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viewJKX Oil & Gas PLC

UNAUDITED PRELIMINARY RESULTS YE 31 DEC 2019

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RNS Number : 4021U
JKX Oil & Gas PLC
29 March 2019
 

 FOR IMMEDIATE RELEASE

29 MARCH 2019

JKX Oil & Gas plc

('JKX', the 'Company' or the 'Group')

UNAUDITED PRELIMINARY RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2018

 

JKX Oil & Gas plc (LSE: JKX), announces its unaudited preliminary results for the year ended 31 December 2018.

 

2018 Highlights

§ Revenue up to $92.9m (2017:$74.6m), benefitting from high sales prices in Ukraine.

§ First full year profit after tax since 2013 of $15.3m (2017:$17.7m loss).

§ Cash generated from continuing operations up to $37.3m (2017:$14.2m).

§ Moved into to net cash position of $8.2m (2017:$9.7m net debt position).

§ Both Ukrainian and Russian production up year on year.

§ In Ukraine, commenced new five year development plan with positive results.

§ In Russia, rigged up for the new three well workover programme targeting a significant increase in production within two years.

 

 

 

 

 

For further information please contact:

 

JKX Oil & Gas plc: +44 (0) 20 7323 4464

Ben Fraser, CFO

 

EM Communications: +44 (0) 20 7002 7860

Stuart Leasor, Jeroen van de Crommenacker

Chairman's statement

 

Dear shareholder, I am pleased to present the results for the full 2018 year and to report that 2018 has been a year of significant and positive change for the Company, with progress made in many key areas.

Previously the Board identified the following areas of immediate focus for 2018:

§ 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, reducing debt and keeping tight control over cost;

§ Resolving outstanding tax issues.

It is particularly notable that I am able to report the first full year profit for the year ending 31 December 2018 since 2013 and that in 2018 we have moved from having a net debt of $9.7m at the start of the year to a closing net cash position of $8.2m.

This represents a significant improvement in the Company's financial position and a vindication of the hard work and commitment from the Company's officers and staff over the year. The Company's focus has been on cost and risk control, building liquidity reserves, stabilising the operations, improving the contractor base and achieving successful results from the workover programme, as well as achieving stronger oil and gas prices.

Along with improved financial results there has also been positive progress in the other key focus areas I identified in the 2017 Annual Report:

Relationship with shareholders

For the first time in many years the Company's Board and senior leaders have remained stable since the last annual report, the only changes in the Board arising from the sale of Proxima's 19.97% shareholding to our new strategic investor, Cascade Investment Fund.    I would like to recognise Proxima's support of the Company and to welcome Cascade. I look forward to a constructive relationship with Cascade over the years to come, whilst ensuring the continued independent nature of the Board.

During the year all the independent Directors (myself included) stood down and offered ourselves up for re-election at an EGM held on 22 March 2018 in order to ensure that we had the confidence of all shareholders.

I am glad to be able to report that all the directors were reappointed - as were Mr Bakunenko and Mr Rusinov who stood down and offered themselves up for re-election at the AGM held on 25 June 2018.

The Board seeks to foster an active and open communication with all our shareholders. During the year I have met with a range of shareholders to ensure that I can explain our strategy and discuss their concerns in order to ensure that decisions are taken in the best interests of the Company as a whole.

Operational and financial alignment between all companies of the Group

The Board has undertaken a review of key processes and has introduced a number of new policies and procedures in order to ensure the robustness of the Group control framework and a harmonised approach on a Group-wide basis. These processes will enhance the Board and senior management's ability to identify and manage risk.

In 2018, the Group has also reviewed its existing contractor base. This work has included comprehensive rig tender exercises in both Ukraine and Russia, to find rigs of a suitable standard to carry out the 2019 work plan. New drilling contractors have been appointed and additional contracts will be concluded in the near future. In addition a five year field development plan has been approved for Ukraine as well as a three well work over programme for Russia.

Focus on operational risk management developing existing fields step by step with proven, low risk technology

In 2018  Poltava Petroleum Company ('PPC') undertook an active work programme including working over leased and owned wells, three successful side-tracks and a new well completed. As a consequence annual production from Ukrainian assets increased by 4.8% in 2018 compared to 2017 and we are now starting to see the benefits of the work done in Q4 2018 and Q1 2019. The Group production from the first 2 months of 2019 is 11% higher than for the same period in 2018 and 9% higher than the average monthly production during 2018.

During 2018 successful production from two leased wells in the northern part of Rudenkivske further confirmed the presence of commercial hydrocarbons and plans are in place to drill a side-track in this field in 2019. Access to WM215, a leased well in the West Mashivske licence, together with the implementation of the necessary flowline connections led to first production from this field in the second half of the year. After year end a new well has been drilled in the new West Mashivske field (WM3) and 3D seismic shooting completed. WM3 is currently being tested and the seismic now being processed.

In Russia production increased by 3% in 2018 compared to 2017. Despite a continuing decline in Well 20 through the year, Russian production is up year-on-year, with the help of periodic acid jobs, to the continued stable performance of Well 25 and 27.

Ensure financial stability by building liquidity reserves, reducing debt and keeping tight control over costs

As reported above, the Company has recorded its first full year profit after tax since 2013 (2018: $15.3 m, 2017: Net loss $17.7 m) and has moved from being in a net debt position to a net cash position (2018 net cash: $8.2 m, 2017: net debt: $9.7m).

The Board and the senior executive team have successfully used the Group's positive operating cash flow to pay off debt on schedule and to consolidate cash reserves by strengthening cost controls and ensuring improved procurement and payment procedures in order to reduce future spend.

All planned payments to bondholders were successfully made in February 2018 and 2019, thus repaying on schedule one third of the capital outstanding on the bonds in 2018 (capital repaid 2018: $5.3 m) and one half of the remainder in 2019 (2019: $5.3 m). The final capital repayment ($5.4 m) will be made in February 2020.

Resolving outstanding tax issues

The Company's principal operating Company, PPC, has three material unresolved tax issues relating to:

1.        A claim for underpayment of rental fees for 2010. The claim, including interest and penalties, amounts to approximately $12.4m. A ruling from the Supreme Court of Ukraine is expected in H1 2019.

2.        Claims for underpayment of rental fees for 2015. The claims, including interest and penalties, amount to approximately $ 30.1m. The tax notification was subsequently cancelled. The cases are still being contested in court. We do not expect any final ruling in these cases before 2020.

3.        An award of approximately $12.1m made by the Hague international tribunal in 2017. In February 2019 we filed for recognition of this award in the Ukrainian courts, and although material uncertainties remain over practical enforcement, we expect the recovery in 2020 at the earliest.

As described above, the timing of the court processes dealing with the royalty claims has become much clearer during 2018, and a decision on the claim for underpayment of rental fees for 2015 is not expected before 2020. This provision for potential liability of $30.1m has consequently been reclassified from short term to long term liabilities. This reclassification, together with the improved cash position, means that the company reasonably expects to have sufficient liquidity to pay tax claims that may arise if we do not successfully defend our position in Ukrainian courts.

More effective governance

The Board is culturally diverse, widely experienced and consists of individuals with knowledge and skills in each of the key areas of risk for the Company and with significant experience of operating in JKX's key markets.

As described in last year's Annual Report and Accounts, an external investigation was commissioned in Q1 2018 into the procurement of legal services and subsequent payments made to legal advisers in Ukraine in 2017. This investigation concluded that there had been a breakdown in internal controls and a number of measures have been introduced to strengthen the Company's internal control systems.

The Board's approach to the senior executive leadership remains unchanged and fit for purpose. In practice this means that each operating subsidiary has a General Director reporting directly to the Chairman whilst a Group Chief Financial Officer provides Group level overview and leadership. At the same time the highly experienced Board continues to make its range of skills and experience available to the Company.

We believe that the current composition of the Board continues to provide the Company with access to expertise and skills that would not otherwise be available to it, whilst reinforcing the Directors' strong commitment to Board independence. In addition to the non-executive Chairman, the number of independent directors has remained steady at three, while the number of non- independent directors has been reduced from three to one.

Outlook

Ukraine and Russia will remain our main areas of operation and the Board and management will continue to devote their full attention to our assets in these countries.

In Ukraine, we are starting to see the benefits of the work done and plan developed in 2018. Provisional production figures in Q1 2019 have risen to 5,015 boepd (2018 average annual production: 3,677  boepd). We will continue to prioritise low cost, low risk activities in order to maximise the impact of our free cash using the newly appointed drilling contractors and we will enhance our technical capabilities to ensure on time and on budget delivery of work packages.

In Russia a rig has arrived for the first well of the three well workover programme planned for 2019 and we are exploring alternative sales strategies in order to secure stable, long term sales at increased prices.

We anticipate a gradually improved cash flow through 2019 as the Group strategy and focus on operational excellence starts to yield results. This includes an unrelenting focus on internal control and cost optimisation.

In summary the key areas of focus for 2019 are:

§ successful implementation of the five year field development programme;

§ continued focus on financial stability, risk management and cost control;

§ resolving outstanding tax issues; and

§ an initial, strategic review of areas of new opportunity.

