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Phoenix Global Res (PGR)

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Monday 17 September, 2018

Phoenix Global Res

INTERIM RESULTS

RNS Number : 8965A
Phoenix Global Resources PLC
17 September 2018
 

17 September 2018

Phoenix Global Resources plc

UNAUDITED INTERIM RESULTS FOR THE SIX-MONTH PERIOD TO 30 JUNE 2018

 

Phoenix Global Resources plc ('Phoenix' or the 'company') (AIM: PGR; BCBA: PGR), the upstream oil and gas company offering its investors an opportunity to invest directly into Argentina's Vaca Muerta and other unconventional resources, is pleased to announce its unaudited interim results for the six-month period ended 30 June 2018.

2018 interim results highlights

·     Revenues of US$92.9 million (proforma¹ H1 2017: US$88.1 million)

·     Realised oil price before hedging of US$60.34/ bbl (H1 2017: US$49.57/ bbl)

·     Average daily production of 10,776 boepd (proforma¹ H2 2017: 11,304 boepd)

·     EBITDAX² of US$18.5 million (proforma¹ H1 2017: US$14.6 million)

·     Swap contract to support capex investment programme entered at US$65.97/ bbl

·   Hedge loss from swap contract of US$10.0 million (US$2.6 million realised and US$7.4 million represents unrealised mark-to-market fair value through expiration on 14 December 2018)

·     H1 2018 adjusted EBITDAX of US$28.4 million, excluding hedge loss

·    Mata Mora and Corralera working interests for retained areas increased to 90% with operatorship assumed by Phoenix

 

Post period highlights

·   Unconventional permits secured for drilling and completions campaign currently underway in Mendoza  province

·     Two wells drilled at Puesto Rojas in H1 2018, one well drilled in August and a further seven wells to be drilled in the remainder of H2 2018

·    Five of the wells at Puesto Rojas are scheduled for unconventional completion in H2 2018 with a further five  conventional completions planned

·     Scheduled to start drilling first horizontal well at Mata Mora in September 2018

·  First unconventional horizontal well targeting Vaca Muerta and Tight Agrio formations at Puesto Rojas scheduled for Q1 2019

·     Conventional exploration well drilled at Laguna el Loro determined to be dry and abandoned

 

Anuj Sharma, CEO said:

 

"The first six-months of 2018 have seen Phoenix make significant progress with the appraisal programme of its substantial position in the Vaca Muerta having crucially satisfied permitting requirements of the Mendoza province in respect of our planned unconventional activity. With this, Phoenix has now moved to investing into drilling and completion activity to appraise and unlock the massive potential of our acreage. During this period, Phoenix is conscious to keep in close contact with local Mendoza representatives as we continue to be a responsible, safe and environmentally sound operator and to provide jobs and investment into the Mendoza region.

The unconventional drilling and completions campaign has been progressing well and as planned with a number of wells completed and currently being put in the flowback stage. I look forward to providing further updates as we progress through and beyond the flowback stage and production from the wells stabilises when we expect to be in a position to ascertain sustainable flow rates and estimates of ultimately recoverable reserves."

Notes:

¹ Proforma figures represent the simple aggregation of H1 2017 financial or operating information for Andes Energia plc ("Andes") and Trefoil Holdings B.V. ("Trefoil") as reported in the respective 30 June 2017 condensed consolidated interim financial information. Such financial information is available in the investor relations section of the company's website, www.phoenixglobalresources.com.

 

² EBITDAX represents earnings before interest, taxes, depreciation, amortisation and exploration expenses. EBITDAX is reconciled on the income statement. Adjusted EBITDAX is stated before/ after adjustment for specific identified items.

 

For further information, please contact:

 

Phoenix Global Resources plc

Anuj Sharma, CEO

Philip Wolfe, CFO

 

T: +54 11 5258 7500

T: +44 20 3912 2805

Stockdale Securities

Antonio Bossi

Ed Thomas

T: +44 20 7601 6100

 

Panmure Gordon

 

Adam James

Charles Lesser

 

T: +44 20 7886 2500

 

Camarco

 

Billy Clegg

Owen Roberts

James Crothers

 

T: +44 20 3757 4980

 

 

Qualified Person Review

In accordance with AIM guidance for mining, oil and gas companies, Mr. Javier Vallesi and Mr. Greg Easley have reviewed the information contained in this announcement. Mr. Vallesi, Chief Operating Officer of the group, is a petroleum engineer with over 22 years of experience in the oil and gas industry and is a member of the Argentinian Institute of Oil and Gas. Mr. Easley, Senior Manager -  Reservoir and Engineering, is a petroleum engineer with over 10 years of experience in the oil and gas industry, is a licenced Professional Engineer in the State of Texas and is a member of the Society of Petroleum Engineers.

 

About Phoenix

Phoenix Global Resources is a London Stock Exchange (AIM: PGR) and Buenos Aires Stock Exchange (BCBA: PGR) listed independent Argentina focused oil and gas exploration and production company.  The company has over 6.3 million licenced working interest acres in Argentina (of which over 5 million are operated), 57.2 million boe of working interest 2P reserves and average production of approximately 11,070 working interest boepd in 2017. Phoenix has significant exposure to the unconventional opportunity in Argentina through its more than 560,000 working interest acres with Vaca Muerta potential.
 

Operations Review

 

Business development activity

Following the company's successful participation in the Q1 2018 Neuquén province bid-round, the company also participated in the April 2018 Mendoza province bid-round. The company submitted targeted bids on two exploration areas and was successful in one of these, receiving a preliminary award of the Loma Cortaderal-Cerro Doña Juana block with Phoenix as sole participant and operator. The block is close to the company's existing Puesto Rojas area concessions and has the potential to add a further 75,000 acres of Vaca Muerta and Tight Agrio potential to complement the company's existing Puesto Rojas portfolio.

 

The preliminary award gives Phoenix exclusivity to agree terms with Mendoza province in respect of the initial exploration period. These terms will include the work programme and once agreed the formal grant of the licence will follow.

 

Phoenix continues to assess its exploration and development portfolio in Argentina and, in particular, acreage where there is potential for further exposure to the Vaca Muerta formation and other unconventional opportunities. The company focuses on opportunities that are either contiguous to its existing unconventional acreage or that are on trend with areas where others have been successful. Selectively adding acreage proximate to existing positions gives opportunities for economies of scale in both exploration and development activity as target formations are better understood and drilling and completion costs can be optimised.

 

H1 2018 production

Average total daily production volumes in Q2 2018 compared to full year 2017 and Q1 2018 were as follows:

 

Production (boepd)

FY 2017

Q1 2018

Q2 2018

11,070

10,749

10,422

 

Daily production volumes in Q2 2018 were slightly lower compared to Q1 2018 primarily as a result of delays in new drilling and completion activity at Puesto Rojas as the company worked through the new permitting process for unconventional activity in Mendoza province. The delays in permitting caused the new drilling to be deferred and hence production from new wells was not realised in the period. In addition, expected natural decline continued related to the existing production base and the company also experienced production interruptions due to adverse weather in the winter months.

 

The production losses at Puesto Rojas were partially compensated by gains at Chachahuen where development drilling by YPF continued to add production volume; at Santa Cruz Sur where successful workover activity added production barrels; and marginal production gains at the Phoenix operated Cuyana basin assets.

 

 

 

Neuquina basin

 

Production (boepd)

FY 2017

Q1 2018

Q2 2018

5,026

5,033

4,588

 

Puesto Rojas Area

 

Production (boepd)

FY 2017

Q1 2018

Q2 2018

2,697

2,401

1,987

 

The production decrease at Puesto Rojas was largely attributable to the natural decline of production from existing wells together with downtime events caused by winter conditions in the area that blocked roads and prevented the trucking of oil from several wells.

