FOR IMMEDIATE RELEASE                                                                                  20 March 2015

JKX Oil & Gas plc

('JKX' or the 'Company')

 

FINAL RESULTS

 FOR THE YEAR ENDED 31 DECEMBER 2014

 

Key Financials

 

·      Revenue: $146.2m (2013: $180.7m)

·      Operating profit before exceptionals: $11.6m (2013: $9.2m)

·      Pre-tax exceptional charges: $72.5m (2013: nil)

(includes a non-cash impairment charge of $69.1m)

·      Loss after exceptionals: $79.5m (2013: profit of $6.5m)

·      Loss per share: 46.21 cents (2013: earnings 3.78 cents)

·      Operating cash flow: $58.4m (2013: $74.8m)

·      Capital expenditure: $42.3m (2013: $64.4m)

·      Cash resources and undrawn bank facilities: $38.9m (2013: $40.9m)

 

Operational Highlights

 

·      Average oil and gas production increased by 2% to 9,919 boepd (2013: 9,731 boepd)

·      New Elizavetovskoye field development in Ukraine brought on-stream

·      Stable gas production maintained in Russia

·      Obtained control of Hernad licences and Hajdunanas production facility in Hungary

·      Agreement to drill two exploration wells in Slovakia

·      Group 2P reserves increased to 97.7MMboe, a reserves replacement ratio of 196%

 

 

Commenting on the results, JKX's Chief Executive Dr Paul Davies said:

"Despite the increasingly challenging political and commercial environment over the past year, we made good operational progress which resulted in achieving our production target for 2014. Although we are encouraged by the lifting of restrictions on gas sales to industrial customers in Ukraine, we expect the performance of both our Ukrainian and Russian subsidiaries to remain under pressure for 2015. Our focus will be on cash conservation and asset protection, but with our solid production assets and reserves we have the potential to make significant increases in production once existing tensions ease."

 

 

For further information please contact:

Cardew Group                                                                                                    T: 020 7930 0777

Anthony Cardew                                                                                                M: 07770 720 389

Nadja Vetter                                                                                                      M: 07941 340 436

 

 

 

 

 

 

 

CHAIRMAN'S STATEMENT

 

Solid production performance in a difficult political environment

Your Company has succeeded in achieving its production targets in 2014 despite a deteriorating political and commercial environment in its main operating locations. The overall operating environment in Ukraine in particular has worsened since my mid-year statement with the introduction of punitive rates of production tax, foreign exchange controls and government imposed restrictions on sales of the Company's gas production to industrial customers.

 

Notwithstanding the operating difficulties encountered, significant progress was made by your Company in 2014 with the new development of the Elizavetovskoye field being brought on-stream in Ukraine and stable gas production from the Koshekhablskoye field in Russia being maintained. Also, we have been able to complete a favourable asset swap in Hungary which gives the Company control and operatorship of both the Hajdunanas production facility and the Hernad licence areas. Finally, agreement has been reached with our partners in Slovakia to drill two exploration wells in our licence in the first half of this year.

 

Oil, gas and LPG realisations in Ukraine fell during the period, exacerbated by a significant weakening of the Hryvna/US Dollar exchange rate. However, Ukraine remains a large gas importer and the cost of imported gas, whether directly from Russia or by reverse flow from Europe, should underpin the level of realisations JKX can achieve from domestic gas production in the future.

 

Gas realisations in Russia were impacted during the year by the weakening of the Rouble/US Dollar exchange rate. Although the effect of western sanctions is not having a significant impact on our ongoing operations, the overall state of the Russian economy will probably result in limited escalation of domestic gas prices in US dollar terms.

 

In line with the rest of our industry, we also suffered from the dramatic fall in international oil prices in the latter part of 2014. We continue to monitor the impact of all of these commercial challenges to our business model closely and are modifying our operating cost base accordingly.

 

Strategy

Your Company's commitment to eastern and central Europe is currently being tested with heightened levels of political risk and commercial uncertainty in our chosen emerging market economies.  Although we believe that the region continues to offer development opportunities in the medium to long term, we are constraining deployment of capital in the area until the investment environment improves. 

 

In Ukraine, we have experienced an unusual combination of aggressive fiscal demands and operating restrictions by the government on our well-established operations. We are vigorously lobbying the Ukrainian Government, the UK Government, the EU and various multi-lateral agencies to restore a positive investment climate for independent oil and gas producers. We believe that the recent counter-intuitive actions of the current Ukrainian Government in halting foreign investment in the upstream oil and gas industry should be reversed as part of conditions attached to the large western financing package being provided by the IMF and western governmental institutions.

 

The growth in the independent gas sector in Russia has slowed, in parallel with an apparent move away by the Russian Government from its medium-term goal of European net-back parity for domestic gas pricing. Political east-west tensions and the imposition of sanctions by the west are undoubtedly a significant contributory factor. Our Russian subsidiary continues to benefit from a stable, albeit flat, commercial market for gas sales in Rouble terms and a constructive rapport with the state regulatory authorities.

 

Despite the recent fall in international oil prices, our exploration and appraisal prospects in Hungary and Slovakia remain attractive. Politically and commercially, both economies are robust and we believe our licence positions warrant continued investment in 2015.

 

JKX is justly proud of its excellent record for health, safety, environmental matters and community liaison ('HSEC'). Although the environmental incident frequency rate in 2014 was again well below the industry benchmark, we failed to maintain the high standards of accident prevention that we have achieved in each of the previous nine years. We will endeavour to maintain our strong health and safety culture across the Group going forward, and seek to again exceed the standards of our industry in this critical area.

 

Performance

Group operations in Russia and Ukraine during the year resulted in a modest rise in both production and operating profit before exceptional charges. These increases were below our earlier expectations primarily due to tubing failures in two of our five production wells in Russia, but also because of shut-in of a proportion of our production capacity in Ukraine in December as a result of government imposed restrictions on sales of our gas production to industrial customers; these restrictions were lifted at the end of February 2015.

 

In Ukraine, the new Elizavetovskoye field development was brought on-stream in the first quarter of the reporting period with two further development wells subsequently added. Two appraisal wells were drilled and completed in the Novo-Nikolaevskoye Complex, together with a number of well workovers.

 

The Koshekhablskoye field in Russia continued to produce at approximately 80% of nominal plant capacity despite tubing failures early in 2014. Rig mobilisation began at the year-end to perform the remedial works required.

 

An independent reserve review of our licence portfolio by DeGolyer & MacNaughton as of 31 December 2014 concluded that we have again increased our 2P reserve base.  After a total 2014 production of 3.6 MMboe, the Group 2P reserves increased to 97.7 MMboe (a reserves replacement ratio of 196%).

 

Your Board

The Board has remained unchanged with five independent non-executive members and four executive members.

 

Dividend

The Board is monitoring closely the Company's liquidity and cash flow in this period of geopolitical uncertainty and falling energy prices. It has concluded that it is not appropriate to recommend a dividend at this time. The Board will continue to review its dividend policy going forward.

 

Outlook 

Our wholly-owned operating subsidiary, Poltava Petroleum Company ('PPC'), is located in central Ukraine, 200 miles south-east of Kiev.  Our wholly-owned operating subsidiary, Yuzhgazenergie ('YGE'), is located in the southern Russian Republic of Adygea. Although the political situation between Ukraine and Russia has deteriorated further since my mid-year statement, there have been no physical disruptions to JKX's operations in either of these locations. However, the commercial performance of both subsidiaries is under pressure and I expect will remain so for the rest of this year.

 

In Ukraine, the unfavourable investment climate (including the introduction of punitive rates of production tax, foreign exchange controls and government imposed restrictions on sale of our gas production during the three months to 28 February 2015) has forced the Company to severely curtail its planned 2015 capital investment programme in Ukraine until the economic parameters for investment improve. The unfavourable investment climate includes risks which, if realised, may impact the going concern status of the Company and is addressed in Note 2 to the financial statements. I will inform shareholders promptly of changes to the Ukrainian Government's position with regard to foreign investors.

 

We have begun international arbitration proceedings against Ukraine under the Energy Charter Treaty and the bilateral investment treaties between Ukraine and the United Kingdom and the Netherlands respectively.  In these proceedings, JKX is seeking, among other things, compensation for losses suffered due to Ukraine's treaty violations. The Company has already been granted an Emergency Award under the Energy Charter Treaty, but has not yet received financial relief for this in Ukraine.

 

In Russia, production is anticipated to be maintained at current levels until the first of the tubing replacements in the Koshekhablskoye field is completed. This is anticipated to be in the third quarter of 2015.

 

In Hungary, the Company anticipates securing a number of production permits encompassing its most promising discoveries within its Hernad licences (JKX: 100%) during the second half of 2015. In Slovakia, the Company plans to participate in drilling two exploration wells (JKX: 25%) during the first half of 2015.

 

Finally, I must acknowledge the work of our dedicated staff, particularly in Poltava, during this very difficult time. I am proud of their commitment to the Company and its goals. I would also like to extend my thanks to our loyal shareholders for their continuing support.  

 

Nigel Moore

Chairman

 

 

 

CHIEF EXECUTIVE'S STATEMENT

 

Maintaining liquidity in a rapidly changing environment

 

Our performance

Following start-up of production from the new Elizavetovskoye field development in Ukraine at the beginning of 2014, appraisal and development drilling continued throughout the year in both the Elizavetovskoye field and the Novo-Nikolaevskoye Complex. Production from the Koshekhablskoye field in Russia was maintained at approximately 80% of nominal plant capacity throughout the year. No drilling or work-overs were undertaken on our Hungary and Slovakia licences in the period.

 

Average oil and gas production for the year increased by 2% to 9,919 boepd (2013: 9,731 boepd), despite an increasingly challenging political and commercial environment.

 

Group revenue for the year was 19% lower at $146.2m (2013: $180.7m) and reflected lower oil and gas realisations in Ukraine and Russia, lower LPG realisations in Ukraine and significantly lower oil and condensate production in Ukraine. 

 

Operating profit before exceptional charges increased by 26% to $11.6m (2013: $9.2m), despite the significant rise in Ukrainian production tax levels in the second half of the year. This tax increase approximately halved the pre-exceptional operating profit figure.

 

An impairment charge of $69m on the carrying value of our oil and gas assets has been made in the results to reflect the impact of lower international oil prices and reduced domestic gas realisations in the near to medium term. Approximately two-thirds of this charge relates to gas assets in the Koshekhablskoye field in Russia as a result of our reduced expectations of the level of near term increases in the regulated gas price.

 

Our progress

In Ukraine, two additional development wells were drilled and completed in the Elizavetovskoye field, making a total of three wells currently in production on the field. Two new appraisal wells were drilled and completed in the Novo-Nikolaevskoye Complex, with a third well drilled but completed in 2015. Five well-workovers were also completed in 2014. Ukraine production averaged 4,810 boepd in the reporting period.

 

Good progress was made during the year on securing and extending our Ukrainian licence position. In the third quarter, the existing 5-year Elizavetovskoye exploration licence was converted to a 20-year production licence. In the fourth quarter, the Zaplavskoye exploration licence was extended and renewed for a further five years.

 

In southern Russia, production from the Koshekhablskoye field was constrained at around 30 MMcfd from three production wells only. Tubing problems in two additional wells resulted in production levels below expectations over the period. A Russian operated rig has been mobilised to the field and is currently preparing to commence the tubing replacement programme. The programme for the first well is expected to be completed in the third quarter of the year. Russia production averaged 5,109 boepd in the reporting period.

 

Completion of the evaluation of our large Georgievskoye exploration licence has shown that the few leads identified are deep and, in the current commercial environment, uneconomic to drill. Consequently, the licence was relinquished at the end of the year.

 

Progress has been made in 2014 on the Company's licence positions in Hungary and Slovakia. In Hungary, the Company exchanged its 25% interest in the Sarkad production licence for an increased (100%) interest in the Hajdunanas production licence and production facility, and the two Hernad exploration licences. In Slovakia, the Company is participating (JKX: 25%) in two exploration wells scheduled to be drilled in the Medzilaborce licence in the first half of 2015.

 

Our organisation

Our Ukrainian subsidiary, PPC, continued to demonstrate its strong organisational and technical ability throughout 2014, with the start-up and subsequent development of the new Elizavetovskoye field development, ongoing development and field optimisation of the Novo-Nikolaevskoye Complex and retention and extension of our production and licence positions. PPC is currently facing a difficult year with the need to reduce operating costs and staffing to reflect the severe reduction in the 2015 capital expenditure budget.

 

Our Russian subsidiary, YGE, has matured as an organisation over the year with an impressive range of technical capability and expertise, notably in the area of plant operation and optimisation. The forthcoming tubing replacement programme on HP/HT wells of more than 5,000m depth will be demanding and place additional pressures on the organisation to complete the work successfully within tight budget constraints.

 

Managing our risks

We are very conscious that a wide spectrum of risk is intrinsic to our industry. The last year has demonstrated its particular relevance in the areas of the world where we operate, with technical risk always accompanied by elevated political and commercial uncertainty. We continue to expend considerable resources and expertise in managing risk, and seek to provide our personnel with research, methodology and tools to manage risk efficiently and effectively.

