2017 Full Year Results
11 April 2018
Gulf Keystone Petroleum Ltd. (LSE: GKP)
("Gulf Keystone", "GKP", "the Group" or "the Company")
2017 Full Year Results Announcement
Strong commercial and operational delivery throughout the year
Profit for the first time since entry to Kurdistan
Gulf Keystone, operator of the Shaikan Field in the Kurdistan Region of Iraq ("Kurdistan"), today announces its results for the year ended 31 December 2017.
Highlights to 31 December 2017 and post reporting period
Operational
· Strong safety performance during 2017; 3 million man-hours without a Lost Time Incident achieved.
· Average gross production of 35,298 barrels of oil per day ("bopd") - in the middle of 32,000-38,000 bopd guidance for the year.
· Plant uptime of 99% in 2017.
· Shaikan production for Q1 2018 averaged 31,588 bopd.
· Gross production guidance for 2018 is set at 27,000-32,000 bopd.
Financial
· Signing of the Crude Oil Sales Agreement, which was announced in January 2018, represents a key milestone for the Company.
· Moved to a more transparent invoicing mechanism with the MNR; payment now linked to international oil price and total production at Shaikan.
· Profit for the first time since entry to Kurdistan - net profit of $14.1 million (2016: net loss of $17.4 million).
· Revenue of $172 million (2016: $194 million).
· The cash component of revenue increased by 28% to $157 million from $122 million in 2016.
· Positive cash flow driven by steady operating activities, payments from KRG and limited investment.
· 11 payments received during 2017 from the KRG amounting to $132 million net (2016: $114 million net to GKP).
· Cash balance of $160 million as at 31 December 2017 (2016: $93 million).
· Continued cost optimisation, with additional initiatives to lower costs achieved against stable production.
· Reduction of operating costs per barrel year-on-year to $2.8/bbl (2016: $3.5/bbl).
· Further reduction of G&A to $21.3 million from $25.5 million in 2016.
· GKP has received payments in Q1 2018 from the KRG totalling $75.1 million gross ($59.3 million net).
· Robust financial position as at 10 April 2018, with cash balance of $203 million against $100 million of debt.
Corporate developments
· Jaap Huijskes assumes the role of Non-Executive Chairman, as of today.
· Updated KPIs were introduced in 2017, as part of GKP's continued efforts to achieve high standards of corporate governance.
Outlook
· The Crude Oil Sales Agreement is an important commercial event and moves the business closer to finalising commercial negotiations with the MNR
· Subject to finalising certain commercial and contractual matters, the Company is ready to resume investment into Shaikan in 2018.
Jón Ferrier, Gulf Keystone's Chief Executive Officer, said:
"We are pleased to have reported a net profit for the year of $14.1 million, compared with a net loss of $17.4 million in 2016. We made considerable commercial progress during the year and into 2018, with the signing of the Shaikan Crude Oil Sales Agreement being a key milestone for the Company.
We were pleased to achieve average gross production of 35,298 bopd at Shaikan, in the middle of our target guidance of 32,000-38,000 bopd for 2017. We are confident that once we are able to restart investment into Shaikan we will be able to lift production towards our near-term target of 55,000 bopd, a step towards the full field development.
I would like to thank our shareholders for their support, our hosts the Kurdistan Region of Iraq, and all Gulf Keystone employees, for their commitment and professionalism during 2017. I would also like to welcome our incoming new Chairman, Jaap Huijskes, and reiterate our thanks to his predecessor, Keith Lough."
The Company will hold a live audio webcast and conference call for analysts at 10:00 (BST) today, 11 April 2018.
The webcast will be available on the Company's website: http://www.gulfkeystone.com/
Enquiries:
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Gulf Keystone Petroleum: |
+44 (0) 20 7514 1400 |
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Jón Ferrier, CEO |
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Sami Zouari, CFO |
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Celicourt Communications: |
+44 (0) 20 7520 9266 |
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Mark Antelme Jimmy Lea |
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or visit: www.gulfkeystone.com
Notes to Editors:
· Gulf Keystone Petroleum Ltd. (LSE: GKP) is a leading independent operator and producer in the Kurdistan Region of Iraq and the operator of the Shaikan field with current production capacity of 40,000 barrels of oil per day
· Further information on Gulf Keystone is available on its website www.gulfkeystone.com
Disclaimer
This announcement contains certain forward-looking statements that are subject to the risks and uncertainties associated with the oil & gas exploration and production business. These statements are made by the Company and its Directors in good faith based on the information available to them up to the time of their approval of this announcement, but such statements should be treated with caution due to inherent risks and uncertainties, including both economic and business factors and/or factors beyond the Company's control or within the Company's control where, for example, the Company decides on a change of plan or strategy. This announcement has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. This announcement should not be relied on by any other party or for any other purpose.
CHAIRMAN'S STATEMENT
Throughout 2017 and into 2018, Gulf Keystone has, with continuing support from the Kurdistan Regional Government ("KRG") and the Ministry of Natural Resources of the KRG ("MNR"), made considerable progress, reflecting the strong alignment of economic interests between operators and Kurdistan. Everyone stands to benefit from the responsible development of the region's natural resources, including Shaikan, one of its most-prized oil fields.
During much of 2017, Kurdistan was buffeted by the political complexities of the region, including the war against ISIS, which for Kurdistan has come at a considerable human and economic cost. In the broader region there were the well-publicised issues impacting both Syria and Turkey. The Kurdish independence referendum that was held in September 2017 contributed to yet more uncertainty for the area where we operate.
The significance of these macro factors, which are clearly out of our control, were profound for our business and our efforts to both create a climate for investment and build deeper liquidity in our shares. This year has seen considerable political and economic uncertainty, leading to a significant drain on the region's financial and other resources.
From an operational perspective, Shaikan continued to perform well throughout 2017. From a commercial perspective, as we have highlighted in recent communications, Gulf Keystone has been seeking clarity around the contractual framework in which it operates. Whilst work remains to be done, the very important Shaikan crude oil export sales agreement ("Crude Oil Sales Agreement"), which was worked on during 2017 and announced in January 2018, represented a major milestone for the Company. The successful implementation of the Crude Oil Sales Agreement is an important commercial event for the Company and moves the business closer to finalising its commercial negotiations and restarting investment into Shaikan. We remain optimistic about shortly arriving at a satisfactory outcome with our partners: the MNR and MOL.
Concurrent to the ongoing negotiations with the MNR, the team has been readying the Company for the future, with substantial technical and commercial work completed. Having closed the year with a cash balance of $160 million, and the plans put in place to deliver the target of increasing production to 55,000 bopd, the Company has the means to move swiftly towards delivering more value from the field for all stakeholders.
We strive to keep our shareholders abreast of progress and take our responsibilities in this regard extremely seriously. Whilst the Company has been busy working on both the updated Field Development Plan ("FDP") and advancing discussions with its partners, it is only appropriate to provide updates to the market once items are concluded and can be described clearly. We appreciate the absence of news flow may feel frustrating for investors.
An updated and comprehensive suite of Key Performance Indicators ("KPIs") were introduced for the Company in 2017 as part of our continued efforts to achieve high standards of corporate governance, and to support both our commitment to transparency and, of course, alignment between our staff and our shareholders. We are also committed to ensuring a greater focus on diversity across all our teams, improving the development of all employees and promotion of women and local employees into positions of seniority.
The KPIs for 2017 are described in the Remuneration Committee Report, which is in the Annual Report.
I would like to thank our shareholders for their ongoing support through what the Board recognises has not been an easy period. We would also like to thank our hosts, the government and people of Kurdistan who have helped enable continuous operations throughout this challenging year. It has been an unsettling time for our staff in London, and particularly for those in Erbil and in the field. There has been uncertainty for many, both at work and at home, and, on behalf of the Board, I thank all our staff for their deep professionalism, stoicism and good grace throughout. It has been said before, but my belief is that Gulf Keystone has a strong future ahead of it. As I finish my tenure as Chairman, which has been a privilege, I would like to wish good fortune to all those connected with Gulf Keystone. I am delighted to be handing over the role of Chairman to Jaap Huijskes. Jaap has already demonstrated his enormous value to the Board and the Company as a whole, as a Non-Executive Director, and I know his experience and skills will serve him well in his new role.
Keith Lough
Chairman
10 April 2018
EXECUTIVE REVIEW
In January 2018, the Company was very pleased to announce the signing of the Crude Oil Sales Agreement. This marked a key milestone for Gulf Keystone, breaking the pattern of receiving a gross fixed amount of US$15 million per month. We have now moved to a transparent invoicing mechanism where monthly payments are linked to both the international oil price and actual production from the Shaikan field. The Crude Oil Sales Agreement confirms a discount for export sales of approximately $22 per barrel for quality and transportation, which is in line with other crude oil sales agreements in the Kurdistan Region of Iraq. As a result of this, we have seen a significant improvement in monthly receipts which have averaged approximately US$21 million (gross) per month for recent payments covering the three months from October to December 2017.
Throughout 2017, the Company achieved average gross production of 35,298 bopd, around the midpoint of our 32,000-38,000 bopd guidance for the year. This result is testament to the reliable nature of the field and the professionalism and commitment of the team, who maintained plant uptime of 99% with zero Lost Time Incidents ("LTIs") in 2017.
In February 2017, the Company was informed that the MNR would begin exporting all Shaikan crude production via trucks to Turkey. This was a temporary measure and did not have a direct commercial bearing on the Company. By November 2017, the MNR had resumed exporting the majority of Shaikan's crude via the export pipeline to Turkey, clear evidence of the suitability and quality of the Shaikan crude within the Kurdish blend, with the remainder being sold domestically.
Due to the regular payment cycle, now long established and in line with our peers, payments under the Crude Oil Sales Agreement, and a tight control on costs, the Company has a strong balance sheet with a cash position of $160m as at 31 December 2017. Moreover, the Company is posting a net profit of $14.1m against a net loss of $17.4m in 2016.
We continue to have constructive dialogue with the MNR on contractual and commercial matters. Subject to finalising these matters, and the subsequent budgetary approvals with our partners, the MNR and MOL, we are looking forward to resuming investment in Shaikan in 2018. This should enable us to meet our stated near to medium-term target of achieving an uplift in gross production to 55,000 bopd, then moving towards the longer-term target of gross production of 100,000 bopd.
Our 2018 plans envisage hooking-up Production Facility 2 ("PF-2") via a 400 metre spur pipeline to the Atrush export pipeline which ultimately connects to the main oil line to Turkey. This pipeline link will improve netbacks by reducing the Company's trucking requirements, as well as lowering the health, safety, security and environment ("HSSE") risks associated with road movements.
Gross production guidance for 2018 has been set at 27,000-32,000 bopd. This guidance takes into account plant and export availability and the potential to install new downhole pumps in certain wells, as part of the investment programme required to increase production to 55,000 bopd.
As we finalise the investment plans to move into the next phase of development of the Shaikan field, the Company will continue to evaluate options to optimise its capital structure for the benefit of the company and its shareholders.
The safety of our staff, and those close to our operations, remains our number one priority and the Company is pleased to report that we had no LTIs reported in 2017 and our facilities remained secure throughout the reporting period.
We would like to take this opportunity to thank Keith Lough, who is stepping down from the role of Chairman, for his service to the Company. Keith has made a considerable contribution to GKP, steering the business through its financial restructuring in 2016 and overseeing the strengthening of GKP's balance sheet since then. We wish him every success in the future.
We would also sincerely like to thank our hosts, the Kurdistan Region of Iraq, and all Gulf Keystone employees, whose professionalism and commitment to GKP has been of the highest order.
We face the future with confidence and look forward to further developing the Shaikan field for the benefit of all.
Jón Ferrier
Chief Executive Officer
Sami Zouari
Chief Financial Officer
10 April 2018
OPERATIONAL REVIEW
Operating performance from the Shaikan field in 2017 was strong, following a similarly good year in 2016. Safety performance remained excellent and the Company has recently achieved three million working hours without a Lost Time Incident ("LTI"). Production volumes increased slightly compared to last year, mainly due to excellent plant availability, which stood at over 99%. The field continues to perform in line with expectations and there has been no gas or water break-through to date.
