JKX Oil & Gas plc ('JKX' or the 'Company')

Half-Yearly Results

For the six months ended 30 June 2017

Highlights

§ Executed Phase 1 of the appraisal program at Rudenkivske field and completed several enhancement projects in Ukraine

§ Completed workover of well 25 in Russia

§ Restarted production in Hungary after a break of more than 3 years

§ Average production decreased by 17.3% at 8,598 boepd (2016: 10,393 boepd)

§ Restructured and extended the short-term bond liabilities

§ Commenced negotiations to resolve legal disputes with the Ukrainian Government

§ Significant changes at the Board level following the Annual General Meeting

 

Key Financials

§ Revenue: $38.0m (2016: $35.4m)

§ Other cost of sales: $12.6m (2016: $9.7m)

§ Loss from operations before tax and exceptional costs $2.2m (2016: $2.8m loss)

§ Exceptional costs $3.1m (2016: $3.1m)

§ Loss for the period: $7.7m (2016: $10.1m loss)

§ Loss per share: 4.46 cents (2016: loss 5.86 cents)

§ Operating cash flow: $4.0m (2016: $7.8m)

§ Capital expenditure: $10.4m (2016: $2.2m)

§ Total cash balance: $4.2m (31 December 2016: $14.3m)

Outlook  

§ Analysis of results of Phase 1 of Rudenkivske appraisal program and preparation for Phase 2 in Ukraine

§ Progress of field development using best working and technical practices from North America adapted to Ukraine

§ Successful completion of well 5 workover to increase gas production in Russia

§ Workover of well Hn-1 in Hungary and search for farm-in partner

§ Amicable settlement of the legal disputes with the Ukrainian Government

§ Review of different options to raise external financing to enable execution of our strategy

 

Acting CEO, Victor Gladun commented:

"During the first half of the year, we have started implementing the Field Development Plans, completed Phase 1 of the appraisal program in the Rudenkivske field in Ukraine, completed well 25 workover in Russia and restructured the significant short-term bond liabilities.  

On the Board level, continued disputes between major shareholders and the Board resulted in a change of the Executive Directors for the second time in 18 months. The Board is actively looking for new Executive and Non Executive Directors. I have taken on the role of Acting CEO to secure a smooth transition. Tom Reed acted as Advisor to the Board and Advisor to the Acting CEO and Russell Hoare served as Acting CFO from the date of the Annual General Meeting ("AGM") on 30 June 2017 until 31 July 2017 to help with the transition. Irrespective of changes in the management team, the Company will continue to seek to mitigate its litigation risks and potential liabilities with the Ukrainian Government, execute on Field Development Plans, and establish opportunities for long-term growth".

 

For further information please contact EM Communications:

Stuart Leasor
leasor@em-comms.com
T: +44 20 3709 5711
M: +44 7703 537721

Jeroen van de Crommenacker
crommenacker@em-comms.com
T: +44 20 3709 5713
M: +44 7887 946719

 

Chairman's statement

 

In the last six months, the development plans laid out by your Board in the 2016 Annual Report have been pursued, with mixed results. The period has also been characterized by continued disputes between major shareholders and the Board, resulting in a change in the executive directors for the second time in 18 months. The plans to navigate the current uncertainties are set out below but our commitment to shareholders continues to be based on transparent communication, the reduction of needless cost and increasing efficiency and production.

In the first half of the year, average production decreased by 17.3% to 8,598 boepd with a focus away from enhancements projects and resources committed instead to the appraisal program in Ukraine, the results of which are discussed in the Chief Executive's Statement. The Company has focused on tight control over cash, enabling the funding of the appraisal program in Ukraine, significant workover activity in Russia and the commencement of production in Hungary after a 3-year break.

 

International oil and gas prices in the last six months have remained volatile around historically low levels. The 17.3% decrease in production offset by improvement in prices translates into a 7.3% increase in half-year revenue to $38.0 million. This is addressed more fully in the Financial Review.

Ukrainian legal cases

For claims relating to 2010 amounting to approximately $11.3 million (including interest and penalties), Poltava Petroleum Company ('PPC') filed an appeal to the Supreme Court in Ukraine ('SCU') in March 2017. The SCU refused to accept the appeal for a hearing and PPC has no current grounds upon which to file further appeals in this particular case. In the meantime, on 1 June 2017, the Kharkiv Appellate Administrative Court upheld the decision of another court in Poltava which found in favour of PPC on technical grounds and cancelled the tax notification decisions against the Company. The tax authorities have filed an appeal against this decision and until we have the result of that appeal, we will continue to hold the accounting provision for the full amount on the balance sheet of the Company.  

 

Court action in relation to the 2015 claims, amounting to approximately $25.9 million, was postponed while the result of the Hague arbitration was unknown (see below) and since then PPC has been successful with continuing to suspend any action while we seek a settlement with the Ukrainian Government (also discussed below).

 

During 2016, searches were undertaken by the Ukrainian police at the office of PPC and the homes of two of our employees. The searches undertaken were the result of an investigation into claims of alleged underpayment of taxes which have been made against PPC by a local prosecutor. In January 2017 there were further searches at both the Poltava and Kyiv offices of PPC, followed by requests for documentation.

 

PPC cooperated fully with the authorities and believes that it is in full legal compliance with the matters outlined in the police requests and that the various searches and requests are completely unjustified. We referred the matter to the British and US Embassies in Kyiv to ask for their assistance in engaging with the relevant authorities to resolve the situation.

 

In respect of the Company's international arbitration against Ukraine to recover production related taxes in Ukraine ('Rental Fees') paid by PPC since 2011 and, damages to the business, the tribunal dismissed the main element of the Company's claim for payment of excessive Rental Fees on 6 February 2017. The tribunal ruled that Ukraine was found not to have violated its treaty obligations in respect of excessive levying of such taxes, but awarded the Company damages of approximately $11.8 million plus interest and costs of $0.3 million in relation to subsidiary claims. In response to this result, the Government of Ukraine submitted an appeal to the UK High Court against the damages award to which the Company has responded.  The High Court will consider the appeal in the second half of 2017.

 

While disappointed with the overall result of the arbitration, we are confident that the Company will be successful defending the appeal in the High Court. The conclusion of these proceedings presents an opportunity to draw a line under historical legal issues and engage with the Government of Ukraine to settle this award and the local tax issues and return focus to key operational matters. We have commenced this settlement process in earnest, will re-engage with it once the new management team has been appointed, and in the meantime continue to defend our local legal cases. While we are optimistic regarding the outcome of these matters, given the magnitude of the legal provisions recorded in respect of the 2010 and 2015 claims, we have considered the risk to the Group's ability to continue as a going concern further in Note 2 to the financial information.

Your Board

Following the replacement of the entire Board on 28 January 2016 and the appointment of further independent directors during the first half of 2016, the composition of the Board was compliant with the UK Corporate Governance Code in respect of the number of independent Non Executive Directors, although the Board remained concerned with the presence of shareholder representatives as I set out in my letter to shareholders ahead of our Annual General Meeting ("AGM") on 30 June 2017.

 

Prior to that meeting, our largest shareholder, Eclairs Group Limited ("Eclairs"), had make public requests to remove all directors from the Board and appoint their own representative, but having been informed that this would not comply with UK law, limited their request to a resolution to remove Tom Reed, the Chief Executive Officer ("CEO"), Russell Hoare, the Chief Financial Officer ("CFO") and Vladimir Rusinov, a representative of Proxima Capital Group ("Proxima"), from the Board. As obliged by law, the Company included such resolutions in the agenda for the AGM.

 

Following this request from Eclairs, Proxima, the Company's 20% shareholder with two representatives on the Board, withdrew their support for the current executive and non-executive members of the Board.

 

Despite the overwhelming support of all other shareholders who voted at the AGM, the combined votes of Eclairs and Proxima resulted in the removal of the CEO and the CFO.  One Proxima representative was also removed from the Board. The appointment of an Eclairs representative was, however, rejected through the combined votes of Proxima and most of the smaller shareholders. The independent directors and myself are disappointed at this turn of events and, as promised in my letter to shareholders prior to the AGM, are unlikely to serve on the Board for the long term.

 

The result of this very complicated process is that your current Board consists of myself as Chairman, two independent directors and one representative of Proxima.  The Board's independence and integrity has been maintained for now and we have set ourselves the task of finding replacements for the CEO and CFO. We have also commenced the search for alternate candidates for the Chairman and independent director roles, following the tendering of my resignation along with those of the two independent non-executive directors. We aim to complete such searches within the next three months to ensure effective continuing management of the Company. The General Director of our Ukrainian operating subsidiary, Victor Gladun, has taken on the role of Acting CEO for this period and up until 31 July  Tom Reed acted as Advisor to the Board and Advisor to the Acting CEO and Russell Hoare continued as Acting CFO to assist with the transition.

 

Staff

Following significant staff reductions across the Group during 2016, the increased operational activity in Ukraine, Russia and Hungary and the uncertainties over governance and management of the Company in recent weeks, it is a testament to the commitment and resilience of our employees that the Company continues to operate effectively.

 

I'd like to thank all of our employees for their continued hard work and faith in the Company.

Outlook

Given the current situation, my responsibility as Chairman is to execute a swift and successful search for a new executive team and new independent board members so that the Company can move forward, and the interests of all shareholders can continue to be protected in accordance with the highest standards of corporate governance. We will update you in due course as we progress this initiative.  

 

 

Chief Executive's statement

Performance highlights

The performance highlights for the period are:

§ Average production of 8,598 boepd (2016: 10,393 boepd)

§ Executed Phase 1 of the appraisal program at Rudenkivske field in Ukraine

§ Completed several enhancement projects in Ukraine, workover of well 25 in Russia, and sidetrack of well Hn-2 in Hungary

§ Completed the bond restructuring which was negotiated in late 2016, thereby removing a material near-term liability  

 

For the six months to 30 June 2017, production decreased by 17.3% from the same period as last year to 8,598 boepd.

 

Gas production in Russia was lower by 25% due to well-25 workover which was offline for approximately four months, partly compensated for by several successful acid stimulations on producing wells during the period.

 

Gas production in Ukraine declined by 7% period-on-period and oil production has declined by 22% due to fewer enhancements of existing well stock while human and physical resources were diverted to the preparation for, and execution of, the first phase of the Rudenkivske appraisal and stimulation program.

 

The Company also resumed production and sales in Hungary after a break of more than three years.

Ukraine

Average production in Ukraine in the first half of 2017 decreased by 8.5% period-on period to 3,766 boepd (2016: 4,114 boped).

 

PPC's workover rig was engaged in well preparation for the appraisal frac program, and the operations and technical teams of the Company were focused on designing and implementing the Rudenkivske appraisal frac program which reduced the number of enhancement projects possible during the first half of 2017. However, the Company has continued to systematically calculate the technical potential of existing well stock to close gaps between actual and potential production and the enhancement program was restarted in June.

 

The first phase of the appraisal program for the Rudenkivske field included workovers of 4 previously plugged and abandoned wells located in an area of the license with contingent resources.  The team completed 12 hydraulic fracturing stages within just 28 days, including inter-field mobilizations, significantly beating previous time and cost performances by the Company in Ukraine. Initial flowback results for these wells were disappointing - although three out of four wells had gas shows in fractured intervals, previously unidentified water influx preventing commercial gas production at least until water-bearing zones are isolated. Currently the opportunities for lifting of gas in these wells are being evaluated and the information gathered during these stages are being used to redesign the second phase of stimulations.

Russia

Average production from the Koshekhablskoye field in the first half of 2017 was 4,654 boepd (2016: 6,222 boepd), a 25% decrease on the average for the first half of 2016 mainly due to a planned production tubing replacement workover on well-25. The well was offline for approximately four months, much longer than initially anticipated, due to a fire on the workover rig and the time required by the rig operator to procure the necessary replacement equipment.

