Preliminary Results
Cardinal Resources plc
02 July 2007
CARDINAL RESOURCES PLC ANNOUNCES
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006
MEASURES TO FUND WORKING CAPITAL REQUIREMENTS
COMPLETION OF THE GAS GATHERING AND SEPARATION FACILITY
LONDON - Saturday, 30 June 2007
Cardinal Resources plc (AIM:CDL) ('Cardinal' or 'the Company'), an
independent oil and gas exploration and production company, today
announces preliminary results for the year ended 31 December 2006;
measures to fund it's working capital requirements for the forthcoming
year and completion of the gas gathering and separation facility.
Hares Group Holdings GmbH ('Hares Holdings'), the parent company of Hares
Group Ltd ('Hares Group'), has today signed a commitment letter (the
'Hares Commitment Letter') to fund the working capital requirements of
Cardinal in case of any shortfall over the period ending 1 July 2008 (the
'Commitment Period'). Any amounts funded will, subject to any required
shareholder and other approvals first being obtained, be satisfied by
issuing equity at the closing of an equity offering contemplated in 2007,
or failing that in cash in equal six monthly installments commencing on 1
February 2009 The maximum number of Cardinal ordinary shares which may be
issued to Hares Holding in satisfaction of the commitment is capped so
that any shares issued would not at any time require Hares Holding to make
a mandatory offer for the remaining Cardinal shares pursuant to Rule 9 of
the City Code on Takeovers and Mergers.
Hares Group is presently a 19.2% shareholder in Cardinal. Hares Group
first became a significant shareholder when Cardinal completed the
acquisition of Rudis Drilling Company from Hares Group on 27 October 2005.
Misbah Al Droubi, Chief Executive of the Hares Group, has been Director of
Cardinal since that date.
Silver Point Capital and Cardinal are in discussions to restructure the
bridge PIK notes first issued on 23 December 2005.
BACKGROUND TO THE REQUIREMENT FOR ADDITIONAL WORKING CAPITAL
A potential shortfall in working capital in the forthcoming year arises as
follows:
1. JAA gas sales.
A cash flow shortfall of approximately $360,000(1) per month arising from
the build up of stock for future sale was announced by Cardinal on 8 May
2007 together with proposed measures to rectify the problem. The measures
proposed will not now be completed in time to enable quarterly receipt of
sales proceeds from JAA gas sales and this has created an additional
working capital requirement.
2. The cost of completing the Gas gathering and separation facility has
exceeded budget.
Cardinal has completed the Gas gathering and separation facility on time
and has linked the Gas gathering and separation facility in to the
existing Ukrainian pipeline ahead of schedule. The Gas gathering and
separation facility is presently undergoing Government health and safety
checks prior to full commissioning and receipt of final approval to
commence gas sales delivered via the pipeline at free market prices.
In addition to working capital shortfalls arising from JAA gas sales and
the cost of the Gas gathering and separation facility, Cardinal has
incurred significant exceptional general and administrative ('G&A')
expenditures since year end in:
a. responding to the request from a shareholder for an Extraordinary General
Meeting which was held on 27 March 2007;
b. negotiating an outsourcing agreement to provide services to a third party
which would if completed reduce G&A expenditures and related due diligence
costs to be reimbursed by that third party if signed; and
c. seeking a resolution to these financing matters by way of the proposed
financing package still under discussion
On 6 February 2007, Cardinal forecast projected cost savings targeted at
$1.5 million to $2 million from actual G&A expenses incurred in 2006.
Progress has been made towards these targets but these targets have not
yet been met.
The impact of the build up of stock of the Company's JAA based gas
production resulted in the Company breaching its financial covenants for
the first quarter of 2007. The Company's ability to satisfy its various
covenants with Silver Point are appraised retrospectively on a quarterly
basis. As previously announced on 8 May 2007. Silver Point Capital has
waived covenant breaches where necessary to date. Such covenant breaches
are technical breaches rather than payment breaches because the borrowing
is structured by way of Payment in Kind Note. If a technical covenant
breach does not receive a further waiver from Silver Point Capital (for
example whilst negotiations continue), Silver Point Capital has the choice
as to whether or not to issue a formal notice of default before any action
would arise from such default. The Directors can give no assurances that
any future covenant breaches will be similarly waived if required. Or that
a notice of default will not subsequently be issued. The next covenant
review will take place in July 2007.
PROPOSED MEDIUM TERM FINANCING PACKAGE UNDER NEGOTIATION
In recent months, Cardinal has been attempting to conclude a package of
financing measures that would, in the opinion of its Directors, make it
attractive for investors to provide additional equity finance either by
way of institutional private placement or underwritten rights issue. The
Directors have always considered it an easier task to raise such equity
finance once production of gas via the new Gas gathering and separation
facility has commenced and sales can be reported. This is a critical time
for the Company because sales at free market prices of gas delivered via
the new Gas gathering and separation facility being commissioned are
expected to commence in forthcoming weeks.
In an attempt to respond to previously stated shareholder concerns the
proposed financing package still being negotiated includes a reduction in
the large number of shareholder warrants outstanding in return for the
issue of equity (which would be a related party transaction requiring a
Directors' fairness opinion in due course), a reduction in the coupon on
the Payment In Kind Notes first issued on 23 December 2005 and an issue of
equity by way of rights or placing to be determined following consultation
with Cardinal's largest shareholders to obtain support which would be
required at an Extraordinary General Meeting ('EGM') (the 'Medium Term
Financing Package').
In order to facilitate a future equity offering and provide for
flexibility in pricing, the Company intends to seek approval of
shareholders at an EGM for a Capital Reorganisation which, if approved by
both shareholders and the Courts, would reduce the nominal value of its
ordinary shares to 1p.
It is Cardinal's present intention so far as is practicable, to obtain an
underwriter or underwriters to an equity issue and for all current
Cardinal shareholders wishing to participate in any equity offering to be
offered the opportunity to subscribe for additional shares as part of this
equity placement or rights issue.
