3rd Quarter Financial Statements

RNS Number : 2586H

Serinus Energy PLC

14 November 2018

 

Serinus Energy plc

Condensed Consolidated Interim Financial Statements

For the three and nine months ended September 30, 2018

(US dollars in 000s)

 

Serinus Energy plc

Condensed Consolidated Interim Statement of Financial Position

(US 000s) (unaudited)

As at:	September 30, 2018	December 31, 2017
Assets
Current assets
Cash and cash equivalents	$                     4,570	$                    7,252
Accounts receivable	6,880	2,980
Income tax receivable	1,450	2,216
Prepaids and other	552	355
Commodity inventory (note 3)	-	1,492
Restricted cash (note 5)	1,104	1,098
Total current assets	14,556	15,393
Property, plant and equipment (note 7)	111,219	99,578
Total assets	$                125,775	$                114,971
Liabilities
Current liabilities
Accounts payable and accrued liabilities	$                  13,778	$                  17,404
Advances for crude oil sales (note 3)	-	353
Income taxes payable	1,739	1,321
Current portion of long-term debt (note 8)	5,516	-
Decommissioning provision	2,801	2,882
Total current liabilities	23,834	21,960
Long-term debt (note 8)	26,821	31,261
Decommissioning provision	44,576	42,799
Other provisions	1,747	1,747
Deferred income tax liability	13,198	13,500
Total liabilities	110,176	111,267
Shareholder's equity
Shareholder's capital (note 9)	375,208	362,534
Contributed surplus	22,861	22,487
Deficit	(382,470)	(381,317)
Total shareholder's equity	15,599	3,704
Total liabilities and shareholder's equity	$                125,775	$                114,971
Commitments and contingencies (note 11)

See accompanying notes to the condensed consolidated interim financial statements

"Signed"		"Signed"
ELEANOR BARKER DIRECTOR, CHAIR OF THE AUDIT COMMITTEE		JEFFREY AULD DIRECTOR, PRESIDENT AND CEO

 

Serinus Energy plc

Condensed Consolidated Interim Statement of Operations and Comprehensive Loss

(US 000s, except per share data) (unaudited)

	Three months ended September 30		Nine months ended September 30
	2018	2017	2018	2017
Revenues
Petroleum and natural gas revenues (notes 3, 6)	$  2,167	$       140	$      6,860	$    5,705
Change in oil inventory (note 3)	-	242	-	(1,031)
	2,167	382	6,860	4,674
Royalties	218	39	673	484
	1,949	343	6,187	4,190
Well incident recovery (note 10)	1,047	-	3,639	-
Operating expenses
Production expenses	691	585	2,009	3,478
General and administrative	816	570	2,225	2,090
Share-based compensation	128	240	374	456
Gain on disposition (note 7)	(117)	-	(117)	(2,179)
Transaction costs (note 10)	27	103	1,367	103
Depletion and depreciation	419	149	1,307	1,379
Impairment	-	4,981	-	4,981
Total operating expenses	1,964	6,628	7,165	10,308
Finance expense
Interest expense and accretion	1,204	980	3,299	2,714
Foreign exchange gain	(99)	(131)	(227)	(155)
Unrealized loss on investments	-	-	-	13
Net finance expense	1,105	849	3,072	2,572
Net loss before income taxes	(73)	(7,134)	(411)	(8,690)
Current income tax expense (recovery)	1,668	(381)	2,078	509
Deferred income tax expense (recovery)	(1,171)	290	(302)	(88)
Net loss and comprehensive loss	$        (570)	$     (7,043)	$    (2,187)	$    (9,111)
Net loss per share - basic and diluted (note 9)	$              -	$       (0.05)	$      (0.01)	$      (0.07)

See accompanying notes to the condensed consolidated interim financial statements

 

Serinus Energy plc

Condensed Consolidated Interim Statement of Cash Flows

(US 000s) (unaudited)

	Three months ended September 30		Nine months ended September 30
	2018	2017(1)	2018	2017(1)
Operating activities
Net loss	$        (570)	$     (7,043)	$    (2,187)	$      (9,111)
Items not involving cash:
Depletion and depreciation (note 7)	419	149	1,307	1,379
Impairment	-	4,981	-	4,981
Gain on disposition	(117)	-	(117)	(2,179)
Accretion expense	249	171	757	513
Share-based compensation	128	240	374	456
Shares issued as compensation	-	-	-	7
Unrealized loss on investments	-	-	-	13
Foreign exchange (gain) loss unrealized	80	(182)	(456)	(54)
Deferred income tax expense (recovery)	(1,171)	290	(302)	(88)
Interest expense	955	809	2,542	2,201
Expenditures on decommissioning liabilities	-	-	(24)	-
Funds from (used in) operations	(27)	(585)	1,894	(1,882)
Changes in non-cash working capital	686	1,210	(5,086)	1,120
Cashflows from (used in) operating activities	659	625	(3,192)	(762)
Financing activities
Common shares issued, net of costs (note 9)	-	-	12,674	18,048
Repayment of long-term debt (note 8)	-	(9)	-	(1,676)
Interest and financing fees (note 8)	(233)	(220)	(432)	(474)
Cashflows from (used in) financing activities	(233)	(229)	12,242	15,898
Investing activities
Exploration and development expenditures, net (note 7)	(2,153)	(3,137)	(12,436)	(6,141)
Change in restricted cash (note 5)	(17)	(2)	(39)	54
Proceeds on disposition of property, plant and equipment (note 7)	117	-	117	-
Proceeds on disposition of investment	-	-	-	54
Cashflows used in investing activities	(2,053)	(3,139)	(12,358)	(6,033)
Impact of foreign currency translation on cash	2	175	626	51
Change in cash and cash equivalents	(1,625)	(2,568)	(2,682)	9,154
Cash and cash equivalents, beginning of period	6,195	16,019	7,252	4,297
Cash and cash equivalents, end of period	$      4,570	$    13,451	$      4,570	$    13,451
Supplemental information
Cash income taxes paid	$              -	$           63	$      1,133	$           63