People

In 2018 the company suffered the tragic loss of an operator in Ukraine. This sad loss has caused the company to review its HSE provision across all its operations, in particular in high risk activities.

2018 has been a period of organisational stability for JKX following a period of significant Board and management change. This stability has given us the chance to continue right-sizing the organisation and to ensure that we have the correct resources in the right places in order to implement our revised strategy.

I would like to thank JKX's staff for ensuring continuity and smooth operations and to both our staff and our shareholders for their continued faith in the Company.

I remain optimistic about the Company, whilst being realistic about the challenges that it continues to face.

On behalf of the Board

 

 

Hans Jochum Horn
Chairman

Financial review

 

Results for the year

The profit after tax for the year of $15.3m is the first reported since 2013 and is a marked improvement upon the loss after tax of $17.7m reported for 2017.  Results for both years include significant charges reflecting updated interest calculations for the provisions for disputed rental fees for 2010 and 2015 in Ukraine ($5.1m in 2018 and $4.4m in 2017).  No other exceptional charges have been reported for 2018, which compares favourably with the significant charges for the unsuccessful Rudenkivske fracturing programme, impairment charges and severance payments reported for 2017.

Total revenue for 2018 is $92.9m, 24.5% higher than the $74.6m reported in 2017.  The increase is primarily due to the higher commodity prices in Ukraine, as well as the 3.1% increase in total Group production from 8,657 boepd in 2017 to 8,937 boepd in 2018.  Gas sales prices and netbacks are still significantly higher in Ukraine than in Russia.

Revenue

Group Revenues*

2018
$m

2017
$m

Change
$m

Change
%

Ukraine

74.9

57.0

17.9

31.4%

Gas

49.2

35.8

13.4

37.4%

Oil

19.3

16.5

2.8

17.0%

Liquefied Petroleum Gas ('LPG')

5.6

4.6

1

21.7%

Other

0.8

0.1

0.7

>100%

Russia

17.8

17.6

0.2

1.1%

Gas

17.2

17.0

0.2

1.2%

Condensate

0.6

0.6

0.0

0.0%

Other

0.2

     0

0.2

 N/A

Total

92.9

74.6

18.3

24.5%

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

 

Sales prices

2018

2017

Change

% Change

Ukraine

 

 

 

 

Gas ($/Mcm)

307.8

237.5

70.3

29.6

Oil ($/bbl)

74.0

64.3

9.7

15.1

LPG ($/tonne)

544.0

467.0

77.0

16.5

Russia

 

 

 

 

Gas ($/Mcm)

58.3

59.7

(1.4)

(2.3)

 

Average exchange rates

2018

2017

Change

% Change

Russia (RUB/$)

62.9

58.3

(4.6)

(7.9)

Ukraine (UAH/$)

27.2

26.6

(0.6)

(2.3)

 

Ukraine revenues

The $17.9m increase in total revenues was due to both higher sales prices, as shown in the table, and higher sales volumes.

The average gas sales price in dollar terms was 29.6% higher in 2018 than in 2017.  This is in line with international market trends.  Total gas sales volumes increased by 5.9% from 150,909 Mcm in 2017 to 159,887 Mcm in 2018, primarily due to the gas production volume having increased 4.9% from 172,939 Mcm in 2017 to 181,482 Mcm in 2018.  The increase in production was a result of the ongoing drilling and workover activity in Ukraine. For more detail please refer to the Operations review. 

The average oil sales price increased from $64.3/bbl in 2017 to $74.0/bbl in 2018 and total oil sales volumes for the year increased 2.1% from 256,076 barrels in 2017 to 261,420 barrels in 2018.  Oil production volume increased 4.5% from 262,334 barrels in 2017 to 274,087 barrels in 2018, with the surplus being taken to inventory.

LPG sales volumes were 10,266 tonnes in 2018 compared to 9,855 tonnes in 2017, with sales prices being higher in 2018 ($544/tonne in 2018 compared to $467/tonne). 

 

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

Russian revenues benefitted from a 3.9% price increase in rouble terms on 1 July 2018 and a year on year increase in production volumes (2018: 316,996 Mcm, 2017: 307,841 Mcm) but were negatively impacted by the weakening of the rouble as shown in the table above, leading to an increase of just 1.1% in dollar terms.

Cost of sales

The provision for disputed rental fees, in respect of claims for additional rental fees for the years 2010 and 2015, was increased by $5.1m, to reflect updated interest calculations, in 2018.

Cost of sales before exceptional items for 2018 totalled $57.5m (2017:$51.9m).  This includes:

§ $21.9m of production taxes, which were $5.2m higher than in 2017 due to the higher production taxes incurred in Ukraine.  The production tax expense in Ukraine increased from $14.9m in 2017 to $20.1m in 2018, mainly due to an increase in the average border gas price which is the basis for calculating gas production taxes (UAH8,194 per Mcm in 2018 compared to UAH6,115 per Mcm in 2017).  Only $1.8m of the total production taxes relate to Russia (2017: $1.8m) where the mineral extraction tax rate for wells deeper than 5,000m has remained at 328 Roubles/Mcm.

§ $20.7m of operating costs, of which $12.1m relates to Ukraine (2017:$9.6m) and $8.6m relates to Russia (2017:$9.9m).  The increase in operating costs in Ukraine is mainly due to a $2.0m increase in well service and rental costs (2018:$3.0m, 2017:$1.0m).  The decrease in Russia is partly due to the rouble exchange rate.

§ $14.9m of depreciation, depletion and amortisation charge (2017:$16.8m).

Administrative expenses

Administrative expenses before exceptional items of $13.9m in 2018 compare favourably to those of $16.4m in 2017.  The decrease is mainly due to staff cost reductions resulting from a right sizing exercise carried out during 2018 to ensure that resources are appropriate to the needs of the Group, and a reduction in legal, lobbying and other professional fees incurred.  2018 administrative expenses include $0.5m of professional fees in relation to the forensic investigation into payment of legal expenses in Ukraine, as disclosed in our previous annual report, which are considered non-recurring.

Finance income and costs

Finance costs decreased from $3.2m in 2017 to $2.5m in 2018. This mainly consists of the convertible bond interest, which reduced from $2.8m to $2.1m due to the repayment of principal outstanding in February 2018.  Finance costs also include unwinding of discount of provisions for site restoration of $0.4m (2017: $0.3m). 

Finance income of $0.9m (2017: $0.3m) comprises income from bank deposits, which has risen in accordance with the increase in funds held.

Taxation

The total tax charge for 2018 is $2.2m (2017: $0.8m credit) comprising a current tax charge of $5.5m (2017: $3.0m) which relates to Ukraine and a deferred tax credit of $3.2m (2017: credit $3.8m).   The increase in current tax charge reflects a higher profitability in Ukraine. The deferred tax credit relates to movements in various deferred tax assets and liabilities in Ukraine and Russia.

Discontinued operation

The Hungarian business is presented as a discontinued operation to reflect our decision to dispose of it, as explained in our previous annual report. It covered its costs in 2018, providing a small operational profit.  The total profit attributable to it, as presented in the consolidated income statement, largely relates to non-cash items as set out in Note 8. The remaining net assets of $0.5m include deposits held to address future abandonment costs.

Capital Expenditure

While we started the year with only $6.9m unrestricted cash and building liquidity was a clear priority, we also recognise the need to invest for the longer term.

Of the $11.8m capital expenditure incurred during the year (2017:$19.3m), $11.1m relates to Ukraine where we drilled a new well and two sidetracks.  Only $0.7m relates to Russia, where investment was minimal while we were securing a suitable rig for the three well workover programme to be performed in 2019.

Cash flows 

During the year the Group significantly increased its available cash balances from $6.9m to $19.2m while at the same time it decreased its borrowings from $16.6m to $11.0m, therefore moving from a net debt to a net cash position.  This was achieved as a result of strong operating cash flow of $37.3m (2017:$14.2m) from continuing operations, almost all of it generated in Ukraine.  Successful completion of the three well workover programme in Russia, improving netbacks by increasing production volumes, will improve its cash contribution to the Group in 2019 and beyond.

Use of cash during the year is as shown in the cash bridge below.  Capital expenditure cash outflow of $3.5m relating to Russia includes $2.8m to settle creditor balances from prior periods.

Net cash outflow from financing activities in the period mainly relates to the $5.8m payment to the bondholders in February 2018.  No dividends were paid to shareholders in the period (2017: nil).

Cash flows ($m)

31 Dec 2017

Cash balance

Cash from continuing operations

Interest paid

Income tax paid

Capex (Ukraine)

Capex  (Russia)

Bond repayment 

Interest received and other

31 Dec 2018

Cash balance

6.9

37.3

(1.9)

(3.9)

(10.2)

(3.5)

(5.8)

0.3

19.2

 

Liquidity outlook

We have considerably improved our liquidity over the last year underpinned by greater operating cash flows.