 

Periodic acid treatments have been performed during the period on well-27 and well-25 to maintain production rates. 

 

The plans to replace damaged tubing in well-5 are currently being reviewed. Successful completion of a well-5 workover should bring production in Russia closer to 40 MMcfd during the second half of 2017.

Hungary

In Hungary, the sidetrack of well Hn-2 was successfully completed in January 2017 and gas sales commenced in February 2017 after a break of more than three years. Average production in the first half of 2017 was 178 boepd.

 

A low-cost opportunity to workover and recomplete well Hn-1 on the same field was identified and is currently being planned.

 

Out of six Mining Plots (production licences) in Hungary covering 200 square kilometers in which JKX has a 100% equity interest, Emőd V (Mezokeresztes) and Tiszavasvári IV plots present the most potential. As the Company continues to search for a farm-in partner to develop these fields, these investment opportunities will be ranked among others throughout the Group and pursued accordingly.

Slovakia

In Slovakia, drilling of three exploration wells was continuously delayed throughout 2016 and first half of 2017 as discussions of community and environmental issues continued with local activists and governmental licensing bodies. The completion of a series of Environmental Impact Assessments on the identified well sites should facilitate the ongoing permitting process, with a view to exploration drilling starting in Q4 2017.

Current and future activity

The current portfolio of assets of JKX consists mostly of mature fields in Russia and Ukraine, with few early-stage assets. When we developed the Field Development plans last year, we identified that the only field in our portfolio in Ukraine with significant growth opportunities is the Rudenkivske field with estimated 2.3 Tcf of gas in place and 0.6 Tcf of 2C contingent resources.

 

We have designed a program to appraise the field and unlock these resources and convert them to reserves minimizing both the costs and time required to complete the program, and to allow for adjustments if we need to make them. The selected approach involves re-entering Soviet-era plugged and abandoned wells which, on one hand, provides access to the reservoirs at much lower cost compared with drilling a new well, yet, on the other hand, bears various technical risks related to re-entering and re-completing old wells with unknown well-bore integrity while relying on log and production data gathered several decades ago. We have initially split the appraisal program into two phases keeping these risks in mind.

 

Although executed to best international standards and with significant improvement made compared to our own history, results of Phase one of the appraisal program showed that our understanding of the complex geology of the Rudenkivske field is incomplete and needs thorough reassessment prior to spending larger amounts of capital on drilling. Work completed to date provided valuable data to adjust our plans for Phase two of the appraisal campaign and further full-field development plan.

 

Alongside further work on appraisal of the Rudenkivske field, we will continue to identify and rank investment opportunities across our portfolio and seek internal and external capital to implement them in the most efficient manner. Additionally, we will continue to evaluate opportunities to optimize our existing portfolio of assets and to acquire assets for future growth.

 

 

Operational review

Group production

For the six months to 30 June 2017, the Company produced 8,598 boepd, comprised of 46.9 MMcfd of gas and 779 bpd of oil and condensate, a decrease of 17.3% on the same period in 2016. The majority of this decline was due to Well 25 being worked over for 4 months, a well that produces approximately 1,500 boepd. The workover on this well has now been completed.

Ukraine

Novomykolaivske licences

Production

Average production from the Novomykolaivske group of fields in the first half of 2017 was 2,508 boepd comprising 10.9 MMcfd of gas and 699 bpd of oil and condensate, a 3% decrease on the average for the first half of 2016. 

Development drilling and other well activity

No drilling took place in the first half of 2017 as the focus was on preparing wells for and carrying out the Phase 1 fracturing campaign. In order to carry out the technically challenging workovers of the old wells there have been as many as 3 workover rigs operating at the same time. The duration of the workovers decreased dramatically in the reporting period allowing us to release the two leased workover rigs (ZJ-20 and Cooper rig) leaving PPC's own workover rig (TW100) to continue. The following workovers and well interventions were carried out in the first half of 2017:

Workovers for the Phase 1 frac campaign were as follows:

§ 19R, 25R and 6R were worked over using the TW100 rig. 19R took a total of 105 days and was cleaned out to a depth of 4,800m. 25R took a total of 20 days and cleaned out to a depth of 4,249 m. 6R took 29 days and was cleaned out to a depth of 4,395m.

§ 10R was worked over using the ZJ-20, it took a total of 77 days and was cleaned out to a depth of 4,542m and plugged back to 4,490m.

§ The ZJ-20 was used to run monobores in 19R, 10R and 25R. The TW100 ran a monobore in 6R.

§ R27 workover was started with the Cooper rig however at a depth of 1,835m the well was suspended due to the well being excluded from Phase 1.

§ Diagnostic Fracture Injection Test ('DFIT') or Data Frac were carried out on 19R and 10R using a local pump truck. With a DFIT performed on R25 using Schlumberger's pumps.

Ignativske South waterflood project:

§ The deepening of IG124 was attempted using the Cooper rig. Unfortunately the workover could not be completed due to excessive losses and the inability to block these losses using cement. Prior to the rig down of the Cooper rig the cement plug across the pre-drilled liner was drilled out to enable re-perforating in the future if required. The shallowest perforations were left open for reservoir monitoring and water injection. Once the reservoir pressure increases through injection to a level of about 1,000 psi the deepening of this well will be reconsidered.

§ An Electric Submersible Pump ('ESP') was run in IG110 using a crane which enabled water injection into the southern part of Ignativske to re-start with a total of 80,000 stb injected into IG126 and IG124 from late January to late February at which time the pump broke due to excessive sand production. A screen and repaired pump were finally installed in late June when the water injection was re-started at a rate of 4,000 stb/d in IG126.

Enhancements and behind pipe:

§ 17m of pre-frac perforations were added in 6R which produced at an initial rate of 8 MMscf/d before declining to 0.3 MMscf/d in 3 weeks.

§ An ESP was run into IG128 using the workover rig. This increased the oil rate from 38 to 132 stb/d of oil before declining to a monthly average of 116 stb/d of oil.

§ NN22 was worked over using the TW100, due to gas evident during the workover, testing was carried out without adding new perforations. NN22 produced 8 MMscf/d, before declining to 1.4 MMscf/d.

§ Wireline operations have focussed on the clearance of wax and salt build up in the production tubing of a number of wells. A sustained programme of wax clearance has helped stabilise oil production.

Rudenkivske Phase 1 appraisal and stimulation campaign

A project to execute the Rudenkivske appraisal and stimulation program was ongoing for more than 6 months and involved the following main stages - field data analysis, ranking of wells, workover and preparation of wells and stimulation of those wells.

A total of 31 old wells in the Rudenkivske field were reviewed for suitability for fracturing based on the current state of the completion. 13 wells were short-listed based on petrophysical interpretation (two of them were consequently perforated in the end of 2016).  Remaining wells were reviewed on a reservoir by reservoir basis to select suitable fracture intervals. After modelling the fracs in FracPro, production forecasts were generated and wells were ranked. Additional consideration was given to location of the wells to allow us to delineate the reservoir for the purpose of de-risking contingent resources.

Prior to the frac campaign numerous studies were conducted in order to enhance performance of the fracs. To determine the least damaging fluid for our reservoirs rheology and retained permeability tests were carried out on fluids from two suppliers at various concentrations and water tests from three different sources. Friction loop tests were conducted to determine the friction profile of the fluid while pumping. The retained permeability tests had to be conducted on R103 core from the Devonian due to the difficulty in getting access to the heritage core from legacy operators. Cement Bond Log ('CBL') tests were run and barrel tests were conducted using all the available guns to confirm ability to effectively perforate through the monobore and the old casing with the limited amount of perforating guns available in country.  

In late May, the Group commenced its stimulation program on the Rudenkivske field in Ukraine and we have now completed Phase 1 of the campaign with a total of 12 stages pumped within 28 days.

For 19R, 5 stages were completed within 6 days with a total of 324 tonnes of proppant placed. Upon initial flowback of the well we observed a mixture of injected and formation water which restricted the flow of gas. Several Production Logging Tools ('PLT'') were run which identified the water producing interval however at present focus is on maintaining the clean-up prior to sealing off the water zone.

For 10R, the initial 3 stages were completed in the lower Tournaisian formation within 5 days with a total of 221 tonnes of proppant placed before the well was put on flowback. We observed non-commercial volumes of gas constrained by flow of formation water, and we decided to plug and abandon the well.

For 25R, the first smaller stage was completed in the Tournaisian interval with a total of 35 tons of proppant placed in formation. Upon the initial flowback and fracture clean up the steady flow of gas with no formation water was observed and a larger fracture treatment for the same Tournaisian zone was performed. A total of 80 tons of proppant was placed in the same interval technically proving the possibility of re-fracturing in the future.

Due to continuing petrophysical uncertainties a Pulse Neutron Neutron ('PNN') log was run in 6R prior to fracturing to help better identify gas zones in the future. Prior to pumping the main stage, the small skin-frac was placed to test and verify zone saturation and make adjustments to the main frac design. Upon confirmation of gas saturation and absence of formation water the main stage was pumped with a total of 30 tons of proppant placed in the Devonian formation.

As flow rates from the above completed zones were significantly below initial forecasts, we have decided to complete the Phase 1 of the campaign. We have now fracture stimulated only 10 out of 48 zones initially identified. Initial findings will be used to fine tune the rest of the program.

Prior to this appraisal campaign, the Group conducted stimulation in 2013 on well R103 when a total of 10 stages were completed, with 673 tonnes of proppant placed, but the program took 67 days as opposed to 28 days. Initial results show radical improvement in efficiency and execution which has been possible by applying North American standards of planning and work practices and combining our local teams with experienced North American expertise.

Tests are planned early in Q3 to determine petrophysical constants across our 3 key reservoir intervals, from core only recently available, in order to help refine the petrophysics interpretation which was found to be the source of most uncertainty in the Phase 1 campaign.

Production facilities

Routine operations at the main processing facility, the LPG plant and the oil loading facility continued smoothly throughout the period.

Extensive field operations were carried out to enable the fracturing of the Phase 1 wells which included: flowline connections, roads, water pits and pads able to accommodate a frac fleet amongst other items.

 

Elyzavetivske Production Licence

Production

Average production from the Elyzavetivske field in the first half of 2017 was 1,257 boepd comprising 7.4 MMcfd of gas and 19 bpd of condensate, a 20% decrease on the average for the first half of 2016. 

Drilling and development activity

PPC successfully acquired permission to open up both EM53 and EM205 to production. EM53 produced an initial gas rate of 1.5 MMscf/d before eventually stabilising at 0.7 MMscf/d. EM205 produced an initial gas rate of 0.6 MMscf/d prior to declining to 0.2 MMscf/d.

Further development activity is being reviewed.

Production facilities

The Elyzavetivske production facility continues to operate efficiently and there have been no further changes following the upgrade at the end of 2014 and the addition of compression in 2015. The plant now has sufficient capacity to accommodate future production from additional wells that are currently being planned and no further modifications are expected. The plant has now been connected with the grid which has led to a small reduction in fuel gas usage.

Russia

Koshekhablskoye licence

Production

Average production from the Koshekhablskoye field in the first half of 2017 was 4,654 boepd comprising 27.6 MMcfd of gas and 50 bpd of condensate, a 25% decrease on the average for the first half of 2016. 

Workover and well stimulation activity

Due to a leak in the tubing of Well 25 the well was worked over to pull the carbon steel tubing and replace it with chrome. Monthly acid treatment has been carried out using coiled tubing on well 27 resulting in a gas rate of between 8 and 16 MMscf/d. Production from crestal well-20 has declined slightly from 13 to 12.6 MMscf/d during the period and is still relatively stable despite the fish preventing us from entering the well with coiled tubing to carry out acid jobs. The deep east-flank well-15 continues to cycle between 0.3 MMcfd and 1.5 MMcfd, with fluid build-up being cleared periodically.