⁽¹⁾ Certain 2017 comparatives have been reclassified so that they are consistent with the current period presentation of movements in working capital.

See accompanying notes to the condensed consolidated interim financial statements

 

Serinus Energy plc

Condensed Consolidated Interim Statement of Shareholder's Equity

(US 000s) (unaudited)

	Share Capital
	Number of shares	Amount	Contributed surplus	Deficit	Total
Balance at December 31, 2016	78,629,941	$     344,479	$       21,796	$   (362,525)	$         3,750
Equity offering, net of issue costs	72,000,000	18,048	-	-	18,048
Issuance of common shares	22,197	7	-	-	7
Share-based compensation	-	-	456	-	456
Net loss	-	-	-	(9,111)	(9,111)
Balance at September 30, 2017	150,652,138	$     362,534	$       22,252	$   (371,636)	$       13,150
Balance at December 31, 2017	150,652,138	$     362,534	$       22,487	$   (381,317)	$         3,704
Adjustment on initial application of IFRS 9 (note 3)	-	-	-	1,034	1,034
Equity offering, net of issue costs (note 9)	66,666,667	12,674	-	-	12,674
Share-based compensation	-	-	374	-	374
Net loss	-	-	-	(2,187)	(2,187)
Balance at September 30, 2018	217,318,805	$     375,208	$       22,861	$   (382,470)	$       15,599

See accompanying notes to the condensed consolidated interim financial statements

                           Notes to the Condensed Consolidated Interim Financial Statements

                           For the three and nine months ended September 30, 2018 and 2017

                            (US 000s, unless otherwise noted)

1.   Reporting entity

Serinus Energy plc ("Serinus" or the "Company" or the "Group") is principally engaged in the exploration for and development of oil and gas properties in Tunisia and Romania. Serinus is incorporated under the Companies (Jersey) Law 1991. The Company's head office and registered office is located at The Le Gallais Building, 54 Bath Street, St. Helier, Jersey, JE1 8SB.

Effective May 3, 2018 the Company continued from Alberta, Canada, to Jersey, Channel Islands. In connection with the continuance, the Company changed its name from Serinus Energy Inc. to Serinus Energy plc and adopted new charter documents. On May 18, 2018, the Company listed on the Alternative Investment Market ("AIM") of the London Stock Exchange. The Company then delisted from the Toronto Stock Exchange on May 22, 2018, retaining its listings on the Warsaw Stock Exchange ("WSE") and AIM.

Serinus is a publicly listed company whose common shares are traded under the symbol "SENX" on AIM and "SEN" on the WSE. Kulczyk Investments, S.A. ("KI") holds a 38.77% investment in Serinus as of September 30, 2018.

The condensed consolidated interim financial statements for Serinus include the accounts of Serinus and its subsidiaries for the three and nine months ended September 30, 2018 and 2017.

2.   Basis of presentation

(a)   Going concern

These condensed consolidated interim financial statements have been prepared on a going concern basis, which assumes that Serinus will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of operations.

The Group meets its day-to-day working capital requirements from net operating cash flows, cash balances, equity, and fully drawn debt facilities (Senior and Convertible loans from the EBRD of $5.4 million and $28.4 million respectively (see note 8). As at October 31, 2018 the group had cash balances of $3.5 million.

The Group has faced financial difficulties stemming from the steep fall in crude oil prices in 2014/2015 which severely impacted operating revenues in Tunisia, resulting in cash flows that were insufficient to cover the corporate costs and debt service costs of the entity. These issues were compounded during 2017 with the shut in of both Tunisian fields as a result of social unrest and protests in the country. The Sabria field recommenced production in September 2017 but was significantly impacted by the shut-in with production only returning to 60% of its pre-shut-in levels. The Chouech Es Saida field remains shut-in, and the Group is currently working towards reopening this field in Q1 2019.

Equity was issued in May 2018 raising net proceeds of $12.7 million to enable the Group to complete construction of a gas plant in Romania, into which two existing wells would be tied in and produced. To date, these proceeds have primarily been used to fund the completion of the gas plant, drill the Moftinu-1007 well, which replaced the Moftinu-1001 well which suffered a blow out in December 2017, and drill the Moftinu-1003 well. The Group is in the process of claiming insurance proceeds in relation to the Moftinu-1007 well. The gas plant is completed but is waiting for the installation of the Low Temperature Separation ("LTS") unit and the Triethylene Glycol ("TEG") unit, which are anticipated to be completed, installed and commissioned December 2018. The plant has been ready to commence experimental production since August 21, 2018 but is waiting for access to the Transgaz system. Transgaz has so far denied access to the system citing that the gas quality is not in accordance with their network specifications. Once the LTS and TEG units are installed, the processed gas will meet these quality specifications.