There has been no new Competent Persons Report ("CPR") during 2017, so the 31 August 2016 report by ERC Equipoise ("ERCE"), along with the letter update received in April 2017, remain the last official reserves position. ERCE confirmed remaining 2P reserves as at 31 December 2016 of 615 MMstb and production in 2017 was 12.9 MMstb. We anticipate a review to the CPR once an update to the field development plan is ready.
The Company continued throughout 2017 to improve efficiency and reduce gross production costs per barrel. In 2017 production costs were, $2.8/bbl, down from $3.5/bbl in 2016 (figures exclude capacity building charges).
We are discussing a comprehensive investment programme for 2018 with the MNR and MOL, that is designed to ensure that we return production to nameplate capacity of 40,000 bopd and then increase it to 55,000 bopd in the near term. The proposed work programme also includes a pipeline tie-in from PF-2 into the export pipeline, a Front End Engineering Design ("FEED") study for gas reinjection and a FEED study for development of the deeper Triassic reservoir, from which we have yet to produce.
HSSE
HSSE performance was once again strong with no LTIs in 2017 and only two recordable incidents, which was the same as our performance in 2016.
To ensure that our HSSE performance remains strong in the future we have put considerable effort into initiatives designed to make sure that we have a proactive approach to safety. To that end, we completed 99% of the planned HSSE work programme for 2017, which included activities, such as a revised HSSE management system, process safety monitoring, workforce training and emergency response.
We are very proud of the fact that we are considered by many in Kurdistan to be at the forefront of HSSE performance and practices.
Our commitment to maintaining a high local proportion of the Company's workforce was continued with 82% of positions being local. Furthermore, as training and experience has been gained we were able to promote local personnel into more senior positions via Gulf Keystone's Competency Based Framework ("CBF"). In 2017, a total of 25 promotions for local personnel took place.
Production
Gross Shaikan production guidance for 2017 was 32,000 to 38,000 bopd, so we were pleased to be in the middle of that range with an average daily production of 35,298 bopd, slightly up on 2016. Gross total production for 2017 increased by 1.4% compared with 2016 (12.9 MMstb from 12.7 MMstb in 2016).
This achievement was greatly helped by stable production rates and constantly high export availability, averaging 99%. The export route was changed by the MNR in February 2017 to road tanker transportation all the way to the Mediterranean coast in Turkey, rather than the previous arrangement of injecting the crude into the export pipeline at Fishkhabour. Despite the change, the operation proved to be very reliable and worked well and safely for all involved. In November 2017, we were directed to return to the original arrangement of using the export pipeline for the majority of the Shaikan production, with the remainder being sold domestically.
The field's observed natural pressure decline is in line with predicted performance and consistent with the reserves stated in the CPR, however we will require further investment in wells and facilities to maintain production at nameplate capacity of 40,000 bopd. The production average for Q1 2018 was 31,588 bopd with only minor export disruptions. Due to the deferral of the investment programme sought for 2017, the gross Shaikan production guidance for 2018 is being set at 27,000 to 32,000 bopd, and the uncertainty relates mainly to the exact performance of the wells at lower reservoir pressures ahead of the installation of downhole pumps.
In 2017, considerable work was done to optimise the existing field development plan. This plan has the same key elements of expansion but makes more use of the potential to debottleneck and grow production at the existing production facilities as well as the installation of new facilities in the future. The proposed investment programme is designed to return daily production to 40,000bopd as quickly as possible and begin modifications to the plant to increase nameplate capacity to 55,000 bopd during 2019, with an estimated gross capex range over the period of $175 million to $215 million, including a 25% contingency. The increase in the guidance compared to last year is primarily due to the addition of three Jurassic wells in the expansion to 55,000 bopd. These have been brought forward from the full field development to gain more reservoir understanding, assure a sustained increased plateau production and benefit from drilling efficiencies and costs savings from a single campaign.
The eventual target of the FDP will now be 100,000 bopd (rather than the 110,000 bopd previously envisaged), but this no longer involves the need for significant new facilities to develop the Jurassic production capacity, as there is more potential to expand the existing facilities than previously thought. The existing production facilities can be further de-bottlenecked to reach 75,000 bopd and this will be quicker and more cost effective than construction of a new site for Jurassic production. The Company will provide further budgetary guidance as appropriate in due course. Cumulative production to date is 48 MMstb or approximately 8% of the 2P.
Reserves
Shaikan is performing in line with expectations; measured pressure decline and the absence of water or gas breakthrough support the geological interpretations of the field, providing the Company with increasing confidence in its understanding. This means reduced uncertainty and allows us to more easily optimise the recovery and required well numbers. As mentioned above, an update to the CPR is expected in due course.
Stuart Catterall
Chief Operating Officer
10 April 2018
Consolidated Income Statement
For the year ended 31 December 2017
|
|
Notes |
2017 |
2016 |
|
|
|
$'000 |
$'000 |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
|
Revenue |
2 |
172,372 |
194,409 |
Cost of sales |
3 |
(126,996) |
(142,827) |
Gross profit |
|
45,376 |
51,582 |
|
|
|
|
|
|
General and administrative expenses |
|
(21,304) |
(25,536) |
|
Profit from operations before exceptional items |
4 |
24,072 |
26,046 |
|
|
|
|
|
|
Interest revenue |
2 |
702 |
100 |
|
Finance costs |
7 |
(11,023) |
(60,182) |
|
Impairment expense |
10 |
- |
(215,658) |
|
Gain on debt extinguishment |
16 |
- |
222,455 |
|
Other gains |
6 |
314 |
9,931 |
|
Profit/ (loss) before tax |
|
14,065 |
(17,308) |
|
|
|
|
|
|
Tax credit/ (charge) |
8 |
61 |
(127) |
|
Profit/ (loss) after tax for the year |
|
14,126 |
(17,435) |
|
Profit/ (loss) per share (cents) |
|
|
|
|
Basic |
9 |
6.16 |
(30.82) |
|
Diluted |
9 |
6.12 |
(30.82) |
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
|
|
|
2017 |
2016 |
|
|
|
$'000 |
$'000 |
|
|
|
|
|
|
|
|
|
|
Profit/ (loss) for the year |
|
14,126 |
(17,435) |
|
Items that may subsequently be reclassified to profit or loss: |
|
|
|
|
|
|
|
|
Exchange differences on translation of foreign operations |
|
1,281 |
(2,901) |
|
|
|
|
|
|
Total comprehensive profit/ (loss) for the year |
|
15,407 |
(20,336) |
Consolidated Balance Sheet
As at 31 December 2017
|
|
Notes |
2017 |
2016 |
|
|
|
$'000 |
$'000 |
|
|
|
|
|
Non-current assets |
|
|
|
|
Intangible assets |
10 |
63 |
99 |
|
Property, plant and equipment |
11 |
417,473 |
489,379 |
|
Deferred tax asset |
18 |
403 |
310 |
|
|
|
417,939 |
489,788 |
|
|
|
|
|
|
Current assets |
|
|
|
|
Inventories |
13 |
17,190 |
15,971 |
|
Trade and other receivables |
14 |
61,710 |
41,565 |
|
Cash and cash equivalents |
|
160,456 |
92,870 |
|
|
|
239,356 |
150,406 |
Total assets |
|
657,295 |
640,194 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
Trade and other payables |
15 |
(57,038) |
(56,284) |
|
Provisions |
17 |
(7,197) |
(7,461) |
|
|
|
(64,235) |
(63,745) |
|
|
|
|
|
Non-current liabilities |
|
|
|
|
Other borrowings |
16 |
(97,067) |
(98,886) |
|
Provisions |
17 |
(24,107) |
(23,794) |
|
|
|
(121,174) |
(122,680) |
|
Total liabilities |
|
(185,409) |
(186,425) |
Net assets |
|
471,886 |
453,769 |
|
|
|
|
|
|
Equity |
|
|
|
|
Share capital |
19 |
229,430 |
229,430 |
|
Share premium account |
19 |
920,728 |
920,728 |
|
Exchange translation reserve |
|
(3,018) |
(4,299) |
|
Accumulated losses |
|
(675,254) |
(692,090) |
|
Total equity |
|
471,886 |
453,769 |
The financial statements were approved by the Board of Directors and authorised for issue on 10 April 2018 and signed on its behalf by:
Jón Ferrier
Chief Executive Officer
Sami Zouari
Chief Financial Officer
Consolidated Statement of Changes in Equity
For the year ended 31 December 2017
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Attributable to equity holders of the Company |
||||||
|
|
Notes |
Share capital |
Share premium account |
Exchange translation reserve |
Accumulated losses |
Convertible bonds reserve |
Total equity |
|
|
|
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
||
|
|
|
|
|
|
|
|
|
|
|
Balance at 1 January 2016 |
|
9,781 |
834,619 |
(1,398) |
(686,520) |
10,179 |
166,661 |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year |
|
- |
- |
- |
(17,435) |
- |
(17,435) |
|
|
Other comprehensive loss for the year |
|
- |
- |
(2,901) |
- |
- |
(2,901) |
|
|
Total comprehensive loss for the year |
|
- |
- |
(2,901) |
(17,435) |
- |
(20,336) |
|
|
Share-based payment expense |
22 |
- |
- |
- |
1,686 |
- |
1,686 |
|
|
Share conversion and issue, net of issue cost |
19 |
219,649 |
86,109 |
- |
- |
- |
305,758 |
|
|
Transfer of convertible bond reserve |
16 |
- |
- |
- |
10,179 |
(10,179) |
- |
|
|
Net loss for the year |
|
- |
- |
- |
(17,435) |
- |
(17,435) |
|
|
Balance at 31 December 2016 |
|
229,430 |
920,728 |
(4,299) |
(692,090) |
- |
453,769 |
|
|
|
|
|
|
|
|
|
|
|
|
Net profit for the year |
|
- |
- |
- |
14,126 |
- |
14,126 |
|
|
Other comprehensive profit for the year |
|
- |
- |
1,281 |
- |
- |
1,281 |
|
|
Total comprehensive profit for the year |
|
- |
- |
1,281 |
14,126 |
- |
15,407 |
|
|
Share-based payment expense |
22 |
- |
- |
- |
2,710 |
- |
2,710 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 31 December 2017 |
|
229,430 |
920,728 |
(3,018) |
(675,254) |
- |
471,886 |
|
Consolidated Cash Flow Statement
For the year ended 31 December 2017
|
|
Notes |
2017 |
2016 |
|
|
|
$'000 |
$'000 |
|
|
|
|
|
|
Operating activities |
|
|
|
|
Cash generated in operations |
20 |
85,300 |
49,619 |
|
Interest received |
|
702 |
100 |
|
Reinstated notes coupon payments |
16 |
(10,111) |
- |
|
Net cash generated from operating activities |
|
75,891 |
49,719 |
|
|
|
|
|
|
Investing activities |
|
|
|
|
Purchase of intangible assets |
|
- |
(123) |
|
Purchase of property, plant and equipment |
|
(8,856) |
(9,557) |
|
Net cash used in investing activities |
|
(8,856) |
(9,680) |
|
|
|
|
|
|
Financing activities |
|
|
|
|
Proceeds on issue of share capital and conversion |
19 |
- |
23,535 |
|
Cost incurred on the Restructuring |
|
- |
(13,884) |
|
Net cash from financing activities |
|
- |
9,651 |
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
67,035 |
49,690 |
|
Cash and cash equivalents at beginning of year |
|
92,870 |
43,641 |
|
Effect of foreign exchange rate changes |
|
551 |
(461) |
|
|
|
|
|
|
Cash and cash equivalents at end of the year being bank balances and cash on hand |
|
160,456 |
92,870 |
Summary of Significant Accounting Policies
General information
The Company is incorporated in Bermuda (registered address: Cumberland House, 9th Floor, 1 Victoria Street, Hamilton, Bermuda). On 25 March 2014, the Company's common shares were admitted, with a standard listing, to the Official List of the United Kingdom Listing Authority ("UKLA") and to trading on the London Stock Exchange's Main Market for listed securities. Previously, the Company was quoted on AIM, a market operated by the London Stock Exchange. In 2008, the Company established a Level 1 American Depositary Receipt programme in conjunction with the Bank of New York Mellon, which has been appointed as the depositary bank. The Company serves as the holding company for the Group, which is engaged in oil and gas exploration and production, operating in the Kurdistan Region of Iraq and the Republic of Algeria.
