Source - RNS
RNS Number : 7424K
Zoltav Resources Inc
26 September 2016
 

Embargoed: 0700hrs, 26 September 2016

 

Zoltav Resources Inc.

("Zoltav" or the "Company")

 

Half Year Report for the Six Months Ended 30 June 2016

 

Zoltav (AIM:ZOL), the Russia-focused oil and gas exploration and production company, announces results for the six months ended 30 June 2016. The full report is available to download from the Investor Relations section of the Company's website at www.zoltav.com.

 

Financial Highlights

 

·     Maiden profit before tax of USD 1.6 million (H1 2015: loss USD 2.5 million) - achieved as a result of excellent operational performance and ongoing cost optimisation programme

 

·     RUB denominated revenue rose 21% to RUB 1,003 million (H1 2015: RUB 828 million); USD denominated revenue flat at USD 14.3 million (H1 2015: USD 14.4 million) as a result of RUB devaluation

 

·     EBITDA increased by 130% to USD 6.2 million (H1 2015: USD 2.7 million)

 

·     Zoltav generated USD 0.8 million of net profit (H1 2015: loss USD 2.8 million)

 

·     Strong operating cash flow of USD 4.8 million (H1 2015: USD 2.9 million)

 

·     Reduced borrowings by 8% (RUB denominated) through repayment of RUB 180 million of PJSC Sberbank debt - in line with all covenants

 

·     Total cash at period end of USD 5.5 million (at 31 December 2015: USD 5.9 million)

 

Operational Highlights - Bortovoy Licence

 

·     Western Gas Plant operated at full increased capacity throughout H1 2016 - producing an increased rate of 9,019 (H1 2015: 8,845) barrels of oil equivalent per day

 

·     Overall production in H1 2016 was 1,596 million (H1 2015: 1,529 million) barrels of oil equivalent - a 4.4% increase

 

·     New Well 117 on the Karpenskoye field was completed and put online in April 2016 with a production rate of 3.9 mmcf/d (0.11 mmcm/d)

 

·     Zhdanovskoye infill Well 107 was successfully acid treated, producing additional 1.13 mmcf/d (0.032 mmcm/d) of gas

 

·     Pre-existing Wells 19 and 103 on the Zhdanovskoye field are scheduled to be hooked-up in September 2016 at rates of 3.2 mmcf/d (0.09 mmcm/d) and 1.1 mmcf/d (0.03 mmcm/d) respectively

 

·     Two new Wells 108 and 109 on the Zhdanovskoye field are planned to be drilled later 2016/early 2017 with estimated production rates of 5.3 mmcf/d (0.150 mmcm/d) each

 

·     3D seismic survey over North Mokrousovskoe field's Devonian structure commenced this month - preliminary results expected by April 2017 enabling Zoltav to plan optimal locations for future production wells

 

Operational Highlights - Koltogor Licences

 

·     Rosnedra confirmed the discovery of the West Koltogor oil field on Koltogor Exploration Licence 10 and, in March 2016, issued an Exploration and Production licence through to March 2036 - intention to bring in partner at appropriate time to assist with further appraisal/development

 

Marcus Rhodes, Non-executive Chairman, commented:

"Zoltav's significant efforts on driving performance at Bortovoy's Western Gas Plant and on cost efficiencies have enabled the Company to deliver a maiden profit before tax for the half year of USD 1.6 million. This was achieved despite the increased weakness of the rouble against the US dollar. Our performance has been further strengthened by an additional uplift of our gas sale price.

 

The Company has high quality assets and experienced management that is intent on driving more profitable growth from the Western Gas Plant, on operating a lean and efficient business and on the development of our organic opportunities - particularly the considerable resource in the Eastern Fields of Bortovoy, where we are working to better understand the feasibility and economic viability of the development options.

 

The Board believes this strategy will not only result in our transition into an attractive and profitable junior oil company - a path on which we are already well advanced - but also position the Company very well should the rouble regain strength and as the oil and gas sector continues to improve."

 

Contacts:

 

Zoltav Resources Inc.

Tel. +44 (0)20 7830 9704

Marcus Rhodes, Non-executive Chairman

(via Vigo Communications)



Shore Capital (Nomad and Joint Broker)

Tel. +44 (0)20 7408 4090

Toby Gibbs or Mark Percy (Corporate Finance)


Jerry Keen (Corporate Broking)




Panmure Gordon (Joint Broker)

Tel. +44 (0)20 7886 2500

Adam James or Tom Salvesen




Vigo Communications

Tel. +44 (0)20 7830 9704

Patrick d'Ancona or Ben Simons

[email protected]

 

 

Chairman's statement

 

I am pleased to present Zoltav's report for the six month period ended 30 June 2016.

 

Zoltav's significant efforts on driving performance at Bortovoy's Western Gas Plant have enabled the Company to deliver a maiden profit before tax for the half year of USD 1.6 million (H1 2015: USD 2.5 million loss). This was achieved despite the increased weakness of the rouble (RUB) against the US dollar (USD).

 

This performance was complemented by the achievement of a further increase from 1 January 2016 in the gas sale price to RUB 3,590/mcm or USD 1.45/mcf. 

 

At Bortovoy, the Western Gas Plant was maintained at full capacity - the limit of which has been further increased - throughout the period under review, producing 9,019 boe/d (1,280 toe/d). Total production in the first half reached 1,596 mboe (226 mtoe), representing an increase of 4.4% compared with the first half of 2015.

