Failure to maintain an appropriate level of financial discipline, governance and controls may lead to unnecessary or inappropriate spending, lack of control over procurement, contracting, investing decisions, and exposure to increased legal, regulatory, or financial risks.

 

During 2018 new financial controls were implemented and corporate governance was enhanced, including through more frequent and detailed management reporting to the Board of Directors.

A Group Policy Manual has been implemented across the group. It is subject to annual review and revision by the Board to ensure that governance and control procedures are sufficient to ensure the appropriate level of financial discipline and controls, as well as delegation of authority along the corporate and management structure.

Health, safety, and environmental risks.

Description: We are exposed to a wide range of significant health, safety, security and environmental risks influenced by the geographic range, operational diversity and technical complexity of our oil and gas exploration and production activities.

The Group has not assessed Climate Change as being a significant risk to its business in the foreseeable future. We monitor supply and demand forecasts for our products from a variety of sources and Climate Change does not appear as a major cited factor. If political responses to Climate Change actually lead to major reductions in coal - fired European electricity generation, the Group may benefit from substitution by cleaner gas - fired plant.

Impact: Technical failure, non-compliance with existing standards and procedures, accidents, natural disasters and other adverse conditions where we operate, could lead to injury, loss of life, damage to the environment, loss of containment of hydrocarbons and other hazardous material, as well as the risk of fires and explosions. Failure to manage these risks effectively could result in loss of certain facilities, with the associated loss of production, or costs associated with mitigation, recovery, compensation and fines. Poor performance in mitigating these risks could also result in damaging publicity for the Group.

 

Health, safety and the environment is a priority of the Board who are involved in the planning and implementation of continuous improvement initiatives. A London-based HSECQ Manager reports directly to Board of Directors.

The Group HSECQ Manager is responsible for maintaining a strong culture of health, safety and environmental awareness in all our operational and business activities. The HSECQ Manager reports to the Board with details of Group performance.

Operations in Ukraine, Russia and Hungary all have a dedicated HSECQ Team of local personnel led by an HSECQ Manager who reports to the HSECQ Director for that particular region.

All locations have HSE Management Systems modelled on the ISO 9000 series, OHSAS 18001 and ISO 14001.

Appropriate insurance policies, provided by reputable insurers, are maintained at Group level to mitigate the Group's financial exposure to any unexpected adverse events arising out of the normal operations.

Asset integrity.

Description: Our operations depend on maintaining and adhering to licence requirements and related regulations set by government authorities in countries we operate in.

Impact: Failure to comply with licence obligations and other regulations or requirements may result in our licences being suspended or revoked which will require us to suspend production and operations.

 

Status of our licences and relevant licence obligations are monitored on a country level.

In 2018 the deadline for the Callovian well drilling commitment in Russia, which is the Group's largest single commitment, was extended until 2025.

Major breach of business, ethical, or compliance standards.

Description: The Company is subject to numerous requirements and standards including UK Bribery Act, UK Listing Rules, UK Corporate Governance Code, UK Listing Rules, Disclosure and Transparency Rules, among others. Additionally, some of our stakeholders, such as financial institutions, may require us to comply with other requirements or ask us to provide information on our business, operations, employees and shareholders as part of Know Your Client ("KYC") procedures.

Impact: Failing to comply with onerous regulations and requirements, such as failure to implement adequate systems to prevent bribery and corruption, could result in prosecution, fines or penalties imposed on the Company or its officers, suspension of operations or listing.

Inability to clear KYC procedures to satisfaction of the third parties may result in refusal to engage in business relationships with the Company.



The CFO is responsible for compliance and, with the support of the Board, implements compliance-related activities and procedures.

Such activities focus on training, monitoring, risk management, due diligence and regular review of policies and procedures.

We prohibit bribery and corruption in any form by all employees and by those working for and/or connected with the business. Employees are expected to report actual, attempted or suspected bribery or other issues related to compliance to their line managers or through our independently managed confidential reporting process, which is available to all staff as well as third parties.

In 2017 we engaged an independent consultant to assess our anti-bribery and corruption ("ABC") policies, procedures, and practices and in 2018 we engaged KPMG to conduct a forensic review of procurement of legal services and subsequent payments made to legal advisors in Ukraine in 2017. Recommendations arising from both have been implemented to further strengthen our ABC framework. This included completion of a full Bribery Risk Assessment.

In dealing with the third parties, our policy is to maximize transparency and provide all information available to address KYC-related procedures and requests.

Commodity prices and FX fluctuations.

Description: JKX is exposed to international oil and gas price movements, policy developments in Russia which may affect the regulated gas price, and movements in exchange rates. Such changes will have a direct effect on the Group's trading results.

Gas prices in Ukraine are closely aligned with gas prices in Europe. Ukraine does not currently purchase gas from Russia directly. Change in gas import flows may have an impact on gas prices in Ukraine, and a prolonged period of low gas prices would impact the Group's liquidity.

In Russia, from 1 July 2019 the regulated price to which our sales contract is tied has increased by 3.9% however, prevailing prices remain significantly lower than in Europe due to existing regulations.

In Ukraine PPC sells the oil it produces at prices determined by a combination of the global oil market and local market factors.

During 2019, both the Hryvnia and the Rouble strengthened moderately.

Impact: A period of low oil and/or gas prices could lead to impairments of the Group's oil and gas assets and may impact the Group's ability to support its field development plans and reduce shareholder returns.

 

JKX's policy is not to hedge commodity price exposure on oil, gas, LPG or condensate and not to hedge foreign exchange risk.

JKX attempts to maximise its realisations versus relevant benchmarks while keeping credit risk to a minimum by selling mostly on spot markets and on a prepayment basis.

As commodity prices in Ukraine closely follow international benchmarks, significant changes in the exchange rates are reflected in commodity prices providing a natural hedge.

In Russia, the vast majority of gas produced is sold to a single local gas trading company through a long term gas sales contract with prices set in Roubles. Sales price for gas is fixed and is subject to increase according to changes in a tariff set by relevant regulatory bodies. The Company continues to seek other sales opportunities in Russia to improve realisations.

The Group attempts to match, as far as practicable, receipts and payments in the same currency and also follow a range of commercial policies to minimise exposures to foreign exchange gains and losses.

Global Covid-19 pandemic.

Description: The Group's oil and gas operations are located in Ukraine and Russia with a head office located in the United Kingdom.  All locations are suffering from increasing levels of Covid-19 infection and in due course there may be increasing disruption of normal working patterns. The national and local governments in all locations are recommending or implementing increasingly severe restrictions in order to manage the situation.

In view of the risk the Group's primary objectives include:

i)      Protecting the health of the Group's staff, contractors and suppliers and those in the communities from which they are drawn;

ii)     Maintaining the Group's operations and business more generally and ensure that high levels of operational safety are maintained; and

iii)    Maximising sales prices in an unpredictable market.

Impact: Increasing levels of infection and restrictions on movement have the potential to negatively impact the Group and specifically the operating companies. These impacts may include a reduction in the number of staff fit to work, a reduced ability to conduct production operations, contractors and suppliers being unable to provide the necessary support, a reduction in demand and lower sales prices. If these risks crystallise there may be business constraint or interruption, reduced production, a fall in demand and reduced sales prices and a consequent reduction in the Group's ability to commit to new capital expenditure.

 

In order to manage this risk the Group (and in particular the 2 operating units, PPC and YGE) have undertaken a holistic review of the likely impact on their businesses and have implemented a range of escalating and proportionate responses. These responses include:

a)     Undertaking awareness-raising in all locations;

b)     Introducing and enforcing social distancing and remote-working, cancellation of business trips and meetings and the use of remote working solutions;

c)     Enhanced cleaning regimes for certain Group facilities;

d)     Temperature screening of staff and contractors at entry points;

e)     Active liaison with local regional and national government;

f)     Securing normal business activities including oil and LPG loading, drilling and work over activity;

g)     Taking steps to minimise exposure to further commodity price decrease; and

h)    Reducing costs to maintain Group liquidity.

 


 

Consolidated income statement

For the year ended 31 December 2019

 

 

Note

2019
$000

2018
$000

Revenue

4

101,744

92,873

Cost of sales

 



Exceptional item - net reversal of provision/(provision for production based taxes)

18

8,410

(5,055)

Other production based taxes

19

(23,518)

(21,857)

Other cost of sales

19

(41,264)

(35,629)

Total cost of sales

19

(56,372)

(62,541)

Gross profit

 

45,372

30,332

Administrative expenses

 

(13,207)

(13,945)

Loss on foreign exchange

 

(615)

(711)

Profit from operations before exceptional items

 

23,140

20,731

Profit from operations after exceptional items

 

31,550

15,676

Finance income

20

857

908

Finance costs

21

(2,054)

(2,510)

Fair value movement on derivative liability

12

62

(59)

Profit before tax

 

30,415

14,015

Taxation - current

25

(6,561)

 (5,478)

Taxation - deferred

 



- before the exceptional items

25

(1,968)

1,472

- on the exceptional items

25

(1,677)

1,761

Total taxation

25

(10,206)

(2,245)

Profit from continuing operations (attributable to equity holders of the parent company)

 

20,209

11,770

Profit from discontinued operation (attributable to equity holders of the parent company), net of tax

14

2,004

3,487

Profit for the year attributable to equity shareholders of the parent company

 

22,213

15,257

 

The above consolidated income statement should be read in conjunction with the accompanying notes.



 


Note

27

2019
$000

2018
$000

Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the parent company:




Basic profit per 10p ordinary share (in cents)




-after exceptional items

27

12.02

7.06

-before exceptional items

27

8.02

9.04

Diluted profit per 10p ordinary share (in cents)

 



-after exceptional items

27

12.02

6.67

-before exceptional items

27

8.02

8.54

Earnings per share for (loss) /profit from discontinued operations attributable to the ordinary equity holders of the parent company:




Basic profit/(loss) per 10p ordinary share (in cents)








-after exceptional items

27

1.19

2.09

-before exceptional items

27

(0.14)

2.09

Diluted profit/(loss) per 10p ordinary share (in cents)

 



-after exceptional items

27

1.19

1.98

-before exceptional items

27

(0.14)

1.98

Earnings per share for profit attributable to the ordinary equity holders of the parent company:

 



Basic profit per 10p ordinary share (in cents)

 

 


-after exceptional items

27

13.21

9.15

-before exceptional items

27

7.88

11.13

Diluted profit per 10p ordinary share (in cents)

 

 


-after exceptional items

27

13.21

8.65

-before exceptional items

27

7.88

10.51

 

The above consolidated income statement should be read in conjunction with the accompanying notes.


Consolidated statement of comprehensive income

For the year ended 31 December 2019

 


2019
$000

2018
$000

Profit for the year

22,213

15,257

Other comprehensive income to be reclassified to profit or loss in subsequent periods when specific conditions are met



Currency translation differences

21,481

(19,475)

Other comprehensive income that will not be reclassified to profit or loss in subsequent periods



Remeasurements of post-employment benefit obligations

(94)

(22)

Changes in the fair value of equity investments at fair value through other comprehensive income

500

-

Other comprehensive income for the year, net of tax

21,887

(19,497)

Total comprehensive  income for the year attributable to equity shareholders of the parent company

44,100

(4,240)




Continuing operations

42,096

(7,587)

Discontinued operations

2,004

3,347

 

 

The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.


Consolidated statement of financial position

As at 31 December 2019

 

 

Note

2019
$000

2018*
$000

ASSETS




Non-current assets




Property, plant and equipment

5(a)

215,728

175,112

Deferred tax assets

26

8,012

10,419

Investment

6

500

-


 

224,240

185,531

Current assets




Inventories

7

6,915

4,352

Trade and other receivables

8

3,931

5,111

Cash and cash equivalents

9

20,629

19,182


 

31,475

28,645

Assets classified as held for sale

14

3,187

1,237

Total current assets

 

34,662

29,882

Total assets

 

258,902

215,413

LIABILITIES




Current liabilities




Current tax liabilities

 

(1,941)

(2,214)

Trade and other payables

10

(14,158)

 (10,782)

Borrowings

11

(5,683)

(5,962)

Provisions

18

(15,861)

(12,645)

Lease liabilities

10

(1,461)

-


 

(39,104)

(31,603)

Liabilities of disposal group classified as held for sale

14

(287)

(775)

Total current liabilities

 

(39,391)

(32,378)

Non-current liabilities




Provisions

18

(31,769)

(35,673)

Borrowings

11

-

(5,041)

Derivatives

12

-

(62)

Defined pension benefit plan

 

(859)

(577)

Lease liabilities

10

(628)

-

Deferred tax liabilities

26

-

 -


 

(33,256)

(41,353)

Total liabilities

 

(72,647)

(73,731)

Net assets


186,255

141,682

EQUITY




Share capital

16

26,666

26,666

Share premium

 

97,476

97,476

Other reserves

17

(150,736)

(172,623)

Retained earnings

 

212,849

190,163

Total equity

 

186,255

141,682

Comparative amounts in respect of inventories and property, plant and equipment have been reclassified for comparability with 2019. Please refer to Note 2.

 

These financial statements were approved by the Board of Directors on 31 March 2020 and signed on its behalf by:

Victor Gladun        Chief Executive Officer        Ben Fraser             Chief Financial Officer

The above consolidated statement of financial position should be read in conjunction with the accompanying notes


Consolidated statement of changes in equity

For the year ended 31 December 2019

 


Attributable to equity shareholders of the parent



Share
capital
$000

Share
premium
$000

Retained
Earnings
$000

Other reserves
(Note 17)
$000

Total
equity
$000







At 1 January 2019

26,666

97,476

190,163

(172,623)

141,682

Profit for the year

-

-

22,213

-

22,213

Exchange differences arising on translation of overseas operations

-

-

-

21,481

21,481

Remeasurement of post-employment benefit obligations

-

-

-

(94)

(94)

Changes in the fair value of equity investments at fair value through other comprehensive income

-

-

-

500

500

Total comprehensive income attributable to equity shareholders of the parent

-

-

22,213

21,887

44,100

Transactions with equity shareholders of the parent






Share-based payment charge

-

-

14

-

14

Exercise of share options (Note 15)

-

-

17

-

17

Sale of shares held by Employee Benefit Trust (Note 15)

-

-

442

-

442

Total transactions with equity shareholders of the parent

-

-

473

-

473

At 31 December 2019

26,666

97,476

212,849

(150,736)

186,255

 







At 1 January 2018

26,666

97,476

174,893

(153,126)

145,909

Profit for the year

-

-

15,257

-

15,257

Exchange differences arising on translation of overseas operations

-

-

-

 (19,475)

 (19,475)

Remeasurement of post-employment benefit obligations

-

-

-

 (22)

 (22)

Total comprehensive loss attributable to equity shareholders of the parent

-

-

15,257

(19,497)

(4,240)

Transactions with equity shareholders of the parent






Share-based payment charge

-

-

13

-

13

Total transactions with equity shareholders of the parent

-

-

13

-

13

At 31 December 2018

26,666

97,476

190,163

(172,623)

141,682

 

Share premium represents the amounts received by the Company on the issue of its shares which were in excess of the nominal value of the shares.

Retained earnings represent the cumulative net gains and losses recognised in the statement of comprehensive income less any amounts reflected directly in other reserves.

Other reserves - please refer to the Note 17 for the details.