 

The company's primary focus at Puesto Rojas in 2018 is on the upcoming unconventional drilling and completions campaign that is an important part of the further evaluation of unconventional potential at Puesto Rojas from both the Vaca Muerta and Tight Agrio formations. Management's effort in H1 2018 was focused on finalising unconventional permits and arranging logistics for the planned drilling and completions campaign that is currently underway.

 

In H1 2018 the company drilled two new wells both of which will be completed in the current campaign. During the drilling of these wells, the company acquired an extensive logging suite together with sidewall core data for both of the wells. This data has also been analysed by WDVG Laboratories in Houston in order to plan targeted completions for the wells. The company expects the targeted completions will enhance both the short and the long term performance of the wells. If successful, the lessons learned can be applied in future wells as part of the process of designing the optimal completion methodology for Puesto Rojas.

 

The successful Cerro del Medio well (CDM-3002), completed in the Agrio formation in August 2017, produced at an average rate of 442 bpd in Q2 2018. Daily production from the well was 150 bopd higher from May 2018 through the end of the period due to an improvement in pump performance.

 

In addition, a workover was performed on the CP-1008 well at the Cerro Pencal block in June to shut down gas production in the upper zones and add an additional oil producing zone in the Agrio. The successful workover has added an additional 50 bopd of production since July.

 

 

 

Chachahuen

 

Production (boepd)

FY 2017

Q1 2018

Q2 2018

1,976

2,377

2,426

 

Production volumes continue to steadily increase at Chachahuen as the area is progressively drilled out and developed by the operator, YPF. In Q2 2018, 13 new wells were drilled including one horizontal well in line with YPF's development plan for the asset.

 

Neuquina basin activity plan

 

Puesto Rojas area

In April 2018, the company completed the acquisition of 59,000 acres of 3D seismic data across the south of Puesto Rojas and part of La Brea. The final volumes of data are currently being processed with the completed suite of seismic volumes from the shoot due to be delivered in October. The seismic volumes will then be interpreted to appraise the resource potential of the area and to inform future drilling programmes. The company hopes to find structures similar to those that were found and have been developed in the Cerro Pencal area to the north of the Puesto Rojas block.

 

The 3D seismic volumes will enable more precise exploitation of unconventional structures due to the enhanced ability to correctly geo-steer wells.

 

Phoenix has five wells at Puesto Rojas that are awaiting unconventional completion. Following finalisation of the Mendoza province unconventional oil and gas regulation in February 2018, the permits for unconventional activity in respect of these wells were issued by Mendoza province in August 2018 with the completion campaign now underway using Halliburton as the main contractor.

 

The company drilled one vertical well in August and plans to drill a further seven vertical wells in the Puesto Rojas area in 2018. In total ten wells will be drilled in 2018 of which five will target the unconventional Vaca Muerta and Tight Agrio formations.  One well will be drilled at each of the Cerro Alquitran and La Paloma concessions to appraise the potential of these areas. These two wells will also satisfy the licence commitments for these areas. The remaining three wells will target exploratory structures  that are expected to be identified in the new 3D seismic volume for La Brea and the south Puesto Rojas area. 

 

On the Rio Atuel concession one conventional exploration well is planned in H2 2018. The objective of the well is to make an initial assessment of the resource potential of the conventional Huitran formation at Rio Atuel. The well will satisfy the licence commitment for the initial exploratory phase on the block.

 

In Q1 2019, the company plans to commence drilling of the first horizontal unconventional well targeting the Vaca Muerta and Tight Agrio formations on the Puesto Rojas concession. This will be significant in demonstrating the large scale development potential of the unconventional resources in this area.

 

Mata Mora

At Mata Mora the company plans to commence drilling its first horizontal wells on the concession in September 2018. The Mata Mora concession is adjacent to one of the most prolific Vaca Muerta areas currently in production. In total the company plans to drill two horizontal wells on the block as part of the upcoming campaign. These two horizontal wells are intended to confirm the potential of the Mata Mora concession for large scale unconventional development and reduce development costs on a per barrel basis.

 

Others

At Chachahuen a further ten new wells are planned for the remainder of 2018 taking the number of wells drilled in 2018 to 57. This activity is in line with the development plan for Chachahuen as this prolific block is progressively drilled out.

 

At Laguna el Loro a new exploration well was drilled and completed in July 2018. The well was planned to explore the resource potential across different conventional targets. The well was dry and has now been abandoned. The well satisfied the investment commitment associated with the initial exploration phase on the concession.

 

Austral basin

 

Production (boepd)

FY 2017

Q1 2018

Q2 2018

3,900

3,923

3,979

 

Total production volumes were stable period on period in the Austral basin.

 

Santa Cruz Sur

Production (boepd)

FY 2017

Q1 2018

Q2 2018

3,180

3,086

3,147

 

Testing of the Orkeke.x-1 well that spudded in Q4 2017 was completed in April. The well was determined to be an unsuccessful attempt at the Magallanes formation in the Santa Cruz Sur area and as such the company has expensed its share of the accumulated drilling costs.

 

At the non-operated Santa Cruz Sur area five of the seven planned 2018 workovers were completed. A successful workover was also completed in the EDL-3 well in the Tobifera formation, resulting in an additional 614 mcf/ d. A second workover attempt at the HT.x-1 well was unsuccessful in the Springhill formation and found gas volumes but at low flow rates. The well is currently awaiting fracture completion in the Tobifera and Springhill formations.

 

The company and its operating partner, ROCH, continue to evaluate the three-well workover programme at Moy Aike, where Moy Aike-5 tested at 1,236 mcf/ d from the Springhill formation. Both the geologic programme and infrastructure requirements are being evaluated to determine the most economical way to develop this structure and connect to the offtake pipeline.

 

Tierra del Fuego

Production (boepd)

FY 2017

Q1 2018

Q2 2018

720

837

832

 

The marginal production decline in the Tierra del Fuego area was due to anticipated natural production decline from wells in the Las Violetas concession. This decline was offset by a choke change in the SM.x-1001 that resulted in increased production of 40 bopd net to Phoenix's interest.

 

Austral basin activity plan

The company, together with ROCH, plans to drill three new development wells and undertake two further workovers of existing wells. The objective of this activity is to enhance production from the Santa Cruz area through the remainder of 2018 and into 2019.

 

Drilling of the first offset to the SM.x-1001 well, which was drilled in the Tierra del Fuego area in 2017, commenced in June 2018 and was completed in July. A further offset well is planned in H2 2018. An additional exploration well is also planned at the Tierra del Fuego area to further appraise the Tobifera and Springhill formations.

 

Cuyana basin

 

Production (boepd)

FY 2017

Q1 2018

Q2 2018

2,136

1,785

1,867

 

There was limited new activity in the Cuyana basin in the period with production from the company's conventional assets remaining relatively consistent. The Puesto Pozo Cercados asset that was relinquished in 2017 was formally handed over to the new operator at the end of August.

 

In the Chañares Herrados area a workover was completed on the CH-1008 well as part of a workover plan for the area, resulting in an incremental 50 bopd of production. The remainder of the production increase was due to maintenance workovers performed in the period.

 

Cuyana basin activity plan

The company continues to evaluate completion options for the TB.x-1002 well at Atamisqui that was drilled in late 2017. Depending on the availability of hydraulic fracture permits in the area, it is possible this well may be completed with a hydraulic fracture.

 

Further workover activities are planned at both Tupungato and Chañares Herrados aimed at arresting the natural decline curve.

 

 

Financial review

 

 

H1 2018

H1 2017

FY 2017

 

US$M

US$M

US$M

Revenue

92.9

58.0

141.8

Gross profit

10.1

11.1

8.4

Operating loss

(19.9)

(5.1)

(275.0)

EBITDAX

18.5

15.0

7.7

Net cash flow from operating activities

6.4

5.5

7.0

Capital expenditure

54.7

29.8

86.0

Net debt

121.8

16.1

168.8

 

Comparative information

 

The company completed a business combination transaction with Trefoil on 10 August 2017. Trefoil comprised Mercuria Energy Group Limited's upstream oil and gas interests in Argentina. The transaction was regarded as a reverse acquisition for accounting purposes and, as such, the comparative financial information for H1 2017 includes only the results of Trefoil. In addition, the full year 2017 financial information represents the results of Trefoil to the date of the combination and the results of the combined business thereafter.