 

Zoltav's excellent operational performance has served to offset the continued weakness of RUB against our reporting currency of USD. Although RUB fell by approximately a further 22% against USD compared with H1 2015 (conversion rates: 70.2583 USDRUB in H1 2016 versus 57.3968 in H1 2015), Zoltav's RUB denominated revenue rose by an impressive 21% to RUB 1,003 million (H1 2015: RUB 828 million). However, the Russian currency's further depreciation had a negative impact equating to USD 3.1 million on the Company's USD denominated revenue. Despite this, management's efforts on maximising production and improving gas price realisations almost entirely offset this currency translation impact, enabling the Company to produce USD denominated revenue of USD 14.3 million (H1 2015: USD 14.4 million).

 

The Company's ongoing programme of cost optimisation at Bortovoy, together with our focus on reducing administrative costs, enabled Zoltav to achieve an operating profit of USD 3.4 million (H1 2015: operating loss of USD 0.4 million). This resulted in an increase in EBITDA of 130% in H1 2016 to USD 6.2 million (H1 2015: USD 2.7 million). Zoltav achieved a net profit of USD 0.8 million (USD 2.8 million loss in H1 2015). 

 

Diall Alliance, the Bortovoy Licence operating company, successfully repaid RUB 180 million (USD 2.5 million) of principal debt according to its schedule. The Company remains in line with all covenants of its credit facility agreement and generated strong operating cash flow in a period when many of its sector peers are not well-financed or struggle to pass covenant tests.

 

The Company's assets underpin potential long-term revenue streams. As the Company has previously stated, Zoltav estimates there are sufficient reserves in the Western Fields of the Bortovoy Licence to keep the Western Gas Plant at full capacity for at least a further decade. Accordingly, the Company commissioned a 3D seismic programme, which commenced this month over the Devonian structure in the North Mokrousovskoye field, in order to identify optimal locations for the drilling of future production wells to tie into the Western Gas Plant.

 

Zoltav has also continued to assess the development potential of the Eastern Fields of the Bortovoy Licence, which could be commercialised through the construction of a second gas plant in this area of the licence.

 

At Koltogor, as a result of opening up the West Koltogor oil field on Koltogor Exploration Licence 10, the Company was granted in March 2016 an Exploration and Production Licence, valid through to March 2036. Our intention remains to bring a partner into the Koltogor licences at the appropriate time to assist in the further appraisal and development of these fields and limit the capital commitments of the Company to opening up the potential of this asset.

 

The search for value accretive acquisitions in Russia and the wider CIS has not to date yielded any prospects which the Board considers to be in the best interests of shareholders. It remains challenging in the current oil and gas environment to access deals that are sufficiently value accretive for shareholders, as sellers are yet to materially adjust their expectations. While this market dynamic persists, the Board has resolved instead to concentrate the Company's efforts on driving more profitable growth from the Western Gas Plant, on operating a lean and efficient business and on the development of our organic opportunities - particularly the considerable resource in the Eastern Fields of Bortovoy, where we are working to better understand the feasibility and economic viability of the development options. The Board believes this strategy will not only result in our transition into an attractive and profitable junior oil company - a path on which we are already well advanced - but also position the Group very well should the RUB regain strength and as the oil and gas sector continues to improve.

 

 

Marcus Rhodes

Non-executive Chairman

 

23 September 2016

 

 

Review of operations

 

Bortovoy Licence

 

Zoltav continued to operate the Western Gas Plant at its full capacity throughout the first half of 2016, with an increased rate of 9,019 boe/d (1,280 toe/d). A number of factors contributed to this strong operational performance including efficient compressors operation which facilitated an increase in sustainable daily production; optimisation of the well stock production regime; and a higher than expected production ratio from Well 107 of the Zhdanovskoye field.

 

A preliminary assessment of the Devonian structure within the North Mokrousovskoye field has enabled the Company to commission a 3D seismic programme over this area, which commenced this month, in order to identify optimal locations for the drilling of future production wells to tie into the Western Gas Plant. This activity is in line with the Company's strategic objective to maintain full production capacity from the Western Gas Plant for at least a further decade.

 

The Company continues to evaluate development scenarios for the highly prospective Eastern Fields of the Bortovoy Licence

 

Production

 

Average daily production from the Western Gas Plant during the first six months of 2016 was 9,019 boe/d (1,280 toe/d) compared to 8,845 boe/d (1,255 toe/d) in 2015. This comprised 47.6 mmcf/d (1.35 mmcm/d) of gas (H1 2015: 46.6 mmcf/d / 1.32 mmcm/d) and 520 bbls/d (66 t/d) of oil and condensate (2015: 544 bbls/d / 69 t/d).

 

Overall production throughout the period was 1,596 mboe, which reflects an increase of 4.4% compared with H1 2015, mostly due to an increase in daily volume going through the plant and a reduction in maintenance shut-down time.

 

In April 2016, the Karpenskoye Well 117 was put into production at an unstimulated rate of 3.9 mmcf/d (0.11 mmcm/d). Higher than expected water cut prevented Zoltav from stimulating the well by applying acid treatment, thus limiting its production rate. In order to offset this, in July 2016 (after the period under review), the Company successfully acid treated the Zhdanovskoye Well 107 (which was hooked-up to the Western Gas Plant in December 2015), enabling it to produce an additional 1.13 mmcf/d (0.032 mmcm/d) of gas.

 

This water cut in the Karpenskoye Well 117, and also in the Zhdanovskoye Well 30, resulted in a 4.2% reduction in the production of liquids in the first half of 2016 compared with H1 2015. This was, however, more than offset by the 4.9% increase in the production of gas.