After a further payment of $6.0m to bond holders in February 2019 the Group remains in a net cash position, with sufficient funds to make the remaining bond payments ($0.4m in August 2019 and $5.8m in February 2020).  In addition in December 2018 PPC, our subsidiary in Ukraine, has renewed and increased a 12 month UAH280m ($10.1m) revolving credit line and a UAH50m ($1.8m) overdraft facility with Tascombank, neither of which are currently being used.  We are confident that this facility can be renewed again for 2020.  As well as 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 terms.

Furthermore, we have improved our understanding of the 2010 and 2015 rental fee claims for which we continue to maintain provisions (see Note 10 to the consolidated financial information) and are now satisfied that we have the resources to meet these potential liabilities if necessary based on the expected timing of potential payments.  In particular, careful consideration has been given to the earliest dates that courts may conclude that PPC may be required to settle each of the various claims in the event that court hearings proceed without undue delay, including assessments with external legal counsel.  The Group's expectation is that a final hearing with respect to the 2010 rental fee claim will take place in 2019 and that final hearings in respect of the 2015 rental fee claims will take place in 2020 and 2021.  The $12.4m provision for the 2010 rental fee claim has therefore been reported under current liabilities and the $30.1m provision for the 2015 rental fee claims has been reported under non-current liabilities.

Both our Ukrainian and Russian operations remain cash flow positive, generating sufficient cash to cover the Group's costs and their own investment programmes and the Group's liquidity is forecast to improve through 2019 and beyond.  The consolidated financial statements have therefore been prepared on a going concern basis (see Note 2 to the consolidated financial information).

 

 

Ben Fraser

Chief Financial Officer

Operations review

 

Group production

In 2018 group average production was 8,937 boepd (2017: 8,657 boepd), an overall increase in production of 3%. The increase in production year-on-year was a result of the ongoing drilling and workover program in Ukraine and higher uptime in Russia.

 

boepd

Workovers1

Sidetracks

New wells

Cash generating unit

2018

2017

2018

2017

2018

2017

2018

2017

Novomykolaivske complex

2,414

2,335

18

15

2

1

0

0

Elyzavetivske Licence

1,263

1,172

2

0

0

0

1

0

Total Ukraine

3,677

3,507

20

15

2

1

1

0

Russia

5,169

5,019

0

2

0

0

0

0

Hungary

91

131

0

1

0

0

0

0

Total Group

8,937

8,657

20

18

2

1

1

0

1            Includes abandonments

 

Gas and oil production increased year-on-year in all cash generating units, except Hungary.

 

Gas, MMcfd

Gas, Mcmd

Oil, bopd

Cash generating unit

2018

2017

2018

2017

2018

2017

Novomykolaivske complex

10.1

9.8

286

276

731

701

Elyzavetivske Licence

7.5

6.9

211

196

20

18

Total Ukraine

17.6

16.7

497

474

751

719

Russia

30.7

29.8

868

843

58

55

Hungary

0.5

0.7

14

20

7

9

Total Group

48.8

47.2

1,379

1,337

816

783

 

Ukraine

Novomykolaivske complex production and operations

 

boepd

Workovers

Sidetracks

Field name

2018

2017

2018

2017

2018

2017

Ignativske

1,395

1,349

6

5

1

1

Molchanivske

346

260

2

2

1

0

Novomykolaivske

286

383

2

0

0

0

Rudenkivske

387

343

8

8

0

0

Novomykolaivske complex

2,414

2,335

18

15

2

1

 

The increase in Novomykolaivske complex production year-on-year was mostly attributed to production from two sidetracks, and the workover of a leased well in Rudenkivske.

Outlook

 

Following the creation of a five year field development plan and the recent success of IG103 sidetrack a follow-up well, IG142, is planned in 2019 to target another structural high point in the potentially productive horizons in the area directly south of IG103 sidetrack.

In Novomykolaivske one firm well, and one contingent well, are planned to be drilled to appraise the V16 to the south of the main field in 2019. Success of these two wells would lead to further wells targeting the shallow Visean sands to the west of the Molchanviske licence. These wells benefit from a relatively low capex cost due to the target depth being less than 2000m.

In Rudenkivske, following the success of the leased well workovers in 2018, a sidetrack is planned to further evaluate the Visean sands in the north western part of the field in 2019. Commercial success of this sidetrack could lead to the drilling of at least 7 more wellbores targeting the Visean sands in the North of Rudenkivkse.

Elyzavetivske Licence production and operations

 

boepd

Workovers

New wells

Field name

2018

2017

2018

2017

2018

2017

Elyzavetivske

1,177

1,172

1

0

1

0

West Mashivske

86

0

1

0

0

0

Elyzavetivske Licence

1,263

1,172

2

0

1

0

 

The increase in production from the Elyzavetivske licence was mainly the result of the successful workover of two leased wells, one of which was on the West Mashivske licence.

Outlook

Following the successful workover of a leased well in West Mashivske and the tie-in to the Elyzavetivske facilities a new well was spudded in the West Mashivske field in December 2018.

After year end the shooting of a 3D seismic survey has been completed and is now being processed which along with the results from the first new well will enable a field development plan to be created for this field, the only undeveloped field in JKX's portfolio.

Russia

Koshekhablskoye licence production and operations

 

boepd

Workovers

Well name

2018

2017

2018

2017

Well 20

1,733

2,153

0

0

Well 25

1,693

1,078

0

1

Well 27

1,665

1,699

0

0

Koshekhablskoye field1

5,169

5,019

0

2

1            Includes Well 15 production and Well 5 workover

 

In 2018 there were no workovers while resources were focussed on finding a suitable rig to complete a 3 well workover program to commence in 2019. This workover programme will include the work overs of Well 5 and Well 18 which upon completion are expected to deliver a significant increase in production within two years.

The Callovian licence commitment has now been extended from 2019 to 2025.

Reserves Update

In Ukraine, production from 2018 has been more than offset by reserves increases across the fields. The most significant increase is the result of continuing production from the West Mashivske field in the Elyzavetivske licence.

In Russia, there has been no change to the reserves this year other than depletion due to 2018 production. Currently more than 50% of the Group reserves are accounted for by Russia and with a current commercial cut-off of 2049, relying on long term price and other commercial assumptions, no change to reserves year-on-year is justified.

Total remaining 2P reserves at 31 December 2018

 

31-Dec-17

Revisions

Production

31-Dec-18

Total

 

 

 

 

Oil (MMbbl)

3.9

(0.4)

(0.3)

3.2

Gas (Bcf)

[MMm3]

546.7

[15,480]

15.5

[439.0]

(17.8)*

[(504.0)]

544.4

[15,415.0]

Oil + Gas (MMboe)

95.0

2.2

(3.3)

93.9

Ukraine

 

 

 

 

Oil (MMbbl)

3.2

(0.4)

(0.3)

2.5

Gas (Bcf)

[MMcm]

120.6

[3,414]

15.6

[443.0]

(6.4)

[(181)]

129.8

[3,676.0]

Oil + Gas (MMboe)

23.3

2.2

(1.3)

24.2

Russia

 

 

 

 

Oil (MMbbl)

0.7

0.0

(0.0)

0.7

Gas (Bcf)

[MMcm]

425.9

[12,059]

(0.1)

[(2.2)]

(11.2)

[(317.0)]

414.6

[11,740.0]

Oil + Gas (MMboe)

71.7

0.0

(1.9)

69.8

*      0.18 Bcf [5 MMcm] produced in Hungary

Field-by-Field 2P reserves at 31 December 2018

MMboe

Dec-17

Revisions

Production

Dec-18

Ukraine

 

 

 

 

Ignativske

5.5

0.2

(0.5)

5.2

Movchanivske

0.7

(0.1)

(0.1)

0.5

Novomykolaivske

0.5

0.4

(0.1)

0.8

Rudenkivske

15.0

0.4

(0.1)

15.2

Zaplavska

-

-

-

-

sub-total Novo-Nik production licences

21.8

0.8

(0.9)

21.7

Elyzavetivske

1.6

1.3

(0.5)

2.5

Total Ukraine

23.3

2.2

(1.3)

24.2

Russia

 

 

 

 

Koshekhablskoye

71.7

0.0

(1.9)

69.8

Total

95.0

2.2

(3.2)

93.9

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

JKX Contingent Resources

There is no change to the contingent resources in 2018.

MMboe

 

1C (low)

2C (best)

3C (high)

Ukraine

 

 

 

 

Ignativske

 

11.98

17.53

50.10

Movchanivske

 

0.00

1.25

2.76

Novomykolaivske

 

0.00

0.00

0.15

Rudenkivske

 

9.16

65.52

197.89

Zaplavska

 

0.03

0.38

1.41

sub-total Novo-Nik production licences

21.17

84.68

252.31

Elyzavetivske

 

0.00

6.20

20.83

Total Ukraine

 

21.17

90.88

273.14

Russia

 

 

 

 

Koshekhablskoye

 

24.12

74.77

107.53

Hungary

 

 

 

 

Hadjunanas

 

0.0

0.0

0.0

Tiszavasvari 6

 

0.2

0.3

0.7

Total

 

45.49

165.95

381.37

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 unrestricted cash on hand at 31 December 2018 is $19.2m compared to $6.9m at 31 December 2017, 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.