 

Income Statement

 

Revenue for the six-month period was US$92.9 million (H1 2017: US$58.0 million), comprising revenue from oil sales of US$81.6 million (2017: US$46.6 million) and revenue from gas sales of US$11.3 million (2017: US$11.4 million).

 

Average daily oil sales in the period were 7,467 bopd with total sales in the period amounting to 1,351,441 bbls. Oil sales were largely consistent month-on-month with natural decline offset by new wells and workover activity. Realised oil prices trended upwards in the period with an average realised price (before hedge losses) of US$60.34/ bbl in H1 2018. This compares to an average realised price per bbl of US$49.57/ bbl in H1 2017 and US$50.46/ bbl in FY 2017.

 

The Argentina domestic oil price was previously subject to regulation that was removed in October 2017. Following deregulation, the domestic price was allowed to float in line with the Brent Crude benchmark price, albeit at a discount of approximately 10% that reflects location and quality differentials. In late 2017 and into 2018, the Brent Crude benchmark trended upwards as confidence in the oil market strengthened and the supply/ demand imbalance that gave rise to weaker prices seen in previous periods began to reverse. In turn, this began to result in increased realised prices in Argentina.

 

In January 2018 and in response to increases in Brent pricing, the company entered into a hedge agreement to swap floating for fixed prices at US$65.97/ bbl. Given the relative weakness seen in Brent pricing through 2017 and the potential for further price volatility the company determined it was appropriate to enter into a hedge to support the 2018 capex investment programme. The hedge was put in place over a fixed proportion of 2018 production.

 

The benefit to the Argentinian domestic price from the recovery in the Brent Crude benchmark was curtailed in May 2018 when, in response to inflationary concerns on refined product prices, the Argentina government intervened in the market and set price caps for domestic crude.

 

Although in itself the hedge instrument limited the company's exposure to upside price gains over US$65.97/ bbl related to the hedged proportion of production, the cap on pricing in Argentina had a detrimental effect on the performance of the hedge. This is because increases in Brent pricing that caused payments to be made by the company under the swap were not compensated by corresponding increases in realisations in Argentina. The company has suffered hedge losses of US$10.0 million in the period of which US$2.6 million was realised in cash with the remainder representing the mark-to-market fair value of the remaining portion of the swap contract. The swap contract is due to expire on 14 December 2018.

 

The company's gas sales are predominantly derived from its Austral basin assets in south Argentina. Total sales volume from Austral was 2,817 mmcf with an average realised price of US$4.20/ mmcf. This compared to an average realised price in FY17 of US$4.07/ mmcf and an average realised price of US$3.97/ mmcf in H1 2017. The increase in the sales price from FY17 resulted from higher spot prices in the Austral basin due to seasonality and colder than normal winter weather.

 

The group recorded an operating loss of US$19.9 million in H1 2018 as compared to a loss of US$5.1 million in H1 2017. The operating loss in the period was driven mainly by an increase in DD&A (US$34.7 million; H1 2017: US$12.3 million), an increase in administration expenses (US$11.7 million; H1 2017: US$5.6 million) and the impact of hedging losses of US$10.0 million (H1 2017: US$ nil).  The increase in DD&A is consistent with the increased PP&E balance and associated production in the combined group as compared to 30 June 2017. The increase in administration expenses reflects increased management and administration costs from operating on a standalone basis as a public company as opposed to Trefoil that was a private subsidiary of a larger group. The H1 2018 operating loss also includes exploration costs of US$3.2 million related to the unsuccessful Orkeke well drilled with ROCH, the company's partner in Austral basin. The H1 2017 operating loss included a one-off impairment loss of US$7.9 million related to the relinquishment of the Puesto Pozo Cercado licence.

 

The net loss for the group in the period was US$41.9 million (H1 2017: US$7.0 million). This was again driven by the increased costs as compared to H1 2017 discussed above, in addition to US$13.8 million of finance costs recognised in the period relating to the group's external financing agreements to fund the unconventional exploration and appraisal that were put in place as part of the business combination and amended and extended in February 2018. 

 

Balance Sheet

 

At 30 June 2018 the group had net assets of US$347.0 million, an increase of US$64.6 million compared to 31 December 2017. The increase is primarily as a result of the US$100 million debt for equity conversion in the period, discussed below.

 

The group's total assets are consistent period on period, after taking account of both additions and depreciation for the period, at US$661.0 million at 30 June 2018 compared to US$664.4 million at 31 December 2017.

 

Intangible assets have increased by US$17.9 million reflecting the licence acquisition and bidding rounds undertaken in the period in Mendoza and Neuquén provinces and also related to the increase in the Mata Mora and Corralera interests in the Neuquina basin.

 

This increase in assets is offset by a reduction in the level of trade receivables by US$8.1 million at 30 June 2018 compared to 31 December 2017. The reduction in trade receivables has resulted from hyperinflation in the Argentinian economy which as at 30 June 2018 had caused the Argentine peso to devalue by more than 30% compared to the US dollar since the start of 2018. While oil sales are priced by reference to the US Dollar the invoiced value is denominated in Peso and hence exchange gains and losses arise from movements in the Dollar/Peso exchange rate.

 

At 30 June 2018 the group had cash on hand of US$10.1 million (31 December 2017: US$23.7 million). Borrowings in the period decreased from US$192.5 million at 31 December 2017 to US$131.9 million at 30 June 2018.

 

In February 2018, the company agreed with Mercuria, its majority shareholder, to convert US$100 million of the bridging and working capital facility, advanced by Mercuria on completion of the combination transaction, into ordinary shares of the company at a price of £0.37 per share. The remaining US$60.0 million of the facility was restructured into a new convertible revolving credit facility of US$160.0 million, providing US$100.0 million of fresh funding to the group. The new facility carries a fixed interest rate of 3-month LIBOR plus 4% and is convertible at £0.45 per share at the option of the lender until maturity in December 2021. As at 30 June 2018, US$105 million had been drawn down on the new facility.

 

Statement of Directors' Responsibilities

 

The Directors confirm that to the best of their knowledge:

a)    The condensed consolidated financial information has been prepared in accordance with IAS 34 'Interim Financial Reporting';

b)    The interim results report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the six months and description of principal risks and uncertainties for the remaining six months of the year); and

c)    The interim results include a fair review of the business and of any required related party disclosures. 

 

 

On behalf of the Board

Phillip Wolfe

Chief financial officer

 

Independent review report to Phoenix Global Resources plc

Report on the consolidated interim financial statements

Our conclusion

We have reviewed Phoenix Global Resources plc's condensed consolidated interim financial information (the "interim financial statements") in the Interim results of Phoenix Global Resources plc for the six-month period ended 30 June 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the AIM Rules for Companies.

What we have reviewed

The interim financial statements comprise:

·     the consolidated statement of financial position as at 30 June 2018;

·     the consolidated income statement and consolidated statement of comprehensive income for the period then ended;

·     the consolidated statement of cash flows for the period then ended;

·     the consolidated statement of changes in equity for the period then ended; and

·     the explanatory notes to the interim financial statements.

The interim financial statements included in the Interim results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the AIM Rules for Companies.

As disclosed in note 1 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The Interim results, including the interim financial statements, are the responsibility of, and have been approved by, the directors. The directors are responsible for preparing the Interim results in accordance with the AIM Rules for Companies which require that the financial information must be presented and prepared in a form consistent with that which will be adopted in the company's annual financial statements.