 

The hooking-up of the pre-existing Well 19 in the western area of the Zhdanovskoye field is progressing to plan and is expected to be put into production in September 2016 with a rate of 3.2 mmcf/day (0.09 mmcm/d).

 

The suspended Well 103 in the Zhdanovskoye field is also expected to be put into production in September 2016 with a rate of 1.1 mmcf/d (0.03 mmcm/d). These initiatives will allow the plant to keep operating at full capacity throughout 2016.

 

Development drilling and other well activity

 

Two new wells are planned for later in 2016 and early 2017. The Zhdanovskoye Well 108 is expected to spud in October 2016. On completion of operations, the rig will move to drill Zhdanovskoye Well 109, which is expected to spud in January 2017. Each well is projected to produce approximately 5.3 mmcf/d (0.150 mmcm/d).

 

The 3D seismic survey over the Devonian structure in North Mokrousovskoye commenced this month, with preliminary interpretation to be completed by April 2017, thus enabling Zoltav to precision plan optimal potential locations for future production wells.

 

Koltogor Licences

 

As the sole owner of the Koltogor Licences, management continues to evaluate farm-out options to assist in the future appraisal and development of the substantial resource from a position of strength. It remains Zoltav's intention to commission an update of its reserves and resources under PRMS, however, as previously stated, the Company has deferred this expenditure until such time as it is strategically necessary to commission an updated report.

 

As a result of opening up the West Koltogor oil field on Koltogor Exploration Licence 10, the Company's application to Rosnedra for an Exploration and Production Licence was approved in March 2016 and is valid through March 2036.

 

Group Reserves under PRMS as at 30 June 2016



Proved

Probable

Proved and probable

Possible

Bortovoy Licence






Gas

bcf

352.9

396.8

749.7

640.0

Oil & liquids

mmbbls

2.0

1.8

3.8

2.4

Gas, oil and liquids

mmboe

62.0

69.2

131.2

111.2

Koltogor Licences






Gas

bcf

0.5

23.5

24.0

55.7

Oil

mmbbls

1.6

73.5

75.1

174.0

Total

mmboe

1.7

77.5

79.2

183.5

Total






Gas

bcf

353.4

420.3

773.7

695.7

Oil & liquids

mmbbls

3.6

75.3

78.9

176.4

Gas, oil and liquids

mmboe

63.7

146.7

210.4

294.7

 

Source: DeGolyer and & MacNaughton (May 2014)

 

 

Financial review

 

Management's focus on profit generation from the Western Gas Plant at Bortovoy, coupled with an intense programme of Group cost optimisation, enabled Zoltav to generate USD 1.6 million of profit before tax in the first half of 2016. EBITDA increased by 130% and reached USD 6.2 million allowing the Company to generate its first net profit of USD 0.8 million.

 

Revenue

 

The Group's RUB revenues in H1 2016 increased by 21% to RUB 1,003 million, compared to RUB 828 million in H1 2015. However, revenues in the Group's reporting currency of USD 14.3 million (H1 2015: USD 14.4 million) were significantly impacted by the further devaluation of RUB by 22% compared with the equivalent period last year (conversion rates: 70.2583 USDRUB in H1 2016 versus 57.3968 in H1 2015).

 

Gas realisations were USD 1.45/mcf or RUB 3,590/mcm.

 

Oil and condensate realisations were USD 22.6/bbl or RUB 1,588/bbl (USD 177.4/T or RUB 12,464/T) (H1 2015: USD 28.54/bbl or RUB 1,638/bbl (USD 224/T or RUB 12,857/T)). Oil and condensate were sold directly at the Western Gas Plant through a tender process to a small number of different purchasers.

 

Cost of sales and G&A costs

 

Total cost of sales decreased by 22% to USD 8.2 million (H1 2015: USD 10.6 million). This included production based taxes of USD 2.9 million (H1 2015: USD 3.3 million), a reduction of 12% compared to H1 2016, and depreciation and depletion of assets of USD 2.9 million (H1 2015: USD 3.1 million), a reduction of 7% compared to H1 2016.

 

Other cost of sales also decreased by 41% to USD 2.4 million over the reported period (H1 2015: USD 4.2 million). Other cost of sales comprised operating expenses from the Bortovoy operating company, Diall Alliance, borne in RUB. RUB expenses fell by 28% primarily due to a cost optimisation programme including staff reduction, fewer well workovers required, materially more efficient purchasing of methanol fluids and fewer equipment repairs due to one-off maintenance expenditures in 2015.

 

The Group's G&A costs decreased by 47% to USD 2.1 million (H1 2015: USD 4.1 million), mostly driven by staff reduction and optimisation of audit, consultancy, administrative and legal fees.

 

Operating profit

 

Zoltav turned the operating loss incurred in H1 2015 of USD 0.4 million into an operating profit for H1 2016 of USD 3.4 million.

 

Finance costs of USD 2.0 million are represented by interest on the RUB 2,040 million (USD 31.7 million) Sberbank facility.

 

Profit before tax

 

Zoltav generated USD 1.6 million of profit before tax, compared to a loss of USD 2.5 million in H1 2015.

 

Taxation

 

The production based tax for the period was USD 2.9 million (H1 2015: USD 3.3 million) which is recognised in the cost of sales. The gas MET rate applicable for the period was 18.3 RUB/mcf or 645 RUB/mcm (H1 2015: 17.5 RUB /mcf or 616 RUB/mcm). The oil MET rate applicable for the period was 3,356 RUB/t (H1 2015: 4,557 RUB ) and MET 4,258 RUB/t (H1 2015: 3,221 RUB/t) for condensate.