Adoption of new and revised Standards
Amendments to IFRSs that are mandatorily effective for the current year
In the current year, the Group has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January 2017. Their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements.
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Amendments to IAS 7 Disclosure Initiative |
The Group has adopted the amendments to IAS 7 for the first time in the current year. The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes. The Group's liabilities arising from financing activities consist of borrowings (note 16). The application of these amendments has had no impact on the Group's consolidated financial statements. |
|
Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses |
The Group has adopted the amendments to IAS 12 for the first time in the current year. The amendments clarify how an entity should evaluate whether there will be sufficient future taxable profits against which it can utilise a deductible temporary difference. The application of these amendments has had no impact on the Group's consolidated financial statements, as the Group already assesses the sufficiency of future taxable profits in a way that is consistent with these amendments. |
|
Annual Improvements to IFRSs 2014-2016 Cycle |
The Group has adopted the amendments to IFRS 12 included in the Annual Improvements to IFRSs 2014-2016 Cycle for the first time in the current year. The other amendments included in this package are not yet mandatorily effective and they have not been early adopted by the Group. IFRS 12 states that an entity need not provide summarised financial information for interests in subsidiaries, associates or joint ventures that are classified (or included in a disposal group that is classified) as held for sale. The amendments clarify that this is the only concession from the disclosure requirements of IFRS 12 for such interests. |
New and revised IFRSs in issue but not yet effective
At the date of authorisation of these financial statements, The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective and in some cases had not yet been adopted by the EU:
|
IFRS 9 |
Financial Instruments |
|
IFRS 15 |
Revenue from Contracts with Customers (and the related Clarifications) |
|
IFRS 16 |
Leases |
|
IFRS 17 |
Insurance Contracts |
|
IFRS 2 (amendments) |
Classification and Measurement of Share-based Payment Transactions |
|
IFRS 4 (amendments) |
Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts |
|
IAS 40 (amendments) |
Transfers of Investment Property |
|
IFRS 10 and IAS 28 (amendments) |
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture |
|
Annual Improvements to IFRSs 2014-2016 Cycle |
Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and IFRS 28 Investments in Associates and Joint Ventures |
|
IFRIC 22 |
Foreign Currency Transactions and Advanced Consideration |
|
IFRIC 23 |
Uncertainty over Income Tax Treatments |
The directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group in future periods, except as noted below:
IFRS 9 Financial Instruments
The Group will adopt IFRS 9 Financial Instruments for the year commencing 1 January 2018. IFRS 9 addresses the classification, measurement and recognition of financial assets and financial liabilities, introduces a new impairment model for financial assets, as well as new rules for hedge accounting. It replaces the old standard of IAS 39 in its entirety.
The Group has performed an assessment of potential impact of adopting IFRS 9 based on the financial assets and financial liabilities as at the date of initial application of IFRS 9 (1 January 2018) and has concluded that the adoption of IFRS 9 will not have a material impact on the financial statements of the Group.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective for accounting periods beginning on or after 1 January 2018. The group is required to adopt IFRS 15 for the year ending 31 December 2018.
The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:
· Step 1: Identify the contract(s) with a customer
· Step 2: Identify the performance obligations in the contract
· Step 3: Determine the transaction price
· Step 4: Allocate the transaction price to the performance obligations in the contract
· Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when 'control' of the goods or services underlying the particular performance obligation is transferred to the customer.
Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15.
In April 2016, the IASB issued Clarifications to IFRS 15 in relation to the identification of performance obligations, principal versus agent considerations, as well as licensing application guidance.
The Group recognises revenue from the following major sources:
· sales of crude oil, and
· transportation services provided to third parties in relation to the transport of their share of the crude oil
The Group has performed an assessment of the potential impact of adopting IFRS 15 based on the revenue relationships as at the date of initial application of IFRS 15 (1 January 2018) and has concluded that the adoption of IFRS 15 will not have a material quantitative impact on the financial statements of the Group.
IFRS 16 Leases
IFRS 16, which has not yet been endorsed by the EU, introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective for accounting periods beginning on or after 1 January 2019. The Group currently expects to adopt IFRS 16 for the year ending 31 December 2019. No decision has been made about whether to use any of the transitional options in IFRS 16.
The Group has performed a preliminary assessment of the potential impact of adopting IFRS 16 based on the current leases and has concluded that the adoption of IFRS 16 should not have a material impact on the financial statements of the Group. The Group will perform a further assessment of the potential impact of adopting IFRS 16 as at 31 December 2018.
Statement of compliance
The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union.
Basis of accounting
The financial statements have been prepared under the historical cost basis, except for the valuation of hydrocarbon inventory and the valuation of certain financial instruments, which have been measured at fair value, and on the going concern basis. Equity-settled share-based payments were initially recognised at fair value, but have not been subsequently revalued. The principal accounting policies adopted are set out below.
Going Concern
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement, the Chief Executive Officer's Statement and the Operational Review. The financial position of the Group at the year end and its cash flows and liquidity position are included in the Financial Review.
The Group has seen a significant improvement in the pattern of cash receipts from the Ministry of Natural Resources of the Kurdistan Regional Government of Iraq ("MNR"), with the total receipts of $132 million net to the Group in 2017 and further net receipts of $61.5 million in the first quarter of 2018 in relation to 2017 sales.
Following the relinquishment of the Ber Bahr block in July 2017, the Group has focused on its core asset, the Shaikan block. The Group's improved liquidity is expected to allow the implementation of the Group's near term investment plan to maintain production at 40,000 bopd with the potential to increase production to 55,000 bopd. This is subject to the approvals of the MNR and MOL Hungarian Oil & Gas plc ("MOL"), the continuation of the regular payment cycle from the MNR and a commercially acceptable investment environment.
The option to delay the Reinstated Notes interest payments, the improvements in oil revenues receipts and prudent cost management give the Group the financial flexibility and capability to meet its working capital requirements.
The Group continues to closely monitor and manage its liquidity risk. Cash forecasts are regularly produced and sensitivities run for different scenarios including, but not limited to, changes in commodity prices, different production rates from the Shaikan block, costs contingencies, disruptions to revenue receipts, etc. The Group has taken appropriate action to reduce its cost base and has $203 million of free cash as at 10 April 2018. The Group's forecasts, taking into account the risks applicable to the Group, show that the Group will be able to have sufficient financial headroom for the 12 months from the date of approval of the 2017 Annual Report and Accounts.
Based on the analysis performed, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis of accounting in preparing the annual Financial Statements.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
Joint arrangements
The Group is engaged in oil and gas exploration, development and production through unincorporated joint arrangements; these are classified as joint operations in accordance with IFRS 11. The Group accounts for its share of the results and net assets of these joint operations. In addition, where the Group acts as operator to the joint operation, the gross liabilities and receivables (including amounts due to or from non-operating partners) of the joint operation are included in the Group's balance sheet.
Sales and interest revenue
The recognition of revenue, particularly the recognition of revenue from export sales of crude oil, is considered to be a key accounting judgement.
Under the Production Sharing Contract for the Shaikan Block between the Kurdistan Regional Government of Iraq ("KRG") and Gulf Keystone Petroleum Limited ("GKPI") and Texas Keystone Inc. and Kalegran Limited (a subsidiary of MOL) signed on 6 November 2017 as amended by subsequent agreements ("Shaikan PSC"), all oil is sold to the KRG, who in turn resell the oil either for export in the pipeline at Fishkhabour or by trucking it to domestic customers. The selling price is determined in accordance with the principles of the Shaikan PSC, based on the Brent crude price less a quality discount and transportation costs.
As the payment mechanism for sales is developing within the Kurdistan Region of Iraq, the Group currently considers that revenue can best be reliably measured when the cash receipt is assured. The assessment of whether cash receipt is reasonably assured is based on management's evaluation of the reliability of the KRG's payments to the international oil companies operating in the Kurdistan Region of Iraq. In January 2018, the Group entered into a crude oil export sales agreement with the KRG ("Crude Oil Sales Agreement"). This Crude Oil Sales Agreement specifies the delivery point, pricing, KRG's contribution to transportation costs and payment terms relating to export sales of crude oil and it is effective from 1 October 2017 until 31 December 2018.
The value of sales revenue is determined after taking account of the following:
· The point of sale for export sales from 15 November 2017 onwards is the point that the crude oil is unloaded into the export pipeline at Fishkhabour;
· The point of sale for export sales prior to 15 November 2017 and for domestic sales is at the Shaikan facility;
· GKP recognises revenue for its share of the revenue on a cash-assured basis and these amounts of recognised revenue may be lower than the Company's entitlement under the Shaikan PSC, giving rise to unrecognised revenue amounts;
· From 15 November 2017 onwards, the group has performed transportation services in respect of the KRG's share of export oil sales. It recharges all of these transportation costs at nil mark-up to the KRG and these recharged transportation costs are recognised as revenue; and
· Under the Shaikan PSC and the bilateral agreement between GKPI and the MNR signed on 16 March 2016 ("Bilateral Agreement"), the Group is entitled to offset certain costs (including capacity building payments and production bonuses) against amounts owed by the KRG to GKPI. In these instances, the group recognises revenue and a reduction in the liability to the KRG.
To the extent that revenue arises from test production during an evaluation programme, an amount is charged from evaluation costs to cost of sales so as to reflect a zero net margin.
Income tax arising from the Company's activities under its production sharing contract is settled by the KRG on behalf of the Company. However, the Company is not able to measure the amount of income tax that has been paid on its behalf and, therefore, the notional income tax amounts have not been included in revenue or in the tax charge.
Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective rate of interest applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition.
Property, plant and equipment other than oil and gas interests
Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is provided at rates calculated to write each asset down to its estimated residual value over its expected useful life as follows:
|
Fixtures and equipment |
- |
20% straight-line |
Intangible assets other than oil and gas interests
Intangible assets, other than oil and gas assets, have finite useful lives and are measured at cost and amortised over their expected useful economic lives as follows:
|
Computer software |
- |
33% straight-line |
Oil and gas assets
The Group has changed its accounting policy for oil and gas assets from modified full cost to successful efforts. This change resulted in the write off of the costs associated with the Sheikh Adi and Ber Bahr blocks which have been relinquished and in the process of relinquishment, respectively, by the Group. The benefit of this voluntary change in the accounting policy is ensuring that the balance sheet reflects only the assets that will bring future economic benefits to the Group. In addition, the successful efforts method is more widely adopted by listed oil companies and therefore, the change in the policy will make the Group's financial statements more comparable to those of its peers (note 25).
Pre-licence costs
Costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred.
Exploration and evaluation costs
The Group follows the successful efforts method of accounting for exploration and evaluations ("E&E") costs. Expenditures directly associated with evaluation or appraisal activities are initially capitalised as intangible asset in cost pools by well, field or exploration area, as appropriate. Such costs include licence acquisition, technical services and studies, seismic acquisition, exploration and appraisal well drilling, payments to contractors, interest payable and directly attributable administration and overhead costs.
These costs are then written off as exploration costs in the income statement unless the existence of economically recoverable reserves has been established and there are no indicators of impairment.
E&E costs are transferred to development and production assets within property, plant and equipment upon the approval of a development programme by the relevant authorities and the determination of commercial reserves existence.
Development and production assets
Development and production assets are accumulated on a field-by-field basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above.
The cost of development and production assets includes the cost of acquisition and purchases of such assets, directly attributable overheads, and costs for future restoration and decommissioning. These costs are capitalised as part of the property, plant and equipment and depreciated based on the Group's depreciation of oil and gas assets policy.
Depreciation of oil and gas assets
The net book values of producing assets are depreciated generally on a field-by-field basis using the unit of production ("UOP") basis which uses the ratio of oil and gas production in the period to the remaining commercial reserves plus the production in the period. Production associated with unrecognised export sales revenue is included in the DD&A calculation. Costs used in the calculation comprise the net book value of the field, and any further anticipated costs to develop such reserves.