 


Consolidated statement of cash flows

For the year ended 31 December 2019

 


Note

2019
$000

2018
$000

Cash flows from operating activities




Cash generated from continuing operations

29

41,386

 37,281

Cash used in discontinued operations

14

(176)

(158)

Bank fees paid

 

-

(69)

Interest paid

 

(1,131)

(1,870)

Income tax paid

 

(7,090)

(3,896)

Net cash generated from operating activities

 

32,989

 31,288

Cash flows from investing activities




Interest received

 

818

 908

Dividend received

 

27

-

Proceeds from sale of property, plant and equipment

 

47

 3

Purchase of property, plant and equipment

 

(27,380)

(13,688)

Net cash used in investing activities

 

(26,488)

(12,777)

Cash flows from financing activities




Restricted cash movement

 

211

286

Exercise of share options

 

17

-

Sale of shares held by Employee Benefit Trust

 

442

-

Repayment of borrowings

 

(5,280)

(5,760)

Lease liabilities

 

(1,776)

-

Net cash used in financing activities

 

(6,386)

(5,474)

Increase in cash and cash equivalents in the year

 

115

 13,037

Cash and cash equivalents at 1 January

 

19,455

6,929

Effect of exchange rates on cash and cash equivalents

 

1,155

(511)

Cash and cash equivalents at 31 December

 

20,725

19,455

Cash and cash equivalents in continuing operations at the end of the year

9

20,629

19,182

Cash and cash equivalents in discontinued operations at the end of the year

14

96

273


 

 


 


Notes to consolidated financial statements

 

1. General information

JKX Oil & Gas plc (the ultimate parent of the Group hereafter, 'the Company') is a public limited company listed on the London Stock Exchange which is domiciled and incorporated in England and Wales under the UK Companies Act. The registered number of the Company is 3050645. The registered office is 6 Cavendish Square, London, W1G 0PD.

The principal activities of the Company and its subsidiaries (the 'Group') are the exploration for, appraisal and development of oil and gas reserves.

2. Basis of preparation

The financial statements for the year ended 31 December 2019 and 31 December 2018 set out in this announcement does not constitute the Company's statutory annual report and financial statements for the year ended 31 December 2018 but is extracted from the audited financial statements for those years. The 31 December 2018 accounts have been delivered to the Registrar of Companies. The statutory financial statements for 2019 will be delivered to the Registrar of Companies in due course.

 

The auditors have reported on the financial statements for the year ended 31 December 2019; their report contained a paragraph drawing attention to disclosures in the financial statements regarding the existence of a material uncertainty related to the ability of the Company to continue as a going concern as a result of the Covid-19 pandemic. Their opinion on the financial statements was not modified in respect of this matter. The report did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

The Group's financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union, IFRS Interpretations Committee ('IFRS IC') interpretations and the Companies Act 2006 applicable for Companies reporting under IFRS and therefore the consolidated financial statements comply with Article 4 of the EU IAS Regulations. The Group's financial statements have been prepared under the historical cost convention, as modified for derivative instruments held at fair value through profit or loss. The principal accounting policies adopted by the Group are set out below.

Additionally, on 1 January 2019, the functional currency of the Group's wholly owned Ukrainian subsidiary Poltava Petroleum Company ('PPC') changed from US Dollar ($) to Ukrainian Hryvnia (hryvnia). The change in the functional currency was considered appropriate as gas prices are denominated in hryvnia in a freely traded gas market and the increased impact of local market forces on gas prices, together with the increasing hryvnia cost base, development plan and availability of hryvnia draw downs in the Group's facilities. As such, management concluded that hryvnia is the currency of the primary economic environment which the Company operates in. This change in functional currency is applied prospectively with effect from 1 January 2019. The exchange rate used to translate the balance sheet to reflect the change in functional currency on adoption is $1: 27.69 hryvnia.

Comparative amounts in respect of property, plant and equipment and inventories have been reclassfied for comparability with 2019 in accordance with IFRS. The reclassifications had no impact on net assets or the profit for the period.

Comparatives

§  In the 2018 Annual report a group of inventories  of $1.6m held for well workovers was included in inventories, whereas in 2019 Annual report they were reclassified under property, plant and equipment to conform with 2019 presentation and to more appropriately reflect their nature. In 2019 Annual report 31 December 2018 inventories balance was reduced by $1.6m from $6.0m to $4.4m; property, plant and equipment balance was increased by $1.6m from $173.5m to $175.1m.

Going concern

The Directors note that the Group is debt free and has generated $33.0m of operating cash flow in 2019, continued its drilling program and ended the year with $20.6m of cash in continuing operations. The Board have reviewed the Group's forecast cash flows for the period to June 2021. Capital and operating costs are based on approved budgets and latest forecasts in the case of 2020 and current development plans in the case of 2021. The forecast cash flows reviewed include scenarios where potential liabilities arise in relation to the rental fee claims in Ukraine (see Note 25 to the consolidated financial statements) including assessments of the timing of such potential payments undertaken following detailed analysis of Ukrainian legislation and the status of each claim with internal and external legal and tax experts. Based on the Group's cash flow forecasts, the Directors believe that the combination of its current cash balances, net cash flows from operations, as well as the anticipated availability of additional courses of action with respect to financing the settlement of any successful rental fee claims arising in the forecast period, mean that the Group will be able to meet its liabilities and commitments as they fall due across the forecast period. In addition, the Group benefits from an undrawn Tascombank loan facility of UAH280m ($11.8m) and overdraft facility of UAH50m ($2.1m) that were both renewed in December 2019, although each draw down is subject to credit approval by the bank.

Notwithstanding the Group's current financial performance and position, the Board are cognisant of the potential impacts of Covid-19 on the Group. Whilst there has been little impact of Covid-19 on the Group's operations at present there may be significant impacts on the business going forward which are currently unknown. The Board has considered possible reverse stress case scenarios for the impact on the Group's operations, financial position and forecasts. Whilst the potential future impacts of Covid-19 are unknown the Board has considered operational disruption that may be caused by the factors such as a) restrictions applied by governments, illness amongst our workforce and disruption to supply chain and sales channels; b) market volatility in respect of commodity prices associated with Covid-19 in addition to geopolitical factors; and c) the Group's ability to utilise its credit facilities. 

In addition to sensitivities that reflect future expectations regarding country, commodity price and currency risks that the Group may encounter, in March 2020 and to date, reverse stress tests have been run to reflect possible negative effects of Covid-19 including sustained lower commodity prices and one month production stoppages in both Russia and Ukraine. None of the scenarios have recognised any possible future benefit that may result from the arbitration award (see Note 25 to the consolidated financial statements). Should the rental claims become payable during the forecast period, or more extended disruption to production occur, the Group would likely need to utilise the Tascom facilities, make forward gas sales, agree a payment plan with the tax authorities, or take other such measure as may be required. Whilst the Board anticipate being able to draw down under those facilities, draw down requests are subject to certain credit approval procedures by the bank and there can be no guarantee that such funding will be made available as and when required. Similarly the Board anticipate being able to secure a payment arrangement with the tax authorities if needed, securing sufficient forward gas sales or taking other such measures as may be required but there can be no guarantee that these measures will be available when required or sufficient.

Having considered the forecasts and sensitivity scenarios the Board considers it is appropriate to adopt the going concern basis of accounting in preparing these financial statements. However, at the date of approval of these financial statements, the potential future impact of Covid-19 is uncertain and there can be no guarantee that the Group would receive credit approval for draw downs on the Tascom facilities, secure an appropriate payment plan arrangement for rental fee claims that fell due, secure sufficient forward gas sales or be able to take suitable other measures as required to maintain liquidity. These circumstances indicate the existence of a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern and therefore it may be unable to realise its assets and discharge its liabilities in the normal course of business. As such this is considered to be a material uncertainty. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

Adoption of new and revised standards

New standards, interpretations and amendments effective from 1 January 2019

The disclosed policies have been applied consistently by the Group for both the current and previous financial year with the exception of the new standards adopted.

The European Union ("EU") IFRS financial information has been drawn up on the basis of accounting policies consistent with those applied in the financial statements for the year to 31 December 2018, except for the following:

(a)   IFRS 16 'Leases'

(b)   IFRIC 23 'Uncertainty over Income Tax Positions'

(c)    Prepayment Features with Negative Compensation - Amendments to IFRS 9

(d)   Long-term Interests in Associates and Joint Ventures - Amendments to IAS 28

(e)   Annual Improvements to IFRS Standards 2015 - 2017 Cycle

(f)    Plan Amendment, Curtailment or Settlement - Amendments to IAS 19

The application of (b) to (f) has had no impact on the disclosures or the amounts recognized in the Group's consolidated financial statements.

There were no retrospective adjustments as a result of adopting IFRS 16 'Leases'. The Group amended accounting policies applied from 1 January 2019 are disclosed in Note 3 under 'Significant accounting policies'.

IFRS 16 specifies how to recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise right-of-use assets and lease liabilities for all material leases. It results in almost all leases being recognised on the balance sheet by lessees, as the distinction between operating and finance leases was removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The Group's well service and rental arrangements in Ukraine for oil and gas extraction activities are outside of the scope of IFRS 16.

The Group adopted IFRS 16 from 1 January 2019 using the modified retrospective approach and accordingly the information presented for 2018 is not restated. It remains as previously reported under IAS 17 and related interpretations. On initial application, the Group elected to record right-of-use assets based on the corresponding lease liability. A right-of-use asset and lease obligations of $3.1m were recorded as of 1 January 2019, with no net impact on retained earnings. When measuring lease liabilities, the Group discounted lease payments using its incremental borrowing rate at 1 January 2019. The weighted-average rate applied is 16%.

The balance sheet shows the following amounts relating to leases:


1 January
2019
$000

Right-of-use asset recognised during the year

$'000

Depreciation charge for the year
$000

31 December
2019
$000

Oil and gas asset - coil tubing

2,159

-

(1,177)

982

Properties

907

446

(332)

1,021

Total 

3,066

446

(1,509)

2,003

 


31 December
2019
$000

Lease liabilities

 

Current

1,461

Non-current

628

Total 

2,089

The income statement shows the following amounts relating to leases:


31 December
2019
$000

Interest on lease liabilities (included in finance cost)

254

Expenses relating to short-term leases (included in administrative expenses)

235

Expenses relating to low-value assets, excluding short-term leases of low-value assets (included in administrative expenses)

31

Total 

520

 


31 December
2019
$000

Amounts recognised in the statement of cash flows

 

Total cash outflow for leases

1,776

 

The following table reconciles the Group's operating lease obligations at 31 December 2018, as disclosed in the Group's consolidated financial statements, to the lease obligations recognised on initial application of IFRS 16 at 1 January 2019.


$

Operating lease commitments at 31 December 2018

3.9

Discounted using the incremental borrowing rate at 1 January 2018

2.8

Effect of discounting

0.4

Recognition exemption for short-term leases

0.2

Assets that do not meet definition of a lease

0.1

Impairment provision to be recognised on one of the properties

0.4

 

Effective as of 1 January 2019, IFRIC 23 explains how to recognise and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment. An uncertain tax treatment is any tax treatment applied by the Group where there is uncertainty over whether that treatment will be accepted by the tax authority. IFRIC 23 applies to all aspects of income tax accounting where there is an uncertainty regarding the treatment of an item, including taxable profit or loss, the tax bases of assets and liabilities, tax losses and credits and tax rates. There was no impact on adoption of IFRIC 23 on 1 January 2019.

New standards, interpretations and amendments not yet effective

Below is a list of new and revised IFRSs that are not yet mandatorily effective (but allow early application) for the year ending 31 December 2019 and have not been early adopted by the Group. These standards are not expected to have a material impact on the Group in the future reporting periods and on foreseeable future transactions.

 

Effective for annual periods beginning on or after

Amendments to IFRS 3, 'Business combinations'

01-Jan-20

Amendments to IAS 1 and IAS 8: Definition of Material

01-Jan-20

Amendments to References to the Conceptual Framework in IFRS Standards

01-Jan-20

IFRS 17, 'Insurance contracts'

01-Jan-21

 

3. Significant accounting policies

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. All intragroup balances, transactions, income and expenses and profits or losses, including unrealised profits arising from intragroup transactions, have been eliminated on consolidation.

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The consolidated financial statements include all the assets, liabilities, revenues, expenses and cash flows of the Companies and their subsidiaries after eliminating intragroup transactions as noted above. Uniform accounting policies are applied across the Group.

Year end for one of the Group's subsidiary, JKX Oil & Gas (Jersey) Ltd, is non-contemporaneous with the Group year end, but its financial results are being consolidated at 31/12/2019.

Foreign currencies

All amounts in these financial statements are presented in thousands of US dollars, unless otherwise stated. The presentation currency of the Group is the US Dollar.

Each entity in the Group is measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

The effect of a change in functional currency is accounted for prospectively. The Group translates all items into the new functional currency using the exchange rate at the date of the change. The resulting translated amounts for non-monetary items are treated as their historical cost.

On consolidation of subsidiaries and joint operations with a non US Dollar presentation currency, their statements of financial position are translated into US Dollar at the closing rate and income and expenses at the average monthly rate. All resulting exchange  differences arising in the period are recognised in other comprehensive income, and cumulatively in the Group's translation reserve. Such translation differences are reclassified to profit or loss in the period in which any such foreign operation is disposed of.

Subsidiaries within the Group hold monetary intercompany balances for which settlement is neither planned nor likely to occur in the foreseeable future and thus this is considered to be part of the Group's net investment in the relevant subsidiary. An exchange difference arises on translation in the company income statement which on consolidation is recognised in equity, only being recognised in the income statement on the disposal of the net investment.

The major exchange rates used for the revaluation of the closing statement of financial position at 31 December 2019 were $1:£0.76 (2018: $1:£0.78), $1: 23.69 Hryvnia (2018: $1: 27.69 Hryvnia), $1: 61.91Roubles (2018: $1: 69.47 Roubles), $1: 294.43 Hungarian Forint (2018: $1: 280.31 Hungarian Forint).

Goodwill and fair value adjustments arising on acquisition are treated as assets/liabilities of the foreign entity and translated at the closing rate.

Property, plant and equipment and other intangible assets

Property plant and equipment comprises the Group's tangible oil and gas assets together with computer equipment, motor vehicles and other equipment and are carried at cost, less any accumulated depreciation and accumulated impairment losses. Cost includes purchase price and construction costs for qualifying assets, together with borrowing costs where applicable, in accordance with the Group's accounting policy. Depreciation of these assets commences when the assets are ready for their intended use.

Oil and gas assets

Exploration, evaluation and development expenditure is accounted for under the 'successful efforts' method. The successful efforts method means that only costs which relate directly to the discovery and development of specific oil and gas reserves are capitalised.

Exploration and evaluation costs are valued at costs less accumulated impairment losses and capitalised within intangible assets. Development expenditure on producing assets is accounted for in accordance with IAS 16, 'Property, plant and equipment'. Costs incurred prior to obtaining legal rights to explore are expensed immediately to the income statement.

All lease and licence acquisition costs, geological and geophysical costs and other direct costs of exploration, evaluation and development are capitalised as intangible assets or property plant and equipment according to their nature. Intangible assets are not amortised and comprise costs relating to the exploration and evaluation of properties which the Directors consider to be unevaluated until reserves are appraised as commercial, at which time they are transferred to property plant and equipment following an impairment review and are depreciated accordingly. Where properties are appraised to have no commercial value, the associated costs are treated as an impairment loss in the period in which the determination is made.

Costs related to hydrocarbon production activities including production plants and capital spares are depreciated on a field by field unit of production method based on commercial proved plus probable reserves of the production licence, except in the case of assets whose useful life differs from the lifetime of the field, which are depreciated on a straight-line basis over their anticipated useful life of up to 10 years.

