Annual Financial Report
26 April 2018
Cadogan Petroleum plc
Preliminary Results for year ended 31 December 2017
The Board of Cadogan Petroleum plc, (“Cadogan†or “the Companyâ€), is pleased to announce the Company’s annual results for the year ended 31 December 2017.
Key Financial highlights of 2017:
§ Average realised price: 41.6$/boe (2016: 34.5$/boe)
§ Gross revenues1: $15.1 million (2016: $19.7 million)
§ Gross profit: $2.1 million (2016: $1.1 million)
§ G&A2: $5.0 million (2016: $5.6 million)
§ Loss for the year: $1.6 million (2016: $5.9 million)
§ Loss per share: 0.7 cents (2016: 2.6 cents)
§ Net cash3 at year end: $37.6 million (2016: $39.7 million)
Key Operational Highlights of 2017:
§ Production: 56,516 boe (2016: 42,495 boe), a 33% increase year-on-year
§ 78% increase in production from the key Monastyretska licence, located in Western Ukraine
§ Completed first step of the diversification strategy by acquiring a 90% interest in Exploenergy s.r.l., in Italy
§ A good year for trading, which generated a healthy profit of $1.3 million4 (2016: loss of $2.0 million)
§ Oil Service operations reduced Group costs by retaining margin within the Group
§ No LTIs’5 and a further reduction of emissions6: 24.11 of CO2e/boe produced (2016: 29.89 CO2e/boe)
Cadogan has successfully delivered on the first pillar of its strategy, which is to make Ukraine its platform for growth by monetising the value of its legacy assets, both core and non-core.
The Group has continued to maintain exploration and production assets in Ukraine, to conduct gas trading operations and to operate an oil service business in Ukraine. Cadogan’s assets are concentrated in the West of the country, far away from the zone of military confrontation with Russia. Gas trading includes the importing of gas from Slovakia and Poland and local purchasing and sales with physical delivery of natural gas. The oil services business focuses on work-over operations, civil works services and other services provided to Exploration and Production (“E&Pâ€) companies.
Our business model
We aim to increase value through:
§ Maintaining a robust balance sheet, monetising the remaining value of our Ukrainian assets; E&P cash flow to be supplemented with revenues from gas trading and oil services
§ Pursuing farm-outs to progress investments in Ukrainian licences
§ Sourcing additional E&P assets to diversify Cadogan’s portfolio, both geographically and operationally; target assets are either in mature exploration or appraisal stage and are located in Europe, Africa, Middle East or Central Asia
The Group has continued to actively pursue its strategy of portfolio re-loading and geographical diversification. At the beginning of 2017, it implemented the first step of this strategy through the acquisition
of a 90% participating interest in Exploenergy s.r.l., an Italian company.
Both gas trading and the service business optimise the use of existing available resources, such as cash as working capital for trading and equipment and competences for the service business, and continue to contribute to the Group’s goal of being cash neutral, while actively searching for value accretive opportunities in the E&P domain.
Ukraine
West Ukraine
The Group was able to increase oil production by 78% from the Monastyretska licence, via the successful re-entry of two old, suspended wells rented from Ukrnafta7 under a profit sharing agreement. Both wells are currently producing with sucker road pumps. The licence is located in the Carpathian fold belt (Skuba unit), in Western Ukraine.
The Group also continued to produce gas from the Debeslavetske and Cheremkhivske gas fields and has maintained both the Bitlyanska licence and its 15% interest in Westgasinvest LLC (“WGIâ€), which holds the Cheremkhivsko-Strupkivska, Debeslavetska Production, Filimonivska, Kurinna, Sandugeyivska and Yakovlivska licences for shale gas exploitation. Eni is the operator of these shale gas licences and Cadogan is carried through the exploration phase. Eni has recently notified Cadogan of its intention to exit the shale gas project and discussions are on-going to agree acceptable exit terms and more generally on the future of WGI. Following Eni’s decision to exit the joint venture and given the uncertainty over the future of WGI the investment has been impaired.
East Ukraine
Cadogan’s application to convert the Pirkovska licence from exploration into production has not yet been awarded. The application has been impacted by a dispute between central and local authorities on the distribution of gas royalties, which has brought the award process in the region to a halt. These assets remain impaired.
Subsidiary businesses
Gas trading operations continued, with sales in Ukraine of both imported and locally produced gas. Despite lower volumes, margins increased substantially as the new team delivered on expectations. Finally, the Group continued providing oil services through its wholly-owned subsidiary Astroservice LLC. These primarily related to well abandonment, site restoration and well workover operations. Unlike previous years, these services were rendered to Group companies during the year as their activity in Ukraine picked-up.
Italy
In January 2017, Cadogan, through its fully owned Dutch subsidiary, finalised the purchase of a 90% interest in Exploenergy s.r.l. (“Exploenergyâ€) for a deferred cash consideration of up to €50,000 per licence, contingent upon licences being awarded. Exploenergy is an Italian company, which has filed applications for two exploration licences (Reno Centese and Corzano), located in the Po Valley region, in close proximity to fields discovered by the former operator. Two leads have been identified on these licences, with combined unrisked prospective resources estimated to be in excess of 60 bcf of gas. Both applications are in an advanced stage of their approval process, which will resume after the national and local election held in early March 2018.
___________________________
1 Gross revenues of $15.1 million (2016: $19.7 million) included $12.7 million (2016: $15.6 million) from trading of natural gas, $2.4 million (2016: $1.6 million) from exploration and production
2 Administrative expenses (“G&Aâ€)
3 Net cash includes cash and cash equivalents less short term borrowings
4 $0.9 million net of interest income received on receivables
5LTI: Lost Time Incidents; TRI: Total Recordable Incidents
6 E&P operations emissions. For details please see the Annual Report
7 PJSC “Ukrnaftaâ€
The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.
For further information, please contact
Cadogan Petroleum plc
| Guido Michelotti | Chief Executive Officer | +380 (44) 594 5870 |
| Ben Harber | Company Secretary | +44 0207 264 4366 |
| Cantor Fitzgerald Europe | ||
| David Porter/Nick Tullock | +44 (0) 20 7894 7000 |
Strategic Report
The Strategic Report has been prepared in accordance with Section 414A of the Companies Act 2006 (the “Actâ€) and presented hereunder. Its purpose is to inform stakeholders and help them assess how the Directors have performed their legal duty under Section 172 of the Act to promote the success of the Company.
Principal activity and status of the Company
The Company is registered as a public limited company (registration number 05718406) in England and Wales. Its principal activity is oil and gas exploration, development and production; the company also conducts gas trading and provides services to other operators.
The Company’s shares have a standard listing on the Official List of the UK Listing Authority and are traded on the main market of the London Stock Exchange.
Key performance indicators
The Group monitors its performance through five key performance indicators (“KPIsâ€):
- to increase oil, gas and condensate production measured on number of barrels of oil equivalent produced per day (“boepdâ€);
- to decrease administrative expenses;
- to increase the Group’s basic earnings per share;
- to maintain no lost time incident; and
- to grow and geographically diversify the portfolio.
The Group’s performance in 2017 against these KPI’s is set out in the table below, together with the prior year performance data.
| Unit | 2017 | 2016 | 2017 vs 2016 | |
| Average production (working interest basis) (1) | boepd | 155 | 116 | + 33.6% |
| Overhead (G&A) | $ million | 5.0 | 5.6 | -10.7% |
| Basic loss per share (2) | cents | (0.7) | (2.6) | -73.1% |
| Lost time incidents (3) | incidents | 0 | 1 | |
| Geographic diversification | new assets | 1 | 0 |
(1) Average production is calculated as the average daily production during the year
(2) Basic loss per ordinary share is calculated by dividing the net loss for the year attributable to equity holders of the parent company by the weighted average number of ordinary shares during the year
(3) Lost time incidents relates to the number of injuries where an employee/contractor is injured and has time off work (IOGP classification)
Chairman’s Statement
2017 has been a good year for Cadogan, which has made significant progress towards profitability notwithstanding the challenging context in the countries where it has assets.
The process of integrating Ukraine within Europe did not progress as expected and a number of warnings came from the European Community, the EBRD and the leading international financial institutions, asking for an acceleration of the process, particularly in terms of fight against corruption and transparency. The economic crisis is not yet over and the confrontation with Russia has remained an open wound and this has exerted some influence of the political agenda. The ban has remained in place on the direct import of Russian gas resulting in the volumes needed to match internal demand being imported from Europe using reverse flow.
The slow pace of reform in the energy sector and the perception of limited transparency have penalised Ukraine which has not witnessed a recovery of foreign direct investment nor new players entering the local exploration and production sector notwithstanding the healthier oil prices. The country's goal of becoming energy independent in the near future has resulted in given a wake-up call to the state-owned companies and also to some of the local privately held companies and this has generated an increase in the drilling activity with some international contractors winning sizable contracts. This is an encouraging development for Astro-Service LLC as it creates opportunities to monetise its value.
The challenging situation facing the E&P industry is represented by the difficulties that the Company faced to convert Zagoryanska and Pirkovska from exploration into production licences. A dispute between local and central authorities on the distribution of royalties which went on for most of 2017 brought the award process in the Poltava council to a complete halt: several applications to award or convert licences were rejected and the Zagoryanska licence was a casualty as the last rejection came at the end of the three year time-frame allowed for conversion. After investing tens of millions of dollars and proving the existence of commercial quantities of gas, 30 million m3 were produced, the company was not awarded its production licence, an award which in most of the countries is a recognised right.
In Italy the pace of progress towards the award of the licences has been hampered by concerns at local level on the long-term sustainability of E&P activities in general and by the local and national elections scheduled for the first quarter of 2018. The company has used this time to introduce itself to regional and national authorities and will now re-focus its communication towards local stakeholders.
In a context that has remained challenging, Cadogan has delivered on its strategy of building in Ukraine its platform for growth. Costs have remained under strict control, with a streamlining of the Executive directorships and a right sizing of the gas operations in West Ukraine contributing to savings. E&P operations from the assets operated by the Company have been taken to profitability, driven by an increase in oil production from Monastyretska licence where management sees an upside for further growth, working capital have been optimised and gas trading has delivered healthy margins.
Management has continued to actively pursue opportunities to renew and geographically diversify the portfolio. Many opportunities have been reviewed using stringent investment criteria that are aimed at delivering long-term value for the shareholders and one was finalised. As a Board, we are confident that these efforts will produce results and are not prepared to relax the selection criteria.
Zev Furst
Non-Executive Chairman
25 April 2018
Chief Executive’s Review
2017 was a good year for Cadogan, with reduced losses of $1.6 million, the best result over the last six years. Net of losses in joint venture (“JVâ€), where the Group is carried and not an operator, the Group would have delivered a $0.7 million profit (2016: $5.8 million loss). This achievement is the result of multiple efforts, including:
§ a strict discipline in controlling costs;
§ E&P operations brought firmly into profitability, due to increased oil production and despite the impact of a punitive tax on gas production;
§ a good year for gas trading, with a healthy margin; and
§ effective efforts to recover past receivables, some of which had been previously impaired as deemed of no value, and the fending-off potential past tax liability.
2017 was also the year that saw the Company’s efforts to geographically diversify its portfolio come to fruition, with the first acquisition outside of Ukraine of an Italian E&P company, which has filed the application for two licences in the prolific Po Valley.
While 2017 witnessed signs of recovery for the oil & gas industry, it has been another difficult year for Ukraine, which remained embroiled in its confrontation with Russia and continued to be economically challenged. The country has made slow progress towards modernisation of its oil & gas legislative framework but the few steps made have fallen short of creating an environment conducive to investment, which the country needs to maximise its domestic production. In this uncertain context, Cadogan has remained one of the few, if not the only, truly foreign investor operating in Ukraine’s E&P sector.
Cadogan’s application to convert the Pirkovska exploration licence into a production licence is a reflection of the uncertainties that still impact the E&P industry in Ukraine. The application was filed two years ago and has been rejected 4 times, together with nearly 70 other applications, by the Poltava local Council, due to its dispute with the Central Government over the split of royalties. An agreement has been reached, effective from 1 January 2018, bringing into law the distribution of royalties and consequently we are cautiously optimistic that the application will be accepted, as Cadogan has fulfilled all the obligations and submitted the documents in due time.
Eni has informed its partners, Nadra1 and Cadogan, of its intention to exit WGI, the shale gas project, and discussions are on-going on whether and under which terms to accept Eni’s exit and, in general, on the future of the project. As a precaution, Cadogan’s management has decided to impair the residual value of its 15% participating interest in the project. Eni’s decision, which comes on top of similar decisions for the Pokrovska and Zagoryanska licences, has a marginal impact on Cadogan’s business. This is a testimony of Cadogan’s proven ability to generate value from a legacy of fragile foundations and marginal assets.
Against this challenging background, Cadogan has done well in 2017. In particular:
§ the average production rate through the year increased up to 155 boepd, the highest level in the last five years, and this increase was achieved with minimal capital deployment; and
§ the result of E&P business segment in 2017 was $0.3 million higher than in the year before, out-performing the 21% increase in the average realised price over the same period of time.
Other highlights of 2017 are:
§ A 33% increase in production, from 42,495 boe in 2016 to 56,516 boe this year;
§ A 11% reduction of overhead (G&A), from $5.6 million in 2016 to $5.0 million this year; this is in addition to the 15% reduction achieved in 2016 and of the 13% reduction in 2015;
§ A good year for trading which generated a healthy margin by leveraging a limited amount of Cadogan’s financial resources;
§ The first step in the process of geographic diversification of the portfolio with the acquisition of Exploenergy in Italy;
§ A robust balance sheet, with $37.6 million of net cash, kept mostly in UK banks; and
§ A year without LTIs’ and with a further reduction of emissions into atmosphere.
In summary, Cadogan has successfully delivered on the first pillar of its strategy, which is to make Ukraine its platform for growth by monetising the value of its legacy assets, both core and non-core.
Core operations
Cadogan has continued to safely and efficiently produce from its fields in the West of Ukraine. Oil production has increased by 78% over the value of the previous year, while gas production has remained constant. This is a remarkable achievement, given the advanced stage of depletion of the two gas fields. Oil operating costs have remained under tight control and gas operations have been further streamlined to match revenues (net of a 70% royalty) with costs. Achieving break-even despite operating our gas assets with a 70% royalty is a testimony of what an efficient operator Cadogan has become and is something we are very proud of. Nonetheless, operating gas assets with a 70% royalty is not sustainable and we will explore alternatives.