Facilities

The plant shut down planned for Q3 2017 has been cancelled as all required plant changes were carried out last year.      

Licence obligations

The best way to assess the Callovian reservoir and satisfy related obligations is being reassessed together with local design institute.

Hungary

JKX operates six Mining Plots (production licences) in Hungary covering 200 sq km and which are 100% owned by Riverside Energy Kft, the Company's wholly-owned Hungarian subsidiary:

Hajdúnánás IV	28 sq km
Hajdúnánás V	7 sq km
Tiszavasvári IV	41 sq km
Emőd V	100 sq km
Pely I	18 sq km
Jaszkiser II	6 sq km

The licence terms will enable JKX to carry out appraisal and development activity over a 35 year period and JKX is currently seeking a farm-in partner, or partners, to participate in the development of these assets.

In Hungary, the sidetrack of well Hn-2 within the Hajdúnánás Field (Hajdúnánás IV Mining Plot) was completed successfully in January 2017 and gas sales commenced in February 2017 after a break of more than three years. Production continued throughout first half of 2017.

A low-cost opportunity to workover and recomplete well Hn-1 on the same field was identified and is planned for the second half of 2017.

Of the other five Mining Plots Emőd V (Mezőkeresztes) and Tiszavasvári IV present the most potential. Further development of these assets will require a 3D seismic acquisition, exploration drilling program comprised of up to 2 wells, and a redevelopment program of up to 5 wells for Mezőkeresztes, and drilling of the Tiv-12 and possible Tiv-10 and Tiv-8 appraisal wells for Tiszavasvári IV.

As the Company continues to search for a farm-in partner to develop these fields, these investment opportunities will be ranked among others throughout the Group and pursued accordingly.

Slovakia

Exploration

JKX holds a 25% equity interest in the Svidnik, Medzilaborce, Snina and Pakostov exploration licences in the Carpathian fold belt in north east Slovakia.

The drilling of three exploration wells was continuously delayed throughout 2016 and the first half of 2017 as discussions regarding community and environmental issues continued with local activists and governmental licensing bodies. The completion of a series of Environmental Impact Assessments on the identified well sites should facilitate the ongoing permitting process, with a view to exploration drilling starting in Q4 2017.

 

Financial performance

 

Production summary	First half 2017	Second half 2016		First half 2016
Production
Oil (Mbbl)	141	174		180
Gas (Bcf)	8.5	9.8	10.2
Oil equivalent (Mboe)	1,556	1,810		1,881
Daily production
Oil (bopd)	779	945		993
Gas (MMcfd)	46.91	53		56
Oil equivalent (boepd)	8,598	9,833		10,393

 

Operating results		First half 2017 $m	Second half  2016 $m		First half  2016 $m
Revenue
Oil		7.1	9.6		6.2
Gas		28.7	26.4		27.9
Liquefied petroleum gas		2.2	2.5		1.3
		38.0	38.4		35.4
Cost of sales
Exceptional item - production based taxes		(1.8)	(24.3)		-
Exceptional item -  provision for impairment of oil and gas assets		-	(2.0)		-
Other cost of sales		(12.6)	(9.8)		(9.7)
Depreciation, depletion and amortisation - oil and gas assets		(10.1)	(8.1)		(10.7)
Other production based taxes		(9.0)	(9.1)		(8.6)
Total cost of sales		(33.5)	(53.3)		(29.0)
Gross profit before exceptional items		6.3	11.4		6.4
Gross profit/(loss) after exceptional items		4.5	(14.9)		6.4
Operating expenses
Disposal of property, plant and equipment		(0.6)	-		-
Exceptional items		(1.3)	(1.4)		(3.1)
Other administrative expenses		(6.6)	(12.6)		(9.6)
(Loss)/gain on foreign exchange		(1.3)	(0.1)		0.5
Loss from operations before exceptional items		(2.2)	(1.1)		(2.8)
Loss from operations after exceptional items		(5.3)	(29.0)		(5.8)
Earnings	First half  2017			Second half  2016		First half  2016
Net loss ($m)	(7.7)			(27.0)		(10.1)
Net loss before exceptional items ($m)	(5.0)			(0.5)		(7.0)
Basic weighted average number of shares in issue (m)	172			172		172
Loss per share before exceptional items (basic, cents)	(2.89)			(0.25)		(4.09)
Loss per share after exceptional items (basic, cents)	(4.46)			(15.70)		(5.86)
Pre-exceptional earnings before interest, corporation tax, depreciation and amortisation1 ($m)	8.3			7.4		8.4

 

Realisations	First half  2017	Second half  2016	First half  2016
Oil (per bbl)	$57.45	$49.65	$39.92
Gas (per Mcf)	$3.67	$2.94	$2.96
LPG (per tonne)	$497.53	$496	$254

 

Cost of production ($/boe)	First half  2017	Second half  2016	First half  2016
Production costs (excluding exceptional item)	$7.84	$5.33	$5.43
Depreciation, depletion and amortisation	$6.46	$5.90	$5.67
Production based taxes	$5.76	$5.21	$4.57

 

Cash flow	First half  2017	Second half  2016	First half  2016
Cash generated from operations ($m)	4.0	9.2	7.8
Operating cash flow per share (cents)	2.3	5.4	4.5

 

Statement of Financial Position	First half  2017	Second half  2016	First half  2016
Total cash2 ($m)	4.2	14.3	18.6
Borrowings ($m)	16.3	16.8	23.8
Net debt3 ($m)	(12.1)	(2.5)	(5.2)
Net debt to equity (%)	(7.9)	(1.6)	(2.9)
Return on average capital employed4 (%)	(9.3)	(11.0)	(11.4)
Additions to property, plant and equipment/intangible assets ($m)
- Ukraine	8.3	2.6	1.5
- Russia	1.7	(0.3)	0.6
- Other	0.4	1.2	0.1
Total	10.4	3.5	2.2

1.   Pre-exceptional earnings before interest, tax, depreciation and amortisation ('EBITDA') is a non-IFRS measure and calculated using loss from operations of $5.3m (2016: $5.8m) and adding back depreciation, depletion and amortisation and exceptional items of $13.6m (2016: $14.2m). EBITDA is an indicator of the Group's ability to generate operating cash flow that can fund its working capital needs, service debt obligations and fund capital expenditures.

2.   Total cash is Cash and cash equivalents plus Restricted Cash.

3.   Net cash/(debt) is Total cash less Borrowings (excluding derivatives).

4.   Return on average capital employed is the annualised loss for the period divided by average capital employed.

 

 

Financial review

Results for the period

The Group recorded a loss of $7.7m for the period which is significantly lower than the loss for the same period in 2016. In 2016, the $10.1m loss was after exceptional charges of $3.1m incurred due to replacement of the Board in January 2016. For the current period, the loss is stated after exceptional charges of $1.4m relating to the provision for severance payments to the Executive Directors following the Company's AGM on 30 June 2017, a negative movement of $1.5m (net of deferred taxes) in provision for production based taxes in Ukraine and a gain of $0.2m in the onerous lease provision.  Therefore, the loss before exceptional items has significantly improved compared to the same period last year by $2.0 m. The Company's financial performance for the first half of 2017 has been positively impacted by improved oil and gas prices, offset by lower production as discussed in detail in the operational review and covered below.

Revenue

Despite the 17.3% production decrease across the Group, the improved commodity prices and commencement of sales in Hungary resulted in a 7.3% increase in half-year revenues to $38.0m (2016: $35.4m) (see revenues bridge chart).

 

http://www.rns-pdf.londonstockexchange.com/rns/6652M_-2017-7-31.pdf

 

 

Group revenues	2017 $m	2016 $m	Change $m	% Change
Ukraine	28.9	25.6	3.3	12.9
Russia	7.9	9.7	(1.8)	(18.6)
Hungary	1.1	-	1.1	100.0
Total	38.0	35.4	2.6	7.3

 

 

Realisations	2017	2016	Change	% Change
Ukraine
Gas ($/Mcf)	6.57	5.77	0.80	13.9
Oil ($/bbl)	57.45	39.92	17.53	43.9
LPG ($/tonne)	497.53	254.70	242.83	95.3
Russia
Gas ($/Mcf)	1.66	1.50	0.16	10.7
Hungary
Gas ($/Mcf)	6.06	-	6.06	100
Group
Gas ($/Mcf)	3.67	2.94	0.73	24.8
Oil ($/bbl)	57.45	39.92	17.53	43.9
LPG ($/tonne)	497.53	254.70	242.83	95.3

 

Average exchange rates	2017	2016	Change	% Change
Russia (RUB/$)	57.84	70.23	12.39	17.6
Ukraine (UAH/$)	26.78	25.65	(1.13)	(4.4)

 

Ukrainian revenues	2017  $m	2016  $m	Change  $m	% Change
Gas	20.0	18.4	1.6	8.7
Oil	6.7	5.9	0.8	13.6
Liquefied Petroleum Gas ('LPG')	2.2	1.3	0.9	69.2
Total	28.9	25.6	3.3	12.9

Ukraine revenues

As the revenue bridge chart demonstrates, one factor affecting revenues from our Ukrainian business was the decreased production due to the suspension of enhancement activity in Ukraine in 2017 due to planning and preparation for the stimulation programme on the Rudenkivske field.  Gas sales volumes in Ukraine were 7.6% lower at 3,453 boepd (2016: 3,737 boepd) as a result of reduced gas production to 3,766 boepd (2016: 4,114 boepd).

Whilst the realised gas price increased by 16% from an average of 5,208 UAH per Mcm in 2016 to 6,052 UAH per Mcm in 2017, US Dollar gas realisations in Ukraine improved only by 13.9% from $5.77/Mcf to $6.57/Mcf due to the 4.4% devaluation of the Hryvnia. Since the introduction of a new law affecting the Ukrainian gas market in 2015, gas prices are more closely following global market trends. The increase in gas realisations is explained by higher prices of imported gas from Europe compared to 2016.

Oil realisations also improved from $39.92/bbl in 2016 to $57.45/bbl in 2017 which is in line with Brent movement from an average of $41.21/bbl during the 1H 2016 to $52.28/bbl during the 1H 2017. Ukrainian realisations are now higher than Brent, with an average premium of $5/bbl in 2017, due to the removal of illegal cheap products from the Ukrainian market and robust local demand for oil exceeding local supply.

LPG sales were affected by both volume declines, associated with a reduced volume of gas produced, and an improvement in the market price achievable in Ukraine.  The average price increased to $497.53/tonne (2016: $254.70/tonne) due to tight controls over customs clearance imposed by certain market players which resulted in a limited access of cheaper LPG products.  However, the strong operational performance of the LPG plant enabled it to contribute $2.2m (2016: $1.3m) to Group revenue. 

Russia revenues

Russian gas sales made up 54% of the Group's volumes sold (2016: 56%).  Gas production in Russia was lower by 25% to 4,654 boepd (2016: 6,222 boepd) largely due to the workover of well 25 in Russia and as the revenue bridge chart shows, this was the largest negative factor affecting Group revenues in the period. 

Gas prices in Russia increased by 10.7% to $1.66/Mcf (2016: $1.50/Mcf) due to appreciation of the Russian Rouble which compensated a 9.5% reduction to the Rouble gas sales price from 1 July 2016 obtained from our sole customer.  We negotiated a 5-year "take or pay" contract to give us more certainty over cash flow from our customer, albeit at a lower price.  On 1 July 2017 Russian gas realisations increased by 3.9% which is in line with the overall market trend for industrial customers.