Our responsibility is to express a conclusion on the interim financial statements in the Interim results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the AIM Rules for Companies and for no other purpose.  We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the Interim results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

 

PricewaterhouseCoopers LLP

Chartered Accountants

London

17 September 2018

 

 

Unaudited consolidated income statement

For the period ended 30 June 2018

 

 

 

Note

Six months to 30 June 2018

US$'000

Six months to 30 June 2017

US$'000

Year to 31 December 2017
US$'000

Revenue

2,3

92,876

58,041

141,799

Government incentives

 

-

121

 -

Cost of sales

4

(82,746)

(47,045)

(133,387)

Gross profit

 

10,130

11,117

8,412

 

 

 

 

 

Exploration expenses

 

(3,678)

(56)

 (931)

Impairment charge

 

-

(7,887)

(232,407)

Selling and distribution expenses

 

(2,916)

(2,758)

 (5,036)

Administrative expenses

 

(11,679)

(5,582)

(39,978)

Other operating (expense)/ income

 

(11,744)

57

(5,040)

Operating loss

 

(19,887)

(5,109)

(274,980)

 

 

 

 

 

Presented as:

 

 

 

 

Adjusted EBITDAX

 

28,413

15,025

40,555

Non-recurring expenses

 

(9,964)

-

(32,900)

EBITDAX

 

18,449

15,025

7,655

Impairment charge

 

-

(7,887)

(232,407)

Depreciation, depletion and amortisation

 

(34,658)

(12,247)

(49,297)

Exploration cost written off

 

(3,678)

-

(931)

Operating loss

 

(19,887)

(5,109)

(274,980)

 

 

 

 

 

Finance income

 

2,923

539

1,976

Finance costs

 

(13,811)

(2,461)

 (13,726)

Loss before taxation

 

(30,775)

(7,031)

(286,730)

 

 

 

 

 

Taxation

8

(11,112)

43

 16,635

Loss for the period

 

(41,887)

(6,988)

(270,095)

 

 

 

 

 

Loss per ordinary share

 

US$

US$

US$

Basic and diluted loss per share

 

(0.02)

(0.01)

(0.19)

 

The above unaudited consolidated income statement should be read in conjunction with the accompanying notes.

 

 

Unaudited consolidated statement of comprehensive income

For the period ended 30 June 2018

 

 

Six months to 30 June 2018

US$'000

Six months to 30 June 2017

US$'000

Year to 31 December 2017
US$'000

Loss for the year

(41,887)

(6,988)

(270,095)

Translation differences

408

166

546

Total comprehensive loss for the year

(41,479)

(6,822)

(269,549)

 

The above items will not be subsequently reclassified to profit and loss. There are no impairment losses on revalued assets recognised directly in equity.

The above unaudited consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.

 

 

Unaudited consolidated statement of financial position

At 30 June 2018

 

 

Note

30 June

2018

US$'000

30 June

2017

US$'000

31 December 2017

US$'000

Non-current assets

 

 

 

 

Property, plant and equipment

5

353,190

194,119

354,245

Intangible assets and goodwill

5

225,179

6,804

207,231

Other receivables

 

3,371

4,485

8,322

Deferred tax assets

9

15,150

-

11,629

Total non-current assets

 

596,890

205,408

581,427

 

 

 

 

 

Current assets

 

 

 

 

Inventories

 

17,131

9,615

14,375

Trade and other receivables

 

36,869

26,561

44,925

Cash and cash equivalents

 

10,099

7,168

23,696

Total current assets

 

64,099

43,344

82,996

Total assets

 

660,989

248,752

664,423

 

 

 

 

 

Non-current liabilities

 

 

 

 

Trade and other payables

 

5,546

-

7,168

Borrowings

7

108,461

10,150

162,502

Deferred tax liabilities

9

96,171

34,847

81,714

Provisions

 

17,344

7,899

17,215

Total non-current liabilities

 

227,522

52,896

268,599

 

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

 

61,762

32,945

82,355

Income tax liability

 

1,262

-

654

Borrowings

7

23,417

13,094

29,974

Provisions

 

-

375

367

Total current liabilities

 

86,441

46,414

113,350

Total liabilities

 

313,963

99,310

381,949

Net assets

 

347,026

149,442

282,474

 

 

 

 

 

Equity

 

 

 

 

Share capital and share premium

 

435,908

150,899

329,877

Other reserves

 

(115,891)

(22,169)

(116,299)

Retained earnings

 

27,009

20,712

68,896

Total equity

 

347,026

149,442

282,474

 

The above unaudited consolidated statement of financial position should be read in conjunction with the accompanying notes.

 

 

Unaudited consolidated statement of changes in equity

For the period ended 30 June 2018

 

Capital and reserves

Called up
share capital
US$'000

Share premium
account
 US$'000

Retained
 earnings
 US$'000

Other
reserves
US$'000

Total equity
US$'000

At 1 January 2017

98,414

52,467

(3,376)

(21,961)

125,544

Loss for the period

-

-

(6,988)

-

(6,988)

Translation differences

-

-

-

166

166

Total comprehensive (loss)/ profit for the period

-

-

(6,988)

166

(6,822)

Issue of ordinary shares

7

11

-

-

18

Transaction with owners

-

-

31,076

-

31,076

Translation differences

-

-

-

(374)

(374)

At 30 June 2017

98,421

52,478

20,712

(22,169)

149,442

 

 

 

 

 

 

At 1 January 2018

329,877

-

68,896

(116,299)

282,474

Loss for the period

-

-

(41,887)

-

(41,887)

Translation differences

-

-

-

408

408

Total comprehensive (loss)/ profit for the period

-

-

(41,887)

408

(41,479)

Debt to equity conversion

27,027

72,973

-

-

100,000

Issue of ordinary shares

2,114

3,917

-

-

6,031

At 30 June 2018

359,018

76,890

27,009

(115,891)

347,026

 

 

Other reserves

Merger
reserve
US$'000

Warrant
reserve
US$'000

Translation
 reserve
US$'000

Deferred
consideration
US$'000

Total other
reserves
US$'000

(26,099)

2,105

(2,440)

4,473

(21,961)

Other comprehensive income

-

-

166

-

166

Translation differences

-

-

(374)

-

(374)

At 30 June 2017

(26,099)

2,105

(2,648)

4,473

(22,169)

 

 

 

 

 

At 1 January 2018

(116,510)

2,105

(1,894)

-

(116,299)

Translation differences

-

-

408

-

408

At 30 June 2018

(116,510)

2,105

(1,486)

-

(115,891)

 

The above statement of consolidated changes in equity should be read in conjunction with the accompanying notes.

 

 

Unaudited consolidated statement of cash flows

For the period ended 30 June 2018

 

 

 

Note

Six months to 30 June 2018

US$'000

Six months to 30 June 2017

US$'000

Year to 31 December 2017
US$'000

Cash flows from operating activities

 

 

 

 

Cash generated from operations

10

7,260

5,455

9,042

Income taxes paid

 

(829)

-

(2,006)

Net cash inflow from operating activities

 

6,431

5,455

7,036

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Payments for property, plant and equipment and intangible assets

 

(54,498)

(11,428)

(82,687)

Net cash acquired from acquisition of subsidiary

 

-

-

1,062

Net cash outflow from investing activities

 

(54,498)

(11,428)

(81,625)

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

Proceeds from issue of shares and other equity instruments

 

4,854

-

9,603

Proceeds from borrowings

 

40,340

11,280

178,607

Repayment of borrowings

 

(3,612)

(2,948)

(89,875)

Interest paid

 

(1,801)

(765)

(4,215)

Cash outflow from hedge

 

(2,571)

-

-

Net cash inflow from financing activities

 

37,210

7,567

94,120

 

 

 

 

 

Net (decrease)/ increase in cash and cash equivalents

 

(10,857)

1,594

19,531

Cash and cash equivalents at the beginning of the financial year

 

23,696

5,243

5,243

Effects of exchange rates on cash and cash equivalents

 

(2,740)

331

(1,078)

Cash and cash equivalents at end of period

 

10,099

7,168

23,696

 

The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.