 

During 2014, we have further enhanced our internal control and risk management processes to ensure they are embedded across all operations in the Group. Regular scheduled revision of our risk register and review of our procedures are fundamental to this process, with continued oversight at Board level. Existing policies and procedures are followed so that we comply with the UK Bribery Act and its guidance.

 

Outlook

We were focused last year on driving forward our development programmes in Ukraine and Russia with the goal of achieving a rising level of Group production over the short to medium term. However, the political events in 2014 meant that we have had to reformulate our strategy for 2015 to one of sustainability of operations, cash conservation and asset protection.

 

In Ukraine, our immediate focus for JKX is maintaining and optimising our operations to ensure we are capable of delivering maximum production of oil, gas and LPG from the existing well stock at the lowest cost. We are encouraged that the restrictions on sales to industrial customers have recently been lifted, and that currently we do not need to shut-in production. Capital expenditure in Ukraine is budgeted at the minimum required to maintain existing operations for the rest of the year; no further drilling is planned in 2015 and the Skytop drilling rig has been demobilised. Further exploration and development drilling prospects can only be considered if production tax levels significantly reduce from the current elevated levels, foreign exchange controls are eased and the overall investment climate improves.

 

In Russia, we anticipate maintaining production from the current three producing wells at around 80% of nominal plant capacity, with periodic acid stimulations as required. In parallel, the tubing replacement programme on well-27 will proceed with completion scheduled for the third quarter. Plant modifications to increase throughput capacity to 60 MMcfd are scheduled to coincide with the annual plant shut-down in late May and should provide sufficient capacity to handle the additional production from well-27 when it comes back on-stream later in the year.

 

In Hungary, we are developing a work programme to restart production from the Hajdunanas field and to secure production permits within our Hernad exploration licences. I hope to provide an update on progress in the third quarter. Furthermore, we are scheduled to drill two wells in one of our Slovakia exploration licences in the first half of the year, and anticipate reporting results in the third quarter.

 

Your Company has solid production assets with substantial independently verified 2P reserves, the potential to significantly increase production and the organisation and personnel committed to growing shareholder value. I remain hopeful that an early easing of the political tension between Ukraine and Russia will allow your Company to resume its production growth trajectory for the benefit of all its shareholders.

 

I must thank all employees for their dedication to our common goals. The Board, management and employees extend their gratitude to our shareholders for their belief and support of the Company.

 

Dr Paul Davies

Chief Executive

 

 

FINANCIAL REVIEW

 

Results for the year

The Group recorded a loss for the year of $79.5m (2013: profit $6.5m) after exceptional charges of $72.5m which comprised:

·      a non-cash impairment charge of $69.1m (2013: nil) for the Group's oil and gas assets in Ukraine, Russia and Hungary; and

·      an exceptional charge of $3.5m as a result of one-off costs incurred in Russia to kill well 27.

Loss for the year before exceptional charges was $22.0m (2013: profit $6.5m).

 

Production

Gas production in 2014 increased as a result of the investment and drilling programme of the last two years which was funded with the proceeds of the convertible bond placement in Q1 2013. Unfortunately, gas production in Russia remained constrained for most of the year as two out of five wells in the portfolio were shut-in from January 2014 due to tubing connection failures.  Tubing replacement operations are underway for the first of these two wells with a return to production anticipated in Q3 2015.

 

In Ukraine, oil and gas production volumes from our mature Novo-Nikolaevskoye fields continued to follow a natural decline profile with our new Elizavetovskoye field development providing predominantly additional gas production.

 

In Ukraine, the split of gas and oil production for 2014 was at 80% / 20% (2013: 71% / 29%).  99% of production in Russia was gas (2013: 99%).

 

Revenue

Group revenues in 2014 by region comprised: Ukraine $118.8m and Russia $27.4m (2013: Ukraine $151.0m, Russia $28.9m and Hungary $0.8m). 

 

Group revenues	2014 $m	2013 $m	Change $m	%Change
Ukraine	118.8	151.0	(32.2)	(21.3%)
Russia	27.4	28.9	(1.5)	(5.2%)
Hungary	-	0.8	(0.8)	(100%)
Total	146.2	180.7	(34.5)	(19.1%)

 

Ukrainian revenues	2014 $m	2013 $m	Change $m
Gas	75.7	91.3	(15.6)
Oil	33.2	44.1	(10.9)
Liquefied Petroleum Gas ('LPG')	9.5	13.9	(4.4)
Other	0.4	1.7	(1.3)
Total	118.8	151.0	(32.2)

 

Lower Ukrainian gas revenue was primarily the result of a reduction in realisations, while the reduction in Ukrainian oil revenues was mainly due to lower production.

 

Average Group sales volume declined by 3.2% to 9,188 boepd (2013: 9,489 boepd), with 48.8% (4,482 boepd) sold in Ukraine and 51.2% (4,706 boepd) attributable to Russia.

 

Realisations

	2014	2013
Ukraine
Gas ($/Mcf)	9.93	11.96
Oil ($/bbl)	90.79	91.03
LPG ($/tonne)	807	898
Russia
Gas ($/Mcf)	2.60	2.77
Hungary
Gas ($/Mcf)	N/A	11.74
Group
Gas ($/Mcf)	5.74	6.73
Oil ($/bbl)	88.80	92.12
LPG ($/tonne)	807	898

 

Gas sales

Whilst Ukrainian gas sales volumes were stable year on year, gas prices declined 17.0% over the period from $11.96/Mcf to $9.93/Mcf due to lower market prices achieved as a result of reduced import prices and the devaluation of the Hryvna from UAH8.0/$ to UAH15.8/$. Whilst the Ukrainian state regulator makes periodic adjustments for Hryvna/$ exchange rate fluctuations, there is a time lag between devaluation and adjustments to the official industrial gas tariff.

 

Our gas realisations in Russia increased by 4.2% from 1 July 2014; however, due to the devaluation of the Russian Rouble in 2014 from RR32.73/$ to RR56.26/$, average gas realisations dropped by 6.1% from $2.77/Mcf to $2.60/Mcf.

 

The combination of lower realisations in Russia and Ukraine resulted in an overall average reduction in gas realisations of 14.7% to $5.74/Mcf (2013: $6.73/Mcf).

 

Oil sales

Reduction in oil sales was driven by a 28.6% decline in volumes rather than realisations, as Ukrainian oil realisations held relatively firm at $90.79/bbl (2013: $91.03/bbl), due to local demand for oil offsetting international oil price trends to yield only a small diminishment in our realisation. 

 

Liquefied Petroleum Gas ('LPG') sales

Gas production volumes from the Novo-Nikolaevskoye Complex decreased by 27.8%, and directly affected LPG production and sales.  The $4.4m (31.7%) decline in LPG revenues was due to lower production volumes combined with a reduction in the domestic market price, resulting from increased competition through both imports and other domestically produced supplies. 

 

Significant new gas production in Ukraine came on-stream from the Elizavetovskoye field which is remote from the LPG plant location at the Novo-Nikolaevskoye Complex and therefore did not impact LPG production.

 

Average LPG realisations reduced approximately 10% to $807/tonne (2013: $898/tonne) with the Ukrainian plant contributing $9.5m (2013: $13.9m) to Group revenue in the reporting period.

 

Loss from operations

Loss from operations was $60.9m which included exceptional charges of $72.5m.

 

Profit from operations before exceptional charges was $11.6m (2013: $9.2m) which was the result of $34.5m decrease in revenues to $146.2m (2013: $180.7m), a decrease in cost of sales by $37.9m and an increase in other costs by $1m.

 

Total cost of sales for the year (before exceptional charges) decreased by $37.9m to $109.4m (2013: $147.3m) mainly due to decreases in:

 

·      Russian operating costs of $4.5m

·      Ukrainian operating costs of $3.6m

·      Ukrainian oil and gas inventory movements and product purchases of $8.3m

·      depreciation, depletion and amortisation ('DD&A') charge of $23.0m

·      Rest of World costs of $2.2m

·      offset by an increase in production based taxes of $3.7m, predominantly related to Ukraine.

 

The decrease in Russian operating costs of $4.5m is largely due to reduced spending on raw materials and supplies following significant purchases made in 2013, lower field support activities and costs, and lower property tax payments due to the reduced value of the Russian assets used for property tax purposes. Additionally, the Rouble devaluation from RR32.73/$ to RR56.26/$ reduced the US Dollar reported cost base for Russia throughout the year.

 

Ukrainian operating costs decreased by $3.6m, mainly due to the devaluation of the Hryvnia from UAH8.0/$ to UAH15.8/$.

 

Ukrainian sales from inventory and product purchases decreased by $8.3m to $1.1m (2013: $9.4m), as a result of production meeting sales demand throughout the year, thus obviating the need to purchase additional gas to meet sales commitments.

 

The DD&A charge reduced by $23.0m mainly due to the upward revision of  reserves at Ignatovskoye, Molchanovskoye, Novo-Nikolaevskoye and Elizavetovskoye fields in Ukraine at the end of 2013 which led to lower 2014 DD&A rates in $/boe as the cost of amortising our oil and gas assets is now spread over a larger reserve base. The Group's DD&A rate reduced to $8.93/boe (2013: $15.62/boe). 

 

Rest of World cost savings are mainly as a result of reduced exploration and evaluation costs written off during the year which were $1.5m lower at $0.02m (2013: $1.5m).

 

Production taxes

Production based taxes for the Group increased by $3.7m to $45.5m (2013: $41.8m), mainly as a result of higher oil and gas production tax rates in Ukraine (see "Other Taxation - Ukraine" section for details). The material increase in production tax rates in August 2014 and the resultant financial effect was somewhat offset by lower amounts of tax due as a result of reduced gas sales prices, lower oil production and the devaluation of the Hryvna. 

 

Average gas production tax in Ukraine increased from $99.60/Mcm to $124.40/Mcm whilst average oil production tax decreased from $36.14/bbl to $34.90/bbl.

 

Average gas production tax in Russia increased from $10.90/Mcm to $11.39/Mcm in 2014 due to implementation of a new Mineral Extraction Tax regime (see "Other Taxation - Russia"), contributing to the Group's effective gas production tax increase from $46.51/Mcm to $60.20/Mcm.  Although not material to the Group, this increase together with the increase in Ukraine resulted in production tax on a boe basis of$12.57/boe (2013: $11.77/boe). 

 

The Group's administrative costs decreased by $4.6m to $19.5m (2013: $24.1m) during the year. Reduction in costs is largely due to decreases in:

 

·      Group staff costs of $3.0m mainly driven by costs incurred in local currencies (Hryvna and Rouble) which devalued significantly against the US Dollar;

·      the share option charge of $1.3m

·      legal and professional fees of $1.4m

·      offset by a $1.1m increase in various other cost categories.

 

The Group's exchange losses increased by $5.6m to $5.7m (2013: $0.1m) due to the Rouble and Hryvna devaluations previously noted.

 

Other taxation - Ukraine

On 1 April 2014, the Ukrainian government increased production tax rates for gas from 25% to 28%. This rate is then applied to the actual average import price for gas as communicated by the Ministry of Economic Development and Trade of Ukraine. The oil tax rate at this time remained constant at 39%.

 

On 1 August 2014, the Ukrainian government passed emergency budget legislation to increase the gas production tax rate from 28% to 55% of the maximum gas price published monthly by the Ministry of Economy. Oil tax rates also increased from 39% to 45% from 1 August 2014.

 

Other taxation - Russia

A new mineral extraction tax ('MET') formula approved in September 2013 was implemented from 1 July 2014. The new formula is based on gas prices, gas production as a share of total hydrocarbon output and complexity of gas reservoirs (depletion rates, depth of the producing horizons and geographical location of producing fields).

 

In addition to production taxes, we are subject to a 2.2% property tax which is based on the net book value of our Russian assets as calculated for property tax purposes.  This amounted to $2.5m in 2014 (2013: $3.7m).  The figure is included in other cost of sales in the consolidated income statement.

 

Finance costs

Finance costs are largely represented by the convertible bond interest at $3.1m (2013: $3.6m).  The $9.1m gain on movement in the fair value of the derivative liability represents the change in fair value of the conversion option associated with the convertible bond since its completion on 19 February 2013. The bonds have a conversion option which becomes more valuable to the bond holder as the Company's share price nears or exceeds the fixed conversion strike price (76.29 pence). As the Company's share price has decreased from 71.50 pence as at 31 December 2013 to 12.00 pence at 31 December 2014, a credit has been recognised that represents the decrease in fair value of the potential liability of the Company to settle any conversion options that may be exercised in future periods.

 

Earnings per share

Basic loss per share before exceptional items were 12.76 cents (2013: earnings 3.78 cents) in line with the pre-exceptional loss.

 

Basic loss per share after exceptional items was 46.21 cents (2013: earnings 3.78 cents) reflecting the Group loss after exceptional items net of their related tax effects of $57.6m (2013: nil).