For assets under construction depreciation begins when the assets are available for use and continues until the assets are derecognised, even if it is idle.

The calculation of the 'unit of production' depreciation takes account of estimated future development costs. The 'unit of production' rate is set at the beginning of each accounting period. Changes in reserves and cost estimates are recognised prospectively applied from the date of the Board approval of revised field development plans.

Other assets

Depreciation is charged so as to write off the cost, less estimated residual value, over their estimated useful lives, using the straight-line method, for the following classes of assets:

Motor vehicles

4 years

Computer equipment

3 years

Other equipment

5 to 10 years

 

The estimated useful lives of property plant and equipment and their residual values are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively. Assets under construction are not subject to depreciation until the date on which the Group makes them available for use.

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement for the relevant period.

Business combinations

The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments issued by the Group in exchange for control of the acquiree. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the criteria for recognition under IFRS 3 (revised) are recognised at their fair value at the acquisition date. In a business combination achieved in stages, the previously held equity interest in the acquiree is re-measured at its acquisition date fair value and the resulting gain or loss, if any, is recognised in the income statement. Acquisition costs are expensed.

Goodwill is recognised as an asset and is initially measured at cost being the excess of the cost of the business combination over the Group's share in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. Impairment losses on goodwill are not reversed.

On disposal of a subsidiary or joint arrangement, the attributable amount of unamortised goodwill, which has not been subject to impairment, is included in the determination of the profit or loss on disposal.

Non-current assets held for sale and discontinued operations

A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale.

Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, and financial assets within the scope of IFRS 9, which are specifically exempt from this requirement. An asset classified as held for sale is not depreciated.

Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the statement of financial position. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the statement of financial position.

Any gain or loss from disposal, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the Consolidated financial statements and related notes for all periods presented. Comparatives in the statement of financial position are not represented when a non-current asset or disposal group is classified as held for sale. Comparatives are represented for presentation of discontinued operations in the Statement of cash flow and Statement of comprehensive income. Further information on discontinued operations and non-current assets held for sale can be found in note 14 "Discontinued operations and assets classified as held for sale".

Impairment of property, plant and equipment and intangible assets

Whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. Individual assets are grouped together as a cash-generating unit for impairment assessment purposes at the lowest level at which their identifiable cash flows, that are largely independent of the cash flows of the other Groups assets, can be determined. A cash-generating unit is the smallest group of assets that independently generates cash flow and whose cash flow is largely independent of the cash flows generated by other assets.

If any such indication of impairment exists the Group makes an estimate of its recoverable amount.

The recoverable amount is the higher of fair value less costs of disposal and value in use. Where the carrying amount of an individual asset or a cash-generating unit exceeds its recoverable amount, the asset/cash-generating unit is considered impaired and is written down to its recoverable amount. Fair value less costs of disposal is determined by discounting the post-tax cash flows expected to be generated by the cash-generating unit, net of associated selling costs, and takes into account assumptions market participants would use in estimating fair value. In assessing the value in use, the estimated future cash flows are adjusted for the risks specific to the asset/cash-generating unit and are discounted to their present value that reflects the current market indicators.

Where an impairment loss subsequently reverses, the carrying amount of the asset/cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. 

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. To the extent that variable rate borrowings are used to finance a qualifying asset and are hedged in an effective cash flow hedge of interest rate risk, the effective portion of the derivative is recognised in other comprehensive income and reclassified to profit or loss when the qualifying asset impacts profit or loss. To the extent that fixed rate borrowings are used to finance a qualifying asset and are hedged in an effective fair value hedge of interest rate risk, the capitalised borrowing costs reflect the hedged interest rate. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

JKX Employee Benefit Trust

The JKX Employee Benefit Trust was established in 2014 to hold ordinary shares purchased to satisfy various new share scheme awards made to the employees of the Company which will be transferred to the members of the scheme on their respective vesting dates subject to satisfying the performance conditions of each scheme.

Financial instruments

Financial assets and financial liabilities are recognised in the consolidated statement of financial position when the Group becomes party to the contractual provisions of the instrument.

Convertible bonds due 2020 - embedded derivative

The net proceeds received from the issue of convertible bonds at the date of issue have been split between two elements: the host debt       instrument classified as a financial liability in Borrowings, and the embedded derivative.

The fair value of the embedded derivative has been calculated first and the residual value is assigned to the host debt liability. The difference between the proceeds of issue of the convertible bonds and the fair value assigned to the embedded derivative, representing the value of the host debt instrument, is included as Borrowings and is not remeasured. The host debt component is then carried at amortised cost and the fair value of the embedded derivative is determined at inception and at each reporting date with the fair value changes being recognised in profit or loss.

Issue costs are apportioned between the host debt element (included in Borrowings) and the derivative component of the convertible bond based on their relative carrying amounts at the date of issue.

The interest expense on the component included in Borrowings is calculated by applying the effective interest method, with interest recognised on an effective yield basis.

Upon redemption of convertible bonds by the Company in the market, the difference between the repurchase cost and the total of the carrying amount of the liability plus the repurchased embedded option to convert is recorded in the income statement.

Equity investments at fair value through other comprehensive income (FVOCI)

Investments in unquoted equity instruments were previously measured at cost less impairment as allowed by IAS 39. As of 1 January 2018 investments in equity instruments were reclassified to financial assets at fair value through other comprehensive income. The Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI). Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest and dividends income and foreign exchange gains and losses which are recognised in profit or loss. There was no impact of reclassification on the carrying value of its unlisted investment. Please refer to Note 6 for details.

Borrowings

Borrowings are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Trade and other receivables

Trade and other receivables are recognised initially at their transaction price in accordance with IFRS 9 and are subsequently measured at amortised cost. The Group applies the simplified approach to providing for expected credit losses (ECL) prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. Expected credit losses are assessed on a forward looking basis. The loss allowance is measured at initial recognition and throughout its life at an amount equal to lifetime ECL. Any impairment is recognised in the income statement within 'Administrative expenses'.

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions, which are readily convertible to known amounts of cash. Cash equivalents are short-term with an original maturity of less than 3 months.

Restricted cash

Restricted cash is disclosed separately on the face of the statement of financial position and denoted as restricted when it is not under the exclusive control of the Group.

Trade and other payables

Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method if the time value of money is significant.

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs.

Inventories

Inventory is comprised of produced oil and gas and certain materials and equipment that are acquired for future use such as: parts for cars/trucks, field maintenance, overalls, hand-tools, general materials, accessories, small value parts for production equipment. The oil and gas is valued at the lower of average production cost and net realisable value; the materials and equipment inventory is valued at purchase cost. Cost comprises direct materials and, where applicable, direct labour costs plus attributable overheads based on a normal level of activity and other costs associated in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution and any provisions for obsolescence.

Taxation

Income tax expense represents the sum of current tax payable and deferred tax.

The current tax payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date.

Tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity or in other                  comprehensive income, in which case the tax is also dealt with in equity or other comprehensive income respectively.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on tax rates and laws substantively enacted by the reporting date. Deferred tax assets and liabilities are offset when there exists a legal and enforceable right to offset and they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Directors of the Group that make the strategic decisions.

Pension obligations

The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period. The defined benefit obligation is calculated annually by an independent actuary using the projected unit credit method.

The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid (hryvnia), and that have terms approximating to the terms of the related obligation. Currently, there is no sufficiently developed market of bonds denominated in hryvnia with a sufficiently long period of repayment which would be consistent with an estimated period of payment of all benefits. In such cases the Standard allows using current market rates to discount respective short-term payments and calculating the discount rate for long-term liabilities by extending the current market rates along the yield curve.

The current service cost of the defined benefit plan, recognised in the Income Statement, except where included in the cost of an asset, reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes curtailments and settlements. Past-service costs are recognised immediately in the Income Statement.

The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation. This cost is included in employee benefit expense in the statement of profit or loss.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise.

Share options

The group operates an equity-settled, share-based compensation plan, under which the Company receives services from Senior Management as consideration for equity instruments (options) of the group. The fair value of the services received from Senior Management in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:

§ including any market performance conditions; (for example, the Company's share price);

§ excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and

§ including the impact of any non-vesting conditions (for example, the requirement for employees to save).

Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied.

In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between service commencement period and grant date.

At the end of each reporting period, the group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

When the options are exercised, the company issues new shares or shares held by the JKX Employee Benefit Trust. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium.

The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity financial statements.

The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the change will be treated as a cash-settled transaction.

The rules regarding the scheme are described in the Remuneration Report and in Note 24 on share based payments.

Bonus scheme

The Group operates a bonus scheme for its employees. The bonus payments are made annually, normally in January of each year and the costs are accrued in the period to which they relate.

Pension costs

The Group contributes to the individual pension scheme of the qualifying employees' choice. Contributions are charged to the income statement as they become payable. The Group has no further payment obligations once the contributions have been paid.

Decommissioning

Provision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision represents the estimated discounted liability for costs which are expected to be incurred in removing production facilities and site restoration at the end of the producing life of each field. A corresponding item of property plant and equipment is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the production facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash flow or the current estimate of the discount rate used are reflected as an adjustment to the provision and the property plant and equipment. Discount rates are based on governmental bonds which will be redeemed around the end of field life. The unwinding of the discount is recognised as a finance cost.

Provisions

Provisions are created where the Group has a present obligation as a result of a past event, where it is probable that it will result in an outflow of economic benefits to settle the obligation, and where it can be reliably measured.

Provisions are measured at the best estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where the effect is material. Where amounts provided for attract interest reflecting the appropriate time value of money no discounting is applicable. The amounts provided are based on the Group's best estimate of the likely committed outflow.

Amounts received in advance for future gas sales are recorded as contract liabilities and revenue is recognized as the performance obligations are met.

Revenue recognition

Revenue from contracts with customers is recognized when or as the Group satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when the customer obtains control of that good or service. The transfer of control of oil, natural gas, LPG, condensate, and other items sold by the Group usually coincides with title passing to the customer and the customer taking physical possession. The Group principally satisfies its performance obligations at a point in time and the amounts of revenue recognized relating to performance obligations satisfied over time are not material.

Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, value added tax ("VAT") and other sales taxes or duty. Production based taxes are not included in revenue, they are paid on production and recorded within cost of sales.

Amounts received in advance for future gas sales are recorded as contract liabilities and revenue is recognized as the performance obligations are met.

Share capital and treasury shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from share premium, net of any tax effects.

When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised in retained earnings.

Repurchased JKX Oil & Gas plc shares are classified as treasury shares in shareholders' equity and are presented in the retained earnings. The consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Company's equity holders until the shares are cancelled or reissued.

When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is presented in share premium. No gain or loss is recognised in the financial statements on the purchase, sale, issue or cancellation of treasury shares.

Leases

At inception of a contract, the Group assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured based on the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The asset is depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. The lease term includes periods covered by an option to extend if the Group is reasonably certain to exercise that option. Lease terms range from two to three years for oil and gas equipment and offices. Service agreements for equipment on the working sites are not considered leases as, based upon an assessment of the terms and nature of their contractual arrangements, the contracts do not convey the right to control the use of an identified asset. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group's estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or the effect is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Group elected to apply the practical expedient not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets. The Group also made use of the practical expedient to not recognise a right-of-use asset or a lease liability for leases for which the lease term ends within 12 months of the date of initial application.

The lease payments associated with these leases are recognised as an expense on a straight-line basis over the lease term.

The Group did not elect to apply the practical expedient to grandfather the assessment of which transactions are leases on the date of initial application, as previously assessed under IAS 17 and IFRIC 4. The Group applied the definition of a lease under IFRS 16 to all existing contracts.

Dividends

Interim dividends are recognised when they are paid to the Company's shareholders. Final dividends are recognised when they are approved by shareholders.

Exceptional items

Exceptional items comprise items of income and expense, including tax items, that are material either because of their size or their nature and unlikely to recur and which merit separate disclosure in order to provide an understanding of the Group's underlying financial performance. Examples of events which may give rise to the disclosure of material items of income and expense as exceptional items include, but are not limited to litigation claims by or against the Group and the restructuring of components of the Group's operations. Exceptional items are disclosed separately on the face of the income statement.

Critical accounting estimates, assumptions and judgements

The Group makes estimates, assumptions and judgements concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates, assumptions and judgements that have a risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

a) Recoverability of oil and gas assets and intangible oil and gas costs (Note 5 (a))

Costs capitalised as oil and gas assets in property, plant and equipment, and intangible assets are assessed for impairment when circumstances suggest that the carrying value may exceed its recoverable value. As part of this assessment, management has carried out an impairment test (ceiling test) on the oil and gas assets classified as property, plant and equipment, where indicators of impairment have been identified on a CGU. This test compares the carrying value of the assets at the reporting date with the expected discounted cash flows from each project prepared under the fair value less cost of disposal approach. For the discounted cash flows to be calculated, management has used a production profile based on its best estimate of proven and probable reserves of the assets and a range of assumptions, including an internal oil and gas price profile benchmarked to mean analysts' consensus and third party estimates and a discount rate which, taking into account other assumptions used in the calculation, management considers to be reflective of the risks. This assessment involves judgement as to (i) the likely commerciality of the asset, (ii) proven, probable ('2P') reserves which are estimated using standard recognised evaluation techniques (iii) future revenues and estimated development costs pertaining to the asset, (iv) the discount rate to be applied for the purposes of deriving a recoverable value including estimates of the relevant levels of risk premiums applied to the assets. In cases where impairment tests demonstrate headroom, reversals of impairment charges are not recognised in the Group income statement if the existence of the headroom is sensitive to pricing, production or discount rates.

b) Depreciation of oil and gas assets (Note 5 (a))

Oil and gas assets held in property, plant and equipment are mainly depreciated on a unit of production basis at a rate calculated by reference to proved plus probable reserves and incorporating the estimated future cost of developing and extracting those reserves. Future development costs are estimated using assumptions as to the numbers of wells required to produce those reserves, the cost of the wells, future production facilities and operating costs; together with assumptions on oil and gas realisations based on the approved field development plans.

c) Taxation including rental fees and deferred tax assets (Notes 25 and 26)

Tax provisions are recognised when it is considered probable that there will be a future outflow of funds to the tax authorities. In this case, provision is made/reversed for the amount that is expected to be settled or won. The provision is updated at each reporting date by management by interpretation and application of known local tax laws with the assistance of established legal, tax and accounting advisors. These interpretations can change over time depending on precedent set and circumstances. In addition new laws can come into effect which can conflict with others and, therefore, are subject to varying interpretations and changes which may be applied retrospectively. A change in estimate of the likelihood of a future outflow or in the expected amount to be settled would result in a charge or credit to income in the period in which the change occurs.

Tax provisions are based on enacted or substantively enacted laws. To the extent that these change there would be a charge or credit to income both in the period of charge, which would include any impact on cumulative provisions, and in future periods.

Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse, and a judgement as to whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease in the level of deferred tax assets recognised that can result in a charge or credit in the period in which the change occurs.

d) Provisions for decommissioning costs (Note 18)

Estimates of the cost of future decommissioning and restoration of production facilities are based on current legal and constructive requirements, technology and price levels, while estimates of when decommissioning will occur depend on assumptions made regarding the economic life of fields which in turn depend on such factors as oil and gas prices, decommissioning costs, discount rates and inflation rates. Management reviewed the estimation process and the basis for the principal assumptions underlying the cost estimates, noting in particular the reasons for any major changes in estimates as compared with the previous year. The Group was satisfied that the approach applied was fair and reasonable. The Group was also satisfied that the discount and inflation rates used to calculate the provision were appropriate. The discount rates were based on government bonds issued in the respective countries.

e) Judgement used in the fair value of unlisted investments (Note 6)

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The objective of a fair value measurement is to estimate the price at which an orderly transaction would take place between market participants under the market conditions that exist at the measurement date. IFRS 13 requires that valuation techniques maximise the use of observable inputs and minimise the use of unobservable inputs. The Group has used a market approach to estimate fair value of the unlisted investments. The Group used its judgements to (i) select a valuation method, (ii) make assumptions that are based on market conditions existing at the end of the reporting period, (iii) determine the point in a range of values that is 'most representative of a fair value', (iv) determine discounts applied to the fair value.

f) Enforcement of arbitration award (Note 25)

No asset has been recognised in respect of the arbitration award due to the uncertainty inherent in the process for, and likely success of, enforcing collection.

g) Exceptional items (Notes 18 and 25)

Judgment is required when determining whether items meet the definition of 'exceptional' under the Group's accounting policy.

Provisions and reversals for August to December 2010 and January to December 2015 rental fee claims have been included in 'exceptional items' due to their material, specific and unusual nature and the Board considered that it was appropriate to highlight these items to users of the financial statements. In particular, the issues are considered to represent isolated historical disputes that will not recur having related to specific circumstances and discrete periods of time with production based taxes currently paid at standard Ukrainian government rates. Whilst the Board is cognisant that items should not be disclosed as exceptional when they recur, in this instance the Board considered items to be exceptional, because the underlying claims are not anticipated to recur and the additional charges refer to accrual of interest and penalties of the original claims.

4. Segmental analysis

The Group has one single class of business, being the exploration for, evaluation, development and production of oil and gas reserves. Accordingly the reportable operating segments are determined by the geographical location of the assets and, therefore all information is being presented for geographical segments. This is consistent with the revenue information that is disclosed for each reportable segment under IFRS 8 Operating Segments.

There are four (2018: four) reportable operating segments which are based on the internal reports provided to the Chief Operating Decision Maker ('CODM'). Ukraine and Russia segments are involved with production and exploration; the 'Rest of World' are involved in exploration, development and production and the UK is the home of the head office and purchases material, capital assets and services on behalf of other segments.

The Group derives revenue from the transfer of goods at a point in time.

Segment revenue, segment expense and segment results include transfers between segments. Those transfers are eliminated on consolidation.

Segment results and assets include items directly attributable to the segment. Segment assets consist primarily of property, plant and equipment, inventories and receivables. Capital expenditures comprise additions to property, plant and equipment and intangible assets.



 

2019

UK
$000

Ukraine
$000

Russia
$000

Rest of World1
$000

Sub Total
$000

Eliminations
$000

Total
$000

External revenue








Revenue by location of asset:








- Oil

-

24,339 

701

-

25,040

-

25,040

- Gas

-

52,319

16,750

-

69,069

-

69,069

- Liquefied petroleum gas

-

6,562

-

-

6,562 

-

6,562 

- Other

-

1,055

18

-

1,073

-

1,073


-

84,275

17,469

-

101,744

-

101,744

Inter segment revenue:








- Management services/other

1,650

-

-

-

1,650

(1,650)

-


1,650

-

-

-

1,650

(1,650)

-

Total revenue

1,650

84,275

17,469

-

103,394

(1,650)

101,744

Profit/(loss) before tax:








Profit/(loss) from operations

(6,922)

37,544

1,052

(236)

31,438

112

31,550

Finance income





857 

-

857

Finance cost





(2,054)

-

(2,054)

Derivative liability written-off





62

-

62






30,303

112

30,415

Assets








Property, plant and equipment

  365

116,734

  98,629

-

215,728

-

215,728

Investment

500

-

-

-

500

-

500

Deferred tax

 -

(172)

 8,184

-

  8,012

-

8,012

Inventories

 -

5,295

  1,620

-

6,915

-

6,915 

Trade and other receivables

349

1,603

1,973

6

3,931

-

3,931

Cash and cash equivalents

 9,496

9,571

1,414

148

20,629

-

20,629

Total assets1

10,714

133,027

111,820

154

255,715

-

255,715

Total liabilities1

(7,323)

(57,980)

(7,027)

(30)

(72,360)

-

(72,360)

Non cash expense (other than depreciation and impairment)

229

214

118

-

561

-

561

Exceptional item - net reversal of provision for production based taxes

-

8,410

-

-

8,410

-

8,410

Increase in property, plant and equipment and intangible assets

 -

20,850

9,104

 -

29,954

-

29,954

Depreciation, depletion and amortisation

246

13,049

5,922

-

19,217

-

19,217

1            Total assets and liabilities exclude assets and liabilities of the Hungarian disposal group classified as held for sale. Please refer to Note 14 for details.

 

Major customers

2019
$000

2018
$000

Ukraine

-

18,131

Russia

17,231

16,911

 

There is one customer in Russia that exceeds 10% of the Group's total revenues (2018: two customers, one in Ukraine
and one in Russia).



 

2018

UK
$000

Ukraine
$000

Russia
$000

Rest of World1
$000

Sub Total
$000

Eliminations
$000

Total
$000

External revenue








Revenue by location of asset:








- Oil

-

19,341

679

-

20,020

-

20,020

- Gas

-

49,221

17,155

-

66,376

-

66,376

- Liquefied petroleum gas

-

5,579

-

-

5,579

-

5,579

- Other

112

781

5

-

898

-

898


112

74,922

17,839

-

92,873

-

92,873

Inter segment revenue:








- Management services/other

3,523

-

-

-

3,523

(3,523)

-


3,523

-

-

-

3,523

(3,523)

-

Total revenue

3,635

74,922

17,839

-

96,396

(3,523)

92,873

Profit/(loss) before tax:








Profit/(loss) from operations

(6,106)

20,979

(104)

(817)

13,952

1,724

15,676

Finance income





908

-

 908

Finance cost





(2,510)

-

(2,510)

Fair value movement on derivative liability





(59)

-

(59)






12,291

1,724

14,015

Assets








Property, plant and equipment

 211

 91,836

 82,331

734

 175,112

-

 175,112

Deferred tax

 -  

966

  9,453

-

  10,419

-

10,419

Inventories

 -  

2,851

1,501

-

4,352 

-

4,352 

Trade and other receivables

736

2,502

1,864

9

5,111

-

5,111

Cash and cash equivalents

 13,344

 3,493

 2,265

80

19,182

-

19,182

Total assets1

14,291

101,648

97,414

823

214,176

-

214,176

Total liabilities1

(12,580)

(56,857)

(3,481)

(38)

 (72,956)

-

(72,956)

Non cash expense (other than depreciation and impairment)

-

673

80

6

759

-

759

Exceptional item - production based taxes

-

5,055

-

-

5,055

-

5,055

Increase in property, plant and equipment and intangible assets

 -

11,011

742

 -

11,753

-

11,753

Depreciation, depletion and amortisation

58

9,210

5,887

-

15,155

-

15,155

2                     Total assets and liabilities exclude assets and liabilities of the Hungarian disposal group classified as held for sale. Please refer to Note 14 for details.



 

5. Property, plant and equipment and Intangible assets

5.(a) Property, plant and equipment

2019

Oil and gas fields
Ukraine
$000


Gas field
Russia
$000



Other assets
$000



Total
$000

Group

 

 

 

 

Cost

 

 

 

 

At 1 January

578,094

192,952

17,755

788,801

Application of IFRS 16 - Right-of-use assets

-

2,159

1,353

3,512

Additions during the year

19,924

8,887

1,143

29,954

Foreign exchange

99,454

23,579

510

123,543

Disposal of property, plant and equipment

-

(10)

(407)

(417)

At 31 December

697,472

227,567

20,354

945,393

Accumulated depreciation, depletion and amortisation and provision for impairment





At 1 January

486,258

110,621

16,810

613,689

Depreciation on disposals of property, plant and equipment

-

(10)

(195)

(205)

Foreign exchange

83,397

13,327

240

96,964

Depreciation charge for the year

12,728

5,784

705

19,217

At 31 December

582,383

129,722

17,560

729,665

Carrying amount

 

 

 

 

At 1 January

91,836

82,331

945

175,112

At 31 December

115,089

97,845

2,794

215,728

 

Oil and gas fields in Ukraine and Russia include $7.8m and $0.6m respectively relating to items under construction (2018: $1.0m and nil). 



 


Oil and gas assets



2018

Oil and gas fields
Ukraine
$000


Gas field
Russia
$000

Oil and gas fields
Hungary
$000



Other assets
$000



Total
$000

Group

 

 

 

 

 

Cost

 

 

 

 

 

At 1 January

567,195

230,149

37,442

18,257

853,043

Additions during the year

10,899

602

-

252

11,753

Foreign exchange

-

(39,325)

-

(292)

(39,617)

Disposal of property, plant and equipment

-

(112)

-

(462)

(574)

Reclassified to assets held for sale

-

-

(37,442)

-

(37,442)

Reclassified from inventories

-

1,638

-

-

1,638

At 31 December

578,094

192,952

-

17,755

788,801

Accumulated depreciation, depletion and amortisation and provision for impairment






At 1 January

477,171

127,188

37,442

17,211

659,012

Depreciation on disposals of property, plant and equipment

-

(112)

-

(459)

(571)

Foreign exchange

-

(22,212)

-

(253)

(22,465)

Depreciation charge for the year

9,087

5,757

-

311

15,155

Reclassified to assets held for sale

-

-

(37,442)

-

(37,442)

At 31 December

486,258

110,621

-

16,810

613,689

Carrying amount






At 1 January

90,024

102,961

-

1,046

194,031

At 31 December

91,836

82,331

-

945

175,112

 



 

5.(b) Intangible assets: exploration and evaluation expenditure

2019

Ukraine
$000

Hungary
$000

Rest of World
$000

Total
$000

Group

 

 

 

 

At 1 January

-

-

-

-

At 31 December

-

-

-

-

 

2018

Ukraine
$000

Hungary
$000

Rest of World
$000

Total
$000

Group





Cost:





At 1 January

1,308

814

14,236

16,358

Reclassified to assets held for sale

-

(814)

-

(814)

Disposal of assets written off

(1,308)

-

(14,236)

(15,544)

At 31 December

-

-

-

-

Provision against oil and gas assets





At 1 January

1,308

814

14,236

16,358

Reclassified to assets held for sale

-

(814)

-

(814)

Disposal of assets written off

(1,308)

-

(14,236)

(15,544)

At 31 December

-

-

-

-

Carrying amount





At 1 January

-

-

-

-

At 31 December

-

-

-

-

 

5.(c) Impairment test for property, plant and equipment

A review was undertaken at the reporting date of the carrying amounts of property, plant and equipment to determine whether there was any indication of a trigger that may have led to these assets suffering an impairment loss. Following this review impairment triggers were noted in relation to the Ukrainian assets due to the significantly lower gas sales prices in 2019, in relation to the Russian assets due to the lower than expected production rate achieved by Well 5 and the negative revision to its reserves in the latest CPR, and in relation to both Ukrainian and Russian assets due to the carrying amount of the Group net assets exceeding the Company's market capitalisation.

As there is no readily available market for the Group's oil and gas properties, fair value is derived as the net present value of the estimated future cash flows arising from the continued use of the assets, incorporating assumptions that a typical market participant would take into account.

The value in use of an oil and gas property is generally lower than its Fair Value Less Costs of Disposal ('FVLCD') as value in use reflects only those cash flows expected to be derived from the asset in its current condition. FVLCD includes appraisal and development expenditure that a market participant would consider likely to enhance the productive capacity of an asset and optimise future cash flows. Consequently, the Group determines recoverable amount based on FVLCD using a Discounted Cash Flow ('DCF') methodology.

The DCF was derived by estimating discounted after tax cash flows for each CGU based on estimates that a typical market participant would use in valuing such assets.

The impairment tests compared the recoverable amount of the respective CGUs noted below to the respective carrying values of their associated assets. The estimates of FVLCD meet the definition of level three fair value measurements as they are determined from unobservable inputs. The impairment tests were performed based on conditions as at year end.

Impairment test for the Ukrainian oil and gas assets

Poltava Petroleum Company ('PPC'), a wholly owned subsidiary of JKX, holds 100% interest in five production licences (Ignativske, Movchanivske, Rudenkivske, Novomykolaivske, Elyzavetivske) and one exploration licence (Zaplavska) in the Poltava region of Ukraine.

The Ignativske, Movchanivske, Rudenkivske, Novomykolaivske production licences contain one or more distinct fields which, together with the Zaplavska exploration licence, form the Novomykolaivske Complex ('NNC').

The Elyzavetivske production licence is located 45km from the Novomykolaivske Complex and has its own gas production facilities.

Ukrainian Cash Generating Units ('CGUs')

In respect of the Group's Ukraine assets the NNC forms a single CGU as these contain oil and gas fields which are serviced by a single processing facility and do not have separately identifiable cash inflows. In addition they have commonality of facilities, personnel and services.

The Elyzavetivske licence also has its own separate processing facilities and separately identifiable cash flows and therefore is a distinct CGU for the purpose of the impairment test. During 2015 an extension to the Elyzavetivske production licence was awarded to PPC which included the West Mashivska field. Due to the proximity of the West Mashivska field to the Elyzavetivske plant, production will be tied back to the Elyzavetivske  processing facilities and therefore forms part of this CGU.

In accordance with IAS 36, the impairment review was undertaken in Ukrainian hryvnia being the currency in which future cash flows from NNC and Elyzavetivske will be generated.

Key Assumptions - NNC and Elyzavetivske  

The key assumptions used in the impairment testing were:

§ Production profiles: these were based on the latest available information assessed internally including assessment of the results of external reserve engineer audits in the year. Such information included 2P reserves for NNC and Elyzavetivske of 21.5 MMboe and 1.8 MMboe, respectively.

§ Economic life of field: it was assumed that the title to the licences is retained and that the NNC licence term will be successfully extended beyond its current 2024 expiration date through to the economic life of the field (expected to be around 2037). The economic life of the Elyzavetivske field is currently expected to be around 2035 as per management's current expectation.

§ Gas prices: during 2015 Ukraine acquired the ability to purchase gas from Europe rather than being completely dependent on Russia for imports. As such, Ukrainian gas prices are expected to be more aligned with European gas prices in future but also influenced by international oil prices. The gas price used for 2020 is based on estimates of gas prices to be realised by our Ukrainian subsidiary determined considering external market forecasts as at year end with consideration given the applicability or otherwise of relevant pricing adjustments for the local market. For the following ten years a forward gas price curve was used with gas prices increasing in line with inflation thereafter.

§ Oil prices: the Company used a forward price curve as at year end for the next eight years and remaining constant thereafter.

§ Production taxes: the Company has assumed production tax rates of 29% for gas and oil. A gas tax rate of 12% is applied to wells drilled since 1 January 2018.

§ Capital and operating costs: these were based on current operating and capital costs in Ukraine for both projects. Estimates were provided by third parties and supported by estimates from our own specialists, where necessary.

§ Post tax nominal discount rate of 14.2%. This was based on a Capital Asset Pricing Model analysis consistent with that used in previous impairment reviews.

Based on the key assumptions set out above:

§ the recoverable amount of NNC's oil and gas assets ($111.4m) exceeds its carrying amount ($107.8m) by $3.6m and therefore NNC's oil and gas assets were not impaired.