The Group's $5.4 million Senior loan is due to be repaid in two equal instalments of $2.7 million each on March 31, 2019 and September 30, 2019. The Group's $28.4 million convertible loan accumulates interest to June 30, 2020 at which point the outstanding amount is repayable in four equal instalments on June 30, 2020, 2021, 2022 and 2023 and interest after June 30, 2020 is to be paid annually on the loan repayment dates. Both loans are subject to covenants. Those covenants were not tested at December 31, 2017 as they were not in effect at that date due to a covenant holiday obtained on debt renegotiation. As at September 30, 2018, the Company was not in compliance with the consolidated debt to EBITDA covenant for the three months ended September 30, 2018. On September 28, 2018, the Company received a waiver from the EBRD formally waiving compliance with this covenant for the period ended September 30, 2018. The implication of this waiver is that the debt repayments will follow their original scheduled repayment terms and the bank will not be acting on its security as a result of the breach.

In assessing the Group's ability to continue as a going concern, the Directors have prepared base and sensitized cash flow forecasts for a period in excess of 12 months from the date of authorization of these interim financial statements.

Base case forecasts indicate that the Group will breach the EBRD covenants at December 31, 2018 and for the foreseeable future, the result of which is that the Senior and Convertible loans will become repayable on demand at the discretion of the bank. The Directors intend to seek waiver of those covenants and the continued availability of those existing loan facilities represents a material uncertainty.

The key assumptions in the base case forecasts are the timing of the start of commercial production in Romania, the field's post-commissioning performance and the ability to reopen the Chouech Es Saida field in Tunisia as set out above. The base case forecasts, including when taking into account any reasonably possible downsides, indicate that the group will be able to operate within the existing loan facilities, should they remain available.

The Directors consider that the continued availability of the existing facilities represents a material uncertainty that may cast significant doubt on the ability of the Group to continue as a going concern. These condensed consolidated interim financial statements do not reflect the adjustments and classifications of assets, liabilities, revenues and expenses which would be necessary if the Group were unable to continue as a going concern.

(b)   Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting and do not include all the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2017.

These condensed consolidated interim financial statements were authorized for issuance by the Company's Board of Director's on November 13, 2018.

3.   Significant accounting policies

Except as described below, the condensed consolidated interim financial statements have been prepared following the same basis of measurement, functional currency and accounting policies and methods of computation as described in the notes to the consolidated financial statements for the year ended December 31, 2017.

Changes to accounting policies

a.     IFRS 15 Revenue from Contracts with Customers

Serinus has adopted IFRS 15 Revenue from Contracts with Customers ("IFRS 15") on January 1, 2018, using the modified retrospective transition approach. Management has reviewed its revenue streams and major contracts with customers using the IFRS 15 principles-based five step model and concluded that upon transition no adjustments were required to opening retained earnings as of January 1, 2018.

To affect the changes under IFRS 15, the Company's revenue recognition policy as disclosed under note 3 in the consolidated financial statements for the year ended December 31, 2017 has been revised as follows:

Revenue from the sale of crude oil, natural gas and natural gas liquids is recorded when performance obligations are satisfied. Performance obligations associated with the sale of crude oil are satisfied at the point in time when the products are delivered for lifting at the loading terminal and the volumes and prices have been agreed upon with the customer, which is the point at which the Company transfers control of the product to the customer. Performance obligations associated with the sale of natural gas and natural gas liquids are satisfied upon delivery at the respective concession delivery points, which is where the purchasers obtain control.

The Company recognizes revenue from contracts with customers based on variable prices benchmarked to Brent crude oil price index.

Under IFRS 15, revenue for crude oil sales is recognized once volumes are delivered for lifting at the loading terminal and the volumes and prices have been agreed upon with the customer rather than the prior requirement to recognize upon lifting. The presentation in the statement of operations of amounts previously recorded as "change in oil inventory" are now recognized as part of "petroleum and natural gas revenues". This has no impact on net earnings. Likewise, on the statement of financial position, commodity inventory net of advances for crude oil sales are now recognized as part of accounts receivable.

The impact on the condensed interim consolidated statement of financial position is as follows:

As at September 30, 2018	As reported in accordance with IFRS 15	Adjustments	Amounts without adoption of IFRS 15
Assets
Current assets
Accounts receivable	6,880	1,603	5,277
Commodity inventory	-	(4,495)	4,495
Total current assets	14,556	(2,892)	17,448
Total assets	$             125,775	$               (2,892)	$             128,667
Liabilities
Current liabilities
Advances for crude oil sales	-	(2,892)	2,892
Total current liabilities	23,834	(2,892)	26,726
Total liabilities	110,176	(2,892)	113,068
Shareholder's equity
Total shareholder's equity	15,599	-	15,599
Total liabilities and shareholder's equity	$             125,775	$               (2,892)	$             128,667

The impact on the condensed interim consolidated statement of operations and comprehensive earnings (loss) is as follows:

For the nine months ended September 30, 2018	As reported in accordance with IFRS 15	Adjustments	Amounts without adoption of IFRS 15
Revenues
Petroleum and natural gas revenues	$                 6,860	(1,031)	$                 7,891
Change in oil inventory	-	1,031	(1,031)
	6,860	-	6,860
Royalties	673	-	673
	6,187	-	6,187
Well incident recovery	3,639	-	3,639
Total operating expense	7,165	-	7,165
Finance expense
Net finance expense	3,072	-	3,072
Net loss before income taxes	(411)	-	(411)
Net loss and comprehensive loss	$               (2,187)	-	$               (2,187)

Disclosure requirements prescribed under IFRS 15 are provided in note 6.

