Half Yearly Report

RNS Number : 1933P

Petroneft Resources PLC

30 September 2013

 

PetroNeft Resources plc

("PetroNeft" or the "Company")

2013 Interim Results

PetroNeft Resources plc (AIM: PTR) owner and operator of Licences 61 and 67, Tomsk Oblast, Russian Federation, is pleased to report its results for the 6 months ended 30 June 2013.

Highlights:

·     H1 production of 445,949 barrels of oil for the period - average of 2,464 bopd

·     Encouraging further progress on financing

·     Current group production 2,500 bopd

David Golder, Chairman of PetroNeft Resources plc, commented:

"The first half of 2013 was a busy period for the Company. Some production issues were resolved leading to more stable production in recent months.

Since the Annual General Meeting on 11 September we have continued to make good progress on re-financing the Company and I hope to be able to update shareholders in detail on this point in the coming weeks."

For further information, contact:

Dennis Francis, CEO, PetroNeft Resources plc	[phone]
Paul Dowling, CFO, PetroNeft Resources plc	[phone]
John Frain/Brian Garrahy, Davy (NOMAD and Joint Broker)	[phone]
Henry Fitzgerald-O'Connor, Canaccord Genuity Limited (Joint Broker)	[phone]
Martin Jackson, Citigate Dewe Rogerson	[phone]
Joe Murray/Ed Micheau, Murray Consultants	[phone]

Dear Shareholder,

I am pleased to report on the activities of the Company for the six months to 30 June 2013 and provide an update on recent activities.

Production and Sales

Production in the six months to 30 June 2013 was 445,949 barrels of oil or an average of 2,464 bopda 13% increase compared to the same period in 2012 where production was 394,652 barrels of oil or an average of 2,168 bopd. We sold 438,350 barrels of oil in the six months to 30 June 2013 (H1 2012:403,674 bbls) and achieved an average oil price of $42.48 (H1 2012: $43.12). The domestic pricing in the second quarter was lower than expected leading to a reduced gross margin in the period but the price has since recovered with record prices achieved in the third quarter.

Two new oil production wells were drilled at Arbuzovskoye in the first quarter in addition to a water source well to provide water for the water injection system at Arbuzovskoye. While we encountered a number of production difficulties in the early months of 2013, we successfully resolved these issues through a programme of re-perforation of wells at Arbuzovskoye.

We are very encouraged by the stability of production in recent months, which is currently steady at 2,500 bopd. The pressure maintenance programme that commenced at Arbuzovskoye in April 2013 is continuing and is working well. In recent weeks, we have seen some positive impact in the production well nearest to the injection well - similar to the response seen earlier at Lineynoye. This should expand to other nearby production wells in the coming months. Production at Lineynoye also remains very stable with little decline evident. We have also benefitted from strong realised oil prices in recent months.

Development drilling programme - Arbuzovskoye oil field

Two new production wells were drilled at Arbuzovskoye in the first half of 2013 achieving initial rates of 140 bopd and 160 bopd. In March 2013, drilling activities were paused at Arbuzovskoye to allow the commencement of the water injection programme the results of which will help guide future well locations.It is likely that at least three additional wells will ultimately be drilled from Arbuzovskoye Pad 1 to fully exploit the area.The drilling rig remains on site at Arbuzovskoye together with supplies to drill three wells.

Financing

In March 2013, we commenced repayments of US$650,000 per month to Macquarie Bank Limited and we continue to make these payments from our own resources. The current balance on this facility, net of cash held by Macquarie in the Debt Service Reserve Account, is US$13.6 million.

To support the Company's developmentaspirations we appointed financial advisors, Evercore Partners LLP, to assist with negotiations in relation to a potential farmout of up to 50% of Licence 61 and are currently in discussions with a number of parties. We are also in active negotiation with a number of Russian and International banks to refinance the Macquarie debt facility with a longer term arrangement which more appropriately reflects the long term production profile and growth potential of our asset base.

Discussions continue on both the re-financing and planned farmout of Licence 61.We have made good progress on concluding a re-financing of the existing Macquarie Bank facility in recent weeks.

Future drilling programme

Subject to the successful completion of re-financing of the bank debt, or a farmout, plans are in place for re-commencement of drilling operations later this year. This plan includes a delineation well at West Lineynoye, commencement of drilling additional production wells at Arbuzovskoye and, in 2014, delineation wells at Tungolskoye and Sibkrayevskoye, where significant upside potential and near-term developments are possible.