The performances of wells located on the Monastyretska licence has been monitored, with a view to gathering data for input into an integrated reservoir study to be awarded in 2018. The primary purpose of the study is to identify the optimum exploitation strategy while assessing reserves. The management team are of the opinion that the field potential has been underestimated in the past, given the field performances to date.
Notwithstanding the repeated filings, the approval for Pirkovska licence has not yet been granted. The debate between Poltava local and central authorities on the royalty distribution and the failure to appoint the Head of the Licensing Authority2 after 2 years, have not helped.
In Italy contacts have been established and Cadogan introduced itself to the regional authorities of the Lombardia and Emilia Romagna regions, as well as to the civil servants of the competent Ministries in Rome (Industry and Environment). The process to secure the licence award has been re-launched and will continue into next year shifting the focus to the local level, town halls and stakeholders at large.
Non E&P operation
Trading has been re-launched after a difficult 2016, with a new team, a lower cost structure, reduced financial costs and a system in place to better manage credit risk. Results have been encouraging, with $0.9 million3 of profit which has supplemented E&P revenues.
Oil services conversely contributed a limited amount of cash, as they have been used primarily to serve the Group (well’s operations). The company competed for and won tenders launched by the Group and have therefore saved money for the Group, thus contributing to keeping costs under control.
The results achieved in 2017 have been possible due to the continued efforts and commitment of Cadogan’s Management and staff. To them, the men and women who have worked for Cadogan go my heartfelt thanks.
Outlook
Cadogan has made another major step towards becoming a leaner and more efficient operator of marginal fields. We have also made solid progress in delivering a sustainable performance, which, along with a robust balance sheet, maintains our strong platform and a springboard on which to build our future of growth.
We expect oil production to grow further, up to 75% over 2017 production, driven by a three wells program of work-overs and stimulations in Monastyretska oil field4; we also expect that our perception of an upside in reserves and resources be confirmed by an integrated reservoir study, which was awarded in the first quarter of 2018.
While working to maximise production, we will undertake the actions necessary to safeguard the remaining licences and maximise their value. We have engaged a UK qualified consultant to assist us in the farm-out of the high risk-high reward Bitlyanska licence and are planning the drilling of two wells in the next 12-18 months, one each in Bitlyanska and Monastyretska. In parallel, we will support the operator Westgasinvest LLC (“WGIâ€)5 in the follow-up of the application for the extension of Cher licence.
We will continue to operate our gas trading business and expect trading volumes to increase over 2017 notwithstanding the challenges of a market still evolving in a manner that is sometimes unpredictable.
As E&P activity in Ukraine picks up, Cadogan will actively explore opportunities to spin-off its E&P services business.
The management team will continue to actively pursue value accretive opportunities to utilise the preserved cash, thus delivering on the second pillar of our strategy, to generate growth and value outside of Ukraine. In doing so, strict discipline and stringent investment criteria will be maintained through the selection process, with a clear focus on long term value generating opportunities. With the benefit of hindsight, of the near 70 opportunities that entered our pipeline over the last couple of years, our disciplined approach has served the company well.
Guido Michelotti
Chief Executive Officer
25 April 2018
__________________________
1 NJSC “Nadra Ukraynyâ€
2 The licensing Authority, the State Service of Geology and Mineral Resources of Ukraine, has been headed by an Acting Chief since January 2015
3 Trading result of $1.4 million excluding interest received on receivables was $0.9 million
4 The operations on the first of the three well program was completed in late February 2018 and delivered nearly a doubling of the well production rate
5 WGI, a company participated by Eni Ukraine Holdings BV, 50.01%, NJSC “Nadra Ukraynyâ€, 34.99%, and Cadogan Ukraine Holdings Limited 15%, is the licence holder of Debeslavetska and Cheremkhivska licences
Operations Review
Overview
At 31 December 2017 the Group held working interests in four conventional gas, condensate and oil exploration and production licences in the west of Ukraine. All these assets are operated by the Group and are located in the Carpathian basin in close proximity to the Ukrainian gas distribution infrastructures.
| Summary of the Group’s licences (as at 31 December 2017) | |||
| Working interest (%) |
Licence | Expiry | Licence type(1) |
| 99.8 | Bitlyanska | December 2019 | E&D |
| 99.2 | Debeslavetska(2) | November 2026 | Production |
| 54.2 | Cheremkhivska(2) | May 2018 | Production |
| 99.2 | Monastyretska | November 2019 | E&D |
(1) E&D = Exploration and Development
(2) In addition, the Group has 99.2% and 54.2% of economic benefit in conventional activities in Debeslavetska and Cheremkhivska licences, respectively through Joint Activity Agreements (“JAAâ€).
In addition to the above, the Group has:
§ filed an application to convert the Pirkovska licence from an exploration to production licence; and
§ a 15% carried interest in Westgasinvest LLC (“WGIâ€), which holds the Cheremkhivsko-Strupkivska, Debeslavetska Production, Filimonivska, Kurinna, Sandugeyivska and Yakovlivska licences for unconventional (shale gas) exploitation.
East Ukraine
East Ukraine has been historically a core area for Cadogan. Today, after the voluntarily relinquishment of Pokrovska’s licence at the end of the exploration phase and the authority’s refusal to award the production licence for Zagoryanska, notwithstanding all requirements having been met, the only asset in that part of Ukraine is the Pirkovska licence which remains impaired. The applications for the award of 20-year production licence has been repeatedly submitted for approval, but the approval has not yet been granted, although the Group has fulfilled its legal obligations and requirements and filed the applications in due time. Delays have occurred due to legislative changes introduced into the award process and to a dispute between central and local authorities on the distribution of revenues from subsoil use tax (royalties). This dispute brought the award process to a complete halt in the Poltava Council and costed the Company the Zagoryanska licence whose conversion from exploration to production was not approved in the three-year’s time frame allowed for conversion.
West Ukraine
The Bitlyanska licence covers an area of 390 square kilometres. Bitlyanska, Borynya and Vovchenska are three hydrocarbon discoveries in this licence area. The Borynya field holds 3P reserves, contingent recoverable resources and prospective resources. Bitlyanska and Vovchenska fields hold contingent recoverable resources.
Borynya 3 well, has been kept on hold, monitored and routinely bled-off for an eventual re-entry and stimulation.
The Monastyretska licence continued to regularly produce oil at an average production rate of 81 boepd (2016: 46 boepd). Two producing wells were added in December 2016 and sucker rod pumps installed later in the year.
The Debeslavetska and Cheremkhivska licences continued producing with a stable gas production rate of 74 boepd (2016: 70 boepd).
Gas trading
The Group continued to import gas from Europe via the Slovakian and Polish borders and to sell it in Ukraine along with some locally purchased quantities. Despite the lower volumes being sold, margins were much higher due to actions taken by management, including, primarily a reduction in administrative and financial costs and an overhaul of the trading team. Opportunistic purchases in summer also contributed to the overall margin.
Service
The Group continued providing services through its wholly-owned subsidiary Astroservice LLC. Services provided were primarily related to well abandonment and site restoration and were rendered mostly to the Group’s companies as their activities increased.
Financial Review - Overview
In 2017 the Group continued with its efforts to approach cash neutrality and profitability through a number of cost reduction initiatives, while supplementing E&P revenues with gas trading.
The E&P business positively contributed to the financial results of the Group, due to a combination of increased production and higher prices. The service business focused on providing drilling and work-over services to the subsidiaries of the Group and the trading business earned healthy margin. These results have been supplemented by further monetising of the Group’s assets, tight control on costs and optimisation of the working capital cycle.
Net cash, which included cash and cash equivalents mostly denominated in USD net of short-term borrowings denominated in UAH, decreased to $37.6 million at 31 December 2017 compared to $39.7 million at 31 December 2016. This was mostly due to increased prepayments made for gas trading and stock of gas at the end of the year.
Income statement
Revenues from production increased from $1.6 million in 2016 to $2.4 million in 2017, mainly due to production volume increase from 42,495 boe in 2016 to 56,516 boe in 2017. E&P cost of sales increased from $1.2 million in 2016 to $1.7 million in 2017. These include production royalties and taxes, fees paid for the rented wells, depreciation and depletion of producing wells and direct staff and other costs for exploration and development. Overall, in 2017, E&P made a positive contribution of $0.7 million (2016: $0.4 million) to gross profit, representing a positive $0.3 million (2016: loss of $11 thousand) business segment result.
The oil services business in 2017 focused on the internal activities providing its services, including drilling and work-overs, to the subsidiaries of the Group.
Gas trading business showed good results in 2017. Although revenues decreased from $15.6 million in 2016 to $12.7 million in 2017, cost of sales decreased even further, from $15.5 million in 2016 to $11.4 million in 2017, resulting in an overall contribution to profit of $1.3 million (2016: $69 thousand). In addition, staff costs (G&A) were reduced, and trading receivables recovered together with interest. These efforts turned a loss of $2.0 million in 2016 into a profit of $1.4 million in 2017.
Administrative expenses (“G&Aâ€) continued to be under strict control. Ukrainian G&A remained flat as staff were compensated for the loss of earning power due to the devaluation of local currency and the overall G&A went down from $5.6 million in 2016 to $5.0 million in 2017.
The reversal of impairment of other assets increased to $1.5 million (2016: impairment of $82 thousand) primarily due to: i) VAT of $1.4 million (2016: $69 thousand), which was previously impaired, as a result of the Group receiving a VAT refund in cash of $1.4 million (2016: $nil) and also offsets of VAT recoverable against trading margin earned; and ii) inventories of $0.1 million (2016: loss of $0.1 million) due to the successful sale of production stock that had previously been impaired due to being held for a considerable time.
Share of loss in joint ventures of $2.3 million (2016: $0.2 million losses) relates to the decision to impair the residual value of Westgasinvest LLC given Eni’s communication of their intention to exit the project.
Finance income of $0.7 million (2016: costs of $1.1 million) reflects interest expense to BNP Paribas (“BNPPâ€) on a credit line used for trading of $0.3 million (2016: $1.4 million), net of i) interest income on cash deposits used for trading of $0.1 million (2016: $31 thousand); ii) investment revenue of $0.2 million (2016: $0.1 million); iii) reversal of interest in respect of a previously accrued provision for corporate tax of $0.2 million (2016: cost of $33 thousand); and iv) interest income on receivables of $0.5 million (2016: $0.2 million).
The tax benefit in 2017 increased to $1.3 million (2016: expense of $0.1 million), partially due to the Group reaching a settlement with the UK tax authorities in August 2017 on a past tax claim for which a provision previously accrued has been reversed and also due to the deferred tax asset recognised on the tax losses carried forward from the Monastyretska licence, which is profitable from continuous growing production.
Balance sheet
Intangible Exploration and Evaluation (“E&Eâ€) assets of $1.7 million (2016: $2.4 million) represent the carrying value of the Bitlyanska licence. This decreased due to reclassification of the Monastyretska licence from Intangible Exploration and Evaluation assets to the Property Plant & Equipment (note 15). The Property Plant & Equipment (PP&E) balance was $2.1 million at 31 December 2017 (2016: $1.3 million). Investments in joint venture of $nil million (2016: $2.3 million) represent the carrying value of the Group’s investments in Westgasinvest LLC, for which impairment of $2.3 million has been recognised (note 17).
Trade and other receivables of $4.5 million (2016: $4.1 million), include $1.3 million (2016: $2.2 million) trading receivables, $1.8 million prepayments for natural gas (2016: $0.8 million), $0.9 million VAT recoverable (2016: $ 0.8 million), which is expected to be recovered through production, trading and services activities, and $0.5 million (2016: $0.4 million) of other receivables and receivables from joint venture. The $1.4 million of trade and other payables as of 31 December 2017 (2016: $1.6 million) represent $0.5 million (2016: $0.2 million) of trade payables, $0.5 million (2016: $0.9 million) of accrued expenses and $0.4 million (2016: $0.2 million) of other creditors.
Provisions include $0.4 million (2016: $8 thousand) of short-term provision for decommissioning cost and $0.4 million of long-term provision for decommissioning costs (2016: $0.7 million of long-term provision).
The cash position of $37.6 million at 31 December 2017, including $7 million used as a pledge for the credit line, has decreased from $43.3 million at 31 December 2016. Net cash, which included cash and cash equivalents mostly denominated in United States Dollar (“USDâ€) net of short-term borrowings denominated in Ukrainian Hryvna (“UAHâ€), decreased to $37.6 million at 31 December 2017 compared to $39.7 million at 31 December 2016. This was mainly due to prepayments made for the gas at the end of the year.
Cash flow statement
The Consolidated Cash Flow Statement shows operating cash outflow before movements in working capital of $2.3 million (2016: $4.4 million), which represent mostly cash generated by the E&P and Trading business segment net of corporate expenses. Working capital has been further improved, which resulted in a $0.4 million cash inflow (2016: $8.2 million).
The Group, during 2017, made minimum capital deployment by investing $0.6 million (2016: $0.2 million) in the purchase of PP&E and E&E assets, mostly for implementing the exploration work program.
In 2017 the Group financed its trading operations with short-term borrowings (Note 22) with proceeds of $3.3 million and repayments of $7.0 million (2016: proceeds of $1.9 million and repayments of $10.2 million).
Related party transactions
Related party transactions are set out in note 28 to the Consolidated Financial Statements.
Treasury
The Group continually monitors its exposure to currency risk. It maintains a portfolio of cash and cash equivalent balances mainly in US dollars (“USDâ€) held primarily in the UK. Production revenues from the sale of hydrocarbons are received in the local currency in Ukraine, however, the hydrocarbon prices are linked to the USD denominated gas and oil prices. To date, funds from such revenues have been used in Ukraine in operations rather than being remitted to the UK.
Risks and uncertainties
There are a number of potential risks and uncertainties that could have a material impact on the Group’s long-term performance and could cause the results to differ materially from expected and historical results. Executive management review the potential risks and then classify them as having a high impact, above $5 million, medium impact, above $1 million but below $5 million, and low impact, below $1 million. They also assess the likelihood of these risks occurring. Risk mitigation factors are reviewed and documented based on the level and likelihood of occurrence. The Audit Committee reviews the risk register and monitors the implementation of improved risk mitigation procedures via Executive management, who are carrying out a robust assessment of the principal risks facing the Group, including those potentially threatening its business model, future performance, solvency and liquidity.
