Interim Results

RNS Number : 2544C

Lekoil Limited

28 September 2018

 

28 September 2018

LEKOIL Limited

("LEKOIL" or the "Company" or the "Group")

Half Year Results for the Six Months to 30 June 2018

 

LEKOIL (AIM: LEK), the oil and gas exploration and development company with a focus on Nigeria and West Africa, reports half year results for the six months to 30 June 2018.

Highlights

Financial

·     Operating profit of US$3.0 million;

·     Net profit of US$1.8 million;

·     Net debt for the period of US$40 million;

·     Period end cash of US$9.8m, and cash of US$6.3 million as at 31 August 2018; and

·     Refinancing and redenomination of Naira facilities into new USD facility underway.

Operational

·     Continuous commercial production and cash flow generation at Otakikpo;

·     Otakikpo gross average production for the period 5,047 bopd, current gross production is 6,000 bopd;

·     Approximately 2.5 million barrels of oil has been produced from Otakikpo to date;

·     The Otakikpo project has now recorded 1.5 million hours with no lost time injuries;

·     3D seismic acquisition now complete at Otakikpo;

·     Updated OPL310 CPR nearing completion; and

·     Planning for OPL325 farm-out process continues.

 

Outlook

·     Otakikpo seismic data processing and interpretation to commence in Q4 2018 with an updated CPR expected in H1 2019;

·     Planning for drilling for Phase Two in Otakikpo is underway with a target spud date in Q4 2018, subject to financing; and

·     Preparation for appraisal drilling at Ogo continues.

Lekan Akinyanmi, LEKOIL's CEO, commented, "Otakikpo is a high quality producing asset, with an impeccable safety record. As a Company, we are looking forward to bringing the field into Phase Two of development as we look to move closer to our goal of achieving production of 20,000 bopd of oil during 2020. As part of our growth strategy, we are eager to commence an appraisal drilling programme for Ogo within the block and subsequently develop this world class field.  Within Lekoil, we have the technical and commercial capability to achieve both these objectives and generate significant value for our shareholders, partners and communities. "

For further information, please visit www.lekoil.com or contact:

LEKOIL Limited Alfred Castaneda, Investor Relations Lisa Mitchell, Chief Financial Officer	[phone]
Strand Hanson Limited (Financial & Nominated Adviser) James Harris / James Spinney / Ritchie Balmer	[phone]
Mirabaud Securities Limited (Joint Broker) Peter Krens / Edward Haig-Thomas	[phone] / [phone]
BMO Capital Markets (Joint Broker) Jeremy Low / Neil Haycock / Thomas Rider	[phone]
Numis Securities (Joint Broker) John Prior / Ben Stoop	[phone]
Tavistock (Financial PR) Simon Hudson / Barney Hayward / Charles Vivian	[phone]

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

Chairman's and CEO's Statement

Introduction

Entering 2018 as a producing company for the first time in our history was a major milestone for Lekoil as we continued to lay the foundations for further growth. 

Strategy

Our strategy remains to build a diversified, self-funded Africa-focused exploration and production business. We look to implement this through growing production at Otakikpo, our existing producing asset, situated in oil mining lease (OML) 11 in the south eastern coastal swamp of the Niger Delta and executing the planned appraisal program at OPL 310, which will be instrumental in unlocking the value potential of this world class discovery, as well as the identification of undervalued, high quality acquisition opportunities.

We have now commenced planning for the Phase Two development at Otakikpo, which is intended to target 20,000 bopd of oil production during 2020, or shortly thereafter. An independent technical study was also completed on our exploration asset OPL325, that identified several prospects and leads on the block with Oil-in-Place volumes demonstrating strong exploration upside potential.

Otakikpo

Current production at Otakikpo is approximately 6,000 bopd. The Joint Venture Parties have agreed to continue production at current levels while focusing on Phase Two activities.  For Phase Two, the Joint Venture Parties anticipate a five well drilling programme with a prospective first well spud by the end of 2018, subject to financing.  Current production profile data demonstrates the ability to sustain average production of around 20,000 bopd commencing between 2020 and 2022. The Company expects Phase Two development to be funded by industry players, which the Company remains in discussions with.

In August of this year, seismic acquisition was completed. We expect processing and interpretation of this data to commence shortly, the results of which will form the basis of an updated Competent Person's Report which is expected to be completed during H1 2019. 

The completion of this seismic survey, and planned development wells in the Phase Two programme, will assist the Joint Venture in optimising development and production.

OPL 310

In June 2017, LEKOIL received Ministerial Consent for the first portion (17.14 per cent.) of the Company's participating interest in this world class asset, OPL 310; following the Honorable Minister of Petroleum Resources of Nigeria granting consent to complete the transfer of this interest that LEKOIL acquired in OPL 310 in February 2011.  As announced by the Company, in March of this year, the Company applied to the Federal High Court for a declaration expected to expedite the Ministerial Consent process with respect to LEKOIL's acquisition of Afren PLC's then remaining 22.86 per cent. participating interest in OPL 310 (through LEKOIL 310 Limited, a wholly owned subsidiary of LEKOIL). LEKOIL is in discussion with its partners in OPL 310, Optimum Petroleum Development Limited ("Optimum"), with the aim of seeking a satisfactory conclusion for all parties on the above matter in order to proceed with the drilling programme for the appraisal well[s].

Work on the updated Competent Person's Report for OPL 310 progresses and is nearing finalisation.  The Company has identified a potential rig to be used during the appraisal programme, which remains subject to Operator confirmation and securing funding.

We continue our discussions with potential partners for the financing of the OPL 310 appraisal programme as we look to deliver the potential of this world-class field and unlock value for the Company and its stakeholders.

Exploration assets

OPL 325

LEKOIL holds a 62 per cent indirect equity interest in OPL 325. In January of this year, an Independent Technical Study was completed by Lumina Geophysical on OPL 325 that identified eleven prospects and leads on the block, estimated to contain potential gross aggregate Oil-In-Place volumes of over 5,700 mmbls (un-risked, Best Estimate case).  Lumina focused primarily on the Paleocene section of the block, generating new structural and stratigraphic maps using 3D pre-stack time migration seismic data.

We continue to make steps towards creating a production sharing contract with the Nigerian National Petroleum Corporation ("NNPC") and look towards the next phase of exploration for OPL 325.  Preparations for the OPL 325 farm-out process have begun with the start of a detailed prospect and lead risking study.

Financial

In the six months ended 30 June 2018, the Group recorded a profit from operating activities of US$3.0million and ended the period with cash and cash equivalents of US$9.8 million (being an increase of nearly US$3.0 million during the six-month period from December 2017). Net debt was US$40 million, a decrease from US$63.8 million at the end of 2017.

In June 2018, the Company entered into a transaction to redenominate the currency of its 4.5 billion naira facility with FBN Capital Limited ("FBNC naira facility") from naira into United States dollars. The FBNC naira facility will be denominated in US$ ("FBNM dollar facility"). Subsequently, the facility was also upsized to refinance the outstanding balance on the Sterling facility. The balance on the 4.5 billion naira FBNC Naira Facility and the refinanced outstanding balance on Sterling bank facility will be re-denominated into a new approximately US$8.45 million facility.

The FBNM dollar facility has an interest rate of 3-month LIBOR plus 10% per annum and will mature in June 30, 2021 with a principal repayment moratorium for two quarters and equal quarterly principal repayments thereafter.

The documentation to complete these transactions is on-going and is expected to complete before year end.

Outlook

With the seismic acquisition complete at Otakikpo, we are now focused on data processing and interpretation that will form the basis for an updated Competent Persons Report.  We also anticipate spudding the first well for Phase Two at Otakikpo, the first milestone on the way to our production target of achieving 20,000 bopd during 2020.

We also look forward to securing the requisite consents and developing OPL 310, a key Company asset and one with world-class appraisal potential identified at Ogo in addition to other promising exploration targets in the block.   

On behalf of the Board, I would like to again thank all of our stakeholders for their continued hard work and support as we build an exciting future for the Company. 