Financial results for the period

The net loss after tax for the period was US$10,593,368 (H1 2012: US$6,990,186). The loss includes a foreign exchange loss of US$6,376,921 (H1 2012: US$2,760,623) on loans denominated in US Dollars and Russian Roubles from PetroNeft to its Russian subsidiaries Stimul-T and Granite Construction whose functional currency is the Russian Rouble. Net cash flows from operating activities in the period were US$3,143,193 (H1 2012: US$4,685,880).

Financial Highlights			Unaudited				Audited
			6 months ended 30 June 2013		6 months ended 30 June 2012		Year ended 31 December 2012
			US$		US$		US$
Revenue			18,624,293		17,646,024		34,581,257
Cost of sales			(16,683,461)		(15,115,280)		(30,134,453)
Gross profit			1,940,832		2,530,744		4,446,804
Gross margin			10%		14%		13%
Administrative expenses
Overheads			(3,386,091)		(3,548,720)		(6,313,028)
Share-based payment expense			(247,549)		(500,044)		(977,030)
Other foreign exchange gain/(loss)			217,634		83,607		(90,533)
			(3,416,006)		(3,965,157)		(7,380,591)
Foreign exchange (loss)/gain on intra-Group loans			(6,376,921)		(2,760,623)		4,538,236
Finance costs			(1,751,751)		(1,750,892)		(4,216,548)
Loss for the period attributable to equity holders of the Parent			(10,593,368)		(6,990,186)		(4,566,143)
Capital expenditure in the period			3,137,110		8,972,891		14,270,220
Net proceeds of equity share issues			-		-		16,256,115
Bank and cash balance at period end (including restricted cash)			4,130,720		5,715,486		7,939,422
Total debt at period end (undiscounted)			33,900,000		45,000,000		36,500,000

Conclusion

The first half of 2013 was a busy period for the Company. Some production issues were resolved leading to more stable production in recent months.

Since the Annual General Meeting on 11 September we have continued to make good progress on re-financing the Company and I hope to be able to update shareholders in detail on this point in the coming weeks.

David Golder

Non-Executive Chairman

Interim Consolidated Income Statement
For the 6 months ended 30 June 2013			Unaudited				Audited
			6 months ended 30 June 2013		6 months ended 30 June 2012		Year ended 31 December 2012
	Note		US$		US$		US$
Continuing operations
Revenue			18,624,293		17,646,024		34,581,257
Cost of sales			(16,683,461)		(15,115,280)		(30,134,453)
Gross profit			1,940,832		2,530,744		4,446,804
Administrative expenses			(3,416,006)		(3,965,157)		(7,380,591)
Exchange gain/(loss) on intra-Group loans			(6,376,921)		(2,760,623)		4,538,236
Operating profit /(loss)			(7,852,095)		(4,195,036)		1,604,449
Loss on disposal of oil and gas properties			-		-		(19,231)
Share of joint venture's net loss			(127,267)		(178,264)		(223,472)
Finance revenue			9,291		10,518		77,233
Finance costs	5		(1,751,751)		(1,750,892)		(4,216,548)
Loss for the period for continuing operations before taxation			(9,721,822)		(6,113,674)		(2,777,569)
Income tax expense	6		(871,546)		(876,512)		(1,788,574)
Loss for the period attributable to equity holders of the Parent			(10,593,368)		(6,990,186)		(4,566,143)
Loss per share attributable to ordinary equity holders of the Parent
Basic and diluted - US dollar cent			(1.64)		(1.68)		(1.03)

Interim Consolidated Statement of Comprehensive Income
For the 6 months ended 30 June 2013			Unaudited				Audited
			6 months ended 30 June 2013		6 months ended 30 June 2012		Year ended 31 December 2012
			US$		US$		US$
Loss for the period attributable to equity holders of the Parent			(10,593,368)		(6,990,186)		(4,566,143)
Currency translation adjustments			(3,395,214)		(1,056,282)		2,406,068
Total comprehensive loss for the period attributable to equity holders of the Parent			(13,988,852)		(8,046,468)		(2,160,075)