The Hares Commitment Letter is regarded by the Cardinal Board as a vital
short term measure to provide for sufficient working capital whilst the
proposed Medium Term Financing Package is put in place.
Cardinal intends to carry out an equity fundraising as soon as practicable
in order to solidify its working capital position and enable Cardinal to
carry out its work programme in Ukraine.
JAA GAS SALES
On 8 May 2007 Cardinal announced that, together with its Joint Activity
Agreement ('JAA') partners, Ukrnafta and Ukrgaz, it is continuing to place
all production from both the RC Field JAA gas sales and the BC Field JAA
429 into storage for future sale until satisfactory clarification is
received in relation to the scope and implementation of a resolution of
The Cabinet of Ministers of Ukraine which amended an existing regulation
on fixed pricing of gas sales by state-owned companies. Free market prices
are approximately 2 to 3 times those of controlled prices. This problem
was first explained in a Cardinal press release dated 13 February 2007. In
the announcement of 8 May 2007 Cardinal explained that this affects
approximately 80 per cent. of Cardinal's current oil and gas production by
volume and that monthly sales and EBITDA/cash flow have been reduced by
approximately US$450,000 and $360,000 respectively (See note 1).
To resolve the issue Cardinal announced that it was:
• negotiating its own direct marketing arrangements for RC Field JAA gas
sales and BC Field JAA 429; and
• continuing to seek clarification on implementation of the amended
regulation.
Cardinal now reports that no further written clarification has been
received and, despite continuing efforts, it has not yet been possible to
conclude agreement on the direct marketing arrangements proposed.
The sale of Cardinal's JAA gas at free market prices will not now take
place before 30 June 2007 and this will result in a significant shortfall
in cash flow for a second quarter in a row. As presently drafted, the
legislation restricting the sales price of JAA gas applies only to the
2007 budget year for Ukraine.
Following the delay until the end of September 2007 of proposed renewed
elections in Ukraine it has proven difficult to reach certainty of
decision making amongst state influenced entities and further delays may
now be encountered before satisfactory resolution of this matter is
concluded.
Cardinal continues to believe that the decision to store JAA gas
production, although impacting on cash flow and working capital in the
short term, will be of benefit to the Company once clarification is
received and arrangements are made to sell the gas at the higher free
market price.
Cardinal is continuing to concentrate its present development efforts and
current production increase programme on licences that it owns 100% and
operates, until the economics of JAA well activities are clarified.
THE COST OF COMPLETING THE GAS GATHERING AND SEPARATION FACILITY
Cardinal has completed the Gas gathering and separation facility on time
and has linked the Gas gathering and separation facility in to the
existing Ukrainian pipeline ahead of schedule. The Gas gathering and
separation facility is presently undergoing Government health and safety
checks prior to full commissioning and receipt of final approval to
commence gas sales delivered via the pipeline at free market prices.
Cardinal has encountered significant capital expenditure cost overruns,
estimated by the Directors at more than 50 per cent. of budget, in
completing the Gas gathering and separation facility and tie in of wells
in the quest to generate revenue on time and meet targets. Cost overruns
have been exacerbated by the late submission of invoices from local
contractors and the high volume of disputed invoices now received. It has
recently become apparent to the Directors that many of these invoices do
not match the authorisations for expenditure granted. In completing the
Gas gathering and separation facility, the role of contractors in
supplying parts, equipment and construction services to Cardinal has been
vital. In a high inflationary oil and gas industry environment for such
goods and services and with a limited number of good suppliers operating
in Ukraine, demand has exceeded supply. Cardinal is attempting to resolve
the high volume of disputed invoices amicably with its suppliers.
EFFECT ON PREVIOUS PRODUCTION FORECASTS
Cardinal first made a production forecast of 3,000 boepd equivalent run
rate by 31 December 2007 on the basis of certain stated assumptions on 13
February 2007 and repeated this forecast most recently with amendments on
8 May 2007. The Hares Commitment Letter provides for the completion of the
Gas gathering and separation facility and the tie in of completed wells.
Because of the Company's and its JAA partners decision to store rather
then sell all JAA production so far in 2007 and cost overruns in
completing the Gas gathering and separation facility and tie in of wells,
the completion of workovers of the three remaining wells (BC#7, BC#9 and
BC#17) which were scheduled for completion in the second half of the year
in reaching the previous target now is subject to additional funding. In
addition, land permit allocations(3) in respect of well BC#7 which
consents were referred to as outstanding in Cardinal's operational update
of 8 May 2007, have yet to be received. However, Cardinal believes that it
has identified the source of water ingress to well BC#111 and the Hares
Commitment Letter permits the capital expenditure necessary to complete
the additional workover and tie of well BC#111 to the Gas gathering and
separation facility. The Directors believe that, subject to successful
completion, additional production from well BC#111 should make up for any
shortfall arising from well BC#7 if consents on well BC#7 are further
delayed.
Without additional funding the Company's year end production forecast is
reduced to a run rate of 2,200 boepd equivalent by 31 December 2007 on the
bases and assumptions set out in Note(2) below. Of this total, present
production amounts to approximately 800 boepd of which approximately 80
per cent comes from JAA gas being placed into storage.
The Directors of Cardinal believe that this revised forecast could yet be
exceeded at 31 December 2007 and the original target of 3,000 boepd
attained if finance is raised by the end of the third quarter 2007 to
permit the completion of the remaining three workovers (BC#7, BC#9 and BC#
17) and a second compressor is available for purchase and commissioning on
site before year end.
OVERALL PROGRESS AGAINST STRATEGIC OBJECTIVES
On 22 December 2006, Cardinal restated its two key strategic objectives
as:
1. completion of the Rudis workovers and drilling programme together with tie
in of the renewed wells to the new Gas gathering and separation facility
and existing Ukrainian pipeline. This objective is expected to be largely
achieved with commissioning of the Gas gathering and separation facility
and commencement of sales in the next few weeks, although the raising of
finance for the last three workovers remains a pressing objective; and
2. re-instatement of the Company's net profit interest in the RC Field to 45.
per cent. (the 'RC re-instatement'). $14 million of finance remains
available and undrawn under the Silver Point Bridge PIK Note facility for
this purpose but progress in reaching agreement with key parties is not
now expected until some time after the result of the proposed renewed
elections in Ukraine at the end of September 2007. This remains an
objective.