After a further payment of $6.0m to bond holders in February 2019 the Group remains in a net cash position, with sufficient funds to make the remaining bond payments ending in February 2020. In addition in December 2018 PPC, our subsidiary in Ukraine, has renewed and increased a 12 month UAH280m ($10.1m) revolving credit line and a UAH50m ($1.8m) overdraft facility with Tascombank, neither of which are currently being used. We are confident that this facility can be renewed again for 2020. YGE, our subsidiary in Russia, is considering options for a similar facility. Other liquidity tools include the ability to make forward sales in Ukraine.

Furthermore we have improved our understanding of the 2010 and 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 2019 and that final hearings in respect of the 2015 rental fee claims will take place in 2020 and 2021.

Geopolitical and fiscal

Description: Most of the Group's operations and more than 97% of our oil and gas assets 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. The Group is currently arranging for this award to be recognized in Ukraine.

 

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.

The Board continues to receive regular legal advice regarding the cases against PPC in respect of the 2010 Claims and 2015 Claims, and has invested considerable time in order to understand them fully.

In respect of the 2010 rental fee claims and 2015 rental fee claims, provisions of $12.4m and $30.1m, respectively, have been recognised in these financial statements to reflect the Company's estimate of the potential liability.

Except for this $42.5m 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 has begun to legalize the international arbitration award in Ukraine and plans to engage with the authorities to reach a mutually beneficial outcome taking in consideration mutual claims.

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 ongoing 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 for 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 account of 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 presence in five 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 2018 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.

 

Since 2017 the current Board has prioritised financial discipline and governance.

During 2018 new financial controls have been implemented and corporate governance has been 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 insure the appropriate level of financial discipline and controls, as well as delegation of authority along the corporate and management structure. All payments are subject to approval by the CFO.

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, has been 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. Since Ukraine stopped purchasing gas from Russia directly, domestic gas prices have been at a premium to those in Europe. Change in gas import flows may have 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 2018 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 2018, the Hryvnia exchange rate remained stable while the Rouble weakened by more than 20%.

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.

Consolidated income statement

For the year ended 31 December 2018

 

 

Note

2018
$000

20171
$000

Revenue

4

92,873

74,631

Cost of sales

 

 

 

Exceptional item - provision for production based taxes

9

(5,055)

(4,357)

Exceptional item - reversal of provision for impairment of Ukrainian oil and gas assets

5

-

5,636

Exceptional item - provision for impairment of Slovakia

5

-

(7,881)

Exceptional item - write off of appraisal expenditure in Ukraine

5

-

(9,391)

Other production based taxes

 

(21,857)

 (16,715)

Other cost of sales

 

(35,629)

(35,219)

Total cost of sales

 

(62,541)

(67,927)

Gross profit

 

30,332

6,704

Exceptional items

 

-

(1,513)

Other administrative expenses

 

 (13,945)

(16,410)

Total administrative expenses

 

 (13,945)

(17,923)

(Loss)/gain on foreign exchange

 

(711)

1,179

Profit from operations before exceptional items

 

20,731

7,466

Profit/(loss) from operations after exceptional items

 

15,676

(10,040)

Finance income

 

908

348

Finance costs

 

(2,510)

(3,164)

Fair value movement on derivative liability

 

(59)

(3)

Profit/(loss) before tax

 

14,015

(12,859)

Taxation - current

10

(5,478)

 (2,964)

Taxation - deferred

 

 

 

- before the exceptional items

10

1,472

(356)

- on the exceptional items

10

1,761

 4,113

Total taxation

10

(2,245)

793

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

 

11,770

(12,066)

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

8

3,487

(5,597)

Profit/(loss) for the year attributable to equity shareholders of the parent company

 

15,257

 (17,663)

1            Prior year numbers were restated as a result of application of IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" to the Group's operations in Hungary. Please refer to Note 8 for details

 

 

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

 

 

Consolidated income statement

For the year ended 31 December 2018

 

 

Note

2018
$000

2017
$000

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

 

 

 

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

 

 

 

-after exceptional items

11

7.06

(7.24)

-before exceptional items

11

9.04

0.79

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

 

 

 

-after exceptional items

11

6.67

(7.24)

-before exceptional items

11

8.54

0.73

Earnings per share for profit/(loss) 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

11

2.09

(3.36)

-before exceptional items

11

2.09

(1.22)

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

 

 

 

-after exceptional items

11

1.98

(3.36)

-before exceptional items

11

1.98

(1.22)

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

 

 

 

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

 

 

 

-after exceptional items

11

9.15

(10.59)

-before exceptional items

11

11.13

(0.42)

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

 

 

 

-after exceptional items

11

8.65

(10.59)

-before exceptional items

11

10.51

(0.42)

*      Comparative earnings per share have been amended to provide a consistent basis of measurement with 2018.  Refer to note 11 for details.

 

 

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

 

 

 

Consolidated statement of comprehensive income

For the year ended 31 December 2018

 

 

2018
$000

20171
$000

Profit/(loss) for the year

15,257

(17,663)

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

 

 

Currency translation differences

(19,475)

7,118

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

 

 

Remeasurements of post-employment benefit obligations

(22)

(333)

Other comprehensive income for the year, net of tax

(19,497)

 6,785

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

(4,240)

(10,878)

 

 

 

Continuing operations

(7,587)

(5,281)

Discontinued operations

3,347

(5,597)

1            Prior year numbers were restated as a result of application of IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" to Group's operations in Hungary. Please refer to Note 8 for details

 

  

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

 

 

 

Consolidated statement of financial position

As at 31 December 2018

 

Note

2018
$000

2017*
$000

ASSETS

 

 

 

Non-current assets

 

 

 

Property, plant and equipment

5(a)

173,474

194,031

Deferred tax assets

 

10,419

11,293

 

 

183,893

205,324

Current assets

 

 

 

Inventories

 

5,990

5,824

Trade and other receivables

 

5,111

4,969

Restricted cash

 

-

 497

Cash and cash equivalents

 

19,182

6,929

 

 

30,283

18,219

Assets classified as held for sale

8

1,237

-

Total current assets

 

 31,520

18,219

Total assets

 

215,413

223,543

LIABILITIES

 

 

 

Current liabilities

 

 

 

Current tax liabilities

 

(2,214)

(645)

Trade and other payables

 

(10,782)

 (11,878)

Borrowings

7

(5,962)

 (7,630)

Provisions

9

(12,645)

 (37,269)

 

 

(31,603)

 (57,422)

Liabilities of disposal group classified as held for sale

8

(775)

-

Total current liabilities

 

(32,378)

(57,422)

Non-current liabilities

 

 

 

Provisions

9

(35,673)

 (5,341)

Borrowings

7

(5,041)

(9,003)

Derivatives

 

(62)

(3)

Defined pension benefit plan

 

(577)

(490)

Deferred tax liabilities

 

-

 (5,375)

 

 

(41,353)

(20,212)

Total liabilities

 

(73,731)

(77,634)

Net assets

 

141,682

145,909

EQUITY

 

 

 

Share capital

 

26,666

26,666

Share premium

 

97,476

97,476

Other reserves

 

(172,623)

(153,126)

Retained earnings

 

190,163

 174,893

Total equity

 

141,682

145,909

*      Comparative amounts in respect of deferred tax assets, liabilities, non-current other receivables and other payables have been reclassified for comparability with 2018. Please refer to Note 2

 The above Consolidated statement of financial position should be read in conjunction with the accompanying notes below.

 

Consolidated statement of changes in equity

For the year ended 31 December 2018

 

Attributable to equity shareholders of the parent

 

 

Share
capital
$000

Share
premium
$000

Retained
Earnings
$000

  Other reserves
$000

Total
equity
$000

At 1 January 2017

26,666

97,476

192,602

 (159,911)

 156,833

Loss for the year

-

-

(17,663)

-

(17,663)

Exchange differences arising on translation of overseas operations

-

-

-

7,118

7,118

Remeasurement of post-employment benefit obligations

-

-

-

(333)

(333)

Total comprehensive loss attributable to equity shareholders of the parent

-

-

(17,663)

6,785

(10,878)

Transactions with equity shareholders of the parent

 

 

 

 

 

Share-based payment credit

-

-

(46)

-

(46)

Total transactions with equity shareholders of the parent

-

-

(46)

-

(46)

At 31 December 2017

26,666

97,476

174,893

(153,126)

145,909

 

 

 

 

 

 

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

 

 

 

 

Consolidated statement of cash flows

 For the year ended 31 December 2018

 

 

Note

2018
$000

2017
$000

Cash flows from operating activities

 

 

 

Cash generated from continuing operations

 

37,281

 14,182

Cash (used)/generated from discontinued operations

8

(158)

1,541

Bank fees paid

 

(69)

-

Interest paid

 

(1,870)

(1,760)

Income tax paid

 

(3,896)

(2,933)

Net cash generated from operating activities

 

31,288

 11,030

Cash flows from investing activities

 

 

 

Interest received

 

908

 348

Dividend received

 

-

114

Proceeds from sale of property, plant and equipment

 

3

 291

Purchase of intangible assets

 

-

 (9,581)

Purchase of property, plant and equipment

 

(13,688)

(7,131)

Net cash used in investing activities

 

(12,777)

(15,959)

Cash flows from financing activities

 

 

 

Restricted cash

 

286

 (296)

Repayment of borrowings

 

(5,760)

 (1,920)

Net cash used in financing activities

 

(5,474)

(2,216)

Increase/(decrease) in cash and cash equivalents in the year

 

13,037

 (7,145)

Cash and cash equivalents at 1 January

 

6,929

14,067

Effect of exchange rates on cash and cash equivalents

 

(511)

7

Cash and cash equivalents at 31 December

 

19,455

6,929

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

 

19,182

6,516

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

8

273

413

Notes to financial information

 

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.