Commercial reserves are proven and probable ("2P") reserves together with, where considered appropriate, a risked portion of 2C contingent resources, which are estimated using standard recognised evaluation techniques. The estimate is regularly reviewed by independent consultants.
Impairment of tangible and intangible non-current assets
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset, or group of assets, is estimated in order to determine the extent of the impairment loss (if any).
For other assets where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
Any impairment identified is immediately recognised as an expense.
Borrowing costs
Borrowing costs directly relating to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised and added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in the income statement in the period in which they are incurred.
Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date.
As described in the Revenue accounting policy section above, it is not possible to calculate the amount of notional tax to be shown in relation to any tax liabilities settled on behalf of the Group by the KRG.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part assets to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also recognised in equity.
Foreign currencies
The individual financial statements of each company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and the financial position of the Group are expressed in US dollar, which is the functional currency of the Group, and the presentation currency for the consolidated financial statements.
In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in the income statement for the year.
On consolidation, the assets and liabilities of the Group's foreign operations which use functional currencies other than US dollars are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity in the Group's translation reserve. On the disposal of a foreign operation, such translation differences are reclassified to profit or loss.
Inventories
Inventories, except for hydrocarbon inventories, are valued at the lower of cost and net realisable value. Hydrocarbon inventories are recorded at net realisable value with changes in hydrocarbon inventories being adjusted through cost of sales.
Financial instruments
Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group has become a party to the contractual provisions of the instrument.
Trade receivables
Trade receivables are measured at amortised cost using the effective interest method less any impairment.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
Liquid investments
Liquid investments comprise short-term liquid investments with maturities of three to twelve months maturity.
Financial assets at fair value through profit and loss
Financial assets are held at fair value through profit and loss ("FVTPL") when the financial asset is either held for trading or it is designated at FVTPL. Financial assets at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the other gains and losses line in the income statement.
Derivative financial instruments
The Group may enter into derivative financial instruments including foreign exchange forward contracts to manage its exposure to foreign exchange rate risk.
Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each balance sheet date. The resulting gain or loss is recognised in the profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.
A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than twelve months and it is not expected to be realised or settled within twelve months. Other derivatives are presented as current assets or current liabilities.
Impairment of financial assets
Financial assets, other than those valued at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.
For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, as well as observable changes in local or national economic conditions that correlate with default on receivables.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs, which are charged to share premium.
Convertible bonds
The net proceeds received from the issue of convertible bonds are split between a liability element and an equity component at the date of issue. The fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of issue of the convertible bonds and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in equity, as a convertible bond reserve and is not re-measured. The equity portion is amortised over the life of the bond to accumulated losses reserve within equity. The liability component is carried at amortised cost using the effective interest method until extinguished upon conversion or at the instrument's maturity date.
Issue costs are apportioned between the liability and equity components of the convertible bonds based on their relative carrying amounts at the date of issue. The portion relating to the equity component is charged directly against equity.
The interest expense on the liability component is calculated by applying the prevailing market interest rate for similar non-convertible debt to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible bonds.
Borrowings
Interest-bearing loans and overdrafts are recorded at the fair value of proceeds received, net of transaction costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the year in which they arise. The liability is carried at amortised cost using the effective interest rate method until maturity.
Trade payables
Trade payables are stated at amortised cost. The average maturity for trade and other payables is one to three months.
Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reliably estimated.
Decommissioning provision
Provision for decommissioning is recognised in full when damage is done to the site and an obligation to restore the site to its original condition exists. The amount recognised is the present value of the estimated future expenditure for restoring the sites of drilled wells and related facilities to their original status. A corresponding amount equivalent to the provision is also recognised as part of the cost of the related oil and gas property. The amount recognised is reassessed each year in accordance with local conditions and requirements. Any change in the present value of the estimated expenditure is dealt with prospectively. The unwinding of the discount is included as a finance cost.
Share-based payments
Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the entity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in Note 22. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight- line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserve.
For cash-settled share-based payments, a liability is recognised for the goods or services acquired, measured initially at the fair value of the liability. At each balance sheet date until the liability is settled, and at the date of settlement, the fair value of the liability is re-measured, with any changes in fair value recognised in profit or loss for the period. Details regarding the determination of the fair value of cash-settled share-based transactions are set out in Note 22.
Leasing
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.
Critical accounting estimates and judgements
In the application of the Group's accounting policies, which are described above, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods.
Accounting estimates
Carrying value of producing assets
Oil and gas assets within property, plant and equipment are held at historical cost value, less accumulated depreciation and impairments.
Producing assets are tested for impairment whenever indicators of impairment exist. Management assesses whether such indicators exist, with reference to the criteria specified in IAS 36 Impairment of Assets, at least annually.
As at 31 December 2017, an internal valuation of the Shaikan field was performed, providing further support in relation to the conclusion that no indicators of impairment existed.
The assumptions and estimates in the valuation model include:
- Commodity prices that are based on latest internal forecasts, benchmarked with external sources of information, to ensure they are within the range of available analyst forecasts and the long-term corporate economic assumptions thereafter;
- Discount rates that are adjusted to reflect risks specific to individual assets and the region;
- Commercial reserves and the related production and payment profiles; and
- Timing of revenue receipts.
Operating costs and capital expenditure are based on financial budgets and internal management forecasts. Cost assumptions incorporate management experience and expectations, as well as the nature and location of the operation and the risks associated therewith. Underlying input cost assumptions are consistent with related output price assumptions.
In line with the Group's accounting policy on impairment, management performs an impairment review of the Group's oil and gas assets annually with reference to indicators as set out in IAS 36. The Group assesses its group of assets called cash generating units (CGU) for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Where indicators are present, management calculates the recoverable amount using key assumptions such as future oil and gas prices, estimated production volume, pre-tax discount rates that reflect the current market assessment of the time value of money and risks specific to the asset, commercial reserves, inflation and transportation fees. The key assumptions are subject to change based on the current market trends and economic conditions. The CGU's recoverable amount is the higher of the fair value less cost of disposal and value in use. Where the CGU's recoverable amount is lower than the carrying amount, the CGU is considered impaired and is written down to its recoverable amount. The Group's sole CGU at 31 December 2017 was Shaikan with a carrying value of $416.9 million. No impairment indicator was identified as at 31 December 2017.
Reserves estimates
Commercial reserves are determined using estimates of oil-in-place, recovery factors and future oil prices. Future development costs are estimated using assumptions as to numbers of wells required to produce the commercial reserves, the cost of such wells and associated production facilities, and other capital and operating costs. Reserves estimates principally affect the depreciation, depletion and amortisation charges, as well as impairment assessments.
Significant accounting judgement
Revenue
The recognition of revenue, particularly the recognition of revenue from exports, is considered to be a key accounting judgement. The Group began commercial production from the Shaikan field in July 2013 and historically made sales to both the domestic and export market. However, as the payment mechanism for sales to the export market is currently developing within the Kurdistan Region of Iraq, the Group considers that revenue can be only reliably measured when the cash receipt is assured. The assessment of whether cash receipts are reasonably assured is based on management's evaluation of the reliability of the MNR's payments to the international oil companies operating in the Kurdistan Region of Iraq. The Group also recognised payables to the MNR that were offset against amounts receivable from the MNR for previously unrecognised revenue in line with the terms of the Shaikan PSC.
The judgement is not to recognise revenue in excess of the sum of the cash receipt that is assured and the amount of payables to the MNR that can be offset against amounts due for previously unrecognised revenue in line with the terms of the Shaikan PSC, despite the Group being entitled to additional revenue under the terms of the Shaikan PSC. Any future agreements between the Company and the KRG might change the amounts of revenue recognised.
Notes to the Consolidated Financial Statements
1. Segment information
For the purposes of resource allocation and assessment of segment performance, the Group is organised into three regional business units - Algeria, Kurdistan and the United Kingdom. These geographical segments are the basis on which the Group reports its segmental information. The chief operating decision maker is the Chief Executive Officer. He is assisted by the Chief Financial Officer and senior management team.
The accounting policies of the reportable segments are consistent with the Group's accounting policies.
Each segment is described in more detail below:
- Kurdistan Region of Iraq: the Kurdistan segment consists of the Shaikan and the Erbil office which provides support to the operations in Kurdistan, as well as segmental information relating to the previously held Akri-Bijeel, Sheikh Adi and Ber Bahr blocks;
- United Kingdom: the UK segment provides geological, geophysical and engineering services to the Gulf Keystone Group; and
- Algeria: the Algerian segment consists of the Algiers office and the Group's operations in Algeria.
Corporate manages activities that serve more than one segment. It represents all overhead and administration costs incurred that cannot be directly linked to one of the above segments.
|
31 December 2017 |
Algeria |
Kurdistan |
United Kingdom |
Corporate |
Elimination |
Total |
|
|
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
|
Revenue |
|
|
|
|
|
|
|
Oil sales |
- |
171,203 |
- |
- |
- |
171,203 |
|
Transportation revenue |
- |
1,169 |
- |
- |
- |
1,169 |
|
Inter-segment sales |
- |
- |
4,337 |
- |
(4,337) |
- |
|
Total revenue |
|
172,372 |
4,337 |
- |
(4,337) |
172,372 |
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
Production costs |
- |
(46,042) |
- |
- |
- |
(46,042) |
|
Oil and gas properties depreciation expense |
- |
(79,785) |
- |
- |
- |
(79,785) |
|
Transportation costs |
- |
(1,169) |
- |
- |
- |
(1,169) |
|
Gross profit / (loss) |
- |
45,376 |
4,337 |
- |
(4,337) |
45,376 |
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
|
|
|
|
|
Allocated general and administrative expenses |
(63) |
(5,387) |
(6,476) |
(12,110) |
3,429 |
(20,607) |
|
Depreciation and amortisation expense |
- |
(145) |
(280) |
- |
- |
(425) |
|
|
|
|
|
|
|
|
|
Profit / (loss) from operations |
(63) |
39,844 |
(2,419) |
(12,110) |
(908) |
24,344 |
|
|
|
|
|
|
|
|
|
Interest revenue |
- |
432 |
- |
270 |
- |
702 |
|
Finance costs |
- |
(714) |
- |
(10,309) |
- |
(11,023) |
|
Other gains / (losses) |
- |
323 |
- |
(281) |
- |
42 |
|
Profit / (loss) before tax |
(63) |
39,885 |
(2,419) |
(22,430) |
(908) |
14,065 |
|
|
|
|
|
|
|
|
|
Tax expense |
- |
- |
61 |
- |
- |
61 |
|
|
|
|
|
|
|
|
|
(Loss) / profit after tax |
(63) |
39,885 |
(2,358) |
(22,430) |
(908) |
14,126 |
|
|
|
|
|
|
|
|
|
Capital expenditure |
- |
43,578 |
- |
- |
- |
43,578 |
|
Total assets |
31 |
582,192 |
14,105 |
57,335 |
3,632 |
657,295 |
During 2017, the total allocated general and administrative expenses of $20.6 million (2016: $25.0 million) included costs that are recoverable under the terms of the Shaikan PSC amounting to $5.4 million (2016: $9.2 million).