TERMS OF THE HARES COMMITMENT LETTER
To overcome the short term cash shortfall, the Cardinal has obtained a
binding commitment to provide working capital from Hares Holding , the
parent company of Hares Group, a substantial shareholder of Cardinal. No
funds have yet been requested or provided pursuant to this commitment. The
main terms of the working capital commitment are:
• it is available until 1 July 2008;
• Hares will make advances as and when required by Cardinal up to an
aggregate maximum of $5 million;
• it is interest free and any capital advances will be repaid on completion
of an equity fundraising by Cardinal no later than 1 July 2008 with any
balance outstanding on 1 July 2008 that is not satisfied in Cardinal
shares being repaid in cash in six equal monthly instalments commencing on
1 February 2009;
• Cardinal will pay Hares Holding a commitment fee of $225,000 on the
earlier of a successful completion of an equity fund raising prior to 1
July 2008 or pursuant to the payment schedule referred to above; and
• The maximum number of Cardinal ordinary shares which may be issued to
Hares Holding in satisfaction of the commitment is capped so that any
shares issued would not at any time require Hares Holding to make a
mandatory offer for the remaining Cardinal shares pursuant to Rule 9 of
the City Code on Takeovers and Mergers.
The Hares Commitment Letter may be terminated by Hares Holding if:
• a change of control of Cardinal occurs, with control for this purpose
being a person or persons acting in concert holding more than 50% of
Cardinal's ordinary share capital; or
• Robert Bensh is no longer serving in an executive capacity with Cardinal.
The continued availability of this working capital commitment is one of
the assumptions the directors have relied upon in their assessment that
the group can continue in operation as a going concern until at least 30
June 2008.
SILVER POINT CAPITAL DISCUSSIONS
Cardinal is currently in discussions with Silver Point Capital to
restructure the Bridge PIK note financing first issued on 23 December 2005
including addressing concerns previously expressed by shareholders.
In this context, Silver Point and its external consultants are currently
reviewing the Company's cost structures, business processes and future
development plans.
DIRECTORS' FAIRNESS OPINION ON HARES COMMITMENT LETTER
Hares Holdings is a related party of the Company as defined by the AIM
Rules for Companies. The Hares Commitment Letter is regarded by the
Cardinal Board as a vital short-term measures to provide for sufficient
working capital until such time as the proposed Medium Term Financing
Package is put in place or other sources of capital are obtained and to
enable signature of the 2006 Annual Report and Accounts. Taking account of
the circumstances described in this press announcement, the Directors of
Cardinal (with the exception of Misbah Al Droubi given his relationship
with Hares Holdings in respect of the Hares Commitment Letter) consider,
having consulted with its nominated adviser, that the terms of the Hares
Commitment Letter are fair and reasonable insofar as shareholders are
concerned.
FINANCIAL REVIEW
Last year proved to be a challenging year for Cardinal but at the same
time a year of transition and progress. The focus was on integration and
consolidation of the business; steady progress was made throughout the
year across all business areas. The efforts were concentrated on the 100%
owned and operated licence areas and successfully integrating Rudis
Drilling Company and the team into the Cardinal Group. The result is
measured by the work programme initiated during the year which is expected
to substantially increase production in the near future. Certain corporate
changes were made and overlapping costs and procedures were eliminated to
make the management structure more transparent and effective. The Group
now has an integrated Western and Ukrainian operations and production team
in place.
A major problem has arisen regarding Cardinal's JAA gas sales which may
have become subject to a mandatory price cap in January 2007. Currently
the produced JAA gas is being placed in storage, but this decision,
although impacting on cash flow and working capital in the short term,
will be of benefit to the Company once clarification is received and
arrangements are made to sell the gas at the higher free market price. The
political situation in Ukraine has been unfavourable and the restrictions
imposed on the JAA gas sales in the past six months have undermined the
cash flow position of the Company.
To offset this issue and reduce such risks in the future Cardinal has
concentrated its financial and human resources on the development of the
Bilousivsko-Chornukhinska ('BC'), North Yablunivska ('NY') and Dubrivska
('DB') licence areas, which the Company 100% owns, controls and operates.
The Company has just completed the construction of the gas gathering and
separation facility on schedule in the BC licence area.
It is now mechanically ready to receive and process gas which will be
free from any price restrictions and are expected to be sold at free
market prices. The inspection, function testing and commissioning of
the gas gathering and separation facility which are necessary in order
to obtain authorisation to start selling gas into the regional gas grid,
began on 26 June 2007. The process of bringing the wells on line will
begin after the commissioning process is completed.
The Group will continue to focus on the low risk/high value targets. This
will include using 3D seismic surveys to expand beyond the areas
successfully drilled during 2006. Cardinal stays committed to its core
objective of developing the current asset base and aggregating
under-developed oil and gas properties in Ukraine and comparable regions
that can be developed using modern equipment, technology and the expertise
of the operational and management team.
OUTLOOK FOR 2007
The immediate tasks ahead are:
• Renewal of covenant waivers from Silver Point Capital which are being
reviewed during the latter part of July 2007 as soon as possible following
review;
• The commencement of free market gas sales from the tie in of wells via the
new Gas gathering and separation facility after it is commissioned in
forthcoming weeks;
• Completion of more permanent Medium Term Financing arrangements including
an equity fundraising to solidify the Company's working capital position
and enable Cardinal to carry out its work programme in Ukraine;
• Attainment of the G&A cost savings previously forecast of between $1.5
million to $2.0 million from actual G&A incurred in 2006;
Followed by:
• A solution to the JAA gas sales issue to enable recommencement of RC Field
JAA gas sales and BC Field JAA 429 gas sales from both storage and future
production. This may not now prove possible until some time after the
proposed elections in Ukraine currently scheduled for the end of September
2007.