The Group has analysed the following categories as key risks:
| Risk | Mitigation |
| Operational risks | |
| Health, Safety and Environment (“HSEâ€) | |
| The oil and gas industry by its nature conducts activities, which can cause health, safety and environmental incidents. Serious incidents can have not only a financial impact but can also damage the Group’s reputation and the opportunity to undertake further projects. | The Group maintains a HSE management system in place and demands that management, staff and contractors adhere to it. The system ensures that the Group meets Ukrainian legislative standards in full and achieves international standards to the maximum extent possible. ISO and OSHA certification of the Management system is being pursued. |
| Drilling and Work-Over operations | |
| The technical difficulty of drilling or re-entering wells in the Group’s locations and equipment limitations can result in the unsuccessful completion of the well. | The incorporation of detailed sub-surface analysis into a robustly engineered well design and work programme, with appropriate procurement procedures and competent on site management, aims to minimise risk. Only certified personnel are hired to operate on the rig floor |
| Production and maintenance | |
| There is a risk that production or transportation facilities could fail due to non-adequate maintenance, control or poor performance of the Group’s suppliers. | All plants are operated and maintained at standards above the Ukrainian minimum legal requirements. Operative staff are experienced and receive supplemental training to ensure that facilities are properly operated and maintained. When not in use the facilities are properly kept under conservation and routinely monitored. Service providers are rigorously reviewed at the tender stage and are monitored during the contract period. |
| Sub-surface risks | |
| The success of the business relies on accurate and detailed analysis of the sub-surface. This can be impacted by poor quality data, either historic or recently gathered, and limited coverage. Certain information provided by external sources may not be accurate. | All externally provided and historic data is rigorously examined and discarded when appropriate. New data acquisition is considered and appropriate programmes implemented, but historic data can be reviewed and reprocessed to improve the overall knowledge base. Agreements with qualified local and international contractors have been entered into to supplement and broaden the pool of expertise available to the Company. |
| Data can be misinterpreted leading to the construction of inaccurate models and subsequent plans. | All analytical outcomes are challenged internally and peer reviewed. Analysis is performed using modern geological software. |
| Area available for drilling operations is limited due to logistics, infrastructures and moratorium. This increases the risk for setting optimum well coordinates. |
If not covered by 3D seismic or fitting over 2D seismic lines, the eventual well’s dislocation will not be accepted. |
| The Group may not be successful in proving commercial production from its Bitlyanska licence and consequently the carrying values of the Group’s oil and gas assets may have to be impaired. | The Group performs a review of its oil and gas assets for impairment on an annual basis, and considers whether to commission a review from a third or a Competent Person’s Report (“CPRâ€) from an independent qualified contractor depending on the circumstances. |
| Financial risks | |
| The Group is at risk from changes in the economic environment both in Ukraine and globally, which can cause foreign exchange movements, changes in the rate of inflation and interest rates and lead to credit risk in relation to the Group’s key counterparties. | Revenues in Ukraine are received in UAH and expenditure is made in UAH, however the prices for hydrocarbons are implicitly linked to USD prices. The Group continues to hold most of its cash reserves in the UK mostly in USD. Cash reserves are placed with leading financial institutions, which are approved by the Audit Committee. The Group is predominantly a USD denominated business. Foreign exchange risk is considered a normal and acceptable business exposure and the Group does not hedge against this risk for its E&P operations. For trading operations, the Group matches the revenues and the source of financing. Refer to note 26 to the Consolidated Financial Statements for detail on financial risks. |
| The Group is at risk that the counterparty will default on its contractual obligations resulting in a financial loss to the Group. | Procedures are in place to scrutinise new counterparty via a Know Your Customer (“KYCâ€), which covers their solvency. In addition, we seek to reduce the risk of customer non-performance by limiting the title transfer to product until the payment is received, prepaying only to known credible suppliers. |
| The Group is at risk that fluctuations in gas prices will have a negative result for the trading operations resulting in a financial loss to the Group. | The Group mostly enters into back-to-back transactions where the price is known at the time of committing to purchase and sell the product. Sometimes the Group takes exposure to open inventory positions when justified by the market conditions in Ukraine, which is supported by the multi-angle analysis of the specific deals, market trends, building models of the gas prices and foreign exchange rates development for medium term. |
| Country risks | |
| Legislative changes may bring unexpected risk and be time consuming for securing licences. |
Accurate monitoring and dialogue with competent authorities are kept in place to minimise the risk. In all cases, deployment of capital in Ukraine is limited and investments are kept at the level required to fulfil licence obligations. |
| Ukraine has not progressed as much as expected towards integration with Europe, the economic crisis is not yet over and the confrontation with Russia has remained an open wound. This exercises some influence on the political agenda, negatively impacts the creation of a transparent market and introduces an element of unpredictability in the development of the legislative framework. |
The Group minimises this risk by maintaining the funds in international banks outside Ukraine, by limiting the deployment or capital in country and by continuously maintaining a working dialogue with the regulatory authorities. The assets of the Group are located far from the area of confrontation with Russia. |
| Other risks | |
| The Group's success depends upon skilled management as well as technical and administrative staff. The loss of service of critical members from the Group's team could have an adverse effect on the business. | The Group periodically reviews the compensation and contract terms of its staff. |
| The Group is at risk of underestimating the risk and complexity associated with the entry into new countries. | The Group applies a set of very rigorous and strict screening criteria in order to evaluate potential investment opportunities. It also seeks for opinion of independent and qualified experts when deemed necessary. Additionally, the level of required rate of return is adjusted to the perceived level of risk. |
| Local communities and stakeholders may cause delays to the projects executions and postpone the activities |
The Group maintains a transparent and open dialogue with authorities and stakeholders to identify their needs and propose solutions which address them as well as to illustrate the activities which it intends to conduct and the measures to mitigate their impact. Local needs and protection of the environment are always taken into consideration when designing mitigation measures, which may go beyond the legislative minimum requirement. |
Statement of Reserves and Resources
During the year 2017 the company conducted a number of rig-less activities in the two gas fields to maintain a sustainable production, in particular in Cheremkhivska where the producible reserves (P1) increased by 0.012 million boe.
Summary of Reserves1
at 31 December 2017
| Mmboe | ||||
| Proved, Probable and Possible Reserves at 1 January 2017 | 7.87 | |||
| Production | (0.06) | |||
| Revisions | 0.01 | |||
| Proved, Probable and Possible Reserves at 31 December 2017 | 7.82 |
1 The study has been conducted as at 31 December 2016 by third-party Brend Vik and since then Cadogan has entered into a Technical Service Agreement with Brend Vik.
Reserves are assigned to the Bitlyanska, Monastyretska, Cheremkhivska and Debeslavetska fields. In addition to the tabled reserves Cadogan has 15.40 million boe of contingent resources associated with Bitlyanska and Monastyretska licences.
Corporate Responsibility
The Board recognises the requirement under Section 414C of the Companies Act 2006 (the “Actâ€) to detail information about environmental matters, employees, human rights and community issues, including information about any policies it has in relation to these matters and the effectiveness of these policies.
The Group considers the sustainability of its business as a key and competitive element of its strategy. Meeting the expectations of our stakeholders is the way in which we secure our licence to operate and to be recognised in the values we declare is the best added value we can bring in order to safeguard and profitably prolong our business. The Board recognises that the protection of the health and safety of its employees and communities as well as of the environment which it impacts is not just an obligation, but it is part of the personal ethics and beliefs of management and staff these are the key drivers for the sustainable development of the Company’s activity. Cadogan Petroleum, its management and employees are committed to continuously improve the Health, Safety and Environment (HSE) performances, our Code of Ethics and the adoption of internationally recognised best practices and standards are for both our, and our employees’, references for conducting operations.
Our activities are carried out in accordance with a policy manual, endorsed by the Board, which has been disseminated to all staff. The Working with Integrity policy and procedures includes the company’s position on business conduct and ethics, anti-bribery, the acceptance of gifts and hospitality and whistleblowing.
The former Chief Operating Officer is the Chairman of the HSE Committee and is supported in his role by Cadogan Ukraine’s HSE Manager. His role is to ensure that the Group has developed suitable procedures, and that operational management have incorporated them into daily operations and that she/he has the necessary level of autonomy and authority to discharge her/his duties effectively and efficiently.
The Board believes that health and safety procedures and training across the Group should be to the standard expected in any company operating in the oil and gas sector. Accordingly, it has set up a Committee to review and agree on the health and safety initiatives and to report back on progress. Management is regularly reporting to the Board on HSE and key safety and environmental issues, which are discussed by the Executive Management. The Health, Safety and Environment Committee Report can be found in the Annual Report.
Health, safety and environment
The Group has developed an integrated HSE management system. The system aims, by using a continuous improvement programme, to ensure that a safety and environmental protection culture is embedded in the organisation and continuously improved. The HSE management system ensures that both Ukrainian and international standards are met, with the Ukrainian HSE legislation requirements taken as an absolute minimum. All the Group’s local operating companies in east and west Ukraine have all the necessary documentation and systems in place to ensure compliance with Ukrainian legislation and Company’s standards.
A proactive approach to the prevention of incidents has been in place throughout 2017, which relies on a proper and reliable induction and near-miss reporting. Staff training on HSE matters and discussion on near miss reporting are recognised as the key factors to generate continuous improvement. In-house training is provided to help staff meet international standards and follow best practice. At present, special attention is being given to training on risk assessments, emergency response, incident prevention, reporting and investigation, as well as emergency drills regularly run on operations’ sites and offices, to ensure that international best practices and standards are maintained to comply with or exceed those required by Ukrainian legislation.
The Board monitors the main Key Performance Indicators (lost time incidents, nearmiss records, mileage driven, training received, CO2 emissions) as business parameters and entry point to reasonably verify that the procedures in place are robust. The Board has benchmarked safety performance against the HSE performance index measured and published annually by the International Association of Oil & Gas Producers. In 2017, the Group recorded over 255,000 man-hours worked with no incidents and close worked to 600,000 hours since last injury in February 2016.
During 2017 the Group continued to monitor the activity’s performances in terms of greenhouse gas emissions as well as to collect statistical data related to consumption of electricity and industrial water and fuel consumption by cars, plants and other work sites, recording a continuous improvement in the efficiency.
Employees
Wellness and professional development is part of the Company’s sustainable development policy and wherever possible local staff are recruited. The Group activity in Ukraine is managed by an entirely by local staff. Procedures are in place to ensure that all recruitments are undertaken on a transparent and fair basis with no discrimination against applicants. Each operating company has its own Human Resources staff to ensure that the Group’s employment policies are properly implemented and followed. As required by Ukrainian legislation, Collective Agreements are in place with the Group’s Ukrainian subsidiary companies, which provide an agreed level of staff benefits and other safeguards for employees. The Group’s Human Resources policy covers key areas such as equal opportunities, wages, overtime and non-discrimination. All staff are aware of the Group’s grievance procedures.
The cessation of the operational activity in the East of the country and the need to reduce costs to remain profitable forced the Group to reduce the level of staffing. The concerned personnel were duly informed and all the necessary procedures were taken. Qualified local contractors are engaged to supplement the required expertise when and to the extent it is necessary.
Sufficient level of health insurance is provided by the Group to employees to ensure they have access to good medical facilities. Each employee’s training needs are assessed on an individual basis to ensure that their skills are adequate to support the Group’s operations, and to help them to develop.
Diversity
The Board recognises the benefits and importance of diversity (gender, ethnic, age, sex, disability, educational and professional backgrounds, etc.) and strives to apply diversity values across the business. We endeavour to employ a skilled workforce that reflects the demographic of the jurisdictions in which we operate. The board will review the existing policies and further develop a diversity policy during the 2018 financial year.
Gender diversity
The Board of Directors of the Company comprised seven male Directors throughout the year to 31 December 2017. The appointment of any new Director is made on the basis of merit.
As at 31 December 2017, the Company comprised a total of 74 persons, as follows:
| Male | Female | |
| Non-executive directors | 5 | - |
| Executive directors | 1 | - |
| Management, other than Executive directors | 7 | 2 |
| Other employees | 37 | 22 |
| Total | 50 | 24 |
Human rights
Cadogan’s commitment to the fundamental principles of human rights is embedded in our HSE polices and throughout our business processes. We promote the core principles of human rights pronounced in the UN Universal Declaration of Human Rights. Our support for these principles is embedded throughout our Code of Conduct, our employment practices and our relationships with suppliers and partners wherever we do business.
Community
The Group’s activities are carried out in rural areas of Ukraine and the Board is aware of its responsibilities to the local communities in which it operates and from which some of the employees are recruited. In our operational sites, management works with the local councils to ensure that the impact of operations is as low as practicable by putting in place measures to mitigate their effect. Projects undertaken include improvement of the road infrastructure in the area, which provides easier access to the operational sites while at the same time minimising inconvenience for the local population and allowing improved road communications in the local communities, especially during winter season or harsh meteorological conditions. Specific community activities are undertaken for the direct benefit of local communities. All activities are followed and supervised by managers who are given specific responsibility for such tasks.
The Group’s local companies see themselves as part of the community and are involved not only with financial assistance when agreed, but also with practical help and support. All these activities are run in accordance with our Working with Integrity policy and procedures. The recruitment of local staff generates additional income for areas that otherwise are predominantly dependent on the agricultural sector.