Samuel Adegboyega	Lekan Akinyanmi
Non-Executive Chairman	Chief Executive Officer
27 September 2018	27 September 2018

 

Financial Review

Overview

For the six months ended 30 June 2018, the Group recorded a profit from operating activities of US$3.0 million and ended the period with cash and cash equivalents of US$9.8 million.  Net debt was US$40 million.

Interim results

The Group recorded a total comprehensive profit of US$1.8 million for the six months ended 30 June 2018 (30 June 2017: loss of US$14.0 million).

Revenue

The Group recorded revenue totaling US$22.4 million, representing the Group's share of crude oil sales from Otakikpo operation during the period, which is recognised as revenue ("Equity Crude"), (30 June 2017: US$6.9 million). The Group's gross entitlement crude was 698,835 barrels out of which the Group lifted 680,654 barrels (30 June 2017: 304,121 barrels). The balance of 18,181 barrels representing the Group's share of overriding royalty crude was lifted on its behalf by its joint venture partner based on an agreed lifting arrangement.

The entitlement crude is comprised of equity crude of 333,429 barrels (sales value US$22.4 million) and cost recovery crude of 261,878 barrels (US$18.2 million).  The cost recovery crude is not included in revenue and is utilised to reduce pre-paid development costs borne by the Group on behalf of partner Green Energy ("GEIL"). The balance of 103,528 barrels from the entitlement crude has been agreed to be utilised to fund GEIL cash calls.

The joint venture audit of the pre-paid development costs continued through September 2018. The likely impact on the balance of pre-paid development costs will be determined at the conclusion of the audit.

From a preliminary analysis, the likely outcome is expected to be that approximately US$14.1 million of the carrying value of the pre-paid development cost will be reduced and items reclassified as sole costs for Lekoil. The corresponding adjustments will be an increase of US$7.1 million to the Lekoil Otakikpo asset value; a reduction to deferred income (US$1.8 million), a reduction in trade payables (US$2.2 million) and a charge to the profit and loss to reverse prior period foreign exchange gains (US$3.0 million). It is expected that the remaining balance of pre-paid development costs will be fully recovered by December 2018.

Cost of sales, operating expenses and administrative expenses

Cost of sales was US$9.4 million (30 June 2017: US$6.1 million). Operating expenses and general & administrative expenses were US$1.1 million and US$8.9 million respectively compared to US$5.6 million (operating expenses and US$4.0 million production bonus) and US$9.0 million (administrative expenses) for the same period in 2017.

Income tax

Income tax expense for the six months ended 30 June 2018 amounted to US$2.2 million (30 June 2017: US$0.4 million).

Capital expenditure

The Group's capital expenditure during the six months ended 30 June 2018 amounted to US$3.9 million, compared to US$0.23 million for the corresponding period in 2017.  This was mostly attributable to the installation of the Permanent Early Production Facility at Otakikpo.

Cash and cash equivalents

The Group had cash and cash equivalents of US$9.8 million as at 30 June 2018 (31 December 2017: US$6.9 million). Also included in other assets is US$2.9 million cash funding of the debt service reserve accounts of FBN Capital Notes and the Shell Western facility.

Loans and borrowings

Principal repayments of US$7.4 million were made on the FBN Capital and Shell Western facilities during the period. 

The balance on the loan facilities as at 30 June 2018 is the equivalent of $25.7 million (31 December 2017: $29.5 million). Accordingly, the Group's net debt (excluding cash held in debt service reserve accounts) amounted to US$40 million at period end.

Loans and borrowings

The Group had the following debt facilities in place at 30 June 2018:

In US$'000	Interest rate p.a.	30 Jun 2018	31 Dec 2017
US$10 million FBNC Dollar Facility	11.25% + LIBOR	5,630	5,828
4.5 billion naira FBNM Naira facility*	6% + NIBOR	-	7,212
FBNC Facility (for Redenomination)*	10% + LIBOR	7,774	-
US$15 million Shell Facility	10% + LIBOR	10,299	13,275
5 billion naira Sterling Bank Facility*	26%	-	2,191
US$5 million FBNM working Facility	11.25% + LIBOR	2,007	1,003
Total		25,710	29,509

Please refer to note 27 in the financial statements for a further breakdown.

*In August 2018, the Company agreed in principle to revise the interest rate of the facility to 3-month LIBOR plus 10% per annum. As part of the transaction, the tenor of the facility will be extended to June 30, 2021 with principal repayment moratoriums for two quarters and equal quarterly principal repayments thereafter.

The documentation to complete this transaction is ongoing and is expected to complete before year end.

Summary statement of financial position

The Group's non-current assets decreased slightly from US$210.4 million as at 31 December 2017 to US$209.7 million as at 30 June 2018. Current assets, which represent the Group's cash resources, trade receivables, pre-paid development costs, other assets and other receivables, decreased from US$66.1 million as at 31 December 2017 to US$53.8 million as at 30 June 2018.  The decrease is a result of a reduction in pre-paid development costs which relate to the Otakikpo field cost recovery arrangement under the GEIL farm-out agreement.

Current liabilities consist of the portion of the loan facilities due within twelve months, amounting to US$15.1 million (31 December 2017: US$17.3 million), trade and other payables amounting to US$20.1 million (31 December 2017: US$32.5 million), current tax payables amounting to US$4.0 million (31 December 2017: US$1.9 million) and deferred income amounting to US$5.4 million (31 December 2017: US$6.7million).

Non-current liabilities consist mainly of the long term portion of the loan facilities amounting to US$10.7 million (31 December 2017: US$12.3 million).

Dividend

The Directors do not recommend the payment of a dividend for the period ended 30 June 2018.

Accounting policies

The Group's significant accounting policies and details of the significant judgments and critical accounting estimates are consistent with those used in the 2017 annual financial statements.

Liquidity risk management and going concern

The Group closely monitors and manages its liquidity risk and ability to service debt as it falls due. Cash forecasts are regularly produced, and sensitivities run for different scenarios including (but not limited to) changes in production rates and commodity pricing, and cost overruns for approved projects.

At 30 June 2018, the Group had liquid resources of approximately US$9.8 million, in the form of cash and cash equivalents which are available to meet capital, operating and administrative expenditure. Included in other assets is US$2.9 million cash funding of the debt service reserve accounts.

These interim condensed consolidated financial statements have been prepared on the going concern basis of accounting, which assumes the Group will continue in operation for the foreseeable future and be able to realise its assets and discharge its liabilities and commitments in the normal course of business.

The ability of the Group to continue to operate as a going concern is dependent on a number of factors considered by the Directors as disclosed below:

·     The ability of the Group to maintain steady state production and lifting on the Otakikpo marginal field;

·     The operational success of the Otakikpo Phase two field development and planned growth in production to 20,000 bopd and the successful financing of these activities;

·     Commodity pricing- given there is no oil price hedging currently in place other than that required by lenders for debt service;

·     Availability of financing for development of OPL 310, which is not currently factored into the cash forecasts; and

·     Ability to defer activities to future periods in the event required.

The Directors have determined that over the course of the next 12 months and taking into consideration the factors mentioned above, there is a reasonable expectation there will be a sufficient source of funds for the Group. In making their assessment, the Directors have considered the Group's current cash position and the generation of funds from forecast production over the period, against the need to service the Group's debt portfolio, and tested the scenarios at different commodity prices. The Group further anticipates that additional funding, if appropriate, could be met by the divestment of assets along with access to the debt and capital markets. Based on their assessment, and taking into consideration the material uncertainties that exist, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the 12-month period in 2019.

These half year consolidated financial statements therefore have been prepared on the going concern basis of accounting, which assumes the Group will continue in operation for the foreseeable future and be able to realise its assets and discharge its liabilities and commitments in the normal course of business. 