 

The income tax charge for the year was USD 0.8 million (H1 2015: USD 0.3 million) and represents deferred tax expense. The deferred tax charge increased due to the net book value differences between IFRS and statutory accounting standards relating to PPE and E&E assets.

 

Net profit

 

Zoltav generated USD 0.8 million of net profit, compared to a loss of USD 2.8 million in H1 2015.

 

Currency translation differences

 

The significant RUB/USD exchange rate volatility had a material effect on the value of our assets and liabilities presented in USD, which is disclosed in note 11.2 of the interim consolidated financial statements.

 

Cash

 

Cash generated from operating activities increased by 63% to USD 4.8 million (H1 2015: cash from operating activities USD 2.9 million).

 

Diall Alliance repaid RUB 180 million (USD 2.5 million) of the principal amount on its Sberbank facility according to schedule. The Company remains in line with the covenants of its credit facility agreement.

 

Zoltav has a sustainable financial position. Total cash at the end of the period was USD 5.5 million (at 31 December 2015: USD 5.9 million).

 

 

Denis Golubovskiy

Director of Finance

 

23 September 2016

 

Interim condensed consolidated statement of comprehensive income for the six months ended 30 June 2016 (unaudited)

 

(in '000s US dollars, unless otherwise stated)

 

 



Six months ended 30 June


Note

2016

2015

Revenue

3

14,281

14,434

Cost of sales




Mineral extraction tax


(2,934)

(3,341)

Depreciation and depletion


(2,861)

(3,109)

Other cost of sales


(2,434)

(4,156)

Total cost of sales


(8,229)

(10,606)

Gross profit


6,052

3,828

Operating, administrative and selling expenses


(2,138)

(4,054)

Other income and expense, net


(537)

(139)

Operating profit/(loss)


3,377

(365)

Finance income


234

523

Finance cost


(1,974)

(2,690)

Profit/(loss) before tax


1,637

(2,532)

Income tax expense


(817)

(272)

Profit/(loss) for the year attributable to owners of the parent


820

(2,804)





Other comprehensive income not to be reclassified to profit or loss in subsequent periods:




Currency translation differences

11.2

11,758

1,560

Other comprehensive income for the period


11,758

1,560

Total comprehensive income/(loss) for the period


12,578

(1,244)





 

 


$ cents

$ cents

Earnings/(loss) per share attributable to owners of the parent during the period:

7



Basic


0.58

(1.98)

Diluted


0.57

(1.95)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Interim condensed consolidated statement of financial position as at 30 June 2016 (unaudited)

 

(in '000s US dollars, unless otherwise stated)

 



As at 30 June

As at 31 December


Note

2016

2015

Assets




Non-current assets




Exploration and evaluation assets

4

74,628

64,355

Property, plant and equipment

5

68,079

59,524

Total non-current assets


142,707

123,879

 

Current assets




Inventories


376

134

Trade and other receivables


2,361

2,584

Financial assets at fair value through profit or loss


40

65

Cash and cash equivalents


5,541

5,880

Total current assets


8,318

8,663

Total assets


151,025

132,542





Equity and liabilities




Share capital

6

28,391

28,391

Share premium


159,899

159,899

Other reserves


43,026

43,026

Accumulated losses


(42,188)

(43,008)

Translation reserve

11.2

(88,130)

(99,888)

Total equity


100,998

88,420





Non-current liabilities




Borrowings

9

26,399

25,317

Provisions

10

7,083

4,912

Other payables


850

-

Deferred tax liabilities


6,085

4,578

Total non-current liabilities


40,417

34,807





Current liabilities




Borrowings

9

5,335

5,123

Other taxes payable


1,554

1,244

Trade and other payables


2,721

2,948

Total current liabilities


9,610

9,315

Total liabilities


50,027

44,122

Total equity and liabilities


151,025

132,542

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Interim condensed consolidated statement of cash flows for the six months ended 30 June 2016 (unaudited)

 

(in '000s US dollars, unless otherwise stated)

 



Six months ended 30 June


Note

2016

2015

Cash flows from operating activities




Profit/(loss) before tax


1,637

(2,532)





Adjustments for:




Depreciation and depletion


2,861

3,182

Net finance costs


1,740

2,167

Other losses, net of gains


670

90

Operating cash inflows before working capital changes


6,908

2,907

(Increase)/decrease in inventory


(242)

98

Decrease in trade and other receivables


228

465

(Decrease)/Increase in trade and other payables


(670)

1,217

Net cash from operating activities before tax paid and interests


6,224

4,687

Interest received


234

523

Interest paid

9

(1,681)

(2,280)

Net cash from operating activities


4,777

2,930





Cash flows from investing activities




Capital expenditure in relation to exploration and evaluation activities


(406)

(506)

Purchase of property, plant and equipment


(2,856)

(2,318)

Disposal of financial assets at fair value through profit or loss


-

105

Net cash used in investing activities


(3,262)

(2,719)





Cash flows from financing activities




Repayment of borrowings

9

(2,495)

(1,045)

Net cash used in from financing activities


(2,495)

(1,045)

Net decrease in cash and cash equivalents


(980)

(834)

Translation differences


641

106

Cash and cash equivalents at the beginning of the year


5,880

10,694

Cash and cash equivalents at the end of the year


5,541

9,966

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Interim condensed consolidated statement of changes in equity for the six months ended 30 June 2016 (unaudited)