Approval
The Strategic Report was approved by the Board of Directors on 25 April 2018 and signed on its behalf by:
Ben Harber
Company Secretary
25 April 2018
Consolidated Income Statement
For the year ended 31 December 2017
| Notes | 2017 $’000 |
2016 $’000 |
|
| CONTINUING OPERATIONS | |||
| Revenue | 6 | 15,145 | 19,692 |
| Cost of sales | (13,093) | (18,623) | |
| Gross profit | 2,052 | 1,069 | |
| Administrative expenses | 7 | (4,981) | (5,603) |
| Impairment of oil and gas assets | 15 | (162) | (90) |
| Reversal of impairment/(impairment) of other assets | 8 | 1,462 | (82) |
| Share of losses in joint venture | 16 | (2,323) | (143) |
| Net foreign exchange (losses)/gains | (116) | 38 | |
| Other operating income/(loss), net | 480 | (9) | |
| Operating loss | (3,588) | (4,820) | |
| Gain on acquisition | 17 | - | 99 |
| Finance income/(costs), net | 11 | 672 | (1,087) |
| Loss before tax | (2,916) | (5,808) | |
| Tax benefit/(charge) | 12 | 1,332 | (110) |
| Loss for the year | (1,584) | (5,918) | |
| Attributable to: | |||
| Owners of the Company | (1,585) | (5,912) | |
| Non-controlling interest | 1 | (6) | |
| (1,584) | (5,918) | ||
| Loss per Ordinary share | cents | cents | |
| Basic | 13 | (0.7) | (2.6) |
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
| 2017 $’000 |
2016 $’000 |
|||
| Loss for the year | (1,584) | (5,918) | ||
| Other comprehensive loss | ||||
| Items that may be reclassified subsequently to profit or loss: |
||||
| Unrealised currency translation differences | (671) | (987) | ||
| Other comprehensive loss | (671) | (987) | ||
| Total comprehensive loss for the year | (2,255) | (6,905) | ||
| Attributable to: | ||||
| Owners of the Company | (2,256) | (6,899) | ||
| Non-controlling interest | 1 | (6) | ||
| (2,255) | (6,905) | |||
| Consolidated Balance Sheet As at 31 December 2017 |
|||
| Notes | 2017 $’000 |
2016 $’000 |
|
| ASSETS | |||
| Non-current assets | |||
| Intangible exploration and evaluation assets | 14 | 1,715 | 2,354 |
| Property, plant and equipment | 15 | 2,095 | 1,312 |
| Investments in joint ventures | 17 | - | 2,323 |
| Deferred tax asset | 21 | 323 | - |
| 4,133 | 5,989 | ||
| Current assets | |||
| Inventories | 18 | 2,292 | 1,879 |
| Trade and other receivables | 19 | 4,497 | 4,146 |
| Cash and cash equivalents | 20 | 37,640 | 43,300 |
| 44,429 | 49,325 | ||
| Total assets | 48,562 | 55,314 | |
| LIABILITIES | |||
| Non-current liabilities | |||
| Provisions | 24 | (412) | (670) |
| (412) | (670) | ||
| Current liabilities | |||
| Short-term borrowings | 22 | - | (3,574) |
| Trade and other payables | 23 | (1,406) | (1,640) |
| Provisions | 24 | (358) | (1,306) |
| (1,764) | (6,520) | ||
| Total liabilities | (2,176) | (7,190) | |
| NET ASSETS | 46,386 | 48,124 | |
| EQUITY | |||
| Share capital | 25 | 13,525 | 13,337 |
| Share premium | 329 | - | |
| Retained earnings | 192,842 | 194,427 | |
| Cumulative translation reserves | (162,170) | (161,499) | |
| Other reserves | 1,589 | 1,589 | |
| Equity attributable to owners of the Company | 46,115 | 47,854 | |
| Non-controlling interest | 271 | 270 | |
| TOTAL EQUITY | 46,386 | 48,124 | |
The consolidated financial statements of Cadogan Petroleum plc, registered in England and Wales no. 05718406, were approved by the Board of Directors and authorised for issue on 25 April 2018. They were signed on its behalf by:
Guido Michelotti
Chief Executive Officer
25 April 2018
Consolidated Cash Flow Statement
For the year ended 31 December 2017
Note |
2017 $’000 |
2016 $’000 |
|||||
| Operating loss | (3,588) | (4,820) | |||||
| Adjustments for: | |||||||
| Depreciation of property, plant and equipment | 15 | 211 | 138 | ||||
| Impairment of oil and gas assets | 15 | 162 | 90 | ||||
| Share of losses in joint ventures | 17 | 2,323 | 143 | ||||
| Impairment of receivables | 8 | 51 | 59 | ||||
| (Reversal of impairment)/Impairment of inventories | 8 | (77) | 92 | ||||
| Reversal of impairment of VAT recoverable | 8 | (1,436) | (69) | ||||
| (Gain)/Loss on disposal of property, plant and equipment | (9) | 13 | |||||
| Effect of foreign exchange rate changes | 116 | (38) | |||||
| Operating cash flows before movements in working capital | (2,247) | (4,391) | |||||
| (Increase)/decrease in inventories | (564) | 1,047 | |||||
| Decrease in receivables | 469 | 9,321 | |||||
| Decrease in payables and provisions | 367 | (2,014) | |||||
| Cash from operations | (1,975) | 3,963 | |||||
| Interest paid | (298) | (1,591) | |||||
| Interest on receivables received | 561 | 230 | |||||
| Income taxes paid | (107) | (8) | |||||
| Net cash (outflow)/inflow from operating activities | (1,819) | 2,594 | |||||
Investing activities |
|||||||
| Investments in joint venture | - | (2,337) | |||||
| Purchases of property, plant and equipment | (68) | (119) | |||||
| Purchases of intangible exploration and evaluation assets | (568) | (39) | |||||
| Proceeds from sale of property, plant and equipment | 198 | 29 | |||||
| Net cash inflow from acquisition of subsidiaries | 17 | - | 2,041 | ||||
| Interest received | 205 | 156 | |||||
| Net cash used in investing activities | (233) | (269) | |||||
| Financing activities | |||||||
| Proceeds from short-term borrowings | 3,365 | 1,908 | |||||
| Repayments of short-term borrowings | (7,075) | (10,232) | |||||
| Net cash used in financing activities | (3,710) | (8,324) | |||||
| Net decrease in cash and cash equivalents | (5,762) | (5,999) | |||||
| Effect of foreign exchange rate changes | 102 | (108) | |||||
| Cash and cash equivalents at beginning of year | 43,300 | 49,407 | |||||
| Cash and cash equivalents at end of year | 37,640 | 43,300 | |||||
| Consolidated Statement of Changes in Equity For the year ended 31 December 2017 |
|||||||||||
| Share capital $’000 |
Retained earnings $’000 |
Cumulative translation reserves $’000 |
Non-controlling interest $’000 |
Total $’000 |
|||||||
| Share premium account $’000 |
Other reserves $’000 |
Equity attributable to owners of the Company | |||||||||
| As at 1 January 2016 | 13,337 | - | 200,339 | (160,512) | 1,589 | 54,753 | 276 | 55,029 | |||
| Net loss for the year | - | - | (5,912) | - | - | (5,912) | (6) | (5,918) | |||
| Other comprehensive loss | - | - | - | (987) | - | (987) | - | (987) | |||
| Total comprehensive loss for the year | - | - | (5,912) | (987) | - |
(6,899) |
(6) | (6,905) | |||
| As at 1 January 2017 | 13,337 | - | 194,427 | (161,499) | 1,589 | 47,854 | 270 | 48,124 | |||
| Net loss for the year | - | - | (1,585) | - | - | (1,585) | 1 | (1,584) | |||
| Other comprehensive loss | - | - | - | (671) | - | (671) | - | (671) | |||
| Total comprehensive loss for the year | - | - | (1,585) | (671) | - |
(2,256) |
1 | (2,255) | |||
| Issue of ordinary shares | 188 | 329 | - | - | - | 517 | - | 517 | |||
| As at 31 December 2017 | 13,525 | 329 | 192,842 | (162,170) | 1,589 | 46,115 | 271 | 46,386 | |||
Notes to the Consolidated Financial Statements
For the year ended 31 December 2017
1. General information
Cadogan Petroleum plc (the “Companyâ€, together with its subsidiaries the “Groupâ€), is registered in England and Wales under the Companies Act 2006. The address of the registered office is 6th Floor, 60 Gracechurch Street, London EC3V 0HR. The nature of the Group’s operations and its principal activities are set out in the Operations Review and the Financial Review.
2. Adoption of new and revised Standards
The accounting policies applied are consistent with those adopted and disclosed in the Group financial statements for the year ended 31 December 2016, except for changes arising from the adoption of the following new accounting pronouncements which became effective in the current reporting period:
§ Amendments to IAS 7 Disclosure initiative. The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes. The application of these amendments has had no impact on the Group’s consolidated financial results but gave rise to additional disclosure as at note 20;
§ Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses. The amendments clarify how an entity should evaluate whether there will be sufficient future taxable profits against which it can utilise a deductible temporary difference. The application of these amendments has had no impact on the Group’s consolidated financial statements as the Group already assesses the sufficiency of future taxable profits in a way that is consistent with these amendments; and
New IFRS accounting standards, amendments and interpretations not yet adopted
The following new IFRS accounting standards in issue but not yet effective:
IFRS 15 Revenue from Contracts with Customers
IFRS 15 will replace IAS 18 Revenue and IAS 11 Construction Contracts and establishes a unified framework for determining the timing, measurement and recognition of revenue. The principle of the new standard is to recognise revenue as performance obligations are met rather than based on the transfer of risks and rewards.
The effective date of the standard is 1 January 2018 to allow companies more time to deal with transitional issues of application.
The Group evaluated the potential impact of adopting IFRS 15. As the Group’s revenue is predominantly derived from arrangements in which the transfer of risks and rewards coincides with the fulfilment of performance obligations (note 3(f)), the timing and amount of revenue recognised is unlikely to be materially affected for the majority of sales.
IFRS 15 also includes disclosure requirements including qualitative and quantitative information about contracts with customers to help users of the financial statements understand the nature, amount, timing and uncertainty of revenue.
IFRS 9 Financial Instruments
IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement and addresses the following three key areas:
§ Classification and measurement establishes a single, principles-based approach for the classification of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held. This is not expected to have any presentational impacts on the Group financial statements;
§ Impairment introduces a new ‘expected credit loss’ impairment model, requiring expected credit losses to be recognised from when financial instruments are first recognised. The transition to this model is expected to result in changes in the systems and computational methods used by the Group to assess receivables and similar assets for impairment. However, given the profile of the Group’s counterparty exposures, this is not expected to have a material impact on the amounts recorded in the financial statements; and
§ Hedge Accounting aligns the accounting treatment with risk management practices of an entity, including making a broader range of exposures eligible for hedge accounting and introducing a more principles-based approach to assessing hedge effectiveness. The adoption of IFRS 9 will not require changes to existing hedging arrangements but may provide scope to apply hedge accounting to a broader range of transactions in the future. The Group does not currently hedge account.
IFRS 9 will take effect for annual reporting periods beginning on or after 1 January 2018 with retrospective application. The Group will take an option not to restate comparative information. The Group’s implementation activities to date have principally focused on gaining an understanding of the likely effects of IFRS 9 given the nature of financial instruments held by the Group. The Group has performed an impact analysis which, whilst subject to further detailed analysis during H1 2018, indicated that there would be no material impact on the Group results.
IFRS 16 Leases
IFRS 16 replaces the following standards and interpretations: IAS 17 Leases and IFRIC 4 Determining whether an Arrangement contains a Lease. The new standard provides a single lessee accounting model for the recognition, measurement, presentation and disclosure of leases. IFRS 16 applies to all leases including subleases and requires lessees to recognise assets and liabilities for all leases, unless the lease term is 12 months or less, or the underlying asset has a low value. Lessors continue to classify leases as operating or finance.
IFRS 16 was issued in January 2016 and will apply to annual reporting periods beginning on or after 1 January 2019. The Group will evaluate the potential impact of IFRS 16 on the financial statements and performance measures. This will include an assessment of whether any arrangements the Group enters into will be considered a lease under IFRS 16, including areas such as well rental arrangements and service contracts with potential lease elements. A more detailed impact analysis and transition activities will be undertaken during 2018.
3. Significant accounting policies
(a) Basis of accounting
The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSâ€) as issued by the International Accounting Standards Board (“IASBâ€) and as adopted by the European Union (“EUâ€), and therefore the Group financial statements comply with Article 4 of the EU IAS Regulation.
The financial statements have been prepared on the historical cost convention basis, except for certain financial assets and liabilities, which have been measured at fair values and using accounting policies consistent with IFRS.
The financial information for the year ended 31 December 2017 and 31 December 2016 set out in this announcement does not constitute the Company's statutory financial statements for the year ended 31 December 2017 but is extracted from the audited financial statements for those years. The 31 December 2016 accounts have been delivered to the Registrar of Companies. The statutory financial statements for 2017 will be delivered to the Registrar of Companies in due course.
The auditors have reported on the financial statements for the year ended 31 December 2017; their report was unqualified and did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report. It did not contain statements under section 498 (2) or (3) of the Companies Act 2006.
While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs and IFRIC interpretations) issued by the International Accounting Standards Board and as endorsed for use in the European Union, and with those parts of the Companies Act 2006 applicable to companies preparing their accounting under IFRS. This announcement does not itself contain sufficient information to comply with IFRSs.
The principal accounting policies adopted are set out below:
(b) Going concern
The Group's business activities, together with the factors likely to affect future development, performance and position are set out in the Strategic Report. The financial position of the Group, its cash flow and liquidity position are described in the Financial Review.
The Group’s cash balance at 31 December 2017 was $37.6 million (2016: $43.3 million). It includes pledged cash of $7 million (2016: $10.9 million) (Note 20). The Directors believe that the funds available at the date of the issue of these financial statements are sufficient for the Group to manage its business risks and planned investments successfully.
The directors’ confirmation that they have carried out a robust assessment of the principal risks facing the Group, including those that could potentially threaten its business model, future performance, solvency or liquidity is in the Annual Report.
The Group’s forecasts and projections, taking into account reasonably possible changes in trading activities, operational performance, start dates and flow rates for commercial production and the price of hydrocarbons sold to Ukrainian customers, show that there are reasonable expectations that the Group will be able to operate on funds currently held and those generated internally, for the foreseeable future.
The Group continues to pursue its farm-out campaign, which, if successful, will enable it to farm-out a portion of its interests in its oil and gas licences to spread the risks associated with further exploration and development.
After making enquiries and considering the uncertainties described above, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and consider the going concern basis of accounting to be appropriate and, thus, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
(c) Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. IFRS 10 defines control to be investor control over an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to control those returns through its power over the investee.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Non-controlling interests in subsidiaries are identified separately from the Group’s equity therein. Those interests of non-controlling shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may be initially measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially measured at fair value.
Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance.
Changes in the Group’s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amount of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the Company.
(d) Business combinations
The acquisition of subsidiaries is accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for resale in accordance with IFRS 5 Non-Current Assets held for sale and Discontinued Operations. These are recognised and measured at fair value less costs to sell.
(e) Investments in joint ventures
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. A joint venture firm recognises its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures.
Under the equity method, the investment is carried on the balance sheet at cost plus changes in the Group’s share of net assets of the entity, less distributions received and less any impairment in value of the investment. The Group Consolidated Income Statement reflects the Group’s share of the results after tax of the equity-accounted entity, adjusted to account for depreciation, amortisation and any impairment of the equity accounted entity’s assets. The Group Statement of Comprehensive Income includes the Group’s share of the equity-accounted entity’s other comprehensive income.
Financial statements of equity-accounted entities are prepared for the same reporting year as the Group. The Group assesses investments in equity-accounted entities for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In doing so, the Group applies the criteria of IFRS 6 ‘Exploration for and evaluation of mineral resources’ as the joint venture holds exploration phase assets. If any such indication of impairment exists, the carrying amount of the investment is compared with its recoverable amount, being the higher of its fair value less costs of disposal and value in use. If the carrying amount exceeds the recoverable amount, the investment is written down to its recoverable amount.