 

b.    IFRS 9 Financial Instruments

Effective January 1, 2018, the Company has adopted IFRS 9 "Financial Instruments" ("IFRS 9"). IFRS 9 sets out requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement ("IAS 39").

On January 1, 2018, the Company:

·      Identified the business model used to manage its financial assets and classified its financial instruments into the appropriate IFRS 9 category;

·      Applied the 'expected credit loss' ("ECL") model to financial assets classified as measured at amortized cost.

The following table shows the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 as at January 1, 2018 for each class of the Company's financial assets and financial liabilities.

	Measurement Category
Financial Instrument	IAS 39	IFRS 9
Cash and cash equivalents	Loans and receivables	Amortized cost
Accounts receivable	Loans and receivables	Amortized cost
Restricted cash	Loans and receivables	Amortized cost
Accounts payable and accrued liabilities	Financial liabilities measured at amortized cost	Amortized cost
Long-term debt(a)	Financial liabilities measured at amortized cost	Amortized cost

^(a) Carrying value was adjusted by $1.0 million on adoption of IFRS 9

The classification and measurement of financial instruments under IFRS 9 did not result in any adjustments to the Company's opening retained earnings as at January 1, 2018 except for an adjustment for debt modifications as the Company renegotiated the repayment terms on its long-term debt, effective October 31, 2017. Under IFRS 9, the amortized cost of the financial liability must be recalculated as the present value of the estimated future contractual cash flows that are discounted at the original effective interest rate. The difference in the carrying amount and the calculated amount is recognized in profit and loss.

The Company calculated a modification loss of $0.4 million on the Senior Loan, and a modification gain of $1.4 million on the Convertible Loan. A net $1.0 million modification gain was recorded as a decrease to long-term debt and an increase to opening retained earnings as at January 1, 2018. The impact on the condensed interim consolidated statement of financial position is shown below:

As at:	December 31, 2017	Adjustments	January 1,  2018
Long-term debt	31,261	(1,034)	30,227
Deficit	(381,317)	1,034	(380,283)

The ECL model applies to the Company's receivables. As at September 30, 2018, all of the Company's trade accounts receivable were investment grade or government entities, and no trade receivables were outstanding for more than 90 days that were past due. The average expected credit loss on the Company's trade accounts receivable was nil.

To affect the changes under IFRS 9, the following revised policy has been applied to current period balances effective January 1, 2018:

The Company applied IFRS 9 retrospectively, but elected not to restate comparative information. As such the comparative information provided continues to be accounted for in accordance with the Company's previous accounting policy as disclosed in the annual consolidated financial statements for the year ended December 31, 2017.

Financial instruments are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are not offset unless the Company has the current legal right to offset and intends to settle on a net basis or settle the asset and liability simultaneously. The Company characterizes its fair value measurements into a three-level hierarchy depending on the degree to which the inputs are observable, as follows:

·      Level 1 inputs are quoted prices in active markets for identical assets and liabilities;

·      Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly; and

·      Level 3 inputs are unobservable inputs for the asset or liability.

Classification and measurement of financial assets

The initial classification of a financial asset depends upon the Company's business model for managing its financial assets and the contractual terms of the cash flows. There are three measurement categories into which the Company classified its financial assets:

·      Amortized costs:  includes assets that are held within a business model whose objective is to hold assets to collect contractual cash flows and its contractual terms give rise on specified dates to cashflows that represent solely payments of principal and interest;

·      Fair value through other comprehensive income ("FVOCI"): includes assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets, where its contractual terms give rise on specified dates to cash flows that represent solely payments of principal and interest; or

·      Fair value through profit or loss ("FVTPL"): includes assets that do not meet the criteria for amortized cost or FVOCI and are measured at fair value through profit or loss.

The Company has no financial assets measured at FVOCI or FVTPL.

Impairment of financial assets

The Company recognizes loss allowances for ECLs on it financial assets measured at amortized cost. Due to the nature of its financial assets, the Company measures loss allowances at an amount equal to the lifetime ECLs. Lifetime ECLs are the anticipated ECLs that result from all possible default events over the expected life of a financial asset. ECLs are a probability-weighted estimate of credit losses.

Classification and measurement of financial liabilities

A financial liability is initially classified as measured at amortized cost or FVTPL. A financial liability is classified as measured at FVTPL if it is held-for-trading, a derivative or designated as FVTPL on initial recognition.

The Company has no financial liabilities measured at FVTPL.