 

(in '000s US dollars, unless otherwise stated)

 


Share capital

Share premium

Capital reserve

Employee share-based compen-sation reserve

Accumula-ted losses

Translation reserve

Total
equity

28,391

159,899

40,444

3,148

(39,542)

(74,434)

117,906

Exchange differences on translation to presentation currency

-

-

-

-

-

1,560

1,560

Loss for the year

-

-

-

-

(2,804)

-

(2,804)

Total comprehensive loss

-

-

-

-

(2,804)

1,560

(1,244)

28,391

159,899

40,444

3,148

(42,346)

(72,874)

116,662









At 1 January 2016

28,391

159,899

40,444

2,582

(43,008)

(99,888)

88,420

Exchange differences on translation to presentation currency

-

-

-

-

-

11,758

11,758

Profit for the year

-

-

-

-

820

-

820

Total comprehensive income

-

-

-

-

820

11,758

12,578

28,391

159,899

40,444

2,582

(42,188)

(88,130)

100,998

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Notes to the interim condensed consolidated financial statements (unaudited)

 

1.            Background

 

1.1       The Company and its operations

 

The Zoltav Group (the Group) comprises Zoltav Resources Inc. (the Company), together with its subsidiaries:

Name

Place of incorporation

Function

Share of the Group in a subsidiary

Zoltav Resources Holdings (Jersey) Limited*

Jersey

Holding company

100%

ZRI Services (UK) Ltd*

United Kingdom

Service company

100%

CenGeo Holdings Limited (hereinafter "CenGeo Holdings")

Cyprus

Holding company

100%

CJSC SibGeCo (hereinafter "SibGeCo")

Russia

Operating company

100%

Royal Atlantic Energy (Cyprus) Limited (hereinafter "Royal")

Cyprus

Holding company

100%

Diall Alliance LLC (hereinafter "Diall")

Russia

Operating company

100%

Zoltav Resource LLC

Russia

Management company

100%

* see note 14

 

The Company was incorporated in the Cayman Islands on 18 November 2003, which does not prescribe the adoption of any particular accounting framework. The Group therefore applies International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board and as adopted by the European Union.

 

The principal activities of the Company and its subsidiaries are the acquisition, exploration, development and production of hydrocarbons in the Russian Federation and the Commonwealth of Independent States (CIS). The Company's shares are listed on the AIM Market (AIM) of the London Stock Exchange. The financial statements are prepared in United States dollars (USD).

 

1.2       Russian business environment

 

The Group's operations are located in the Russian Federation.

 

1.3       Russian Federation

 

The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to varying interpretations.

 

The recent political and economic turmoil and falling crude oil prices have had and may continue to have a negative impact on the Russian economy, including further weakening of RUB, higher interest rates, reduced liquidity and making it harder to raise international funding. These events, including current and future international sanctions against Russian companies and individuals and the related uncertainty and volatility of the financial markets, may have a significant impact on the Group's operations and financial position, the effect of which is difficult to predict. The future economic and regulatory situation may differ from management's expectations.

 

Whilst not currently affecting the Group's operations, the sanctions being imposed by the European Union and the United States of America continue to evolve. The Company cannot confirm that the sanctions will not have an effect on the Group's operations or its ability to access international capital markets in the future.

 

 

2.         Significant accounting policies

 

2.1       Basis of preparation

 

The interim condensed consolidated financial statements of the Group have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting (IAS 34), as adopted by the European Union (EU), International Financial Reporting Interpretations Committee (IFRIC) interpretations, and the Companies Act 2006 applicable to companies reporting under IFRS. The interim condensed consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

 

The preparation of interim condensed consolidated financial statements in conformity with IAS 34 requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies.

 

2.2       Going concern

 

The consolidated financial statements have been prepared on the going concern basis that contemplates the realisation of assets and satisfaction of liabilities and commitments in the ordinary course of business.

 

The Group's current liabilities exceeded current assets at 30 June 2016 by USD 1,292 thousand (31 December 2015: USD 652 thousand).

 

From 2016 to 2018 the Group forecasts an increase in sales and a decrease in operating expenses as it renegotiates the payment terms with contractors which, it forecasts, will lead to an improvement of the cash position and mitigate the liquidity risk. The sales increase is to be reached by sales price growth under the long-term sales contract with Gazprom Mezhregiongaz Saratov LLC and sales volume increase, resulting from the commencement of a new well in April 2016 and planned commencement of two additional wells in October 2016 and January 2017. On 7 September 2016, the Group optimised the structure of the Board of Directors which, together with further cost optimisation of operating, administrative and selling expenses, will allow the Group to further improve operating cash flows.

 

These actions have already significantly improved operating cash flows during the six months ended 30 June 2016 to USD 4,777 thousand (2015: USD 2,930 thousand).

 

Considering the above actions and plans of the Group, management believes that a going concern basis for preparing these financial statements is appropriate.

 

2.3       Disclosure of impact of new and future accounting standards

 

The accounting policies and methods of computation are consistent with those used in the Group's Annual Report and Financial Statements for the year ended 31 December 2015.

 

a)         Adoption of amended Standards

 

The Group applied for the first time certain standards and amendments, which are effective for periods beginning on or after 1 January 2016. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

Although the new standards and amendments are applied for the first time in 2016, they did not have an impact on the interim condensed consolidated financial statements of the Group.