 

Taxation

The total tax charge for the year was $25.8m (2013: credit $2.5m) comprising a current tax charge of $9.5m (2013: $8.6m), a deferred tax charge before exceptional items of $31.3m (2013: credit $11.1m) and a deferred tax credit of $15.0m in respect of exceptional items (2013: nil).

 

The current tax charge comprises:

 

·      a foreign exchange loss of $5.7m Hryvna-based prepaid tax of the prior year, following devaluation of the currency;

·      a $4.7m charge in respect of our Ukrainian profit for the year (2013: $8.6m), which has reduced as a result of lower profitability in Ukraine;

·      a $0.9m credit in respect of Hungarian and UK tax.

 

 The total deferred tax charge of $16.3m (2013: $11.1m credit) comprises:

 

·      $31.4m charge reflecting the derecognition of the Russian deferred tax asset in respect of losses carried forward to future periods (2013: $11.1m credit) and the related foreign exchange loss on the balance due to Rouble devaluation. Under Russian tax law corporate tax losses expire after 10 years and following our reduced expectations of the level of near term increases in the regulated gas price in Russia, forecast profits in the near term do not reflect the Company being able to utilise these losses;

·      $15.0m credit (2013: nil) relating to impairments to our oil and gas assets; and

·      $0.1m net credit for changes in other short term timing differences and the related foreign exchange effects.

 

In Ukraine, the corporate tax rate for 2014 was 18% and remains at this level for 2015.

 

Loss for the year after tax

The result for the year, after exceptional charges of $57.6m (net of deferred tax effect on exceptional charges), was a loss of $79.5m (2013: profit of $6.5m). On a pre-exceptional basis, loss for the year was $22.0m (2013: profit $6.5m). 

 

On a pre-exceptional basis, the $28.5m change is the combined result of:

·      a $34.5m decrease in revenues mainly due to reduced Ukrainian gas realisations;

·      a decrease in cost of sales of $37.9m to $109.4m (2013: $147.3m) as a result of reduced charges related to sales from inventory in Ukraine, a decrease in Ukrainian production taxes and a decrease in DD&A charges;

·      an increase in foreign exchange losses of $5.6m;

·      a net decrease in administrative and net finance charges of $5.8m;

·      a $0.2m gain from the Hungarian asset swap;

·      a $11.0m change in the fair value impact of the derivative attached to the convertible bond; and

·      a $43.3m increase in the total taxation charge.

 

Exceptional charges

Exceptional charges of $72.5m in the year consist of:

·      $3.5m charge relating to well control operations in Russia (see note 5 to the financial statements);

·      an $69.1m impairment charge against our oil and gas assets

 

The impairment charge for the year of $69.1m comprises:

 

·      $46.3m in respect of Russian oil and gas assets mainly as a result of our lower expectations for near term increases in the regulated gas price in the domestic gas market;

·      $10.0m in respect of our Hungarian oil and gas assets due to the sharp decline in international oil and gas prices;

·      $12.8m in respect of our Elizavetovskoye field in Ukraine mainly as a result of the 71% decline in assessed 2P reserves at the end of the year.

 

See Note 5 to the financial statements for full impairment disclosures.

 

Cash flows

The Group generated cash from operations was lower at $58.4m (2013: $74.8m), mainly due to lower production in Ukraine and lower gas sales realisations in both Ukraine and Russia. In parallel, both the Hryvna and Rouble devalued sharply against the US dollar through the year and we experienced sudden and significant increases to production tax rates in Ukraine from August onwards. Financial resources were mainly spent on new drilling and work-over projects to maintain future production levels.

 

Interest and bond charges paid were $1.1m higher at $3.3m (2013: $2.2m) because of a full year's interest payment on the bonds and less interest expense paid to Credit Agricole for the working capital facility.

 

Corporation tax paid was 52% lower at $7.6m (2013: $15.9m), predominantly due to lower profitability in Ukraine and the utilisation of prepaid tax in Ukraine at the end of last year.

 

Net cash generated from operating activities was lower at $47.5m (2013: $56.7m) as a result of the $16.4m reduction in cash from operations and a $1.1m increase in interest payments offset by a reduction of $8.4m in Ukrainian corporation tax payments.

 

Investment in property plant and equipment in 2014 was $21.5m lower than the prior year at $40.0m (2013: $61.5m).

 

Investment in Russian plant and equipment accounted for $4.8m (2013: $20.2m) of the Group's capital spend in the year, representing 12.2% (2013: 31.6%) of the total for the year. The 2014 cost mainly relates to work-over activity and acidisation of wells to maintain the performance of the wells throughout the year.

 

At the end of the year, the carrying value of the Group's oil and gas assets in Russia was $115.4m (2013: $286.3m) after an impairment of $46.3m (2013: nil). The focus of the ongoing and future work is to increase the Russian plant capacity by a minimum of 50% to 60 MMcfd and have a suite of producing wells which fill this capacity, in addition to providing a level of redundancy during periods of well intervention.

 

Capital expenditure in Ukraine during 2014 was $35.4m (2013: $41.7m). Our Ukrainian capital investments included completion of Elizavetovskoye wells E301, E302 and E303, appraisal wells NN80, IG-140 and IG-141 at our Novo-Nikolaevskoye Complex, and the work-over of wells on the mature fields using the Skytop N-75 and TW-100 rigs respectively. These projects all comprise part of the investment programme outlined at the beginning of 2013 to increase production from our existing production licences and new appraisal opportunities.

 

Net cash inflow from financing activities decreased dramatically to $1.4m (2013: inflow $19.2m), comprised mainly of the $1.5m of cash inflow from the working capital facility provided by Credit Agricole. The 2014 decline is explained by the $37.8m of bond proceeds received in 2013 which was offset by the repayment of the Credit Agricole capital facility ($15.0m) and $4.0m for the purchase of employee trust shares.

 

To assist with Group liquidity, the Company purchased $8.7m of selected Ukrainian government US$ treasury bills in October 2014 with a fixed coupon and which matured in January and February 2015. 

 

Cash

Cash at the end of the year (excluding restricted cash) was $25.4m (2013: $25.7m). This resulted from a cash balance at the beginning of the year of $25.7m (2013: $12.0m) enhanced by an increase in cash and cash equivalents during the year of $7.0m (2013: $14.3m increase), before the negative effects of foreign exchange on cash balances of $7.3m (2013: decrease $0.6m).

 

Liquidity

The Group employs a number of financial instruments to manage the liquidity associated with the Group's operations. These include cash and cash equivalents, together with receivables and payables that arise directly from our operations.

 

Separate from these, the main financial instrument of the Group is the $40 million guaranteed unsubordinated convertible bond which was placed in Q1 2013 with institutional investors which matures in 2018.  The bonds have an annual coupon of 8 per cent per annum payable semi-annually in arrears.  The bonds terms and conditions contain an annual put option each February until maturity.  None of the bondholders exercised their option to put 10% of the outstanding principal of the bonds in February 2014.  Bonds with a principal amount of $4m were redeemed on 19 February 2015 in addition to an early redemption premium of $0.2m in accordance with the terms and conditions of the bond. Further information on the terms and conditions of the bonds is included in notes 13 and 14 to the financial statements. 

 

The Group renewed the Credit Agricole working capital facility in Q2 2014 and continues to benefit from the flexibility that this financing provides our Ukrainian subsidiary, in particular to manage its working capital needs.  The facility is available until 30 June 2015 with the maximum facility reducing to $10 million and $5 million on 30 April 2015 and 30 May 2015, respectively. Drawings of $1.5m were outstanding at 31 December 2014.

 

In addition, and as noted above, as a consequence of Ukrainian currency controls and in order to maintain liquidity across the Group, the Company purchased Ukrainian government US$ treasury bills with a fixed coupon and short maturity dates. 

 

Dividends

No dividends have been paid or proposed during the year, and the Board will not be recommending the payment of a dividend at the forthcoming AGM.

 

Outlook

The Company's financial position has been severely impacted by the deteriorating economic conditions in Ukraine and Russia.  The ramifications are significant. 

 

The criteria for further investment in Ukraine is an ability to exchange and repatriate dividends, currency stability, continuation of an open gas market for independent producers and a production tax regime which permits producers to generate commensurate returns with the risks taken. Although the Company has made a significant investment in Ukraine over the last 20 years, the Board currently considers it prudent to minimise further capital investment in Ukraine until such time as the aforementioned conditions return.

 

In Russia, the combination of currency devaluation and a minimal gas tariff increase in the near term has reduced the projected returns on our Russian project. The Board also considers that the recent downgrading of the country to sub-investment grade and the threat of currency controls has a negative effect on our plans to expand our current licence portfolio there. Consequently, ongoing capital expenditure in Russia is limited to the re-instatement of production from well-27 which the Company expects to be funded from insurance proceeds.

 

The Company is focusing on maintaining its liquidity by minimisation of capital expenditure and reduction of operating costs in Ukraine and Russia. However, a limited amount of financial resources will be spent in 2015 to progress development of our Slovakian and Hungarian assets with a view to maintaining appraisal and development programmes in these locations. 

 

 

Cynthia Dubin

Finance Director

 

 

 

OPERATIONS REVIEW

2014 saw start-up of production in the Elizavetovskoye gas field and steady production in the Novo-Nikolaevskoye group of fields in Ukraine, and constrained production from the Koshekhablskoye field in Russia. Production levels were adversely affected in the second half of the year due to production tax increases in Ukraine which significantly reduced funds available for investment.

Group production

In 2014, production in Ukraine from the Novo-Nikolaevskoye group of fields was supplemented by the start-up of the Elizavetovskoye gas field at the beginning of the period. Unfortunately, Ukrainian production was constrained in the fourth quarter by government restrictions on access to our industrial customer base. Production from the Koshekhablskoye field in Russia remained steady through the period. No oil and gas was produced by the Hajdunanas field in Hungary in 2014.

Group average production in 2014 was 9,919 boepd, comprising 53.4 MMcfd of gas and 1,003 bpd of oil and condensate, a 1.5% increase on the average for 2013.

Ukraine

Novo-Nikolaevskoye licences

Production

Average production from the Novo-Nikolaevskoye group of fields in 2014 was 3,277 boepd comprising 14.1 MMcfd of gas and 932 bpd of oil and condensate, a 28% decrease on the average for 2013.

 

Development drilling and other well activity

The Skytop N-75 rig moved to the Novo-Nikolaevskoye area to start drilling operations in mid-March while the TW-100 workover rig was active throughout the period, carrying out five re-completions, one well repair and six abandonments.

 

·      Appraisal well NN-80 was drilled to a depth of 1,794m and targeted the upper V-15 Visean sandstone in the Novo-Nikolaevskoye field. Initial results were considerably above expectations with a flow rate of 4.98 MMcfd and 51 bcpd. Production has since stabilised at around 1 MMcfd with 8 bcpd.

·      Appraisal well IG-141 was drilled to a depth of 2,802m and targeted the Devonian sandstone in a downthrown fault block on the northern flank of the Ignatovskoye field. Initial flow rates exceeded expectations, but decline was rapid and the well, after additional perforations, is now producing around 30 bopd.

·      Appraisal well IG-140 was drilled to a total measured depth of 3,200 metres (2,354m TVD) in an untested downthrown fault block on the west flank of the Ignatovskoye field with the final 400 metres section in the Visean carbonate reservoir being drilled close to horizontal. The well was completed in the first quarter of 2015 using a pre-drilled liner and then an acid squeeze. Gas lift is being used to bring oil to the surface and the well continues to clean up. The low permeability suggests that the reservoir in this fault block has not undergone the same degree of diagenetic change as the main field fault block.    

·      Recompletions using the TW-100 rig in period included wells M-170 and IG-129 to allow for additional perforations in the Devonian sandstone and the Tournaisian T2 sandstone respectively. In addition, well NN-09 was recompleted for gas lift, NN-74 was recompleted to produce the V15 Visean sandstone and additional perforations were made in IG-141.

·      A pilot waterflood project on Ignatovskoye was kicked off in 2012 with the injection of produced water into the Visean carbonate reservoir well IG-126 and was boosted by the injection of excess water from the Rudenkovskoye R-103 frac operation in 2013. The aim of the project was to verify fault barriers and establish which wells were in direct communication. Well IG-138 reacted positively and it was evident that, once pressure had been partially restored in the fault block, production was rising slowly reaching almost three times its historical low point on natural decline. Water breakthrough in the third quarter of 2014 led to a reduction in oil production from the well and confirmed the model. An additional 10 metres of perforation were added near the top of the reservoir at the end of the period giving a further boost to oil production.

·      Work continues on planning for the Molchanovskoye North sandstone reservoir waterflood with a pilot project being prepared.

·      Wells M-163, M-164, M-168, M-170 and M-205 on the Molchanovskoye field were plugged and abandoned along with IG-107 and IG-129 on the Ignatovskoye field, well NN-75 on the Novo-Nikolaevskoye field and the Zaplavskoye Z-05 exploration well.