Recent accounting pronouncements

IFRS 16 Leases

In January 2016, the IASB issued IFRS 16 "Leases" ("IFRS 16"), which requires entities to recognize assets and lease obligations on the balance sheet. For lessees, IFRS 16 removes the classification of leases as either operating leases or finance leases, effectively treating all leases as finance leases. Certain short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements and may continue to be treated as operating leases. Lessors will continue with a dual lease classification model. Classification will determine how and when a lessor will recognize lease revenue and what assets would be recorded.

IFRS 16 is effective for years beginning on or after January 1, 2019 with early adoption permitted if IFRS 15 "Revenue From Contracts With Customers" has been adopted. The standard shall be applied retrospectively to each period presented or using a modified retrospective approach where the Company recognizes the cumulative effect as an adjustment to the opening retained earnings and applies the standard prospectively. The Company has completed identifying and gathering contracts that fall into the scope of the standard and is currently analyzing and calculating the impact of these contracts. The extent of the impact of the adoption of the standard has not yet been determined. The Company plans to apply IFRS 16 effective January 1, 2019. The Company intends to adopt the standard using the modified retrospective approach recognizing the cumulative impact of adoption in retained earnings as of January 1, 2019 and apply several of the practical expedients available such as low-value and short-term exemptions.

4.   Use of estimates and judgments

Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognized in the condensed consolidated interim financial statements are described in note 4 to the consolidated financial statements for the year ended December 31, 2017. There has been no change in these areas during the nine months ended September 30, 2018.

5.   Restricted cash

The Company has cash on deposit with the Alberta Energy Regulator of $1.1 million, as required to meet future abandonment obligations existing on certain oil and gas properties in Canada (December 31, 2017: $1.1 million). The fair value of restricted cash approximates the carrying value.

6.   Revenue

The Company sells its production pursuant to variable-price contracts with customers. The transaction price for these variable priced contracts is based on underlying commodity prices, adjusted for quality, location, or other factors depending on the contract terms. Under the contracts, the Company is required to deliver a variable volume of crude oil and natural gas to the contract counterparty. A total of 20% of the Company's annual oil production from the Sabria concession is required to be sold in the local market at an approximate 10% discount to the prices obtained under other crude oil contracts in Tunisia. Revenue is recognized when a unit of production is delivered to the counterparty and the performance obligations are satisfied at the variable prices benchmarked to Brent crude oil price index. The nature and effect of initially applying IFRS 15 on the Company's consolidated interim financial statements is disclosed in note 3. The disaggregation of revenue by major products and geographical market has been included in the segment note (see note 12).

The Company's revenue was entirely generated in Tunisia for the three and nine months ended September 30, 2018 and was based on Brent crude oil index pricing. Of total revenues, one customer represented 44%. The Company's contract with Shell is for a period of five years beginning 2016, while the Company's contracts for local sales in Tunisia are generally for the period of the concession.

As at September 30, 2018, the receivable balance related to contracts with customers, included within "accounts receivable" is $2.5 million (January 1, 2018 - $1.6 million).

 

7.   Property, plant and equipment

	Oil and gas interests	Other	Total
Cost or deemed cost:
Balance as at December 31, 2016	$           221,404	$               2,527	$           223,931
Capital expenditures	449	(28)	421
Transfers from exploration and evaluation	29,302	-	29,302
Change in decommissioning provision	2,935	-	2,935
Dispositions	-	(10)	(10)
Balance as at December 31, 2017	$           254,090	$               2,489	$           256,579
Capital expenditures	11,817	87	11,904
Change in decommissioning provision	1,044	-	1,044
Dispositions	(3,303)	-	(3,303)
Balance as at September 30, 2018	$           263,648	$               2,576	$           266,224
Accumulated depletion and depreciation:
Balance as at December 31, 2016	$          (148,654)	$              (1,507)	$          (150,161)
Depletion and depreciation	(1,670)	(196)	(1,866)
Dispositions	-	7	7
Impairment	(4,981)	-	(4,981)
Balance as at December 31, 2017	$          (155,305)	$              (1,696)	$          (157,001)
Depletion and depreciation	(1,150)	(157)	(1,307)
Dispositions	3,303	-	3,303
Balance as at September 30, 2018	$          (153,152)	$              (1,853)	$          (155,005)
Net book value
Balance as at December 31, 2017	$              8,785	$                   93	$             99,578
Balance as at September 30, 2018	$           110,496	$                  723	$           111,219

Future development costs associated with the proved plus probable reserves of $53.0 million (2017 - $53.0 million) were included in the depletion calculation for the Tunisia operating segment.

During the three months ended September 30, 2018, proceeds of $117 thousand were received for the disposition of raw materials inventory in Tunisia.

As at September 30, 2018, there were no impairment indicator triggers or triggers for reversals indicating the need for an impairment test, or a reversal, as such, no additional impairment or reversals have been recorded.

8.   Long-term debt

As at		September 30, 2018	December 31, 2017
Senior loan (1)		$               5,403	$               5,505
Convertible loan (2)		28,352	26,362
Debt-principal balance		33,755	31,867
Unamortized discounts and debt costs		(416)	(606)
Modification gain		(1,002)	-
		$             32,337	$             31,261
Debt principal balance
Current portion		$               5,516	$                       -
Long-term portion		$             26,821	$             31,261

⁽¹⁾ Includes loan principal of $5.4 million (December 31, 2017 - $5.4 million) plus accrued interest.