Hungary revenues

Hungarian gas and condensate sales commenced in February 2017 and achieved 169 boepd which made up 2% of the Group's volumes sold (2016: nil). 

Loss from operations 

Loss from operations before tax and exceptional charges for the period was $2.2m (2016: loss $2.8m). This was the result of a $2.6m increase in Group revenues and a $3.0m decrease in the Group's administrative expenses offset by an increase of $2.7m in cost of sales due mainly to the activity associated with the stimulation programme on Rudenkivske field. There was also a negative variance of $1.8m in foreign exchange loss and $0.6m in loss on disposal of property, plant and equipment.     

Cost of sales

The $2.7m increase in cost of sales before exceptional charges to $31.7m (2016: $29.0m) comprises the following items:

§ an increase in Ukrainian operating costs by $2.2m, or 47.1%;

§ an increase in Russian operating costs by $0.2m, or 3.2%;

§ an increase in Hungarian operating costs by $1.0m due to commencement of commercial sales while operating costs in Hungary in 2016 were classified as administrative expenses; 

§ a reduction in the depreciation, depletion and amortisation ('DD&A') charge of $0.6m;

§ an increase in production based taxes by $0.4m;

§ a decrease in Rest of World costs of $0.5m.

 

The increase in Russian operating costs of $0.2m is largely due to the Rouble appreciation which increased the US Dollar reported cost base for Russia throughout the year. Russian property tax charges remained the same at $0.4m (2016: $0.4m). 

Ukrainian operating costs increased by $2.2m due to higher costs necessary for preparation for stimulation programme and more significant staff costs, which is in line with the strategy of strengthening the technical team in Kiev with high calibre professionals from the United States, including temporary staff involved during the stimulation campaign. Operating expenses in 2017 also comprise one-off cost of purchase of gas on the market ($0.4m) to fulfil gas commitments of PPC in June which were agreed and approved before the beginning of the month. PPC committed to this level of sales in June due to an over-optimistic production forecast of the stimulation programme results whereas the actual levels were lower than expected.

Operating costs in Rest of World decreased mainly due to staff reductions in the technical team in London during 2016 for which the benefits are now beginning to show against comparative numbers. 

The DD&A charge reduced by $0.6m, largely as a result of lower production levels in Ukraine and Russia.

Production based taxes (before exceptional charges) increased by $0.4m, which are considered further below. 

Disposal of property, plant and equipment ('PP&E')

A loss on disposal of PP&E of $0.6m was recognised in Russia. These items were deemed obsolete as a result of a stock-take in November 2016.

Exceptional charges

Exceptional charges of $3.1million comprised mainly the following:

§ a $1.4 million of provision for severance costs to the Chief Executive Officer and Chief Financial Officer who were both removed from the Board following the Company's AGM on 30 June 2017;

§ a $1.8 million movement in provision for production taxes in relation to ongoing Rental Fee disputes;

§ a gain of $0.2m due to unwinding of an onerous lease provision.

Administrative expenses

Excluding the exceptional costs, other administrative expenses have decreased by $3.0m to $6.6m (2016: $9.6m) as a result of the following:

§ A decrease in legal and professional fees of $2.7 million mainly due to:

§ decrease in arbitration legal and court fees of $2.6m due to completion of the Hague main case;

§ less legal assistance required in Ukraine related to the court cases in respect of 2010 and 2015 Rental Fees ($0.4m); and

§ offsetting increase in professional services of $0.3m incurred in respect of updating and executing the Field Development Plans.

§ Increase in marketing and development costs of $0.4m due to involvement of investor relations/ government relations agencies to raise awareness of our strategy in Ukraine, the United States and the United Kingdom; and

§ A decrease of $0.7m in staff and other costs across the Group mainly as a result of our cost savings initiatives.  We were able to significantly reduce the costs of the Company's London headquarters, including the Board costs. Head office headcount has been reduced by 45% and we now occupy one floor of the building where we previously occupied four floors. Headcount reductions in both Ukraine and Russia were initiated during the latter half of 2016.

Net finance charges

Finance income of $0.2m comprises income from bank deposits of $0.2m (2016: $0.4m). 2016 income also included a gain on the repurchase of convertible bonds of $0.5m.

Finance costs have decreased by $0.9m to $1.5m (2016: $2.4m) comprising convertible bond interest. Despite an increase in interest rate, overall the liability significantly reduced as a result of the redemption of $10.0m of the Bonds in February 2016 and repurchase and subsequent cancellation of Bonds with face value of $2.2m, $1.4m and $6.4m, made in June, September and October 2016, respectively. 

A $0.1m charge (2016: $1.3m) arising from fair value movement on the derivative liability represents the change in fair value of the conversion option associated with the convertible bond.

Taxation

The total tax charge for the period was $1.0m (2016: $1.5m) comprising a current tax charge of $1.9m (2016: $1.4m) and a deferred tax credit of $0.9m (2016: charge $0.1m). 

The increase in current tax charge to $1.9m reflects higher profitability in Ukraine. In Ukraine, the corporate tax rate for 2017 and 2016 was 18%.

Production taxes

Production based tax expense for the period increased to $9.0m (2016: $8.6m), which has been recognised in cost of sales, due to commencement of production in Hungary and higher gas production taxes in Ukraine.

In Ukraine, production tax expense (before exceptional charges) increased by $0.2m from $7.7m to $7.9m mainly due to an increase in the average border price which is the basis for calculating the royalties (UAH6,115 per mcm in 2017 compared to UAH5,028 per mcm in 2016).  Oil production tax is lower due to reduced royalty rate from a maximum from 45% to 29% and lower oil production. 

We can now attempt to draw a line under our claim against the Ukrainian Government for overpayment of production taxes as in February 2017 the international arbitration tribunal issued its Award on the Company's claims and awarded the Company damages of approximately $11.8 million plus interest, and costs of $0.3 million in relation to subsidiary claims, although the main part of our claim was rejected by the tribunal. In March 2017 the Company received a notice by Ukraine's Ministry of Justice to the High Court of the United Kingdom naming JKX as a defendant in an application seeking to set aside the arbitration award against Ukraine and in favour of JKX. The hearing is planned for October 2017. In the meantime, we have initiated a dialogue with Ukrainian Government to put aside this historic claim and focus on future investment in the Ukrainian energy sector.  Please refer to Note 14 for detail on legal cases.  

In Russia, production taxes were $0.8m (2016: $0.8m). The gas and condensate mineral extraction tax ('MET') rate applicable in 1H 2017 remained approximately the same at 312 Roubles/Mcm (2016: 312 Roubles/Mcm). The formula for MET 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). Our Russian subsidiary, YGE, is entitled to a 50% discount based on the depth of our gas reservoirs.

In addition to production taxes, YGE is subject to a 2.2% property tax which is based on the net book value of its Russian assets as calculated for property tax purposes.  This amounted to $0.4m in 2017 (2016: $0.4m) and is included in other cost of sales.

In Hungary, production taxes were $0.1m (2016: nil).

Loss for the period

Loss for the period before exceptional charges was $5.0m (2016: $7.0m). Basic loss per share before exceptional items was 2.89 cents (2016: 4.09 cents). Basic loss per share after exceptional items was 4.46 cents (2016: 5.86 cents).

Cash flows

Cash generated from operations was $4.0m (2016: $7.8m). The decrease is a result of the $0.2m increase in loss from operations after exceptional items for the reasons described above, adjusted for movement in exceptional items of $3.1m, a $0.6m decrease in non-cash DD&A, a $8.7m cash outflow due to changes in working capital and other charges of $2.0m for the period.

Income tax paid in the period increased to $1.9m (2016: $0.01m), due to higher profits earned by our Ukrainian subsidiary. Interest paid during the period comprised $0.6m (2016: $1.4m), in respect of financing charges on the convertible bond which significantly reduced as a result of restructuring.

Following a commencement of the Field Development Plan, group capital spend for the first half-year significantly increased to $10.3m (2016: $2.2m).

Net cash outflow from financing activities in the period mainly relates to the $1.9m of accretion payment to the bondholders in February 2017 (2016: $10.9m redemption of the Bond in February 2016 and $1.7m used to repurchase 11 convertible bonds). 

No dividends were paid to shareholders in the period (2016: nil).

The resultant decrease in cash and cash equivalents in the period before adjusting for foreign exchange effects was $10.2m (2016: $7.6m).

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.

Bonds with a principal amount of $10.0m were redeemed on 19 February 2016 in addition to an early redemption premium of $0.9m in accordance with the terms and conditions of the bond. In order to reduce the ongoing liability and to improve the Company's ability to restructure the Bonds, repurchases, and subsequent cancellation, amounting to $2.2 million, $1.4 million and $6.4 million were made in June, September and October 2016, respectively, utilising improved operating cash flows within the Group. These purchases were all made at discounts to face value.

In January 2017 the Company was able to restructure the remaining $16 million of Bonds resulting in the liability being amortised over three years starting from February 2018 with a payment of $2.6 million made in February 2017. The financing of the Bonds are now within the operating cash flow capabilities of the Company and the business can move forward with its development plans subject to resolution of the Group's legal issues in Ukraine.  Further information on the terms and conditions of the Bonds is included in Note 8 to the consolidated interim financial statements. 

Outlook

 In 2016 we focused on reducing costs and implementing a robust capital allocation policy which ensured maximised cash flows from our assets and improvements to the Company's profitability and liquidity.  We announced that drawing a line under our legal claims and shareholders' issues will allow us focus on our main activity in 2017 - investment in oil and gas production.

As a result of completing Field Development Plans (FDPs) for Ukraine and Russia, we embarked on an exciting stimulation programme in Ukraine which was a significant success from an execution and efficiency perspective, although disappointing from a production point of view. 

Once we have interpreted the results of stimulation programme, we will revise our plans in Ukraine.  We are planning for all steps necessary to restart our drilling programme in late 2017 - early 2018. In Russia, we are planning to commence a workover of well 5 and believe that we have the technical expertise and financial resources to successfully complete this project which will enable an increase in sustainable production.

Following the results of the AGM on 30 June 2017, I have remained as acting CFO for a transition period and supported the Board in developing and financing the Group's strategy ensuring that our short-term and long-term liabilities, including the bond payment of $6.9m in February 2018, are successfully managed and planned for. My transition period has now been completed and I'd like to take this opportunity to thank the employees of JKX for their tireless commitment. It has been a privilege to work with them and I wish them every success for the future of the Company.  

 

 

Risks and uncertainties

 

The Group continuously monitors major strategic, operational, financial and external risks it faces and determines the appropriate course of action to manage these risks. Key risks and uncertainties which may impact the Group's performance have not changed materially from those stated on pages 29 to 32 of the Group's 2016 Annual Report, apart from the points made below reflecting the current transition in executive management.

Financial risk management

The main financial risk faced by the Group is non-availability of funds to meet business needs and debt servicing requirements (liquidity risk). The significant factors outside of management control that could adversely impact cash flows, profits and liquidity of the Group remain the ongoing legal disputes concerning Rental Fees in Ukraine, along with international oil and gas prices and risks associated with operating in Ukraine and Russia given the short-term economic outlook for these countries remains uncertain.

These are critical factors to consider when addressing an issue of whether the Group is a going concern (see Note 2 to the condensed consolidated interim financial information).

Principal risks and uncertainties for the remaining six months of 2017 include:

Tax legislation

Starting from 2015, the Company had lodged several claims under the Agreement between the United Kingdom and Ukraine for the Promotion and Reciprocal Protection of Investments (the "UK-Ukraine BIT") with regards to excessive royalties and production taxes ('Rental Fees') paid by the Company's subsidiary Poltava Petroleum Company ('PPC') plus damages. In February 2017, the tribunal ruled that Ukraine had not violated its treaty obligations in respect of excessive levying of such taxes, but awarded the Company damages of approximately $11.8 million plus interest and costs of $0.3 million in relation to subsidiary claims. In March 2017 the Company received a notice by Ukraine's Ministry of Justice to the High Court of the United Kingdom naming JKX as a defendant in an application seeking to set aside the arbitration award in favour of the Company. The High Court will consider the appeal in October 2017.   