 

 

Notes to the unaudited consolidated financial information

 

1. Basis of preparation

 

General information

The company is a Public Limited Company (plc) incorporated in England and Wales and is domiciled in the United Kingdom. The Registered Office address is 6th Floor, King's House, 10 Haymarket, London SW1Y 4BP. The company is listed on the AIM market of the London Stock Exchange and maintains a secondary listing on the Buenos Aires Stock Exchange.

The principal activities of the company and its subsidiaries (together 'the group') are the exploration for and the development and production of oil and gas in Argentina.

Basis of preparation

This unaudited condensed consolidated interim financial information for the six-months ended 30 June 2018 has been prepared in accordance with IAS 34, 'Interim financial reporting' as adopted by the European Union. This condensed consolidated financial information should be read in conjunction with the group's annual financial statements for the year ended 31 December 2017, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

The financial information for the year ended 31 December 2017 contained within this condensed consolidated financial information does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The information within was derived from the statutory accounts for the year ended 31 December 2017, a copy of which has been delivered to the Registrar of Companies. The auditors' report on these accounts was unqualified, did not include a reference to any matters to which the auditor drew attention by way of an emphasis of matter and did not contain a statement under sections 498 (2) or (3) of the Companies Act 2006.  

The annual financial statements for the year ended 31 December 2017 are available on the company's website at www.phoenixglobalresources.com.

The group's business activities, together with factors likely to affect its future development, performance and position are set out in the operational and financial review sections of this report. The financial position of the group, its cash flows, liquidity position and borrowing facilities are described in the financial review section.

This condensed consolidated financial information has been prepared on the going concern basis. The company has received confirmation from its majority shareholder, Mercuria Energy Group Limited, of its current intention to provide financial support to the company, if required, in order that the company may continue to service its liabilities as they fall due for a period of not less than 12 months from the approval of this interim condensed consolidated financial information.

Estimates and judgements

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

 

In preparing the condensed consolidated financial information, the significant judgements made by management in applying the group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2017.

 

Principal risks and uncertainties

In preparing the condensed consolidated financial information management is required to consider the principal risks and uncertainties facing the group. In management's opinion the principal risks and uncertainties facing the group are unchanged since the preparation of the consolidated financial statements for the year ended 31 December 2017. Those risks and uncertainties, together with management's response to them are described in the Risk Review section of the 2017 Annual Report and Accounts.

Accounting policies

The accounting policies applied in this condensed consolidated financial information are consistent with those applied in preparing the financial statements for the year ended 31 December 2017.

New accounting standards adopted in the period

IFRS 9: Financial Instruments

The implementation of IFRS 9 in the period has not had a material impact upon the group's financial statements.

Fair value of financial assets and liabilities

With the exception of current assets and liabilities, for which carrying value at period end is determined to approximate fair value due to their short-term nature, the only non-derivative financial instrument held at period end is the non-current borrowings. The non-current borrowings are held at amortised cost based on the underlying interest rate of LIBOR plus 4% and have been determined to be level 1 in the fair value hierarchy.

Derivative financial instruments

The group's policy is to consider oil and gas price hedging when and where it is economically attractive to lock-in prices at levels that protect the cash flow of the group and its future business plan. The group does not use derivatives for speculative purposes. Derivatives are carried at fair value, with any changes in the fair value recorded in the consolidated income statement immediately.

Fair value is defined as the amount for which the asset or liability could be exchanged in an arm's length transaction at the measurement date. Where available, fair values are determined using quoted prices in active markets. To the extent that such prices are not available, established estimation techniques such as option pricing models and discounted cash flow analysis are used.

During the period the group entered into a Brent Crude swap with Mercuria Energy Trading S.A. to hedge approximately 70% of its 2018 production. The swap allowed the group to lock-in a forward price of $65.97/ bbl. The hedging relationship is for a period of 11 months and based on forecast production at the inception date. At 30 June 2018, the fair value of the swap amounted to a liability of US$7.4 million. No hedge accounting has been applied in the period.

The fair value of the swap at the measurement date is based upon quoted forward prices from ICE and accordingly the swap has been classified as level 1 in the fair value hierarchy.

Expected credit losses

The company has evaluated the financial instruments that it holds, and particularly assets, for expected credit losses. No risk of credit loss that would require provision or discounting under IFRS 9 has been identified. The group's principal financial assets relate to trade receivable balances with its customers. All of the company's sales relate to the sale of oil and gas, the majority of which are short cycle receivables that are typically settled within 30 days. The major customers are either the Argentina state owned oil company, YPF, or other recognised market participants. The company has not historically suffered significant credit losses. In rare occasions where counterparties experience financial difficulty, appropriate provision is made in respect of outstanding receivables immediately upon identification of a potential credit issue.

IFRS 15: Revenue from Contracts with Customers

The implementation of IFRS 15 has not had any impact on revenue recognition (timing or quantum) for oil and gas sales.

The standard describes a five-step approach to be taken to the assessment of revenue that includes identifying the customer, understanding performance obligations, determining the transaction price and allocating the price to identifiable obligations. The revenue is then recognised progressively as each obligation is met.

The company's only revenue is from sales of oil and gas which are commodity products and are priced relative to quoted benchmarks. Sales contracts contain a single obligation to deliver the product to a specified point at which time title passes to the customer. The sales contracts are offtake contracts in that the customer will take whatever volume is produced.

The contracts have a single performance obligation. The price in the contract is based on observable market inputs and is clearly defined.

The following new standard is mandatory from 1 January 2019:

IFRS 16: Leases

The implementation of IFRS 16 is not expected to have a material impact upon the group's financial statements.

The company typically only has lease contracts for office space that are short term in nature (3-5 years). Contracts are also entered into for the use drilling rigs and frac equipment, however the current level of the company's drilling and completion operations mean that these contracts are agreed on a project by project basis or linking two or three projects. The company is not party to any drilling or completion contracts that have a service period of greater than six months.

2. Segment information

The group's executive management comprising the chief executive officer, the chief financial officer and the chief operating officer has been determined collectively as the chief operating decision maker for the group. The information reported to the group's executive management for the purposes of resource allocation and assessment of segment performance is focused on the basins in which the group operates. The strategy of the group is focused on the development of the Vaca Muerta shale opportunity in the Neuquina basin while optimising conventional production from that basin. In addition, the group is active in the Austral basin in south Argentina where its operations with its partner, ROCH, are targeted at exploiting gas resources in the group's licence areas within the basin. The group also has production activities in the Cuyana basin. Segments that are not currently material to the operations or result of the group are aggregated within 'Corporate - unallocated'.

The Neuquina, Austral and Cuyana basins have been determined by the group to represent the reportable segments of the business based on the level of activity across these basins and the information provided to the executive management.

The group's executive management primarily uses a measure of adjusted earnings before interest, tax, depreciation, amortisation and exploration expense (EBITDAX) to assess the performance of the operating segments. However, the chief executive officer also receives information about segment revenue and capital expenditure on a monthly basis.