• Attainment of the 2,200 boepd production forecast on the bases and
assumptions set out above. The Directors of Cardinal believe that this
revised forecast could yet be exceeded at 31 December 2007 and the
original target of 3,000 boepd attained if finance is raised by the end of
the third quarter 2007 to permit the completion of the remaining three
workovers (BC#7, BC#9 and BC#17) and a second compressor is available for
purchase and commissioning on site before year end.
• Interpretation of completed 3-D seismic surveys over 100% controlled
licence areas and completion and interpretation of more 3-D seismic
surveys once finance is available;
• Re-instatement of the Company's net profit interest in the RC Field from
14,9 per cent. to 45 per cent. (the 'RC re-instatement'). $14 million of
finance currently remains available and undrawn under the Silver Point
Bridge PIK Note facility for this purpose. The Company remains committed
to resolving the dispute. All the options are being considered with regard
to ensuring a resolution of the reinstatement, including Cardinal's
contractual right to initiate arbitration in Stockholm. The political
situation in Ukraine has been unstable and the progress in resolving the
issue has been disappointing to date. Elections in Ukraine are delayed
until 30 September 2007; the aftermath of previous elections and changes
in management of State influenced entities with which Cardinal has Joint
Activity Agreements has led to delays in decision making.
REVIEW OF THE BUSINESS
In the year under review, Cardinal has been transformed into a company
with a portfolio of assets and an ambitious development drilling programme
aimed at increasing oil & gas reserves and production.
The successful integration of the acquired assets of Rudis Drilling
Company, the completion of the well swap and the raising of capital have
all been major achievements and enabled the Company to continue its
development programme:
• Well Swap with joint activity partner, Ukrgazvydobuvannya (Ukrgaz) was
completed in March 2006 which increased Cardinal's ownership and
operational control of the BC licence area. Under the new swap agreement
with Ukrgaz Cardinal increased its working interest in six undeveloped
wells previously in JAA #429 from 50% to 100%. Cardinal also obtains 50%
of one additional workover candidate in the NY licence area.
• The Company completed on schedule a 25km(2) 3D seismic survey in Dubrivska
licence area in the first quarter of 2007 that increased the probability
of additional drilling locations.
• Extended exploration and pilot production licences on BC, NY and DB
licence areas for a five year period until November 2011.
The BC #111 well was reclaimed and the works to shut off the water influx
are planned for the third quarter.
• The Chornukhy #3A well in the BC licence area was drilled and successfully
completed with the tested flow rate of 675 boepd. It was drilled using a
Ukrainian 'hybridized' drilling rig, developed by Cardinal, which reduced
the drilling time from a forecasted eight months to 76days.
• The NY #4 well was suspended at 1,800 meters inside casing. The well now
awaits completion of a 35 km(2) 3-D seismic survey over the NY licence
area. The 3-D survey will confirm the bottom hole location for the #4
well, further delineate six existing locations and likely identify
additional potential drilling locations. Completion of a 3-D seismic
survey would take approximately four months and is presently subject to
availability of finance.
FINANCIAL REVIEW
2006 2005
(restated)
$'000 $'000
Operating loss (7,850) (8,625)
Depreciation/depletion charge 673 196
Share of joint venture 631 1,173
EBITDA (including non-recurring costs) (6,546) (7,256)
Non-recurring costs 25 1,976
EBITDA (excluding non-recurring costs) (6,521) (5,280)
Group turnover, including the Company's share of joint venture at the
Bytkiv Field, was $8.0million, an increase of 74% over turnover in 2005,
reflecting higher production and prices for the year. EBITDA for the year
improved to a loss of $6.5million from a restated loss of $7.3 million in
2005. Excluding non-recurring costs, EBITDA was a loss of $6.5million,
compared to a restated loss of $5.3million in 2005, reflecting a
significant increase in unit operating costs due to higher production
taxes, rentals and other G&A expenses.
$17.5million financing was secured in December 2006 from Silver Point
Capital (''SPC'') to provide additional working capital for Cardinal's
operational development programme. Cash at bank and on hand amounted to
$14.2million as a result of proceeds from the additional SPC financing. In
addition, $14.1million of the SPC financing remains undrawn at year end.
Liabilities increased to $44.0million primarily as a result of the
additional SPC funding.
Average gas realisation for the Group in 2006, including VAT, was $3.10/
Mcf, an uplift of 48% over the average gas price in 2005. Oil and
condensate prices averaged almost $59/Bbl, an increase of over 31% for the
year. Gas sales represented approximately 58% of total revenues in 2006,
up from55% in 2005. Fixed assets increased by 72% to $33.0 million as a
result of drilling and workover activities on the Rudis assets during the
year.
Robert J Bensh Chairman and CEO of Cardinal comments:
'The political situation in Ukraine has been unfavourable and the
restrictions imposed on the JAA gas sales in the past six months have
undermined the cash flow position of the Company. We are grateful for the
continued support of our major shareholder Hares that will help to
alleviate the JAA gas sales issue and for the support of Silver Point
Capital. We see these short term financing measures as vital in achieving
our ultimate goal. We have completed the construction of the gas gathering
and separation facility and the free from price restrictions production
should improve the Company's position in the near future.'
Misbah Al Droubi CEO of Hares Group: 'We have committed to provide
Cardinal with working capital as and when required. We fully support the
Company's development plans and remain confident that Cardinal's highly
skilled and dedicated management team will grasp the opportunity to build
on strengths, expand the business and create value for all shareholders.'
Notes:
(1) Estimates of monthly sales, and EBITDA/cash flow by the Directors made
on 8 May 2007 were (and are still) based upon March 2007 production and
December 2006 approximate realised prices and costs.