In parallel to the claims made against Ukraine under the UK-Ukraine BIT, the Company has persistently defended its position in Ukrainian courts regarding the Rental Fee charges levied for 2010 and 2015. The Company's Ukrainian subsidiary, PPC, has recognised total provisions of $37.2 million (including interest and penalties, see Note 14). Whilst the tribunal ruling poses additional challenges for the Company, in particular regarding the 2015 claims (totalling $25.9 million), the Company will continue to defend its position in the Ukrainian courts in all outstanding cases.

At the same time, the Company has begun a dialogue with the Government of Ukraine in order to satisfy the terms of the arbitration award and reach a mutually beneficial outcome.

Reservoir performance

The hydrocarbon reservoirs that we operate in Ukraine and Russia generate the cash flow that underpins the Group's growth. These reservoirs may not perform as expected, exposing the Group to lower profits and less cash to fund planned development.

Existing production from our mature fields at the Novomykolaivske Complex in Ukraine requires a high level of maintenance and intervention to minimise natural production decline. In Russia, acidization of producing wells and other well maintenance procedures are required from time to time to maintain stable production levels.

Our investment in development projects or workovers of old wells is subject to uncertainty inherent in exploring and developing hydrocarbon reserves and resources. Accurate reservoir performance forecasts are critical in achieving the desired economic returns and to determine the availability and allocation of funds. In modelling reservoir performance, we rely on multiple sources of data, some of which are decades old (reflecting the time when certain wells were originally drilled) and therefore could be not accurate. If reservoir performance is lower than anticipated, sufficient financing may reflect on planned investment in other development projects which will result in lower production, profits and cash flows.

Commodity prices - Russia and Ukraine

Company policy is not to hedge commodity price exposure on oil, gas, LPG or condensate and therefore any change in prices would have a direct effect on the Group's trading results. We are subject to risk of unfavourable international oil and gas price movements that can be affected by political developments in Russia and Ukraine. In Russia the government sets certain gas tariffs to which the Company's Russian subsidiary, Yuzhgazenergie LLC ('YGE') has pegged its gas sales price. The tariff has increased by 3.9% starting from July 2017. The Company is continuously seeking opportunities to improve its gas realisations.

Ukrainian gas prices have recently been aligned with those across Europe that exhibit significant volatility and seasonality. A prolonged period of low gas prices in Ukraine would impact the Group's liquidity.

Environmental, asset integrity, and safety incidents

As we continue with the development of our oil and gas reserves, we are exposed to a wide range of significant health, safety, security and environmental risks that arise as a result of the geographic spread, operational diversity, regulatory environment and technical complexity of our exploration and production activities.

 

IT threats and cyberattacks, technical failure, non-compliance with existing standards and procedures, accidents, natural disasters and other adverse conditions in our operational locations, could lead to injury, loss of life, damage to the environment, loss of containment of hydrocarbons and other hazardous material, as well as the risk of fires and explosions. Failure to manage these risks effectively could result in loss of certain facilities, with the associated loss of production, or costs associated with mitigation, recovery, compensation and fines, or loss of operating license. The threat of IT and cyberattacks is particularly evident given the recent global and regional attacks which have affected many companies and the Company's IT management is reviewing this risk in particular.

In Russia, YGE maintains a regular dialogue with Rosnedra and Rosprirodnadzor, the licencing authorities, to ensure that they are kept informed about the progress of field development and the associated exploration and reserves determination commitments. Rosnedra and Rosprirodnazor are fully aware that there are certain licence commitments under YGE's Koshekhablskoye licence which have not been met and have issued YGE with notices to this effect. YGE is addressing these issues and expects to resolve them in 2017.

In April 2017 during a planned workover of well 25 in Russia there were delays in the workover due to a fire on the workover rig. The fire was limited to the rig itself and was promptly put out by the rig crew without any injuries.

Health, safety and the environment is a priority of the Board who are involved in the planning and implementation of continuous improvement initiatives. Operations in Ukraine, Russia and Hungary all have a dedicated HSECQ teams, HSE Management Systems modelled on the ISO 9000 series, OHSAS 18001 and ISO 14001. Appropriate insurances by reputable insurers are maintained to manage the financial exposure to any unexpected adverse events that would affect normal operations.

Executive Management Changes

Following the Company's AGM on 30 June 2017, the Chief Executive Officer, Thomas Reed, and Chief Financial Officer, Russell Hoare, were both removed from the Board and commenced working a limited transition period during which Mr Reed acted as an Advisor to the Board and to the Acting CEO and Mr Hoare served as Acting CFO. That transition period has now expired as recently announced. Until a permanent replacement is appointed, Victor Gladun, the General Director of the Company's Ukrainian subsidiary, has been appointed Acting CEO.

During such a transition, where roles and responsibilities are being transferred and changed, many of the risks and uncertainties outlined above become more apparent. The Board is very aware of this increased risk during the transition period and is closely monitoring the relevant control mechanisms within the Company to ensure this period of uncertainty is navigated with minimum disruption to the business.

 

 

Statement of Directors' responsibilities

 

The Directors confirm that, to the best of their knowledge, this condensed consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union, and that the interim management report includes a fair review of the information required by the Disclosure and Transparency Rules 4.2.7R and 4.2.8R, namely:

§ an indication of important events that have occurred in the first six months of 2017 and their impact on the condensed set of financial information, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

§ material related party transactions in the first six months of 2017 and any material changes in related party transactions described in the last Annual Report.

A list of current Directors is maintained on the JKX Oil & Gas plc website www.jkx.co.uk.

On behalf of the Board

 

Paul Ostling
Non Executive Chairman

31 July 2017

 

 

Independent review report to JKX Oil & Gas plc

 

Report on the condensed consolidated interim financial information

Our conclusion

We have reviewed JKX Oil & Gas plc's condensed consolidated interim financial information (the "interim financial statements") in the half-yearly report of JKX Oil & Gas plc for the 6 month period ended 30 June 2017. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

 

Emphasis of matter

Without modifying our conclusion on the interim financial statements, we have considered the adequacy of the disclosure made in note 2 to the interim financial statements concerning the group's ability to continue as a going concern. At 30 June 2017, the Group has recorded a provision of $37.2m in relation to additional Rental Fees which may become immediately due and payable in Ukraine as a result of unfavourable outcomes in one or more of the ongoing court proceedings. This condition, along with the other matters explained in note 2 to the financial statements, indicates the existence of a material uncertainty which may cast significant doubt about the group's ability to continue as a going concern. The interim financial information does not include the adjustments that would result if the group was unable to continue as a going concern.

 

What we have reviewed

The interim financial statements comprise the:

§ Condensed consolidated statement of financial position as at 30 June 2017;

§ Condensed consolidated income statement for the period then ended;

§ Condensed consolidated statement of comprehensive income for the period then ended; 

§ Condensed consolidated statement of cash flows for the period then ended;

§ Condensed consolidated statement of changes in equity (unaudited) for the period then ended; and

§ explanatory notes to the interim financial statements.

The interim financial statements included in the half-yearly report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

 

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The half-yearly report, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the half-yearly report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

 

What a review of interim financial statements involves

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

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

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

 

 

 

 

 

PricewaterhouseCoopers LLP

Chartered Accountants

London

31 July 2017

 

a)     The maintenance and integrity of the JKX Oil & Gas plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.

b)     Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

 

 

 

 GROUP FINANCIAL STATEMENTS

Condensed consolidated income statement

 

	Note	Six months to 30 June 2017  (unaudited) $000	Six months to 30 June 2016 (unaudited) $000	Year to 31 December 2016 (audited) $000
Revenue	4	37,985	35,361	73,848
Cost of sales
Exceptional item -production based taxes	13	(1,824)	-	(24,340)
Exceptional item - provision for impairment of oil and gas assets		-	-	(2,000)
Production based taxes		(8,957)	(8,595)	(17,737)
Depreciation, depletion and amortisation		(10,051)	(10,669)	(18,791)
Other cost of sales		(12,642)	(9,747)	(19,499)
Total cost of sales		(33,474)	(29,011)	(82,367)
Gross profit/(loss)		4,511	6,350	(8,519)
Disposal of property, plant and equipment	5	(578)	-	-
Exceptional items	13	(1,256)	(3,055)	(4,484)
Other administrative expenses		(6,633)	(9,566)	(22,182)
Total administrative expenses		(8,467)	(12,621)	(26,666)
(Loss)/gain on foreign exchange		(1,342)	451	431
Loss from operations before exceptional items		(2,218)	(2,765)	(3,930)
Loss from operations after exceptional items		(5,298)	(5,820)	(34,754)
Finance income		233	898	1,836
Finance cost		(1,535)	(2,376)	(4,636)
Fair value movement on derivative liability	9	(68)	(1,289)	(599)
Loss before tax		(6,668)	(8,587)	(38,153)
Taxation - current		(1,865)	(1,385)	(1,341)
Taxation - deferred
- before the exceptional items		486	(117)	1,209
- on the exceptional items		364	-	1,170
Total taxation		(1,015)	(1,502)	1,038
Loss for the period/year attributable to equity shareholders of the parent company		(7,683)	(10,089)	(37,115)
Basic loss per 10p ordinary share (in cents)
-before exceptional items	15	(2.89)	(4.09)	(4.34)
-after exceptional items		(4.46)	(5.86)	(21.56)
Diluted loss per 10p ordinary share (in cents)
-before exceptional items	15	(2.89)	(4.09)	(4.34)
-after exceptional items		(4.46)	(5.86)	(21.56)

 

 

 

 

GROUP FINANCIAL STATEMENTS

Condensed consolidated
statement of comprehensive income

 

		Six months to 30 June 2017  (unaudited) $000	Six months to 30 June 2016 (unaudited) $000	Year to 31 December 2016 (audited) $000
Loss for the period/year		(7,683)	(10,089)	(37,115)
Other comprehensive income to be reclassified to loss or profit in subsequent periods when specific conditions are met
Currency translation differences		3,502	14,128	19,634
Other comprehensive income for the period/year, net of tax		3,502	14,128	19,634
Total comprehensive (loss)/income for the period/year attributable to equity shareholders of the parent company		(4,181)	4,039	(17,481)

 

 

GROUP FINANCIAL STATEMENTS

Condensed consolidated
statement of financial position

 

	Note	As at 30 June 2017 (unaudited) $000	As at 30 June  2016  (unaudited) $000	As at   31 December 2016  (audited) $000
Assets
Non-current assets
Property, plant and equipment	5	196,037	196,635	194,510
Intangible assets	5	8,319	7,918	7,706
Other receivable	6	3,206	3,471	3,277
Deferred tax assets		18,311	15,876	18,724
		225,873	223,900	224,217
Current assets
Inventories		4,948	5,075	4,585
Trade and other receivables		4,517	6,761	4,174
Restricted cash	7	218	259	201
Cash and cash equivalents	7	4,011	18,365	14,067
		13,694	30,460	23,027
Total assets		239,567	254,360	247,244
Liabilities
Current liabilities
Trade and other payables		(10,652)	(17,288)	(15,687)
Borrowings	8	(5,280)	(23,816)	(16,795)
Provisions	12	(39,071)	(10,481)	(34,510)
Derivatives		-	(1,995)	(1,341)
		(55,003)	(53,580)	(68,333)
Non-current liabilities
Provisions	12	(4,601)	(4,310)	(4,264)
Other payable		(3,206)	(3,471)	(3,277)
Borrowings	8	(11,033)	-	-
Derivatives	9	(68)	-	-
Deferred tax liabilities		(13,067)	(14,671)	(14,537)
		(31,975)	(22,452)	(22,078)
Total liabilities		(86,978)	(76,032)	(90,411)
Net assets		152,589	178,328	156,833
Equity
Share capital	11	26,666	26,666	26,666
Share premium		97,476	97,476	97,476
Other reserves		(156,409)	(165,417)	(159,911)
Retained earnings		184,856	219,603	192,602
Total equity		152,589	178,328	156,833