As described in the Chairman's statement, an investigation into the procurement of legal services in Ukraine, and subsequent payments made to legal advisers, was commissioned by the Audit Committee in Q1 2018 and is now complete. While this investigation concluded there was a breakdown in the group's internal control in relation to the engagement and contracting with these legal advisers, the Committee has not been able to conclude on the nature of the payments made in 2017, and the extent to which these were valid payments for legal services provided. The current Board has introduced a number of measures to strengthen the Company's internal control systems and has reviewed legal costs incurred in 2018 and is satisfied as to the nature of such costs.

2. Basis of preparation

The preliminary results, which are unaudited, do not include all the notes of the type normally included in an annual financial report. Accordingly, this unaudited preliminary announcement does not constitute financial statements as defined by the Companies Act 2006 and should therefore be read in conjunction with the Annual Report for the year ended 31 December 2018, and any public announcements made by the Group during the reporting period. The annual financial report for the year ended 31 December 2018 was prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS's") and the accounting policies applied in this preliminary announcement are consistent with the polices applied in the annual financial report for the year ended 31 December 2017 unless otherwise noted. The annual financial report for the year ended 31 December 2017 has been filed with the Registrar of Companies at Companies House. The audit report on these financial statements was qualified, making reference to a limitation of scope in respect of legal fees paid in the Ukraine. It is anticipated that the audit report on the consolidated financial statements for the year ended 31 December 2018 will also include a limitation of scope in respect of this comparative Ukrainian legal fee issue.

Comparatives

Comparative amounts in respect of deferred tax assets, liabilities, non-current other receivables and other payables have been reclassfied for comparability with 2018 in accordance with IFRS. The reclassifications had no impact on net assets or the loss for the period.

§ In the 2017 Annual report deferred tax assets of $20.8m and liabilities of $14.9m were presented gross, whereas in the 2018 Annual report the 2017 deferred tax assets of $11.3m and liabilities of $5.4m are presented net. Deferred tax assets and liabilities are offset where 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.

§ In the 2017 Annual report defined pension benefit plan liabilities of $0.5m were included in current trade and other payables, whereas in the 2018 Annual report they are presented separately under non-current liabilities.

§ Non-current other receivables of $3.1m and payables of $3.1m consisting of VAT were presented gross in the 2017 Annual report, whereas in the 2018 Annual report they are presented net reflecting that the amounts arise in the same taxable entity and are settled on a net basis.

Going concern

Background to the Group's performance and funding, including significant developments over the past year, is provided in the Financial Review. The Directors have reviewed the Group's forecast cash flows for the period to June 2020.  Capital and operating costs are based on approved budgets and latest forecasts in the case of 2019 and current development plans in the case of 2020.  The forecast cash flows reviewed include scenarios where potential liabilities arise in relation to the rental fee claims in Ukraine (see Note 10) 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.  In addition the Directors have considered further scenarios that reflect future expectations regarding country, commodity price and currency risks that the Group may encounter.  None of the scenarios have recognised any possible future benefit that may result from the arbitration award (see Note 10). Based on the Group's cash flow forecasts, the Directors believe that the combination of its current cash balances, expected future production and resulting net cash flows from operations, as well as the 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 currently has adequate cash and other available resources to meet its liabilities and commitments as they fall due across the forecast period.  One key means of such financing is the Tascombank loan of UAH280m ($10.1m) and overdraft facility of UAH50m ($1.8m) that was renewed and increased in December 2018 and that the Directors are confident will continue to be available throughout the forecast period beyond its current maturity date of December 2019 given operating cash flows, the recent renewal and increase and the security package available. Having considered the forecasts and reasonable sensitivity scenarios the Board considers it is appropriate to adopt the going concern basis of accounting in preparing the financial information.

3. Significant accounting policies

Adoption of new and revised standards

New standards, interpretations and amendments effective from 1 January 2018

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 2017, except for the following:

(a)       IFRS 2 Share Based Payments (Amendment - Classification and Measurement of Share-Based Payment Transactions)

(b)      Annual Improvements to IFRSs 2014 - 2016 Cycle (IFRS 1 First-time Adoption of IFRS, IFRS 12 Disclosures of interest in Other Entities and IAS 28 Investments in Associates and Joint Ventures)

(c)       IFRIC Interpretation 22  'Foreign Currency Transactions and Advance Consideration'

(d)      IFRS 9 'Financial instruments'

(e)      IFRS 15 'Revenue from contracts with customers'

The application of (a) to (c) 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 the new standards (d) and (e) listed below. The Group amended accounting policies applied from 1 January 2018 are disclosed in Note 3 under 'Significant accounting policies'.

IFRS 15 'Revenue from contracts with customers'

The IASB has issued a new standard for the recognition of revenue. This replaced IAS 18 which covers contracts for goods and services and IAS 11 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer.

To assess the impact of IFRS 15 on the Group's revenue recognition, a 5-step model had been applied to analyse sales contracts in Ukraine, Russia and Hungary. According to the analysis carried out by the Group, the current practice of revenue recognition complies with the new IFRS 15 revenue recognition standard and there was no impact from the adoption of the new standard on 1 January 2018.

IFRS 9 'Financial instruments'

IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. The classification depends on the entity's business model for managing the financial assets and the contractual terms of the cash flows. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the group has transferred substantially all the risks and rewards of ownership.

From 1 January 2018, the Group classifies its financial assets in the following measurement categories:

Those to be measured at amortised cost

Trade and intergroup receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Company analysed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortized cost measurement under IFRS 9. Therefore, reclassification for these instruments is not required.

IFRS 9 sets out a new forward looking 'expected loss' impairment model which replaces the incurred loss model in IAS 39 and applies to financial assets classified at amortised cost, debt instruments measured at FVOCI, contract assets under IFRS 15 Revenue from Contracts with Customers, intergroup receivables, lease receivables, loan commitments and certain financial guarantee contracts. Under the IFRS 9 'expected credit loss' model, a credit event (or impairment 'trigger') no longer has to occur before credit losses are recognised. It is therefore appropriate that the Group's policy for recognition of trade and other receivables is amended.

Based on the review of the historic occurrence of credit losses, consideration of prospective factors and given the short-term nature of trade and other receivables and the Group's active management of credit risk, the Group did not identify any credit losses requiring provision except for specific items in Note 8. The outlook for the oil and gas industry is not expected to result in a significant change in the Group's exposure to credit losses.

Those to be measured subsequently at fair value (either through OCI, or through profit or loss)

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 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.

Financial liabilities

Financial liabilities held by the Group comprise trade and other payables and Convertible Bonds due 19 February 2020. Convertible Bonds were restructured on 3 January 2017. The Group has reviewed its financial liabilities and there was no impact from the adoption of the new standard on 1 January 2018.

Under IAS 39 the revised terms and conditions of the Bond were considered to be a modification and therefore the difference in the amortised cost carrying amount at the modification date was recognised through a change in the effective interest rate at the modification date through to the end of the revised estimated term of the Bond. In accordance with IFRS 9, following a modification or renegotiation of a financial asset or financial liability that does not result in de-recognition, an entity is required to recognise any modification gain or loss immediately in profit or loss. Any gain or loss is determined by recalculating the gross carrying amount of the financial liability by discounting the new contractual cash flows using the original effective interest rate. The difference between the original contractual cash flows of the Bond and the modified cash flows discounted at the original effective interest rate is immaterial and hence there is no impact on adoption of IFRS 9 on 1 January 2018.

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 2018 and have not been early adopted by the Group. The Group's assessment of the impact of these new standards and interpretations is set out below:

 

Effective for annual periods beginning on or after

IFRIC 23 'Uncertainty over Income Tax Positions'

01-Jan-19

IFRS 16 'Leases'

01-Jan-19

 

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 an entity 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 will be no impact on adoption of IFRIC 23 on 1 January 2019, as detailed disclosures on judgements and estimates used in calculation of taxation as well as rental fees and deferred tax assets are included in accounting policies under 'critical accounting estimates, assumptions and judgements' and Notes 27 and 28.