⁽²⁾ Includes loan principal of $20.0 million (December 31, 2017 - $20.0 million) plus accrued interest.

As at September 30, 2018, the Company had $32.3 million in total debt consisting of a $5.4 million Senior Loan plus accrued interest and a $20.0 million Convertible Loan plus accrued interest, net of unamortized discounts and costs, and a debt modification gain. The current portion of the long-term debt is $5.5 million as described below under the Senior Loan. Both loans are fully drawn and are secured by the Tunisian assets, pledges of certain bank accounts, shares of the Company's subsidiaries through which both Tunisian and Romanian concessions are owned, plus the benefits arising from the Company's interests in insurance policies and on-lending arrangements within the Serinus group of companies.

As at September 30, 2018, the Company was not in compliance with the consolidated debt to EBITDA covenant for the three months ended September 30, 2018. On September 28, 2018, the Company received a waiver from the EBRD formally waiving compliance with this covenant for the period ended September 30, 2018. The implication of this waiver is that the debt repayments will follow their original scheduled repayment terms and the bank will not be acting on its security as a result of the breach.

Under the terms of the loan agreements EBRD has the right on change of control of the Company to demand repayment of the debt. Given the AIM listing and equity raise, EBRD waived its right to require prepayment, provided that, as a result of the equity raise, Kulczyk Investments S.A. shareholding did not drop below 30% and there was no single investor who would hold more than 24.99% of the Company's share capital.

Senior Loan                                                                                               

The Senior Loan bears interest at a variable rate equal to LIBOR plus 6%. The Senior Loan is repayable in two instalments of $2.7 million each on March 31, 2019 and September 30, 2019. The Senior Loan is subject to a cash sweep which is calculated on a semi-annual basis occurring on December 31 and June 30 of each year. The cash sweep is calculated based on the Company's consolidated cash balance (excluding amounts held as restricted cash). If consolidated cash on these dates is in excess of $7 million, the difference is to be used to prepay the Senior Loan in inverse order of maturity until the outstanding loan balance is no greater than that under the original amortization schedule.

The Senior Loan agreement contains a prepayment clause whereby EBRD has the option to request prepayment in the event that the annual reserves coverage ratio for Tunisian reserves is less than 1.5, in an amount to bring the ratio back on side. With respect to December 31, 2017 reserves, EBRD has waived its right to require prepayment.

Convertible Loan

The Convertible Loan is repayable in four equal instalments on June 30, 2020, 2021, 2022 and 2023. Interest is accrued up to June 30, 2020 and will form part of the principal to be amortized over these repayment periods. Interest accruing subsequent to June 2020 will be paid annually with the principle repayments. The Convertible Loan bears interest at a variable rate equal to LIBOR plus a margin between 8% and 17%. The margin level is determined based on consolidated Tunisian and Romanian net revenues earned.

The Company can elect, subject to certain conditions, to convert all or any portion of the Convertible Loan principal and accrued interest outstanding for newly issued shares of the Company at the then current market price of the shares on the TSX or WSE, as required by the exchange rules. The EBRD can also at any time, and on multiple occasions elect to convert all or any portion of the Convertible Loan principal and accrued interest outstanding for newly issued shares of the Company at the then current market price of the shares on the TSX or WSE. The conversion amount is restricted such that the number of shares issued would result in EBRD holding a maximum of 5% of the issued share capital of the Company. Conditions to conversion include a requirement for substantially all of the Company's assets and operations to be located and carried out in the EBRD countries of operations. The Convertible Loan terms have not yet been updated with the EBRD to reflect the Company's listing on AIM and delisting from the TSX.

The conversion feature of the loan is based on market price, which would result in the issuance of a variable number of shares of the Company, and as a result, no value was allocated to the conversion option. The Convertible Loan is recorded as debt and classified as financial liabilities at amortized costs.

The Company can also repay the Convertible Loan at maturity in cash or in-kind, subject to certain conditions, by issuing new common shares valued at the then current market price of the shares on the TSX or WSE. The repayment amount is subject to a discount of approximately 10% in the event that the requirement for substantially all of the Company's assets and operations to be located and carried out in the EBRD countries of operations is not met at the date of repayment.

Covenants

Both loan agreements contain a number of affirmative covenants, including maintaining the specified security, environmental and social compliance, and maintenance of specified financial ratios. Financial covenants are calculated at the consolidated level, and there was relief from financial covenants until the quarter ended September 30, 2018. The consolidated debt to EBITDA covenant came into effect September 30, 2018, with a required maximum ratio of 10.0 times and from December 2018 onwards the required maximum ratio will be 2.5 times. The debt service coverage ratio becomes effective for the quarter ended December 31, 2018 with a minimum ratio of 1.3 times and is only applicable to the Senior Loan.

9.   Shareholder's capital

(a)   Authorized

The Company is authorized to issue an unlimited number of ordinary shares without nominal or pay value.

The Company has a total of 217,318,805 ordinary shares outstanding at September 30, 2018 (December 31, 2017 - 150,652,138).

On May 18, 2018, the Company issued 66,666,667 ordinary shares at £0.15 per common share, for gross equity proceeds of £10 million. Proceeds, net of issuance costs of $0.8 million, totaled $12.7 million.