(2) The table set out below summarises the Company's revised expected
production profile for the second half of 2007 and is based on the
following assumptions: (i) current production rates of approximately 800
boepd from existing producing wells continue at the same rate (of which
approximately 80% relates to JAA gas sales presently being placed in
storage); (ii) successful commencement of Cardinal's new gas processing
plant and tie-in to existing Ukrainian pipelines; and either (iii) receipt
of land permit allocations(3) in respect of well BC#7; or (iv) successful
completion of well BC#111 to prevent water ingress and tie in to the Gas
gathering and separation facility. Production estimates are based upon (v)
the Company's assessment of recent test results of wells ready to tie into
production; and (vi) the Company's interpretation of historic records of
test results from the early 1980s for workover wells drilling and or to be
drilled. A number of factors, such as technical difficulties in completion
and or tie-in could cause actual production to differ materially from
current expectations. The expected uplift in daily production does not
include any additional uplift that could arise in the event that Cardinal
consummates the RC re-instatement
Projected Net Production Rate at 31 December 2007 boepd (000s).
May 2007 run rate 0.8
Ready to tie-in 1.4
---
Expected December 2007 run rate 2.2
---
The Directors of Cardinal believe that this revised forecast could yet be
exceeded at 31 December 2007 if finance is raised before the end of the
third quarter 2007 to permit the completion of the remaining three workovers
(BC#7, BC#9 and BC#17) and a second compressor is available for purchase and
commissioning on site before year end.
(3) On 19 December 2006 Ukraine adopted amendments to the Land Code, which
are effective for 2007. These amendments (specifically, Article 15 of the
Code) forbid any changes of the purpose of use of agricultural lands such
that agricultural land should remain as agricultural land, and can not be
used for other purposes, other than social needs. These amendments will
not be effective after 31 December 2007 unless extended
(4) This press release contains certain forward-looking statements. These
statements relate to future events or future performance and reflect
management's expectations regarding Cardinal's growth, results of
operations, performance and business prospects and opportunities. Such
forward-looking statements reflect the Directors' current beliefs, are
based on information currently available to the Directors and are based on
reasonable assumptions as of this date. No assurance, however, can be
given that the expectations will be achieved. A number of factors could
cause actual results to differ materially from the projections,
anticipated results or other expectations expressed in this press release.
While Cardinal makes these forward-looking statements in good faith,
neither Cardinal, nor its Directors and management, can guarantee that the
anticipated future results will be achieved.
(5) Cliff West, Executive Vice President and Chief Operating Officer of
Cardinal (Member of the American Association of Petroleum Geologists -
Certified Petroleum Geologist # 1563) is the qualified person that has
reviewed and approved the technical information within this press
announcement
Glossary of Terms
boe Barrels of oil equivalent
boepd Barrels of oil equivalent per day
BC licence area Bilousivsko-Chornukhinska licence area
RC licence area Rudivsko-Chernovozavodske licence area
NY licence area North Yablunivska licence area
DB licence area Dubrivska licence area
Consolidated Profit and Loss Account
Year ended 31 Year Ended 31
December 2006 December 2005
(Restated)
Note $'000 $'000
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Turnover
Group and share of joint 1 7,962 4,587
venture
Less: share of joint venture
turnover (2,237) (1,556)
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5,725 3,031
Cost of sales
Production and selling costs (3,431) (1,434)
Depreciation and amortisation (492) (161)
Exploration costs expenses (526) -
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Total cost of sales (4,449) (1,595)
Gross profit 1,276 1,436
Costs of admission to AIM - (467)
Reorganisation and EGM costs (25) (1,509)
Share based payment (515) (565)
Other general and administrative expenses (8,586) (7,520)
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Total general and administrative expenses (9,126) (10,061)
Operating loss (7,850) (8,625)
Share of operating profit of joint
Venture 631 1,173
Interest receivable 623 96
Interest payable (6,058) (221)
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Loss on ordinary activities before taxation (12,654) (7,577)
Taxation on loss on ordinary activities (921) (473)
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Loss on ordinary activities transferred
to reserves (13,575) (8,050)
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Basic and diluted loss per share ($) 2 (0.119) (0.097)
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Consolidated Balance Sheet
As at As at
31 December 2006 31 December 2005
(Restated)
$'000 $'000
Note
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Fixed assets
Intangible assets 3,021 1,587
Tangible assets 28,093 16,345
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31,114 17,932
Investments
Joint ventures
Share of gross assets 2,185 2,428
Share of gross liabilities (297) (1,171)
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3 1,888 1,257
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33,002 19,189
Current assets
Stocks 24 160
Debtors 3,412 1,543
Cash at bank and in hand 1,543 23,995
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17,651 25,698
Creditors: amounts
falling due within one year 4 (7,759) (5,045)
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Net current assets 9,892 20,653
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Total assets less current liabilities 42,894 39,842
Creditors: amounts falling due after
more than one year 5 (35,344) (19,233)
Provision for liabilities (897) (897)
---------------------------------------------------------------------------
6,653 19,712
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Capital and reserves
Called up share capital 42,165 42,165
Share premium account 2,968 2,968
Reverse acquisition reserve (1,278) (1,278)
Share based payment reserve 1,081 565
Other reserve 1,829 1,829
Profit and loss account (40,112) (26,537)
----------------------------------------------------------------------------
Total shareholders' funds 6,653 19,712
----------------------------------------------------------------------------
Consolidated Cash Flow Statement
Year ended Year ended
31 December 2006 31 December 2005
(Restated)
$'000 $'000
---------------------------------------------------------------------------
Net cash outflow from operating
activities (9,462) (5,905)
Returns on investments and servicing
of finance
Interest received 623 96
Interest paid (46) (220)
---------------------------------------------------------------------------
Net cash inflow / (outflow) from
returns on investments and
servicing of finance 577 (124)
Taxation (860) (256)
Capital expenditure and financial investment
Purchase of intangible fixed assets (1,441) (1,131)
Purchase of tangible fixed assets (12,421) (380)
--------------------------------------------------------------------------
Net cash outflow from capital expenditure
and financial investment (13,862) (1,511)
Acquisitions
Cash paid for purchase of subsidiary
undertaking - (6,000)
Net cash from purchase of subsidiary
undertaking - 723
---------------------------------------------------------------------------
Net cash outflow from acquisitions - (5,277)
Financing
Silver Point loan advance 17,500 23,900
Costs of loan arrangement (3,673) (4,817)
Share and warrant issues - 20,341
Costs of admission to AIM - (4,541)
----------------------------------------------------------------------------
Net cash inflow from financing 13,827 34,883
----------------------------------------------------------------------------
(Decrease)/increase in cash (9,780) 21,810
Basis of preparation
The financial statements have been prepared under the historical cost
convention and in accordance with applicable UK accounting standards
except for the adoption of reverse acquisition accounting which
constitutes a true and fair override departure from UK Accounting
Standards. The financial statements are also prepared under the Statement
of Recommended Practice for 'Accounting for Oil and Gas Exploration,
Development, Production and Decommissioning Activities' issued in June
2001.