 

 

 

 

GROUP FINANCIAL STATEMENTS

Condensed consolidated
statement of changes in equity (unaudited)

 

	Attributable to equity shareholders of the parent
				Other reserves
	Share capital $000	Share premium $000	Retained earnings $000	Merger reserve $000	Capital redemption reserve $000	Foreign currency translation reserve $000	Total $000
At 1 January 2016	26,666	97,476	229,669	30,680	587	(210,812)	174,266
Loss for the period	-	-	(10,089)	-	-	-	(10,089)
Exchange differences arising on translation of overseas operations	-	-	-	-	-	14,128	14,128
Total comprehensive (loss)/income attributable to equity shareholders of the parent	-	-	(10,089)	-	-	14,128	4,039
Transactions with equity shareholders of the parent
Share-based payment charge	-	-	23	-	-	-	23
Total transactions with equity shareholders of the parent	-	-	23	-	-	-	23
At 30 June 2016	26,666	97,476	219,603	30,680	587	(196,684)	178,328
At 1 January 2017	26,666	97,476	192,602	30,680	587	(191,178)	156,833
Loss for the period	-	-	(7,683)	-	-	-	(7,683)
Exchange differences arising on translation of overseas operations	-	-	-	-	-	3,502	3,502
Total comprehensive (loss)/income attributable to equity shareholders of the parent	-	-	(7,683)	-	-	3,502	(4,181)
Transactions with equity shareholders of the parent
Share-based payment credit	-	-	(63)	-	-	-	(63)
Total transactions with equity shareholders of the parent	-	-	(63)	-	-	-	(63)
At 30 June 2017	26,666	97,476	184,856	30,680	587	(187,676)	152,589

 

 

 

GROUP FINANCIAL STATEMENTS

Condensed consolidated
statement of cash flows

	Note	Six months to 30 June 2017  (unaudited) $000	Six months to 30 June 2016 (unaudited) $000	Year to 31 December 2016 (audited) $000
Cash flows from operating activities
Cash generated from operations	17	4,027	7,828	17,038
Interest paid		(640)	(1,440)	(2,392)
Income tax paid		(1,864)	(6)	(10)
Net cash generated from operating activities		1,523	6,382	14,636
Cash flows from investing activities
Interest received		233	420	753
Dividend received		80	-	-
Proceeds from sale of property, plant and equipment		266	220	550
Purchase of property, plant and equipment		(10,325)	(2,152)	(7,366)
Purchase of intangible assets		(60)	-	(90)
Net cash used in investing activities		(9,806)	(1,512)	(6,153)
Cash flows from financing activities
Restricted cash		(17)	53	111
Repayment of borrowings		(1,920)	(10,856)	(10,856)
Repurchase of convertible bonds		-	(1,692)	(9,036)
Net cash used in financing activities		(1,937)	(12,495)	(19,781)
Decrease in cash and cash equivalents in the period/year		(10,220)	(7,625)	(11,298)
Effect of exchange rates on cash and cash equivalents		164	47	(578)
Cash and cash equivalents at the beginning of the period/year		14,067	25,943	25,943
Cash and cash equivalents at the end of the period/year	7	4,011	18,365	14,067

 

GROUP FINANCIAL STATEMENTS

Notes to the interim financial information

 

1. General information and accounting policies

JKX Oil & Gas plc (the ultimate parent of the Group hereafter, 'the Company') is a public limited company listed on the London Stock Exchange which is domiciled and incorporated in England and Wales under the UK Companies Act. The registered office is 6 Cavendish Square, London, W1G 0PD and the principal activities of the Group are exploration, appraisal, development and production of oil and gas reserves. The registered number of the Company is 03050645.

The condensed consolidated interim financial information incorporate the results of JKX Oil & Gas plc and its subsidiary undertakings as at 30 June 2017 and was approved by the Directors for issue on 27 July 2017.

This condensed consolidated interim financial information does not constitute accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2016 were approved by the Board of Directors on 17 March 2017 and delivered to the Registrar of Companies. The report of the auditors on those accounts while 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.

This condensed consolidated interim financial information has not been audited, but was the subject of an independent review carried out by the Company's auditors, PricewaterhouseCoopers LLP.

2. Basis of preparation

This condensed consolidated interim financial information for the six months ended 30 June 2017 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2016 which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union. A copy of the annual financial statements is available on the Company's corporate website (www.jkx.co.uk) or from the Company's registered office.

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

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.

The Company's Ukrainian subsidiary, Poltava Petroleum Company ('PPC') has made provision for potential liabilities arising from separate court proceedings regarding the amount of production taxes ('Rental Fees') paid in Ukraine for certain periods since 2010, which total approximately $37.2 million (including interest and penalties, see Note 14 to the interim consolidated financial information). PPC continues to contest these claims through the Ukrainian legal system.

In addition, in 2015 and as detailed in Note 14, the Company and its wholly-owned Ukrainian and Dutch subsidiaries commenced international arbitration proceedings against Ukraine under the Energy Charter Treaty and BIT seeking a repayment of Rental Fees that PPC has paid on production of oil and gas in Ukraine since 2011, in addition to damages to the business.

In February 2017, the international arbitration tribunal ruled that Ukraine was found not to have violated its treaty obligations in respect of the levying of Rental Fees but awarded the Company damages of $11.8 million plus interest, and costs of $0.3 million in relation to subsidiary claims. No adjustment has been made in these financial statements to recognise any possible future benefit to the Company that may result from the tribunal award in the Company's favour, with the tribunal ruling subject to an appeal hearing scheduled for in the High Court later in 2017 and ultimately to enforcement proceedings in Ukrainian courts.

Taking into account the damages awarded to the Company and the Ukrainian court proceedings against PPC in respect of production taxes, there is a net shortfall of $25.1 million owed by the Group to Ukraine. Should PPC lose the claims against it in respect of production taxes due for 2010 and 2015, and the Ukrainian Authorities demand immediate settlement, the Group does not currently have sufficient cash resources to settle the claims and this would affect its ability to meet its obligations to creditors and bondholders.

Accordingly, the Group's going concern assessment is sensitive to the outcome of the production-related tax disputes with the Ukrainian Government. 

The Directors have concluded that it is necessary to draw attention to the potential impact of the Group becoming liable for additional Rental Fees in Ukraine as a result of unfavourable outcomes in one or both of the ongoing court proceedings. It is unclear whether either or both of these claims against PPC will be realised and settlement enforced but they are material uncertainties which may cast significant doubt about the Group's ability to continue as a going concern.

However, 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, as well as the availability of additional courses of action with respect to financing and/or negotiation with Ukraine for the settlement of any successful production tax claim, mean that it is appropriate to continue to adopt the going concern basis of accounting in preparing the interim consolidated financial information. The financial information does not include the adjustments that would result if the Group was unable to continue as a going concern.

3. Accounting policies

The accounting policies adopted are consistent with those used in the annual financial statements for the year ended 31 December 2016 and those expected to be applied in the 31 December 2017 annual financial statements. Taxes on income in the interim period are accrued using the tax rate that would be applicable on expected total annual earnings. There were no new standards, interpretations or amendments to standards issued and effective for the period which materially impacted the Group. Management have commenced an assessment of the impact of IFRS 9 and IFRS 15, which are both mandatory from 1 January 2018 and expect to conclude these impact assessments in the second half of 2017.

4. Segmental analysis

The Group has one single class of business, being the exploration for, appraisal, 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 (2016: 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.

First half 2017	UK $000	Ukraine $000	Russia $000	Rest of World $000	Sub total $000	Eliminations $000	Total $000
External revenue
Revenue by location of asset
- Oil	-	6,748	267	108	7,123	-	7,123
- Gas	-	20,000	7,652	1,035	28,687	-	28,687
- LPG	-	2,159	-	-	2,159	-	2,159
-                        - Management services/other	-	9	7	-	16		16
	-	28,916	7,926	1,143	37,985	-	37,985
Inter segment revenue
- Management services/other	6,247	-	-	-	6,247	(6,247)	-
	6,247	-	-	-	6,247	(6,247)	-
Total revenue	6,247	28,916	7,926	1,143	44,232	(6,247)	37,985
Loss before tax
Loss from operations	(1,440)	(1,737)	(1,963)	(65)	(5,205)	(93)	(5,298)
Finance income					233	-	233
Finance cost					(1,535)	-	(1,535)
Fair value movement on derivative liability					(68)	-	(68)
Loss before tax					(6,575)	(93)	(6,668)
Total assets	1,526	100,309	121,323	16,409	239,567		239,567
Total liabilities	(19,182)	(56,233)	(7,554)	(4,009)	(86,978)		(86,978)

 

First half 2016	UK $000	Ukraine $000	Russia $000	Rest of World $000	Sub total $000	Eliminations $000	Total $000
External revenue
Revenue by location of asset
- Oil	-	5,920	289	-	6,209	-	6,209
- Gas	-	18,424	9,440	-	27,864	-	27,864
- LPG	-	1,288	-	-	1,288	-	1,288
	-	25,632	9,729	-	35,361	-	35,361
Inter segment revenue
- Management services/other	4,094	-	-	-	4,094	(4,094)	-
	4,094	-	-	-	4,094	(4,094)	-
Total revenue	4,094	25,632	9,729	-	39,455	(4,094)	35,361
(Loss)/profit before tax
(Loss)/profit from operations	(5,719)	542	(59)	(556)	(5,792)	(28)	(5,820)
Finance income					898	-	898
Finance cost					(2,376)	-	(2,376)
Fair value movement on derivative liability					(1,289)	-	(1,289)
Loss before tax					(8,559)	(28)	(8,587)
Total assets	8,667	113,555	118,479	13,659	254,360	-	254,360
Total liabilities	(31,459)	(33,290)	(9,695)	(1,588)	(76,032)		(76,032)

5. Property, plant and equipment and other intangible assets

During the period the Group acquired $10.4m additional assets (2016: $2.2m) in Ukraine, Russia and Hungary, with 99% (2016: 100%) in respect of Group's oil and gas producing and development assets and 1% (2016: nil) being spent on intangible assets.

In Russia, a loss on disposal of oil and gas assets of $0.6m was recognised during the period. The items disposed of were deemed obsolete for using for operations as a result of a stock-take completed in November 2016.

At the reporting date a review of the carrying amounts of property, plant and equipment was undertaken to determine whether there was any indication of a trigger that may have led to these assets suffering an impairment loss. Following this review, no impairment triggers were identified in relation to the Group's assets.

6. Other receivable

The non-current receivable consists of VAT recoverable as a result of expenditures incurred in Russia. The receivable is expected to be recovered between two and five years (2016: two and five years).

7. Cash

	1 January 2017 $000	Net movement $000	30 June 2017 $000
Cash	8,874	(5,296)	3,578
Short term deposits	5,193	(4,760)	433
Cash and cash equivalents	14,067	(10,056)	4,011
Restricted cash	201	17	218
Total	14,268	(10,039)	4,229

 

Short term deposits comprise amounts which are held on deposit, but are readily convertible to cash.