Lisa Mitchell

Chief Financial Officer

27 September 2018

INDEPENDENT AUDITOR'S REPORT ON REVIEW OF CONDENSED INTERIM FINANCIAL INFORMATION

TO THE MEMBERS OF LEKOIL LIMITED

Introduction

We have reviewed the accompanying condensed consolidated statement of financial position of Lekoil Limited ("the Company") and its subsidiaries (together referred to as 'the Group') as at 30 June 2018, and the condensed consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the six-month period then ended, and notes to the interim financial information ("the condensed consolidated interim financial information"). The Directors are responsible for the preparation and presentation of these condensed consolidated interim financial information in accordance with International Accounting Standards (IAS) 34 Interim Financial Reporting as adopted by the European Union (EU). Our responsibility is to express a conclusion on this condensed consolidated interim financial information based on our review.

Scope of Review

We conducted our review in accordance with the International Standard on Review Engagements 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed consolidated interim financial information as at 30 June 2018 is not prepared in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Material Uncertainty Related to Going Concern

We draw attention to Note 2(b) in the condensed consolidated financial statements which indicates that the Group has a negative operating cash flows of US$3.57 million for the period ended 30 June 2018 and as of that date, the Group's accumulated deficit amounts to US$60.65 million. These events or conditions, along with other matters as set forth in Note 2(b), indicate that a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern. Our conclusion is not modified in respect of this matter.

Olufemi Abegunde FCA-FRC/2013/ICAN/000000004507

For: Deloitte & Touche

Chartered Accountants

Lagos, Nigeria

September 2018

Consolidated statement of profit or loss and other comprehensive income

For the six months ended 30 June

	Notes	(Unaudited) 6 months to 30 June 2018 US$'000	(Unaudited) 6 months to 30 June 2017 US$'000
Revenue	6	22,387	6,946
Cost of sales	7	(9,363)	(6,083)
Gross profit		13,024	863
Operating expenses	8	(1,110)	(1,559)
Production bonus		-	(4,000)
General & administrative expenses	9	(8,865)	(9,023)
Profit/(loss) from operating activities		3,049	(13,719)
Finance income	10	3,724	3,726
Finance costs		(2,821)	(3,601)
Net finance income		903	125
Profit/(loss) before income tax		3,952	(13,594)
Income tax expense	11(d)	(2,189)	(425)
Profit/(loss) for the period		1,763	(14,019)
Other comprehensive income		-	-
Total comprehensive profit/(loss) for the period		1,763	(14,019)
Total comprehensive profit/(loss) attributable to:
Owners of the Company		1,208	(12,915)
Non-controlling interests		555	(1,104)
		1,763	(14,019)
Profit/(loss) per share:
Basic profit/(loss) per share (US$)	12	0.002	(0.024)
Diluted profit/(loss) per share (US$)		0.002	(0.024)

The notes are an integral part of these consolidated interim financial statements.

Condensed consolidated statement of financial position

Assets	Notes	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Property, plant and equipment	13	33,119	34,593
Exploration and evaluation assets	14	132,282	130,773
Intangible assets	15	5,319	6,269
Deferred tax assets	11(c)	23,378	23,249
Other receivables	18	2,566	2,487
Other assets	19	13,000	13,000
Total non-current assets		209,664	210,371
Inventories	16	1,680	1,090
Trade receivables	17	10,879	6,044
Other receivables	18	588	3,680
Other assets	19	3,851	5,901
Pre-paid development costs	20	27,000	42,463
Cash and cash equivalents	21	9,838	6,922
Total current assets		53,836	66,100
Total assets		263,500	276,471
Current liabilities
Trade and other payables	24	20,095	32,475
Current tax payables	11(e)	4,013	1,912
Deferred income	26	5,372	6,685
Loans and borrowings	27	15,077	17,317
		44,557	58,389
Non-current liabilities
Provision for asset retirement obligation	25	116	107
Loans and borrowings	27	10,633	12,192
		10,749	12,299
Total liabilities		55,306	70,688
Net assets		208,194	205,783
Non-current liabilities
Share capital	22	27	27
Share premium	22	264,004	264,004
Accumulated deficit		(60,647)	(61,855)
Other reserve		22	22
Share based payment reserve		8,323	7,675
Equity attributable to owners of the Company		211,729	209,873
Non-controlling interests	23	(3,535)	(4,090)
Total equity		208,194	205,783

These interim financial statements were approved by the Board of Directors on 27 September 2018 and signed on its behalf by: Olalekan Akinyanmi - Chief Executive Officer and Lisa Mitchell - Chief Financial Officer

The notes are an integral part of these consolidated interim financial statements.

Condensed consolidated statement of changes in equity

For the six months ended 30 June

In US$'000

	Share capital	Share premium	Accumulated deficit	Other reserve	Share-based payments reserve	Total	Non-controlling interests	Total equity
Balance at 1 January 2018 (audited)	27	264,004	(61,855)	22	7,675	209,873	(4,090)	205,783
Total comprehensive income for the period
Profit for the period	-	-	1,208	-	-	1,208	555	1,763
Total comprehensive income for the period	-	-	1,208	-	-	1,208	555	1,763
Transactions with owners of the Company
Share-based payment- personnel expenses	-	-	-	-	648	648	-	648
Total transactions with owners of the Company	-	-	-	-	648	648	-	648
Balance at 30 June 2018 (unaudited)	27	264,004	(60,647)	22	8,323	211,729	(3,535)	208,194
For the six months ended 30 June 2017 In US$'000
Balance at 1 January 2017 (audited)	27	264,004	(66,974)	-	6,479	203,536	(5,436)	198,100
Total comprehensive income for the period
Loss for the period	-	-	(12,915)	-	-	(12,915)	(1,104)	(14,019)
Total comprehensive income for the period	-	-	(12,915)	-	-	(12,915)	(1,104)	(14,019)
Transactions with owners of the Company
Share-based payment- personnel expenses	-	-	-	-	435	435	-	435
Total transactions with owners of the Company	-	-	-	-	435	435	-	435
Balance at 30 June 2017 (unaudited)	27	264,004	(79,889)	-	6,914	191,056	(6,540)	184,516

The notes are an integral part of these consolidated interim financial statements.

Condensed consolidated statement of cash flows

For the six months ended 30 June

	Notes	(Unaudited) 6 months to 30 June 2018 US$'000	(Unaudited) 6 months to 30 June 2017 US$'000
Cash Flows from Operating Activities
Profit/ (loss) for the period		1,763	(14,019)
Adjustments for:
- Equity-settled share-based payment		648	435
- Foreign exchange rate changes in loans and borrowing		(15)	(487)
- Pre-paid development costs carried interest		(1,759)	(3,885)
- Adjustments of leasehold improvement		-	24
- Adjustment to software maintenance cost		-	291
- Finance cost		3,036	3,601
- Depreciation and amortisation	13,15	4,840	2,789
Cash flow generated from/ (used in) operations before working capital adjustments		8,513	(11,251)
Changes in:
Inventory		(590)	(334)
Deferred income		(1,313)	3,973
Trade and other payables		(12,380)	3,565
Trade receivables		(4,835)	(1,136)
Other assets		2,051	(2,114)
Other receivables		3,013	(2,261)
Income taxes		2,189	425
Net cash used in operating activities		(3,352)	(9,133)
Income tax paid		(218)	-
		(3,570)	(9,133)
Cash Flows from Investing Activities
Acquisition of property, plant and equipment	13	(2,416)	(108)
Pre-paid development costs	20	(993)	(5,444)
Recoveries from pre-paid development costs	20	18,215	7,523
Acquisition of exploration and evaluation assets	14	(1,509)	(125)
Net cash generated from investing activities		13,297	1,846
Cash Flows from Financing Activities
Draw down of loan facilities	27	2,311	16,137
Repayment of loan	27	(7,419)	(3,595)
Interest and transaction costs related to loan	27	(1,703)	(3,248)
Net cash (used in) / generated from financing activities		(6,811)	9,294
Net increase in cash and cash equivalents		2,916	2,007
Cash and cash equivalents at 1 January		6,922	4,385
Cash and cash equivalents at end of period		9,838	6,392

The notes are an integral part of these consolidated interim financial statements.