First half 2018

Unaudited

 Neuquina
basin
US$'000

 Austral
basin
US$'000

 Cuyana
basin
US$'000

 Corporate/
unallocated
 US$'000

 Total
US$'000

Revenue

47,949

22,637

22,290

-

92,876

Profit/(loss) for the period

4,584

7

2,074

(48,552)

(41,887)

Add: depreciation, depletion and amortisation

23,480

5,940

4,868

370

34,658

Add: exploration costs written off

323

3,165

-

190

3,678

Add: impairment

-

-

-

-

-

Less: finance income

-

-

-

(2,923)

(2,923)

Add: finance costs

-

-

-

13,811

13,811

Add: taxation

-

-

-

11,112

11,112

EBITDAX

28,387

9,112

6,942

(25,992)

18,449

 

 

 

 

 

 

Oil revenues

47,935

11,318

22,291

-

81,544

bbls sold

805,817

179,432

366,192

-

1,351,441

Realised price (US$/bbl)

59.49

63.08

60.87

-

60.34

 

 

 

 

 

 

Gas revenues

14

11,318

-

-

11,332

MMcf sold

3

2,696

-

-

2,699

Realised price (US$/MMcf)

4.56

4.20

-

-

4.20

 

 

 

 

 

 

Capital expenditure

 

 

 

 

 

Property, plant and equipment & intangible exploration and evaluation assets

44,690

6,258

2,550

1,217

54,715

Total capital expenditure

44,690

6,258

2,550

1,217

54,715

 

 

First half 2017

Unaudited

Neuquina
basin
US$'000

Austral
basin
US$'000

 Cuyana
 basin
 US$'000

Corporate/
unallocated
US$'000

Total
 US$'000

Revenue

21,804

21,585

14,652

-

58,041

Profit/(loss) for the year

21,737

(2,019)

(18,537)

(8,169)

(6,988)

Add: depreciation, depletion and amortisation

4,610

4,312

3,313

12

12,247

Add: exploration costs written off

-

-

-

-

-

Add: impairment

-

-

7,887

-

7,887

Less: finance income

(241)

-

-

(298)

(539)

Add: finance costs

-

385

-

2,076

2,461

Add: taxation

(2,157)

-

-

2,114

(43)

EBITDAX

23,950

2,678

(7,338)

(4,265)

15,025

 

 

 

 

 

 

Oil revenues

21,783

10,185

14,652

-

46,620

bbls sold

454,197

194,749

291,448

-

940,394

Realised price (US$/bbl)

47.96

52.30

50.27

-

49.57

 

 

 

 

 

 

Gas revenues

21

11,400

-

-

11,421

MMcf sold

4

2,817

-

-

2,821

Realised price (US$/MMcf)

4.72

4.05

-

-

4.05

 

 

 

 

 

 

Capital expenditure

 

 

 

 

 

Property, plant and equipment & intangible exploration and evaluation assets

20,880

6,928

1,980

-

29,788

Total capital expenditure

20,880

6,928

1,980

-

29,788

There are no intersegment revenues in either period presented. All revenues represent sales to external customers and all sales are made in Argentina. The significant majority of oil and gas sales are made to the Argentinian state-owned oil company, YPF.

3. Total revenue

Unaudited

Six months to 30 June 2018

US$'000

Six months to 30 June 2017

US$'000

Year to 31 December 2017
US$'000

Crude oil revenue

81,544

46,620

117,031

Gas revenue

11,332

11,421

 24,768

Total revenue

92,876

58,041

141,799

 

4. Cost of sales

Unaudited

Six months to 30 June 2018

US$'000

Six months to 30 June 2017

US$'000

Year to 31 December 2017
US$'000

Production costs

47,733

32,408

82,806

Depreciation of oil and gas assets

34,658

12,247

49,297

Movements in crude inventory

355

2,390

1,284

Total cost of sales

82,746

47,045

133,387

 

5. Non-financial assets and liabilities
 

Property, plant and equipment

 

 

Non-current assets - unaudited

Fixtures, fittings, equipment and vehicles
US$'000

Development and production
assets
 US$'000

Assets under construction US$'000

Total
US$'000

At 1 January 2017

 

 

 

 

Cost

4,420

387,209

18,057

409,686

Accumulated depreciation and impairment

(4,356)

(217,440)

-

(221,796)

Net book amount

64

169,769

18,057

187,890

 

 

 

 

 

Period ended 30 June 2017

 

 

 

 

Opening net book amount

64

169,769

18,057

187,890

Transfers

222

18,578

(18,800)

-

Additions

12

-

29,777

29,788

Disposals

-

-

(3,425)

(3,425)

Depreciation charge

(68)

(12,179)

-

(12,247)

Impairment charge

-

(7,887)

-

(7,887)

Closing net book amount

230

168,281

25,609

194,119

 

 

 

 

 

At 30 June 2017

 

 

 

 

Cost

4,654

405,787

25,609

436,049

Accumulated depreciation and impairment

(4,424)

(237,506)

-

(241,930)

Net book amount

230

168,281

25,609

194,119

 

 

Non-current assets - unaudited

Fixtures, fittings, equipment and vehicles
US$'000

 Development and production assets
US$'000

 Assets under construction US$'000

 Total
US$'000

At 1 January 2018

 

 

 

 

Cost

7,320

583,103

18,241

608,664

Accumulated depreciation and impairment

(4,608)

(249,811)

-

(254,419)

Net book amount

2,712

333,292

18,241

354,245

 

 

 

 

 

Period ended 30 June 2018

 

 

 

 

Opening net book amount

2,712

333,292

18,241

354,245

Transfers to intangibles

-

(1,414)

-

(1,414)

Transfers

1,825

37,481

(39,306)

-

Additions

896

-

37,285

38,181

Depreciation charge

(1,774)

(32,883)

-

(34,657)

Exploration costs written off

-

(3,165)

-

(3,165)

Closing net book amount

3,659

333,311

16,220

353,190

 

 

 

 

 

At 30 June 2018

 

 

 

 

Cost

10,041

619,171

16,220

645,432

Accumulated depreciation and impairment

(6,382)

(285,860)

-

(292,242)

Net book amount

3,659

333,311

16,220

353,190

Additions to property, plant and equipment in the period ended 30 June 2018 include US$0.2 million of interest capitalised in respect of qualifying assets (H1 2017: US$0.3 million).

The total amount of interest capitalised within property, plant and equipment at 30 June 2018 is US$2.2 million (2017: US$1.1 million).

Certain exploration and evaluation assets at 30 June 2017 have been reclassified to PPE to align with the combined group accounting policy and classification as at 31 December 2017.

Intangible assets

 

Non-current assets - unaudited

Goodwill US$'000

Exploration and evaluation
 assets
US$'000

Total
US$'000

At 1 January 2017

 

 

 

Cost

-

6,804

6,804

Net book amount

-

6,804

6,804

 

 

 

 

Period ended 30 June 2017

 

 

 

Opening net book amount

-

6,804

6,804

Additions

-

-

-

Closing net book amount

-

6,804

6,804

 

 

 

 

At 30 June 2017

 

 

 

Cost

-

6,804

6,804

Net book amount

-

6,804

6,804

 

Non-current assets - unaudited

Goodwill
US$'000

Exploration and evaluation
assets
US$'000

 Total
US$'000

At 1 January 2018

 

 

 

Cost

260,007

171,393

431,400

Accumulated amortisation and impairment

(224,169)

-

(224,169)

Net book amount

35,838

171,393

207,231

 

 

 

 

Period ended 30 June 2018

 

 

 

Opening net book amount

35,838

171,393

207,231

Additions

-

16,535

16,534

Transfer from property, plant and equipment

-

1,414

1,414

Closing net book amount

35,838

189,342

225,179

 

 

 

 

At 30 June 2018

 

 

 

Cost

260,007

189,342

449,348

Accumulated amortisation and impairment

(224,169)

-

(224,169)

Net book amount

35,838

189,342

225,179

 

Exploration and evaluation assets are primarily the group's licence interests in exploration and appraisal assets located in Argentina. The exploration and evaluation assets consist of both conventional and unconventional oil and gas properties.

 

Impairment tests for exploration and evaluation assets

Exploration and evaluation assets are subject to impairment testing prior to reclassification as tangible fixed assets where commercially viable reserves are confirmed. Where commercially viable reserves are not encountered at the end of the exploration phase for an area the accumulated exploration costs are written off in the income statement.

Impairment tests for goodwill

Goodwill is monitored by management at the level of the operating segments identified in note 2.

A segment level summary of the goodwill allocation is presented below.

At 30 June 2018 and 31 December 2017

Neuquina
basin
US$'000

Austral basin
US$'000

Cuyana basin
US$'000

Other
US$'000

Corporate/ unallocated
US$'000

Total
US$'000

Chachahuen

15,223

-

-

-

-

15,223

Corralera

16,780

-

-

-

-

16,780

Mata Mora

3,835

-

-

-

-

3,835

Total

35,838

-

-

-

-

35,838

 

No goodwill was recognised prior to 2017. All goodwill presented relates to the allocation of technical goodwill arising as a result of accounting for deferred tax on the business combination that completed on 10 August 2017, refer note 6.