·      A smaller diameter velocity string was installed within the production tubing of the multi-fracced well R-103 in the Rudenkovskoye field using a coiled tubing unit. The velocity string aids fluid recovery and minimises the risk of liquid loading which may inhibit gas production, particularly in the lower frac zones. This has proved moderately successful and is now being supplemented by a gas lift system.

·      Wireline operations have focussed on the clearance of wax and salt build-up in the production tubing of many wells. A more aggressive programme in the period has yielded improved oil production above expectations.

Production facilities

Operations at the main production facility and the LPG plant continued smoothly through the year. Work continues on plant optimisation, re-routing flowlines to reduce back pressure, and wax clearance of flowlines to enhance production from the available well stock. 

 

Elizavetovskoye field

Elizavetovskoye production licence

The Elizavetovskoye gas field commenced production in January 2014. A new production licence covering an area of 70.8 square kilometres was awarded in the third quarter. It is valid for 20 years and replaces the existing 5-year exploration licence which had been due to expire at the fourth quarter.

 

Production

Average production from the Elizavetovskoye field in the period was 1,511 boepd comprising 8.9 MMcfd of gas and 20 bpd of condensate. There was no production in 2013.

 

Drilling and development activity

The Skytop rig drilled well E-301 at the end of 2013 and the well was completed in early 2014. The second well E-302 was completed in March and the third well E-303 was completed in September.

 

·      Both E-301 and E-302 were completed in the Permian A2 carbonate reservoir and are each producing at stabilised rates of around 5 MMcfd and 10 bpd condensate.

·      The third well E-303 on the field targeted the deeper Carboniferous G7 to G12 sandstone reservoirs and was drilled to a total depth of 4,406 metres. It was initially completed in the G7-12 sandstone reservoirs only. Production from the deeper reservoirs, whilst steady, is not economic in the current punitive production tax regime in Ukraine. Consequently, following additional perforations in the shallower A2 carbonate reservoir and acid treatment, comingled production with the G7-12 sandstone reservoirs was 5.2 MMcfd of gas with 18 bpd of condensate.

·      The 145 sq. km 3D seismic programme was completed in early March and interpretation completed in August with the data being used to refine further drilling locations and aid the updating of the field reserves.

·      The early production facility ('EPF') was completed at the end of 2013 and took first gas from the E-301 well in January 2014. It has subsequently been upgraded with doubling of its capacity from 15 MMcfd to 30 MMcfd to cater for the recently revised hydrocarbon dew point specifications in the export pipeline. Compression has now also been installed to ensure maximum possible input to the export line.

Zaplavskoye exploration licence activity

Following the earlier success of the two exploration wells Z-04 and Z-05 in the northwest of the licence, attention has been focussed on identifying new prospects in the area using data from the recent 3D seismic acquisition programme and logs from the historic well stock. Amplitude analysis of the Visean sandstones has already contributed to good development drilling and recompletion results in the Novo-Nikolaevskoye field, and on-going amplitude studies indicate further potential for Visean V25/26 sandstone traps in addition to more conventional Devonian sandstone and Visean carbonate structural closures. Up to seven new prospects or leads have been identified with prospective resources ranging from 5 to 60 Bcf unrisked with the aim of working these up for future drilling.

 

The Zaplavskoye exploration licence surrounds four of the Company's adjoining production licences in Poltava on their western, southern and eastern sides and was due to expire at the end of 2014. The Ukrainian authorities have extended the licence term by a further five years with an area to the south of the licence being relinquished and an area to the west of the licence added. The licence area now totals 173 square kilometres and is valid until 31 December 2019.

Russia

Koshekhablskoye licence

Production

Average production from the Koshekhablskoye field in 2014 was 5,109 boepd comprising 30.3 MMcfd of gas and 51 bpd of condensate, a 1% increase on the average for 2013.  The production figures are steady but are below expectations due to the loss of predicted additional production from well-27 and well-05 in the period.

 

Workover and well stimulation activity

Production from crestal well-20 in the period ranges from 15-20 MMcfd, subject to routine acid treatment, while production from the north flank well-25 ranges from 10-15 MMcfd. Both wells have benefited from coiled tubing acid treatments and it appears that a 4 to 6 month cycle of treatment is the most cost effective. The deep east flank well-15, originally thought to have been tight, now cycles from 0.9 - 1.5 MMcfd with fluid build-up being cleared periodically.

Early in the period, it was observed that pressure had started to build in the annulus of well-27 and there appeared to be communication with the casing annuli. The well was diverted to the flare pit to minimise the pressure on the casing and a coiled tubing unit mobilised to kill the well. This operation was completed successfully in the second quarter and a rig is now on location preparing to restore the pressure integrity of the well and replace the tubing. Completion and restoration of production is expected in the third quarter of 2015.

At the same time, drifting of the tubing in the newly completed well-05 indicated an obstacle at around 2,600m which appeared to be a joint of damaged tubing. The well was suspended and the tubing will be replaced as soon as practicable.

Facilities

The Gas Processing Facility ('GPF') has been operating comfortably within its current design capacity of 40 MMcfd.

The plant performance has been reviewed and work is underway to increase the capacity to 60 MMcfd. This entails changes to some of the vessels, replacement of some valves and pipework and improvements to the operating procedures. A Russian design institute has been contracted to prepare the submissions for government approval which is scheduled for the second quarter of 2015. Plant modifications are currently scheduled for late May.  

 

Licence obligations

The obligation to re-enter and sidetrack well-09 to re-drill the full Callovian reservoir sequence and, if successful, test the Callovian V unit has been deferred until 2017.

 

Georgievskoye exploration licence

Our wholly owned Russian subsidiary, Yuzhgazenergie LLC ('YGE'), was awarded the 170.7 sq. km Georgievskoye exploration licence in 2012. The largest part of the licence lies adjacent to, and immediately south of the Koshekhablskoye production licence but a significant part of it also runs to the northwest of the Koshekhablskoye field as well as covering the western and eastern flanks of the field.

 

Recovery, reprocessing and interpretation of all the existing 2D seismic is complete, the original 3D cube has been reprocessed and evaluation of the data is complete. Disappointingly, the few leads identified are deep and, under current economic conditions, uneconomic to drill. Consequently the decision to relinquish the licence has been made.

Hungary

Licences

In November 2014 JKX exchanged its 25% beneficial interest in a 15.6 sq km section of the Sarkad Mining Plot for a further 50% interest in the Hernad I & II Exploration Licences and the Hajdunanas IV Mining Plot.  JKX now operates these three licences with 100% equity and is developing a work programme to restart production and complete exploration activities.

 

Production

Hajdunanas field

Production from the Hajdunanas and Gorbehaza fields (JKX now 100%) was suspended in 2013. JKX has taken full ownership of the licences in an asset swap and is currently preparing plans for further development of the Hajdunanas field.

 

Exploration and appraisal

Hernad licences

JKX now holds a 100% equity interest in the two Hernad licences in the northern Pannonian Basin. Although these are due for relinquishment in 2015, the Company is in discussion with the Hungarian authorities with the aim of obtaining a number of mining plots, which are effectively production licences, to permit further appraisal of the most promising discoveries in the licences.

 

Sarkad I Mining Plot

JKX has transferred its 25% interest in the 15.6 sq. km farm-in area around the Nyekpuszta-2 gas condensate discovery well to its joint venture partner, in exchange for 100% ownership the Hernad/Hajdunanas licences.

 

Turkeve IV Mining Plot

The Turkeve IV Mining Plot (JKX 50%) of 10 sq. km has been approved for the productive area around the Ny-7 well. The operator continues to look for an economic solution to produce from the Ny-7 well where the high CO₂ content has prevented direct access to the pipeline network.

 

Slovakia

Exploration

JKX continues to hold a 25% equity interest in the Svidnik, Medzilaborce and Snina exploration licences in the Carpathian fold belt in north east Slovakia. Following a change in operator, the Cierne-1 exploration well has been deferred. A programme of magneto-telluric geophysical surveys combined with seismic re-interpretation has led to the identification of a number of shallower prospects across the licences and drilling is planned on two of these in the first half of 2015. 

 

Bulgaria

Exploration

JKX's withdrawal from the Provadia licence became effective in January 2014 and the Company no longer has any licence interests in Bulgaria.

 

Martin Miller

Technical Director

 

PRINCIPAL RISKS AND UNCERTAINTIES

2014 risk update

The principal risks facing the Group have increased from those detailed in the 2013 Annual Report mainly due to events in Ukraine and the decline in international oil prices. Our overall assessment of those risks has changed in 2014 as follows:

·      Geopolitical risk has increased significantly in Ukraine as the heightened political tensions in the region and the military conflict in the east of Ukraine continue.  The military conflict has not impacted the Group's operations to date but the situation continues to be closely monitored.

·      In an attempt to fund Ukraine's deficit, its external debt and the ongoing military conflict, the government issued three decrees in the second half of 2014 which were issued without warning and were effective immediately for a number of months. These had the effect of:

o  doubling the rate of gas production tax until 31 December 2015;

o  implementing currency restrictions, initially until 1 December 2014, and subsequently extended to 2 March 2015 and again to 3 June 2015; and

o  directing major industrial gas buyers to acquire their gas solely from the Ukraine state-owned gas company from 1 December 2014 to 28 February 2015. 

·      The associated risk to the Group's future gas sales volumes, prices and taxes in Ukraine has therefore increased as a result of these decrees which remain in place and continue to have a significant adverse financial impact on the Group and liquidity.

·      As a result of the decrees the Board has suspended its planned 2015 capital investment programme in Ukraine until the economic parameters for investment improve, which increases the risk of declining production from our mature fields there.

·      In addition the commodity price risk has increased following the halving of global oil prices during 2014.  We sell the oil that we produce at prices determined by the global oil market. The price at which we can sell our gas in Ukraine is set quarterly according to the Russia-Ukraine gas border price which in turn is based on the price of a basket of oil-related products.  The reduction in global oil prices has therefore reduced the regulated gas price in Ukraine at which we can sell our gas.

·      Foreign exchange risk has increased following the continued gradual devaluation of the Ukrainian Hyrvna through 2014 and, more recently, the sharp devaluation of the Russian Rouble. As a result, in US$ terms, the Group's operating costs and Russian gas sales value decreased, in addition the Group reported a foreign exchange loss of $5.7m in the income statement, a $5.7m foreign exchange loss in the current tax charge related to the revaluation of the Hyrvna-denominated prepaid tax and a devaluation of the Group's net assets of $130.3m in the statement of comprehensive income.

·      Continued volatility in the Rouble and Hyrvna will affect the US$ value of future profits, assets and cash flows of the Group, and may impact future investments decisions in Russia and Ukraine.

·      Reserves replacement risk has increased this year as the decline in international oil and gas prices has resulted in previously identified reserves becoming uneconomic at lower oil prices.  In addition, key projects planned that may have materially enhanced the Group's reserves and production at the Elizavetovskoye and Rudenkovskoye fields in Ukraine, and at our deeper Callovian reserves in Russia, may no longer be commercial due to the local investment parameters combined with lower future oil and gas price expectations. 

DIRECTORS' RESPONSIBILITY STATEMENT ON THE ANNUAL REPORT

The responsibility statement below has been prepared in connection with the Company's full annual report for the year ended 31 December 2014. Certain parts thereof are not included within this announcement.

Each of the Directors confirms that, to the best of their knowledge:

·      the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group;

·      the Directors' report contained in the annual report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces;

·      the annual report and financial statements, taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the company's performance, business model and strategy.