Notes to the condensed consolidated interim financial statements

1 Reporting entity

Lekoil Limited (the "Company" or "Lekoil") is a company domiciled in the Cayman Islands. The address of the Company's registered office is Intertrust Group, 190 Elgin Avenue, Georgetown, Grand Cayman, Cayman Islands. These condensed consolidated financial statements (interim financial statements) as at and for the six months ended 30 June 2018 comprise the Company and its subsidiaries (together referred to as the "Group" and individually as "Group entities"). The Group's principal activity is exploration and production of oil and gas.

2 Basis of preparation

(a) Statement of compliance

These unaudited condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. They do not include all the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual consolidated financial statements as at and for the year ended 31 December 2017.

These interim financial statements were authorised for issue by the Company's Board of Directors on 27 September 2018

(b) Going concern basis of accounting

These unaudited condensed consolidated interim financial statements have been prepared on the going concern basis of accounting, which assumes that the Group will continue in operation for the foreseeable future and be able to realise its assets and discharge its liabilities and commitments in the normal course of business.

The Group has a negative operating cash flows of US$3.57 million for the period ended 30 June 2018 (30 June 2017: US$9.1 million) and as of that date, the Group's accumulated deficit amounts to US$60.65 million (31 December 2017: US$61.86 million).

The ability of the Group to continue to operate as a going concern is dependent on a number of factors considered by the Directors as disclosed below:

·     The ability of the Group to maintain steady state production and lifting on the Otakikpo marginal field;

·     The operational success of the Otakikpo Phase 2 field development and planned growth in production to 20,000 bopd and the successful financing of these activities;

·     Commodity pricing given there is no oil price hedging currently in place other than that required by lenders for debt service;

·     Availability of financing for development of OPL310, which is not currently factored into the cash forecasts; and,

·     Ability to defer activities to future periods in the event required.

The Directors have determined that over the course of the next 12 months and taking into consideration the factors mentioned above, there is a reasonable expectation there will be a sufficient source of funds for the Group. In making their assessment, the Directors have considered the Group's current cash position and the generation of funds from forecast production over the period, against the need to service the Group's debt portfolio, and tested the scenarios at different commodity prices. The Group further anticipates that additional funding, if appropriate, could be met by the divestment of assets along with access to the debt and capital markets. Based on their assessment, and taking into consideration the material uncertainties that exist, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the 12 month period in 2019.

Having considered and taking into account the material uncertainties that may occur with respect to the above matters, the Directors believe that the Group will achieve adequate resources to continue operations into the foreseeable future and the Group will be able to realise their assets and discharge their liabilities in the normal course of business. The Directors therefore adopt and approve the going concern basis in the preparation of the condensed consolidated financial statements.

3 Use of estimates and judgments

In preparing these interim financial statements, management has made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty that were applied in preparing the consolidated financial statements as at and for the year ended 31 December 2017, were considered to be applicable for these interim financial statements. The assumptions are as follows;

a)  Note 2(b) - Going Concern basis of accounting.

b) Notes 14 - Exploration and evaluation accounting judgment. The Group policy is to capitalise all expenditure incurred during the exploration and appraisal phase until the determination process has been completed or until such point as commercial reserves have been established. Exploration and evaluation assets are expected to be recouped in future through successful development and exploitation of the area of interest.

c)  Note 14(c) - The Directors have a reasonable expectation that the license for OPL 310 will be converted or renewed as appropriate upon expiration, based on the usual practice with the oil and gas industry in Nigeria and interaction with the appropriate government agency.

d) Note 19 - On the basis that the Group requires Ministerial Consent to take control of the oil mineral interest held by Afren Oil and Gas, the Group has not consolidated Afren Oil and Gas and has accounted for payments made in respect of the Afren Oil and Gas acquisition as other assets.

(ii) Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the period ended 30 June 2018 are included in the following notes: 

Note 2(b) - Going concern. Key assumptions made and judgment exercised by the Directors in preparing the Group's cash forecast.

Note 11(c) - Unrecognised deferred tax assets. Availability of future taxable profit against which carry forward losses can be used.

Notes 13, 14 and15 - Impairment test of property plant and equipment, exploration and evaluation assets and intangible assets: Key assumptions underlying recoverable amounts.

Note 14(c) - The Directors expectation that the license for OPL 310 will be converted or renewed as appropriate upon expiration.

Note 14(d) - Carrying value of exploration and evaluation assets. Basis for the conclusion that the carrying value of E&E assets do not exceed their recoverable amount.

Notes 19 and 20 - Carrying value of other assets and pre-paid development costs. Basis for the conclusion that the carrying value of other assets and pre-paid development costs do not exceed their recoverable amount.

Note 25- Provisions. Key assumptions underlying the obligation as at year end.

Note 28 - Share based payment arrangements. Key assumptions made in measuring fair values.

Note 31- Financial commitments and contingencies. Key assumptions about the likelihood and magnitude of an outflow of economic resources. Oil and gas reserves. Key assumptions underlying the estimation of oil and gas reserves.

4 Significant accounting policies

(a) Revenue Recognition

Revenue arises from the sale of crude oil. Revenue comprises the realised value of crude oil lifted by the buyer (offtaker). Revenue is recognised when crude products are lifted by a third party (buyer) Free on Board ('FOB') at the Group's lifting terminal. At the point of lifting, all risks and rewards are transferred to the buyer.

(b) Over lift and under lift

Lifting or offtake arrangements for oil produced in certain of the Group's jointly owned operations are such that each participant may not receive and sell its precise share of the overall production in each period. The resulting imbalance between cumulative entitlement and cumulative production less stock is underlift or overlift. Underlift and overlift are valued at market value and included within receivables and payables respectively. Movements during an accounting period are adjusted through cost of sales such that gross profit is recognised on an entitlements basis.

(c) All other accounting policies and methods of computation applied in these condensed consolidated interim financial statements are the same as those applied in the Group's consolidated financial statements as at and for the year ended 31 December 2017.

5 Operating segments

The Group has a single class of business which is exploration, development and production of petroleum oil and natural gas. The geographical areas are defined by the Group as operating segments in accordance with IFRS 8- Operating Segments. As at the period end, the Group had operational activities mainly in one geographical segment, Nigeria.

Geographical information

In presenting information on the basis of geographical segments, segment assets are based on the geographical location of the assets.

Non-current assets

	30 June 2018 US$'000	31 December 2017 US$'000
Nigeria	193,485	208,123
Namibia	554	440
Cayman*	15,622	1,787
Others	3	21
	209,664	210,371

Non-current assets presented consists of property, plant & equipment, intangible assets, long term prepayment, other receivables and exploration and evaluation (E&E) assets.

	30 June 2018
	Nigeria	Namibia	Cayman Islands	Others	Total
Revenue	22,387	-	-	-	22,387
Profit/ (loss) from operating activities	7,151	(81)	(3,445)	(576)	3,049
Net finance income/ (costs)	931	(51)	37	(14)	903
Tax expense	(2,189)	-	-	-	(2,189)
Total comprehensive income/ (loss) for the period	5,893	(132)	(3,408)	(590)	1,763
	30 June 2017
	Nigeria	Namibia	Cayman Islands	Others	Total
Revenue	6,946	-	-	-	6,946
Loss from operating activities	(10,521)	(85)	(2,513)	(600)	(13,719)
Net finance income/ (costs)	84	(5)	38	8	125
Tax expense	(425)	-	-	-	(425)
Total comprehensive loss for the period	(10,862)	(90)	(2,475)	(592)	(14,019)

*Cayman Island and USA segments have been merged into one segment. 

6. Revenue

	(Unaudited) 30 June 2018 US$'000	(Unaudited) 30 June 2017 US$'000
Crude proceeds	22,387	6,946

Crude proceeds of US$22.39 million represents the Group's share of crude oil sales from Otakikpo operation during the period, which is recognised as revenue ("Equity Crude"), (30 June 2017: US$6.95 million).

The Group's gross entitlement crude was 698,835 barrels out of which the Group lifted 680,654 barrels (30 June 2017: 304,121 barrels). The balance of 18,181 barrels representing the Group's share of overriding royalty crude was lifted on its behalf by its joint venture partner based on an agreed lifting arrangement.