§ Elyzavetivske's recoverable amount (including the West Mashivska extension) ($19.9m) exceeds its carrying amount ($15.8m) by $4.1m, and therefore the CGU's oil and gas assets were not impaired.

Sensitivity analysis for the NNC and Elyzavetivske

Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above. Sensitivity analysis to potential changes in key assumptions has therefore been provided below.

The impact on the impairment calculation of applying different assumptions to gas prices, production volumes, future capital expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows:



NNC
Increase/(decrease) in headroom of $3.6 for NNC CGU
$m

Elyzavetivske
 Increase/(decrease) in headroom of $4.1m for Elyzavetivske CGU $m

Impact if gas and oil prices:

increased by 20%

40.0

7.9


reduced by 20%

(40.0)

(7.9)

Impact if gas and oil production volumes:

increased by 10%

36.8

6.5


decreased by 10%

(17.1)

(0.4)

Impact if future capital expenditure:

increased by 20%

(7.2)

(2.2)


decreased by 20%

26.9

4.7

Impact if post-tax discount rate:

increased by 2 percentage points to 16.2%

(10.4)

(0.5)


decreased by 2 percentage points to 12.2%

14.5

0.5

 

Impairment test for Yuzhgazenergie LLC ('YGE'), Russia

Following the 2007 acquisition of YGE in Russia, a technical and environmental re-evaluation of YGE's Koshekhablskoye gas field redevelopment was undertaken by the Group. The re-evaluation resulted in a revised development plan and production profile. The development plan and production profile have continued to be refined since that time.

In accordance with IAS 36, the impairment review has been undertaken in Russian Roubles, which is the functional currency of YGE.

Key Assumptions - YGE

The key assumptions used in the impairment testing were:

§ Production profiles: these were based on the latest available information assessed internally including assessment of the results of external reserve engineer audits in the year. Such information included 2P reserves for YGE of 56.6 MMboe.

§ Economic life of field: it was assumed that YGE will be successful in extending the licence term beyond its current 2026 expiration to the economic life of the field (expected to be around 2049). The discounted cash flow methodology used has not taken account of any opportunities that may exist to extract reserves in a shorter timeframe by investing to increase the current plant capacity.

§ Gas prices: from 1 July 2020 and annually thereafter, the gas prices have been increased by 3.8% and then by 2% through to 2025 based on historical experience.

§ Capital and operating costs: these were based on current operating and capital costs in Russia, project estimates provided by third parties and supported by estimates from our own specialists, where necessary.

§ Post tax nominal Rouble discount rate of 10.5%. This was based on a Capital Asset Pricing Model analysis consistent with that used in previous impairment reviews.

Based on the key assumptions set out above YGE's recoverable amount ($112.8m) exceeds it carrying amount ($97.8m) by $15.0m and therefore YGE's Koshekhablskoye gas field was not impaired.

Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above. Sensitivity analysis to  potential changes in key assumptions has therefore been reviewed below.

The impact on the impairment calculation of applying different assumptions to gas prices, production, future capital expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows:

Sensitivity Analysis



Increase/(decrease) in headroom of $15.0m for Yuzhgazenergie CGU
$m

Impact of Adygean gas price:

growth rates increased by 10% annually

4.2


growth rates reduced by 10% annually

(4.2)

Impact of production volumes:

Increased by 10%

36.3


Decreased by 10%

(7.4)

Impact of future capital expenditure:

Increased by 20%

(9.7)


Decreased by 20%

20.2

Impact of post-tax discount rate:

Increased by 1 percentage point to 11.5%

(8.0)


Decreased by 1 percentage point to 9.5%

10.4

 

6. Investments

Group unquoted equity investments comprise a 10% holding of the ordinary share capital of PJSC of "Mining Company Ukrnaftoburinnya" ("UNB"), a Ukrainian oil and gas company, and a 1.43% holding of the ordinary share capital of Linx Telecommunications Holding B.V. ("Linx"), a Netherlands telecommunications company. These investments were previously measured at cost as allowed by IAS 39 (paragraph 46 (c)) and were fully impaired at 31 December 2017 and had been for several years.

As of 1 January 2018 Group's investments in equity instruments were reclassified to financial assets at fair value through other comprehensive income in accordance with the provisions of IFRS 9. The Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI).

At 31 December 2019 the carrying value of UNB remained fully impaired following assessment by the Board considering relevant available information and valuation techniques, reflecting:

§ the lack of liquidity in the shares of UNB and considerations regarding the nature of markets for such an investment;

§ the absence of any history of dividends or other returns on the investment since acquisition in 2006 and the significant uncertainty regarding future returns;

§ the absence of regular formal communication with UNB or potential buyers;

§ the level of uncertainty regarding any market valuation method based on quoted Ukrainian oil and gas companies given key differences in the respective businesses and corporate structures;

§ the limited number of quoted Ukrainian oil and gas companies that can be used for the market valuation approach, defined in IFRS 13; and

§ a paper prepared by a specialist third party advisor to the Board of Directors noted the limited number of likely parties potentially interested in purchasing the investment and the difficulties in determining the consideration for which the investment might be disposed generally.

At 31 December 2019 the carrying value of Linx was reported as $0.5m (2018: nil), with this valuation being based upon management's expectation of future and final dividends to be received from Linx in 2020. Management attends Linx shareholder meetings and is in regular communication with its management. Management understands that Linx continues to dispose of its businesses units and dividend out all proceeds to shareholders prior to a liquidation of the company. Previously dividends were received during 2017 and 2019 of $0.1m and $0.03m respectively after disposals of other business units. The carrying value of $0.5m is consistent with Linx management expectations of consideration to be received for disposal of the remaining business units and also with the most recent financial statements of Linx.

7. Inventories


2019
$000

2018
$000

Warehouse inventory and materials

 4,056

  2,273

Oil and gas inventory

 2,859

  2,079


 6,915

4,352

 

During the year there were no obsolete inventories written off to profit and loss (2018: there were no obsolete inventories written off to profit and loss).

8. Trade and other receivables


2019
$000

2018
$000

Trade receivables

 2,221

2,085

Less: ECLs

 (423)

(559)

Trade receivables - net

 1,798

1,526

Other receivables

 160

279

VAT receivable

 639

384

Prepayments

 1,334

2,922


 3,931

5,111

 

As of 31 December 2019, trade and other receivables of $0.4m (2018: $0.6m) were past due and full expected credit loss ("ECL") provision was recognized with the asset considered credit impaired. The amount of the provision was $0.4m (2018: $0.6m). This receivable relates to a single gas customer, which is more than three years past due. Legal proceedings were initiated in Q4 of 2016 and finished in Q3 of 2018 in favour of the Company. During the year ended 31 December 2019 the Company collected $0.1m and is seeking collection of the amount outstanding, but significant uncertainty remains over the collection.

As of 31 December 2019, trade and other receivables of $3.9m (2018: $1.8m) were current and not impaired. There is no difference between the carrying value of trade and other receivables and their fair value.

Prepayments comprise of prepayments made to suppliers. Decrease in prepayments of $1.6m from $2.9m to $1.3m is mainly due to the completion of 3D seismic work on Elizavetivske filed in Ukraine in April 2109, which amounted to $1.3m and was included in $2.9m balance at 31 December 2018.

The carrying amounts of the Group's trade and other receivables are denominated in the following currencies:


2019
$000

2018
$000

US Dollar

11

42

Sterling

-

-

Euros

1

1

Hungarian Forints

-

-

Ukrainian Hryvnia

148

15

Russian Roubles

1,798

1,747


1,958

1,805

 

9. Cash and cash equivalents


2019
$000

2018
$000

Cash

 12,495

16,939

Short term deposits

 8,134

2,243


 20,629

 19,182

 

Short term deposits held comprised amounts held on deposit, but were readily convertible to cash.

10. Trade and other payables


2019
$000

2018
$000

Current

 


Trade payables

3,894

 873

Other payables

298

3

Contract liabilities

 2,111

3,273

Other taxes and social security costs

 2,435

   2,196

VAT payable

 1,993

1,327

Accruals

 3,427

3,110


14,158

10,782

Current

 


Lease liabilities

1,461

-

Non-Current

 


Lease liabilities

628

-

 

11. Borrowings


2019
$000

2018
$000

Current



Convertible bonds due 2020

5,683

5,962

Term-loans repayable within one year

5,683

5,962

Non-Current



Convertible bonds due 2020

-

5,041

Term-loans repayable after more than one year

-

5,041

Convertible bonds due 2020

On 19 February 2013 the Company successfully completed the placing of $40m of guaranteed unsubordinated convertible bonds with institutional investors which were due 2018 (prior to restructuring) raising cash of $37.2m net of issue costs.

Prior to restructuring the Bonds had an annual coupon of 8 per cent per annum payable semi-annually in arrears.

The Bonds were convertible into ordinary shares of the Company at any time from 1 April 2013 up until seven days prior to their maturity on 19 February 2020 at a conversion price of 76.29 pence per Ordinary Share, unless the Company settles the conversion notice by paying the Bondholder the Cash Alternative Amount (see below).

The Company made the final payment to Bondholders on 19 February 2020 in accordance with the terms and conditions of the Bond (see Note 33).

Convertible bonds restructured on 3 January 2017

On 3 January 2017 a special resolution was approved by Bondholders to change the terms and conditions of the Bonds. The main amendments to the terms and conditions of the Bonds were as follows:

§ the Bondholder's option to require redemption of all of the outstanding Bonds on 19 February 2017 was deleted;

§ the final maturity date of the Bonds was extended to 19 February 2020, with the outstanding principal amount of the Bonds being repaid in three instalments; 33% on 19 February 2018; 33 % on 19 February 2019; and 34% on the 19 February 2020;

§ the coupon rate of the Bonds was increased from 8% to 14%;

§ the covenant which limited new borrowings by the Company was removed; and

§ the Company were to make two payments to Bondholders in respect of prior accretion amounts, on 19 February 2017 and on 19 February 2018 of 12.0% and 3.0%, respectively, of the principal amount of the Bonds.

On 19 February 2018 the Company made a payment of the first instalment to Bondholders of $5.3m (33% of the principal amount of the Bonds), together with the final accretion payment of $0.5m (3.0% of the principal amount of the Bonds) and interest of $1.1m. On 19 February 2019 the Company made a payment of the second instalment to Bondholders of $5.3m (33% of the principal amount of the Bonds), together with $0.7m interest payment in accordance with the terms and conditions of the Bond. On 19 August 2019 the Company made interest payment of $0.4m in accordance with the terms and conditions of the Bond. On 19 February 2020 the Company made the final payment of the third instalment to Bondholders of $5.4m (34% of the principal amount of the Bonds), together with $0.4m interest payment in accordance with the terms and conditions of the Bond.

Cash Alternative Amount

At the option of the Company, the conversion notice in respect of the Bonds could be settled in cash rather than shares, the Cash Alternative Amount payable was based on the Volume Weighted Average Price of the Company's shares prior to the conversion notice.

Credit facility

On 11 December 2018, PPC, our subsidiary in Ukraine, renewed a 12 month revolving credit line from Tascombank for UAH280m (originally secured 15 December 2017 for UAH150 m). At 31 December 2019 the total short-term line of credit amounted to $11.8m at an exchange rate of $1: 23.69 (2018: $10.1m at an exchange rate of $1: 27.69 Hryvnia). The amount outstanding at 31 December 2019 was nil (2018: nil), so the undrawn portion totaled $11.8m (2018: $10.1m). The facility will be available through December 2021 (subject to planned renewal if required) and draw downs are subject to certain bank credit approvals. In addition PPC holds a UAH50m ($1.8m) overdraft facility which remains undrawn and was renewed until 13 December 2021.

The main terms and conditions of the revolving credit line are as follows:

§ drawdowns can be made either in USD or UAH and are individually subject to credit approval by the lender;

§ interest rate cost for USD drawn down is 9%;

§ interest rate cost for UAH drawn down: 17.0% to 30 days, 17.50% 31 to 90 days, 20.00% 91 to 180 days, 21.00% 181 to 365 days;

§ borrowing above UAH90m, equivalent to $3.8m at 31 December 2019 (2018: $3.3m) will require a corporate guarantee from JKX Oil & Gas Plc. The corporate guarantee provided by the JKX Oil & Gas plc in respect of the credit facility with Tascombank is considered to be an insurance contract under the provisions of IFRS 4;

§ assets with a market value of UAH460m, equivalent to $19.4m at 31 December 2019 (2018: UAH460m, equivalent to $16.6m at 31 December 2018) have been identified for use as a collateral, collateral is to be provided only on a drawdown;

§ amount borrowed will be repaid during the last 4 months, by equal-sized monthly payments, to be effected on the last day of the month/the last day of the credit limit period. Last date of repayment for the last part of amount borrowed is 13 December 2021.

The credit facility of $11.8m (2018:  $10.1m) includes two financial covenants. If the covenants are not met an additional interest of 2% applies to the facility but failure to meet covenants does not represent an event of default:

§ to keep gross margin at no less than 50% during the period of the credit facility agreement, based on PPC's financial reporting results.

§ starting from the first quarter of 2019 and during the period of the credit facility agreement, PPC is to maintain the ratio between financial (interest) debt and EBITDA (adjusted to the annual value) at no more than 3.0.

12. Derivatives


2019
$000

2018
$000

Non-current derivative financial instruments



At the beginning of the year

62

3

Derivative liability written-off

(62)

-

Fair value loss movement during the year

-

59

At the end of the year

-

62

 

Convertible bonds due 2020 - embedded derivatives

Company Call Option

The Company could redeem the Bonds at any time in full but not in part at their principal amount plus one semi-annual coupon plus any accrued interest. If the Bonds were called prior to 19 February 2020, the redemption price would also include an additional U.S. $6,000 per Bond.

The Company could redeem the Bonds any time in full but not in part at their principal amount plus any accrued interest if the aggregate principal amount of the Bonds outstanding is less than 15% of the aggregate principal amount originally issued.

Fixed exchange rate

The Sterling-US Dollar exchange rate is fixed at £1/$1.5809 for the conversion and other features.

The Company made the final payment to Bondholders on 19 February 2020 in accordance with the terms and conditions of the Bond (see Note 33).

13. Financial instruments

Fair values of financial assets and financial liabilities - Group

Set out below is a comparison by category of carrying amounts and fair values of the Group's financial instruments. Fair value is the amount at which a financial instrument could be exchanged in an arm's length transaction. Where available, market values have been used (this excludes short term assets and liabilities).


Book Value
2019
$000

Fair Value
2019
$000

Book Value
2018
$000

Fair Value
2018

$000

Financial assets

 




Cash and cash equivalents and restricted cash (Note 9) - classified at amortised cost

20,629

20,629

19,182

19,182

Trade receivables (Note 8) - classified at amortised cost

 1,798

 1,798

1,526

1,526

Other receivables (Note 8) - classified at amortised cost

 160

 160

279

279

Financial liabilities

 

 



Trade payables (Note 10) - carried at amortised cost

3,894

3,894

 873

 873

Other payables (Note 10) - carried at amortised cost

298

298

 3

 3

Accruals (Note 10) - carried at amortised cost

3,080

3,080

2,468

2,468

Borrowings - convertible bonds due 2020
(Note 11) - carried at amortised cost (current)

5,683

5,683

5,962

5,962

Borrowings - convertible bonds due 2020 

(Note 11) - carried at amortised cost (non-current)

-

-

5,041

5,041

Lease liabilities

2,089

2,089

-

-

Derivatives - fair value through profit or loss (Note 12)

-

-

62

62

 

Financial liabilities measured at amortised cost are carried at $15.0m (2018: $14.3m). The Group's borrowings at 31 December 2019 relate entirely to the convertible bonds due 2020.