|
31 December 2016 |
Algeria |
Kurdistan |
United Kingdom |
Corporate |
Elimination |
Total |
|
|
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
|
|
|
|
|
|
|
As restated |
|
|
|
|
|
|
|
(note 25) |
|
Revenue |
|
|
|
|
|
|
|
Oil sales |
- |
194,409 |
- |
- |
- |
194,409 |
|
Inter-segment sales |
- |
- |
5,542 |
- |
(5,542) |
- |
|
Total revenue |
|
194,409 |
5,542 |
- |
(5,542) |
194,409 |
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
Production costs |
- |
(61,191) |
- |
- |
- |
(61,191) |
|
Oil and gas properties depreciation expense |
- |
(81,636) |
- |
- |
- |
(81,636) |
|
|
|
|
|
|
|
|
|
Gross profit / (loss) |
- |
51,582 |
5,542 |
- |
(5,542) |
51,582 |
|
General and administrative expenses |
|
|
|
|
|
|
|
Allocated general and administrative expenses |
(843) |
(9,222) |
(6,439) |
(13,447) |
4,993 |
(24,958) |
|
Depreciation and amortisation expense |
- |
(295) |
(283) |
- |
- |
(578) |
|
|
|
|
|
|
|
|
|
Profit / (loss) from operations |
(843) |
42,065 |
(1,180) |
(13,447) |
(549) |
26,046 |
|
|
|
|
|
|
|
|
|
Interest revenue |
- |
- |
16 |
84 |
- |
100 |
|
Finance income/ (costs) |
- |
(700) |
- |
(59,915) |
433 |
(60,182) |
|
Impairment charge |
- |
(215,658) |
- |
- |
- |
(215,658) |
|
Gain on debt extinguishments |
- |
- |
- |
222,455 |
- |
222,455 |
|
Other gains |
181 |
3,963 |
- |
5,787 |
- |
9,931 |
|
Profit / (loss) before tax |
(662) |
(170,330) |
(1,164) |
154,964 |
(116) |
(17,308) |
|
|
|
|
|
|
|
|
|
Tax expense |
- |
- |
(127) |
- |
- |
(127) |
|
|
|
|
|
|
|
|
|
(Loss) / profit after tax |
(662) |
(170,330) |
(1,291) |
154,964 |
(116) |
(17,435) |
|
|
|
|
|
|
|
|
|
Capital expenditure |
- |
9,454 |
138 |
- |
- |
9,592 |
|
Total assets |
38 |
546,163 |
12,864 |
75,675 |
5,454 |
640,194 |
Geographical information
The Group's information about its segment assets (non-current assets excluding deferred tax assets and other financial assets) by geographical location is detailed below:
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Algeria |
- |
- |
|
Kurdistan |
417,536 |
488,893 |
|
Bermuda |
- |
- |
|
United Kingdom |
512 |
585 |
|
|
417,536 |
489,478 |
Information about major customers
Included in revenues arising from the Kurdistan segment are revenues of approximately $172.4 million which arose from sales to the Group's largest customer (2016: $194.4 million from largest customer).
2. Revenue
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Oil sales |
171,203 |
194,409 |
|
Transportation revenue |
1,169 |
- |
|
|
172,372 |
194,409 |
|
Interest revenue |
702 |
100 |
|
|
173,074 |
194,509 |
The Group accounting policy for revenue recognition is set out in the Summary of Significant Accounting Policies above, with revenue recognition on a cash-assured basis.
During 2017, the cash-assured values recognised as oil sales were the group's share of the $15m received in respect of sales in each of the first nine months of the year and the invoiced revenue for the last three months of the year amounting to $156.3m (2016: $121.8m). The cost offset revenue recognised was $14.9m (2016: $72.6m). The oil sales price was calculated using the monthly Brent price less an average discount of $20.3 (2016: $20.2) per barrel for quality and transportation costs.
3. Cost of Sales
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Oil production costs |
46,042 |
61,191 |
|
Depreciation of oil and gas properties |
79,785 |
81,636 |
|
Transportation costs |
1,169 |
- |
|
|
126,996 |
142,827 |
Oil production costs represent the Group's share of gross production expenditure for the Shaikan field for the year and include capacity building charges of $17.2 million (2016: $18.0 million), but no Shaikan PSC production bonus was payable in 2017 (2016: $8.0 million). All costs are included with no deferral of costs associated with unrecognised sales in accordance with the Group's revenue policy. Production and depreciation, depletion and amortisation ("DD&A") costs related to revenue arrears recognised in 2017 and 2016 have been charged to the income statement in prior periods when the oil was lifted.
A unit-of-production method, based on full entitlement production, commercial reserves and costs for Shaikan field full development, has been used to calculate the DD&A charge for the year. Commercial reserves are proven and probable ("2P") reserves, estimated using standard recognised evaluation techniques. Production and reserves entitlement associated with unrecognised sales in accordance with the Group's revenue policy have been included in the full year DD&A calculation.
4. Profit/ (loss) from operations
|
|
2017 |
2016 $'000 |
|
|
|
|
|
Profit/ (loss) from operations has been arrived at after charging/ (crediting): |
|
|
|
Depreciation of property, plant and equipment (note 11) |
80,163 |
82,176 |
|
Amortisation of intangible assets (note 10) |
47 |
38 |
|
Credit in relation to Excalibur litigation (note 6) |
- |
(3,188) |
|
Staff costs (see note 5) |
22,770 |
24,228 |
|
Auditor's remuneration for audit services (see below) |
219 |
173 |
|
Operating lease rentals (note 21) |
2,924 |
3,936 |
|
|
|
|
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Fees payable to the Company's auditor for the audit of the Company's annual accounts |
192 |
154 |
|
Fees payable to the Company's auditor for other services to the Group |
|
|
|
- audit of the Company's subsidiaries pursuant to legislation |
27 |
19 |
|
Total audit fees |
219 |
173 |
|
|
||
|
Other assurance services (half year review) |
67 |
73 |
|
Corporate finance services |
5 |
454 |
|
Tax services (advisory) |
- |
9 |
|
Total fees |
291 |
709 |
5. Staff costs
The average monthly number of employees (including Executive Directors) for the year was as follows:
|
|
2017 Number |
2016 Number |
|
|
|
|
|
Office and management |
72 |
80 |
|
Technical and operational |
222 |
229 |
|
|
294 |
309 |
|
|
|
|
|
Employee benefits recognised as an expense during the year comprised: |
|
|
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Wages and salaries |
18,478 |
20,929 |
|
Social security costs |
1,672 |
2,044 |
|
Share-based payment (see note 22) |
2,620 |
1,255 |
|
|
22,770 |
24,228 |
6. Other gains
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Other gains |
272 |
6,876 |
|
Exchange gains |
42 |
3,055 |
|
|
314 |
9,931 |
In 2017, other gains consisted of the release of the decommissioning liability relating to the Ber Bahr block of $0.3 million.
In 2016, other gains consisted of the release of the decommissioning liability relating to the Akri Bijeel block of $3.7 million and the receipt of an additional repayment of costs incurred in relation to Excalibur Ventures LLC litigation of $3.2 million. On 18 November 2016, the Court ordered that the appeals be dismissed and the sum of $3.2 million (£2.6 million) was received by the Group in January 2017. As at 31 December 2016, this was included in other receivables in Note 14.
7. Finance costs
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Interest payable in respect of convertible bonds (see note 16) |
- |
22,203 |
|
Interest payable in respect of other bonds (see note 16) |
- |
35,232 |
|
Reinstated notes interest capitalised (see note 16) |
10,309 |
2,481 |
|
Unwinding of discount on provisions (see note 17) |
714 |
699 |
|
Capitalised finance costs |
- |
(433) |
|
|
11,023 |
60,182 |
8. Tax
|
|
2017 $'000 |
2016 $'000 |
|
Corporation tax |
|
|
|
Current year charge |
- |
- |
|
Adjustment in respect of prior years |
- |
1 |
|
Deferred UK corporation tax income / (expense) (see note 18) |
61 |
(128) |
|
Tax income / (expense) attributable to the Company and its subsidiaries |
61 |
(127) |
Under current Bermudian laws, the Group is not required to pay taxes in Bermuda on either income or capital gains. The Group has received an undertaking from the Minister of Finance in Bermuda exempting it from any such taxes at least until the year 2035.
Any corporate tax liability in Algeria is settled out of Sonatrach's share of oil under the terms of the Algerian PSCs and is therefore not reflected in the tax charge for the year.
In the Kurdistan Region, the Group is subject to corporate income tax on its income from petroleum operations under the Kurdistan PSCs. The rate of corporate income tax is currently 15% on total income. Under the Shaikan PSC, any corporate income tax arising from petroleum operations will be paid from the KRG's share of petroleum profits. Due to the uncertainty over the payment mechanism for oil sales in Kurdistan, it has not been possible to measure reliably the taxation due that has been paid on behalf of the Group by the KRG and therefore the notional tax amounts have not been included in revenue or in the tax charge. This is an accounting presentational issue and there is no taxation to be paid.
The tax currently payable is based on taxable profit for the year earned in the United Kingdom by the Group's UK subsidiary. UK corporation tax is calculated at 19.25% (2016: 20.00%) of the estimated assessable profit for the year of the UK subsidiary.
Deferred tax is provided for due to the temporary differences which give rise to such a balance in jurisdictions subject to income tax. During the current period no taxable profits were made in respect of the Group's Kurdistan PSC, nor were there any temporary differences on which deferred tax is required to be provided. As a result, no corporate income tax or deferred tax has been provided for Kurdistan in the period.
All deferred tax arises in the UK.
The income / (expense) for the year can be reconciled to the profit / (loss) per the income statement as follows:
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
|
|
|
|
Profit / (loss) before tax |
14,065 |
(17,308) |
|
|
|
|
|
Tax at the Bermudian tax rate of 0% (2016: 0%) |
- |
- |
|
Effect of different tax rates of subsidiaries operating in other jurisdictions |
61 |
(127) |
|
Tax credit / (charge) for the year |
61 |
(127) |
9. Profit / (loss) per share
The calculation of the basic and diluted profit/(loss) per share is based on the following data:
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Profit / (loss) |
|
|
|
Profit / (loss) after tax for the purposes of basic and diluted loss per share |
14,126 |
(17,435) |
|
|
2017 Number (000s) |
2016 Number (000s) |
|
Number of shares |
|
|
|
Basic weighted average number of shares |
229,317 |
56,565 |
The Group followed the steps specified by IAS 33 in determining whether potential common shares are dilutive or anti-dilutive.
Reconciliation of dilutive shares:
|
|
2017 Number (000s) |
2016 Number (000's) |
Number of shares |
|
|
|
|
|
|
|
Basic number of ordinary shares outstanding |
229,317 |
56,565 |
|
Effect of dilutive potential ordinary shares |
1,595 |
- |
|
Diluted number of ordinary shares outstanding |
230,912 |
56,565 |
The average number of ordinary shares in issue excludes shares held by Employee Benefit Trustee ("EBT") and the Exit Event Trustee.
The diluted number of ordinary shares outstanding including share options is calculated on the assumption of conversion of all potentially dilutive ordinary shares. During the year ended 31 December 2017, there were 460,000 (2016: 460,000) share options that were excluded from the calculation of diluted earnings, because they were anti-dilutive.
10. Intangible assets
|
|
Exploration and evaluation costs $'000 |
Computer software $'000 |
Total $'000 |
Year ended 31 December 2016 |
|
|
|
|
Opening net book |
235,695 |
14 |
235,709 |
|
Other movements related to the relinquishment of Sheikh Adi |
(20,037) |
- |
(20,037) |
|
Additions |
- |
138 |
138 |
|
Write offs |
(215,658) |
- |
(215,658) |
|
Amortisation charge |
- |
(38) |
(38) |
|
Foreign currency translation differences |
- |
(15) |
(15) |
|
Closing net book value |
- |
99 |
99 |
|
|
|
|
|
At 31 December 2016 |
|
|
|
|
Cost |
- |
1,053 |
1,053 |
|
Accumulated amortisation |
- |
(954) |
(954) |
|
Net book value |
- |
99 |
99 |
Year ended 31 December 2017 |
|
|
|
|
Opening net book value |
- |
99 |
99 |
|
Amortisation charge |
- |
(47) |
(47) |
|
Foreign currency translation differences |
- |
(11) |
(11) |
|
Closing net book value |
- |
63 |
63 |
|
|
|
|
|
At 31 December 2017 |
|
|
|
|
Cost |
- |
1,064 |
1,064 |
|
Accumulated amortisation |
- |
(1,001) |
(1,001) |
|
Net book value |
- |
63 |
63 |
In March 2016, the Group relinquished the Sheikh Adi block. As part of the agreement for relinquishment of the Sheikh Adi block, the MNR released the Group from its obligations to pay past PSC payments due with the exception of $10.0 million relating to reduced PSC bonuses due on the declaration of commerciality. This will be offset against the past costs associated with the Shaikan Government Participation Option. This is included in the Other creditors in Note 15.
During 2016, expenditure amounting to $215.7 million relating to the Sheikh Adi block was written off upon relinquishment and included in the impairment expense in the Consolidated Income Statement.
The net book value at 31 December 2017 includes intangible assets relating to computer software. The amortisation charge of $47,000 (2016: $38,000) for computer software has been included in general and administrative expenses.