The Group ceases to use the equity method of accounting from the date on which it no longer has joint control over the joint venture or significant influence over the associate, or when the interest becomes classified as an asset held for sale.
(f) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for hydrocarbon products and services provided in the normal course of business, net of discounts, value added tax (‘VAT’) and other sales-related taxes, excluding royalties on production. Sales of hydrocarbons are recognised when the title has passed (defined point in the pipeline for gas sales and loading point for oil). Revenue from services is recognised in the accounting period in which services are rendered. The main types of services provided by the Group are drilling and civil works services. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition.
To the extent that revenue arises from test production during an evaluation programme, an amount is credited to evaluation costs and charged to cost of sales, so as to reflect a zero net margin.
(g) Foreign currencies
The functional currency of the Group’s Ukrainian operations is Ukrainian Hryvnia. The functional currency of the Group’s UK subsidiaries and the parent company is US Dollar. The vast majority of the Group’s earnings and costs are linked to US dollars or US dollar linked currencies. The investing activity of the Company is being conducted in US dollars and the majority of the Group’s funds are currently denominated in US dollars. The Group primary operating environment is outside UK and UK subsidiaries remain registered in UK only due to listing.
In preparing the financial statements of the individual companies, transactions in currencies other than the functional currency of each Group company (‘foreign currencies’) are recorded in the functional currency at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated into the functional currency at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Foreign exchange differences on cash and cash equivalents are recognised in operating profit or loss in the period in which they arise.
Exchange differences are recognised in the profit or loss in the period in which they arise except for exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur. This forms part of the net investment in a foreign operation, which is recognised in the foreign currency translation reserve and in profit or loss on disposal of the net investment.
For the purpose of presenting consolidated financial statements, the results and financial position of each entity of the Group, where the functional currency is not the US dollar, are translated into US dollars as follows:
i. assets and liabilities of the Group’s foreign operations are translated at the closing rate on the balance sheet date;
ii. income and expenses are translated at the average exchange rates for the period, where it approximates to actual rates. In other cases, if exchange rates fluctuate significantly during that period, the exchange rates at the date of the transactions are used; and
iii. all resulting exchange differences arising, if any, are recognised in other comprehensive income and accumulated equity (attributed to non-controlling interests as appropriate), transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
| The relevant exchange rates used were as follows: |
| Year ended 31 December 2017 | Year ended 31 December 2016 | |||
| GBP/USD | USD/UAH | GBP/USD | USD/UAH | |
| Closing rate | 1.3494 | 28.3865 | 1.2346 | 27.4770 |
| Average rate | 1.2890 | 26.8034 | 1.3557 | 25.8169 |
(h) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. This is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when 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 case of the uncertainty of the tax treatment, the Group assess, whether it is probable or not, that the tax treatment will be accepted, and to determine the value, the Group use the most likely amount or the expected value in determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates.
(i) Other property, plant and equipment
Property, plant and equipment (‘PP&E’) are carried at cost less accumulated depreciation and any recognised impairment loss. Depreciation and amortisation is charged so as to write-off the cost or valuation of assets, other than land, over their estimated useful lives, using the straight-line method, on the following bases:
Other PP&E 10% to 30%
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income.
(j) Intangible exploration and evaluation assets
The Group applies the modified full cost method of accounting for intangible exploration and evaluation (‘E&E’) expenditure, which complies with requirements set out in IFRS 6 Exploration for and Evaluation of Mineral Resources. Under the modified full cost method of accounting, expenditure made on exploring for and evaluating oil and gas properties is accumulated and initially capitalised as an intangible asset, by reference to appropriate cost centres being the appropriate oil or gas property. E&E assets are then assessed for impairment on a geographical cost pool basis, which are assessed at the level of individual licences.
E&E assets comprise costs of (i) E&E activities which are in progress at the balance sheet date, but wherethe existence of commercial reserves has yet to be determined (ii) E&E expenditure which, whilst representing part of the E&E activities associated with adding to the commercial reserves of an established cost pool, did not result in the discovery of commercial reserves.
Costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as incurred.
Exploration and Evaluation costs
E&E expenditure is initially capitalised as an E&E asset. Payments to acquire the legal right to explore, costs of technical services and studies, seismic acquisition, exploratory drilling and testing are also capitalised as intangible E&E assets.
Tangible assets used in E&E activities (such as the Group’s vehicles, drilling rigs, seismic equipment and other property, plant and equipment) are normally classified as PP&E. However, to the extent that such assets are consumed in developing an intangible E&E asset, the amount reflecting that consumption is recorded as part of the cost of the intangible asset. Such intangible costs include directly attributable overheads, including the depreciation of PP&E items utilised in E&E activities, together with the cost of other materials consumed during the exploration and evaluation phases.
E&E assets are not amortised prior to the conclusion of appraisal activities.
Treatment of E&E assets at conclusion of appraisal activities
Intangible E&E assets related to each exploration property are carried forward, until the existence (or otherwise) of commercial reserves has been determined. If commercial reserves have been discovered, the related E&E assets are assessed for impairment on individual assets basis as set out below and any impairment loss is recognised in the income statement. Upon approval of a development programme, the carrying value, after any impairment loss, of the relevant E&E assets is reclassified to the development and production assets within PP&E.
Intangible E&E assets that relate to E&E activities that are determined not to have resulted in the discovery of commercial reserves remain capitalised as intangible E&E assets at cost less accumulated amortisation, subject to meeting a pool-wide impairment test in accordance with the accounting policy for impairment of E&E assets set out below.
Impairment of E&E assets
E&E assets are assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Such indicators include, but are not limited to those situations outlined in paragraph 20 of IFRS 6 Exploration for and Evaluation of Mineral Resources such as, a) licence expiry during year or in the near future and will not likely to be renewed; b) expenditure on E&E activity neither budgeted nor planned; c) commercial quantities of mineral resources have been discovered; and d) sufficient data exist to indicate that carrying amount of E&E asset is unlikely to be recovered in full from successful development or sale.
Where there are indications of impairment, the E&E assets concerned are tested for impairment. Where the E&E assets concerned fall within the scope of an established full cost pool, which are not larger than an operating segment, they are tested for impairment together with all development and production assets associated with that cost pool, as a single cash generating unit.
The aggregate carrying value of the relevant assets is compared against the expected recoverable amount of the pool, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves from that pool. Where the assets fall into an area that does not have an established pool or if there are no producing assets to cover the unsuccessful exploration and evaluation costs, those assets would fail the impairment test and be written off to the income statement in full.
Impairment losses are recognised in the income statement as additional depreciation and amortisation and are separately disclosed.
(k) Development and production assets
Development and production assets are accumulated on a field-by-field basis and represent the cost of developing the commercial Reserves discovered and bringing them into production, together with E&E expenditures incurred in finding commercial Reserves transferred from intangible E&E assets.
The cost of development and production assets comprises the cost of acquisitions and purchases of such assets, directly attributable overheads, finance costs capitalised, and the cost of recognising provisions for future restoration and decommissioning.
Depreciation of producing assets
Depreciation is calculated on the net book values of producing assets on a field-by-field basis using the unit of production method. The unit of production method refers to the ratio of production in the reporting year as a proportion of the Proved and Probable Reserves of the relevant field, taking into account future development expenditures necessary to bring those Reserves into production.
Producing assets are generally grouped with other assets that are dedicated to serving the same Reserves for depreciation purposes, but are depreciated separately from producing assets that serve other Reserves.
(l) Impairment of development and production assets and other property, plant and equipment
At each balance sheet date, the Group reviews the carrying amounts of its PP&E to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately.
(m) Inventories
Oil and gas stock and spare parts are stated at the lower of cost and net realisable value. Costs comprise direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is allocated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
(n) Financial instruments
Recognition of financial assets and financial liabilities
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.
Derecognition of financial assets and financial liabilities
The Group derecognises a financial asset only when the contractual rights to cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for the amount it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. The Group derecognises financial liabilities when the Group’s obligations are discharged, cancelled or expired.
Financial assets
The Group classifies its financial assets in the following categories: loans and receivables; available-for-sale financial assets; held to maturity investments; and financial assets at fair value through profit or loss (“FVTPLâ€). The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than twelve months after the balance sheet date which will then be classified as non-current assets. Loans and receivables are classified as “other receivables†and “cash and cash equivalents†in the balance sheet.
Trade and other receivables
Trade and other receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, on-demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash with three months or less remaining to maturity and are subject to an insignificant risk of changes in value.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount of the financial asset and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.
Evidence of impairment could include: significant financial difficulty of the issuer or counterparty; default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organisation.
For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis.
The carrying amount of the financial assets is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.
Financial liabilities
Financial liabilities are classi?ed as either ?nancial liabilities ‘at FVTPL’ or ‘other ?nancial liabilities’
Trade payables and short-term borrowings
Trade payables and short-term borrowings are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.
(o) Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
(p) Decommissioning
A provision for decommissioning is recognised in full when the related facilities are installed. The decommissioning provision is calculated as the net present value of the Group’s share of the expenditure expected to be incurred at the end of the producing life of each field in the removal and decommissioning of the production, storage and transportation facilities currently in place. The cost of recognising the decommissioning provision is included as part of the cost of the relevant asset and is thus charged to the income statement on a unit of production basis in accordance with the Group’s policy for depletion and depreciation of tangible non-current assets. Period charges for changes in the net present value of the decommissioning provision arising from discounting are included within finance costs.
4. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group’s accounting policies, which are described in note 3, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of the assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both the current and future periods.
The following are the critical judgements and estimates that the Directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.
Critical judgements
(a) Classification of the exploration licence as PP&E
Although Monastyretska is an exploration licence, in Ukraine it is allowed to produce hydrocarbons from an exploration licence. In 2017 the Group significantly increased production of oil on this licence and confirmed commercially viable reserves. Due to this, assets of Monastyretska have been reclassified from E&E to PP&E and started to be depreciated.
(b) Impairment of investments in joint ventures
The Group’s investments in joint ventures are accounted for using the equity method. The carrying value of the Group’s investments is reviewed at each balance sheet date with reference to the impairment indicators in IFRS 6. As a result impairment of $2.3 million has been recognised in the financial statements following Eni’s notification of exit from WGI. Further details are provided in Note 17.
Areas of key estimation uncertainty
(a) Impairment of E&E assets
The outcome of ongoing exploration, and therefore the recoverability of the carrying value of intangible exploration and evaluation assets, is inherently uncertain. Management assess impairment indicators and if necessary performs impairment review, which considers key sources of estimation to implement the Group’s policy with respect to exploration and evaluation assets and considers these assets for impairment at least annually with reference to indicators in IFRS 6 (Note 14).
5. Segment information
Segment information is presented on the basis of management’s perspective and relates to the parts of the Group that are defined as operating segments. Operating segments are identified on the basis of internal reports provided to the Group’s chief operating decision maker (“CODMâ€). The Group has identified its senior management team as its CODM and the internal reports used by the senior management team to oversee operations and make decisions on allocating resources serve as the basis of information presented. These internal reports are prepared on the same basis as these consolidated financial statements.
Segment information is analysed on the basis of the type of activity, products sold or services provided. The majority of the Group’s operations and all Group’s revenues are located within Ukraine. Segment information is analysed on the basis of the types of goods supplied by the Group’s operating divisions. The Group’s reportable segments under IFRS 8 are therefore as follows:
Exploration and Production
§ E&P activities on the exploration and production licences for natural gas, oil and condensate.
Service
§ Drilling services to exploration and production companies; and
§ Civil works services to exploration and production companies.
Trading
§ Import of natural gas from European countries; and
§ Local purchase and sales of natural gas operations with physical delivery of natural gas.
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in Note 3. Sales between segments are carried out at rates considered to approximate market prices. The segment result represents operating profit under IFRS before unallocated corporate expenses. Unallocated corporate expenses include management remuneration, representative expenses and expenses incurred in respect of the maintenance of office premises. This is the measure reported to the CODM for the purposes of resource allocation and assessment of segment performance. The Group does not present information on segment assets and liabilities as the CODM does not review such information for decision-making purposes.
As of 31 December 2017 and for the year then ended the Group’s segmental information was as follows:
| Exploration and Production | Service(1) | Trading | Consolidated | |
| $’000 | $’000 | $’000 | $’000 | |
| Sales of hydrocarbons | 1,779 | - | 13,367 | 15,146 |
| Sales between segments | 630 | - | (630) | - |
| Total revenue | 2,409 | - | 12,737 | 15,146 |
| Cost of sales | (1,687) | - | (11,406) | (13,093) |
| Administrative expenses | (454) | (26) | (265) | (745) |
| Finance income, net (Note 11) (2) | - | - | 305 | 305 |
| Segment results | 268 | (26) | 1,371 | 1,613 |
| Unallocated administrative expenses | (4,236) | |||
| Other income, net | 2,308 | |||
| Impairment of oil and gas assets | (162) | |||
| Share of loss in joint ventures | (2,323) | |||
| Net foreign exchange gains | (116) | |||
| Loss before tax | (2,916) |
(1) The services business segment in 2017 primarily provided well work-overs and other works to other Group companies as tenders secured with third parties had been deferred by customers.
(2) Net finance income includes $0.26 million of interest on short-term borrowings, $0.49 million of interest income on receivables and $67 thousand of interest on cash deposits used for trading.
(3) Trading result excluding interest received on receivables was $0.9 million.
As of 31 December 2016 and for the year then ended the Group’s segmental information was as follows:
| Exploration and Production | Service | Trading | Consolidated | |
| $’000 | $’000 | $’000 | $’000 | |
| Sales of hydrocarbons | 598 | - | 16,598 | 17,196 |
| Other revenue | - | 2,496(1) | - | 2,496 |
| Sales between segments | 981 | (981) | - | |
| Total revenue | 1,579 | 2,496 | 15,617 | 19,692 |
| Cost of sales | (1,182) | (1,893) | (15,548) | (18,623) |
| Administrative expenses | (408) | - | (886) | (1,294) |
| Finance cost, net (Note 11) (2) | - | - | (1,153) | (1,153) |
| Segment results | (11) | 603 | (1,970) | (1,378) |
| Unallocated administrative expenses | (4,309) | |||
| Other losses, net | (25) | |||
| Impairment of oil and gas assets(3) | (90) | |||
| Gain on acquisition of assets | 99 | |||
| Share of loss in joint ventures(4) | (143) | |||
| Net foreign exchange gains | 38 | |||
| Loss before tax | (5,808) |
1 Services provided were primarily related to well abandonment and site restoration.
2 Net finance cost includes $1.4 million of interest on short-term borrowings, $0.2 million of interest income on receivables and $31 thousand of interest on cash deposits used for trading.