Interim Consolidated Balance Sheet
As at 30 June 2013			Unaudited				Audited
			30 June 2013		30 June 2012		31 December 2012
	Note		US$		US$		US$
Assets
Non-current Assets
Oil and gas properties	7		97,483,831		93,862,706		105,097,756
Property, plant and equipment	8		1,464,430		1,710,360		1,696,626
Exploration and evaluation assets	9		26,282,372		25,962,359		28,294,677
Equity-accounted investment in joint venture	10		3,438,283		3,573,728		3,819,142
			128,668,916		125,109,153		138,908,201
Current Assets
Inventories	11		1,811,156		1,612,014		1,711,417
Trade and other receivables	12		978,403		1,512,656		1,320,032
Cash and cash equivalents	13		130,720		1,715,486		3,939,422
Restricted cash	13		4,000,000		4,000,000		4,000,000
			6,920,279		8,840,156		10,970,871
Total Assets			135,589,195		133,949,309		149,879,072
Equity and Liabilities
Capital and Reserves
Called up share capital			8,561,499		5,636,142		8,561,499
Share premium account			136,762,387		122,431,629		136,762,387
Share-based payments reserve			6,513,594		5,591,829		6,266,045
Retained loss			(58,950,664)		(50,781,339)		(48,357,296)
Currency translation reserve			(8,619,657)		(8,686,793)		(5,224,443)
Other reserves			336,000		336,000		336,000
Equity attributable to equity holders of the Parent			84,603,159		74,527,468		98,344,192
Non-current Liabilities
Provisions			1,644,170		1,655,442		1,843,790
Interest-bearing loans and borrowings	15		14,682,383		14,474,828		14,559,722
Deferred tax liability	6		5,740,566		3,961,350		4,871,227
			22,067,119		20,091,620		21,274,739
Current Liabilities
Trade and other payables	14		10,102,313		9,635,150		8,909,830
Interest-bearing loans and borrowings	15		18,816,604		29,695,071		21,350,311
			28,918,917		39,330,221		30,260,141
Total Liabilities			50,986,036		59,421,841		51,534,880
Total Equity and Liabilities			135,589,195		133,949,309		149,879,072

Interim Consolidated Statement of Changes in Equity
For the 6 months ended 30 June 2013
	Share capital		Share premium		Share-based payment and other reserves		Currency translation reserve		Retained loss		Total
	US$		US$		US$		US$		US$		US$
At 1 January 2012	5,636,142		122,431,629		5,230,985		(7,630,511)		(43,791,153)		81,877,092
Loss for the year	-		-		-		-		(4,566,143)		(4,566,143)
Currency translation adjustments	-		-		-		2,406,068		-		2,406,068
Total comprehensive loss for the year	-		-		-		2,406,068		(4,566,143)		(2,160,075)
New share capital subscribed	2,762,969		14,447,506		-		-		-		17,210,475
Transaction costs on issue of share capital	-		(954,360)		-		-		-		(954,360)
Conversion of debt for new shares issued	162,388		837,612		-		-		-		1,000,000
Share-based payment expense	-		-		977,030		-		-		977,030
Share-based payment expense - Macquarie warrants	-		-		197,230		-		-		197,230
Arawak warrants	-		-		196,800		-		-		196,800
At 31 December 2012	8,561,499		136,762,387		6,602,045		(5,224,443)		(48,357,296)		98,344,192
At 1 January 2013	8,561,499		136,762,387		6,602,045		(5,224,443)		(48,357,296)		98,344,192
Loss for the period	-		-		-		-		(10,593,368)		(10,593,368)
Currency translation adjustments	-		-		-		(3,395,214)		-		(3,395,214)
Total comprehensive loss for the period	-		-		-		(3,395,214)		(10,593,368)		(13,988,582)
Share-based payment expense	-		-		247,549		-		-		247,549
At 30 June 2013	8,561,499		136,762,387		6,849,594		(8,619,657)		(58,950,664)		84,603,159