11. Property, plant and equipment
|
|
Oil and Gas Properties $'000 |
Fixtures and Equipment $'000 |
Total $'000 |
Year ended 31 December 2016 |
|
|
|
|
Opening net book value |
560,835 |
1,343 |
562,178 |
|
Additions |
9,435 |
19 |
9,454 |
|
Depreciation charge |
(81,636) |
(540) |
(82,176) |
|
Foreign currency translation differences |
- |
(77) |
(77) |
|
Closing net book value |
488,634 |
745 |
489,379 |
|
|
|
|
|
|
At 31 December 2016 |
|
|
|
Cost |
685,087 |
5,743 |
690,830 |
|
Accumulated depreciation |
(196,453) |
(4,998) |
(201,451) |
|
Net book value |
488,634 |
745 |
489,379 |
|
|
|
|
|
Year ended 31 December 2017 |
|
|
|
|
Opening net book value |
488,634 |
745 |
489,379 |
|
Additions |
8,059 |
114 |
8,173 |
|
Depreciation charge |
(79,785) |
(378) |
(80,163) |
|
Foreign currency translation differences |
- |
84 |
84 |
|
Closing net book value |
416,908 |
565 |
417,473 |
|
|
|
|
|
|
At 31 December 2017 |
|
|
|
Cost |
693,146 |
5,941 |
699,087 |
|
Accumulated depreciation |
(276,238) |
(5,376) |
(281,614) |
|
Net book value |
416,908 |
565 |
417,473 |
The net book value of oil and gas properties at 31 December 2017 is comprised of property, plant and equipment relating to the Shaikan block and has a carrying value of $416.9 million (2016: $488.6 million).
The additions to the Shaikan asset during the year include costs for various studies and production facilities improvement projects.
The DD&A charge of $79.8 million on oil and gas properties (2016: $81.6 million) has been included within cost of sales (note 3). The depreciation charge of $0.4 million on fixtures and equipment (2016: $0.5 million) has been included in general and administrative expenses.
For details of the key assumptions and judgements underlying the impairment assessment and the depreciation, depletion and amortisation charge, refer to the "Critical accounting estimates and judgments" section of the Summary of Significant Accounting Policies.
12. Group Companies
Details of the Company's subsidiaries and joint operations at 31 December 2017, and 31 December 2016, are as follows:
|
Name of subsidiary
|
Place of incorporation
|
Proportion of ownership interest |
Proportion of voting power held |
Principal activity
|
|
Gulf Keystone Petroleum (UK) Limited 6th floor New Fetter Place 8-10 New Fetter Lane London EC4A 1AZ |
United Kingdom
|
100%
|
100%
|
Geological, geophysical and engineering services |
|
Gulf Keystone Petroleum International Limited Cumberland House 9th floor, 1 Victoria Street PO Box 1561 Hamilton HMFX Bermuda |
Bermuda
|
100%
|
100%
|
Exploration and evaluation activities in Kurdistan |
|
Gulf Keystone Petroleum Numidia Limited Cumberland House 9th floor, 1 Victoria Street PO Box 1561 Hamilton HMFX Bermuda |
Bermuda
|
100%
|
100%
|
Exploration and evaluation activities
|
|
Gulf Keystone Petroleum HBH Limited Cumberland House 9th floor, 1 Victoria Street PO Box 1561 Hamilton HMFX Bermuda |
Bermuda |
100%
|
100%
|
Exploration and evaluation activities |
|
Shaikan Petroleum Limited Cumberland House 9th floor, 1 Victoria Street PO Box 1561 Hamilton HMFX Bermuda |
Bermuda |
100%
|
100%
|
Exploration and evaluation activities
|
|
Name of joint operation
|
Place of incorporation
|
Proportion of ownership interest |
Proportion of voting power held(2) |
Principal activity
|
|
Shaikan
|
Kurdistan
|
80%(1)
|
33.3%
|
Production and development activities |
|
Sheikh-Adi (3)
|
Kurdistan
|
100%
|
50%
|
Exploration and evaluation activities |
|
Ber Bahr (4)
|
Kurdistan
|
40%
|
33.3%
|
Exploration and evaluation activities |
(1) 75% is held directly by Gulf Keystone Petroleum International Limited, with 5% held in trust for Texas Keystone, Inc. ("TKI") until formal transfer of the share is completed.
(2) Proportion of voting power is as defined in the individual Production Sharing Contracts (PSC). The above are joint operations based on the voting rights as set out in each PSC.
(3) Relinquished effective 16 March 2016
(4) Relinquished effective 13 July 2017
13. Inventories
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Warehouse stocks and materials |
14,569 |
14,814 |
|
Crude oil |
2,621 |
1,157 |
|
|
17,190 |
15,971 |
Inventories at 31 December 2017 include write downs to net realisable value of $0.4 million (2016: $2.9 million).
14. Trade and other receivables
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Trade receivables |
57,887 |
36,000 |
|
Other receivables |
3,260 |
4,976 |
|
Corporation tax receivable |
1 |
- |
|
Prepayments and accrued income |
562 |
589 |
|
|
61,710 |
41,565 |
Trade receivables comprise amounts due from the MNR for revenue less capacity building payments for the four months from September 2017 to December 2017 totalling $57.9 million as at 31 December 2017 (2016: $36.0 million), which has all been received subsequent to the year end. This included past due trade receivables of $42.6 million (2016: $24.0 million).
Included within other receivables for 2017 is an amount of $0.4 million (2016: $0.4 million) being the deposits for leased assets which are receivable after more than one year. There are no receivables from related parties as at 31 December 2017 (2016: $nil) (see note 23). No impairments of receivables have been recognised during the year (2016: $nil).
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value and no amounts are provided against them.
15. Trade and other payables
Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs.
The Directors consider that the carrying amount of trade payables approximates their fair value.
|
|
2017 $'000 |
2016 $'000 |
|
Trade payables |
2,687 |
2,922 |
|
Other payables |
26,168 |
26,917 |
|
Accrued expenses |
28,183 |
26,445 |
|
|
57,038 |
56,284 |
There is $2.0 million interest payable included in the accrued expenses as at 31 December 2017 (2016: $nil) (see note 16).
In accordance with the Bilateral Agreement, the Group received payments during 2016 from the MNR in excess of entitlements under the Shaikan PSC amounting to $16.2 million and the amount of the Sheikh Adi PSC bonus that was payable on the declaration of commerciality was reduced to $10.0 million. Both of these liabilities are included in Other payables, but these liabilities form part of the ongoing Shaikan PSC amendment negotiations and it is likely that they will be offset against unrecognised revenue arrears, because, under the Shaikan PSC and the Bilateral Agreement, the Group is entitled to offset certain costs against amounts owed by the KRG to GKPI. In these instances, the group recognises revenue that has previously been unrecognised and a reduction in the liability to the KRG.
16. Long term borrowings and warrants
On 14 October 2016, the Company successfully completed a balance sheet restructuring ("Balance Sheet Restructuring") which reduced the Company's debt from over $600 million to $100 million through the partial conversion of the Guaranteed Notes and full conversion of the Convertible Bonds to Common Shares in the Company.
The impact of the Balance Sheet Restructuring on the long term borrowing was as follows:
a) The Company's convertible debt securities issued in 2012 and 2013 consisting of $325 million convertible bonds due on October 2017 carrying a coupon of 6.25% payable on a bi-annual basis (the "Convertible Bonds") were extinguished as a result of the Balance Sheet Restructuring. The related accrued interest payable of $20.2 million was also cancelled in consideration for 4,585,192,303 shares with a fair value of £0.012 ($0.0144) per share on 14 October 2016.
The Company's three-year senior guaranteed notes of $250 million ("Guaranteed Notes"), carrying a coupon of 13% per annum payable on a bi-annual basis and freely tradeable, and the related accrued interest payable of $32.3 million were extinguished in consideration for 15,031,035,578 Common Shares at a fair value price of £0.012 ($0.0144) per share. In addition, Reinstated Notes of $100 million were issued by the Company (see note 16b).
The extinguishment of the Convertible Bonds and the Guaranteed Notes resulted in a net gain of $222.4 million as included in the Consolidated Income statement.
b) On 14 October 2016, the Company issued $100 million of new guaranteed notes ("Reinstated Notes"). The unsecured Reinstated Notes are guaranteed by Gulf Keystone Petroleum International Limited, the Company's subsidiary and their terms are the same as the Guaranteed Notes subject to the following amendments:
- Maturity date is 18 October 2021. At any time prior to maturity, the Reinstated Notes are redeemable in part or full at par and can therefore be refinanced without any prepayment penalty;
- The Company has the option to defer its interest payments until the maturity of the Reinstated Notes in PIK at 13% or pay in cash at 10% until 18 October 2018. From 19 October 2018, the Company is mandatorily liable to pay interest in cash at 10%;
- The aggregate principal amount of the Reinstated Notes shall be increased by the amount of such PIK interest on the date such interest is due and interest will accrue on the increased principal amount from such date;
- The Company will be permitted to raise up to $45 million of additional indebtedness at any time on market terms to fund capital and operating expenditure;
- Certain other amendments, including inter alia, the removal of security, removal of the Debt Service Reserve Account requirement and the extension of the grace periods in respect of certain events of default under the Reinstated Notes; and
- Cost of $12.0 million incurred in relation to the Balance Sheet Restructuring was expensed.
The liabilities associated with the Reinstated Notes are presented in the following table:
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Liability component at 1 January |
98,886 |
555,374 |
|
Liability component of the guaranteed notes at issue |
|
|
|
Interest charged during the year |
- |
57,435 |
|
Interest paid during the year |
(10,111) |
- |
|
Extinguishment of liability and related interest during the year |
- |
(612,809) |
|
Issue of Reinstated Notes at fair value |
- |
96,405 |
|
Reinstated notes interest capitalised during the year |
10,309 |
2,481 |
|
Liability component at 31 December |
99,084 |
98,886 |
Liability component reported in:
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Current liabilities: (see note 15) |
2,017 |
- |
|
Non-current liabilities |
97,067 |
98,886 |
|
|
99,084 |
98,886 |
As part of the Balance Sheet Restructuring, the interest payable relating to Convertible Bonds and Guaranteed Notes was extinguished. The interest charged was computed until 13 October 2016 by applying the effective rates on an annual basis to the liability component for the period. The effective interest rates for the initial $275 million convertible bond issue in October 2012 and the $50 million tap issue in October 2012 is 9.26% and 7.20%, respectively. The effective interest rate for the 2014 Notes is 19.7%. The interest capitalised on the Reinstated Notes was calculated using the effective interest rate of 12.11%.
For the year ended 31 December 2017, the Company recognised $10.3 million interest capitalised on the Reinstated Notes (2016: $2.5 million). Of this amount, $8.3 million was capitalised as part of Other borrowings in the Consolidated Balance Sheet and $2.0 million interest was accrued on the Reinstated Notes (2016: $nil). The interest payment method will be reassessed prior to each interest payment date. Any difference from what was capitalised or accrued for the year ended 31 December 2017 and the actual interest payment method selected will be adjusted prospectively.
The Reinstated Notes are traded on the Luxembourg Stock Exchange and the fair value at the prevailing market price as at the balance sheet date was:
|
|
Market price |
2017 $'000 |
2016 $'000 |
|
|
|
|
|
|
Convertible Bonds |
n/a |
- |
- |
|
2014 Notes |
n/a |
- |
- |
|
Reinstated Notes |
$0.98241 |
98,241 |
97,229 |
|
|
|
98,241 |
97,229 |
As of 31 December 2017, the Group's remaining contractual liability comprising principal and interest based on undiscounted cash flows at the maturity date of the Reinstated Notes is as follows:
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Within one year |
10,000 |
- |
|
Within two to five years |
130,000 |
167,241 |
|
|
140,000 |
167,241 |
As at 31 December 2017, there were no warrants to purchase New Common Shares of $1.0 each at an exercise price of $81.30 in issue (2016: 400,000 warrants), as the warrants expired unexercised on 18 April 2017.