3 Impairment loss recognised in 2016 of $90 thousand related to exploration and production segment.
4 Share of losses in the joint ventures includes $1.7 million of operating losses, $0.8 million of additional impairment of Westgasinvest LLC and $2.3 million of income received by one of the Group subsidiaries for decommissioning services provided to the joint ventures (Note 17).
6. Revenue
| 2017 $’000 |
2016 $’000 |
|
| Sale of hydrocarbons | 15,145 | 17,196 |
| Other revenues | - | 2,496 |
| 15,145 | 19,692 |
Information about major customers
Included in revenues for the year ended 31 December 2017 are revenues of $7.4 million (2016: $6.3 million), which arose from sales to the Group’s two largest customers.
7. Administrative expenses
| 2017 $’000 |
2016 $’000 |
|||
| Staff costs (Note 10) | 2,531 | 3,082 | ||
| Professional fees | 1,206 | 1,555 | ||
| Travel | 238 | 316 | ||
| Office rent | 161 | 138 | ||
| Insurance | 177 | 122 | ||
| Other | 668 | 390 | ||
| 4,981 | 5,603 | |||
8. Reversal of impairment / (impairment) of other assets
| 2017 $’000 |
2016 $’000 |
|||
| Inventories | 77 | (92) | ||
| Receivables | (51) | (59) | ||
| VAT recoverable | 1,436 | 69 | ||
| Reversal of impairment/(impairment) of other assets, net | 1,462 | (82) | ||
The carrying value of inventory as at 31 December 2017 and 2016 has been impaired to reduce it to net realisable value (see note 18). At 31 December 2017, $77 thousand of impairment has been released following the sale of previously impaired inventory for this amount.
$1.4 million (2016: $69 thousand) of provision against VAT has been released following receipt and offsets of VAT payable. $6.4 million remains impaired due to the continued delays and uncertainty associated with recovering VAT in Ukraine.
9. Auditor’s remuneration
The analysis of auditor’s remuneration is as follows:
2017 $’000 |
2016 $’000 |
|
| Audit fees | ||
| Fees payable to the Company’s auditor and their associates for the audit of the Company’s annual accounts | 229 | 146 |
| Fees payable to the Company’s auditor and their associates for other services to the Group: | ||
| - The audit of the Company’s subsidiaries | 13 | 43 |
| Total audit fees | 242 | 189 |
| Non-audit fees | ||
| - Audit-related assurance services | 5 | 19 |
| - Taxation compliance services | 33 | 36 |
| Non-audit fees | 38 | 55 |
Audit fees for 2017 refer to BDO LLP of $121 thousand for the audit of group accounts as of and for the year ended 31 December 2017 and to Deloitte LLP, the Group’s previous auditor, of $108 thousand, for the audit as of and for the year ended 31 December 2016. Non-audit service fees in 2017 include $33 thousand of tax compliance services provided by BDO LLP. The tax compliance services relates to reporting periods prior to BDO LLP’s appointment as the Group’s auditor and was discontinued upon their appointment. The audit-related assurance services for 2017 include $5 thousand in respect of BDO LLP.
10. Staff costs
The average monthly number of employees (including Executive Directors) was:
| 2017 Number |
2016 Number |
|
| Executive Directors | 1 | 3 |
| Other employees | 68 | 66 |
| 69 | 69 | |
| Total number of employees at 31 December | 69 | 69 |
| $’000 | $’000 | |
| Their aggregate remuneration comprised: | ||
| Wages and salaries | 2,150 | 2,443 |
| Annual bonus | 179 | 475 |
| Social security costs | 290 | 164 |
| 2,619 | 3,082 |
Within wages and salaries $0.8 million (2016: $1.1 million) relates to amounts accrued and paid to Executive Directors for services rendered.
11. Finance income/(costs), net
| 2017 $’000 |
2016 $’000 |
|
| Interest expense on short-term borrowings | (256) | (1,414) |
| Total interest expense on financial liabilities | (256) | (1,414) |
| Interest benefit/(expense) on tax provision (note 24) | 189 | (33) |
| Interest income on receivables | 494 | 230 |
| Interest income on cash deposits in Ukraine | 67 | 31 |
| Investment revenue | 205 | 125 |
| Total interest income on financial assets | 955 | 386 |
| Unwinding of discount on decommissioning provision (note 24) | (27) | (26) |
| 672 | (1,087) |
12. Tax
| 2017 $’000 |
2016 $’000 |
|
| Current tax | - | 110 |
| Adjustment in relation to the current tax of prior years | (1,009) | - |
| Deferred tax | ||
| Recognition of previously unrecognised deferred tax assets | (323) | - |
| (1,332) | 110 |
The Group’s operations are conducted primarily outside the UK, namely in Ukraine. The most appropriate tax rate for the Group is therefore considered to be 18% (2016: 18%), the rate of profit tax in Ukraine, which is the primary source of revenue for the Group. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
As at 31 December 2015 the Company recognised a short-term provision in respect of a probable corporate tax obligation of $1.3 million (£0.9 million) and up to $0.2 million (£0.1 million) of interest in respect on the classification of taxable income and expenses. On 29 August 2017 the Company signed a settlement with HMRC. For this reason, the provision in respect of probable tax obligation of $1 million and interest of $0.2 million has been reversed.
The taxation charge for the year can be reconciled to the loss per the income statement as follows:
| 2017 $’000 |
2017 % |
2016 $’000 |
2016 % |
|
| Loss before tax | (2,916) | 100 | (5,808) | 100 |
| Tax credit at Ukraine corporation tax rate of 18% (2016: 18%) | (525) | 18 | (1,045) | 18 |
| Permanent differences | (923) | 32 | 1,060 | (18.2) |
| Unrecognised tax losses generated in the year | 1,174 | (40) | 378 | (6.5) |
| Recognition of previously unrecognised deferred tax assets | (323) | 11 | - | - |
| Tax credit related to the Joint venture losses | 418 | 14 | 26 | (0.4) |
| Effect of different tax rates | (144) | 5 | (309) | 5.3 |
| (323) | 11 | 110 | (1.8) | |
| Adjustments recognised in the current year in relation to the current tax of prior years |
(1,009) |
- | |
- |
| Income tax (benefit)/expense recognised in profit or loss | (1,332) | - | 110 | - |
Permanent differences mostly represent differences on profit/(loss) items, including provisions, accruals, impairments, related to taxation in Ukraine, where it is probable that such differences will not reverse in the foreseeable future.
13. Loss per Ordinary share
Basic loss per Ordinary Share is calculated by dividing the net loss for the year attributable to owners of the Company by the weighted average number of Ordinary shares outstanding during the year. The calculation of the basic loss per share is based on the following data:
| Loss attributable to owners of the Company | 2017 $’000 |
2016 $’000 |
| Loss for the purposes of basic loss per share being net loss attributable to owners of the Company | (1,585) | (5,912) |
Number of shares |
Number ‘000 |
Number ‘000 |
| Weighted average number of Ordinary shares for the purposes of basic loss per share |
232,251 | 231,092 |
| Cent | cent | |
| Loss per Ordinary share | ||
| Basic | (0.7) | (2.6) |
The Group has no potentially dilutive instruments in issue. Therefore no diluted loss per share is presented above.
14. Intangible exploration and evaluation assets
Cost |
$’000 | |
| At 1 January 2016 | 25,333 | |
| Additions | 39 | |
| Disposals | (27) | |
| Exchange differences | (2,997) | |
| At 1 January 2017 | 22,348 | |
| Additions | 461 | |
| Disposals | (78) | |
| Change in estimate of decommissioning assets (note 24) | 27 | |
| Transfer to property, plant and equipment | (937) | |
| Exchange differences | (753) | |
| At 31 December 2017 | 21,068 | |
| Impairment | ||
| At 1 January 2016 | 22,633 | |
| Exchange differences | (2,639) | |
| At 1 January 2017 | 19,994 | |
| Exchange differences | (641) | |
| At 31 December 2017 | 19,353 | |
| Carrying amount | ||
| At 31 December 2017 | 1,715 | |
| At 31 December 2016 | 2,354 |
The carrying amount of E&E assets as at 31 December 2017 of $1.7 million (2016: $2.4 million) relates to Bitlyanska licence. Management has performed an impairment review. As part of the information considered management carried out the assessment of the Bitlyanska licence’s value in use based on the underlying discounted cash flow forecasts. The impairment review supported the conclusion that no impairment was applicable. Key assumptions used in the impairment assessment were: future gas price was assumed to be flat $230, real per m3; and the pre-tax discount rate used was 20%, real.
Break-even point in the model would require gas prices to fall to $160 or the discount rate to increase to 90%.
15. Property, plant and equipment
| Cost | Development and production assets $’000 |
Other $’000 |
Total $’000 |
| At 1 January 2016 | 6,094 | 3,173 | 9,267 |
| Additions | 90 | 29 | 119 |
| Disposals | - | (29) | (29) |
| Exchange differences | (711) | (370) | (1,081) |
| At 1 January 2017 | 5,473 | 2,803 | 8,276 |
| Additions | 133 | 148 | 281 |
| Change in estimate of decommissioning assets (note 24) | 73 | - | 73 |
| Transfer from E&E | 937 | - | 937 |
| Disposals | (51) | (324) | (375) |
| Exchange differences | (193) | (91) | (283) |
| At 31 December 2017 | 6,372 | 2,536 | 8,909 |
| Accumulated depreciation and impairment | |||
| At 1 January 2016 | 6,094 | 1,512 | 7,606 |
| Impairment | 90 | - | 90 |
| Charge for the year | - | 138 | 138 |
| Disposals | - | (14) | (14) |
| Exchange differences | (711) | (145) | (856) |
| At 1 January 2017 | 5,473 | 1,491 | 6,964 |
| Impairment | 162 | - | 162 |
| Charge for the year | 44 | 167 | 211 |
| Disposals | (107) | (199) | (306) |
| Exchange differences | (171) | (46) | (217) |
| At 31 December 2017 | 5,401 | 1,413 | 6,814 |
| Carrying amount | |||
| At 31 December 2017 | 971 | 1,124 | 2,095 |
| At 31 December 2016 | - | 1,312 | 1,312 |
Other property, plant and equipment include fixtures and fittings for the development and production activities.
The carrying amount of development and production assets as at 31 December 2017 of $0.9 million relates to Monastyretska licence. The Monastyretska asset of $0.5 million was classified as an exploration and evaluation asset as at 31 December 2016. Until last year all costs had been capitalised as the licence is at exploration stage and production was minimal. Given the recent increase in the number of producing wells and growth of production rate, the Group concluded that the asset reached commercial feasibility and production from July 2017 and reclassified this asset to development and production. Past amounts plus the cost incurred in 2017 have started to be depreciated. Depreciation includes $17 thousand for Monastyretska licence.
Management has performed an impairment review. As part of the information considered management carried out the assessment of the Monastyretska licence’s value in use based on the underlying discounted cash flow forecasts. The impairment review supported the conclusion that no impairment was applicable. Key assumptions used in the impairment assessment were: future oil price was assumed to be flat $330, real per tonne; and the pre-tax discount rate used was 20%, real.
16. Subsidiaries
The Company had investments in the following subsidiary undertakings as at 31 December 2017:
| Name | Country of incorporation and operation |
Proportion of voting interest % |
Activity | Registered office |
| Directly held | ||||
| Cadogan Petroleum Holdings Ltd | UK | 100 | Holding company | 6th Floor 60 Gracechurch Street, London, United Kingdom, EC3V 0HR |
| Ramet Holdings Ltd | Cyprus | 100 | Holding company | 48 Inomenon Ethnon, Guricon House, Floor 2 & 3, 6042, Larnaca, Cyprus |
| Indirectly held | ||||
| Cadogan Petroleum Holdings BV | Netherlands | 100 | Holding company | Hoogoorddreef 15, 1101 BA Amsterdam |
| Cadogan Bitlyanske BV | Netherlands | 100 | Holding company | Hoogoorddreef 15, 1101 BA Amsterdam |
| Cadogan Delta BV | Netherlands | 100 | Holding company | Hoogoorddreef 15, 1101 BA Amsterdam |
| Cadogan Astro Energy BV | Netherlands | 100 | Holding company | Hoogoorddreef 15, 1101 BA Amsterdam |
| Cadogan Pirkovskoe BV | Netherlands | 100 | Holding company | Hoogoorddreef 15, 1101 BA Amsterdam |
| Cadogan Zagoryanske Production BV | Netherlands | 100 | Holding company | Hoogoorddreef 15, 1101 BA Amsterdam |
| Zagoryanska Petroleum BV | Netherlands | 100 | Holding company | Hoogoorddreef 15, 1101 BA Amsterdam |
| Pokrovskoe Petroleum BV | Netherlands | 100 | Holding company | Hoogoorddreef 15, 1101 BA Amsterdam |
| Cadogan Ukraine Holdings Limited | Cyprus | 100 | Holding company | 48 Inomenon Ethnon, Guricon House, Floor 2 & 3, 6042, Larnaca, Cyprus |
| Momentum Enterprise (Europe) Ltd | Cyprus | 100 | Holding company | 48 Inomenon Ethnon, Guricon House, Floor 2 & 3, 6042, Larnaca, Cyprus |
| Rentoul Ltd | Isle of Man | 100 | Holding company | Commerce House, 1 Bowring Road, Ramsey, Isle of Man IM8 2LQ |
| Radley Investments Ltd | UK | 100 | Dormant | Lynton House 7-12 Tavistock Square London WC1H 9LT |
| Name | Country of incorporation and operation |
Proportion of voting interest % |
Activity | Registered office |
| Cadogan Petroleum Trading SAGL | Switzerland | 100 | Dormant | Via Clemente Maraini 39, 6900 Lugano, Switzerland |
| LLC AstroInvest-Ukraine | Ukraine | 100 | Exploration | 5a, Pogrebnyak Street, ap. 2, Zinkiv, Poltava region, Ukraine, 38100 |
| LLC Astro Gas | Ukraine | 100 | Exploration | 5a, Pogrebnyak Street, ap. 2, Zinkiv, Poltava region, Ukraine, 38100 |
| LLC Astroinvest-Energy | Ukraine | 100 | Exploration | 5a, Pogrebnyak Street, ap. 2, Zinkiv, Poltava region, Ukraine, 38100 |
| LLC Industrial Company Gazvydobuvannya | Ukraine | 100 | Exploration | 3, Myru str., Poltava, Ukraine, 36022 |
| DP USENCO Ukraine | Ukraine | 100 | Exploration | 8, Mitskevycha sq., Lviv, Ukraine, 79000 |
| LLC USENCO Nadra | Ukraine | 95 | Exploration | 9a, Karpenka-Karoho str., Sambir, Lviv region, Ukraine |
| JV Delta | Ukraine | 100 | Exploration | 3 Petro Kozlaniuk str, Kolomyia, |
| LLC Cadogan Ukraine | Ukraine | 100 | Corporate services | 48/50A Zhylyanska Street, BC “Primeâ€, 8th fl. 01033 Kyiv, Ukraine |
| LLC Astro-Service | Ukraine | 100 | Service Company | 3 Petro Kozlaniuk str, Kolomyia, |
| OJSC AgroNaftoGasTechService | Ukraine | 79.9 | Construction services | Ivan Franko str, Hvizdets, Kolomyia district, Ivano-Frankivsk Region, Ukraine |
| Exploenergy s.r.l. | Italy | 90 (2016: 0) |
Exploration | Via Triulziana 16c, San Donato Milanese Milano, CAP 20097, Italy |
During the year ended 31 December 2017, the Group structure continued to be rationalised both so as to reduce the number of legal entities and also to replace the structure of multiple jurisdictions with one based on a series of sub-holding companies incorporated in the Netherlands for each licence area. In 2017 the subsidiaries liquidated/sold included: Cadogan Black Sea Holdings B.V., Cadogan Momentum Holdings Inc. and Global Commodities NC SAS.