IFRS 16 specifies how to recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize right-of-use assets and lease liabilities for all material leases. It will result in almost all leases being recognised on the balance sheet by lessees, as the distinction between operating and finance leases is 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's accounting policy under IFRS 16 will be as follows: at inception of a contract, the Group will assess 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 will recognize a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset will be 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 assets will be 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 will include 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 offices. Service agreements for equipment on the working sites are not considered leases. 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 will be 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 will use its incremental borrowing rate as the discount rate. The lease liability will be measured at amortized cost using the effective interest method. It will be remeasured when there will be 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 will be made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Group will elect to apply the practical expedient not to recognize 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 lease payments associated with these leases will be recognized as an expense on a straight-line basis over the lease term.

The Group is planning to adopt IFRS 16 from 1 January 2019 using the modified retrospective approach and accordingly the information presented for 2018 is not going to be restated. It would remain as previously reported under IAS 17 and related interpretations. On initial application, the Group will elect to record right-of-use assets based on the corresponding lease liability. A right-of-use assets and lease obligations of $0.8m will be recorded as of 1 January 2019, with no net impact on retained earnings. When measuring lease liabilities, the Group will discount lease payments using its incremental borrowing rate at 1 January 2019. The weighted-average rate applied is 17%.

The Group has not elected 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 will apply the definition of a lease under IFRS 16 to all existing contracts.

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 recognized on initial application of IFRS 16 at 1 January 2019.

 

$

Operating lease commitments at 31 December 2018

1.8

Discounted using the incremental borrowing rate at 1 January 2018

0.8

Effect of discounting

0.2

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

 

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.

Assets that are classified as held for sale are carried at the lower of carrying amount and fair value less costs to sell. An asset classified as held for sale is not depreciated.

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.

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 information 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 8 "Discontinued operations and assets classified as held for sale".

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, impairment events, disposals of operations or individual assets, 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 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, (v) .  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) Carrying value of intangible exploration and evaluation expenditure (Note 5 (b))

The carrying value for intangible exploration and evaluation assets represent the costs of active exploration projects the commerciality of which is unevaluated until reserves can be appraised. 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. The recoverability of intangible exploration assets is assessed by comparing the carrying value to estimates of the present value of projects where indicators of impairment have been identified on an asset.  The present values of intangible exploration assets are inherently judgemental.  Exploration and evaluation costs will be written off to the income statement unless commercial reserves are established or the determination process is not completed and there are no indications of impairment. The outcome of ongoing exploration, and therefore whether the carrying value of exploration and evaluation assets will ultimately be recovered, is inherently uncertain.

c) 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 proven 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.

d) Taxation including rental fees and deferred tax assets (Note 10)

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 for the amount that is expected to be settled. 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.

e) Provisions for decommissioning costs (Note 9)

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. The 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.

f) 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.

g) Enforcement of arbitration award (Note 10)

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.

h) Exceptional items (Note 5 and 10)

Judgment is required when determining whether items meet the definition of 'exceptional' under the Group's accounting policy.  Impairments and reversals of impairments reflecting specific circumstances including strategic re-focusing of the business, changes arising due to unusual market conditions or geopolitical factors are considered to qualify as exceptional items. 

Provisions 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 information. 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 two 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.

There are four (2017: 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. The Group is only engaged in one business of upstream oil and gas exploration and production, 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.

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.

 

 

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

 80,693

734

 173,474

-

 173,474

Deferred tax

 -  

966

  9,453

-

  10,419

-

10,419

Inventories

 -  

2,851

 3,139

-

5,990 

-

5,990 

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

1            Total assets and liabilities exclude assets and liabilities of the Hungarian disposal group classified as held for sale. Please refer to Note 8 for details

 

 

2017

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

-

16,458

636

-

17,094

-

17,094

- Gas

-

35,835

16,998

-

52,833

-

52,833

- Liquefied petroleum gas

-

4,607

-

-

4,607

-

4,607

- Management services/other

33

50

14

-

97

-

97

 

33

56,950

17,648

-

74,631

-

74,631

Inter segment revenue:

 

 

 

 

 

 

 

- Management services/other

11,020

-

-

-

11,020

(11,020)

-

 

11,020

-

-

-

11,020

(11,020)

-

Total revenue

11,053

56,950

17,648

-

85,651

(11,020)

74,631

Loss before tax:

 

 

 

 

 

 

 

(Loss)/profit from operations

 (1,911)

 3,733

 (2,692)

 (9,067)

 (9,937)

 (103)

 (10,040)

Finance income

 

 

 

 

 348

-

 348

Finance cost

 

 

 

 

 (3,164)

-

 (3,164)

Fair value movement on derivative liability

 

 

 

 

 (3)

-

 (3)

 

 

 

 

 

 (12,756)

(103)

 (12,859)

Assets

 

 

 

 

 

 

 

Property, plant and equipment

268

90,024

102,961

778

194,031

-

194,031

Intangible assets

 -  

 -  

 -  

-

-

-

-

Deferred tax

 -  

-

11,293

-

 11,293

-

11,293

Inventories

 -  

 2,497

 3,327

 -  

 5,824

-

 5,824

Trade and other receivables

572

1,528

2,004

865

4,969

-

4,969

Restricted cash

269

-

-

228

497

-

497

Cash and cash equivalents

 2,762

 3,141

 558

468

6,929

-

6,929

Total assets

 3,871

 97,190

 120,143

2,339

 223,543

-

 223,543

Total liabilities

 (18,227)

 (49,196)

 (6,177)

 (4,034)

 (77,634)

-

 (77,634)

Non cash expense (other than depreciation and impairment)

80

-

36

-

116

-

116

Exceptional item - reversal of provision for impairment of Ukrainian oil and gas assets

-

5,636

-

-

5,636

-

5,636

Exceptional Item - provision for impairment in Slovakia

-

-

-

7,881

7,881

-

7,881

Exceptional item - write off of appraisal expenditure in Ukraine

-

9,391

-

-

9,391

-

9,391

Exceptional item - production based taxes

-

4,357

-

-

4,357

-

4,357

Exceptional items - other

1,513

-

-

-

1,513

-

1,513

Increase in property, plant and equipment and intangible assets

203

12,688

5,771

660

19,322

-

19,322

Depreciation, depletion and amortisation

116

12,139

5,173

-

17,428

-

17,428

1            Assets and liabilities include Hungary at 31 December 2017 within 'Rest of the World'. The loss before tax excludes the loss of the Hungarian disposal group classified as held for sale in 2018 with the comparative results of the disposal group reclassified to discontinued operations. Please refer to Note 8 for details

 

Major customers

2018
$000

2017
$000

Ukraine

18,131

-

Russia

16,911

16,964

 

There are two customers, one in Ukraine and one in Russia, that exceed 10% of the Group's total revenues (2017:  one in Russia).

 

 

5. Property, plant and equipment and Intangible assets

5.(a) Property, plant and equipment

 

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)

At 31 December

578,094

191,314

-

17,755

787,163

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

80,693

-

945

173,474

 

 

 

 

Oil and gas assets

 

 

2017

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

564,023

213,181

36,971

18,296

832,471

Additions during the year

3,172

5,756

471

344

9,743

Foreign exchange

-

12,088

-

117

12,205

Disposal of property, plant and equipment

-

(876)

-

(500)

(1,376)

At 31 December

567,195

230,149

37,442

18,257

853,043

Accumulated depreciation, depletion and amortisation and provision for impairment

 

 

 

 

 

At 1 January

471,013

115,293

34,687

16,968

637,961

Depreciation on disposals of property, plant and equipment

-

(24)

-

(487)

(511)

Exceptional item - reversal of provision for impairment of Ukrainian oil and gas assets

(5,636)

-

-

-

(5,636)

Exceptional item - provision for impairment of oil and gas assets in Hungary

-

-

2,755

-

2,755

Foreign exchange

-

6,957

-

58

7,015

Depreciation charge for the year

11,794

4,962

-

672

17,428

At 31 December

477,171

127,188

37,442

17,211

659,012

Carrying amount

 

 

 

 

 

At 1 January

93,010

97,888

2,284

1,328

194,510

At 31 December

90,024

102,961

-

1,046

194,031

 

Exceptional item - provision for impairment of oil and gas assets

During 2017 and 2018 impairment test triggers were identified in respect of our oil and gas assets with impairments and reversals of impairments recorded in 2017.  Full impairment disclosures for each of the impairment tests are made in the Note 5 (c).

 

 

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

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

-

-

-

-

 

2017

Ukraine
$000

Hungary
$000

Rest of World
$000

Total
$000

Group

 

 

 

 

Cost:

 

 

 

 

At 1 January

1,308

814

13,247

15,369

Additions during the year

9,391

-

190

9,581

Exceptional item - write off of appraisal expenditure in Ukraine

(9,391)

-

-

(9,391)

Foreign exchange

-

-

799

799

At 31 December

1,308

814

14,236

16,358

Provision against oil and gas assets

 

 

 

 

At 1 January

1,308

-

6,355

7,663

Exceptional item - Impairment of Hungarian and Slovakian assets

-

814

7,881

8,695

At 31 December

1,308

814

14,236

16,358

Carrying amount

 

 

 

 

At 1 January

-

814

6,892

7,706

At 31 December

-

-

-

-

 

Exceptional item - write off of appraisal expenditure in Ukraine and provision for impairment of intangible assets

Full details are provided in the Note 5 (d).