17. Provisions
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Current provisions |
7,197 |
7,461 |
|
Non-current provisions |
24,107 |
23,794 |
|
|
31,304 |
31,255 |
|
|
Current Provisions (Algeria and Kurdistan) |
Non-current Provisions (Kurdistan) |
Total |
|
Decommissioning provision |
$'000 |
$'000 |
$'000 |
|
At 1 January 2017 |
7,461 |
23,794 |
31,255 |
|
New provisions and changes in estimates |
8 |
(402) |
(394) |
|
Unwinding of discount |
- |
715 |
715 |
|
Release of provisions |
(272) |
- |
(272) |
|
At 31 December 2017 |
7,197 |
24,107 |
31,304 |
The provision for decommissioning is based on the net present value of the Group's share of expenditure which may be incurred in the removal and decommissioning of the wells and facilities currently in place and restoration of the sites to their original state. This expenditure is estimated to be incurred over the next twelve months on Algerian assets. The expenditure on the Shaikan block in Kurdistan is expected to take place over the next 25 years.
The Group relinquished Ber Bahr in July 2017 with no further liabilities payable by the Group. The balance of the decommissioning liability of $0.3 million was released and recognised in other gains in the Consolidated Income Statement (2016: $nil).
18. Deferred tax asset
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods.
|
|
Accelerated tax depreciation
$'000 |
Share-based payments
$'000 |
Tax losses carried forward $'000 |
Total
$'000 |
|
At 1 January 2016 |
(111) |
158 |
436 |
483 |
|
(Charge)/credit to income statement |
15 |
(132) |
(11) |
(128) |
|
Exchange differences |
14 |
10 |
(69) |
(45) |
|
At 31 December 2016 |
(82) |
36 |
356 |
310 |
|
(Charge)/credit to income statement |
21 |
92 |
(52) |
61 |
|
Exchange differences |
(7) |
8 |
31 |
32 |
|
At 31 December 2017 |
(68) |
136 |
335 |
403 |
19. Share capital
|
|
2017 $000s |
2016 $000s |
|
Authorised |
|
|
|
|
|
|
|
Common shares of $1 each (2016: $1 each) |
231,605 |
231,605 |
|
Non-voting shares of $0.01 each |
500 |
500 |
|
Preferred shares of $1,000 each |
20,000 |
20,000 |
|
Series A Preferred shares of $1,000 each |
40,000 |
40,000 |
|
|
292,105 |
292,105 |
|
|
Common shares |
|||||
|
|
|
Share |
Share |
|||
|
|
No. of shares |
Amount |
capital |
premium |
||
|
|
000 |
$'000 |
$'000 |
$'000 |
||
|
Balance 31 December 2015 |
978,138 |
844,400 |
9,781 |
834,619 |
||
|
|
|
|
|
|
||
|
Share placement |
21,964,819 |
306,116 |
219,649 |
86,467 |
||
|
Share consolidation |
(22,713,527) |
- |
- |
- |
||
|
Issue cost of share placement |
- |
(358) |
- |
(358) |
||
|
|
|
|
|
|
||
|
Balance 31 December 2016 |
229,430 |
1,150,158 |
229,430 |
920,728 |
||
|
|
|
|
|
|
||
|
Balance 31 December 2017 |
229,430 |
1,150,158 |
229,430 |
920,728 |
||
At 31 December 2017, a total of 0.01 million common shares at $1.0 each were held by the EBT (2016: 0.1 million at $1.0 each) and 0.1 million shares at $1.0 each were held by the Exit Event Trustee (2016: 0.1 million at $1.0 each). All 0.11 million common shares were included within reserves (2016: 0.2 million).
Rights attached to share capital
The holders of the common shares have the following rights (subject to the other provisions of the Byelaws):
|
(i) |
entitled to one vote per common share; |
|
(ii) |
entitled to receive notice of, and attend and vote at, general meetings of the Company; |
|
(iii) |
entitled to dividends or other distributions; and |
|
(iv) |
in the event of a winding-up or dissolution of the Company, whether voluntary or involuntary or for a reorganisation or otherwise or upon a distribution of capital, entitled to receive the amount of capital paid up on their common shares and to participate further in the surplus assets of the Company only after payment of the Series A Liquidation Value (as defined in the Byelaws) on the Series A Preferred Shares.
|
20. Reconciliation of profit from operations to net cash generated from operating activities
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
|
|
|
|
Profit from operations |
24,072 |
26,046 |
|
|
|
|
|
Adjustments for: |
|
|
|
|
|
|
|
Depreciation, depletion and amortisation of property, plant and equipment |
80,163 |
82,176 |
|
Amortisation of intangible assets |
47 |
38 |
|
Other gains or losses |
(11) |
- |
|
Share-based payment expense |
2,710 |
1,255 |
|
(Increase)/ decrease in inventories |
(1,219) |
2,573 |
|
Increase in receivables |
(20,125) |
(22,129) |
|
Increase/ (decrease) in payables |
(337) |
(40,522) |
|
Net cash generated by operations |
85,300 |
49,437 |
|
Income tax received |
- |
182 |
|
Net cash generated from operating activities |
85,300 |
49,619 |
21. Commitments
Operating lease commitments - the Group as a lessee
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Minimum lease payments under operating leases recognised as expense for the year |
2,924 |
3,936 |
At the balance sheet date, the Group had outstanding total commitments under non-cancellable operating leases, which fall due as follows:
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Within one year |
1,144 |
1,805 |
|
In the second to fifth years inclusive |
1,519 |
1,617 |
|
|
2,663 |
3,422 |
Operating lease payments represent rentals payable by the Group for certain of its office and residence properties and facilities and vehicle rentals in the United Kingdom and the Kurdistan Region of Iraq. The non-cancellable operating leases within Kurdistan are for up to one year in duration.
Exploration and development commitments
Due to the nature of the Group's operations in exploring and evaluating areas of interest and development of assets, it is difficult to accurately forecast the nature or amount of future expenditure.
Expenditure commitments on current permits for the Group could be reduced by selective relinquishment of exploration tenure, by the sale of assets or by the renegotiation of expenditure commitments. There is no significant capital commitment expected in the year ending 31 December 2018 for the Group (2017: $nil).
22. Share-based payments
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Share options charge |
2,710 |
1,686 |
|
|
2,710 |
1,686 |
Value Creation Plan
On 12 December 2016 the Company awarded performance units under the 2016 Gulf Keystone Petroleum Value Creation Plan ("VCP") to the directors and persons discharging managerial responsibilities of the Company listed below:
|
Executive |
Position |
Number of units awarded |
|
Jón Ferrier |
CEO |
386,667 |
|
Sami Zouari |
CFO |
306,667 |
|
Nadhim Zahawi |
CSO |
226,667 |
The award of performance units is based on a distribution of one third of the total awards each during the first year and, thereafter, 40% for the CEO; 30% for the CFO and 20% for the CSO for the remainder of the plan, with the remaining 10% available for future distribution subject to board decision.
Participants in the VCP are selected at the discretion of the Remuneration Committee. Awards under the VCP are granted in the form of performance units of which there are a maximum of 1,000,000 available.
The key terms and conditions of the VCP are set out below:
· Subject to the achievement of performance conditions, the VCP award may be converted into a number of nil cost options over a number of shares on five measurement dates over the 5 year life of the plan.
· The value of the award is dependent on the extent to which the actual Total Shareholder Return exceeds the Threshold Total Shareholder Return at each measurement date.
· The Threshold Total Shareholder Return (the 'Hurdle') will be equal to 8% per annum compound growth on each measurement date or the highest Total Shareholder Return if this is higher than the 8% compound rate.
· The VCP limits the value on grant of nil-cost options to $20 million for the whole plan. Once this limit has been reached no further nil-cost options may be granted on that or any subsequent measurement date.
· Vesting of the nil-cost options occurs following the third, fourth and fifth measurement dates should the performance parameters be achieved. At the third and fourth measurement date, 50% of earned nil-cost options will vest subject to achievement of the 'hurdle'.
· At the fifth measurement date, providing the 'hurdle' has been achieved i.e. 8% per annum increase in total shareholder return on a compound basis, 100% of the outstanding nil-cost options will vest. If the 'hurdle' has not been achieved, then the outstanding nil-cost options will lapse.
· Where there is a change of control of the company before 31 December 2017 the terms of the VCP will not apply but the participants will share awards based on 2% of the value of the sale consideration less the value provided to employees under the SRP (described above).
A charge of $1.12 million (2016: $0.06 million) in relation to the VCP is included in the total share options charge.
Staff Retention Plan
At the 2016 Annual General Meeting, shareholders approved the adoption of the Gulf Keystone Petroleum 2016 Staff Retention Plan (SRP), which is designed to reward members of staff through the grant of share options at a zero exercise price.
The exercise of the awarded options is not subject to any performance conditions and can be exercised at any time after the three year vesting period but within ten years after the date of grant. If options are not exercised within ten years, the options will lapse and will not be exercisable. If an employee leaves the company during the three years from the date of grant, the options will lapse on the date notice to leave is given to the company. Should an employee be regarded as a good leaver, the options may be exercised at any time within a period of six months from departure date.
|
|
2017 |
2016 |
||
|
|
Number of share options '000 |
Weighted average exercise price (in pence) |
Number of share options '000 |
Weighted average exercise price (in pence) |
|
|
|
|
|
|
|
Outstanding at 1 January |
1,402 |
- |
1,402 |
- |
|
Granted during the year |
611 |
- |
- |
- |
|
Exercised during the year |
(325) |
- |
- |
- |
|
Forfeited during the year |
(93) |
- |
- |
- |
|
Outstanding at 31 December |
1,595 |
- |
1,402 |
- |
|
|
|
|
|
|
|
Exercisable at 31 December |
- |
- |
- |
- |
The weighted average share price at the date of exercise for share options exercised during the period was £1.06. The options outstanding at 31 December 2017 had a weighted average remaining contractual life of 9 years.
During 2017, 611,000 options were granted to employees under the Group's staff retention plan.
The inputs into the stochastic (binomial) valuation model were as follows:
|
|
2017 |
2016 |
|
|
|
|
Weighted average opening share price on date of grant (in pence) |
119.47 |
120.00 |
|
|
|
|
The expected volatility was calculated as 97.2% for the January 2017 awards, 94.0% for the early July 2017 awards, 94.1% for the July 2017 awards and has been based on the Company's share price volatility averaged for the three years prior to grant date.
The expected weighted average term of the new options is 3 years. The risk free rate for the new options awarded was 0.26% for January 2017 awards, 0.43% for early July 2017 and 0.32% for late July 2017.
The weighted average fair value of the options granted in 2017 was £1.19 (2016: £1.20).
The Company has not made a dividend payment to date and, as there is no expectation of making payments in the immediate future, the dividend yield variable has been set at zero for all grants.
A charge of $0.90 million (2016: $0.04 million) in relation to the SRP is included in the total share options charge.
Share options outstanding at the end of the year have the following expiry date and exercise prices:
Expiry date |
Exercise price (pence)
|
Options ('000)
|
|||
|
|
2017 |
2016 |
2017 |
2016 |
|
|
|
|
|
|
|
|
11 December 2026 |
- |
- |
994 |
- |
|
09 January 2027 |
- |
- |
350 |
- |
|
30 June 2027 |
- |
- |
206 |
- |
|
30 July 2027 |
- |
- |
45 |
- |
|
|
|
|
|
1,595 |
- |
|
Equity-settled share option plan
The Group's share option plan provides for an exercise price at least equal to the closing market price of the Group shares on the date prior to grant. Awards made under the Group's share option plan have a vesting period of at least three years except for awards made under the Long Term Incentive Plan, which vest in equal tranches over a minimum of three years subsequent to the achievement of a number of operational and market-based performance conditions. Options expire if they remain unexercised after a period of 10 years from the date of grant. The options granted in 2015 were made under the recruitment remuneration policy, vest in three equal tranches over two years, and expire if they remain unexercised after a period of 7 years from the date of grant. Options are forfeited if the employee leaves the Group before the options vest. The company has not made any awards during 2017 under this scheme.
|
|
2017 |
2016 |
||
|
|
Number of share options '000 |
Weighted average exercise price (in pence) |
Number of share options '000 |
Weighted average exercise price (in pence) |
|
|
|
|
|
|
|
Outstanding at 1 January |
360 |
10,190.0 |
35,967 |
101.9 |
|
Share Consolidation (note 19) |
- |
- |
(35,607) |
10,088.1 |
|
Outstanding at 1 January |
360 |
10,190.0 |
360 |
10,190.0 |
|
Granted during the year |
- |
- |
- |
- |
|
Forfeited during the year |
- |
- |
- |
- |
|
Outstanding at 31 December |
360 |
10,149.7 |
360 |
10,190.0 |
|
|
|
|
|
|
|
Exercisable at 31 December |
360 |
10,149.7 |
309 |
10,599.0 |
No options were exercised, granted or cancelled in 2017 (2016: nil).