The entitlement crude is comprised of equity crude of 333,429 (sales value US$22.4 million) barrels and cost recovery crude of 261,878 barrels (US$18.2 million).  The cost recovery crude is not included in revenue and is utilised to reduce pre-paid development costs borne by the Group on behalf of partner GEIL. The balance of 103,528 barrels from the entitlement crude has been agreed to be utilised to fund GEIL cash calls. 

7. Cost of sales

	(Unaudited) 30 June 2018 US$'000	(Unaudited) 30 June 2017 US$'000
Depreciation and amortisation	3,715	2,274
Production operation costs	737	929
Evacuation & Related Expenses	1,480	1,053
Crude handling and lifting expenses	720	1,173
Royalty expenses	3,231	939
Closing stock adjustments	(590)	(334)
Other expenses	70	49
	9,363	6,083

8. Operating expenses

	(Unaudited) 30 June 2018 US$'000	(Unaudited) 30 June 2017 US$'000
Field support costs	373	490
Community and security expenses	737	1,069
	1,110	1,559

9. General & administrative expenses

General & administrative expenses are significantly made up of:	(Unaudited) 30 June 2018 US$'000	(Unaudited) 30 June 2017 US$'000
Personnel expenses	4,063	4,366
Depreciation and amortisation	1,126	942
Rent expenses	796	709

10. Finance income and costs

Finance income	(Unaudited) 30 June 2018 US$'000	(Unaudited) 30 June 2017 US$'000
Joint venture partner carry interest income (a)	3,072	1,272
Other interest income (b)	85	45
Net foreign exchange gains (c)	567	2,409
	3,724	3,726
Finance costs (d)	2,821	3,601

(a)  Joint venture partner carry interest income

Joint venture partner carry interest income represents interest on pre-paid development costs. Following the commencement of production and sale of crude, the Group commenced recoveries from the pre-paid development costs. Consequently, the Group reclassifies the interest portion of the pre-paid development costs to finance income proportionately over the period over which the cost recovery occurs by reference to cost recoveries in each period as a percentage of the total capital and operating costs incurred to date in the development of the field.

(b)  Other interest income

Other interest income consists of interests on an unsecured loan of US$1,500,000 granted to a Director on 9 December 2014 with a three-year maturity, at an interest rate of four percent per annum. The loan was extended for another three years in September 2017, to 9 December 2020 under the same terms and conditions. Also included is income earned from investments of the Group's cash resources in fixed deposit and call accounts.

(c)  Net foreign exchange gain

Foreign exchange gains represent currency exchange difference gains resulting from the conversion of US dollar amounts to Nigerian Naira amounts; to meet obligations settled in Nigerian Naira.

(d)  Finance costs

Finance costs consist largely of interest costs on third party loans during the period. The interest costs are no longer capitalised following the completion of development works for which the loans were procured.

11. Taxes

(a) Petroleum profit tax

The Group with its principal assets and operations in Nigeria is subject to the Petroleum Profit Tax Act of Nigeria (PPTA). The Group's Petroleum Profit Tax charge for the period is summarised below:

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Balance at 1 January	218	-
Charge for the period	1,129	181
Tertiary education tax	207	37
Payment for the period	(218)	-
Balance at period end	1,336	218

(b) Company income tax

Interest on recovered carried cost and technical fees earned on Otakikpo operations of the group is subject to the Company Income Tax Act of Nigeria (CITA). The Group's Company Income Tax charge for the period is summarised below:

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Balance at 1 January	1,694	-
Charge for the period	922	1,588
Tertiary education tax	61	106
Payment for the period	-	-
Balance at period end	2,677	1,694

(c) Deferred tax assets

The Group has an estimated deferred tax asset of US$72.8million (31 December 2017: US$72.7 million), including an additional deferred tax asset of US$0.13 million recognised in the current period which brings the total recognised deferred tax asset as at 30 June 2018 to US$23.4 million (31 December 2017: US$23.2 million), derived from the activities of its subsidiary Lekoil Oil and Gas Investments Limited.  The Directors have assessed the future profitability of its operation in the Otakikpo marginal field and have a reasonable expectation that the Group will make sufficient taxable profit from Lekoil Oil and Gas Investments Limited in the near future to utilise the deferred tax assets. The balance of US$49.45 million of unrecognised deferred tax assets relates to unutilised capital allowances and tax losses from its other subsidiaries in which the Directors are not certain when there will be available taxable profit from the subsidiaries to utilise the deferred tax assets.

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Recognised deferred tax assets	23,378	23,249
Unrecognised deferred tax assets	49,451	49,451
	72,829	72,700

(d) Total income tax expense recognised in the period

	(Unaudited) 30 June 2018 US$'000	(Unaudited) 30 June 2017 US$'000
Petroleum profit tax	1,129	425
Company income tax	922	-
Tertiary education tax	268	-
Recognised deferred tax	(130)	-
	2,189	425

(e) Current tax liabilities

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Balance at 1 January	1,912	-
Charge for the period
-   Petroleum profit tax	1,129	181
-   Company income tax	922	1,588
-   Tertiary education tax	268	143
Payment during the period	(218)	-
Balance at 30 June	4,013	1,912

12. Profit/(loss) per share

(a)  The calculation of basic profit/(loss) per share has been based on the following profit/(loss) attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding.

(i) Profit/(loss) attributable to ordinary shareholders (basic and diluted)

In US Dollars	(Unaudited) 30 June 2018 US$'000	(Unaudited) 30 June 2017 US$'000
Profit/(loss) for the period attributable to owners of the Group	1,208	(12,915)
(ii) Weighted-average number of ordinary shares (basic and diluted)
In US Dollars	(Unaudited) 30 June 2018	(Unaudited) 30 June 2017
Issued ordinary shares at I January	536,529,893	536,529,893
Effect of share options	-	-
Weighted-average number of ordinary shares (diluted) at period end	536,529,893	536,529,893

(iii) Profit/(loss) per share:
Basic profit/(loss) per share (US$)		0.002	(0.024)
Diluted profit/(loss) per share (US$)		0.002	(0.024)

13. Property, Plant and Equipment

(a)    The movement on this account was as follows:

	Oil and Gas Assets US$'000	Motor Vehicles US$'000	Furniture & Fittings US$'000	Computers, Communication & Household Equipment US$'000	Leasehold Improvement US$'000	Plant, Machinery, Storage Tank & Others US$'000	Total US$'000
Cost:
Balance at 1 January 2018	40,059	296	417	764	1,199	148	42,883
Additions	2,273	-	10	3	-	130	2,416
Balance at 30 June 2018	42,332	296	427	767	1,199	278	45,299
Accumulated depreciation and impairment losses
Balance at 1 January 2018	6,327	203	249	519	944	48	8,290
Charge for the period	3,717	21	40	81	6	25	3,890
Balance at 30 June 2018	10,044	224	289	600	950	73	12,180
Carrying amounts:
At 30 June 2018 (Unaudited)	32,288	72	138	167	249	205	33,119
At 31 December 2017 (Audited)	33,732	93	168	245	255	100	34,593

14. Exploration and Evaluation (E&E) assets

E & E assets represent the Group's oil mineral rights acquisition and exploration costs.

(a)    The movement on the E&E assets account was as follows:

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Balance at 1 January	130,773	128,732
Additions during the period	1,509	2,309
Derecognition of block 2514A	-	(268)
Balance at end of period	132,282	130,773

(b) The additions during the six month period ended 30 June 2018 consists of the Group's exploration and evaluation expenditure in OPL 310 of US$1.02 million, US$0.38 million expenditure in OPL 325 and US$0.11 million expenditure in Namibia. 

(c) The OPL 310 lease term expires in February 2019. The Group is carrying out preparatory work for the drilling of an appraisal well which is subject to securing financing. Based on the usual practice within the oil and gas industry in Nigeria and interaction with the appropriate government agencies, the Directors are confident that OPL 310 license will either be extended or converted to OML as appropriate before expiration date. The total exploration and evaluation expenditure on OPL 310 as at 30 June 2018 is US$115.21 million (31 December 2017: US$114.19 million).