6. Business combination - update to purchase price allocation

Summary of acquisition

On 10 August 2017 the parent entity (Andes) acquired 100% of the issued share capital of the Trefoil group of companies by way of a reverse takeover. The acquisition significantly increased the group's licenced acreage position in Argentina and, in particular, related to the Vaca Muerta shale formation and other unconventional oil and gas prospects present in much of the combined group's acreage in the Neuquina basin.

Details of the purchase consideration, the net assets acquired and goodwill are as follows:

 

US$'000

Ordinary shares issued

385,058

Both the assessed fair value of Trefoil and its oil and gas reserves were greater than those of Andes and therefore the transaction represented a reverse takeover under the AIM Rules for Companies. Because of the reverse nature of the transaction, and although Andes was the legal acquirer, Trefoil was determined to be the accounting acquirer for the purposes of purchase accounting. Accordingly, the transaction has been accounted for under IFRS 3, 'Business Combinations'.

The purchase consideration is valued by reference to the number of shares held by Andes shareholders at the transaction date multiplied by the Andes share price on that day. This represents the value 'given up' by Andes shareholders in exchange for an interest in the enlarged group.

 

 

The assets and liabilities recognised at 31 December 2017 as a result of the acquisition were as follows:

 

Provisional
fair value
US$'000

Cash

 1,062

Trade receivables

 22,826

Inventory

 409

Available for sale financial assets

 12,812

Property, plant and equipment: development and production assets

 132,173

Property, plant and equipment: facilities

 8,440

Property, plant and equipment: fixtures, fittings equipment and vehicles

 153

Intangible assets: exploration and evaluation assets

 161,760

Trade payables

 (67,683)

Borrowings

 (86,574)

Contingent liabilities

 (4,680)

Provisions

(2,141)

Deferred tax liability

 (53,506)

Net identifiable assets acquired

 125,051

Add: goodwill

 260,007

Fair value of net assets acquired

 385,058

 

Goodwill arose on the acquisition amounting to US$260,007,000. Of this amount US$224,161,000 related to the difference between the fair value of the purchase consideration given and the fair value of the net assets acquired and liabilities assumed. Under IFRS 3 the purchase consideration was calculated by reference to the market price of the shares issued in consideration at the date of completion. The closing share price on the date of the completion was £0.49/ share. The directors assessed the carrying value of this element of the goodwill at the time of the acquisition and specifically noted:

· that prior to and following the combination, the group operated in a single country, Argentina;

· the group's operations related in whole to exploration for and the appraisal and development of oil and gas assets;

· both oil and gas are commodity products that trade in an active market that, particularly in the case of oil, is international; and

· oil and gas assets are valued based on the quantity of oil or gas that it is estimated can be economically recovered.

Having taken these factors into consideration, the directors concluded that there was no basis for recognising goodwill related to the difference between the fair value of the consideration given and of the assets and liabilities acquired. Accordingly this element of the goodwill was immediately impaired.

The remaining goodwill of US$35,838,000 arises as a result of the application of deferred tax accounting to the fair values recorded in respect of the Andes assets 'acquired'.

The directors consider that this element of goodwill that is recorded as a result of the accounting for deferred tax is attributable to the enhanced opportunities and benefits to the enlarged group arising from the potential greater scale of the business as Vaca Muerta is developed.

There have been no identified changes in circumstance and no subsequent events related to the business combination in the period ended 30 June 2018 that would result in adjustment to the provisional fair value amounts recorded at 31 December 2017 and shown above.

7. Borrowings

 

30 June 2018

30 December 2017

 Unaudited

Current
US$'000

Non-current US$'000

Total
US$'000

Current
US$'000

Non-current US$'000

Total
US$'000

Secured

 

 

 

 

 

 

Bank loans

18,306

924

19,230

19,694

 2,502

22,196

Total secured borrowings

18,306

924

19,230

19,694

 2,502

22,196

 

 

 

 

 

 

 

Unsecured

 

 

 

 

 

 

Bank loans

2,122

-

2,122

3,802

-

3,802

Loans from related parties

-

107,537

107,537

2,616

160,000

162,616

Other loans

2,989

-

2,989

3,857

-

3,857

Bank overdraft

-

-

-

5

-

5

Total unsecured borrowings

5,111

107,537

112,648

10,280

160,000

170,280

Total borrowings

23,417

108,461

131,878

 29,974

162,502

192,476

 

 

In February 2018 the company converted US$100.0 million of the Bridging and Working Capital Facility previously advanced by Mercuria into 194,387,299 new ordinary shares of Phoenix at a price of £0.37 per share (based on an exchange rate of £1.00 : US$1.39). At the same time the remaining US$60.0 million was restructured into a New Convertible Rolling Credit Facility ('RCF').

 

The new facility of US$160.0 million provides additional funds of US$100.0 million and bears interest at a rate of 4% over 3-month LIBOR with a maturity date of 31 December 2021. The New Convertible RCF has a 17-month repayment grace period and will be amortised in eleven equal quarterly repayment instalments from 30 June 2019 until maturity. Mercuria Group has the right to convert all or part of the outstanding principal of the facility into additional new ordinary shares of Phoenix at a price of £0.45 per share at any time from 30 June 2018 until 10 business days prior to the maturity, subject to appropriate shareholder resolutions in relation to the authority to allot and disapplication of pre-emption rights in relation to such shares having been approved.

Secured liabilities and assets pledged as security

Secured liabilities include a total of US$1.8 million AR$ denominated loans that carry interest at a rate of 22-34% repayable in November 2018 and August 2020 and accrued interest of US$0.2 million. In addition, the group is party to US Dollar denominated secured loans totalling US$17.2 million with interest rates ranging from 3-6.2%.

 

 

Transactions with owners, 2017

In the period to 30 June 2017 and ahead of the combination transaction that completed on 10 August 2017, certain loan balances were between Trefoil and its owners (principally Upstream Capital Partners VI) were restructured. This restructuring resulted in a contribution to retained earnings of Trefoil in the amount of US$31.1 million.

8. Income tax expense

This note provides an analysis of the group's income tax expense, shows what amounts are recognised directly in equity and how the tax expense is affected by non-assessable and non-deductible items. It also explains significant estimates made in relation to the group's tax position.

Income tax expense - unaudited

Period to 30 June 2018

 US$'000

Period to 30 June 2017
 US$'000

Year to 31 December 2017
US$'000

Current tax

 

 

 

Current tax on profits for the year

176

3,165

 4,794

Total current tax expense

176

3,165

 4,794

 

 

 

 

Deferred income tax - unaudited

 

 

 

Decrease/ (increase) in deferred tax

10,936

(3,208)

 (21,429)

Total deferred tax expense/ (benefit)

10,936

(3,208)

(21,429)

Income tax expense/ (benefit)

11,112

(43)

(16,635)

 

Reconciliation of income tax expense to notional tax charge calculated using corporate tax rate:

Unaudited

Period to 30 June 2018

 US$'000

Period to 30 June 2017
 US$'000

Year to 31 December 2017

US$'000

Loss from continuing operations before income tax expense

(30,775)

(7,031)

(286,730)

Tax at the Argentina tax rate of 30% (2017: 35%)

9,233

2,461

100,356

Tax effect of amounts which are not deductible (taxable) in calculating taxable income:

 

 

 

Goodwill impairment

-

-

(78,459)

Effect of currency translation on tax values

(13,367)

(2,563)

(11,660)

Effect of change in tax rate

889

-

 10,084

Expenses not deductible for taxation

(1,670)

(245)

 (1,776)

Deferred tax assets not recognised

(6,954)

(268)

 (1,690)

Fiscal assessment

919

158

525

Other

(162)

500

(745)

Total income tax (expense)/ benefit

(11,112)

43

16,635

 

The corporate income tax rate in Argentina in 2017 was 35% (2016: 35%) and applies to profits earned and losses suffered in the year to 31 December 2017.