The responsibility statement was approved by the Board of directors on 19 March 2015 and is signed on its behalf by:

 

Dr Paul Davies

Chief Executive

 

Cynthia Dubin

Finance Director

Consolidated income statement

for the year ended 31 December

		2014	2013
	Note	$000	$000
Revenue	3	146,206	180,738
Cost of sales
Production based taxes		(45,519)	(41,803)
Exceptional item - provision for impairment of  oil and gas assets	4	(69,062)	-
Write off of exploration and evaluation costs	4(b)	-	(1,452)
Exceptional item - well control operations	4(a)	(3,471)	-
Other cost of sales		(63,847)	(104,048)
Total cost of sales		(181,899)	(147,303)
Gross (loss)/profit		(35,693)	33,435
Administrative expenses		(19,536)	(24,129)
Loss on foreign exchange		(5,673)	(142)
Profit from operations before exceptional items		11,631	9,164
(Loss)/profit from operations after exceptional items		(60,902)	9,164
Finance income		1,094	377
Finance costs		(3,197)	(3,625)
Fair value movement on derivative liability	6	9,072	(1,957)
Net result arising from business combinations		222	-
(Loss)/profit before tax		(53,711)	3,959
Taxation - current		(9,511)	(8,590)
Taxation - deferred
- before the exceptional items		(31,270)	11,132
- on the exceptional items		14,961	-
Total taxation	7	(25,820)	2,542
(Loss)/profit for the year attributable to equity shareholders of the parent company		(79,531)	6,501
Basic (loss)/earnings per 10p ordinary share (in cents)
- before exceptional items		(12.76)	3.78
- after exceptional items	8	(46.21)	3.78
Diluted loss)/earnings per 10p ordinary share (in cents)
- before exceptional items		(12.76)	3.72
- after exceptional items		(46.21)	3.72

 

 

 

Consolidated statement of comprehensive income

for the year ended 31 December

		2014	2013
		$000	$000
(Loss)/profit for the year		(79,531)	6,501
Comprehensive income to be reclassified to profit or loss in subsequent periods when specific conditions are met
Currency translation differences		(130,327)	(25,031)
Other comprehensive loss for the year, net of tax		(130,327)	(25,031)
Total comprehensive loss attributable to:
Equity shareholders of the parent		(209,858)	(18,530)

 

 

Consolidated statement of financial position

as at 31 December

		2014	2013
	Note	$000	$000
ASSETS
Non-current assets
Property, plant and equipment	4(a)	292,474	465,616
Intangible assets	4(b)	7,932	18,927
Other receivable		3,966	4,414
Deferred tax assets		21,048	34,783
		325,420	523,740
Current assets
Inventories		4,124	6,041
Trade and other receivables		10,018	27,687
Restricted cash		559	198
Cash and cash equivalents		25,384	25,682
Held to maturity financial investments		2,700	-
		42,785	59,608
Total assets		368,205	583,348
LIABILITIES
Current liabilities
Trade and other payables		(16,225)	(24,391)
Borrowings	5	(5,590)	(4,000)
		(21,815)	(28,391)
Non-current liabilities
Provisions		(3,988)	(3,967)
Other payables		(3,966)	(4,414)
Borrowings	5	(30,837)	(28,166)
Derivatives	6	(1,037)	(10,109)
Deferred tax liabilities		(25,214)	(17,380)
		(65,042)	(64,036)
Total liabilities		(86,857)	(92,427)
Net assets		281,348	490,921
EQUITY
Share capital		26,666	26,666
Share premium		97,476	97,476
Other reserves		(153,268)	(22,941)
Retained earnings		310,474	389,720
Total equity		281,348	490,921

 

 

Consolidated statement of changes in equity

 

	Share capital $000	Share premium $000	Retained earnings $000	Other reserves $000	Total equity $000
At 1 January 2013	26,657	97,476	385,676	2,090	511,899
Profit for the year	-	-	6,501	-	6,501
Exchange differences arising on translation of overseas operations	-	-	-	(25,031)	(25,031)
Total comprehensive income /(loss) attributable to equity shareholders of the parent	-	-	6,501	(25,031)	(18,530)
Transactions with equity shareholders of the parent
Issue of ordinary shares	9	-	-	-	9
Share-based payment charge	-	-	1,544	-	1,544
Treasury shares1	-	-	(4,001)	-	(4,001)
Total transactions with equity shareholders of the parent	9	-	(2,457)	-	(2,448)
At 31 December 2013	26,666	97,476	389,720	(22,941)	490,921
At 1 January 2014	26,666	97,476	389,720	(22,941)	490,921
Loss for the year	-	-	(79,531)	-	(79,531)
Exchange differences arising on translation of overseas operations	-	-	-	(130,327)	(130,327)
Total comprehensive loss attributable to equity shareholders of the parent	-	-	(79,531)	(130,327)	(209,858)
Transactions with equity shareholders of the parent
Share-based payment charge	-	-	285	-	285
Total transactions with equity shareholders of the parent	-	-	285	-	285
At 31 December 2014	26,666	97,476	310,474	(153,268)	281,348

Consolidated statement of cash flows

for the year ended 31 December

		2014 $000	2013 $000
Cash flows from operating activities
Cash generated from operations		58,411	74,814
Interest paid		(3,345)	(2,217)
Income tax paid		(7,579)	(15,937)
Net cash generated from operating activities		47,487	56,660
Cash flows from investing activities
Increase in held-to-maturity investments		(2,700)	-
Interest received		771	251
Purchase of intangible assets		(338)	(404)
Purchase of property, plant and equipment		(39,986)	(61,472)
Cash acquired from business combination		362	-
Net cash used in investing activities		(41,891)	(61,625)
Cash flows from financing activities
Restricted cash		(93)	389
Repayment of borrowings		-	(14,951)
Funds received from borrowings (net of costs)		1,522	37,789
Purchase of employee trust shares		-	(4,001)
Net cash generated from financing activities		1,429	19,226
Increase in cash and cash equivalents in the year		7,025	14,261
Cash and cash equivalents at 1 January		25,682	12,042
Effect of exchange rates on cash and cash equivalents		(7,323)	(621)
Cash and cash equivalents at 31 December		25,384	25,682

 

 

1.     General information

 

The consolidated financial information for JKX Oil & Gas plc (the 'Company') and its subsidiaries (together 'the Group') set out in this preliminary announcement has been derived from the audited consolidated financial statements of the Group for the year ended 31 December 2014 (the 'financial statements'). The auditors have reported on the 2014 financial statements and their reports were unqualified and did not contain statements under s498(2) or (3) Companies Act 2006. The auditors' report on the 2014 financial statements, whilst unqualified, contained an emphasis of matter which drew attention to the existence of a material uncertainty which may cast significant doubt about the Company's ability to continue as a going concern, for further details see note 2. The auditors' report on the 2013 accounts contained no emphasis of matter.

 

The 2014 Annual Report was approved by the Board of Directors on 19 March 2015, and will be mailed to shareholders in April 2015. The financial information in this statement is audited but does not have the status of statutory accounts within the meaning of Section 434 of the Companies Act 2006.

 

Full accounts for JKX Oil and Gas plc for the year ended 31 December 2013 have been delivered to the Registrar of Companies. The auditors' report on the full financial statements for the year to 31 December 2013 was unqualified and did not contain statements under Section 498 (1) (regarding adequacy of accounting records and returns), or under Section 498 (3) (regarding provision of necessary information and explanations) of the United Kingdom Companies Act 2006.

 

2.     Basis of preparation

 

The financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted for use in the European Union. The accounting policies used by JKX Oil and Gas plc (the 'Group',) are consistent with those set out in the 2013 Annual Report. A full list of accounting policies will be presented in the 2014 Annual Report.

Going concern

 

The majority of the Group's revenues, profits and cash flow from operations are currently derived from its oil and gas production in Ukraine, rather than Russia. 

 

During 2014 and early 2015, three Ukrainian government decrees were issued without warning and with immediate legal effect which:

 

o             increased the rate of gas production tax payments on oil and gas from 39% and 28% to 45% and 55% respectively;

 

o             instituted currency restrictions, initially until 1 December 2014 but later extended to 2 March 2015 and subsequently to 3 June 2015; and

 

o             directed major industrial gas buyers to acquire their gas solely from the Ukraine state-owned gas company from 1 December 2014 through to 28 February 2015.

 

These decrees have had (and two continue to have) a significant adverse financial impact on the Group, along with the decline in international oil prices which have fallen precipitously since June 2014.

 

As a result the Board has taken steps to streamline the organisation in the most practical way possible but without compromising safety and reliability. It has minimised capital expenditure and reduced operating costs through staff reductions in all key operational and administrative areas. Nonetheless, the Board is maintaining a reduced operational capability in Ukraine such that, if the production tax rates are restored to normal levels and the currency restrictions are not extended, then the Group's planned investment programme in Ukraine can be swiftly restored.

 

The Directors have concluded that it is necessary to draw attention to the material uncertainties relating to the risk: (i) that currency restrictions will extended through 2016 such that the Group is unable to repatriate cash from Ukraine; (ii) of the Ukrainian government implementing new decrees restricting access to the market for our gas; and (iii) of our gas or oil realisations deteriorating materially.  It is unclear whether any or all of these risks will be realised. These specific risks, which represent material uncertainties, may cast doubt about the Group's ability to meet its obligations as they fall due and continue as a going concern.  The Group has a significant obligation of $10 million which may become payable pursuant to its $40 million Convertible Bond (see notes 5 and 6 to the financial information) in February 2016 if Bondholders exercise their put option at that time. However the Directors believe that there is a reasonable basis to mitigate the effects of such eventualities through further operational and cash management measures. 

 

Based on the Group's cash flow forecasts, the Directors believe that the combination of its current cash balances, expected future production and resulting net cash flows from operations, the implemented/planned cost reductions as well as the availability of additional courses of action should the need arise, provide a reasonable expectation that the Group and Company will continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing this financial information. This financial information does not include the adjustments that would result if the Group and Company were unable to continue as a going concern.

 

3.     Segmental analysis

The Group has one single class of business, being the exploration for, evaluation, development and production of oil and gas reserves. Accordingly the reportable operating segments are determined by the geographical location of the assets.

 

There are four (2013: four) reportable operating segments which are based on the internal reports provided to the Chief Operating Decision Maker ('CODM'). Ukraine and Russia segments are involved with production and exploration; the 'Rest of World' are involved in exploration, development and production and the UK is the home of the head office and purchases material, capital assets and services on behalf of other segments. The 'Rest of World' segment comprises operations in Hungary and Slovakia.

 

Transfer prices between segments are set on an arm's length basis in a manner similar to transactions with third parties. Segment revenue, segment expense and segment results include transfers between segments. Those transfers are eliminated on consolidation.

 

Segment results and assets include items directly attributable to the segment. Segment assets consist primarily of property, plant and equipment, inventories and receivables. Capital expenditures comprise additions to property, plant and equipment and intangible assets.

 

2014	UK	Ukraine	Russia	Rest of World	Sub Total	Eliminations	Total
	$000	$000	$000	$000	$000	$000	$000
External revenue
Revenue by location of asset:
- Oil	-	33,150	873	14	34,037	-	34,037
- Gas	-	75,741	26,526	-	102,267	-	102,267
- Liquefied petroleum gas	-	9,542	-	-	9,542	-	9,542
- Management services/other	-	360	-	-	360	-	360
	-	118,793	27,399	14	146,206	-	146,206
Inter segment revenue:
- Management services/other	15,687	-	-	-	15,687	(15,687)	-
	15,687	-	-	-	15,687	(15,687)	-
Total revenue	15,687	118,793	27,399	14	161,893	(15,687)	146,206
Profit before tax:
(Loss)/profit from operations	(6,631)	17,392	(58,026)	(13,503)	(60,768)	(134)	(60,902)
Finance income					1,094	-	1,094
Finance cost					(3,197)		(3,197)
Fair Value Adjustment on acquisition					222	-	222
Fair value movement on derivative liability					9,072	-	9,072
					(53,577)	(134)	(53,711)
Assets
Property, plant and equipment	1,452	168,513	115,375	7,134	292,474	-	292,474
Intangible assets	-	-	-	7,932	7,932	-	7,932
Other receivable	-	-	3,966	-	3,966	-	3,966
Deferred tax	-	7,520	13,527	1	21,048	-	21,048
Inventories	-	2,108	2,016	-	4,124	-	4,124
Trade and other receivables	631	6,480	1,254	1,653	10,018	-	10,018
Restricted cash	6	-	-	553	559	-	559
Cash and cash equivalents	12,105	526	5,891	6,862	25,384	-	25,384
Held to maturity financial investments	-	-	-	2,700	2,700	-	2,700
Total assets	14,194	185,147	142,029	26,835	368,205	-	368,205
Total liabilities	(38,164)	(35,428)	(10,232)	(3,033)	(86,857)	-	(86,857)
Non cash expense (other than depreciation and impairment)	340	1,143	3,288	1,186	5,957	-	5,957
Exceptional item - well control operations	-	-	3,471	-	3,471	-	3,471
Exceptional item - provision for impairment of  oil and gas assets	-	12,800	46,262	10,000	69,062	-	69,062
Increase in property, plant and equipment and intangible assets	321	35,382	5,263	1,311	42,277	-	42,277
Depreciation, depletion and amortisation	803	23,179	9,227	1,181	34,390	-	34,390

 

 

2013	UK	Ukraine	Russia	Rest of world	Sub Total	Eliminations	Total
	$000	$000	$000	$000	$000	$000	$000
External revenue
Revenue by location of asset:
- Oil	-	44,067	761	74	44,902	-	44,902
- Gas	-	91,339	28,090	811	120,240	-	120,240
- Liquefied petroleum gas	-	13,888	-	-	13,888		13,888
- Management services/other	-	1,708	-	-	1,708	-	1,708
	-	151,002	28,851	885	180,738	-	180,738
Inter segment revenue:
- Management services/other	14,627	-	-	-	14,627	(14,627)	-
- Equipment	84	-	-	-	84	(84)	-
	14,711	-	-	-	14,711	(14,711)	-
Total revenue	14,711	151,002	28,851	885	195,449	(14,711)	180,738
Profit before tax:
(Loss)/profit from operations	(17,226)	38,876	(7,020)	(5,136)	9,494	(330)	9,164
					377	-	377
Finance cost					(3,625)	-	(3,625)
Fair value movement on derivative liability					(1,957)	-	(1,957)
					4,289	(330)	3,959
Assets
Property, plant and equipment	1,753	169,110	286,305	8,448	465,616	-	465,616
Intangible assets	-	-	-	18,927	18,927	-	18,927
Other receivable	-	-	4,414	-	4,414	-	4,414
Deferred tax	-	3,347	31,436	-	34,783	-	34,783
Inventories	-	3,377	2,664	-	6,041	-	6,041
Trade and other receivables	645	11,169	11,210	4,663	27,687	-	27,687
Restricted cash	6	-	-	192	198	-	198
Cash and cash equivalent	14,996	6,696	3,115	875	25,682	-	25,682
Total assets	17,400	193,699	339,144	33,105	583,348	-	583,348
Total liabilities	(48,091)	(18,672)	(21,300)	(4,364)	(92,427)	-	(92,427)
Non-cash expense (other than depreciation and impairment)	1,238	504	290	-	2,032	-	2,032
Write off of exploration and evaluation costs	-	-	-	1,452	1,452	-	1,452
Increase in property, plant and equipment and intangible assets	1,161	41,627	20,227	1,358	64,373	-	64,373
Depreciation, depletion and amortisation	675	44,205	11,188	1,079	57,147	-	57,147

 

Major customers	2014	2013
	$000	$000
1  Ukraine	46,461	68,600

 

There is 1 (2013: 1) customer in the Ukraine that exceeds 10% of the Group's total revenues.