(d) Following an Expert's evaluation of the resource capability of OPL 310 carried out in 2016 and further evaluation by in house resource, the Directors have concluded that no impairment charge was necessary. This was based upon management's assessment of the asset value in use, its expectation on renewals and planned expenditure to appraisal drilling. The Directors estimates value in use by using a discounted cashflow with pre-tax discount rates of between 8% - 20%.

15. Intangible assets

The movement on the intangible assets account was as follows:

	Mineral Rights Acquisition Costs* US$'000	Geological and Geophysical Software US$'000	Accounting Software US$'000	Total US$'000
Costs
Balance at 1 January 2018	7,000	1,787	104	8,891
Additions for the period	-	-	-	-
Balance at 30 June 2018	7,000	1,787	104	8,891
Accumulated amortisation
Balance at 1 January 2018	1,318	1,237	67	2,622
Charge for the period	741	203	6	950
Balance at 30 June 2018	2,059	1,440	73	3,572
Carrying amounts
At 30 June 2018 (Unaudited)	4,941	347	31	5,319
At 31 December 2017 (Audited)	5,682	550	37	6,269

*Mineral rights acquisition costs represent the signature bonus for the Otakikpo marginal field amounting to US$7.0 million

16. Inventories

Inventories consist of the Group's share of crude stock of US$1.7 million as at 30 June 2018 (31 December 2017: US$1.1 million).

17. Trade receivables

Trade receivables comprise:	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Sales proceeds receivables (a)	10,879	6,044

(a)   Trade receivables consist of the balance due from the crude offtaker from the proceeds of crude sales.

18. Other receivables

Other receivables comprise:

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Non-current Director's loan (b)	1,736	1,691
Due from Afren Investment Oil & Gas (Nigeria) Limited (c)	830	796
	2,566	2,487
Current Cash call receivable from joint venture partner- GEIL (a)	455	3,606
Employee loans and advances	31	10
Other receivables	102	64
	588	3,680

a) The cash call due receivable from joint venture partner (GEIL), represents GEIL's share of cash calls paid by the Group on their behalf.

(b) The Director's loan represents the balance due on an unsecured loan of US$1,500,000 granted to a Director on 9 December 2014. The loan had a three year term and bore interest at a rate of four per cent per annum. In September 2017, the loan was extended for another 3 years to 9 December 2020 under the same terms and conditions.

(c) The amount due from Afren Investment Oil & Gas (Nigeria) Limited (Afren) represents Afren's share of OPL 310 joint venture expenditure paid by the Group on Afren's behalf.

19. Other assets

Other assets comprises:

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Non-current
Deposit for investments in Afren Investments Oil & Gas (Nigeria) Limited (a)	13,000	13,000
Current
Non-government royalty	-	1,779
Restricted cash (b)	2,945	3,294
Prepaid rent	145	361
Prepaid insurance	367	53
Others	394	414
	3,851	5,901

(a) On 30, November 2015, Lekoil 310 Limited, a wholly owned subsidiary of Lekoil Limited executed a sale and purchase agreement with the Administrators of Afren Nigeria Holdings Limited and Afren Plc. relating to the entire issued share capital of Afren Investment Oil & Gas (Nigeria) Limited and certain intra-company debts.

In accordance with the agreement, Lekoil 310 Limited shall acquire the entire share capital of Afren Investment Oil & Gas (Nigeria) Limited and will be assigned the intra-company debts of Afren Nigeria Holdings Limited and Afren Plc., with Afren Investment Oil & Gas (Nigeria) Limited for considerations of US$1, US$6.4 million and US$6.6 million respectively.

Consequently, on 18 November 2015, Lekoil 310 Limited made the Initial Payments of US$5.9 million and US$6.1 million for Afren Investment Oil & Gas (Nigeria) Limited intra-company debts with Afren Plc. and Afren Nigeria Holdings Limited respectively. The Group further paid the balance US$1.0 million in December 2017. The cumulative payment of US$13.0 million has been reported as deposit for shares pending the receipt of the consent of the Minister of Petroleum.

(b) Restricted cash represents cash funding of the debt service reserve accounts for two quarters of interest for the FBN Capital Notes and one quarter of interest and principal payment of the Shell Western facility.

20. Pre-paid development costs

	(Unaudited) 30 June 2017 US$'000		(Audited) 31 December 2017 US$'000
Balance at 1 January	42,463		66,825
Adjustment	-		(5,477)
Additions during the period	993		7,894
Recoveries during the period	(18,215)		(33,700)
Interest for the period	1,759		6,921
Balance at period end	27,000		42,463

(a) Pre-paid development costs represents GEIL's share of costs (60% of joint operations' costs) in the Otakikpo marginal field.  Under the terms of the farm-in agreement, Lekoil Oil and Gas Investment Limited undertakes to fund GEIL's participating interest share of all costs relating to the Otakikpo marginal field, until the completion of the Initial Work Program. The Group will recover costs at a rate of LIBOR plus a margin of 10% through crude oil lifting when the field commences production. However, for expenditure above US$70 million, the recovery rate increases to LIBOR plus a margin of 13%. The interest on carried cost has been included as part of the pre-paid development costs.

The Group commenced recovery of pre-paid development costs in April 2017, following the commencement of crude lifting. The sum of US$18.2 million was recovered in the period to 30 June 2018 (31 December 2017 full year recovery: US$33.7 million).

The joint venture audit of the pre-paid development costs continued through September 2018. The likely impact on the balance of pre-paid development costs will be determined at the conclusion of the audit. The audit is expected to be concluded before the end of the year.

From a preliminary analysis, the likely outcome is that approximately US$14.1 million of the carrying value of the pre-paid development cost will be reduced and items reclassified as sole costs for Lekoil. The corresponding adjustments will be an increase of US$7.1 million to the Lekoil Otakikpo asset value; a reduction to deferred income (US$1.8 million), a reduction in trade payables (US$2.2 million) and a charge to the profit and loss to reverse prior period foreign exchange gains (US$3.0 million). It is expected that the remaining balance of pre-paid development costs will be fully recovered by December 2018.

21. Cash and cash equivalents

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Bank balances	9,838	6,922

22. Capital and reserves

(a)  Share capital

	(Unaudited) 30 June 2018
Authorised (number)	50,000
Total issued and called up share capital (US$'000)	27
	30 June 2018
In issue at 1 January	27
Issued for cash	-
In issue and fully paid, end of period	27
Authorised - par value $0.00005 (2017: $0.00005)	1,000,000,000

(b)  Share premium

Share premium represents the excess of amount received over the nominal value of the total issued share capital as at the reporting date. The analysis of this account is as follows:

	(Unaudited) 30 June 2018 US$'000
Balance at 1 January	264,004
Additional issue of shares during the period	-
Balance at end of period	264,004

23. Non-controlling interest

	% of ownership	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Lekoil Nigeria Limited	10	3,304	3,885
Lekoil Exploration and Production (Pty) Limited (Namibia)	20	231	205
Balance at period end		3,535	4,090

24. Trade and other payables

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Accounts payable	7,030	16,833
Accrued expenses	7,187	7,409
Non-government royalties payable	588	2,044
Other statutory deductions	5,125	6,114
Other payables	165	75
	20,095	32,475

25. Provision for asset retirement obligation

The Group has recognised a provision for asset retirement obligation ("ARO") which represents the estimated present value of the amount the Group will incur to plug, abandon and remediate Otakikpo operations at the end of the productive lives, in accordance with applicable legislations.

(a)   The movement in provision for asset retirement obligation account was as follows:

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Balance at 1 January	107	91
Unwinding of discount	9	16
Balance at end of period	116	107

These costs are expected to be incurred in approximately year 2040 dependent on government and future production profiles of the project. The provision has been estimated at a US inflation rate of 2% and discounted to present value at 17%. The provision recognised represents 40% of the net present value of the estimated total future costs as the Company's partner, GEIL is expected to bear 60% of the cost.

A corresponding amount equivalent to the provision is recognised as part of the cost of the related property, plant and equipment. The amount recognised is the estimated cost of decommissioning discounted to its net present value and is reassessed each year in accordance with local conditions and requirements, reflecting management's best estimates.