17. Joint venture
As at the end of the 2017 reporting periods the details of the Group’s joint venture is as follows:
| Company name | Licences held | Country of incorporation and operation |
Ownership share % |
Activity |
| LLC Westgasinvest | Cheremkhivsko-Strupkivska, Debeslavetska Production, Filimonivska, Yakovlivska, Sandugeyevska, Kurinna licence | Ukraine | 15 | Exploration |
As at 31 December 2017 Westgasinvest LLC is accounted for using the equity method in these consolidated financial statements. According to the shareholders’ agreements, which regulate the activities of the jointly controlled entities, all key decisions require unanimous approval from the shareholders, therefore these entities are jointly controlled.
Summarised financial information in respect of each of the Group’s material joint ventures is set out below. The summarised financial information below represents amounts shown in the joint venture’s financial statements prepared in accordance with IFRSs.
| 2017 $’000 |
2016 $’000 |
||
| Non-current assets | 64 | 1,460 | |
| Current assets | 591 | 60 | |
| Non-current liabilities | - | - | |
| Current liabilities | (1,141) | (391) | |
| Included in the above amounts are: | |||
| Cash and cash equivalents | 11 | 49 | |
| Current financial liabilities (excluding trade payables) | 13 | 47 | |
| Revenue | - | - | |
| Loss for the period | (4,490) | (3,150) | |
| Other comprehensive income | (820) | (1,686) | |
| Total comprehensive loss | (5,310) | (4,836) | |
| Net assets of the joint venture | (486) | 1,129 |
The carrying amounts of the Group’s interest in joint venture recognised in the financial statements of the Group using the equity method are set out in the tables below:
| LLC Westgasinvest $’000 |
|
| Net assets recognised as at 1 January 2016 | 3,881 |
| Loss for the year | (1,558) |
| Net assets recognised as at 1 January 2017 | 2,323 |
| Loss for the year | (2,323) |
| Carrying amount of Group’s interest as at 31 December 2017 | - |
In 2017, Eni has informed its partners, NJSC “Nadra Ukrayny†and Cadogan Ukraine, of its intention to exit the joint venture and discussions are on-going on whether and under which terms to accept Eni’s exit and, more in general, on the future of the project. As a result of the subsequent uncertainty as to the future exploration of the licences following the proposed exit by Eni which provided a carried interest to the Group, management has decided to impair the residual value of its 15 % participating interest in the project. The loss for the year comprises of 15% share in loss for the period of $0.7 million (2016: $0.7 million) and remaining amount of $1.6 million (2016: $0.8 million) related to impairment of investment in joint venture.
Acquisition of remaining interest in joint ventures in 2016
21 December 2016 the Group acquired 30% of the issued share capital of Pokrovskaya Petroleum B.V. (“Pokâ€) and 60% of the issued share capital of Zagoryanskaya Petroleum B.V. (“Zagâ€) for an immaterial consideration, resulting in Pokrovskaya Petroleum B.V. and Zagoryanskaya Petroleum B.V. becoming wholly-owned companies. As a result of the transaction, the Group acquired $2.0 million of cash and also $5.9 million of VAT credit and $103 million of unused tax losses of both companies, for which the impairment had been recognised in prior years. The Group consolidated the entities and recognised a gain in the amount of $99 thousand.
In 2016 till the date of acquisition Zag had $1.2 million of profit and Pok incurred $2.0 million of losses mainly related to the impairment of E&E assets due to licence expiration in August 2016.
18. Inventories
2017 $’000 |
2016 $’000 |
||
| Natural gas | 1,312 | 987 | |
| Other inventories | 1,143 | 1,076 | |
| Impairment provision for obsolete inventory | (163) | (184) | |
| Carrying amount | 2,292 | 1,879 |
The impairment provision as at 31 December 2017 and 2016 is made so as to reduce the carrying value of the obsolete inventories to net realisable value. As at 31 December 2017 and 2016 the Group had no inventories carried at fair value less costs of disposal. Cost of inventories sold during the year was $0.3 million (2016: $29 thousand).
19. Trade and other receivables
| 2017 $’000 |
2016 $’000 |
||
| Trading prepayments | 1,797 | 777 | |
| Trading receivables | 1,338 | 2,163 | |
| VAT recoverable | 896 | 829 | |
| Receivable from joint venture | 56 | 58 | |
| Other receivables | 410 | 319 | |
| 4,497 | 4,146 |
Trading prepayments represent actual payments made by the Group to suppliers for the January 2018 gas supply.
Trading receivables represent current receivables from customers and are to be repaid within four months after the year end. The Group considers that the carrying amount of receivables approximates their fair value.
VAT recoverable is presented net of the cumulative provision of $6.4 million (2016: $7.3 million) against Ukrainian VAT receivable has been recognised as at 31 December 2017. VAT recoverable relates to the gas trading operations, production and expected to be recovered through the gas and oil sales. Refer to note 8.
20. Notes supporting statement of cash flows
Cash and cash equivalents as at 31 December 2017 of $37.6 million (2016: $43.3 million) comprise cash held by the Group. The Directors consider that the carrying amount of these assets approximates to their fair value. As of 31 December 2017 total amount of pledged cash is $7 million (2016: $10.9 million), which related to security of borrowings and held at UK bank (note 22).
Non-cash transactions from financing activities are shown in the reconciliation of liabilities from financing transactions:
| Short term borrowings $’000 |
|
| At 1 January 2016 | 12,903 |
| Cash flows | (8,324) |
| Effects of foreign exchange | (1,005) |
| At 1 January 2017 | 3,574 |
| Cash flows | (3,709) |
| Effects of foreign exchange | 135 |
| At 31 December 2017 | - |
21. Deferred tax
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period:
| Temporary differences $’000 |
|
| Liability as at 1 January 2016 | - |
| Deferred tax benefit | - |
| Exchange differences | - |
| Liability as at 1 January 2017 | - |
| Deferred tax benefit | 323 |
| Exchange differences | - |
| Asset as at 31 December 2017 | 323 |
At 31 December 2017, the Group had the following unused tax losses available for offset against future taxable profits:
| 2017 $’000 |
2016 $’000 |
|||
| UK | 15,028 | 10,652 | ||
| Ukraine | 182,469 | 180,475 | ||
| 197,497 | 191,127 |
Deferred tax assets have been recognised in respect of those tax losses where there is sufficient certainty that profit will be available in future periods against which they can be utilised.
The Group’s unused tax losses of $14.9 million (2016: $10.7 million) relating to losses incurred in the UK are available to shelter future non-trading profits arising within the Company. These losses are not subject to a time restriction on expiry.
Unused tax losses incurred by Ukraine subsidiaries amount to $182.5 million (2016: $180.5 million). Under general provisions, these losses may be carried forward indefinitely to be offset against any type of taxable income arising from the same company of origination. Tax losses may not be surrendered from one Ukraine subsidiary to another.
22. Short-term borrowings
In October 2014 the Group started to use short-term borrowings as a financing facility for its trading activities. Borrowings are represented by credit line drawn in short-term tranches in UAH at a Ukrainian bank which is a 100% subsidiary of a UK bank. The credit line is secured by $7 million of cash balance placed at the European bank in the UK.
The outstanding amount as at 31 December 2017 was $nil million (2016: $3.6 million). Interest is paid monthly and as at 31 December 2017 accrued interest amounted to $nil million (2016: $0.04 million).
23. Trade and other payables
| 2017 $’000 |
2016 $’000 |
|
| Trading payables | 477 | 176 |
| Accruals | 480 | 850 |
| Trade creditors | 264 | 40 |
| VAT payable | 17 | 335 |
| Corporate tax payable | - | 113 |
| Other payables | 168 | 126 |
| 1,406 | 1,640 |
Trade creditors and accruals principally comprise amounts outstanding for ongoing costs. The average credit period taken for trade purchases is 35 days (2016: 33 days). The Group has financial risk management policies to ensure that all payables are paid within the credit timeframe.
The Directors consider that the carrying amount of trade and other payables approximates to their fair value. No interest is generally charged on outstanding balances.
24. Provisions
The provisions at 31 December 2017 comprise of $0.8 million (2016: $2.0 million) of decommissioning provision.
As at 31 December 2016 the Group recognised a short-term provision of $1.3 million (£1.1 million) in respect of a dispute on the historic classification taxable income and expenses in a UK tax filing. The Group appealed to the Tribunal, which was due in September 2017, however on 25 August 2017 the Group reached settlement with HMRC which resulted in $1 million of reversal of the provision in respect of possible corporate tax obligation and reversal of $0.2 million of related accrued interest expenses.
Decommissioning
| $’000 | |
| At 1 January 2016 | 732 |
| Unwinding of discount on decommissioning provision (note 11) | 26 |
| Exchange differences | (80) |
| At 1 January 2017 | 678 |
| Change in estimate (note 14 and 15) | 100 |
| Unwinding of discount on decommissioning provision (note 11) | 27 |
| Exchange differences | (35) |
| At 31 December 2017 | 770 |
$’000 |
|
| At 1 January 2016 | 732 |
| Non-current | 670 |
| Current | 8 |
| At 1 January 2017 | 678 |
| Non-current | 412 |
| Current | 358 |
| At 31 December 2017 | 770 |
In accordance with the Group’s environmental policy and applicable legal requirements, the Group intends to restore the sites it is working on after completing exploration or development activities.
A short-term provision of $0.3 million (2016: $8 thousand) has been made for decommissioning costs, which are expected to be incurred within the next year as a result of the demobilisation of drilling equipment and respective site restoration.
The long-term provision recognised in respect of decommissioning reflects management’s estimate of the net present value of the Group’s share of the expenditure expected to be incurred in this respect. This amount has been recognised as a provision at its net present value, using a discount rate that reflects the market assessment of time value of money at that date, and the unwinding of the discount on the provision has been charged to the income statement. These expenditures are expected to be incurred at the end of the producing life of each field in the removal and decommissioning of the facilities currently in place (currently estimated to be between 1 and 17 years).
25. Share capital
Authorised and issued equity share capital
| 2017 | 2016 | |||
| Number | $’000 | Number | $’000 | |
| Authorised Ordinary shares of £0.03 each |
1,000,000 | 57,713 | 1,000,000 | 57,713 |
| Issued Ordinary shares of £0.03 each |
235,729 | 13,525 | 231,092 | 13,337 |
Authorised but unissued share capital of £30 million has been translated into US dollars at the historic exchange rate of the issued share capital. The Company has one class of Ordinary shares, which carry no right to fixed income.
Issued equity share capital
| Ordinary shares of £0.03 |
|||
| At 31 December 2016 | 231,091,734 | ||
| Issued during year | 4,637,588 | ||
| At 31 December 2017 | 235,729,322 | ||
On 22 September 2017 the Company issued 4,637,588 ordinary shares of £0.03 each in the capital of the Company for cash on the basis of £0.0825 per share to the CEO, Mr Guido Michelotti.
26. Financial instruments
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern, while maximising the return to shareholders.
The capital resources of the Group consist of cash and cash equivalents arising from equity attributable to owners of the Company, comprising issued capital, reserves and retained earnings as disclosed in the Consolidated Statement of Changes in Equity.
Externally imposed capital requirement
The Group is not subject to externally imposed capital requirements.
Categories of financial instruments
| 2017 $’000 |
2016 $’000 |
|||||
| Financial assets – loans and receivables (includes cash and cash equivalents) | ||||||
| Cash and cash equivalents | 37,640 | 43,300 | ||||
| Trading receivable | 1,338 | 2,163 | ||||
| Other receivables | 410 | 318 | ||||
| Receivable from joint venture | 56 | 58 | ||||
| 39,444 | 45,839 | |||||
| Financial liabilities – measured at amortised cost | ||||||
| Accruals | 480 | 850 | ||||
| Trading payables | 477 | 176 | ||||
| Trade creditors | 264 | 40 | ||||
| Other payables | 168 | 10 | ||||
| Short-term borrowings | - | 3,574 | ||||
| 1,389 | 4,650 | |||||
The Group considers that the carrying amount of financial instruments approximates their fair value.
Financial risk management objectives
Management co-ordinates access to domestic and international financial markets and monitors and manages the financial risks relating to the operations of the Group in Ukraine through internal risks reports, which analyse exposures by degree and magnitude of risks. These risks include commodity price risks, foreign currency risk, credit risk, liquidity risk and cash flow interest rate risk. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.
The Audit Committee of the Board reviews and monitors risks faced by the Group at meetings held throughout the year.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect the value of the financial instruments. The Group is not exposed to interest rate risk because entities of the Group borrow funds at fixed interest rates.
Commodity price risk
The commodity price risk related to Ukrainian gas and condensate prices and, to a lesser extent, prices for crude oil are the Group’s most significant market risk exposures. World prices for gas and crude oil are characterised by significant fluctuations that are determined by the global balance of supply and demand and worldwide political developments, including actions taken by the Organisation of Petroleum Exporting Countries.