Fair value hierarchy

Derivatives

At 31 December 2018 the Group's derivative financial instrument related to embedded derivative within the convertible bonds due 2020 (Note 12). The value of the derivative was calculated at inception using the Monte Carlo simulation methodology and subsequently using the Black-Scholes formula, and the Company's historic share price and volatility, treasury rates and other estimations. As it was derived from inputs that are not from observable market data it was grouped into level 3 within the fair value measurement hierarchy.

The main assumptions used in valuation of the derivative conversion option as at 31 December 2018 were:

§ underlying share price of 2018: £0.11;

§ £/US$ spot rate of £1/$1.2754;

§ historic volatility of 54.03%;

§ risk free rate based on the maturity which is 1.14 year US Treasury rate of 2.578% and 0.14 year US Treasury rate of 2.444% (continuously compounded).

A 10% increase/decrease in Company's historic share price volatility would have resulted in an increase in the fair value loss for the year of $0.1m and decrease in the fair value loss of $0.02m, respectively, assuming that all other variables remain constant.

Following the final payment of the Bond made to Bondholders on 19 February 2020 (see Note 33) the derivative of $0.1m was written off to the Income statement at 31 December 2019 as its fair value was negligible at year end.

Credit risk - Group

The Group has policies in place to ensure that sales of products are made to customers with appropriate credit worthiness. The Group limits credit risk by assessing creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness after transactions have been initiated. Where appropriate, the use of prepayment for product sales limits the exposure to credit risk. There is no difference between the carrying amount of trade and other receivables and the maximum credit risk exposure.

The maximum financial exposure due to credit risk on the Group's financial assets, representing the sum of cash and cash equivalents, trade receivables and other current assets, as at 31 December 2019 was $22.6m (2018: $21.0m).

Capital management - Group

The Directors determine the appropriate capital structure of the Group specifically, how much is raised from shareholders (equity) and how much is borrowed from financial institutions (debt) in order to finance the Group's business strategy.

The Group's policy as to the level of equity capital and reserves is to ensure that it maintains a strong financial position and low gearing ratio which provides financial flexibility to continue as a going concern and to maximise shareholder value. The capital structure of the Group consists of shareholders' equity together with net debt. The Group's funding requirements are met through a combination of debt, equity and operational cash flow.

Net cash

Net cash comprises: borrowings disclosed in Note 11 and total cash in Note 9 and excludes derivatives. Equity attributable to the shareholders of the Company comprises issued capital, other reserves and retained earnings (see Consolidated statement of changes in equity).

The capital structure of the Group is as follows:


2019
$000

2018
$000

Convertible bonds due 2020 (current and non-current, Note 11)

(5,683)

(11,003)

Total cash (Note 9)

20,629

19,182

Net cash

14,946

8,179

Total shareholders' equity

186,255

141,682

 

Liquidity risk - Group

The treasury function is responsible for liquidity, funding and settlement management under policies approved by the Board of Directors. Liquidity needs are monitored using regular forecasting of operational cash flows and financing commitments. The Group maintains a mixture of cash and cash equivalents and committed facilities in order to ensure sufficient funding for business requirements.

The following tables set out details of the expected contractual maturity of non-derivative financial liabilities. The tables include both interest and principal cash flows on an undiscounted basis. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curves at the reporting date.

The maturity analysis for financial liabilities was as follows:

Group - 31 December 2019

Within 3 months
$000

3 months
 - 1year
  $000

1 - 2 years
  $000

 2 - 5 years
  $000

Maturity of financial liabilities

 

 

 

 

Trade payables (Note 10)

3,894

-

-

-

Other payables (Note 10)

298

-

-

-

Accruals (Note 10)

3,080

-

-

-

Borrowings - Convertible bonds due 2020

5,683

-

-

-

Lease liabilities

484

1,294

392

342

 

Group - 31 December 2018

Within 3 months
$000

3 months
 - 1year
  $000

 1-2 years
  $000

Maturity of financial liabilities




Trade payables (Note 10)

 873

-

-

Other payables (Note 10)

  3

-

-

Accruals (Note 10)

2,468

-

-

Borrowings - Convertible bonds due 2020

6,030

381

5,821

 

Interest rate risk profile of financial assets and liabilities - Group

Fixed rate interest is charged on the Group's convertible bond (see Note 11). The interest rate profile of the other financial assets and liabilities of the Group as at 31 December is as follows (excluding short-term assets and liabilities, non-interest bearing):

Group - 31 December

2019
Within 1 Year
$000

2018
Within 1 Year
$000

Floating rate

 

 

Short term deposits (Note 9)

8,134

2,243

Other receivables (Note 8)

160

279

Other payables (Note 10)

298

3

 

Floating rate financial assets comprise cash deposits placed on money markets at call, seven day and monthly rates.

Interest rate sensitivity - Group

The sensitivity analysis below has been determined based on the exposure to interest rates on our short term deposits at the reporting date.

If interest rates had been 1 per cent higher/lower and all other variables were held constant, the Group's profit (2018: profit) after tax and net assets for the year ended 31 December 2019 would increase/decrease by $12,000 (2018: $16,000). 1 per cent is the sensitivity rate used as it best represents management's assessment of the possible change in interest rates that could apply to the Group.

Foreign currency exposures - Group

The table below shows the extent to which the Group has monetary assets and liabilities in currencies other than the functional currency of the operating company involved. These exposures give rise to the net currency gains and losses recognised in the income statement.

As at 31 December the asset/(liability) foreign currency exposures were:


2019
$000

2018
$000

Sterling

675

(1,223)

Euros

1,086

 371

Ukrainian Hryvnia

5,470

 4,583

Bulgarian Leva

41

 33

Russian Roubles

(368)

3,732

Canadian Dollar

-

 6

Total net

6,904

 7,502

3            Foreign currency exposures do not include Hungarian Forints, as Hungary is included under "assets held for sale" in the Statement of financial position.

Foreign currency sensitivity - Group

The Group is mainly exposed to the currency fluctuations of Ukraine (Hryvnia), Russia (Rouble) and UK (Sterling). The sensitivity analysis principally arises on money market deposits and working capital items held at the reporting date.

The following table details the Group's sensitivity to a 10 per cent (2018: 10 per cent) increase and decrease in the US Dollar against Sterling and against Hryvnia and Rouble, all other variables were held constant. Due to the historically significant foreign currency fluctuation in the UK, Ukraine and Russia 10 per cent has been used to calculate sensitivity for Sterling, Hryvnia and Rouble. 10 per cent (2018: 10 per cent) is the sensitivity rate that best represents management's assessment of the possible change in the foreign exchange rates affecting the Group. A positive number below indicates an increase in profit and equity when the US Dollar weakens against the relevant currency. For a strengthening of the US Dollar against the relevant currency, there would be an equal and opposite impact on the profit and other equity, and the balances below would be negative.


Hryvnia
2019
$000

Hryvnia
2018
$000

Rouble
2019
$000

Rouble
2018
$000

Sterling
2019
$000

Sterling
2018
$000

Profit/(loss) for the year and Equity

 


 


 


10 per cent strengthening of the US Dollar/ (2018: 10 per cent)

547

458

 (37)

373

67

(122)

10 per cent weakening of the US Dollar/(2018: 10 per cent)

(547)

(458)

37

(373)

(67)

122

 

Commodity risk and sensitivity - Group

The Group's earnings are exposed to the effect of fluctuations in oil, gas and condensate prices. The Group's oil, gas and condensate is sold to local trading companies through market related contracts.

The Group is a price taker and does not enter into commodity hedge agreements unless required for borrowing purposes which may occur from time to time. Therefore no sensitivity analysis has been prepared on the exposure to oil, gas or condensate prices for outstanding monetary items at the 31 December 2019 as there is no impact on any outstanding amounts.

14. Discontinued operations and assets classified as held for sale

In early February 2018 the Group announced its intention to exit its oil and gas operations in Hungary and initiated an active programme to dispose of its Hungarian business. The sale-purchase agreement for the disposal of the Hungarian business was executed in March 2020.

The associated assets and liabilities were presented as held for sale in the financial statements at 31 December 2018 and remains as such at 31 December 2019. Prior to the reclassification assets were measured at the lower of carrying amount and fair value less costs to sell.

At the time the sale was agreed the consideration expected to be received was comprising of approximately $2.0m of consideration and a working capital adjustment anticipated to be $0.9m, with the actual consideration sum due to be determined and settled in full on completion which is expected before the end of April 2020. A reversal of impairment of $2.2m was recognised at 31 December 2019. The amount of this reversal is exceeded by previous historical impairment charges, allowing for depreciation, made against the Hungarian assets.

The financial performance and cash flow information presented are for periods ended 31 December 2019 and 31 December 2018.


31 December
2019
$000

31 December 2018
$000

Revenue

133

 1,645

Exceptional item - reversal of provision for impairment of Hungary

2,232

-

Royalties

(25)

 (75)

Other cost of sales

(369)

 (356)

Total cost of sales

1,971

 (431)

Administrative expenses

(11)

 20

Gain/(loss)  on foreign exchange

44

 (304)

Profit from operations and before tax

2,004

 930

Taxation - current

-

(7)

Taxation - deferred

-

2,564

Total taxation

-

2,557

Profit for the year

2,004

3,487

 

Net cash outflow from operating activities

(176)

(158)

Effect of exchange rates on cash and cash equivalents

-

17

Net cash used by the subsidiary

(176)

(141)




 

The following assets and liabilities were classified as held for sale in relation to the discontinued operation as at 31 December 2019 and 2018.

Assets and liabilities of disposal group classified as held for sale

31 December 2019
$000

31 December 2018
$000

Assets classified as held for sale



Property, plant and equipment

2,232

-

Trade and other receivables

859

753

Cash

96

273

Restricted cash

-

211

Total assets of disposal group held for sale

3,187

1,237

Liabilities of the disposal group classified as held for sale

 


Trade and other payables

(87)

(322)

Abandonment provision

(200)

(453)

Total liabilities of disposal group held for sale

(287)

(775)

Net assets

2,900

462

 

15. JKX Employee Benefit Trust

In 2013, JKX Employee Benefit Trust was established and acquired 5,000,000 of shares in JKX Oil & Gas plc at a cost of $4.0m for the purpose of making awards under the Group's employee share schemes and these shares have been classified in the statement of financial position as treasury shares within retained earnings.

During 2019 JKX Employee Benefit Trust sold 1,186,547 shares at an average price of £0.30 per share (2018: nil). 180,525 shares were used in 2019 (2018: nil)  to settle share options, out of which 48,660 were sold in order to cover National insurance cost, therefore at 31 December 2019 JKX Employee Benefit Trust held 3,632,928 shares in JKX Oil & Gas plc (2018: 5,000,000). During January 2020 JKX Employee Benefit Trust sold its remaining 3,632,928 shares at an average price of £0.28 per share.

16. Share capital

Equity share capital, denominated in Sterling, was as follows:


2019
Number

2019
£000

2019
$000

2018
Number

2018
£000

2018
$000

Authorised

 

 

 




Ordinary shares of 10p each

300,000,000

30,000

-

300,000,000

30,000

-

Allotted, called up and fully paid

 

 

 




Opening balance at 1 January

172,125,916

17,212

26,666

172,125,916

17,212

26,666

Exercise of share options

-

-

-

-

-

-

Closing balance at 31 December

172,125,916

17,212

26,666

172,125,916

17,212

26,666

 

Of which the following are shares held in treasury:

Treasury shares held at
1 January and 31 December

402,771

40

77

402,771

40

77

 

The Company did not purchase any treasury shares during 2019 (2018: none) and no treasury shares were used in 2019 (2018: none) to settle share options. There are no shares reserved for issue under options or contracts. As at 31 December 2019 the market value of the treasury shares held was $0.1m (2018: $0.2m).

17. Other reserves


Merger reserve
$000

Capital redemption reserve
$000

Foreign currency translation reserve
$000

Post-employment benefit obligation reserve
$000

 

 

Equity investments with FVOCI reserve

$000

Total
$000

At 1 January 2018

30,680

587

(184,060)

(333)

-

(153,126)

Exchange differences arising on translation of overseas operations

-

-

(19,475)

-

-

(19,475)

Remeasurement of post-employment benefit obligations

-

-

-

(22)

-

(22)

At 31 December 2018

30,680

587

(203,535)

(355)

-

(172,623)








At 1 January 2019

30,680

587

(203,535)

(355)

-

(172,623)

Exchange differences arising on translation of overseas operations

-

-

21,481

-

-

21,481

Remeasurement of post-employment benefit obligations

-

-

-

(94)

-

(94)

Changes in the fair value of equity investments at fair value through other comprehensive income

-

-

-

-

500

500

At 31 December 2019

30,680

587

(182,054)

(449)

500

(150,736)

 

Merger reserve was created on 30 May 1995 when JKX Oil & Gas plc acquired the issued share capital of JP Kenny Exploration & Production Limited for the issue of ordinary shares and represents the difference between the fair value of consideration given for the shares and the nominal value of those instruments.

Capital redemption reserve relates to the buyback of shares in 2002, there have been no additional share buy-backs since this time.

Foreign currency translation reserve includes movements that relate to the retranslation of the subsidiaries whose functional currencies are not the US Dollar.

Equity investments with FVOCI reserve includes movements that relate to changes in the fair value of unlisted investments in equity.

During 2019, the Russian Rouble ('RR') strengthened by approximately 11% from RR69.47/$ to RR61.91/$ (2018: weakened by approximately 21%, from RR57.60/$ to RR69.47/$). Ukrainian Hryvnia ('UAH') strengthened by approximately 14% from UAH 27.69/$ to UAH 23.69/$ (2018: strengthened by approximately 1%, from UAH 28.07/$ to UAH 27.69/$). Currency translation differences of US$21.4m (2018: US$19.4m) included in the Consolidated statement of comprehensive income arose on the translation of property, plant and equipment denominated in RR and UAH and amounted to $12.2m and $9.2m respectively (see Note 5 (a)).

Post-employment benefit obligation reserve relates to a remeasurement of liability for defined benefit pension plan in PPC, our subsidiary in Ukraine. Under the Ukrainian legislation, employees who work in hazardous conditions have the right for an early retirement. PPC has jobs with hazardous working conditions (hereinafter referred to as the "list II") and participates in the government defined benefit plan. Upon early retirement the pensioners are entitled to a pension which is financed by their employers until they enrol into a regular pension scheme financed by a Pension Fund of Ukraine. The early pension benefit (in the form of a monthly annuity) is payable by employers only until the employee has reached the statutory retirement age (60 - for males and females). The right to pension emerges once a number of conditions pertaining to pension insurance service record and service record in hazardous jobs have been met and a certain age has been reached. Once employees from the list II have reached 55 years of age, PPC would compensate to Pension Fund of Ukraine pension obligation for the next 5 years on a monthly basis. The employer is responsible for 100% for "list II" categories of early pensioners. Pensions are calculated using a formula based on the employee's salary, pension insurance service record, and total length of past service at specific types of workplaces ("list II" category) and, thus, the pension plan is a defined benefit plan by its nature.