 

b)        Standards issued but not yet effective

 

IFRS 9 Financial Instruments

 

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments, which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Retrospective application is required, but comparative information is not compulsory. Early application of previous versions of IFRS 9 (2009, 2010 and 2013) is permitted if the date of initial application is before 1 February 2015. The adoption of IFRS 9 will have insignificant effect on the classification and measurement of the Group's financial assets.

 

IFRS 15 Revenue from Contracts with Customers

 

IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognising revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2018 with early adoption permitted.

 

Management of the Group does not expect these new standards have a material impact on the consolidated financial statements of the Group.

 

2.4       Segment reporting

 

Segmental reporting follows the Group's internal reporting structure.

 

Operating segments are defined as components of the Group where separate financial information is available and reported regularly to the chief operating decision maker ("CODM"), which is determined to be the Board of Directors of the Company. The Board of Directors decides how to allocate resources and assesses operational and financial performance using the information provided.

 

The CODM receives reports of monthly operating profit reported in IFRS financial statements for the Group and its development and production entities. The Group has other entities that engage as either head office or in a corporate capacity or as holding companies. Management has concluded that due to application of the aggregation criteria that separate financial information for segments is not required. No geographic segmental information is presented as all of the companies' operating activities are based in the Russian Federation.

 

Management has determined therefore that the operations of the Group comprise one operating segment and the Group operates in only one geographic area − the Russian Federation.

 

2.5       Assets and liabilities not measured at fair value but for which fair value is disclosed

 

Fair values analysed by level in the fair value hierarchy of assets and liabilities of the Group not measured at fair value are as follows:

 


30 June 2016

30 June 2015


Fair value

Carrying value

Fair value

Carrying value

Financial assets





Trade and other receivables

2,361

2,361

2,702

2,702

Total assets

2,361

2,361

2,702

2,702

 

Financial liabilities





Borrowings

32,187

31,734

42,981

41,802

Trade and other payables

3,571

3,571

3,234

3,234

Total liabilities

35,758

35,305

46,215

45,036

 

The fair value of borrowings is based on cash flows discounted using a rate based on the borrowing rate of 13.65% (2015: 11.48%) and is within level 2 of the fair value hierarchy.

 

 

3.         Revenue

 

The Group's operations comprise one class of business being oil and gas exploration, development and production and all revenues are from one geographic region, the Saratov Region in the Russian Federation. Companies incorporated outside of Russia provide support to the operations in Russia.

 

Revenue is primarily from the sale of three products:

 


Six months ended 30 June


2016

2015

Gas sales

12,201

11,706

Oil sales

1,123

1,473

Condensate sales

957

1,255

Total sales

14,281

14,434

 

All gas sales are made to one customer, Gazprom Mezhregiongaz Saratov LLC, under a long-term contract effective until 31 December 2020 with terms reviewed annually. Condensate and oil are sold to regional buyers. The sales of all three products are denominated in RUB.

 

 

4.         Exploration and evaluation assets

 


Sub-soil licences

Drilling,
seismic and other costs

Decommi-ssioning
asset

Construction work in progress

Total

Balance at 1 January 2015

36,460

45,084

2,269

109

83,922

Additions

378

117

-

11

506

Reclassification

107

-

-

(107)

-

Transfer to property, plant and equipment

-

-

-

-

-

Change in the estimates of decommissioning provision (note 10)

-

-

-

-

-

Exchange difference

495

588

30

(1)

1,112

Balance at 30 June 2015

37,440

45,789

2,299

12

85,540







Balance at 1 January 2016

28,828

35,073

451

3

64,355

Additions

1,154

23

-

7

1,184

Reclassification

2

-

-

(2)

-

Transfer to property, plant and equipment

-

-

-

-

-

Change in the estimates of decommissioning provision (note 10)

-

-

307

-

307

Exchange difference

3,992

4,697

92

1

8,782

Balance at 30 June 2016

33,976

39,793

850

9

74,628

 

In management's opinion, as at 30 June 2016 there were no non-compliance issues in respect of the licences that would have an adverse effect on the financial position or the operating results of the Group.

 

 

5.         Property, plant and equipment

 


Oil and gas assets

Motor
vehicles

Other equipment and furniture

Construction work in progress

Total

Cost at 1 January 2015

78,921

265

138

5,027

84,351

Additions

72

25

1

1,734

1,832

Reclassification

2,220

16

-

(2,236)

-

Transfer from exploration and evaluation assets

-

-

-

-

-

Change in the estimates of decommissioning provision (note 10)

-

-

-

-

-

Disposals

(40)

-

-

(122)

(162)

Exchange difference

1,394

8

2

38

1,442

Cost at 30 June 2015

82,567

314

141

4,441

87,463







Cost at 1 January 2016

62,353

217

106

3,536

66,212

Additions

1

-

-

2,803

2,804

Reclassification

3,306

-

-

(3,306)

-

Transfer from exploration and evaluation assets

-

-

-

-

-

Change in the estimates of decommissioning provision (note 10)

650

-

-

-

650

Disposals

(107)

-

-

(23)

(130)

Exchange difference

8,747

29

14

426

9,216

Cost at 30 June 2016

74,950

246

120

3,436

78,752







Accumulated depreciation and impairment






Balance at 1 January 2015

(2,102)

(21)

(65)

-

(2,188)

Depreciation and depletion

(3,122)

(50)

(9)

-

(3,181)

Disposals

16

-

-

-

16

Exchange difference

(367)

(6)

(1)

-

(374)

Balance at 30 June 2015

(5,575)

(77)

(75)

-

(5,727)







Balance at 1 January 2016

(6,535)