The accounting policies have remained unchanged from the previous year
apart from the adoption of FRS 20 'Share-based Payment' from 1 January
2006. This is described further below.
Going concern
The Group meets its day to day working capital requirements through a
positive cash balance. The Group has incurred losses in the year. Since
the year end, although revenues have increased and general and
administrative expenses have been reduced, Cardinal remains, in common
with other junior oil and gas companies, reliant on raising further funds
periodically through debt or equity finance.
The nature of the company's business is such that there can be
considerable and unpredictable variation in the timing of cash flows.
Bearing this in mind, the directors have prepared projected cash flow
forecasts for the period ending 30 June 2008. The Group had cash of
approximately $900,000 at 31May 2007. The directors' forecasts show that
the cash currently available will be fully utilised during August 2007 so
that further funds will be needed no later than August 2007. The directors
estimate that further working capital of up to $5million will be required
for the period ending 30 June 2008, assuming that SPC repayment of $41.4
million due in March 2008 is rescheduled (as set out below).
To overcome the short term cash shortfall, the Group has obtained a
binding commitment to provide working capital from Hares Holding, the
parent company of Hares Group, a substantial shareholder of Cardinal. No
funds have yet been requested or provided pursuant to this commitment. The
main terms of the working capital commitment are:
• it is available until 1 July 2008;
• Hares Holding will make advances as and when required by Cardinal up to an
aggregate maximum of $5 million;
• it is interest free and any capital advances will be repaid on completion
of an equity fundraising by Cardinal no later than 1 July 2008 with any
balance outstanding on 1 July 2008 that is not satisfied in Cardinal
shares being repaid in cash in six equal monthly installments commencing
on 31 January 2009;
• Cardinal will pay Hares a commitment fee of $225,000 on the earlier of a
successful completion of an equity fund raising prior to 1 July 2008 or
pursuant to the payment schedule referred to above; and
• The maximum number of Cardinal ordinary shares which may be issued to
Hares Holding in satisfaction of the commitment is capped so that any
shares issued would not at any time require Hares Holding to make a
mandatory offer for the remaining Cardinal shares pursuant to Rule 9 of
the City Code on Takeovers and Mergers.
The Hares Commitment Letter may be terminated by Hares Holding if:
• a change of control of Cardinal occurs, with control for this purpose
being a person or persons acting in concert holding more than 50% of
Cardinal's ordinary share capital; or
• Robert Bensh is no longer serving in an executive capacity with Cardinal.
The continued availability of this working capital commitment is one of
the assumptions the directors have relied upon in their assessment that
the Group can continue in operation as a going concern until at least 30
June 2008.
In addition, the Group had borrowings from Silverpoint Capital ('SPC') of
$41.4million at 31 December 2006, which are at present due for repayment
in March 2008. The Group is currently in negotiations with SPC to
re-finance the borrowings such that the $41.4 million will not be due for
repayment until at least 30 June 2008.
The Group has no other bank facilities at present.
The directors' forecasts do not include the repayment of the $41.4m on the
assumption that the negotiations with SPC are successful. The projections
also include revenue from a new gas gathering and separation facility,
recently completed in Ukraine, expected to be generating cash inflows from
July 2007.
The directors projections which reflect the working capital commitment
facility from Hares and the rescheduling of the SPC loan, show that the
company will continue to operate within the currently available funds
together with those from the working capital commitment from Hares, future
fundraising and the renegotiation of the repayment terms of existing
borrowings.
However, there can be no certainty that the facility from Hares will be
sufficient, negotiations with SPC currently in progress, or an issue of
equity shares, would be successful. Nevertheless, the directors consider
it is appropriate to prepare the financial statements on the going concern
basis. If the assumptions are not borne out then the Group would not be a
going concern. The financial statements do not include any adjustments
that would result from the inability to renegotiate the SPC loan
repayment, the withdraw of the Hares working capital facility or raise
additional funding.
Changes in accounting policies
In preparing the financial statements for the current year, the Group has
adopted FRS 20 'Share-based Payment' (IFRS 2) and this required changes to
previously published statements.
Basis of consolidation
The Group financial statements consolidate those of the Company and its
subsidiary undertakings made up to 31 December 2006. Acquisitions of
subsidiaries are dealt with by the acquisition method of accounting except
for the reverse takeover transaction of Carpatsky by the Company in 2004
and completed in April 2005.
In March 2004 the Company agreed to enter into a reorganisation
arrangement with Carpatsky. The arrangement set out an agreement whereby
Carpatsky shareholders would exchange their existing Carpatsky shares on a
2 for 1 basis for Cardinal shares.
Due to the relative values of the companies, the former Carpatsky
shareholders would become the majority shareholders with 71% of the
enlarged share capital, the Company's continuing operations was that of
Carpatsky and executive management of the Company were those of Carpatsky.
The Companies Act 1985, FRS 6 and FRS 7 would normally require the
Company's consolidated accounts to follow the legal form of the business
combination. In that case the pre-acquisition results would be those of
Cardinal and its subsidiary undertakings, which would exclude Carpatsky.
However, this would portray the combination as an acquisition of Carpatsky
by Cardinal and would, in the opinion of the directors, fail to give a
true and fair view of the substance of the business combination.
Accordingly, the directors have adopted reverse acquisition accounting as
the basis of consolidation in order to give a true and fair view.