18. Provisions

Current provisions

Production based taxes1
$000

Onerous lease provision2
$000

Total
$000

At 1 January 2019

12,431

214

12,645

Included in right-of-use assets on transition

-

(214)

(214)

Foreign currency translation

2,107

-

2,107

Amount provided in the year

1,323

-

1,323

At 31 December 2019

15,861

-

15,861

 

Non-current provisions

Production based taxes1
$000

Total
$000

At 1 January 2019

30,074

30,074

Amount provided in the year

4,670

4,670

Amount released in the year

(14,403)

(14,403)

Foreign currency translation

5,064

5,064

At 31 December 2019

25,405

25,405

4            The provision for production based taxes, is in respect of claims against PPC for additional rental fees for the periods August to December 2010 and January to December 2015. $8.4m was recognised as a credit in the 2019 Consolidated income statement (2018:$5.1m charge) which is the net of a $14.4m reversal of provisions for four tax cases that have been closed in favour of PPC relating to January to December 2015 claims and of $6.0m interest accrued for the remaining cases that have not been closed, of which  $1.3m charge relates to the August to December 2010 claim (2018:$1.0m) and $4.7m charge relate to January to December 2015 claims  (2018:$4.1m). Remaining claims are being contested in the Ukrainian courts (see Note 25). The amount is denominated in Ukrainian Hryvnia ('UAH') and is stated above at its US$-equivalent amount using the 2019 year end rate of UAH23.69/$ (2018: UAH27.69/$). The provision for rental fee claims at 31 December 2019 includes estimated interest and penalties. Judgement is applied regarding application of relevant legislation to determine estimates of the interest and penalties, together with aspects of the underlying claims which are considered overstated based on the legislation on which the claims are based, should this legislation be applied, notwithstanding that the Group disputes the claims in their entirety. The Board believes that the claims are without merit under Ukrainian law and the Company will continue to contest them vigorously. Whilst provisions are held by the Group, additional contingent liabilities exist in respect of the rental fee claims given the judgments required in forming the provisions and alternative potential outcomes.

5            2018 onerous lease provision concerned the Group's liability for onerous lease contracts relating to its London office. Following a reduction in London office staff in 2016, three out of the four floors of the occupied building became surplus to requirements. The provision was determined as the present value of the unavoidable costs relating to rents and rates to the end of the lease terms, net of the expected sub-lease income, discounted at 6.5%. The remaining life of the leases at 31 December 2018 was 3 years. Subsequently, three out of three floors have been assigned to new tenants which resulted in the release of the provision.

 

Non-current provisions
Provision on decommissioning

Ukraine
$000

Russia
$000

Total
$000

Provision for site restoration  

 

 

 

At 1 January 2019

3,581

2,018

5,599

Foreign exchange adjustment

573

251

824

Revision in estimates

(676)

-

(676)

Unwinding of discount (Note 21)

500

117

617

At 31 December 2019

3,978

2,386

6,364

 

The provision in respect of Ukraine represents the present value of the well and site restoration costs that are expected to be incurred up to 2034 (2018: 2035). The Russia provision results from the decommissioning of 15 wells (2018:15) and removal of plant as required by the licence obligation and is due to start from 2050 (2018: 2050). The provisions are made using the Group's internal estimates that management believe form a reasonable basis for the expected future costs of decommissioning.

19. Cost of sales


2019
$000

2018
$000

Operating costs

22,752

 20,897

Depreciation, depletion and amortisation

18,512

 14,732

Other production based taxes

23,518

 21,857


64,782

57,486

Exceptional item - production based taxes (credit)/charge (Note 18)

(8,410)

5,055


56,372

62,541

 

The cost of inventories (calculated by reference to production costs) expensed in cost of sales in 2019 was $3.0m (2018: $0.9m).

20. Finance income

 

2019
$000

2018
$000

Interest income on deposits

857

 908


857

908

 

21. Finance costs


2019
$000

2018
$000

Borrowing costs

1,183

 2,068

Interest for lease liabilities

254

-

Unwinding of discount on site restoration (Note 18)

617

 442


2,054

 2,510

 

22. Profit from operations - analysis of costs by nature

Profit from operations derives solely from continuing operations and is stated after charging/(crediting) the following:


2019
$000

2018
$000

Depreciation - other assets (Note 5. (a))

705

311

Depreciation, depletion and amortisation - oil and gas assets (Note 5. (a))

18,512

14,732

Staff costs (none was capitalised during the year (2018: net of $0.5m), Note 23)

9,051

12,452

Foreign exchange loss

615

711

 

During the year the Group (including its overseas subsidiaries) obtained the following services from the Company's auditors:


2019
$000

2018
$000

2018
$000


BDO fees

BDO fees

PWC fees

Audit of the parent company and consolidated financial statements

294

205

-

Fees payable to company's auditors for other services:

 



- Audit of the Company's subsidiaries

231

167

-

- Audit related assurance services

80

-

105

- Other non-audit services

-

2

2


605

374

107

 

No non-audit services were provided in 2019 (2018: included $2 thousand of tax advisory services provided by BDO Unicon Moscow. The tax advisory services fee relates to reporting periods prior to BDO LLP's appointment as the Group auditor and was discontinued upon their appointment.)

23. Staff costs


2019
$000

2018
$000

Wages and salaries

8,741

12,502

UK social security costs

130

257

Other pension costs

166

205

Share based payments (equity-settled) (Note 24)

14

13


9,051

12,977

 

Staff costs for the year ended 31 December 2018 were shown gross and $0.5m was capitalised, representing time spent on exploration and development activities.

During the year, the average monthly number of employees was:


2019
Number

2018
Number

Management/operational

492

487

Administration support

82

88


574

575

 

There is one Director on service contract included within management/operational (2018: nil). Further details of the Directors and their remuneration are included in the Remuneration Report.

24. Share-based payments

According to the 2010 Performance Share Plan (PSP) that is currently in place, the Remuneration Committee has the ability to grant awards of nil-cost options annually to senior management of the Group, conditional on the Group's performance over a period of at least three years. No consideration is required to be paid for the grant or exercise of an Option. Vesting of the options is dependent upon certain criteria, including comparison of the Group's TSR against the FTSE Fledgling index and the All-Share Oil & Gas Producers index. Options lapse when certain criteria are not met and may be forfeited when employees cease to be employed by the Group. The plan rules are described in the Directors' Remuneration Report. All share-based payments are equity settled. During the year 180,525 share options were exercised and none granted in accordance with the PSP (2018: nil). The weighted average share price at the date of exercise of these shares was 23 pence.

At 31 December 2018, there were outstanding options under the PSP, exercisable during the years 2019 to 2026 to acquire 256,150 shares of the Company at nil cost per share. The vesting period for 256,150 of the share options was 3 years, with an exercise period of 7 years making a 10 year maximum term. During 2019 180,525 shares were exercised at nil cost per share and 75,625 shares lapsed. There were no outstanding options under the PSP at 31 December 2019.

The following table illustrates the number and weighted average exercise prices ('WAEP') of, and movements in, share options during the year.


2019
Number

2019
WAEP

2018
Number

2018
WAEP

Outstanding  at 1 January

151,250

0.00p

1,059,650

0.00p

Exercisable at 1 January

104,900

0.00p

-

-

Lapsed/forfeited during the year

(75,625)

0.00p

(803,500)

0.00p

Exercise of share options

(180,525)

0.00p

-

-

Outstanding at 31 December

-

-

151,250

0.00p

Exercisable at 31 December 

-

-

104,900

0.00p

 

25. Taxation

Analysis of tax on loss

2019
$000

2018
$000

Current tax

 


UK - current tax

-

-

Overseas - current year

6,561

5,478

Current tax expense

6,561

5,478

Deferred tax

 


Overseas - prior year

-

-

Overseas - current year

3,645

(3,233)

Deferred tax benefit

-

(3,233)

Income tax expense

10,206

2,245

 

Factors that affect the total tax charge

The total tax charge for the year of $10.2m (2018: $2.2m charge) is lower (2018: lower) than the average rate of UK corporation tax of 19.00% (2018: 19.00%). The differences are explained below:

Total tax reconciliation

2019
$000

2018
$000

Profit before tax

30,415

14,015

Tax calculated at 19.00% (2018: 19.00%)

5,779

2,663

Movement in recognised tax losses

474

(1,332)

Effect of tax rates in foreign jurisdictions

355

205

Rental fee provision

1,677

(724)

Other non-deductible expenses

1,745

1,149

Other

176

284




Total tax charge

10,206

2,245

 

The total tax charge for the year was $10.2m (2018: $2.2m charge) comprising a current tax charge of $6.6m (2018: $5.5m charge) in respect of Ukraine, a deferred tax charge before exceptional items of $2.0m (2018: credit of $1.5m) and a deferred tax charge of $1.7m in respect of exceptional items (2018: credit of $1.8m). The increase in current tax charge reflects a higher profitability in Ukraine. In Ukraine, the corporate tax rate for 2018 was 18% and remains at this level in 2019.

The standard rate of corporation tax in the UK changed from 20% to 19% with effect from 1 April 2017. The Company's profits for this accounting year are taxed at an effective rate of 19.00%.

Factors that may affect future tax charges

A significant proportion of the Group's income will be generated overseas. Profits made overseas will not be able to be offset by costs elsewhere in the Group. This could lead to a higher than expected tax rate for the Group.

Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2015 and Finance Bill 2016. These include a reduction to the main rate from 19% to 17% from 1 April 2020. The impact of the rate reduction is not expected to have a material impact on UK current taxation.

Taxation in Ukraine - production taxes

Since Poltava Petroleum Company's ('PPC's') inception in 1994 the Company has operated in a regime where conflicting laws have existed, including in relation to effective taxes on oil and gas production.

In order to avoid any confusion over the level of taxes due, in 1994, PPC entered into a licence agreement with the Ukrainian State Committee on Geology and the Utilisation of Mineral Resources ('the Licence Agreement') which set out expressly in the Licence Agreement that PPC would pay Rental Fees on production at a rate of only 5.5% of sales value for the duration of the Licence Agreement.

Pursuant to the Licence Agreement, PPC was granted an exploration licence and four 20-year production licences, each in respect of a particular field. In 2004, PPC's production licences were renewed and extended until 2024, Subsoil Use Agreements were signed and attached to the licences and operations continued as before.

In December 1994, a new fee on the production of oil and gas (known as a 'Rental Payment' or 'Rental Fee') was introduced through Ukrainian regulations. On 30 December 1995, JKX, together with its Ukrainian subsidiaries (including PPC), was issued with a Joint Decision of the Ministry of Economy, the Ministry of Finance and the State Committee for the Oil and Gas ('the Exemption Letter'), which established a zero rent payment rate for oil and natural gas produced in Ukraine by PPC for the duration of the Licence Agreement for Exploration and Exploitation of the Fields. Based on the Exemption Letter PPC did not expect to pay any Rental Fees until the new law on Rental Fees was enacted in 2011.

Rental Fees paid since 2011

In 2011 a new law was enacted which established new mechanisms for the determination of the Rental Fee. Notwithstanding the Exemption Letter, in January 2011 PPC began to pay the Rental Fee in order to avoid further issues with the Ukrainian authorities but without prejudice to its right to challenge the validity of the demands.

Rental fees paid have been recorded in cost of sales in each of the accounting periods to which they relate.

International arbitration proceedings

In 2015, the Company and its wholly-owned Ukrainian and Dutch subsidiaries commenced arbitration proceedings against Ukraine under the Energy Charter Treaty, the bilateral investment treaties between Ukraine and the United Kingdom and the Netherlands, respectively. In these proceedings, the Company sought repayment of more than $180 million in Rental Fees that PPC had paid on production of oil and gas in Ukraine since 2011, in addition to damages to the business.

During 2015 Rental Fees in Ukraine were increased to 55% and capital control restrictions were introduced. On 14 January 2015, an Emergency Arbitrator issued an Award ordering Ukraine not to collect Rental Fees from PPC in excess of 28% on gas produced by PPC, pending the outcome of the application to a full tribunal for the Interim Award. On 23 July 2015 an international arbitration tribunal issued an Interim Award requiring the Government of Ukraine to limit the collection of Rental Fees on gas produced by PPC to a rate of 28%.

The Interim Award was to remain in effect until final judgement was rendered on the main arbitration case, which was heard in early July 2016. A decision from the tribunal was awarded on 6 February 2017.

The tribunal did not find in favour of the Company in respect of the Rental Fees but awarded the Company damages of $11.8 million plus interest, and costs of $0.3 million in relation to subsidiary claims.

In March 2017, Ukraine's Ministry of Justice filed a claim with the High Court of the United Kingdom naming JKX as a defendant in an application seeking to set aside the arbitration award for damages against Ukraine and in favour of JKX.

In October 2017 the High Court of the United Kingdom, ordered that the application brought by Ukraine seeking to set aside the recent arbitration award against Ukraine and in favour of JKX be dismissed. The Government of Ukraine is therefore still liable to pay to JKX the sum of USD11.8 million plus interest, and costs of USD0.3 million in relation to subsidiary claims, as previously ordered. The Judge also ordered that Ukraine should pay JKX's costs of $0.1 million.

The arbitration award has now been legally recognised in Ukraine and in December 2019 JKX filed for its collection. No recognition will be made in the financial statements of any possible future benefit that may result from this award until there is further clarity on the process for, and likely success of, enforcing collection.

Rental Fee demands

The Group currently has two claims (2018: two) for additional Rental Fees being contested through the Ukrainian court process. These arise from disputes over the amount of Rental Fees paid by PPC for certain periods since 2010 (2018: 2010), which in total amount to approximately $41.3 million (2018: $42.5 million) (including interest and penalties), as detailed below. All amounts are being claimed in Ukrainian Hryvnia ('UAH') and are stated below at their US$-equivalent amounts using the year end rate of $1:UAH 23.69 (2018: $1: UAH 27.69).

§ August - December 2010: approximately $15.9 million (2018: $12.4 million) (including $10.7 million (2018: $8.0 million) of interest and penalties). On 11 March 2014 PPC won the case in the Poltava Court. The tax office appealed and the Kharkiv Appellate Administrative Court reversed the earlier decision. PPC then lost an appeal in the High Administrative Court of Ukraine and the Supreme Court rejected PPC's application for the appeal. PPC has discovered that there were in fact certain procedures that were not followed regarding the tax notifications that formed the basis of the original claims against PPC. Certain documentation was found to be missing from the files of the tax authorities. In April 2017 the Poltava Circuit Administrative Court found in favour of PPC and cancelled the tax notification decisions on the grounds that due process had not been followed. On 1 June 2017 the Kharkiv Appellate Administrative Court upheld the judgment of the Poltava Circuit Administrative Court. In July 2017 the Poltava Joint State Tax Inspectorate ("PJSTI") filed a cassation complaint against the previous court judgements of lower courts in PPC's favour. This cassation hearing at the Supreme Court of Ukraine is expected before the end of 2020. Whilst PPC has been successful in the April, June and July 2017 court hearings, the Board considers it appropriate to maintain a provision notwithstanding that PPC disputes the claim basis, given assessment of all relevant facts and circumstances.