Interim Consolidated Cash Flow Statement
For the 6 months ended 30 June 2013
			Unaudited				Audited
			6 months ended 30 June 2013		6 months ended 30 June 2012		Year ended 31 December 2012
			US$		US$		US$
Operating activities
Loss before taxation			(9,721,822)		(6,113,674)		(2,777,569)
Adjustment to reconcile loss before tax to net cash flows
Non-cash
Depreciation			2,730,042		1,933,985		4,637,596
Loss on disposal of oil and gas properties			-		-		19,231
Share loss in joint venture			127,267		178,264		223,472
Share-based payment expense			247,549		500,044		977,030
Finance revenue			(9,291)		(10,518)		(77,233)
Finance costs	5		1,751,751		1,750,892		4,216,548
Working capital adjustments
Decrease in trade and other receivables			241,470		1,204,750		1,603,422
Decrease in inventories			186,463		447,077		383,541
Increase/(decrease) in trade and other payables			7,589,764		4,805,860		(1,837,731)
Income tax paid			-		(10,800)		(186,675)
Net cash flows received from operating activities			3,143,193		4,685,880		7,181,632
Investing activities
Purchase of oil and gas properties			(2,670,631)		(11,748,966)		(18,479,654)
Advance payments to contractors			(19,000)		(92,963)		(119,159)
Purchase of property, plant and equipment			(90,317)		(6,219)		(15,529)
Proceeds from disposal of property, plant and equipment			32,275		(1,260,416)		3,549
Exploration and evaluation payments			(171,908)		-		(1,787,260)
Investment in joint venture undertaking			-		-		-
Decreasein restricted cash			-		1,000,000		1,000,000
Interest received			9,291		10,518		52,714
Net cash used in investing activities			(2,910,290)		(12,098,046)		(19,345,339)

Interim Consolidated Cash Flow Statement (continued)

			Unaudited				Audited
			6 months ended 30 June 2013		6 months ended 30 June 2012		Year ended 31 December 2012
			US$		US$		US$
Financing activities
Proceeds from issue of share capital			-		-		17,210,475
Transaction costs of issue of shares			-		-		(954,360)
Proceeds from loan facilities			-		15,000,000		15,000,000
Transaction costs on loans and borrowings			-		(337,754)		(350,811)
Repayment of loan facilities			(2,600,000)		(5,000,000)		(12,500,000)
Interest paid			(1,436,185)		(1,575,270)		(3,340,504)
Net cash (paid)/received (to)/from financing activities			(4,036,185)		8,086,976		15,064,800
Net (decrease)/increase in cash and cash equivalents			(3,803,282)		674,810		2,901,093
Translation adjustment			(5,420)		10,671		8,324
Cash and cash equivalents at the beginning of the period			3,939,422		1,030,005		1,030,005
Cash and cash equivalents at the end of the period	13		130,720		1,715,486		3,939,422

1.         Corporate information

The interim condensed consolidated financial statements of the Group for the six months ended 30 June 2013 were authorised for issue in accordance with a resolution of the Directors on 27 September 2013.

PetroNeft Resources plc ('the Company', or together with its subsidiaries, 'the Group') is a Company incorporated in Ireland. The Company is listed on the Alternative Investment Market ('AIM') of the London Stock Exchange and the Enterprise Securities Market ('ESM') of the Irish Stock Exchange. The address of the registered office and the business address in Ireland is 20 Holles Street, Dublin 2. The Company is domiciled in the Republic of Ireland.

The principal activities of the Group are oil and gas exploration, development and production. 

2.          Going concern

As noted in the 2012 Annual Report in October 2012 a revised borrowing base was agreed with Macquarie Bank Limited ("Macquarie")which amongst other things led to the commencement of monthly repayments of US$650,000 on 31 March 2013. The Macquarie loan matures in May 2014 at which time a final payment of US$8.4 million (in addition to the US$4 million restricted cash held by Macquarie) will be required.

The Company has entered into discussions with a number of parties and is currently pursuing two independent funding strategies. In consultation with major shareholders and finance providers we have concluded that a farmout of up to 50% of Licence 61, while remaining as operator, represents the best way to provide the necessary finance to strengthen the Group's financial position and allow it to realise the full potential of its substantial asset base. In that regard we have contracted Evercore Partners to run a formal process to seek an industry partner to join in the development and exploration of the licence. We have set up an extensive electronic data room and are in discussions with a number of potential partners. Secondly, we are also in discussions with certain Russian and international banks with a view to re-financing the existing debt facilities,however, the farmout option remains the preference of the Board of Directors. The aim of these discussions is to deliver a long term solution to the Group's finances to enable it to fully exploit its portfolio of reserves and prospects.

While, as at the date of approval of these financial statements, no commitment has been received in respect of either a farmout or re-financing, and there can be no certainty that additional funding will ultimately be received, significant progress has been made and the Directors remain confident about the outcome of these discussions and the resilience of the Group despite the pressures outlined above.