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 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.

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 US$ 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.  Such information included 2P reserves for NNC and Elyzavetivske of 21.7 MMboe and 2.5 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 2035).  The economic life of the Elyzavetivske field is currently expected to be around 2029 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 Russian-Ukrainian border price and international oil prices. The gas price used for 2019 is based on current and forecast gas prices realised by our Ukrainian subsidiary. For the following ten years a forward gas price curve was used with gas prices remaining constant thereafter.

§ Oil prices: the Company used a forward price curve for the next ten 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 new wells. 

§ 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 19.1%. 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 ($105.5m) exceeds its carrying amount ($83.0m) by $22.5m and therefore NNC's oil and gas assets were not impaired.

§ Elyzavetivske's recoverable amount (including the West Mashivska extension) ($14.6m) exceeds its carrying amount ($8.0m) by $6.6m, and therefore the CGU's oil and gas assets were not impaired.

Elyzavetivske impairment reversal in 2017

During 2014 the Elyzavetivske field was impaired by $12.8m after significant erosion of the headroom from 2013. The main driver of the impairment was the reduction in reserves. Had this impairment not been made, then the carrying value of Elyzavetivske would have been $6.1m as at 31 December 2017. Therefore, a reversal of $5.6m was recognised in 2017.

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 likely and 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 $22.5m for NNC CGU
$m

Elyzavetivske
 Increase/(decrease) in headroom of $6.6m for Elyzavetivske CGU
$m

Impact if gas and oil prices:

increased by 20%

44.5

6.8

 

reduced by 20%

(44.5)

(6.9)

Impact if gas and oil production volumes:

increased by 10%

27.4

3.7

 

decreased by 10%

(27.4)

(3.6)

Impact if future capital expenditure:

increased by 20%

(18.7)

(1.2)

 

decreased by 20%

18.7

1.2

Impact if post-tax discount rate:

increased by 2 percentage points to 21.1%

(10.7)

(0.6)

 

decreased by 2 percentage points to 17.1%

12.4

0.7

 

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.  Such information included 2P reserves for YGE of 69.8 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 2019 and annually thereafter, the gas prices have been increased by 4.0% through to 2026 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 13.6%. 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 ($104.7m) exceeds it carrying amount ($80.6m) by $24.1m 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 likely and 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 $24.1m for Yuzhgazenergie CGU
$m

Impact of Adygean gas price:

growth rates increased by 10% annually

7.5

 

growth rates reduced by 10% annually

(7.4)

Impact of production volumes:

Increased by 10%

22.7

 

Decreased by 10%

(22.7)

Impact of future capital expenditure:

Increased by 20%

(8.8)

 

Decreased by 20%

8.8

Impact of post-tax discount rate:

Increased by 1 percentage point to 14.6%

(8.0)

 

Decreased by 1 percentage point to 12.6%

9.0

 

Impairment test for Hungarian oil and gas assets in 2017

As a result of impairment testing of Hungarian oil and gas assets, the carrying amount exceeded the CGU's recoverable amount of nil by $2.8m and therefore the assets were impaired to nil due to the reduction in the estimated recoverable oil and gas volumes from this field.

5.(d) Appraisal expenditure written off and impairment test for intangible assets

Exceptional item in 2017 - appraisal expenditure written off

After the well stimulation programme to target contingent resources in the Northern part of Rudenkivske two of the wells were abandoned due to lack of gas production. Other wells are only expected to produce insignificant quantities of gas. The total amount of written off expenditure was $9.4m.

Impairment of Hungarian exploration and evaluation expenditure in 2017

The Tiszavasvári-IV Mining Plot contains the Tiszavasvári-6 discovery well ('TZ-6'), which, due to the early stage of appraisal, was classified as an exploration and appraisal asset and recognised within intangible assets.

In 2017, the absence of a firm work programme at year end to develop the Hungarian reserves constituted an impairment trigger and accordingly an impairment test was undertaken. At year end there were no further exploration or evaluation planned or budgeted. There was no clear indication that FVLCD was greater than zero and the assets were impaired in full by $0.8m.

Impairment of Slovakian exploration and evaluation expenditure in 2017

During 2017 there was no progress with the exploration licences in Slovakia and at year end there was no further exploration or evaluation planned or budgeted. There was no clear indication that FVLCD was greater than zero and the assets were impaired in full by $7.9m.

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 2018 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; and

§ 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.

At 31 December 2018 the carrying value of Linx remained fully impaired following assessment by the Board considering relevant available information and valuation techniques, reflecting:

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

§ the absence of dividends or other returns on its investment since the investment acquisition in 2002  (apart from a one-off dividend received during 2017 of $0.1m due to reorganisation of Linx).

§ the absence of formal communication with any potential buyers; and

§ the level of uncertainty regarding any market valuation method based on the limited number of quoted Netherlands telecommunication companies and key differences in the respective businesses.

7. Borrowings

 

2018
$000

2017
$000

Current

 

 

Convertible bonds due 2020

5,962

7,630

Term-loans repayable within one year

5,962

7,630

Non-Current

 

 

Convertible bonds due 2020

5,041

9,003

Term-loans repayable after more than one year

5,041

9,003

 

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 are 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). 

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.

19 February 2017 the Company made the first payment to Bondholders in respect of prior accretion amounts of $1.9m (12.0% of the principal amount of the Bonds) and interest payment of $1.8m. 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.

The revised terms and conditions of the Bond were considered to be a modification and therefore the difference in the amortised cost carrying amount at the modification date was recognised through a change in the effective interest rate at the modification date through to the end of the revised estimated term of the Bond. Interest, after the deduction of issue costs is charged to the income statement using an effective rate of 17.3% (18.0% prior to restructuring).

There was therefore no impact of the restructuring of the Bond on the Consolidated Income Statement in 2017.

The impact of the amendments to the Bond on the Consolidated Statement of Financial Position was to decrease the carrying amount of the total Bond liability of $18.1m (at 31 December 2016, includes the associated derivative) by $0.7m, which is amortised over the estimated remaining life of the modified Bond.

In accordance with  IFRS 9, following a modification or renegotiation of a financial liability that does not result in de-recognition, the Group is required to recognise any modification gain or loss immediately in profit or loss. Any gain or loss is determined by recalculating the gross carrying amount of the financial liability by discounting the new contractual cash flows using the original effective interest rate. The difference between the original contractual cash flows of the Bond and the modified cash flows discounted at the original effective interest rate is immaterial and hence there was no impact on adoption of IFRS 9 on 1 January 2018.

Cash Alternative Amount

At the option of the Company, the conversion notice in respect of the Bonds can be settled in cash rather than shares, the Cash Alternative Amount payable is 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 2018 the total short-term line of credit amounted to $10.1m at an exchange rate of $1: 27.69 (2017: $5.3m at an exchange rate of $1: 28.07 Hryvnia). The amount outstanding at 31 December 2018 was nil (2017: nil), so the undrawn portion totalled $10.1m (2017: $5.3m). The facility will be available through 14 December 2019 (2017: 14 December 2018) subject to planned renewal if required. In addition PPC holds a UAH50m ($1.8m) overdraft facility which remains undrawn and is due for renewal in December 2019.

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

§ drawdowns can be made either in USD or UAH;

§ interest rate cost for USD drawn down is 10%;

§ interest rate cost for UAH drawn down: 17.5% to 30 days, 18.0% 31 to 90 days, 20.75% 91 to 180 days, 22.5% 181 to 365 days;

§ borrowing above UAH90m, equivalent to $3.3m at 31 December 2018 (2017: $3.2m) 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 $16.6m at 31 December 2018 (2017: UAH355m, equivalent to $12.6m at 31 December 2017) 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, in 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 14.12.2019.

The credit facility of $10.1m (2017:  $5.3m) 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.

8. 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 locate a buyer for its subsidiary JKX Hungary BV which  owns 100% of Riverside Energy Kft, based in Hungary. Preparation of marketing materials and a target investor list were complete in Q1 2018, and the marketing process was commenced in Q2 2018. It is anticipated that binding bids will be received in the first half of 2019 and sale is highly probable within the next 12 months.

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

The financial performance and cash flow information presented are for periods ended 31 December 2018 and 31 December 2017.