 

4.     (a) Property, plant and equipment

 

2014	Oil and gas assets			Other assets
	Oil and gas fields	Gas field	Oil and gas fields
	Ukraine	Russia	Hungary		Total
	$000	$000	$000	$000	$000
Group
Cost
At 1 January	522,127	375,529	32,788	21,711	952,155
Additions during the year*	35,382	5,263	244	1,051	41,940
Additions relating to stepped acquisition	-	-	3,182	-	3,182
Foreign exchange equity adjustment	-	(157,088)	-	(919)	(158,007)
Disposal of property, plant and equipment	-	(186)	-	(1,276)	(1,462)
At 31 December	557,509	223,518	36,214	20,567	837,808
Accumulated depreciation, depletion and amortisation and provision for impairment
At 1 January	353,017	89,224	27,448	16,850	486,539
Depreciation on disposals of property, plant and equipment	-	(25)	-	(1,368)	(1,393)
Exceptional item - provision for impairment of oil and gas assets	12,800	46,262	3,733	-	62,795
Foreign exchange equity adjustment	-	(36,545)	-	(452)	(36,997)
Depreciation charge for the year	23,179	9,227	-	1,984	34,390
At 31 December	388,996	108,143	31,181	17,014	545,334
Carrying amount
At 1 January                                                                                          169,110		286,305	5,340	4,861	465,616
At 31 December	168,513	115,375	5,033	3,553	292,474

 

*Finance costs that have been capitalised within oil and gas properties during the year total $3.0m (2013: $1.7m), at a weighted average interest rate of 18.0 per cent (2013: 18.0 per cent).

 

Oil and gas fields in Ukraine and Russia does not include any items under construction (2013: $6.3m and nil).

 

Exceptional item - well control operations

During the year, due to unexpected pressure building in the annulus of well-27 at our Koshekhablskoye field in Russia, the well was diverted to the flare pit and a coiled tubing unit was mobilised to kill the well. This operation was completed successfully. The cost of these well control operations was $3.5m which has been charged to the income statement during the year.

 

Exceptional item - provision for impairment of oil and gas assets

At the reporting date impairment triggers were noted in respect of our oil and gas assets in Ukraine, Russia and Hungary.  Impairment tests were completed resulting in impairments of $69.1m comprised of $12.8m in respect of our Ukrainian oil and gas fields, $46.3m in respect of our Russian gas field, $3.7m in respect of our Hungarian oil and gas fields and $6.3m in respect of our Hungarian exploration and evaluation costs (see note 4 (b)).

 

Full impairment disclosures for each of the impairment tests are made in notes 4 (c), (d), (e) and (f).

 

2013	Oil and gas assets			Other assets
	Oil and gas fields	Gas field	Oil and gas fields
	Ukraine	Russia	Hungary		Total
	$000	$000	$000	$000	$000
Group
Cost
At 1 January	479,253	378,087	32,477	20,053	909,870
Additions during the year*	41,627	20,227	311	1,802	63,967
Foreign exchange equity adjustment	-	(22,785)	-	(125)	(22,910)
Disposal of property, plant and equipment	(246)	-	-	(19)	(265)
Reclassification	1,493	-	-	-	1,493
At 31 December	522,127	375,529	32,788	21,711	952,155
Accumulated depreciation, depletion and amortisation and provision for impairment
At 1 January	308,946	78,447	27,350	15,252	429,995
Depreciation on disposals of property, plant and equipment	(134)	-	-	(19)	(153)
Foreign exchange equity adjustment	-	(411)	-	(39)	(450)
Depreciation charge for the year	44,205	11,188	98	1,656	57,147
At 31 December	353,017	89,224	27,448	16,850	486,539
Carrying amount
At 1 January	170,307	299,640	5,127	4,801	479,875
At 31 December	169,110	286,305	5,340	4,861	465,616

 

4.     (b) Intangible assets: exploration and evaluation expenditure

 

2014	Ukraine	Hungary	Rest of World	Total
	$000	$000	$000	$000
Group
Cost:
At 1 January	1,308	11,144	14,138	26,590
Additions during the year	-	102	237	339
Write off of unsuccessful exploration and evaluation costs	-	(15)	-	(15)
Additions relating to stepped acquisition	-	1,316		1,316
Exceptional item - provision for impairment of Hungarian assets (note 4(f))	-	(6,267)	-	(6,267)
Disposal relating to stepped acquisition	-	(5,512)	-	(5,512)
Effect of exchange rates on intangible assets	-	-	(856)	(856)
At 31 December	1,308	768	13,519	15,595
Provision against oil and gas assets
At 1 January and 31 December	1,308	-	6,355	7,663
Carrying amount
At 1 January	-	11,144	7,783	18,927
At 31 December	-	768	7,164	7,932

 

2013	Ukraine	Hungary	Rest of World	Total
	$000	$000	$000	$000
Group
Cost:
At 1 January	2,801	12,371	13,628	28,800
Additions during the year	-	225	181	406
Write off of unsuccessful exploration costs	-	(1,452)	-	(1,452)
Effect of exchange rates on intangible assets	-	-	329	329
Reclassification	(1,493)	-	-	(1,493)
At 31 December	1,308	11,144	14,138	26,590
Provision against oil and gas assets
At 1 January and 31 December	1,308	-	6,355	7,663
Carrying amount
At 1 January	1,493	12,371	7,273	21,137
At 31 December	-	11,144	7,783	18,927

The amounts for intangible exploration and appraisal assets represent costs incurred on active exploration and appraisal projects.

In 2013, the write off of exploration and evaluation costs comprises seismic data costs of $1.4m in Hungary and exploration costs of $0.1m in respect of our Turkeve licence in Hungary.

 

The total write off of unsuccessful exploration and evaluation costs of $1.5m  was recognised in cost of sales in 2013.

4. (c) Impairment test for property, plant and equipment

A review was undertaken at the reporting date of the carrying amounts of property, plant and equipment to determine whether there was any indication of a trigger that may have led to these assets suffering an impairment loss. Following this review impairment triggers were noted in relation to the Ukrainian assets (see note 4 (d)), Yuzhgazenergie LLC ('YGE') in Russia (see note 4 (e)) and the Hungarian assets (see note 4 (f)).

 

As there is no readily available market for the Group's oil and gas properties, fair value is derived as the net present value of the estimated future cash flows arising from the continued use of the assets, incorporating assumptions that a typical market participant would take into account.

 

The value in use of an oil and gas property is generally lower than its fair value less costs of disposal ('FVLCD') as value in use reflects only those cash flows expected to be derived from the asset in its current condition. FVLCD includes appraisal and development expenditure that a market participant would consider likely to enhance the productive capacity of an asset and optimise future cash flows. Consequently, the Group determines recoverable amount based on FVLCD using a discounted cash flow ('DCF') methodology. 

 

The DCF was derived by estimating discounted after tax cash flows for each CGU based on estimates that a typical market participant would use in valuing such assets.

 

The impairment tests compared the recoverable amount of the respective CGUs noted below to the respective carrying values of their associated assets. The estimates of FVLCD meet the definition of level three fair value measurements as they are determined from unobservable inputs.

4. (d) Impairment test for the Ukrainian oil and gas assets

The Ukrainian government issued decrees in the second half of 2014 which directed major industrial gas buyers to acquire their gas solely from the Ukraine state-owned gas company from 1 December 2014 through to 28 February 2015 and increased the rate of gas production tax to 55% (from 28%), initially for 3 months but now extended until 31 December 2015.   These factors, combined with the sharp decline in international oil prices and a 71% reduction in the assessed 3P reserves for the Elizavetovskoye field constituted an impairment trigger and accordingly an impairment test was undertaken.

 

Poltava Petroleum Company ('PPC'), a wholly owned subsidiary of JKX, holds 100% interest in five production licences (Ignatovskoye, Molchanovskoye, Rudenkovskoye, Novo-Nikolaevskoye, Elizavetovskoye) and one exploration licence (Zaplavskoye) in the Poltava region of Ukraine.

 

The Ignatovskoye, Molchanovskoye, Rudenkovskoye, Novo-Nikolaevskoye production licences contain one or more distinct fields which, together with the Zaplavskoye exploration licence, form the Novo-Nikolaevskoye Complex ('NNC').

 

The Elizavetovskoye production licence is located 45km from the Novo-Nikolaevskoye Complex and has its own gas production facilities. 

 

Ukrainian Cash Generating Units ('CGUs')

In respect of the Group's Ukraine assets the NNC forms a single CGU as these contain oil and gas fields which are serviced by a single processing facility and do not have separately identifiable cash inflows.  In addition they have commonality of facilities, personnel and services.

 

The Elizavetovskoye licence also has its own separate processing facilities and separately identifiable cash flows and therefore is a distinct CGU for the purpose of the impairment test. 

 

In accordance with IAS 36, the impairment review was been undertaken in US$ being the currency in which future cash flows from NNC and Elizavetovskoye will be generated.

 

Key Assumptions - NNC and Elizavetovskoye

The key assumptions used in the impairment testing were:

 

·      Production profiles: these were based on the latest available information provided by independent reserve engineers, DeGolyer & MacNaughton, at 31 December 2014.  Such information included 3P reserves for NNC and Elizavetovskoye of 27.4 MMboe and 2.5 MMboe, respectively.

·      Economic life of field: it was assumed that NNC will be successful in extending the licence term beyond its current 2024 expiration to the economic life of the field (expected to be around 2032).  The economic life of the Elizavetovskoye field is currently expected to be around 2018.

·      Gas prices: the gas price is based on the forecast expected maximum gas price set monthly by NKRE (electricity regulator). For the next three years, gas prices were based on Ukrainian gas market price expectations which are mainly influenced by European gas prices, the Russian-Ukrainian border price, and international oil prices.  Thereafter gas prices were increased at 2.8%.

·      Oil prices: the Company used a forward price curve for the next five years and an increase of 2.8% per annum thereafter.

·      Production taxes: for 2015, the Company has assumed production tax rates of 55% for gas and 45% for oil which were introduced by the government as an emergency measure in 2014 and have been extended through to 31 December 2015. From 1 January 2016, the Company has assumed that these rates will reduce to normalised levels of 28% and 39% for gas and oil, respectively.

·      Capital and operating costs: these were based on current operating and capital costs in Ukraine for both projects. Estimates were provided by third parties and supported by estimates from our own specialists, where necessary.

·      Post tax nominal discount rate of 17.2%. This was based on a Capital Asset Pricing Model analysis consistent with that used in previous impairment reviews

Based on the key assumptions set out above:

 

·      NNC's recoverable amount exceeds its carrying value by $42.6m and therefore NNC's oil and gas assets were not impaired however there has been a significant erosion of the headroom from the prior year; and

·      the Elizavetovskoye field was impaired by $12.8m after significant erosion of the headroom from the prior year. The main driver of the impairment has been the reduction in Elizavetovskoye's 3P reserves to 2.5 MMboe (2013: 8.7 MMboe) and the increase in gas production tax rates.

 

Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above.  Sensitivity analysis to likely and potential changes in key assumptions has therefore been provided below.