Under the recent tax reform plan the corporate income tax rate was reduced to 30% for the years ended 31 December 2018 and 2019 and will be reduced further to 25% for years ended 31 December 2020 and forward.

The reduction in the corporate income tax rate related only to profits reinvested in Argentina. An additional tax is applied to dividends to revert the aggregate tax rate in respect of the profits used to make the dividend to 35%. This calculation is done on a first-in/ first-out basis by reference to accumulated net income within retained earnings.

9. Deferred tax balances

Deferred tax assets

Unaudited

30 June

2018
 US$'000

30 June

 2017 US$'000

31 December 2017
US$'000

Tax losses

5,295

-

2,837

Provisions

7,635

-

8,051

Others

7,172

-

8,118

Total deferred tax assets

20,102

-

19,006

 

Argentina tax law does not contain the concept of tax groups and therefore deferred tax assets and liabilities cannot be offset between and among companies registered in Argentina and falling under the control of the same shareholder. Outside of Argentina, the group does not have sufficient concentration of subsidiaries in a single tax jurisdiction to warrant seeking tax group status to allow the offset of assets and liabilities.

The company did not recognise deferred income tax assets of US$6.9 million in respect of tax losses amounting to US$23.1 million as there is insufficient evidence that the potential assets will be recovered.

Assessed tax losses amounting to US$5.3 million will expire between 2023 to 2025.

 

Movements

Tax losses
 US$'000

Provisions
 US$'000

Inventories
US$'000

Other
US$'000

Total
US$'000

At 1 January 2017

-

-

1,352

-

1,352

(Charged) to profit and loss

-

-

(1,352)

-

(1,352)

At 30 June 2017

-

-

-

-

-

 

 

Movements

Tax losses
US$'000

Provisions
US$'000

Inventories
US$'000

Other
US$'000

Total
US$'000

At 1 January 2018

2,837

8,051

-

8,118

19,006

Credited/(charged) to profit and loss

2,458

(416)

-

(946)

1,096

At 30 June 2018

5,295

7,635

-

7,172

20,102

 

  

The timeframe for expected recovery or settlement of deferred tax assets is as follows:

 

 

30 June

2018
US$'000

30 June

2017

US$'000

31 December 2017
 US$'000

No more than 12 months after the reporting period

12,467

-

15,197

More than 12 months after the reporting period

7,635

-

3,809

 

20,102

-

19,006

 

Deferred tax liabilities

 

The balance comprises temporary differences attributable to:

 

 

30 June

2018
US$'000

30 June

 2017

US$'000

31 December 2017

US$'000

Property, plant and equipment and intangible assets

(99,612)

(31,949)

(85,802)

Inventories

(96)

-

(1,108)

Others

(1,415)

(2,898)

(2,181)

Total deferred tax liabilities

(101,123)

(34,847)

(89,091)

 

Movements

Property,
plant and
equipment
and intangible
assets US$'000

Inventories
US$'000

Other
US$'000

Total
 US$'000

At 1 January 2017

(35,572)

-

(3,788)

(39,360)

Credited to profit and loss

3,623

-

890

4,513

At 30 June 2017

(31,949)

-

(2,898)

(34,847)

 

Movements

Property,
plant and
equipment
and intangible
assets
US$'000

Inventories
US$'000

Other
US$'000

Total
US$'000

At 1 January 2018

(85,802)

(1,108)

(2,181)

(89,091)

(Charged)/ credited to profit and loss

(13,810)

1,012

766

(12,032)

At 30 June 2018

(99,612)

(96)

(1,415)

(101,123)

 

The above presentation of deferred tax assets and liabilities is prepared showing the aggregate of the gross asset and liability position on a company by company basis.

Deferred tax assets and liabilities presented in the balance sheet reflect the offset of deferred tax assets and liabilities where permissible. The deferred tax assets and liabilities, after legal offset, are shown in the table below.

   

 

30 June

2018
US$'000

30 June

2017

US$'000

31 December 2017

US$'000

Deferred income tax assets

15,150

-

11,629

Deferred tax liabilities

(96,171)

(34,847)

(81,714)

Net deferred income tax liability

(81,021)

(34,847)

(70,085)

 

10. Cash generated from operations

 

Unaudited

Period to 30 June 2018

 US$'000

Period to 30 June 2017
 US$'000

Year to 31 December 2017
US$'000

Profit for the period before taxation

(30,775)

(7,031)

(286,730)

 

 

 

 

Adjusted for:

 

 

 

Finance costs

7,750

1,125

8,207

Finance income

(223)

(9)

(572)

Other finance results

-

-

4,018

Accretion of discount on asset retirement obligation

(425)

274

142

Net unrealised exchange gains/(losses)

2,312

376

506

Income on short term investments

-

-

(572)

Impaired receivables

474

-

5,355

Share based payments

-

-

105

Impairment

3,165

7,887

232,407

Depreciation and amortisation

34,658

12,247

49,297

Loss from hedging activity

9,964

-

-

 

 

 

 

Change in operating assets and liabilities, including net effects from business combination:

 

 

 

(Increase)/ decrease in inventories

(2,756)

(344)

(4,696)

(Increase)/ decrease in trade and other receivables

(8,481)

(6,298)

(7,122)

(Decrease)/ increase in trade and other payables

(8,590)

(2,552)

6,825

Increase/ (decrease) in provisions

187

(220)

1,872

Cash generated from operations

7,260

5,455

9,042

 

11. Related party transactions

In January 2018 the company entered a floating-for-fixed Brent crude swap contract with Mercuria Energy Trading S.A. The swap price under the contract is US$65.97 per barrel and the contract is in place over a defined portion of the company's oil production. The contract settles monthly and expires on 14 December 2018 (refer note 1).

12. Events occurring after the reporting period

No events occurred after the reporting period requiring disclosure.

 

 

Additional information

Production summary

 

Basin/Concession

2Q18

WI

FY2017

1Q18

2Q18

 

Gross BOE/D

%

Net

BOE/D

Net

BOE/D

Net

BOE/D

AUSTRAL

11,092

 

3,900

3,923

3,978

Angostura (CA-14)

1,995

13%

50

241

252

Campo Bremen

838

70%

573

524

586

Chorrillos

2,936

70%

2,103

2,037

2,055

Las Violetas

4,432

13%

646

574

559

Moy Aike

163

70%

105

112

114

Oceano

559

70%

399

414

391

Rio Cullen

169

13%

24

22

21

CUYANA

2,019

 

2,136

1,786

1,866

Atamisqui

310

100%

333

325

310

Chañares Herrados

695

78%

514

417

542

Puesto Pozo Cercado

0

78%

274

-

-

Refugio Tupungato

1,014

100%

1,014

1,043

1,014

GOLFO SAN JORGE

8

 

8

8

7

Sur Rio Deseado Este

8

25%

8

8

7

NEUQUINA

14,499

 

5,026

5,033

4,589

Cajon De Los Caballos

293

38%

159

130

110

Cerro Mollar Norte

86

100%

105

102

86

Cerro Mollar Oeste

80

100%

107

98

80

Chachahuen Sur

11,873

20%

1,949

2,332

2,375

Chachahuen Sur (Permiso)

258

20%

28

45

52

El Manzano Oeste (Agrio)

12

100%

43

33

12

El Manzano Oeste (Resto)

37

40%

16

17

15

La Brea

31

100%

67

29

31

La Paloma

1

100%

-

2

1

Puesto Rojas

1,821

100%

2,485

2,202

1,821

Rio Atuel

-

67%

-

-

-

Vega Grande

6

100%

68

44

6

GRAND TOTAL

27,618

 

11,070

10,749

10,440

 

Translation

This document is the English original in the event of any discrepancy between the original English document and the Spanish translation, the English original shall prevail.

 

 

- ENDS -

 


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