These fluctuations may have a significant effect on the Group’s revenues and operating profits going forward. In 2017 the price for Ukrainian gas was mainly based on the current price of the European gas imports. Management continues to expect that the Group’s principal market for gas will be the Ukrainian domestic market.
The Group does not hedge market risk resulting from fluctuations in gas, condensate and oil prices, and holds no financial instruments, which are sensitive to commodity price risk.
Foreign exchange risk and foreign currency risk management
The Group undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise, the Group considers exposure to be minimal. The Group to date has elected not to hedge its exposure to the risk of changes in foreign currency exchange rates.
Inflation risk management
Inflation in Ukraine and in the international market for oil and gas may affect the Group’s cost for equipment and supplies. The Directors will proceed with the Group’s practices of keeping deposits in US dollar accounts until funds are needed and selling its production in the spot market to enable the Group to manage the risk of inflation.
Credit risk management
Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group’s credit management process includes the assessment, monitoring and reporting of counterparty exposure on a regular basis. Credit risk with respect to receivables and advances is mitigated by active and continuous monitoring the credit quality of its counterparties through internal reviews and assessment. Trading receivables as at 31 December 2017 have been paid within four months after year end, there were no material past due receivables as at year end.
The Group makes allowances for impairment of receivables where there is an identified event which, based on previous experience, is evidence of a reduction in the recoverability of cash flows.
The credit risk on liquid funds (cash) is considered to be limited because the counterparties are financial institutions with high and good credit ratings, assigned by international credit-rating agencies in the UK and Ukraine respectively.
The carrying amount of financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate cash reserves and by continuously monitoring forecast and actual cash flows.
The following tables sets out details of the expected contractual maturity of financial liabilities.
Within 3 months |
3 months to 1 year | More than 1 year | Total |
|
| $’000 | $’000 | $’000 | $’000 | |
| At 31 December 2017 | ||||
| Short-term borrowings | - | - | - | - |
| Trade and other payables | 1,389 | - | - | 1,389 |
| At 31 December 2016 | ||||
| Short-term borrowings | 3,574 | - | - | 3,574 |
| Trade and other payables | 1,640 | - | - | 1,640 |
27. Commitments and contingencies
The Group has working interests in four licences to conduct its exploration and development activities in Ukraine. Each licence is held with the obligation to fulfil a minimum set of exploration activities within its term and is summarised on an annual basis, including the agreed minimum amount forecasted expenditure to fulfil those obligations. The activities and proposed expenditure levels are agreed with the government licencing authority.
The required future financing of exploration and development work on fields under the licence obligations are as follows:
2017 $’000 |
2016 $’000 |
|
| Within one year | 931 | 79 |
| Between two and five years | 829 | 1,635 |
| 1,760 | 1,714 |
Tax contingent liabilities
The Group assesses its liabilities and contingencies for all tax years open for audit by UK and Ukraine tax authorities based upon the latest information available. For those matters where it is probable that an adjustment will be made, the Group records its best estimate of these tax liabilities, including related interest charges. Inherent uncertainties exist in estimates of tax contingencies due to complexities of interpretation and changes in tax laws.
Whilst the Group believes it has adequately provided for the outcome of these matters, certain periods are under audit by the UK and Ukraine tax authorities, and therefore future results may include favourable or unfavourable adjustments to these estimated tax liabilities in the period the assessments are made, or resolved. The final outcome of tax examinations may result in a materially different outcome than assumed in the tax liabilities.
28. Related party transactions
All transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. The application of IFRS 11 has resulted in the existing joint ventures LLC Astroinvest-Energy, LLC Gazvydobuvannya and LLC Westgasinvest being accounted for under the equity method and disclosed as related parties. LLC Astroinvest-Energy and LLC Gazvydobuvannya continued to be related parties until the acquisition on 21 December 2016 of 100% of these companies by the Group.
During the period, Group companies entered into the following transactions with joint ventures who are considered as related parties of the Group:
| 2017 $’000 |
2016 $’000 |
||||
| Revenues from services provided and sales of goods | 84 | 2,496 | |||
| Purchases of goods | - | - | |||
| Amounts owed by related parties | 56 | 58 | |||
| Amounts owed to related parties | - | - | |||
Directors’ remuneration
The remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of individual Directors is provided in the audited part of the Annual Report on Remuneration 2017 included in the Annual Report.
| Purchase of services | Amounts owing | |||||
| 2017 $’000 |
2016 $’000 |
2017 $’000 |
2016 $’000 |
|||
| Directors’ remuneration | 1,392 | 1,807 | 204 | 479 | ||
The total remuneration of the highest paid Director was $0.7 million in the year (2016: $1.0 million).
The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received and no provisions have been made for doubtful debts in respect of the amounts owed by related parties.
29. Events after the balance sheet date
There were no events after the balance sheet date.
Company Balance Sheet
As at 31 December 2017
| Notes | 2017 $’000 |
2016 $’000 |
|
| ASSETS | |||
| Non-current assets | |||
| Investments | 32 | - | - |
| Receivables from subsidiaries | 33 | 19,576 | 39,277 |
| 19,576 | 39,277 | ||
| Current assets | |||
| Trade and other receivables | 33 | 78 | 17 |
| Cash and cash equivalents | 33 | 27,406 | 28,380 |
| 27,484 | 28,397 | ||
| Total assets | 47,060 | 67,674 | |
| LIABILITIES | |||
| Current liabilities | |||
| Trade and other payables | 34 | (671) | (934) |
| (671) | (934) | ||
| Total liabilities | (671) | (934) | |
| Net assets | 46,389 | 66,740 | |
| EQUITY | |||
| Share capital | 35 | 13,525 | 13,337 |
| Share premium | 329 | - | |
| Retained earnings1 | 141,254 | 162,122 | |
| Cumulative translation reserves | 36 | (108,719) | (108,719) |
| Total equity | 46,389 | 66,740 |
The financial statements of Cadogan Petroleum plc, registered in England and Wales no. 05718406, were approved by the Board of Directors and authorised for issue on 25 April 2018.
They were signed on its behalf by:
Guido Michelotti
Chief Executive Officer
25 April 2018
1 Included in retained earnings, loss for the financial year ended 31 December 2017 was $20.9 million (2016: $5.4 million).
Company Cash Flow Statement
For the year ended 31 December 2017
| 2017 $’000 |
2016 $’000 |
|||||
| Operating activities Loss for the year |
(20,868) |
(5,445) |
||||
| Adjustments for: Interest received Effect of foreign exchange rate changes Impairment of receivables from subsidiaries |
(185) (74) 19,376 |
(131) 120 3,415 |
||||
| Operating cash flows before movements in working capital | (1,751) | (2,041) | ||||
| (Increase)/decrease in receivables | (61) | 715 | ||||
| Increase in payables | 255 | 562 | ||||
| Cash used in operations | (1,557) | (764) | ||||
| Income taxes paid | - | - | ||||
| Net cash outflow from operating activities | (1,557) | (764) | ||||
| Investing activities | ||||||
| Interest received | 185 | 131 | ||||
| Loans to subsidiary companies | 325 | (15,790) | ||||
| Net cash from/(used in) investing activities | 510 | (15,659) | ||||
| Net decrease in cash and cash equivalents | (1,047) | (16,423) | ||||
| Effect of foreign exchange rate changes | 73 | (79) | ||||
| Cash and cash equivalents at beginning of year | 28,380 | 44,882 | ||||
| Cash and cash equivalents at end of year | 27,406 | 28,380 | ||||
Company Statement of Changes in Equity
For the year ended 31 December 2017
Share capital $’000 |
Share premium account $’000 |
Retained earnings $’000 |
Cumulative translation reserves $’000 |
Total $’000 |
|
| As at 1 January 2016 | 13,337 | - | 167,567 | (108,719) | 72,185 |
| Net loss for the year | - | - | (5,445) | - | (5,445) |
| Total comprehensive loss for the year | - | - | (5,445) | - | (5,445) |
| As at 1 January 2017 | 13,337 | - | 162,122 | (108,719) | 66,740 |
| Net loss for the year | - | - | (20,868) | - | (20,868) |
| Total comprehensive loss for the year | - | - | (20,868) | - | (20,868) |
| Issue of ordinary shares | 188 | 329 | - | - | 517 |
| As at 31 December 2017 | 13,525 | 329 | 141,254 | (108,719) | 46,389 |
30. Significant accounting policies
The separate financial statements of the Company are presented as required by the Companies Act 2006 (the “Actâ€). As permitted by the Act, the separate financial statements have been prepared in accordance with International Financial Reporting Standards, as adopted in the EU.
The financial statements have been prepared on the historical cost basis. The principal accounting policies adopted are the same as those set out in note 3 to the Consolidated Financial Statements except as noted below.
As permitted by section 408 of the Act, the Company has elected not to present its profit and loss account for the year. Cadogan Petroleum plc reports a loss for the financial year ended 31 December 2017 of $20.9 million (2016: $5.4 million).
Investments
Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.
Critical accounting judgements and key sources of estimation uncertainty
The Company’s financial statements, and in particular its investments in and receivables from subsidiaries, are affected by certain of the critical accounting judgements and key sources of estimation uncertainty. The Company evaluated recoverability of receivables from subsidiaries by assessing the likelihood of repayments based on the financial position of each subsidiary.
31. Auditor’s remuneration
The auditor’s remuneration for audit and other services is disclosed in note 9 to the Consolidated Financial Statements.
32. Investments
The Company’s subsidiaries are disclosed in note 16 to the Consolidated Financial Statements. The investments in subsidiaries are all stated at cost less any provision for impairment.
33. Financial assets
The Company’s principal financial assets are bank balances and cash and cash equivalents and receivables from related parties none of which are past due. The Directors consider that the carrying amount of receivables from related parties approximates to their fair value.
Receivables from subsidiaries
At the balance sheet date gross amounts receivable from the fellow Group companies were $331.9 million (2016: $332.3 million). The Company recognised impairment of $19.4 million in relation to receivables from subsidiaries in 2017 (2016: $3.4 million). The accumulated provision on receivable as at 31 December 2017 was $312.5 million (2016: $293.1 million). The carrying value of the receivables from the fellow Group companies as at 31 December 2017 was $19.6 million (2016: $39.2 million). Receivables from subsidiaries are interest free and repayable on demand. There are no past due receivables.
Trade and other receivables
| 2017 $’000 |
2016 $’000 |
||
| Prepayments | - | - | |
| Other receivables | 78 | 17 | |
| 78 | 17 |
Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Company and short-term bank deposits with an original maturity of three months or less. The carrying value of these assets approximates to their fair value.
As of 31 December 2017 cash and cash equivalents in the amount of $7 million, related to security of the loan provided to the Ukrainian subsidiary and held at European bank in the UK, was pledged (note 22).
34. Financial liabilities
Trade and other payables
| 2017 $’000 |
2016 $’000 |
||
| Accruals | 214 | 554 | |
| Trade creditors | 58 | 29 | |
| Other creditors and payables | 399 | 351 | |
| 671 | 934 |
Trade payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 39 days (2016: 48 days).
The Directors consider that the carrying amount of trade and other payables approximates to their fair value. No interest is charged on balances outstanding.
35. Share capital
The Company’s share capital is disclosed in note 25 to the Consolidated Financial Statements.
36. Cumulative translation reserve
The directors decided to change the functional currency of the Company from sterling to US dollars with effect from 1 January 2016.
The effect of a change in functional currency is accounted for prospectively. In other words, the Company translates all items into the US dollar using the exchange rate at the date of the change. The resulting translated amounts for non-monetary items are treated as their historical cost. Exchange differences arising from the translation of an operation previously recognised in other comprehensive income in accordance with paragraphs 32 and 39(c) IAS 21 “Foreign Currency†are not reclassified from equity to profit or loss until the disposal of the operation.
38. Financial instruments
The Company manages its capital to ensure that it is able to continue as a going concern while maximising the return to shareholders. Refer to note 26 for the Group’s overall strategy and financial risk management objectives.
The capital resources of the Company consist of cash and cash equivalents arising from equity, comprising issued capital, reserves and retained earnings.
Categories of financial instruments
| 2017 $’000 |
2016 $’000 |
|
| Financial assets – loans and receivables (includes cash and cash equivalents) | ||
| Cash and cash equivalents | 27,406 | 28,380 |
| Amounts due from subsidiaries | 19,576 | 39,277 |
| 46,982 | 67,657 | |
| Financial liabilities – measured at amortised cost | ||
| Trade creditors | (58) | (29) |
| (457) | (380) |
Interest rate risk
All financial liabilities held by the Company are non-interest bearing. As the Company has no committed borrowings, the Company is not exposed to any significant risks associated with fluctuations in interest rates.
Credit risk
Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Company. For cash and cash equivalents, the Company only transacts with entities that are rated equivalent to investment grade and above. Other financial assets consist of amounts receivable from related parties.
The Company’s credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies.
The carrying amount of financial assets recorded in the Company financial statements, which is net of any impairment losses, represents the Company’s maximum exposure to credit risk.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Company’s short, medium and long-term funding and liquidity management requirements. The Company maintains adequate reserves, by continuously monitoring forecast and actual cash flows.
The Company’s financial liabilities are not significant and therefore no maturity analysis has been presented.
Foreign exchange risk and foreign currency risk management
The Company undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise, the Company considers exposure to be minimal. The Company holds a large portion of its monetary assets and monetary liabilities in US dollars. More information on the foreign exchange risk and foreign currency risk management is disclosed in note 26 to the Consolidated Financial Statements.
39. Related parties
Amounts due from subsidiaries
The Company has entered into a number of unsecured related party transactions with its subsidiary undertakings. The most significant transactions carried out between the Company and its subsidiary undertakings are mainly for short and long-term financing. Amounts owed from these entities are detailed below:
| 2017 $’000 |
2016 $’000 |
|
| Cadogan Petroleum Holdings Limited | 19,576 | 39,277 |
| 19,576 | 39,277 |
Refer to note 33 for details on the Company’s receivables due from subsidiaries.
The remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. In 2017 there were no other employees in the Company. Further information about the remuneration of individual Directors is provided in the audited part of the Annual Report on Remuneration 2017 included in the Annual Report.
| Remuneration | Amounts owing | |||||
| 2017 $’000 |
2016 $’000 |
2017 $’000 |
2016 $’000 |
|||
| Directors’ remuneration | 989 | 1,071 | - | 454 | ||
The total remuneration of the highest paid Director was $0.7 million in the year (2016: $1.0 million).
40. Events after the balance sheet date
Events after the balance sheet date are disclosed in note 29 to the Consolidated Financial Statements.
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