 

The impact on the impairment calculation of applying different assumptions to gas prices, production volumes, production tax rates, future capital expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows:

 

Sensitivity analysis for the NNC and the Elizavetovskoye field

		NNC Increase/(decrease) in impairment headroom of $42.6m for NNC CGU $m	Elizavetovskoye Increase/(decrease) in impairment of $12.8m for Elizavetovskoye CGU $m
Impact if regulated gas price:	increased by 10%	25.2	(4.4)
	reduced by 10%	(25.2)	4.4
Impact if gas production volumes:	increased by 10%	32.4	(4.4)
	decreased by 10%	(32.4)	4.4
Impact if future capital expenditure:	increased by 20%	(26.3)	3.1
	decreased by 20%	26.3	(3.1)
Impact if post-tax discount rate:	increased by 1 percentage point to 18.2%	(9.0)	0.2
	decreased by 1 percentage point to 16.2%	9.7	(0.2)

 

4. (e) Impairment test for Yuzhgazenergie LLC ('YGE'), Russia

Following the 2007 acquisition of YGE in Russia, a technical and environmental re-evaluation of YGE's Koshekhablskoye gas field redevelopment was undertaken by the Group. The re-evaluation resulted in a revised development plan and production profile. The development plan and production profile have continued to be refined since that time.

 

For purposes of testing for impairment triggers of YGE's non-current assets, the Company took account of developments since the last test for impairment in 2013, based on the assessment of FVLCD. 

 

In previous estimates, the Company assumed net-back convergence with European gas prices occurring in 2023, which was in line with the Russian government's stated intention, after applying to increase gas sector tariffs annually by 10% to achieve this. 

 

The domestic gas market in Russia has deteriorated significantly during 2014 and the prospects for a significant improvement in the domestic gas market in the near term have receded rapidly.

 

The economic recession in Russia, the devaluation of the Rouble, the sharp decline in international oil prices and the declining gas demand in Europe and Russia have conspired to create a short term gas oversupply within Russia and a cessation of any political appetite for achieving net-back parity with European gas prices.

 

This revision to our estimate of the future increases in Russian gas prices constituted an impairment trigger.  Accordingly an impairment test was undertaken.

 

In accordance with IAS 36, the impairment review was been undertaken in Russian Roubles.

 

Key Assumptions - YGE

The key assumptions used in the impairment testing were:

·      Production profiles: these were based on the latest available information provided by independent reserve engineers, DeGolyer & MacNaughton, at 31 December 2014.  Such information included 3P reserves for YGE of 68.3 MMboe.

·      Economic life of field: it was assumed that YGE will be successful in extending the licence term beyond its current 2026 expiration to the economic life of the field (expected to be around 2047). The discounted cash flow methodology used has not taken account of any opportunities that may exist to extract reserves in a shorter timeframe by investing to increase the current plant capacity.

·      Gas prices: for 2015 these were based on the gas sales agreement that the Company had negotiated with Kubangazifikatziya for the forecast gas production in 2015.  The gas price is expected to remain at the same level through to 1 July 2016.

·      Gas prices: from 1 July 2016 and annually thereafter, the gas prices have been increased by Rouble inflation of between 4.3% and 8.0% through to 2021, and 5.1% thereafter.

·      Gas prices: historically, gas prices in the Adygea Region are higher than the average gas price across all regions in Russia as a result of the vast transportation distances from Russia's main producing regions.  The Company has assumed that Adygean gas prices will remain higher than the average price across Russia.

·      Capital and operating costs: these were based on current operating and capital costs in Russia, project estimates provided by third parties and supported by estimates from our own specialists, where necessary.

·      Post tax nominal Rouble discount rate of 15.2%. This was based on a Capital Asset Pricing Model analysis consistent with that used in previous impairment reviews.

Based on the key assumptions set out above YGE was impaired by $46.3m. The main driver of the impairment has been the revision to the expected increase in Adygean gas prices.

Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above.  Sensitivity analysis to likely and potential changes in key assumptions has therefore been provided below.

The impact on the impairment calculation of applying different assumptions to gas prices, production, future capital expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows:

Sensitivity Analysis for YGE

		Increase/(decrease) in impairment of $46.3m for Yuzhgazenergie LLC CGU $m
Impact if Adygean gas price:	increased by 10%	(28.8)
	reduced by 10%	27.8
Impact if gas production volumes:	increased by 10%	(27.8)
	decreased by 10%	26.8
Impact if future capital expenditure:	increased by 20%	15.7
	decreased by 20%	(15.7)
Impact if post-tax discount rate:	increased by 1 percentage point to 16.2%	9.6
	decreased by 1 percentage point to 14.2%	(10.8)

 

4. (f) Impairment test for Hungarian oil and gas assets

Hungarian property plant and equipment - HHE North Kft ('HHN')

The Company holds a 100% interest in two Hernad licences through its wholly owned Hungarian subsidiary, HHE North Kft ('HHN'). Hernad I licence which contains two suspended wells which experienced an unexpected decline in production rates in 2013.  A full impairment review of the Hernad field was completed at the end of 2013 and no impairment was noted (see below).

 

Hungarian property plant and equipment - Turkeve

Through its wholly owned Dutch subsidiary, JKX Hungary BV, the Company holds a 50% interest in the Turkeve IV Mining Plot of 10 sq. km ('Turkeve') on which the Ny-7 well encountered gas.

 

Hungarian intangible assets: exploration and evaluation expenditure - Tiszavasvári-6

The Hernad licences also contain the Tiszavasvári-6 discovery well ('TZ-6'), which, due to the early stage of appraisal, is classified as an exploration and appraisal asset and recognised within intangible assets.

 

During the second half of 2014, there was a sharp decline in international oil prices. In addition, due to the absence of a firm work programme at year end to develop the Hungarian reserves, the estimated reserves at the Group's Hungarian oil and gas fields were reclassified as contingent resources. These factors constituted an impairment trigger and accordingly an impairment test was undertaken.

 

Hungarian Cash Generating Units ('CGUs')

HHN forms a single CGU as it holds the two suspended oil and gas wells which are serviced by a single processing facility and which do not have separately identifiable cash inflows.  In addition they have commonality of facilities, personnel and services.  

The development of the Turkeve field and the TZ-6 discovery require their own distinct processing facilities. Once these discoveries are developed, they will have separately identifiable cash flows and therefore are two separate CGUs for the impairment test of the Hungarian oil and gas assets. 

In accordance with IAS 36, the impairment reviews for the Hungarian assets have been undertaken in US$ being the currency in which future cash flows from HHN, Turkeve and TZ-6 will be generated.

 

Key Assumptions - HHN, Turkeve and TZ-6

The key assumptions used in the impairment testing in 2014 were:

·      Production profiles: these were based on the latest available information provided by our reserve engineers which included contingent resources of 0.6 MMboe for HHN, 0.3 MMboe (net to JKX) for Turkeve and 4.6 MMboe for TZ-6.

·      Oil and gas prices: these were based on current prices being realised and short term price curves derived from expectations in the Hungarian oil and gas market.

·      Capital and operating costs: these were based on project estimates provided by third parties and the partner and operator of our Hungarian assets.

The post tax discount rate of 10% was applied. This was based on a Capital Asset Pricing Model analysis for our Hungarian assets. 

Accordingly the impairment review is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above.  Sensitivity analysis to likely and potential changes in key assumptions has therefore been provided below.

Based on the key assumptions set out above:

·      HHN was impaired by $2.7m; 

·      Turkeve was impaired by $1.0m; and

·      TZ-6 was impaired by $6.3m.

The main driver of the impairments to Turkeve and TZ-6 has been the decline in expected future oil and gas prices.

The impact on the impairment calculation of applying different assumptions to production, oil and gas prices and future capital and operating costs, all other inputs remaining equal, would be as follows:

 

		HHN Increase/(decrease) in impairment of $2.7m for HHN CGU $m	Turkeve Increase/(decrease) in impairment of $1.0m for Turkeve CGU $m	TZ-6 Increase/(decrease) in impairment of $6.3m for TZ-6 CGU $m
Impact if oil and gas production:	increased by 10%	(0.9)	(0.3)	(0.5)
	decreased by 10%	0.9	0.3	0.5
Impact if oil and gas prices:	increased by 10%	(0.9)	(0.3)	(0.5)
	decreased by 10%	0.9	0.3	0.5
Impact if future capital and operating costs:	increased by 20%	1.2	0.2	1.0
	decreased by 20%	(1.2)	(0.2)	(1.0)

 

HHE North Kft ('HHN'), Hungary - 2013 impairment disclosures

During 2013, the two producing Hungarian wells on our Hernad field experienced an unexpected decline in production rates:

·      well Hn-1, stopped production in late 2012 and attempts to recommence production during 2013 have been unsuccessful

·      well Hn-2 was restarted in February 2013 but had eventually stopped producing by the end of the year. 

 

The unexpected decline in production from these two wells was considered to constitute an impairment trigger and a full impairment test was undertaken in respect of our oil and gas assets relating to the Hernad field.

 

The test compared the recoverable amount of the Hernad field Cash Generating Unit ('CGU'), which contained these two wells and which is held by HHN, the subsidiary which holds our Hungarian assets, to the carrying value of the CGU. The estimate of recoverable amount was based on FVLCD, derived by estimating discounted after tax cash flows for the CGU based on estimates that a typical market participant would use in valuing such assets. In accordance with IAS 36, the impairment review was undertaken in US$ being the functional currency of our Hungarian operations. 

The key assumptions used in the impairment testing in 2013 were:

·      Production profiles: these were based on the latest available information provided by our reserve engineers based on reserve information from the operator and external engineers, such information included 3P reserves of 0.3 MMboe

·      Oil and gas prices: these were based on current prices being realised and short term price curves derived from expectations in the Hungarian oil and gas market

·      Capital and operating costs: these were based on project estimates provided by third parties and the partner and operator of our Hungarian assets.

The post tax discount rate of 10% was applied. This was based on a Capital Asset Pricing Model analysis for our Hungarian assets. 

Accordingly the impairment review is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by management, particularly in relation to the key assumptions described above.  Sensitivity analysis to likely and potential changes in key assumptions has therefore been reviewed below.

Based on the key assumptions set out above HHN's recoverable amount exceeds its carrying value by $1.0m and therefore HHN's oil and gas assets in respect of the Hernad field were not impaired.

The impact on the impairment calculation of applying different assumptions to production, oil and gas prices and future capital and operating costs, all other inputs remaining equal, would be as follows:

 

		Increase/(decrease) in impairment headroom of $1.0m for Hernad CGU $m
Impact if oil and gas production:	Increased by 10%	1.0
	Decreased by 10%	(1.0)
Impact if oil and gas prices:	Increased by 10%	1.0
	Decreased by 10%	(1.0)
Impact if future capital  and operating costs:	Increased by 10%	(0.6)
	Decreased by 10%	0.6

 

2013	Oil and gas assets			Other property, plant and equipment
	Oil and gas fields	Gas field	Oil and gas fields
	Ukraine	Russia	Hungary		Total
	$000	$000	$000	$000	$000
Group
Cost
At 1 January	479,253	378,087	32,477	20,053	909,870
Additions during the year*	41,627	20,227	311	1,802	63,967
Foreign exchange equity adjustment	-	(22,785)	-	(125)	(22,910)
Disposal of property, plant and equipment	(246)	-	-	(19)	(265)
Reclassification	1,493	-	-	-	1,493
At 31 December	522,127	375,529	32,788	21,711	952,155
Accumulated depreciation, depletion and amortisation and provision for impairment
At 1 January	308,946	78,447	27,350	15,252	429,995
Depreciation on disposals of property, plant and equipment	(134)	-	-	(19)	(153)
Foreign exchange equity adjustment	-	(411)	-	(39)	(450)
Depreciation charge for the year	44,205	11,188	98	1,656	57,147
At 31 December	353,017	89,224	27,448	16,850	486,539
Carrying amount
At 1 January                                                                                       170,307		299,640	5,127	4,801	479,875
At 31 December	169,110	286,305	5,340	4,861	465,616

 

*Finance costs that have been capitalised within oil and gas properties during the year total $1.7m (2012: $2.5m), at a weighted average interest rate of 18.0 per cent (2012: 25.2 per cent).

 

Oil and gas fields in Ukraine and Russia include $6.3m and nil respectively relating to items under construction (2012: $9.1m and nil).

 

5.     Borrowings

	2014	2013
	$000	$000
Current
Convertible bonds due 2018	4,068	4,000
Credit facility	1,522	-
Term-loans repayable within one year	5,590	4,000
Non-Current
Convertible bonds due 2018	30,837	28,166

 

Convertible bonds due 2018

On 19 February 2013 the Company successfully completed the placing of $40m of guaranteed unsubordinated convertible bonds with institutional investors which are due 2018 raising cash of $37.2m net of issue costs.  

The Bonds have an annual coupon of 8 per cent per annum payable semi-annually in arrears.  The Bonds are convertible into ordinary shares of the Company at any time from 1 April 2013 up until seven days prior to their maturity on 19 February 2018 at a conversion price of 76.29 pence per Ordinary Share, unless the Company settles the conversion notice by paying the Bondholder the Cash Alternative Amount (see below).   

Interest, after the deduction of issue costs and the inclusion of the redemption premium, will be charged to the income statement using an effective rate of 18.0%.

 

Cash Alternative Amount

At the option of the Company, the conversion notice in respect of the Bonds can be settled in cash rather than shares, the Cash Alternative Amount payable is based on the Volume Weighted Average Price of the Company's shares prior to the conversion notice.