The Group has analysed its cash flow requirements through to 31 December 2014 in detail. The monthly repayments from operating cash flows of US$650,000 to Macquarie commenced in March 2013, however, based on our current cash flow forecasts the Group will need to obtain additional funding in order to repay in full the final amount of US$8.4 million due in May 2014. The cash flow includes estimates for a number of key variables including timing of cash flows of development expenditure, oil price, production rates, and management of working capital. The Directors believe that the Group's cash flow forecasts represent the Group's best estimate of the results over the forecast period as at the date of approval of the financial statements. As part of the Directors' overall consideration of the appropriateness of going concern, the cash flow is stress tested to assess the potential adverse effect arising from reasonable changes in circumstance. It is recognised that the cash flow impact of these changes could result in further funding being required.   In addition, under the revised borrowing base the Group has to remain in compliance with certain financial covenants and lender approvals.     

These circumstances represent a material uncertainty that may cast significant doubt upon the Group and the Company's ability to continue as a going concern. Nevertheless, after making enquiries, and considering the uncertainties described above, the Directors are confident that the Group and the Company will have adequate resources to continue in operational existence for the foreseeable future. For these reasons, the Directors continue to adopt the going concern basis in preparing the annual report and accounts.

Accordingly, these financial statements do not include any adjustments to the carrying amount or classification of assets and liabilities that would result if the Group or Company was unable to continue as a going concern.

3.          Accounting policies

3.1       Basis of Preparation

The interim condensed consolidated financial statements for the six months ended 30 June 2013 have been prepared in accordance with IAS 34 Interim Financial Reporting.

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31 December 2012 which are available on the Group's website - www.petroneft.com.

The interim condensed consolidated financial statements are presented in US dollars ("US$").

3.2       Significant Accounting Policies

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2012.

4.         Segment information

At present the Group has one reportable operating segment, which is oil exploration and production. As a result, there are no further disclosures required in respect of the Group's reporting segment.

The risk and returns of the Group's operations are primarily determined by the nature of the activities that the Group engages in, rather than the geographical location of these operations.  This is reflected by the Group's organisational structure and the Group's internal financial reporting systems.

Management monitors and evaluates the operating results for the purpose of making decisions consistently with how it determines operating profit or loss in the consolidated financial statements.

Geographical segments

All of the Group's sales are in Russia. Substantially all of the Group's capital expenditures are in Russia.

Non-current assets
Assets are allocated based on where the assets are located:
	Unaudited				Audited
	30 June 2013		30 June 2012		31 December 2012
	US$		US$		US$
Russia	128,662,026		125,101,637		138,899,550
Ireland	6,890		7,516		8,651
	128,668,916		125,109,153		138,908,201

5.	Finance costs
				Unaudited				Audited
				6 months ended 30 June 2013		6 months ended 30 June 2012		Year ended 31 December 2012
				US$		US$		US$
	Interest on loans			1,625,139		1,673,265		3,890,820
	Unwinding of discount on decommissioning provision			126,612		77,627		65,167
	Other			-		-		260,561
				1,751,751		1,750,892		4,216,548

6.	Income tax
				Unaudited				Audited
				6 months ended 30 June 2013		6 months ended 30 June 2012		Year ended 31 December 2012
				US$		US$		US$
	Current income tax
	Current income tax charge			2,206		61,920		64,105
	Income tax on dividends (paid in Russia)			-		10,797		10,799
	Total current income tax			2,206		72,717		74,904
	Deferred tax
	Relating to origination and reversal of temporary differences			869,340		803,795		1,713,670
	Total deferred tax			869,340		803,795		1,713,670
	Income tax expense reported in the Consolidated Income Statement			871,546		876,512		1,788,574

7.	Oil and gas properties
		Wells		Equipment and facilities		Pipeline		Total
		US$		US$		US$		US$
	Cost
	At 1 January 2012	63,611,460		25,557,989		13,315,422		102,484,871
	Additions	8,281,792		1,227,254		2,333,384		11,842,430
	Disposals	(19,231)		-		-		(19,231)
	Translation adjustment	3,485,238		1,383,657		754,214		5,623,109
	At 1 January 2013	75,359,259		28,168,900		16,403,020		119,931,179
	Additions	1,725,175		1,302,167		24,650		3,051,992
	Disposals	-		-		-		-
	Translation adjustment	(5,394,916)		(2,076,186)		(1,171,594)		(8,642,696)
	At 30 June 2013	71,689,518		27,394,881		15,256,076		114,340,475
	Depreciation
	At 1 January 2012	8,711,882		958,420		116,593		9,786,895
	Charge for the year	3,706,710		893,632		108,953		4,709,295
	Translation adjustment	261,360		61,149		14,724		337,233
	At 1 January 2013	12,679,952		1,913,201		240,270		14,833,423
	Charge for the period	2,263,383		552,758		60,486		2,876,627
	Translation adjustment	(666,470)		(166,498)		(20,438)		(853,406)
	At 30 June 2013	14,276,865		2,299,461		280,318		16,856,644
	Net book values
	At 30 June 2013	57,412,653		25,095,420		14,975,758		97,483,831
	At 31 December 2012	62,679,307		26,255,699		16,162,750		105,097,756

The net book value at 30 June 2013 includes US$5,952,907(YE2012: US$8,369,828) in respect of assets under construction, which are not yet being depreciated.