(96)

(57)

-

(6,688)

Depreciation and depletion

(2,844)

(36)

(4)

-

(2,884)

Disposals

60

-

-

-

60

Exchange difference

(1,137)

(16)

(8)

-

(1,161)

Balance at 30 June 2016

(10,456)

(148)

(69)

-

(10,673)







Net book value at 1 January 2015

76,819

244

73

5,027

82,163

Net book value at 30 June 2015

76,992

237

66

4,441

81,736

Net book value at 1 January 2016

55,818

121

49

3,536

59,524

Net book value at 30 June 2016

64,494

98

51

3,436

68,079

 

 

6.         Share capital

 

At 30 June 2016 and 31 December 2015

Number of ordinary shares

Nominal value

Authorised (par value of USD 0.20 each)

250,000,000

50,000

Issued and fully paid (par value of USD 0.20 each)

141,955,386

28,391

 

 

7.         Earnings/(loss) per share

 

Basic earnings/(loss) per share is calculated by dividing the loss attributable to owners of the Company by the weighted average number of ordinary shares in issue during the year.

 

Diluted earnings/(loss) per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has share options and warrants as dilutive potential ordinary shares.

 


Six months ended 30 June


2016

2015

Earnings/(loss)/ attributable to owners of the Company −
Basic and diluted

820

(2,804)

 


Number of

shares

Number of

shares

Weighted average number of shares for calculating basic earnings/(loss) per share

141,955,386

141,955,386

Effect of dilutive potential ordinary shares − share options

1,952,500

2,117,500

Weighted average number of shares for calculating diluted earnings/(loss) per share

143,907,886

144,072,886

 


US cents

US cents

Basic earnings/(loss) per share

0.58

(1.98)

Diluted earnings/(loss) per share

0.57

(1.95)

 

 

8.         Share-based payments

 

At 30 June 2016, the Company had a total of 1,952,500 outstanding share options (31 December 2015: 1,952,500).

 

 

9.         Borrowings

 


2016

2015

Non-revolving credit facility − current liability, as at 1 January

5,123

3,200

Interest accrued

1,699

2,289

Interest paid

(1,681)

(2,280)

Reclassified from non-current liability

2,135

3,136

Repayment

(2,495)

(1,045)

Exchange difference

554

103

Non-revolving credit facility − current liability, as at 30 June

5,335

5,403




Non-revolving credit facility - non-current liability, as at 1 January

25,317

39,076

Reclassified to current liability

(2,135)

(3,136)

Exchange difference

3,217

459

Non-revolving credit facility - non-current liability, as at 30 June

26,399

36,399

 

On 4 April 2014, Diall Alliance entered into a non-revolving credit facility agreement (no. 5878) with Sberbank of Russia OJSC with the maximum amount of the facility of RUB 2,400,000 thousand (USD 37,350 thousand at exchange rate at 30 June 2016). The full amount of the facility was drawn down in 2014. The maturity date is 30 April 2021, being the 7-year anniversary of the facility being entered into. Diall Alliance is obliged to repay the principal amount of the loan in 24 tranches commencing on 11 May 2015 and on a quarterly basis from then on with a final repayment tranche being payable on the maturity date. During the first six months of 2016, Diall Alliance repaid RUB 180,000 thousand (2015: RUB 180,000 thousand). The interest rate is 10.98% per annum. Sberbank may unilaterally amend the interest rate in the event of increase in refinancing rates of the Central Bank of Russia. Diall Alliance paid an upfront commission on the facility of 1% of the facility amount (RUB 24,000 thousand (USD 800 thousand at the transaction date exchange rate)) and there is a drawdown charge of 0.25% per year on the balance of the facility amount not withdrawn by Diall Alliance within the established timeframe. Diall Alliance has the option to prepay the loan in whole or in part at any time, subject to the payment of a fee. Diall Alliance provided certain warranties and representations to Sberbank in the agreement. The agreement contains certain loan covenants and events of default, which are customary for a facility of this type. Diall Alliance is in compliance with these covenants. The loan is secured on the fixed assets of Diall Alliance, such security being granted pursuant to various pledge and mortgage deeds entered into by Diall Alliance on or about the date of the Sberbank Facility. Total property, plant and equipment pledged as of 30 June 2016 amounted to USD 46,772 thousand.

 

The outstanding amount of the facility as of 30 June 2016 was RUB 2,040,000 thousand (USD 31,734 thousand) and as of 31 December 2015 was RUB 2,220,000 thousand (USD 30,440 thousand). The credit facility is measured at amortised cost, using the effective interest method.

 

 

10.       Decommissioning and environmental restoration provision

 

The decommissioning and environmental restoration provision represents the net present value of the estimated future obligations for abandonment and site restoration costs which are expected to be incurred at the end of the production lives of the gas and oil fields which is estimated to be within 20 years.


2016

2015

Provision as at 1 January

4,912

10,649

Additions

32

-

Unwinding of discount

260

382

Change in estimate of decommissioning and environmental restoration provision

1,090

-

Exchange difference

789

152

Provision as at 30 June

7,083

11,183

 

This provision has been created based on the Group's internal estimates. Assumptions, based on the current economic environment, have been made which the directors believe are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon future market prices for the necessary dismantlement works required which will reflect market conditions at the relevant time. Furthermore, the timing is likely to depend on when the fields cease to produce at economically viable rates. This in turn will depend upon future oil prices and future operating costs, which are inherently uncertain.