Restricted cash

At 30 June 2017 $0.2m (31 December 2016: $0.2m) of the cash held in Hungary at K & H Bank Zrt was restricted as under the Hungarian Mining Act the Group is required to deposit cash to cover compensation for any land damage and the costs of recultivation, including environmental damage of the waste management facilities.

8. Borrowings

	30 June 2017 $000	30 June 2016 $000	31 December 2016 $000
Current
Convertible bonds due 2020 (2016: 2018) 1	5,280	23,816	16,795
Term-loans repayable within one year	5,280	23,816	16,795
Non-current
Convertible bonds due 2020 (2016: 2018)	11,033	-	-
Term-loans repayable after more than one year	11,033	-	-

¹At 30 June 2017 current liabilities included $5.3m that is due to be repaid to bondholders on 19 February 2018 (33% of the total outstanding Bond principal of $16m).

Convertible bonds due 2018 - prior to restructuring

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

Prior to restructuring the Bonds had 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 (prior to restructuring) 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). 

Convertible bonds restructured on 3 January 2017         

On 3 January 2017 a special resolution was approved by Bondholders to change the terms and conditions of the Bonds. The main amendments to the terms and conditions of the Bonds were as follows:

§ the Bondholder's option to require redemption of all of the outstanding Bonds on 19 February 2017 was deleted;

§ the final maturity date of the Bonds was extended to 19 February 2020, with the outstanding principal amount of the Bonds being repaid in three instalments; 33% on 19 February 2018; 33 % on 19 February 2019; and 34% on the 19 February 2020;

§ the coupon rate of the Bonds was increased from 8% to 14%;

§ the covenant which limited new borrowings by the Company has been removed; and

§ the Company are to make two payments to Bondholders in respect of prior accretion amounts, on 19 February 2017 and on 19 February 2018 of 12.0% and 3.0%, respectively, of the principal amount of the Bonds.

§ 19 February 2017 the Company made first payment to Bondholders of $1.9m, 12.0% of the principal amount of the Bonds, in respect of prior accretion amounts and in accordance with the terms and conditions of the Bond.

The revised terms and conditions of the Bond is considered to be a modification and therefore the difference in the amortised cost carrying amount at the modification date is recognised through a change in the effective interest rate at the modification date through to the end of the revised estimated term of the Bond. Interest, after the deduction of issue costs is charged to the income statement using an effective rate of 17.4% (18.0% prior to restructuring).

There is therefore no immediate impact of the restructuring of the Bond on the Consolidated Income Statement in 2017.

The impact of the amendments to the Bond on the Consolidated Statement of Financial Position was to decrease the carrying amount of the total Bond liability of $18.1m (at 31 December 2016, includes the associated derivative) by $0.7m, which will be amortised over the estimated remaining life of the modified Bond.

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.

Convertible bonds repurchased and cancelled

On 19 February 2016, in accordance with the terms and conditions of the Bonds, the Company repurchased 50 Bonds with a total principal amount of $10m. In June, September and October 2016, the Company repurchased and subsequently cancelled a total of 50 Bonds with par value of $10m resulting in $1.1m gain on redemption, which has been included in Finance income for the year ended 31 December 2016 (see Group Annual Return for the year ended 31 December 2016, Note 21). The remaining principal amount of outstanding Bonds at 31 December 2016 was $16.0m. No Bonds have been repurchased during the first half of 2017.

 

 

9. Derivatives

 

	30 June 2017 $000	30 June 2016 $000	31 December 2016 $000
Current derivative financial instruments
Reclassification to/from non-current derivative financial instruments	(1,341)	1,995	1,341
At the end of the period/ year	-	1,995	1,341
Non-current derivative financial instruments
At the beginning of the year	-	2,171	2,171
Reclassification from/to current derivative financial instruments	1,341	(1,995)	(1,341)
Full/partial settlement of derivative liability	(1,341)	(1,465)	(1,429)
Fair value loss movement during the period/year	68	1,289	599
At the end of the period/ year	68	-	-

 

Convertible bonds due 2020 - embedded derivatives

Bondholder Put Option - cancelled 3 January 2017

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

Redemption Date	Maximum number of Bonds to be redeemed
19 February 2017	all outstanding Bonds

 

At 31 December 2016 current liabilities included $16.8m in respect of the put option available to bondholders on 19 February 2017.  On 3 January 2017, this put option was cancelled as part of the Bond restructuring as detailed in Note 8. Bonds with a principal amount of $10.0m were redeemed on 19 February 2016 in addition to an early redemption premium of $0.9m in accordance with the terms and conditions of the bond.

Company Call Option

The Company can redeem the Bonds at any time in full but not in part at their principal amount plus one semi-annual coupon plus any accrued interest. If the Bonds are called prior to 19 February 2018, the redemption price will also include an additional U.S. $6,000 per Bond.

The Company can redeem the Bonds any time in full but not in part at their principal amount plus any accrued interest 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.

 

10. Financial instruments

Fair values of financial assets and financial liabilities - Group

Set out below is a comparison by category of carrying amounts and fair values of the Group's financial instruments.  Fair value is the amount at which a financial instrument could be exchanged in an arm's length transaction. Where available, market values have been used (this excludes short term assets and liabilities).

	Book Value 30 June 2017 $000	Fair Value 30 June 2017 $000	Book Value  31 December 2016 $000	Fair Value  31 December 2016 $'000
Financial assets
Cash and cash equivalent and restricted cash (Note 7)	4,229	4,229	14,268	14,268
Trade receivables - classified as loans and receivables	1,619	1,619	2,107	2,107
Other receivables - classified as loans and receivables	430	430	1,019	1,019
Financial liabilities
Trade payables - carried at amortised cost	4,549	4,549	2,562	2,562
Other payables - carried at amortised cost	1,672	1,672	2,759	2,759
Borrowings - convertible bond due 2020 (2016: 2018) (Note 8) - at amortised cost (current)	5,280	5,280	-	-
Borrowings - convertible bond due 2020 (2016: 2018) (Note 8) - at amortised cost (non-current)	11,033	11,033	16,795	15,955
Derivatives - fair value through profit or loss (Note 9)	68	68	1,341	1,341

 

Financial liabilities measured at amortised cost are carried at $22.5m (31 December 2016: $22.1m). The Group's borrowings at 30 June 2017 relate entirely to the convertible bond due 2020 (31 December 2016: 2018).

Fair value hierarchy

Derivatives

At the period end the Group's derivative financial instrument related to various embedded derivatives within the convertible bonds due 2020 (2016: 2018) (Note 9). The value of the derivative was calculated at inception using the Monte Carlo simulation methodology and subsequently using the Black-Scholes formula, discounted cash flow methodology, and the Company's historic share price and volatility, treasury rates and other estimations. As it was derived from inputs that are not from observable market data it was grouped into level 3 within the fair value measurement hierarchy.

The main assumptions used in valuation of the derivative conversion option as at 30 June 2017 were:

§ underlying share price of: £0.1950 (31 December 2016: £0.3025);

§ £/US$ spot rate of 1.3025 (31 December 2016: £1/$1.2340 );

§ historic volatility of 59.41% (31 December 2016: 53.42%);

§ risk free rate based on the maturity which is 2.64 year US Treasury rate of 1.486%, 1.64 year US Treasury rate of 1.347% and 0.64 year US Treasury rate of 1.238% (continuously compounded). At 31 December 2016 risk free rate was based on 1.14 years US Treasury rate of 0.956%.

A 10% increase/decrease in Company's historic share price volatility would have resulted in an increase in the fair value loss for the year of $0.07m and a decrease in the fair value loss of $0.04m respectively (31 December 2016: increase in the fair value loss for the year of $0.04m, decrease in the fair value loss of $0.02m, respectively), assuming that all other variables remain constant.

Credit risk - Group

The Group has policies in place to ensure that sales of products are made to customers with appropriate credit worthiness. The Group limits credit risk by assessing creditworthiness of potential counterparties before entering into transactions with them and continuing to evaluate their creditworthiness after transactions have been initiated. Where appropriate, the use of prepayment for product sales limits the exposure to credit risk. There is no difference between the carrying amount of trade and other receivables and the maximum credit risk exposure. 

The maximum financial exposure due to credit risk on the Group's financial assets, representing the sum of cash and cash equivalents, trade receivables and other current assets, as at 30 June 2017 was $ 6.3m (31 December 2016: $17.4m).

Capital management - Group

The Directors determine the appropriate capital structure of the Group specifically, how much is raised from shareholders (equity) and how much is borrowed from financial institutions (debt) in order to finance the Group's business strategy. 

The Group's policy as to the level of equity capital and reserves is to ensure that it maintains a strong financial position and low gearing ratio which provides financial flexibility to continue as a going concern and to maximise shareholder value. The capital structure of the Group consists of shareholders' equity together with net debt. The Group's funding requirements are met through a combination of debt, equity and operational cash flow.

Net debt

Net debt comprises: borrowings disclosed in Note 8 and total cash in Note 7, and excludes derivatives. Equity attributable to the shareholders of the Company comprises issued capital, capital reserves and retained earnings, (see Condensed consolidated statement of changes in equity).

The capital structure of the Group is as follows:

	30 June 2017 $000	31 December  2016 $000
Convertible bonds due 2020 (31 December 2016: 2018)  (current and non-current, Note 8)	(16,313)	(16,795)
Total cash (Note 7)	4,229	14,268
Net debt	(12,084)	(2,527)
Total equity	152,589	156,833

 

Following the issue of $40m of convertible bonds in February 2013, the primary capital risk to the Group was the level of indebtedness. The convertible bond included a financial covenant which limited the Group's indebtedness (excluding the bonds themselves) in respect of any new borrowings (in addition to the bond amount) to three times 12-month free cash flow based on the most recently published consolidated financial statements. During the year ended 31 December 2016 the Group has complied with this financial covenant. On 3 January 2017 this indebtedness covenant was cancelled as part of the Bond restructuring as detailed in Note 8.

Liquidity risk - Group

The treasury function is responsible for liquidity, funding and settlement management under policies approved by the Board of Directors. Liquidity needs are monitored using regular forecasting of operational cash flows and financing commitments. The Group maintains a mixture of cash and cash equivalents and committed facilities in order to ensure sufficient funding for business requirements.

Significant restrictions

Temporary capital controls were established by the National Bank of Ukraine ('NBU') on 1 December 2014 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 Hryvnia to purchase Ukrainian Government bonds.

The restrictions were effective until 8 June 2016 but have subsequently been eased by the NBU resolution No. 342 on 9 June 2016. The resolution enabled the repatriation of dividends from JKX's Ukrainian subsidiary for the years 2014 and 2015. NBU issued the Resolution No.33 on 13 April 2017 which enabled the repatriation of dividends for 2016.

Prior to the easing of restrictions, Cash and short-term deposits held in Ukraine were subject to local exchange control regulations which restricted exporting capital from Ukraine. Following the easing of these restrictions, no cash or short term deposits included within this consolidated financial information is restricted.

The following tables set out details of the expected contractual maturity of non-derivative financial liabilities. The tables include both interest and principal cash flows on an undiscounted basis. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curves at the reporting date.

 

The maturity analysis for financial liabilities was as follows:

Group - 30 June 2017	Within 3 months  $000	3 months - 1 year  $000	1-2 years  $000	2-3 years  $000
Maturity of financial liabilities
Trade payables	4,549	-	-	-
Other payables	1,672	-	-	-
Borrowings - Convertible bonds due 2020	1,120	6,880	6,781	6,201

 

Group - 31 December 2016	Within 3  months  $000
Maturity of financial liabilities
Trade payables	2,562
Other payables	2,759
Borrowings - Convertible bonds due 20181	16,795

Prior to restructuring of the Bonds on 3 January 2017. See Note 8

Interest rate risk profile of financial assets and liabilities - Group

Fixed rate interest is charged on the Group's convertible bond (see Note 8). The interest rate profile of the other financial assets and liabilities of the Group as at 30 June is as follows (excluding short-term assets and liabilities, non-interest bearing):

Group - period ended 30 June	2017 Within 1 Year $000	2016 Within 1 Year $000
Floating rate
Short term deposits (Note 7)	433	8,229
Other receivables	430	314
Other payables	1,672	3,300

 

Floating rate financial assets comprise cash deposits placed on money markets at call, seven day and monthly rates.