Expenditure of US$3,051,992was incurred mainly in connection with the Arbuzovskoye oil field, primarily relating to production wells and oilfield infrastructure.

8.	Property, Plant and Equipment
		Buildings &
		leasehold		Plant and		Motor
		improvements		machinery		vehicles		Total
		US$		US$		US$		US$
	Cost
	At 1 January 2012	1,046,723		1,748,682		117,670		2,913,075
	Additions	-		15,529		-		15,529
	Disposals	-		(3,549)		-		(3,549)
	Translation adjustment	55,961		94,062		6,325		156,348
	At 1 January 2013	1,102,684		1,854,724		123,995		3,081,403
	Additions	-		14,943		70,175		85,118
	Disposals	-		(32,275)		-		(32,275)
	Translation adjustment	(79,421)		(130,548)		(12,786)		(222,755)
	At 30 June 2013	1,023,263		1,706,844		181,384		2,911,491
	Depreciation
	At 1 January 2012	146,251		785,981		54,905		987,137
	Charge for the year	63,217		250,421		25,698		339,336
	Translation adjustment	8,996		45,896		3,412		58,304
	At 1 January 2013	218,464		1,082,298		84,015		1,384,777
	Charge for the period	31,610		141,172		16,643		189,425
	Disposals	-		(19,676)		-		(19,676)
	Translation adjustment	(17,444)		(83,064)		(6,957)		(107,465)
	At 30 June 2013	232,630		1,120,730		93,701		1,447,061
	Net book values
	At 30 June 2013	790,633		586,114		87,683		1,464,430
	At 31 December 2012	884,220		772,426		39,980		1,696,626

9.	Exploration and evaluation assets
						Exploration & Evaluation Expenditure
						US$
	Cost
	At 1 January 2012					24,552,717
	Additions					2,412,261
	Translation adjustment					1,329,699
	At 1 January 2013					28,294,677
	Disposals					(25,587)
	Translation adjustment					(1,986,718)
	At 30 June 2013					26,282,372
	Net book values
	At 30 June 2013					26,282,372
	At 31 December 2012					28,294,677

Exploration and evaluation expenditure represents active exploration projects. These amounts will be written-off to the Consolidated Income Statement as exploration costs unless commercial reserves are established, or the determination process is not completed and there are no indications of impairment. The outcome of ongoing exploration, and therefore whether the carrying value of these assets will ultimately be recovered, is inherently uncertain.

In accordance with IFRS 6, once commercial viability is demonstrated the capitalised exploration and evaluation costs are transferred to oil and gas properties or intangibles, as appropriate after being assessed for impairment.

10.

Equity-accounted investment in Joint Venture

PetroNeft Resources plchas a 50% interest in Russian BD Holdings B.V., a jointly controlled entity which holds 100% of LLC Lineynoye, an entity involved in oil and gas exploration and the registered holder of Licence 67. The interest in this joint venture is accounted for using theequity accounting method.Russian BD Holdings B.V. is incorporated in the Netherlands and carries out its activities in Russia.

			Share of net assets
			US$
At 1 January 2012			3,851,880
Retained loss			(223,472)
Translation adjustment			190,734
At 1 January 2013			3,819,142
Retained loss			(127,268)
Translation adjustment			(253,591)
At 30 June 2013			3,438,283

Summarised financial statement information prepared in accordance with IFRS of the equity-accounted joint venture entity is disclosed below:

Summarised Interim Financial statements of equity-accounted joint venture (50% share)