(b)   Per share information

	Three months ended September 30		Nine months ended September 30
(000s, except per share amounts)	2018	2017	2018	2017
Net earnings loss - basic	$            (570)	$          (7,043)	$      (2,187)	$          (9,111)
Weighted average shares outstanding Basic and dilutive	217,319	150,652	183,863	136,139
Net earnings (loss) per share - basic and dilutive	$                   -	$             (0.05)	$         (0.01)	$           (0.07)

⁽¹⁾ For the nine months ended September 30, 2018, there were 4.2 million weighted average stock options exercisable that were excluded from the calculation as the impact was anti-dilutive (For the nine months ended September 30, 2017 - 0.2 million).

(c)   Stock options

Subsequent to September 30, 2018, the Company converted its options from a TSX plan to an AIM plan and converted the exercise price on all outstanding options to Pound Sterling based on the exchange rate at the date of continuance.

A summary of the changes to the option plan during the nine months ended September 30, 2018, are presented below:

	USD denominated options		CAD denominated options
	Number of options	Weighted average exercise price (USD)	Number of options	Weighted average exercise price (CAD)
Balance as at December 31, 2017	67,000	$                  3.68	9,933,000	$                  0.36
Expired	(20,000)	3.14	-	-
Forfeited	-	-	(1,043,000)	0.37
Balance as at September 30, 2018	47,000	$               3.92	8,890,000	$               0.36

The following tables summarize information about the USD and CAD options outstanding as at September 30, 2018:

USD denominated options				CAD denominated options
Exercise price (USD)	Options outstanding	Options exercisable	Weighted average contractual life (years)	Exercise price (CAD)	Options outstanding	Options exercisable	Weighted average contractual life (years)
$3.01 - $4.00	12,000	12,000	0.1	$0.30 - $1.00	8,840,000	4,080,000	4.2
$4.01 - $5.00	35,000	35,000	0.1	$1.01 - $2.50	50,000	50,000	1.1
	47,000	47,000	0.1		8,890,000	4,130,000	4.2

10. Other expenses and income

(a)   Well incident recovery

In December 2017, during routine operations to bring the Moftinu 1001 well out of suspension in preparation for future production, an unexpected gas release occurred and subsequently ignited.

The Company incurred a total of $4.0 million to bring the well under control which was fully provided for at year end 2017. The Company submitted an interim insurance claim in Q1 2018 and has received payment for the full amount of $2.6 million. The Company submitted its second interim insurance claim in Q3 2018 and recognized the proceeds of $1.0 million as a recovery in the statement of operations during the three months ended September 30, 2018. The Company received cash proceeds of $0.8 million in Q3 2018, with the remaining $0.2 million as a receivable on the balance sheet, which was received subsequent to September 30, 2018.

(b)   Transaction costs

Transaction costs include costs associated with the continuance of the Company from Alberta, Canada, to Jersey, Channel Islands, and includes the legal, accounting and due diligence costs associated with listing its shares for trading on the AIM.

11. Commitments and contingencies

Future payments for the Company's commitments as at September 30, 2018 are below. A commitment is an enforceable and legally binding agreement to make a payment in the future for the purchase of goods and services. These items exclude amounts recorded on the balance sheet.

	Within 1 Year	2-3 Years	4-5 Years	Thereafter	Total
Operating leases	$               608	$               616	$                     -	$                   -	$            1,224
Gas plant - Romania (1)	378	-	-	-	378
Debt (2)	5,403	14,176	14,176	-	33,755
Total	$            6,389	$          14,792	$          14,176	$                   -	$          35,357

⁽¹⁾ Contractual obligation on the construction of the gas processing facility.

⁽²⁾ Debt obligations presented exclude deferred financing costs and include accrued interest.

The Company's commitments are all in the ordinary course of business and include the work commitments for Tunisia and Romania.

Tunisia

The Tunisian state oil and gas company, ETAP, has the right to back into up to a 50% working interest in the Chouech Es Saida concession if, and when, the cumulative crude oil sales, net of royalties and shrinkage, from the concession exceeds 6.5 million barrels. As at September 30, 2018, cumulative liquid hydrocarbon sales net of royalties and shrinkage was 5.2 million barrels.

Romania

The work obligations pursuant to the Phase 3 extension, approved on October 28, 2016, include the drilling of two wells, and, at the Company's option, either the acquisition of 120 km2 of new 3D seismic data or drill a third well. The two firm wells must be drilled to minimum depths of 1,000 and 1,600 meters respectively, and if so elected, the third well to a depth of 2,000 meters. The term of the Phase 3 extension is for three years, expiring on October 28, 2019. On May 5, 2017, the Company signed a letter of guarantee with the National Agency for Mineral Resources in Romania for up to $12 million to cover the necessary expenses for the fulfillment of the minimal commitments for the Phase 3 extension. This guarantee was made net of any amounts already spent by the Company since the time of the extension's approval. The Company has completed the work obligations for drilling the first two wells, the Moftinu-1007 and Moftinu-1003.

Office space

The Company has a lease agreement for office space in Calgary, Canada, which expires on November 30, 2020, and an office lease agreement in Bucharest, Romania, which expires on August 27, 2020. Operating leases on office buildings are in the ordinary course of business. The Company has the option to renew or extend the leases on its office buildings with new lease terms to be based on current market prices.