The unwinding of the discount on the decommissioning is included as a finance cost.

Changes in the estimated timing of decommissioning or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision and a corresponding adjustment to property, plant and equipment.

During the period, there was no revision in the Group's decommissioning costs estimate. Management believe the estimates continue to form a reasonable basis for the expected future costs of decommissioning, which are expected to be incurred in approximately 2040.

26. Deferred income

 Deferred income comprises:

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Balance at 1 January	6,685	7,426
Additional carried interest during the period	1,759	4,553
Charge to finance income (a)	(3,072)	(5,294)
Balance at period end	5,372	6,685

(a) Following the commencement of production and recovery of pre-paid development costs, the Group reclassifies the interest portion of the pre-paid development costs to finance income proportionately over the period over which the cost recovery occurs, by reference to cost recoveries in each period as a percentage of the total capital and operating costs incurred to date in the development of the field.

27. Loans and borrowings

The movement in the loan account was as follows:

	(Unaudited) 30 June 2018 US$'000	(Audited) 31 December 2017 US$'000
Balance at 1 January	29,509	27,390
Draw-down during the period	2,311	18,137
Effective interest during the period	3,027	6,834
Principal repayment during the period	(7,419)	(13,568)
Interest and fees paid during the period	(1,703)	(6,635)
Revaluation adjustments	(15)	(2,649)
Balance at end of period	25,710	29,509
Current	15,077	17,317
Non-current	10,633	12,192
	25,710	29,509

(a) FBN Capital Limited Notes Issuance Agreements - two-tranche facility

The Company entered into notes issuance agreements dated 16 June, 2016 with FBN Capital Limited ("FBNC") providing for a loan of US$10 million with a 3-year tenor ("FBNC dollar facility") and a loan of 2 billion Naira (approximately US$10 million at the time of issuance) with a three-year tenor ("FBNC naira facility", together the "FBNC facilities"). The FBNC facilities are fully drawn and are secured by the LOGL assets as well as a Lekoil Limited guarantee.

(i)  FBNC dollar facility

The full US$10 million was drawn on the facility in June 2016 to fund the repayment of an existing bridge facility issued by FBNC in May 2015 and to fund the Otakikpo field development. As of May 2016, the bridge facility remaining balance was US$5 million with repayment due in May 2016. In May 2016, the maturity date of the bridge facility was extended from May 2016 to August 2016.  The US$5 million balance was subsequently repaid in June 2016 with proceeds from the FBNC dollar facility.

Interest is charged on the FBNC dollar facility at 3-month LIBOR plus 11.25% per annum and interest payments are due at the end of each quarterly period. The loan is repayable in ten quarterly instalments starting from March 2017 in accordance with a repayment schedule.

The loan has a final maturity date of June 30, 2019 and is secured by the Company's interest in the Otakikpo fields and facilities as well as a parent company guarantee.

In August 2018, the Company entered into a transaction to revise the interest rate of the facility to 3-month LIBOR plus 10% per annum. As part of the transaction, the tenor of the facility will be extended to June 30, 2021 with principal repayment moratoriums for two quarters and equal quarterly principal repayments thereafter.

The documentation to complete this transaction is on-going and is expected to complete before year end.

(ii) FBNC naira facility

The full 2 billion naira was drawn on the facility in June 2016 to fund the Otakikpo field development. Interest is charged on the FBNC naira facility at the greater of 3-month NIBOR plus 6% or 20% per annum, and interest payments are due at the end of each quarterly period. The loan is repayable in ten quarterly instalments starting from March 2017 in accordance with a repayment schedule.

The loan had a final maturity date of 30 June 2019 and is secured by the Company's interest in the Otakikpo field and facilities as well as a parent company guarantee.

In September 2016, the Company upsized the FBNC naira facility by 2.5 billion naira. The fully drawn amount was used to fund Otakikpo expenditures.

In September 2017, FBNC moved the loan to its affiliate, FBN Merchant Bank (FBNM) for administrative purposes.

In June 2018, the Company entered into a transaction to redenominate the currency of the facility from naira into United States dollars. The FBNC naira facility will be denominated in US$ ("FBNM dollar facility"). Subsequently, the facility was also upsized to refinance the outstanding balance on the Sterling facility referred to below. The balance on the 4.5 billion naira FBNM Naira Facility and the refinanced outstanding balance on Sterling bank facility will be re-denominated into a new US$8.45 million facility.

The FBNM dollar facility has an interest rate of 3-month LIBOR plus 10% per annum and will mature in June 30, 2021 with a principal repayment moratorium for two quarters and equal quarterly principal repayments thereafter.

The documentation to complete these transactions is on-going and is expected to complete before year end.

(b)   US$5 million FBN Merchant Bank Working Capital Facility

The Company put in place a one-year US$5.0 million revolving credit facility in December 2017. The primary purpose of the revolver was to manage the working capital funding requirements of the Company. The facility has a 60-day repayment cycle for any drawn down amount and interest rate is charged at 90-day LIBOR plus 11.25% per annum. As at 30 June 2018, the Group had drawn US$2.0 million on this facility.

(c) 5-billion naira Sterling Bank Corporate Loan Facility

On 23 June 2016, the Company signed an agreement with Sterling Bank Plc ("Sterling") to secure a three-year Corporate Loan Facility for 5 billion naira (the "Sterling facility). The purpose of the facility was to fund the Otakikpo field development.

In September 2016, the Company drew down 1 billion naira on the facility. Interest charged on the Sterling facility was initially at the greater of 3-month NIBOR plus 10% per annum and interest payments are due at the end of each quarterly period from June 2017. The interest rate was subsequently amended to 26% per annum in February 2017. The loan is repayable in ten quarterly instalments starting from June 2017 in accordance with a repayment schedule.

The loan had a final maturity date of 30 September 2019 and is secured by the Company's interest in the Otakikpo field and facilities as well as a parent company guarantee.

In June 2018, the Company entered into a transaction to refinance the outstanding balance on the facility into the FBNM dollar facility.

The documentation to complete this transaction is on-going and is expected to complete before year end.

(d)   US$15 Million Shell Western Supply and Trading Limited Advance Payment Facility

On 30 March 2017, the Company signed an agreement with Shell Western Supply and Trading Limited ("Shell"), a member of the Royal Dutch Shell group of companies (LSE: RDSA, RDSB) to secure a three-year advance payment facility for US$15 million (the "Shell facility").

The full US$15 million was drawn on the facility in March 2017 to fund the residual pre-production development costs of the Otakikpo field.

Interest is charged on the Shell facility at 3-month LIBOR plus 10% per annum and interest payments are due at the end of each quarterly period. The loan is repayable in ten quarterly instalments starting from December 2017 in accordance with a repayment schedule.

The loan has a final maturity date of 31 March 2020 and is secured by the Company's interest in the Otakikpo field and facilities as well as a parent company guarantee.

As part of the terms under the Shell facility, the Company is required to enter into a series of monthly oil price related put options. At reporting date, the oil price was well above the exercise price resulting in the hedges having no value.

The following is the outstanding balance of interest-bearing loans and borrowings as at the period end:

	Interest rate p.a.	30 June 2018 US$'000	31 Dec 2017 US$'000
US$10 million FBNC Dollar Facility	11.25% + LIBOR	5,630	5,828
4.5 billion naira FBNM Naira Facility*	6% + NIBOR	-	7,212
FBNC Facility (for Redenomination)*	10% + LIBOR	7,774	-
US$15 million Shell Facility	10% + LIBOR	10,299	13,275
5 billion naira Sterling Bank Facility*	26%	-	2,191
US$5 million FBNM working Facility	11.25% + LIBOR	2,007	1,003
Total		25,710	29,509

* In June 2018, the Company entered into a transaction to refinance the outstanding balance on the facility into the FBNM dollar facility.

The Sterling bank facility was fully paid off during the period through a loan buy out by FBN Capital. The balance on the 4.5 billion naira FBNM Naira Facility and the refinanced outstanding balance on Sterling bank facility will be re-denominated into a new US$8.45 million facility. The new facility has a 6 months moratorium on principal with an interest rate of 3 month LIBOR plus 10% per annum. The facility tenure is 36 months. The documentation to complete this transaction is on-going and is expected to complete before year end.