			Unaudited				Audited
			6 months ended 30 June 2013		6 months ended 30 June 2012		Year ended 31 December 2012
			US$		US$		US$
Sales and other operating revenues			-		-		-
Operating expenses			(35,545)		(105,815)		(196,468)
Exchange loss			(65,450)		(63,427)		8,890
Finance revenue			86		1,380		1,719
Finance costs			(21,377)		(8,338)		(30,437)
Loss before taxation			(122,286)		(176,200)		(216,296)
Taxation			(4,982)		(2,064)		(7,176)
Loss for the period			(127,268)		(178,264)		(223,472)
			Unaudited				Audited
			30 June 2013		30 June 2012		31 December 2012
			US$		US$		US$
Current assets			108,627		189,733		61,672
Non-current assets			4,273,484		4,243,349		4,647,923
Total assets			4,382,111		4,433,082		4,709,595
Current liabilities			(51,643)		(33,450)		(29,413)
Non-current liabilities			(892,185)		(825,904)		(861,040)
Total liabilities			(943,828)		(859,354)		(890,453)

11.	Inventories
				Unaudited				Audited
				30 June 2013		30 June 2012		31 December 2012
				US$		US$		US$
	Oil stock			1,662,932		1,417,696		1,572,957
	Materials			148,224		194,318		138,460
				1,811,156		1,612,014		1,711,417

12.	Trade and other receivables
			Unaudited				Audited
			30 June 2013		30 June 2012		31 December 2012
			US$		US$		US$
	Russian VAT		16,729		335,395		55,519
	Russian profit tax receivable		6,610		-		168,885
	Other receivables		156,180		359,750		165,054
	Receivable from jointly controlled entity (Note 16)		721,092		647,868		657,492
	Advances to and receivables from related parties (Note 16)		7,035		50,702		69,762
	Advances to contractors		11,965		42,261		49,397
	Prepayments		58,792		76,680		153,923
			978,403		1,512,656		1,320,032

              The Directors consider that the carrying amount of trade and other receivables approximates their fair value.

              Other receivables are non-interest-bearing and are normally settled on 60-day terms.

Amounts owed by subsidiary undertakings are interest-bearing. Interest is charged at rates ranging from 0% to 10%.

13.	Cash and Cash Equivalents and Restricted Cash
				Unaudited				Audited
				30 June 2013		30 June 2012		31 December 2012
				US$		US$		US$
	Cash at bank and in hand			130,720		1,715,486		3,939,422
	Restricted cash			4,000,000		4,000,000		4,000,000
				4,130,720		5,715,486		7,939,422

              At 30 June 2013 restricted cash amounting to US$4 million is being held in a Macquarie Debt Service Reserve Account ("DSRA").This account is part of the security package held by Macquarie and may be offset against the loan in the event of a default on the loan or by agreement between the parties.

              Bank deposits earn interest at floating rates based on daily deposit rates.Short-term deposits are made for varying periods of between one day and one month depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.

14.	Trade and other payables
			Unaudited				Audited
			30 June 2013		30 June 2012		31 December 2012
			US$		US$		US$
	Trade payables		1,545,374		3,063,278		945,955
	Trade payables to jointly controlled entity (Note 16)		182,945		16,768		18,241
	Trade payables to related parties (Note 16)		2,011,715		3,113,786		1,947,539
	Corporation tax		66,878		69,746		64,105
	Oil taxes, VAT and employee taxes		4,936,089		2,318,789		3,221,291
	Other payables		186,958		187,785		169,540
	Payments received in advance		387,595		-		1,531,204
	Accruals		784,759		864,998		1,011,955
			10,102,313		9,635,150		8,909,830

              The Directors consider that the carrying amount of trade and other payables approximates their fair value.

              Trade and other payables are non-interest-bearing and are normally settled on 60-day terms.

              Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs.

15.	Loans and borrowings
				Unaudited			Audited
	Group and Company	Effective interest rate	Maturity	30 June 2013		30 June 2012	31 December 2012
		%		US$		US$	US$
	Interest bearing
	Current liabilities
	Macquarie Bank - US$75,000,000 loan facility	9.79%	31-May-14	18,816,604		29,695,071	21,350,311
	Total current liabilites			18,816,604		29,695,071	21,350,311
	Non-current liabilities
	Arawak - US$15,000,000 loan	7.16%	30-May-15	14,682,383		14,474,828	14,559,722
	Total non-current liabilites			14,682,383		14,474,828	14,559,722
	Total loans and borrowings			33,498,987		44,366,699	35,910,033
	Contractual undiscounted liability			33,900,000		45,000,000	36,500,000

Macquarie loan facility

On 28 May 2010 the Group agreeda loan facility agreement for up to US$30 million with Macquarieto re-finance an existing facility of US$5 million. In April 2011, PetroNeft signed a revised borrowing base loan facility agreement with Macquarie for up to US$75 million. The initial borrowing base was set at US$30 million.