 

The provision reflects two liabilities: one is to dismantle the property, plant and equipment assets and the other is to restore the environment. The decommissioning part of the provision is reversed when an oil well is abandoned and corresponding capitalised costs are expensed. The environmental part of the provision is reversed when the expenses on restoration are actually incurred.

 

 

11.       Financial risk management

 

11.1    Liquidity risk

 

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group monitors the risk of cash shortfalls by means of current liquidity planning. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. This approach is used to analyse payment dates associated with financial assets, and also to forecast cash flows from operating activities. The contractual maturities of financial liabilities are presented including estimated interest payments.

 


Contractual amount

Less than

1 year

1-3 years

Over
3 years

Financial liabilities as at 30 June 2016





Borrowings

41,335

8,346

16,208

16,781

Trade and other payables

3,571

2,721

-

850

Total

44,906

11,067

16,208

17,631

 

 






Contractual amount

Less than

1 year

1-3 years

Over

3 years

Financial liabilities as at 31 December 2015





Borrowings

40,346

8,006

12,921

19,419

Trade and other payables

2,948

2,948

-

-

Total

43,294

10,954

12,921

19,419

 

11.2    Foreign exchange risk and the effect of translation to presentational currency

 

The Company does not have any significant exposure to foreign currency risk as no significant sales, purchases and borrowings are denominated in a currency other than the functional currency of Diall Alliance and SibGeCo, which is the RUB.

 

The Group's operations are within the Russian Federation where all of its revenue, costs and financing from both Sberbank and intra-group lending are denominated in RUB. As a result there is no exposure at the operating subsidiary level to foreign exchange movements.

 

The Group does not currently enter into forward exchange contracts or otherwise hedge its potential foreign exchange exposure.

 

As noted above, the Company's operations are in the Russian Federation and its prime currency of operation in the region is the RUB. The RUB/USD exchange rate moved from 72.8827 as at 31 December 2015 to 64.2575 as at 30 June 2016 and continues to fluctuate. When presenting financial statements in USD under IFRS, these movements are reflected at each asset and liability level with the net adjusting amount being reflected within Shareholders equity. Total translation reserve as at 30 June 2016 equals USD 88,130 thousand (31 December 2015: USD 99,888 thousand) and the effect of such recalculation into presentation currency of net assets during the six months ended 30 June 2016 amounts USD 11,758 thousand (2015: USD 1,560 thousand).

 

 

12.       Commitments and contingencies

 

12.1    Capital commitments

 

Capital expenditure contracted for at the end of the reporting period but not yet incurred at 30 June 2016 was USD 362 thousand (31 December 2015: USD 226 thousand).

 

12.2    Insurance

 

The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not generally available. The Company's insurance currently includes cover for damage to or loss of assets, including business interruption insurance, should an insurable incident result in a shut-down of the Western Plant for an extended period of time, insurance for out-of-control wells and environmental damage caused thereby, third party liability coverage (including employer's liability insurance) and directors and officers liability insurance, in each case subject to excesses, exclusions and limitations. However, there can be no assurance that such insurance will be adequate to cover losses or exposure for liability or that the Company will continue to be able to obtain insurance to cover such risks. Until the Company obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Company's operations and financial position.

 

12.3    Litigation

 

The Company was involved in a number of court procedures (both as a plaintiff and as a defendant) arising in the normal course of business. In the opinion of management, there are no current legal proceedings or other claims outstanding, which could have a material adverse effect on the results of operation financial position or cash flows of the Company and which have not been accrued or disclosed in these financial statements.

 

12.4    Taxation contingencies

 

Russian tax legislation which was enacted or substantively enacted at the end of the reporting period is subject to varying interpretations when being applied to the transactions and activities of the Group. Consequently, tax positions taken by management and the formal documentation supporting the tax positions may be successfully challenged by relevant authorities. Russian tax administration is gradually strengthening, including the fact that there is a higher risk of review of tax transactions without a clear business purpose or with tax incompliant counterparties. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances, reviews may cover longer periods. As Russian tax legislation does not provide definitive guidance in certain areas, the Group adopts, from time to time, interpretations of such uncertain areas that reduce the overall tax rate of the Group. While management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that outflow of resources will be required should such tax positions and interpretations be challenged by the relevant authorities. The impact of any such challenge cannot be reliably estimated; however, it may be material to the financial position and/or the overall operations of the Group.

 

The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines penalties and interest charges. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substance-based position in their interpretation and enforcement of tax legislation.

 

These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However the interpretations of the relevant authorities could differ and the effect on this historical financial information if the authorities were successful in enforcing their interpretations could be significant.

 

12.5    Environmental matters

 

The Group's operations are in the upstream oil industry in the Russian Federation and its activities may have an impact on the environment. The enforcement of environmental regulations in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligation related thereto. The outcome of environmental liabilities under proposed or future legislation, or as a result of stricter interpretation and enforcement of existing legislation, cannot reasonably be estimated at present, but could be material.

 

Under the current levels of enforcement of existing legislation, management believes there are no significant liabilities in addition to amounts which are already accrued as a part of decommissioning provision and which would have a material adverse effect on the financial position of the Group.

 

 

13.       Related party transactions

 

During the period there were no operations with related parties, except for key management remunerations.

 

 

14.       Events after the reporting date

 

Zoltav Resources Holdings (Jersey) Limited and ZRI Services (UK) Ltd, 100% owned subsidiaries were dissolved via voluntary strike-off at 19 August and 20 September 2016, respectively.


This information is provided by RNS
The company news service from the London Stock Exchange
 
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