28. Share-based payment arrangements

At 30 June 2018, the Group had the following share-based payment arrangements:

Long-term incentive plan scheme (equity-settled)

The long-term incentive plan scheme ("LTIP") was approved on 19 November 2014 and amended on 21 December 2015. The Board approved the grant of 2,500,000 stock options to the CEO, Lekan Akinyanmi on 28 June 2017. The Board further approved the grant of 7,109,750 stock options to employees of the Group and 1,500,000 stock options to the CFO, Lisa Mitchell on 23 August 2017 and 1 October 2017 respectively.  No new awards were approved during the period.

The options are subject to performance criteria and vest three years from the grant date subject to meeting certain performance criteria. The share options granted are subject to market-based vesting conditions.

The options will vest subject to the Company's annual compound Total Shareholder Return ("TSR") over the three year performance period starting on the grant date, with:

·   no options vest if annual compound TSR is less than 10%;

·   30% of options vest if annual compound TSR is 10%;

·   100% options vest if annual compound TSR is 20% or more; and

·   between 30% and 100%, the percentage of options that will vest is determined on a straight-line basis for annual compound TSR between 10% and 20%.

The number and weighted average exercise prices of share options are as follows:

	Weighted average exercise price US$	Number of options	Weighted average exercise price US$	Number of options
	30 June 2018		31 December 2017
Outstanding at 1 January	0.53	27,526,750	0.62	20,501,000
Granted during the period	-	-	0.27	8,609,750
Forfeited during the period	-	-	0.27	(1,584,000)
Outstanding at period end	0.53	27,526,750	0.53	27,526,750

The options outstanding at 30 June 2018 had exercise prices in the range of US$0.27 to US$0.62 and a weighted average contractual life of 3.52 years.

Share option scheme (equity-settled)

The Group established a share option scheme available to Directors, key management personnel, employees and consultants providing employment-type services, which provides the opportunity to purchase shares in the Group. In accordance with the scheme, holders of vested options are entitled to purchase shares at prices of the shares established at the date of grant, during a period expiring on the tenth anniversary of the effective date i.e. grant date. The grant dates for awards were 3 December 2010, 1 June 2011, 1 November 2011, 4 June 2012, 19 February 2013, 7 April 2013, 17 May 2013 and 26 March 2014 based upon a shared understanding of the terms of the awards at that time. This share option scheme has been replaced by the LTIP scheme described above.  As such, no new options were granted during the period under this scheme.

The number and weighted average exercise prices of share options are as follows:

	Weighted average exercise price US$	Number of options	Weighted average exercise price US$	Number of options
	30 June 2018		31 December 2017
Outstanding at 1 January	0.58	17,462,986	0.58	17,462,986
Granted during the period	-	-	-	-
Forfeited during the period	-	-	-	-
Exercised during the period	-	-	-	-
Outstanding at period end	0.58	17,462,986	0.58	17,462,986
Exercisable at period end	0.75	17,462,986	0.75	17,352,986

The options outstanding at 30 June 2018 have a weighted average contractual life of 3.55 year.

Non-executive Director share plan (equity-settled)

The Board established the Non-Executive Director share plan on 21 December 2015.

These stock options are not subject to any performance criteria and vest three years from the grant date, subject to successful completion of a three year service period starting on the grant date. The options can be exercised over a seven year period beginning on the expiry of the service period.

No new awards were approved during the period.

The number and weighted average exercise prices of share options are as follows:

	Weighted average exercise price US$	Number of options	Weighted average exercise price US$	Number of options
	30 June 2018		31 December 2017
Outstanding at 1 January	0.35	1,500,000	0.43	1,000,000
Granted during the period	-	-	0.27	500,000
Outstanding at period end	0.35	1,500,000	0.35	1,500,000

The options outstanding at 30 June 2018 had a weighted average exercise price of US$0.35 to and a weighted average contractual life of 7.0 years.

29. Related party transactions

The Group had transactions during the period with the following related parties:

(a)  Transactions with key management personnel

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly. These are the Directors of the Group.

(i) Loans to key management personnel

An unsecured loan of US$1,500,000 was granted to a Director on 9 December 2014. The loan had a three year term and bears interest at a rate of four per cent per annum. Repayment is due at the end of the term. In September 2017, the loan was extended for another 3 years to 9 December 2020 under the same terms and conditions. At 30 June 2018, the balance outstanding was US$1,724,833 (31 December 2017: US$1,691,364) and is included in 'trade and other receivables' while the accrued interest income of US$33,469 (31 December 2017: US$65,052) is included in 'finance income'.

(ii) Key management personnel transactions

Transactions with key management and related parties are summarised below:

·     The Group sponsored entrepreneurship development initiative valued at US$5,600 as part of its corporate social responsibility activities. The programme was organized by Accent Entrepreneurship Initiative, a company promoted by persons related to a director.

·     The Group also donated US$2,800 to Muritala Mohammed Foundation which is led by a director toward corporate social responsibility activities.

·     The Group engaged the services of Aluko & Oyebode, a company related to a director for legal advisory services valued at US$9,800.

·     There is an outstanding balance of US$0.87 million as at 30 June 2018 (31 December 2017: US$1.72 million) with respect to well completion services rendered by SOWSCO Wells Services Nigeria Limited, a company controlled by a Director.

Key management personnel compensation

In addition to their salaries, the Group also provides non-cash benefits to key management personnel, in form of share based payments.

(iii) Key management personnel and Director transactions

Directors of the Company control 8.27% of the voting shares of the Company as at 30 June 2018 (31 December 2017 is 8.27%).

(b)   Lekoil Limited, Cayman Islands has a Management & Technical Services Agreement with Lekoil Management Corporation (LMC) a wholly owned subsidiary, under the terms of which LMC was appointed to provide management, corporate support and technical services. The remuneration to LMC includes reimbursement for charges and operating costs incurred by LMC.

30. Events after the reporting date

In June 2018, the Company entered into a transaction to redenominate the currency of its 4.5 billion naira facility with FBN Capital Limited ("FBNC naira facility") from naira into United States dollars. The FBNC naira facility will be denominated in US$ ("FBNM dollar facility"). Subsequently, the facility was also upsized to refinance the outstanding balance on the Sterling facility. The balance on the 4.5 billion naira FBNC Naira Facility and the refinanced outstanding balance on Sterling bank facility will be re-denominated into a new approximately US$8.45 million facility.

The documentation to complete these transactions is on-going and is expected to complete before year end.

Other than the matter disclosed above, there are no other events between the reporting date and the date of authorising these financial statements that have not been adjusted for or disclosed in these condensed consolidated financial statements.

31. Financial commitments and contingencies

(a)  On 5 December 2014, the joint venture "Green Energy International Limited/ Lekoil Oil and Gas Investments Limited" signed a Memorandum of Understanding (MoU) with its host community, Ikuru covering a period of 5 year with respect to the Otakikpo Marginal Field area. The key items of the MoU include the following:

- The joint venture will allocate 3% of its revenue from the Liquefied Petroleum Gas (LPG) produced from the field to Ikuru Community in each financial year;

- The joint venture will allocate the sum of US$0.53 million (NGN 148.32 million) annually for sustainable community development activities.

(d)  In May 2015, the Company provided a corporate guarantee in favour of FBN Capital for loan notes issued by Lekoil Oil and Gas Investment Limited, a sub-subsidiary of the Company for the sum of US$10 million and NGN 2 billion. The guarantee will be in place throughout the duration of the loan notes.

(e)  Litigation and claims

Following absence of feedback with respect to the application for Ministerial Consent for its acquisition of the additional 22.86 per cent interest in OPL 310, the Company announced in March 2018 that it has applied to the Federal High Court for a declaration that is expected to expedite the consent process and preserve the unexpired tenure in the licence.

Other than the matter disclosed above, there are no litigations or claims involving the Group as at 30 June 2018 (31 December 2017 is Nil).

-Ends-

 

END

 

 

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