In invoking the true and fair override the Directors note that reverse
acquisition accounting is endorsed under International Financial Reporting
Standard 3. Furthermore, the Urgent Issues Task Force of the UK's
Accounting Standards Board considered the subject and concluded that there
are instances where it is right and proper to invoke the true and fair
override in such a way.
The effect on the consolidated financial statements of adopting reverse
acquisition accounting, rather than following the legal form, are
widespread. However, the following table indicates the principal effect on
the composition of the consolidated reserves.
Impact of
Reverse Normal reverse
acquisition acquisition acquisition
accounting accounting accounting
$'000 $'000 $'000
---------------------------------------------------------------------------
Reverse acquisition
reserve (1,278) - (1,278)
Profit and loss account (18,487) (5,538) (12,949)
----------------------------------------------------------------------------
(19,765) (5,538) (14,227)
Share based payments
The Group has adopted FRS20 with effect from 1 January 2006. FRS20
requires the recognition of a charge to the profit and loss account for
all applicable share based payments including share options.
The Group has equity-settled share based payments but no cash-settled
share based payments. All share based payment awards granted after 7
November 2002 which had not vested prior to 1 January 2006 are recognised
in the financial statements at their fair value at the date of grant.
If vesting periods or non-market based vesting conditions apply, the
expense is allocated over the vesting period, based on the best available
estimate of share options expected to vest. Estimates are revised
subsequently if there is any indication that the number of share options
expected to vest differs from previous estimates. Any cumulative
adjustment prior to vesting is recognised in the current period. Any
adjustment for options which lapse prior to vesting is recognised in the
current period.
All equity-settled share based payments are ultimately recognised as an
expense in the profit and loss account with a corresponding credit to
'other reserves'.
Notes to the preliminary results
1 Turnover
Turnover represents amounts invoiced in respect of sales of oil and gas,
exclusive of indirect taxes and excise duties.
An analysis of turnover is presented below:
Year ended Year ended
31 December 31 December
2006 2005
$'000 $'000
-----------------------------------------------------------------------------
Oil sales 1,442 1,374
Gas sales 4,614 2,500
Condensate sales 1,444 713
Refined product 462 -
----------------------------------------------------------------------------
Group turnover 7,962 4,587
----------------------------------------------------------------------------
Share of joint ventures' turnover
Gas sales/Oil sales (2,237) (1,556)
----------------------------------------------------------------------------
Net turnover 5,725 3,031
----------------------------------------------------------------------------
Turnover, operating loss and net assets were wholly attributable to the
Group's primary activities, all of which arise in Ukraine.
2 Loss per share
The basic and diluted loss per share is based on equity losses of
$13,575,000 (2005 restated: $8,050,000) and 114,554,108 (2005: 83,200,895)
ordinary shares at 20p each, being the average number of shares in issue
during the year. The options and warrants in issue are not dilutive.
3 Fixed asset investments
Group
Total fixed asset investments comprise:
Year ended Year ended
31 December 31 December
2006 2005
$'000 $'000
---------------------------------------------------------------------------
Interests in joint ventures 1,888 1,257
---------------------------------------------------------------------------
Joint venture
At 31 December 2006 and 2005 the Group had interests in the following
joint venture:
Country of Class of share Proportion Nature of
incorporation capital held held business
----------------------------------------------------------------------------
UkrCarpatOil
Limited Ukraine Capital 45% Oil
contribution production
------------------------------------------------------------------------------
UkrCarpatOil Limited is a joint venture for operations at the Bytkiv Field
between Carpatsky Petroleum Corporation (''CPC'') and Ukrnafta. The
Company has a 45% interest in UkrCarpatOil Limited through its ownership
of CPC, Cardinal's wholly-owned subsidiary. As UkrCarpatOil Limited is a
limited liability company registered under Ukrainian law, it does not
issue shares and the shareholders' (known as ''participants'') ownership
and voting interests are directly proportional to their respective portion
of capital contribution subscribed. The authorised fund of UkrCarpatOil
Limited is UAH 12,220, with Ukrnafta holding a 55% participation interest
and CPC holding a 45% participation interest.
Share of
net assets
$'000
----------------------------------------------------------------------------
Cost
At 1 January 2006 2,164
Share of profit 631
----------------------------------------------------------------------------
At 31 December 2006 2,795
----------------------------------------------------------------------------
Amounts written off
At 1 January 2006 907
----------------------------------------------------------------------------
At 31 December 2006 907
----------------------------------------------------------------------------
Net book amount at 31 December 2006 1,888
----------------------------------------------------------------------------
Net book amount at 31 December 2005 1,257
----------------------------------------------------------------------------
The Group's share of the results, assets and liabilities of UkrCarpatOil
Limited was:
31 December 31 December
2006 2005
$ '000 $'000
-----------------------------------------------------------------------------
Turnover 2,237 1,556
Profit before tax 680 1,173
Taxation (49) (217)
Profit after tax 631 956
Fixed assets 419 518
Current assets 1,766 1,910
Liabilities due within one year 297 1,171
----------------------------------------------------------------------------
Joint Arrangements
The Group conducts some of its operations through two joint activity
agreements ('JAA'). One is between CPC and Ukrnafta covering development
of the RC Field. The second JAA (JAA #429) is between Rudis and
Ukrgazvydobuvannya (Ukrgaz) and covers three wells targeted for workovers
(wells # 201; 203; 300) in NY and one well (Dubrivska #1) that tested
encouraging but non commercial oil shows in the Dubrivska licence areas
and one producing well # 161 in Bilske field. CPC and Rudis have accounted
for their interests in the JAAs as joint activities that are not an entity
in line with Financial Reporting Standard 9 based on their relative
ownership percentage in the JAAs.
The RC Field JAA was entered into by CPC with Ukrnafta in 1995 to
undertake the joint development of the RC Field. The RC Field JAA
contemplates both parties owning a 50% working interest in the project
venture based on equal capital contributions, with Ukrnafta receiving an
additional 10% net profit interest (i.e. the Group would have a 45% net
profit interest if both parties had contributed an equal 50% to the joint
account). Under the JAA, the working interest of each party is based on
the capital contributions computed on a quarterly basis. The Group's share
of net profit is calculated as 90% of its capital contributions to the JAA
at the end of each quarter. Due to CPC's inability to meet capital
commitments under the JAA during the period from 2001 to 2003, its working
interest and net profits interest were reduced on a dilutive basis to a
16.57% working interest and 14.91% net profit interest in the JAA, in both
2006 and 2005.