§ January - December 2015: approximately $25.4 million (2018: $30.1 million) (including $16.7 million (2018: $17.9 million) of interest and penalties). Following the commencement of international arbitration proceedings at the beginning of 2015 (see above), from July 2015 PPC reverted to paying a 28% Rental Fee for gas production (instead of the revised official rate of 55%) as a result of the awards granted under the arbitration. PPC also declared part of its Rental Fee payments at 55% for the first 6 months of 2015 as overpayments and consequently stopped paying the Rental Fee for gas in order to align the total payments made in 2015 with the 28% rate awarded made under the arbitration proceedings. The Ukrainian tax authorities have issued PPC with the series of claims for the difference between 28% and 55%, which were being contested in eight separate cases. Four of these cases have now been resolved in PPC's favour and the others continue to be contested:  

§ Case No. 816/845/16 for principal of $0.3m. In December 2018 the Poltava Circuit Administrative Court, and in May 2019 the Kharkiv Appellate Administrative Court, found in favour of PPC and both ruled that Tax Notification Decisions previously issued against PPC were illegal and were cancelled. It was expected that PJSTI would file cassation complaint. In July 2019 the Supreme Court of Ukraine refused to accept the cassation complaint of the PJSTI for procedural reasons, meaning that these decisions will not be appealed. This case is therefore closed in favour of PPC.

§ Case No. 816/688/16 for principal of $1.8m. In April 2019, the Poltava Circuit Administrative Court, found in favour of PPC and ruled that Tax Notification Decisions previously issued against PPC were illegal and were cancelled. As PJSTI did not file an appeal within the required time, the judgement of the Poltava Circuit Administrative Court is now binding. This case is therefore closed in favour of PPC.

§ Two cases (Nos. No. 816/846/16 and No. 816/844/16) for a total principal of $3.5m. On 14 November 2019 the Poltava Circuit Administrative Court found in favor of PPC in both cases as well as ruled that Tax Notification Decisions previously issued against PPC were illegal and were cancelled. PJSTI filed appellate complaints in both cases, however, failed to pay the court fee. The Kharkiv Appellate Administrative Court returned in January 2020 appellate complaints in both cases without consideration. PJSTI had time until mid-March 2020 to challenge the above return of appellate complaints, however they failed to do so. Thus, the cases are effectively closed in favour of PPC.

§ Two cases (Nos. 816/687/16 and 816/1191/16) for a total principal of $2.1m are in the process of consideration by the first instance court of merits.

§ Case No. 816/685/16 for a total principal of $2.2m was previously suspended. PJSTI have filed cassation complaint with the Supreme Court to unsuspend it. The hearing is expected to take place in the second half of 2020. If PJSTI is successful at these hearings, then the case will be considered by the first instance court of merits.

§ Case No. 816/686/16 for a total principal of $4.4m were previously confirmed as suspended by the Supreme Court. It is expected that PJSTI may file motions in the first instance court to renew these cases.

It is expected that the process of hearings in respect of the remaining outstanding 2015 rental fee claims will continue into 2021 and possibly beyond.  Full provisions are made for all these outstanding claims and classified as non-current.  In 2019 reversals  have been applied to the provisions (inclusive of interest and penalties) of $0.6m in respect of Case No. 816/845/16, $4.8m in respect of Case No. 816/688/16,  $5.3m in respect of Case No. 816/846/16 and $3.7m in respect of Case No. 816/844/16,  as all four cases have been closed in PPC's favour.

An exceptional item of $8.4 million has been credited to the Consolidated income statement in the year (2018: $5.1 million charge), being the net of provisions reversed for cases closed in PPC's favour and interest accrued on the remaining  August - December 2010 and January - December 2015 claims (see Note 18).



 

§

26. Deferred tax


Assets

Liability

Net


2019
$000

2018
$000

2019
$000

2018
$000

2019
$000

2018
$000

Continuing operations







Ukraine

8,108

9,193

(8,280)

(8,227)

(172)

966

Russia

12,033

11,130

(3,849)

(1,677)

8,184

9,453

Deferred tax asset

 



 

8,012

10,419

 

Refer to Note 2 for details of reclassifications between deferred tax assets and liabilities affecting the comparative information.

The balance comprises temporary differences attributable to:


Assets

Liability

Net


2019
$000

2018
$000

2019
$000

2018
$000

2019
$000

2018
$000








Property, plant and equipment 

-

-

(12,128)

(9,635)

(12,128)

(9,635)

Inventory

614

1,206

-

-

614

1,206

Provision for disputed rental fees

6,528

7,038

-

-

6,528

7,038

Provision for site restoration  

1,131

1,058

-

-

1,131

1,058

Tax losses

11,556

10,721

-

-

11,556

10,721

Other

311

300

(1)

(269)

310

31

Deferred tax asset /(liability)recognized

20,141

20,323

(12,129)

(9,904)

8,012

10,419

 


1 January
2019
$000

exchange differences
$000

to profit
or loss
$000

31 December 2019
$000

Deferred tax liabilities

 

 

 

 

Property, plant and equipment 

(9,635)

(1,511)

(982)

(12,128)

Other

(269)

32

236

(1)

Deferred tax assets

 

 

 

 

Inventory

1,206

191

(783)

614

Provision for disputed rental fees

7,038

1,188

(1,698)

6,528

Provision for site restoration  

1,058

160

(87)

1,131

Tax losses

10,721

1,310

(474)

11,556

Other

300

(132)

143

310

Net deferred tax

10,419

1,238

(3,645)

8,012

* Note there are minor differences in the tables due to rounding effects

 

 

 

 

 

 

 



(Charged)/credited 




1 January
2018
$000

exchange differences
$000

to profit or loss * $000

classified as discontinued operation and credited to income statement $000

31 December 2018
$000

Deferred tax liabilities






Property, plant and equipment 

(9,941)

-

306

-

(9,635)

Other

(3,000)

-

167

2,564

(269)

Deferred tax assets






Inventory

1,215

-

(9)

-

1,206

Provision for disputed rental fees

5,277

-

1,761

-

7,038

Provision for site restoration  

925

(75)

208

-

1,058

Tax losses

10,858

(1,221)

1,084

-

10,721

Other

584

-

(284)

-

300

Net deferred tax

5,918

(1,296)

3,233

2,564

10,419

 

* Out of charge of $1.3m, $2.4m (charge) relates to discontinued operation (refer to Note 14) and $3.8m (credit) to continuing operation.

 

The deferred tax assets include an amount of $11.6m (2018: $10.7m) which relates to carried forward tax losses of our Russian subsidiary. The Group concluded that the deferred tax assets will be recoverable using the estimated future income based on the approved business plans and budgets for the subsidiary notwithstanding historic losses. The subsidiary is expected to generate taxable income from 2020 onwards.

Unprovided deferred taxation

2019
$000

2018
$000

Tax losses

(12,547)

(35,439)

Property, plant and equipment 

-

-

Other temporary differences

-

-


(12,547)

(35,439)

 

There is no expiry date on the remaining losses as 31 December 2019. The UK corporation tax main rate will be at 19% for the next year and starting from 1 April 2020 will be reduced to 17%. The impact of the rate reduction is not expected to have a material impact.

27. Earnings per share

The calculation of the basic and diluted earnings per share attributable to the owners of the parent is based on the weighted average number of shares in issue during the year of 168,090,217 (2018: 166,723,145), including shares held to satisfy the Group's employee share schemes and shares purchased by the Company and held as treasury shares of 4,035,699 (2018: 5,402,771), and the profit for the relevant year.

Profit before exceptional items in 2019 of $13,246,738 (2018 profit: $18,550,956) is calculated from the 2019 profit of $22,212,692  (2018: $15,257,404) adjusted for exceptional items of $10,642,954(2018: $5,054,552) and the related deferred tax on the exceptional items of $1,677,000 (2018: $1,761,000).

The diluted earnings per share for the year is based on 173,176,095 (2018: 176,455,391) ordinary shares calculated as follows:


2019
$000

2018
$000

Profit

 


Profit for the purpose of basic and diluted earnings per share (profit for the year attributable to the owners of the parent):

 


After exceptional item

22,213

15,257

Before exceptional item

13,247

18,551




Number of shares

2019

2018

Basic weighted average number of shares

172,125,916

  172,125,916

Treasury shares

(402,771)

(402,771)

Shares held in Employee Benefit Trust (Note 15)

(5,000,000)

(5,000,000)

Sale of shares held by Employee Benefit Trust (Note 15)

1,186,547

-

Exercise of share options (Note 24)

180,525

-

Weighted average number of shares

168,090,217

166,723,145

Dilutive potential ordinary shares:



Share options

-

256,150

Convertible bonds 2020

-

9,476,096

Weighted average number of shares for diluted earnings per share

168,090,217

176,455,391

 

In accordance with IAS 33 (Earnings per share) the effects of antidilutive potential have not been included when calculating dilutive earnings per share for the year end 31 December 2019. 5,085,878 potentially dilutive ordinary shares associated with the convertible bonds (Note 13) have been excluded as they are antidilutive in 2019.

The effects of dilutive potential have been included when calculating dilutive earnings per share for the years ended 31 December 2018. 9,476,096 potentially dilutive ordinary shares associated with the convertible bonds have been included as they are dilutive at 31 December 2018.

There were no outstanding share options at 31 December 2019 (2018: 256,150, of which 256,150 had a potentially dilutive effect). All of the Group's equity derivatives were anti-dilutive for the year ended 31 December 2019 (2018: all dilutive).

28. Dividends

No interim dividend was paid for 2019 (2018: nil). In respect of the full year 2019, the directors do not propose a final dividend (2018: no final dividend paid).

29. Reconciliation of loss from operations to net cash inflow from operations


2019
$000

2018
$000

Profit from operations (continuing operations)

31,550

15,676

Profit from operations (discontinued operations)

2,004

930

Depreciation, depletion and amortisation

19,217

 15,155

Gain on disposal of fixed assets

(98)

 -

Exceptional item - (decrease)/increase in provision for production based taxes, including forex

(8,410)

5,441

Reversal of provision for impairment of Hungary

(2,232)

-

Increase in provisions - onerous lease provision, including forex

-

284

Abandonment provision write-off

-

(172)

Share-based payment charge

14

13

Cash generated from operations before changes in working capital

42,045

37,327

Decrease/(increase) in operating trade and other receivables

1,156

 (1,288)

Increase in operating trade and other payables

1,811

1,250

Increase in inventories

(3,802)

 (166)

Net cash generated from continuing operations

41,386

 37,281

Net cash used in discontinued operations (Note 14)

(176)

(158)

 



 

Changes in liabilities from financing activities

The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group's consolidated cash flow statement as cash flows from financing activities.


Borrowings
$000

Leases
$000

At 1 January 2019

 

11,003

 

3,511

Cash flows



- Payment of principal

(5,280)

(1,776)

- Payment of interest

(1,131)

-

Non-cash flows



-            - Accruals

-

134

-            - Foreign exchange

-

(34)

- Interest accruing in the period

1,091

254

At 31 December 2019

5,683

2,089

 


Borrowings
$000

At 1 January 2018

16,633

Cash flows


- Payment of principal

(5,280)

- Payment of interest

(1,870)

- Accretion payment

(480)

Non-cash flows


- Interest accruing in the period

2,000

At 31 December 2018

11,003

 

30. Capital commitments

Under the work programmes for the Group's exploration and development licenses the Group had no commitments to future capital expenditure on drilling rigs and facilities at 31 December 2019 (2018: $4.4m).

31. Related party transactions

Key management compensation

Key management personnel are considered to comprise only the Directors. The remuneration of Directors during the year was as follows:


2019
$000

2018
$000

Short-term employee benefits

999

670

Share-based payments charge

14

13


1,013

683

 

Further information about the remuneration of individual Directors, together with the Directors' interests in the share capital of JKX Oil & Gas plc, is provided in the Remuneration Report and in the Directors Report.

Three Non Executive Directors joined the Board during 2019 following removal of two Non Executive Directors at 2019 Annual General meeting (AGM) and resignations of the other two Non Executive Directors after 2019 AGM. Victor Gladun was appointed as an Executive Director of the Company at the AGM and on 20 September he was additionally appointed as the CEO of the JKX Group. Please refer to the Remuneration Report for the disclosure on the bonus awarded to the Group CEO for 2019 (2018: nil).

There were five Non Executive Directors at 31 December 2018 following resignations of Vladimir Tatarchuk and Vladimir Rusinov on 16 August 2018. There were no Executive Directors appointed as Directors in 2018.

Share-based payments represents the expenses arising from share-based payments included in the income statement, determined based on the fair value of the related awards at the date of grant (Note 24).

Transactions with related parties

The transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.

PJSC "Mining Company Ukrnaftoburinnya" ("UNB"), a Ukrainian oil and gas company in which Group holds a 10% of the ordinary share capital was considered a related party at 31 December 2019. One of the Group's Non Executive Directors, Michael Bakunenko, a member of Audit and Remuneration Committees, is also a Chairman of the Board of UNB.

The following transactions were carried out with UNB:


2019
$000

2018
$000

Gas sales

1,330

662

Sale of property, plant and equipment (pipes)

135

-

 


2019
$000

2018
$000

Oil purchase

-

240

 

Gas, oil and property, plant and equipment are sold and purchased on normal commercial terms and conditions.

Vladimir Tatarchuk and Vladimir Rusinov were appointed to the Board on 28 January 2016 and had a beneficial interest in Convertible Bonds with principal amount of $3.4m (interest and accretion amount of $0.8m) at 31 December 2017, which are held by Proxima (see Notes 11 and 12).

In February 2018, the following redemptions were made in relation to Proxima's bond holding and in accordance with the terms and conditions of the restructured Bonds (see Note 11):

§ $1.1m in respect of first instalment of the principal;

§ $0.1m in respect of prior accretion amounts;

§ $0.2m Bond interest payment.

On 16 August 2018 Vladimir Tatarchuk and Vladimir Rusinov tendered their resignations with immediate effect, and such resignations were accepted by the board. They ceased to be related parties as of this date.

Subsidiary undertakings and joint operations

The Company's principal subsidiary undertakings including the name, country of incorporation, registered address and proportion of ownership interest for each are disclosed in Note B to the Company's separate financial statements which follow these consolidated financial statements.

Transactions between subsidiaries and between the Company and its subsidiaries are eliminated on consolidation.

32. Audit exemptions for subsidiary companies

The Group has elected to take advantage of the full extent of the exemptions available under Section 479A of the Companies Act 2006. Exemption from mandatory audit in section 479A of the act is available for qualifying subsidiaries that fulfil a set of conditions. As a result, statutory financial statements will not be audited for the following UK entities:  JKX Services Limited, JKX Bulgaria Limited, JKX Georgia Ltd, JKX (Ukraine) Ltd, Baltic Energy Trading Ltd, EuroDril Limited, JP Kenny Exploration & Production Limited, Page Gas Ltd, Trans-European Energy Services Limited, JKX Limited.

33. Events after the reporting date

On 19 February 2020 the Company made a payment of the final instalment to Bondholders of $5.4m (34% of the principal amount of the Bonds), together with $0.4m interest payment in accordance with the terms and conditions of the Bond.

In early February 2018 the Group announced its intention to exit its oil and gas operations in Hungary and initiated an active programme to dispose of its Hungarian business. The sale-purchase agreement for the disposal of the Hungarian business for expected consideration of around $2.9m was executed in March 2020.

At the date of approval of these consolidated financial statements, Covid-19 continues to spread internationally, contributing to a sharp decline in global financial markets and a significant decrease in global economic activity. On 11 March 2020, the Covid-19 outbreak was declared a global pandemic by the World Health Organization and has since then resulted in numerous governments and companies, including JKX, introducing a variety of measures to contain the spread of the virus. The outbreak has also created significant volatility in financial markets and is considered to have negatively impacted commodity prices, including oil prices, which is relevant to financial performance since year end and may impact future asset values should they remain depressed.


 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.
 
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Quick facts: JKX Oil & Gas PLC

Price: 18

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Market Cap: £30.91 m
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