12. Segment information

The Company's reportable segments are organized by geographical areas and consist of the exploration, development and production of oil and natural gas in Romania and Tunisia. The Corporate segment includes all corporate activities and items not allocated to reportable operating segments and therefore includes Brunei.

 

	Romania	Tunisia	Corporate	Total
As at September 30, 2018
Total assets	$       45,963	$       75,178	$         4,634	$     25,775
For the three months ended September 30, 2018
Petroleum and natural gas revenues
Crude oil	$                  -	$          ,594	$                  -	$         1,594
Natural gas	-	573	-	573
	-	2,167	-	2,167
Royalties	-	218	-	218
	-	1,949	-	1,949
Well incident recovery	1,047	-	-	1,047
Operating expenses
Production expenses	-	686	5	691
General and administrative	-	-	816	816
Share-based compensation	-	-	128	128
Gain on disposition	-	(117)	-	(117)
Transaction costs	-	-	27	27
Depletion and depreciation	2	385	32	419
Finance (income) expense
Interest expense and accretion	7	242	955	1,204
Foreign exchange (gain) loss	(339)	216	24	(99)
Net earnings (loss) before income taxes	1,377	537	(1,987)	(73)
Current income tax expense	-	1,668	-	1,668
Deferred income tax recovery	-	(1,171)	-	(1,171)
Net earnings (loss)	$          1,377	$               40	$        (1,987)	$          (570)
Capital expenditures (1)	$          4,544	$              (15)	$                 1	$         4,530
For the nine months ended September 30, 2018
Petroleum and natural gas revenues
Crude oil	$                  -	$          4,851	$                 -	$         4,851
Natural gas	-	2,009	-	2,009
	-	6,860	-	6,860
Royalties	-	673	-	673
	-	6,187	-	6,187
Well incident recovery	3,639	-	-	3,639
Operating expenses
Production expenses	-	1,963	46	2,009
General and administrative	-	-	2,225	2,225
Share-based compensation	-	-	374	374
Gain on disposition	-	(117)	-	(117)
Transaction costs	-	-	1,367	1,367
Depletion and depreciation	5	1,177	125	1,307
Finance (income) expense
Interest expense and accretion	33	724	2,542	3,299
Foreign exchange (gain) loss	(840)	404	209	(227)
Net earnings (loss) before income taxes	4,441	2,036	(6,888)	(411)
Current income tax expense	-	2,076	2	2,078
Deferred income tax expense	-	(302)	-	(302)
Net earnings (loss)	$          4,441	$             262	$        (6,890)	$       (2,187)
Capital expenditures (1)	$       11,850	$             (31)	$               85	$       11,904

⁽¹⁾ Capital expenditures exclude the impact of changes in non-cash working capital.

	Romania	Tunisia	Corporate	Total
As at December 31, 2017
Total assets	$       32,353	$        5,852	$         6,766	$     14,971
For the three months ended September 30, 2017
Petroleum and natural gas revenues
Crude oil	$                 -	$            298	$	$           298
Natural gas	-	84	-	84
	-	382	-	382
Royalties	-	39	-	39
	-	343	-	343
Operating expenses
Production expenses	-	578	7	585
General and administrative	-	-	570	570
Share-based compensation	-	-	240	240
Transaction costs	-	-	103	103
Depletion and depreciation	1	112	36	149
Impairment	-	4,981	-	4,981
Finance (income) expense
Interest expense and accretion	21	169	790	980
Foreign exchange (gain) loss	19	45	(195)	(131)
Net earnings (loss) before income taxes	(41)	(5,542)	(1,551)	(7,134)
Current income tax expense (recovery)	-	(382)	1	(381)
Deferred income tax expense (recovery)	-	290	-	290
Net earnings (loss)	$             (41)	$       (5,450)	$       (1,552)	$      (7,043)
Capital expenditures (1)	$         3,322	$              13	$	$        3,335
For the nine months ended September 30, 2017
Petroleum and natural gas revenues
Crude oil	$                 -	$         3,751	$                -	$        3,751
Natural gas	-	923	-	923
	-	4,674	-	4,674
Royalties	-	484	-	484
	-	4,190	-	4,190
Operating expenses
Production expenses	-	3,443	35	3,478
General and administrative	-	-	2,090	2,090
Gain on disposition	-	-	(2,179)	(2,179)
Share-based compensation	-	-	456	456
Transaction costs	-	-	103	103
Depletion and depreciation	4	1,267	108	1,379
Impairment	-	4,981	-	4,981
Finance (income) expense
Interest expense and accretion	4	509	2,201	2,714
Unrealized loss on investments	-	-	13	13
Foreign exchange (gain) loss	(41)	189	(303)	(155)
Net earnings (loss) before income taxes	33	(6,199)	(2,524)	(8,690)
Current income tax expense	-	507	2	509
Deferred income tax expense (recovery)	-	(88)	-	(88)
Net earnings (loss)	$              33	$       (6,618)	$       (2,526)	$       (9,111)
Capital expenditures (1)	$         5,229	$            417	$                -	$        5,646

⁽¹⁾ Capital expenditures exclude the impact of changes in non-cash working capital.

 

END

 

 

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