The options outstanding at 31 December 2017 had a weighted average exercise price of £102 (2016: £102) and a weighted average remaining contractual life of 3 years (2016: 4 years).
A charge of $0.69 million (2016: $1.59 million) in relation to the SRP is included in the total share options charge.
Share options outstanding at the end of the year have the following expiry date and exercise prices:
Expiry date |
Exercise price (pence)
|
Options ('000)
|
|||
|
|
2017 |
2016 |
2017 |
2016 |
|
|
|
|
|
|
|
|
13 February 2018 |
3,000 |
3,000 |
11.0 |
11.0 |
|
24 September 2018 |
3,000 |
3,000 |
20.1 |
20.1 |
|
15 March 2019 |
3,000 |
3,000 |
15.9 |
15.9 |
|
30 July 2019 |
3,000 |
3,000 |
10.0 |
10.0 |
|
24 Jun 2020 |
7,500 |
7,500 |
156.3 |
156.3 |
|
22 September 2020 |
14,750 |
14,750 |
2.5 |
2.5 |
|
10 October 2020 |
17,500 |
17,500 |
2.5 |
2.5 |
|
6 February 2021 |
17,500 |
17,500 |
94.4 |
94.4 |
|
19 June 2021 |
14,625 |
14,625 |
5.5 |
5.5 |
|
7 July 2021 |
14,625 |
14,625 |
2.5 |
2.5 |
|
14 July 2021 |
14,625 |
14,625 |
2.5 |
2.5 |
|
21 July 2021 |
14,625 |
14,625 |
5.0 |
5.0 |
|
19 September 2021 |
15,250 |
15,250 |
2.5 |
2.5 |
|
26 October 2021 |
14,625 |
14,625 |
2.5 |
2.5 |
|
21 January 2022 |
5,500 |
5,500 |
15.0 |
15.0 |
|
20 March 2022 |
19,450 |
19,450 |
4.0 |
4.0 |
|
20 March 2022 |
25,000 |
25,000 |
2.5 |
2.5 |
|
8 July 2023 |
15,875 |
15,875 |
2.5 |
2.5 |
|
24 April 2024 |
9,975 |
9,975 |
2.5 |
2.5 |
|
|
|
|
|
359.7 |
359.7 |
|
Bonus shares
All shares in the Company's Executive Bonus Scheme were issued by 31 December 2014.
Exit Event Awards
On March 2012, the Remuneration Committee recommended that the Company make cash settled awards to certain Executive Directors and employees conditional on the occurrence of an Exit Event (as defined below) up to a maximum amount equivalent to the value of 0.1 million common shares (adjusted for consolidation on 100:1 basis) at the time of an Exit Event, and that a trustee (the "Exit Event Trustee") be appointed to hold and, subject to the occurrence of an Exit Event, to sell sufficient common shares to satisfy the Exit Event Awards.
On 21 March 2012, the Board approved the Exit Event Awards to certain Executive Directors and employees, subject to the occurrence of an Exit Event, equivalent to the value of 0.02 million common shares (adjusted for consolidation on 100:1 basis). The Exit Event Trustee will hold the remaining 0.08 million common shares (adjusted for consolidation on 100:1 basis) to satisfy any future Exit Event Awards to full-time employees of the Company and subsidiary companies, subject to the occurrence of an Exit Event, with such beneficiaries to be determined in due course. A further award of 0.01 million common shares (adjusted for consolidation on 100:1 basis) was made to staff in December 2013, with no additional Exit Event Awards made to Directors. The first tranche of Exit Event Awards expired in March 2017.
An Exit Event envisages a sale of either the Company or a substantial proportion (i.e. more than 50%) of its assets.
These share-based payments are measured at the fair value of the associated liability at the year end. As at 31 December 2017, the fair value of Exit Event Awards was $nil (2016: $nil) based on the market value of the shares and the probability of the Exit Event occurring assessed as of that date.
23. Related party transactions
The Group has a related party relationship with its subsidiaries. The Company and its subsidiaries, in the ordinary course of business, enter into various sales, purchase and service transactions with joint operations in which the Group has a material interest. These transactions are under terms that are no less favourable to the Group than those arranged with third parties.
Remuneration of key management personnel
The remuneration of the Directors and Officers, the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Those identified as key management personnel include the Directors of the Company and the following key personnel:
J Barker - HR Director
S Catterall - Chief Operations Officer
U Eminkahyagil - Kurdistan Country Manager
B Demont - Kurdistan Country Manager
K Kelly - Sub-Surface Manager Kurdistan
N Kernoha - Financial Controller
W McAvock - Financial Controller
M Messaoudi - Algeria Country Manager
G Papineau-Legris - Commercial Director
A Robinson - Legal Director & Company Secretary
M Ross - Legal Director & Company Secretary
J Stafford - Vice President Operations
N Zahawi - Chief Strategy Officer
The values below are calculated in accordance with IAS 19 and IFRS 2.
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Short-term employee benefits |
6,514 |
5,136 |
|
Other allowances |
- |
- |
|
Share-based payment - options |
1,630 |
302 |
|
|
8,144 |
5,438 |
Further information about the remuneration of individual Directors is provided in the Directors' Emoluments section of the Remuneration Committee Report.
24. Financial instruments
|
|
2017 $'000 |
2016 $'000 |
|
|
|
|
|
Financial assets |
|
|
|
Cash and cash equivalents |
160,456 |
92,870 |
|
Loans and receivables |
61,148 |
40,976 |
|
|
221,604 |
133,846 |
|
|
|
|
|
Financial liabilities |
|
|
|
Trade and other payables |
57,038 |
41,844 |
|
Reinstated Note |
97,068 |
98,886 |
|
|
154,106 |
140,730 |
All loans and payables, except for the Reinstated Notes, are due to be settled within one year and are classified as current liabilities.
The maturity profile and fair values of the Reinstated Notes are disclosed in note 16. The maturity profile of all other financial liabilities is indicated by their classification in the balance sheet as "current" or "non-current". Further information relevant to the Group's liquidity position is disclosed in the Directors' Report under "Going Concern".
Fair value hierarchy
In line with IFRS 13 - 'Fair Value Measurement' the Group uses the following hierarchy for determining the fair value of financial instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and
Level 3: techniques which use inputs which have a significant effect on the recorded value that are not based on observable market data.
Capital Risk Management
The Group manages its capital to ensure that the entities within the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group is not subject to externally imposed capital requirements. The capital structure of the Group consists of cash, cash equivalents, Reinstated Notes and equity attributable to equity holders of the parent, comprising issued capital, reserves and accumulated losses as disclosed in Note 19, the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Changes in Equity.
Capital Structure
The Group's Board of Directors reviews the capital structure on a regular basis and makes adjustments to it in light of changes in economic conditions. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital.
On 14 October 2016, the Group successfully completed the Balance Sheet Restructuring reducing the Group's debt from over $600 million to $100 million of the Reinstated Notes through the partial conversion of the guaranteed notes and full conversion of the convertible bonds to the Company's common shares.
Significant Accounting Policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in the Summary of Significant Accounting Policies.
Financial Risk Management Objectives
The Group's management monitors and manages the financial risks relating to the operations of the Group. These financial risks include market risk (including commodity price, currency and fair value interest rate risk), credit risk, liquidity risk and cash flow interest rate risk.
The Group currently has no currency risk or other hedges against financial risks as the benefit of entering into such agreements is not considered to be significant enough as to outweigh the significant cost and administrative burden associated with such hedging contracts. The Group does not use derivative financial instruments for speculative purposes.
The risks are closely reviewed by the Board on a regular basis and steps are taken where necessary to ensure these risks are minimised.
Market risk
The Group's activities expose it primarily to the financial risks of changes in foreign currency exchange rates, oil prices and changes in interest rates in relation to the Group's cash balances. The operating currencies of the Group are the pound sterling (GBP), United States dollar (USD), Algerian dinar (DZD) and Iraqi dinar (IQD).
The Group's exposure to currency risk is low as the Reinstated Notes are denominated in USD, which is the main currency for the Group's transactions, and following the utilisation of sterling funds from previous equity raises. During the year the majority of funds raised in the GBP equity issue were converted to USD at the spot rate, with a small balance being held in GBP to meet GBP denominated expenditure. Previously, currency hedges were entered into to address foreign currency risk arising when entering into funding transactions in GBP.
There have been no changes to the Group's exposure to other market risks or any changes to the manner in which the Group manages and measures the risk. The Group does not hedge against the effects of movement in oil prices. The risks are monitored by the Board on a regular basis.
Foreign currency risk management
The Group undertakes certain transactions denominated in foreign currencies, being any currency other than the functional currency of the Group subsidiary concerned. Hence, exposures to exchange rate fluctuations arise.
At 31 December 2017, a 10% weakening or strengthening of the US dollar against the other currencies in which the Group's monetary assets and monetary liabilities are denominated would not have a material effect on the Group's net current assets or loss before tax.
Interest rate risk management
The Group's policy on interest rate management is agreed at the Board level and is reviewed on an ongoing basis. The current policy is to maintain a certain amount of funds in the form of cash for short-term liabilities and have the rest on relatively short-term deposits, usually between one and three months, to maximise returns and accessibility. Under the terms of the Reinstated Notes, until 18 October 2018, the Group has the option to defer interest at 13% or pay in cash at 10%. From 19 October 2018, the Group must pay interest in cash at 10%.
Interest rate sensitivity analysis
Based on the exposure to the interest rates for cash and cash equivalents at the balance sheet date, a 0.5% increase or decrease in interest rates would not have had a material impact on the Group's loss for the year or the previous year. A rate of 0.5% is used as it represents management's assessment of the reasonably possible changes in interest rates.
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. As at 31 December 2017, the maximum exposure to credit risk from a trade receivable outstanding from one customer is $60 million (2016: $36 million).
The credit risk on liquid funds is limited because the counterparties for a significant portion of the cash and cash equivalents at the balance sheet date are banks with good credit ratings assigned by international credit-rating agencies.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of Directors. It is the Group's policy to finance its business by means of internally generated funds, external share capital and debt. In common with many exploration companies, the Group raises finance for its exploration and appraisal activities in discrete tranches to finance its activities for limited periods. The Group seeks to raise further funding as and when required.
25. Contingent liabilities
The Group has a contingent liability of $27 million (2016: $27 million) in relation to the proceeds from the sale of test production in the period prior to the approval of the Shaikan Field Development Plan in July 2013. The Shaikan PSC does not appear to address expressly any party's rights to this pre-Development Plan petroleum. This suggests strongly that there must have been some other agreement, understanding or arrangement between GKP and the KRG as to how this pre-Development Plan petroleum would be lifted and sold. The sales were made based on sales contracts with domestic offtakers which were approved by the KRG. The Group believes that the receipts from these sales of pre-Development Plan petroleum are for the account of the Contractor (GKP and MOL), rather than the KRG and accordingly recorded them as test revenue in prior years. However, the KRG has requested a repayment of these amounts and the Group is currently involved in negotiations to resolve this matter. The Group has received external legal advice and does not consider that a probable material payment is payable to the KRG. This contingent liability forms part of the ongoing Shaikan PSC amendment negotiations and it is likely that it will be settled as part of those negotiations.
26. Events after the balance sheet date
In early April 2018, considering the current healthy cash balance and regularity of payments from the MNR, the Group decided to pay its upcoming Reinstated Notes coupon of $5.0 million at 10% interest rate on 18 April 2018, even though it has the option to postpone it to maturity (at 13% interest rate).
This information is provided by RNS
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