 

31 December 2018     $000

31 December 2017
$000

Revenue

1,645

 1,804

Cost of sales

 

 

Exceptional item - provision for impairment of Hungary

-

(3,569)

Royalties

  (75)

 (241)

Other cost of sales

(356)

 (1,428)

Total cost of sales

(431)

 (5,238)

Administrative expenses

 20

 2

(Loss)/gain on foreign exchange

(304)

 244

Profit/(loss) from operations and before tax

930

 (3,188)

Taxation - current

(7)

-

Taxation - deferred

2,564

(2,409)

Total taxation

2,557

(2,409)

Profit/(loss) for the year

3,487

(5,597)

 

Net cash (outflow)/inflow from operating activities

(158)

1,541

Net cash used in financing activities

-

(27)

Net cash outflow from investing activities

-

(1,572)

Effect of exchange rates on cash and cash equivalents

17

25

Net cash used by the subsidiary

(141)

(33)

 

 

 

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

Assets and liabilities of disposal group classified as held for sale

31 December 2018
$000

Assets classified as held for sale

 

Trade and other receivables

753

Cash

273

Restricted cash

211

Total assets of disposal group held for sale

1,237

Liabilities of the disposal group classified as held for sale

 

Deferred tax liability

-

Trade and other payables

(322)

Abandonment provision

(453)

Total liabilities of disposal group held for sale

(775)

Net assets

462

 

9. Provisions

Current provisions

Onerous lease provision (2)
$000

Production based taxes (1)
$000

Total
$000

At 1 January 2018

204

37,065

37,269

Foreign currency translation

4

385

389

Amount utilised in the year

(274)

-

(274)

Amount provided in the year

280

5,055

5,335

Reclassification to non-current provisions

-

(30,074)

(30,074)

At 31 December 2018

214

12,431

12,645

 

Non-current provisions

Production based taxes (1)
$000

Total
$000

At 1 January 2018

           -

-

Reclassification from current provisions

30,074

30,074

At 31 December 2018

30,074

30,074

1            The provision for production based taxes, is in respect of a claim against PPC for additional rental fee for the period August to December 2010 and January to December 2015. $5.1m (2017: $4.4m) was recognised as a charge in the 2018 Consolidated income statement and relates to interest accrued during 2018, of which $1.0m (2017: $1.1m) relates to August to December 2010 liability and $4.1m (2017: $3.3m) to January to December 2015.  Both claims are being contested in the Ukrainian courts (see Note 10). The amount is denominated in Ukrainian Hryvnia ('UAH') and is stated above at its US$-equivalent amount using the 2018 year end rate of UAH27.69/$ (2017: UAH 28.07/$). The provision for rental fee claims at 31 December 2018 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.

 

2            2018 onerous lease provision concerns 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. Subsequently, two out of three floors have been assigned to new tenants. The provision has been 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% (2017: 6.5%). The remaining life of the leases at 31 December 2018 was 3 years (2017: 4 years)

 

Provisions relating to the 2015 rental fee claims of $30.1m were reclassified from current provisions to non-current provisions in 2018.  Management, together with its legal advisors, has done a thorough review of the expected hearings and possible appeals of the 2015 rental fee claim cases.  It is the opinion of management that even if the Company is not able to defend its position successfully in court, no payments related to these cases will fall due before 2020 at the earliest.

Non-current provisions

Provision on decommissioning

Ukraine

$000

Russia

$000

Hungary

$000

Total

$000

Provision for site restoration  

 

 

 

 

At 1 January 2018

2,574

2,142

625

5,341

Foreign exchange adjustment

 -

(390)

-

(390)

Revision in estimates

831

 -

-

831

Unwinding of discount

176

266

-

442

Transfer of assets held for sale

-

-

(625)

(625)

At 31 December 2018

3,581

2,018

-

5,599

 

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 2035 (2017: 2034). The Russia provision results from the decommissioning of 15 wells (2017:12) and removal of plant as required by the licence obligation and is due to start from 2050 (2017: 2049). The provisions are made using the Group's internal estimates that management believe form a reasonable basis for the expected future costs of decommissioning.

10. Taxation

Analysis of tax on loss

2018
$000

2017
$000

Current tax

 

 

UK - current tax

-

-

Overseas - current year

5,478

2,964

Current tax expense

5,478

2,964

Deferred tax

 

 

Overseas - prior year

-

-

Overseas - current year

(3,233)

(3,757)

Deferred tax benefit

(3,233)

(3,757)

Income tax expense/ (benefit)

2,245

(793)

 

 

 

Factors that affect the total tax charge

The total tax charge for the year of $2.2m (2017: $0.8m credit) is higher (2017: higher) than the average rate of UK corporation tax of 19.00% (2017: 19.25%). The differences are explained below:

Total tax reconciliation

2018
$000

2017
$000

Profit / (Loss)  before tax

14,015

(12,859)

Tax calculated at 19.00% (2017: 19.25%)

2,663

(2,475)

Recognition of previously unrecognised tax losses

(1,332)

2,709

Permanent foreign exchange differences

-

913

Effect of tax rates in foreign jurisdictions

205

354

Rental fee provision

(724)

(3,280)

Other non-deductible expenses

1,149

2,642

Other

284

(70)

 

 

 

Total tax charge/(credit)

2,245

(793)

 

The total tax charge for the year was $2.2m (2017: $0.8m credit) comprising a current tax charge of $5.5m (2017: $3.0m) in respect of Ukraine, a deferred tax credit before exceptional items of $1.5m (2017: credit of $0.4m) and a deferred tax credit of $1.8m in respect of exceptional items (2017: credit of $4.1m). The increase in current tax charge reflects a higher profitability in Ukraine. In Ukraine, the corporate tax rate for 2017 was 18% and remains at this level in 2018.

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%.

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 reductions to the main rate to reduce the rate to 19% from 1 April 2017 and to 17% from 1 April 2020. The impact of the rate reduction is not expected to have a material impact on UK current taxation.

The corporation tax rate in Ukraine for 2018 was 18% (2017: 18%).

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.

Since 2011, the Rental Fees paid by PPC have amounted to more than $180 million. These charges 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 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 is 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 Uncitral 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 $83,638.

On 21 February 2019 application was filed for the recognition and enforcement of the arbitration award. 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 (2017: 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 (2017: 2010), which in total amount to approximately $42.5 million (2017: $37.1 million) (including interest and penalties), as detailed below. All amounts are being claimed in Ukrainian Hryvnia ('UAH') and are stated below at their US$-equivalent amounts using the year end rate of $1:UAH27.69 (2017: $1: UAH 28.07).

§ August - December 2010: approximately $12.4 million (2017: $11.3 million) (including $8.0 million (2017: $7.0 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 in mid-2019. 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 $30.1 million (2017: $25.8 million) (including $17.9 million (2017: $13.7 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%. The 2015 Rental Fee claims are being contested in eight separate cases. The first of these was subject to ruling by the Poltava Circuit Administrative Court (PCAC) in December 2018.  While the PCAC ruled that the disputed tax notification decisions in this case were illegal and cancelled them, meaning that PPC won the case on merits, it should be noted that the PJSTI has appealed the judgment. Three other cases are now being considered by the PCAC, and four others are still suspended in connection with the finalisation of the international arbitration. It is expected that hearings in respect of the majority of these claims will be held in the remainder of 2019 and 2020.

Following the tribunal's dismissal of the Company's claim for overpayment of Rental Fees, an exceptional charge of $5.1 million has been charged to the Consolidated income statement in the year (2017: $4.4 million) relating to interest accrued on the August - December 2010 and January - December 2015 claims (see Note 9).

11. 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 166,723,145(2017: 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 5,402,771 (2017: 5,402,771), and the profit for the relevant year. The loss and diluted loss per share as previously presented in the 2017 Annual Report was calculated based on a weighted average number of shares of 172,125,916.  The comparatives have been revised to reflect the weighted average number of shares shown below to include the treasury shares and treasury shares held in the EBT.

Profit before exceptional items in 2018 of $18,550,956 (2017 loss: $701,204) is calculated from the 2018 profit of $15,257,404 (2017: $17,662,920 loss) and adding back exceptional items of $3,293,552 (2017: $21,074,348) less the related deferred tax on the exceptional items of $1,761,000 (2017: $4,112,632).

The diluted earnings per share for the year is based on 176,455,391 (2017: 166,723,145) ordinary shares calculated as follows:

 

2018
$000

2017
$000

Profit/(loss)

 

 

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

 

 

Before exceptional item

18,551

(701)

After exceptional item

15,257

(17,663)

 

Number of shares

2018

2017

Basic weighted average number of shares

 172,125,916

  172,125,916

Treasury shares

(402,771)

(402,771)

Treasury shares held in Employee Benefit Trust

(5,000,000)

(5,000,000)

Weighted average number of shares

166,723,145

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

176,455,391

166,723,145

 

The effects of dilutive potential have been included when calculating dilutive earnings per share for the year ended 31 December 2018 (31 December 2017 loss per share, hence antidilutive). 9,476,096 (31 December 2017: 13,266,244) potentially dilutive ordinary shares associated with the convertible bonds have been included as they are dilutive at 31 December 2018 (31 December 2017: antidilutive, hence excluded).

There were 822,950 (2017: 1,059,650) outstanding share options at 31 December 2018, of which 822,950 (2017: nil) had a potentially dilutive effect.  All of the Group's equity derivatives were dilutive for the year ended 31 December 2018 (31 December 2017: antidilutive, hence excluded).

12. Events after the reporting date

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 21 February 2019 application was filed for the recognition and enforcement of the arbitration award. 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.

 


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.
 
END
 
 
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Quick facts: JKX Oil & Gas PLC

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Market Cap: £41.21 m
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