 

Credit facility

On 31 March 2011, Poltava Petroleum Company ('PPC'), our subsidiary in Ukraine, entered into a reducing credit facility agreement with Crédit Agricole CIB (France) secured by indemnity provided by the parent company, JKX Oil & Gas plc. The credit facility is for a maximum of Ukrainian Hryvna equivalent of $15.0m.  The facility was renewed on 27 June 2014 and is available until 30 June 2015 (2013: 30 June 2014) with the maximum facility reducing to $10.0m and $5.0m on 30 April 2015 and 30 May 2015 respectively. All provisions contained in the credit facility documentation have been negotiated on normal commercial and customary terms for such finance arrangements.

The interest is calculated at prevailing Crédit Agricole CIB (France) bank rate plus a margin.

 

6.     Derivatives

Non-current derivative financial instruments	2014 $000	2013 $000
At the beginning of the year/on completion of the Bond (19 February 2013)	10,109	8,152
Fair value movement during the year
-       Net (gain)/loss	(9,072)	1,957
At the end of the year	1,037	10,109

 

Non-current derivative financial instruments

Convertible bonds due 2018 - embedded derivatives

Coupon Makewhole

Upon conversion of a Bond prior to the 19 February 2015 the Company is required to pay an amount of interest equal to the aggregate interest which would have been payable on the principal amount of the Bond if such Bond had been outstanding until 19 February 2015.

 

Bondholder Put Option

Bondholders have the right to require the Company to redeem the following number of Bonds on the following dates together with accrued and unpaid interest to (but excluding) such dates:

 

Redemption Date	Maximum number of Bonds to be redeemed
19 February 2015	10% of the Bonds, having an aggregate principal amount of $4,000,000
19 February 2016	25% of the  Bonds, having an aggregate principal amount of $10,000,000
19 February 2017	all outstanding Bonds

 

Current liabilities include $4.1m (2013: $4.0m) in respect of the put option available to bondholders on 19 February 2015. Bonds with a principal amount of $4m were redeemed on 19 February 2015 in addition to an early redemption premium of $0.2m in accordance with the terms and conditions of the bond. None of the bondholders exercised their option to put 10% of the outstanding principal of the bonds on 19 February 2014. 

 

Company Call Option

The Company can redeem the Bonds early in full but not in part at their principal amount together with accrued interest at any time on or after 19 February 2017 if the Volume Weighted Average Price of the Company's shares over a specified period equal or exceed 130 per cent of the principal amount of the Bonds; or if the aggregate principal amount of the bonds outstanding is less than 15% of the aggregate principal amount originally issued.

 

Fixed exchange rate

The Sterling-US Dollar exchange rate is fixed at £1/$1.5809 for the conversion and other features.

7.     Taxation

	2014	2013
Analysis of tax on profit	$000	$000
Current tax
UK - current tax	(1,400)	-
Overseas - current year	10,911	8,590
Current tax total	9,511	8,590
Deferred tax
Overseas - current year	16,309	(11,132)
Deferred tax total	16,309	(11,132)
Total taxation	25,820	(2,542)

 

Taxation in Ukraine - production taxes

Since Poltava Petroleum Company's ('PPC's') inception in 1994 the Company has operated in a regime where conflicting laws have often existed, including in relation to effective taxes on oil and gas production. Various laws and regulations have existed and have implied a number of variable rates.

 

In 1994, PPC entered into a licence agreement with the Ukrainian State Committee on Geology and the Utilisation of Mineral Resources ('the Licence Agreement') which set out expressly in the Licence Agreement that PPC would pay royalties on production at a rate of only 5.5% even in the event that existing tax rates were amended or new taxes introduced so as to adversely affect the economic benefit to be derived by PPC or the Company.

 

Pursuant to the Licence Agreement, PPC was granted an exploration licence and four 20-year production licences, each in respect of a particular field. In 2004, PPC's production licences were renewed and extended until 2024. New licence agreements were also signed to reflect this change and PPC's operations continued as before.

 

The Company and PPC have continued to invest in Ukraine on the basis that PPC would pay royalties on production at a rate of only 5.5%.

 

In December 1994, a new fee on the production of gas (known as a 'Rental Payment' or 'Rental Fee') was introduced in Ukrainian law. On 30 December 1995, PPC was issued a letter by the Ministry of Economy, the Ministry of Finance and the State Committee for the Oil and Gas Industry ('the Exemption Letter'), which establish a zero rent payment rate for oil and natural gas produced in Ukraine by PPC.  Based on the Exemption Letter, therefore, PPC did not expect to pay any Rental Fees.

 

Rental Fee Demands and Changes in Law since 2003

Since 2003, however, in violation of the Exemption Letter, the Ukrainian authorities have repeatedly demanded payment of a Rental Fee from PPC. The first such demand was issued in 2003, but was held to be invalid by the Ukrainian Court of Appeal. Two further demands were made of PPC in 2007 for UAH75m (approximately $4.7m at the year end rate of UAH15.77/$) and in 2010 for UAH153m (approximately $9.7m at the year end rate of UAH15.77/$) for Rental Fees for the periods from January to March 2007 and from August 2010 to December 2010, respectively.

 

PPC has challenged both of these demands and appeals are currently pending before the Ukrainian Higher Administrative Court (the highest court in Ukraine for administrative matters). The Company continues to receive legal advice that the claims against PPC regarding payment of Rental Fees to 31 December 2010 has little legal merit under Ukrainian law for legal and technical reasons, on the basis of tax audits completed and the three year statute of limitation. No provision has been made for the possible future liabilities that may result from these tax uncertainties.

 

Recovery of Rental Fees paid since 2011

In 2011, new laws were enacted which established new mechanisms for the determination of the Rental Fee. Notwithstanding the Exemption Letter, PPC began, in January 2011, to pay the Rental Fee in order to avoid further issues with the Ukrainian authorities and without prejudice to its right to challenge the validity of the demands.

 

Since 2011, however, Ukraine has effected legislative changes that have incrementally increased Rental Fee rates. The first increase came into effect on 1 January 2013, when the Rental Fee was combined with another type of production tax, and the combined rate applicable to PPC was raised to 25%. Next, in April 2014, this rate was increased to 28%. Finally and most drastically, in an increase which came into effect on 3 August 2014, the rate applicable to PPC was increased to 55%.

 

Since 2011, the Rental Fees been paid by PPC have amounted to more than $180m. These charges have been recorded in cost of sales in each of the accounting periods to which they relate.

 

International arbitration proceedings

The Company and its wholly-owned Ukrainian and Dutch subsidiaries have commenced arbitration proceedings against Ukraine under the Energy Charter Treaty, the bilateral investment treaties between Ukraine and the United Kingdom and the Netherlands, respectively.  In these proceedings, the Company is seeking compensation for the losses it has suffered from Ukraine's treaty violations, including Ukraine's failure to treat the Company's investments in a "fair and equitable" manner and failing to comply with commitments made by Ukraine in respect of the Company's investments.  

 

In particular, the Company is seeking repayment of more than $180m in rental fees that PPC has paid on production of oil and gas in Ukraine since 2011.

 

In support of the Company's claims against Ukraine under the Energy Charter Treaty, an Emergency Arbitrator appointed under the Arbitration Rules of the Stockholm Chamber of Commerce issued an Emergency Award on 14 January 2015 ordering Ukraine to refrain from imposing royalties on the production of gas by Poltava Petroleum Company, the Company's Ukrainian subsidiary, in excess of the rate of 28% (as opposed to the 55% rate that is currently applicable under Ukrainian law).  The Emergency Award is binding on Ukraine under international law; however, since Ukraine has, thus far, refused to comply with the Award, the Company has applied to have it recognised and enforced by the Ukrainian courts.  In addition, the Company will seek orders from the Tribunal constituted under the Energy Charter Treaty to compel Ukraine to comply with the Award. No adjustment has been made to recognise any possible future benefit to the Company that may result from these arbitration proceedings.

 

8.     (Loss)/earnings per share

The calculation of the basic and diluted (loss)/earnings per share attributable to the owners of the parent is based on the weighted average number of shares in issue during the year of 172,125,916 (2013: 172,108,553) and the (loss)/profit for the relevant year.  

 

Loss before exceptional item in 2014 of $21,959,036 (2013 earnings: $6,501,000) is calculated from the 2014 loss of $79,531,000 (2013 earnings: $6,501,000) and adding back exceptional items of $72,532,964 (2013: nil) less the related deferred tax on the exceptional items of $14,961,000 (2013: nil).

 

The diluted earnings per share for the year is based on 172,125,916 (2013: 174,464,053) ordinary shares calculated as follows:

 

	2014	2013
	$000	$000
(Loss)/earnings
(Loss)/earnings for the purpose of basic and diluted earnings per share (profit for the year attributable to the owners of the parent):
Before exceptional item	(21,959)	6,501
After exceptional item	(79,531)	6,501
Number of shares	2014	2013
Basic weighted average number of shares	172,125,916	172,108,553
Dilutive potential ordinary shares:
Share options	-	2,355,500
Weighted average number of shares for diluted earnings per share	172,125,916	174,464,053

 

In accordance with IAS 33 (Earnings per share) the effects of antidilutive potential have not been included when calculating dilutive loss per share for the year end 31 December 2014 (2013: nil). 33,165,609 (2013: 28,792,122) potentially dilutive ordinary shares associated with the convertible bonds (note 6) have been excluded as they are antidilutive in 2014, however they could be dilutive in future periods.

 

There were 10,854,700 (2013: 6,549,300) outstanding share options at 31 December 2014, of which 3,637,200 (2013: 2,355,500) had a potentially dilutive effect.  All of the Group's equity derivatives were anti-dilutive for the year ended 31 December 2014.

9.     Events after the reporting date

Ukrainian Government gas sales restrictions removed

The Ukrainian Government issued a decree on 29 November 2014 directing major industrial buyers to acquire their gas solely from the Ukraine state-owned gas company Naftogaz during the three-month period 1 December 2014 to 28 February 2015. This resulted in the Company's Ukrainian subsidiary being forced to shut-in a proportion of its oil and gas production during this period.

 

In February 2015, the Company received confirmation from the Ukrainian state gas distributor that 100% of its nominations for March delivery of gas to industrial customers have been accepted. The Company has now returned all wells in its Ukrainian fields to full production.

 

National Bank of Ukraine ('NBU') strengthens its currency control restrictions

Temporary capital controls established by the NBU on 1 December 2014 remain in place in an attempt by the Ukrainian government to safeguard the economy and protect foreign exchange reserves in the short term.

 

On 4 March 2015 a number of new NBU Resolutions were implemented with immediate effect (NBU No. 160 dated 3 March 2015; Resolution of the NBU No. 161 dated 3 March 2015; Resolution of the NBU No. 154 dated 2 March 2015).

The Resolutions extended the currency control restrictions implemented in Ukraine on 1 December 2014 and introduced additional measures which have the impact of restricting the remittance of funds to foreign investors under certain conditions and bans the transfer of Hryvna to purchase Ukrainian government bonds.

The restrictions are effective until 3 June 2015.

 

International arbitration proceedings in respect of production taxes

The Company and its wholly-owned Ukrainian and Dutch subsidiaries commenced arbitration proceedings against Ukraine under the Energy Charter Treaty, the bilateral investment treaty between the United Kingdom and Ukraine and the bilateral investment treaty between the Netherlands and Ukraine. See Note 7 for further information.

 

Glossary

2P reserves	Proved plus probable
3P reserves	Proved, probable and possible
P50	Reserves and/or resources estimates that have a 50 per cent probability of being met or exceeded
AFE	Authorisation For Expenditure
AIFR	All Injury Frequency Rate
Bcf	Billion cubic feet
Bcm	Billion cubic metres
bcpd	Barrel of condensate per day
boe	Barrel of oil equivalent
boepd	Barrel of oil equivalent per day
bopd	Barrel of oil per day
bpd	Barrel per day
bwpd	Barrels of water per day
cfpd	Cubic feet per day
EPF	Early Production Facility
GPF	Gas Processing Facility
HHN	HHE North Kft
Hryvna	The lawful currency of Ukraine
HSECQ	Health, Safety, Environment, Community and Quality
KPI	Key Performance Indicator
LIBOR	London InterBank Offered Rate
LPG	Liquefied Petroleum Gas
LTI	Lost Time Injuries
Mbbl	Thousand barrels
Mboe	Thousand barrels of oil equivalent
Mcf	Thousand cubic feet
MMcfd	Million cubic feet per day
MMbbl	Million barrels
MMboe	Million barrels of oil equivalent
PPC	Poltava Petroleum Company
Roubles	The lawful currency of Russia
RR	Russian Roubles
sq.km	Square kilometre
TD	Total depth
$	United States Dollars
UAH	Ukrainian Hryvna
US	United States
VAT	Value Added Tax
YGE	Yuzhgazenergie LLC

Conversion factors 6,000 standard cubic feet of gas = 1 boe