The Rudis JAA (JAA #429) was entered into by Rudis with Ukrgaz in 2004 to
undertake the joint development of certain wells in two licence areas
owned 100% by Rudis (BC Area and NY Area), exploration on the DB licence
area and for reworking of certain wells in two more fields owned by
Ukrgaz. The Rudis JAA was amended in January 2006 to provide that the
wells on the BC licence area are exclusively owned and operated by Rudis.
In addition, the amendment provided that certain wells were removed from
the Rudis JAA and others from the NY licence were added. Under the Rudis
JAA the parties each own a 50% working and net profit interest.
In 2006 Rudis funded 100% of the cost of certain JAA capital expenditure.
The amount in excess of the Rudis 50% working and net profit interest in
the Rudis JAA, that is, the remaining 50% of the contribution, $2.2
million, has been treated as an additional investment by the Group.
4 Creditors: Amounts falling due within one year
Group Group
As at As at
31 December 31 December
2006 2005
$'000 $'000
-----------------------------------------------------------------------------
Trade creditors 2,288 1,699
Social security and
Other taxes 422 61
Amounts owed to
joint ventures and
joint arrangements - 304
Other creditors 312 618
Accruals 4,737 2,363
----------------------------------------------------------------------------
7,759 5,045
----------------------------------------------------------------------------
Amounts owed to joint ventures and joint arrangements represent amounts
due to the Group's partners in its joint venture and joint activity
agreements.
5 Creditors: Amounts falling due after more than one year
Group Group
As at 31 December As at 31 December
2006 2005
$'000 $'000
----------------------------------------------------------------------------
Gross bank
borrowings one
to two years 41,400 23,900
Less: costs of
raising bank borrowings (6,206) (4,817)
----------------------------------------------------------------------------
35,194 19,083
Other creditors 150 150
----------------------------------------------------------------------------
35,344 19,233
Silver Point Capital - bank borrowings
On 22 December 2006 the Group closed on a financing with Silver Point
Capital (SPC), amending and restating the existing $38 million bridge
financing facility entered into in December 2005 (Bridge PIK Notes) and
increasing the facility by $17.5 million to $55.5 million. $17.5 million
was funded at the closing which, in addition to the $23.9 million funded
on 23 December 2005, brings the total funding to $41.4 million, while
$14.1 million remains committed (since 23 December 2005) but unfunded.
The Company issued 1.9 million new warrants in the parent company (New PLC
Warrants) to SPC at an exercise price of 20p. The New PLC Warrants have a
five year term from 22 December 2006. SPC also retained the 4,389,875
warrants over Cardinal shares granted on 1 December 2005 (PLC Warrants)
which remained at a price of 27.5p. The term of the PLC Warrants remains
unchanged at 5 years from 23 December 2005.
Cardinal Resources Finance Limited (Cardinal Finance) issued a further
38.5 million warrants to SPC to subscribe for further shares in Cardinal
Finance (New Warrants). 7.7 million of these New Warrants became
exercisable at closing and the remaining 30.8 million New Warrants will
become exercisable as to 20% every 91 days after 22 December 2006. The New
Warrants have a term of five years from 22 December 2006 at a subscription
price equivalent to 20p. SPC retained the 75.9 million Cardinal Finance
warrants issued in December 2005 (Existing Warrants).
Bellwether asset transfer agreement
Under the asset transfer agreement effective 29 June 2001 signed between
Bellwether Exploration Company (later merged to become Mission Resources
Corporation and later acquired by Petrohawk Energy Corporation)
('Bellwether'), inter alia, Carpatsky granted a production payment to
Bellwether amounting to 3% of 'net proceeds of production' from
Carpatsky's worldwide oil and gas interests for 20 years (from 1 January
2001), but not to exceed $8.4 million.
Management believes the current value of the Bellwether 3% production
payment is approximately $150,000. The Company determined that the payment
due for the period 29 June 2001 to 31 December 2005 under the 3%
production payment was $34,485.10. This amount was tendered to Petrohawk
on 15 March 2006. In addition, on 15 March 2006, the Company offered to
Petrohawk to purchase (in effect cancel) the production payment in
consideration of Company's payment of $150,000 to Petrohawk. Management
has reduced the value of this liability to $150,000 down from $1,220,480
which was carried in 2004 to which Petrohawk has not responded.
Publication of non-statutory accounts
The financial information herein does not constitute statutory accounts as
defined in section 240 of the Companies Act 1985. The financial
information has been extracted from the Group's 2006 statutory financial
statements upon which the auditors reported on 29 June 2007. Their opinion
is unqualified and does not include any statement under section 237 of the
Companies Act 1985 but refers to the uncertainties surrounding the ability
of the Group to continue as a going concern (as described in the basis of
preparation above). The accounts have been prepared in accordance with
applicable accounting standards and under the historical cost convention.
Copies of the annual report are being posted to shareholders and copies
will be available from the company's registered office and are available
from the Company's web site at www.cardinal-uk.com.
For further information please contact:
Cardinal Resources Nominated Adviser
Charles Green / Natalia Egorova Nabarro Wells & Co. Limited
+44 (0) 20 7936 5250 John Wilkes / Marc Cramsie
investor.relations@cardinal-uk.com +44 (0) 20 7710 7410
cardinal@nabarro-wells.co.uk
Notes to Editor
Cardinal Resources plc is an independent oil and gas company engaged in
the acquisition, development, production and exploration of oil and
natural gas properties in Ukraine. Cardinal is an experienced operator in
the country focused on expanding its existing operations through the
farm-in or acquisition of additional upstream oil and gas assets that can
be further developed through the application of modern technology and
expertise.
This information is provided by RNS
The company news service from the London Stock Exchange
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