During 2012, pursuant to a borrowing base review, the Group repaid an amount of US$7.5 million on its outstanding loan balance and in addition an amount of US$1 million was converted into equity by way of issuing new shares. In addition to this monthly repayments of US$650,000 commenced on 31 March 2013.

Under the various loan agreements Macquarie was granted 10.1 million warrants at various strike prices and with various expiry dates. There was also a 1% cash arrangement fee associated with the new loan facility in 2011.

Total transaction costs, including share-based payment expense connected with the warrants granted, incurred in the 6 months to June 2013 amounted to US$Nil (2012: US$0.2 million) and are applied against the proceeds. The effective interest rate will be applied to the liability to accrete the transaction costs over the period of the loan.

Certain oil and gas properties (wells, central processing facility, pipeline) together with shares in WorldAce Investments Ltd, shares in Stimul-T, certain bank accounts and inventories are pledged as a security for the Macquarie loan facility agreement.

During the period the Group was in breach of certain financial covenants and conditions subject to the loan agreement, relating primarily certain financial ratios.  These conditions were waived by Macquarie such that the Group was not in breach as at the period-end.  However as the waiver did not extend to more than 12 months after the period-end, all of the Macquarie debt is classified as repayable within one year.

15.          Loans and borrowings (continued)

Arawak Energy Russia B.V. loan facility

On 30 May 2012, the Group signed a three-year loan agreement with Arawak for US$15 million. The loan carries an interest rate of LIBOR plus 6%. In addition, 4,000,000 warrants were granted to Arawak aspart of the loan agreement. Total transaction costs incurred in 2012 amounted to US$0.35 million and are applied against the proceeds. The effective interest rate will be applied to the liability to accrete the transaction costs over the period of the loan.Interest is payable monthly and the principal is repayable in one instalment on 30 May 2015. The loan is secured on PetroNeft's 50% interest in Russian BD Holdings B.V.

The loan arrangement constitutes a compound financial instrument under IAS 32 Financial Instruments: Presentationcomprising loans and borrowing and an equity component (warrants). These warrants granted to Arawak should be accounted for separately. Using the split accounting method, a value of US$0.2 million was allocated to the equity component which has been credited to reserves.

16.        Related party disclosures

Transactions between PetroNeft Resources plc and its subsidiaries, Stimul-T, Granite, Pervomayka, Dolomite, WorldAce Investments have been eliminated on consolidation. Details of transactions between the Group and other related parties are disclosed below.

Vakha Sobraliev, a Director of PetroNeft, is the principal of LLC Tomskburneftegaz ("TBNG") which has drilled production and exploration wells for the Group. Various contracts for drilling have been awarded to TBNG in recent years. All drilling contracts with TBNG are "turnkey" contracts whereby TBNG assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. As part of this relationship PetroNeft Group companies also occasionally sell sundry goods and services to TBNG. Other companies related to TBNG also provide some services to the Group such as transportation, power management and repairs.

The following is a summary of the transactions:

	30 June 2013		31 December 2012
	TBNG	Other companies	TBNG	Other companies
	US$	US$	US$	US$
Period ended
Maximum value of new contracts awarded during the period	-	-	441,264	-
Paid during the period for drilling and other services	1,568,998	78,803	9,834,779	491,339
Amount due to TBNG and related companies at period end	1,961,139	50,576	1,922,796	24,743
Received during the period for sundry goods and services	58,686	-	15,501	-
Amount due from TBNG and related companies at period end	3,755	3,280	66,228	3,534

16.        Related party disclosures(continued)

The Group has an indirect 50% interest in Lineynoye which in turn is 100% owned by the jointly controlled entity Russian BD Holdings B.V. Lineynoye also entered into some transactions with TBNG and related companies as follows:

	30 June 2013		31 December 2012
	TBNG	Other companies	TBNG	Other companies
	US$	US$	US$	US$
Period ended
Paid during the period for drilling and related services	-	-	1,375,582	-

The Group provided various goods and services to the jointly controlled entity Russian BD Holdings B.V. and its wholly-owned subsidiary LLC Lineynoye during six months ended 30 June 2013 amounting to US$88,958 (FY2012: US$332,424). An amount of US$721,092 (YE2012: US$657,492) is outstanding from these entities at 30 June 2013 while an amount of US$182,945 (YE2012: US$18,241) is payable.

 

END

 

 

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