11. Share capital

Equity share capital, denominated in Sterling, was as follows:

	30 June 2017 Number	30 June 2017 £000	30 June 2017 $000	2016 Number	2016 £000	2016 $000
Allotted, called up and fully paid
Balance at 1 January and 30 June	172,125,916	17,212	26,666	172,125,916	17,212	26,666

 

Of which the following are shares held in treasury:

Treasury shares held at 1 January and 30 June

402,771

40

77

402,771

40

77

 

Treasury shares and Employee Benefit Trust

The Company did not purchase any treasury shares during the period (2016: nil). There were no treasury shares used in the period (2016: nil) to settle share options.

JKX Employee Benefit Trust was established in 2013 and acquired 5,000,000 shares in JKX Oil & Gas plc for the purpose of making awards under the Group's employee share schemes and these shares have been classified in the statement of financial position as treasury shares within equity.

None of these shares were used during the period (2016: nil) to settle share options. At the period end JKX Employee Benefit Trust held 5,000,000 shares in JKX Oil & Gas plc.

There are no shares reserved for issue under options or contracts.

12. Provisions

Current provisions	Remuneration and severance costs provision (3) $000	Onerous lease provision (2) $000	Production based taxes (1) $000	Total $000
At 1 January 2017	-	589	33,921	34,510
Foreign currency translation	-	28	1,453	1,481
Amount provided / (utilised)in the period/year	1,440	(184)	1,824	3,080
At 30 June 2017	1,440	433	37,198	39,071

1.   The provision for production based taxes, which had been recognised as a charge in the 2016 and 2015 Consolidated income statements, is in respect of a claim against PPC for additional Rental Fees for the period January to December 2015 and August to December 2010 respectively.  Both claims are being contested in the Ukrainian courts (see Note 14). The amount is denominated in Ukrainian Hryvnia ('UAH') and is stated above at its US$-equivalent amount using exchange rate at 30 June 2017 of UAH26.10/$ (31 December 2016: UAH 27.19/$). The provision is based on the total value of the claims plus interest and penalties. The Board believes that the claims are without merit under Ukrainian law and the Company will continue to contest it vigorously. No contingent liabilities exist in respect of Ukrainian production taxes (31 December 2016: nil).

2.   The onerous lease provision covers the Group's liability for onerous lease contracts relating to London office. Following reduction in London office staff, two out of the four floors of the occupied building became surplus to requirements. Provision has been determined as the present value of the unavoidable costs relating to rents and rates to the end of the lease terms, net of the expected sub-lease income, discounted at 6%. The remaining life of the leases at 30 June 2017 is 4.5 years (31 December 2016: 5 years).

3.   Provision for severance costs to the Chief Executive Officer and Chief Financial Officer who were both removed from the Board of Directors following the Company's AGM on 30 June 2017.
 

Non-current provisions

	30 June 2017 $000	30 June 2016 $000	31 December 2016 $000
Provision for site restoration	4,601	4,310	4,264

13. Exceptional items

 

During the period exceptional items as detailed below have been included in cost of sales and administrative expenses in the income statement:

	Cost of                 sales (1) $000	Administrative expenses (1) $000
Production based taxes - amount provided in the period	1,824	-
Onerous lease provision - amount utilised in the period	-	(184)
Remuneration and severance costs provision - amount provided in the period	-	1,440
	1,824	1,256

¹ Please see Note 12 for details

Exceptional items -information at 30 June 2016

Exceptional item - remuneration and severance costs

Exceptional charges of $3.1million comprise the following:

§ $2.5 million of severance costs and additional remuneration which the previous Board approved and paid prior to the General Meeting on 28 January 2016; 

§ $0.5 million of professional advisory fees incurred in relation to the General Meeting and the replacement of the Board on 28 January 2016;

§ $0.1 million severance costs incurred as a result of staff reductions at the Group's London headquarters.

14. Taxation

No UK tax liability has arisen during the six months ended 30 June 2017 (2016: $nil) due to the availability of tax losses. The current tax charged in the period relates to Ukrainian corporation tax which has arisen in the Group's subsidiary, Poltava Petroleum Company. Taxes charged on production of hydrocarbons in Ukraine, Russia and Hungary are included in cost of sales.

Factors that may affect future tax charges

A significant proportion of the Group's income will be generated overseas. Profits made overseas will not be able to be offset by costs elsewhere in the Group. This could lead to a higher than expected tax rate for the Group.

Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2015 and Finance Bill 2016. These include reductions to the main rate to reduce the rate to 19% from 1 April 2017 and to 17% from 1 April 2020. The impact of the rate reduction is not expected to have a material impact on UK current taxation.

The corporation tax rate in Ukraine for 2017 is 18% (2016: 18%).

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 existed, including in relation to effective taxes on oil and gas production.

In order to avoid any confusion over the level of taxes due, 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% of sales value for the duration of the Licence Agreement.

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, Subsoil Use Agreements were signed and attached to the licences and operations continued as before.

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

In December 1994, a new fee on the production of oil and gas (known as a 'Rental Payment' or 'Rental Fee') was introduced through Ukrainian regulations. On 30 December 1995, JKX, together with its Ukrainian subsidiaries (including PPC), was issued with a Joint Decision of the Ministry of Economy, the Ministry of Finance and the State Committee for the Oil and Gas ('the Exemption Letter'), which established a zero rent payment rate for oil and natural gas produced in Ukraine by PPC for the duration of the Licence Agreement for Exploration and Exploitation of the Fields.  Based on the Exemption Letter PPC did not expect to pay any Rental Fees.

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, in January 2011 PPC began to pay the Rental Fee in order to avoid further issues with the Ukrainian authorities but without prejudice to its right to challenge the validity of the demands.

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

International arbitration proceedings

In 2015, the Company and its wholly-owned Ukrainian and Dutch subsidiaries 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 sought repayment of more than $180 million in Rental Fees that PPC paid on production of oil and gas in Ukraine since 2011, in addition to damages to the business.

During 2015 Rental Fees in Ukraine were increased to 55% and capital control restrictions were introduced. On 14 January 2015, an Emergency Arbitrator issued an Award ordering Ukraine not to collect Rental Fees from PPC in excess of 28% on gas produced by PPC, pending the outcome of the application to a full tribunal for the Interim Award. On 23 July 2015 an international arbitration tribunal issued an Interim Award requiring the Government of Ukraine to limit the collection of Rental Fees on gas produced by PPC to a rate of 28%.

The Interim Award was to remain in effect until final judgement is rendered on the main arbitration case, which was heard in early July 2016. A decision from the tribunal was awarded on 6 February 2017.

The tribunal ruled that Ukraine was found not to have violated its treaty obligations in respect of the levying of Rental Fees but awarded the Company damages of $11.8 million plus interest, and costs of $0.3 million in relation to subsidiary claims.

In March 2017 the Company received a notice by Ukraine's Ministry of Justice to the High Court of the United Kingdom naming JKX as a defendant in an application seeking to set aside the arbitration award for damages against Ukraine and in favour of JKX. The High Court will consider the appeal in October 2017.   

Rental Fee demands

The Group currently has two claims (2016: two) for additional Rental Fees being contested through the Ukrainian court process. These arise from disputes over the amount of Rental Fees paid by PPC for certain periods since 2010 (2016: 2010), which in total amount to approximately $37.2 million (31 December 2016: $33.9 million) (including interest and penalties), as detailed below.  All amounts are being claimed in Ukrainian Hryvnia ('UAH') and are stated below at their US$-equivalent amounts using the period end rate of $1:UAH26.1 (2016: $1:UAH 27.2). 

§  August - December 2010: approximately $11.3 million (31 December 2016: $10.6 million) (including $6.8m (31 December 2016:  $6.1) million of interest and penalties). On 11 March 2014 PPC won the case in the Poltava Court. The tax office appealed and the Kharkiv Appellate Administrative Court reversed the earlier decision. PPC then lost an appeal in the High Administrative Court of Ukraine and the Supreme Court rejected PPC's application for the appeal.  PPC has discovered that there were in fact certain procedures that were not followed regarding the tax notifications that formed the basis of the original claims against PPC. Certain documentation was found to be missing from the files of the tax authorities. In April 2017 the Poltava Circuit Administrative Court found in favour of PPC and cancelled the tax notification decisions on the grounds that due process had not been followed. On 1 June 2017 the Kharkiv Appellate Administrative Court upheld the judgment of the Poltava Circuit Administrative Court. The tax authorities filed a cassation complaint and the case is currently being transferred from the Kharkiv Appellate Administrative Court to the High Administrative Court of Ukraine (the HACU). If the HACU rejects the claim of the tax authorities, it would render the basis for the 2010 claims invalid.

 

As part of these proceedings, property, plant and equipment that cost UAH158m (31 December 2016: UAH158m (approximately $6.1million (31 December 2016: $5.8 million) at the period end rate of $1:UAH26.1 (31 December 2016: $1: UAH27.2) was required to be pledged as security against the non-settlement of the 2010 Rental Fee claim that may arise in the event that the Ukrainian authorities are successful. The net book value of the property, plant and equipment is $22.0 million based on the historical exchange rates at the dates of acquisition which were between $1:UAH5 and $1:UAH8.

 

§  January - December 2015: approximately $25.9 million (31 December 2016: $23.3 million) (including $11.4 million (31 December 2016: $10.8 million) of interest and penalties). Following the commencement of international arbitration proceedings at the beginning of 2015 (see above), from July 2015 PPC reverted to paying a 28% Rental Fee for gas production (instead of the revised official rate of 55%) as a result of the awards granted under the arbitration. PPC also declared part of its Rental Fee payments at 55% for the first 6 months of 2015 as overpayments and consequently stopped paying the Rental Fee for gas in order to align the total payments made in 2015 with the 28% rate awarded made under the arbitration proceedings. The Ukrainian tax authorities have issued PPC with claims for the difference between 28% and 55%. PPC is in the process of court hearings in respect of the claim, although the Company considers such claims to be in direct violation of the Interim Award received from the arbitration tribunal, noted above. In addition, in April 2016, the tax authorities issued PPC with a separate demand for $0.1 million of penalties and interest on unpaid Rental Fees for the period of August-October 2015. PPC also filed lawsuits against the tax authorities to cancel the application of such additional penalties and interest.

 

Following the tribunal's dismissal of the Company's claim for overpayment of Rental Fees, an exceptional charge of $24.3 million was charged to the Consolidated income statement in 2016 relating to the January - December 2015 claim. Following recognition of further interest and penalties during 6 months of 2017, which are presented as an exceptional charge, the provision recorded at 30 June 2017 is $25.9million. 

No adjustment has been made to recognise any possible future benefit to the Company that may result from the tribunal award in the Company's favour for damages of $11.8 million plus interest, and costs of $0.3 million.

In the prior year there was a claim of approximately $6 million (including $3 million of interest and penalties) relating to the period January - March 2007. In 2016 the Supreme Court of Ukraine ruled in favour of the Company in respect of this claim and a second parallel case related to this claim was won by PPC with the High Administrative Court of Ukraine.

15. Loss per share

The calculation of loss per ordinary share for the six months ended 30 June 2017 is based on the weighted average number of shares in issue during the period of 172,125,916 (2016: 172,125,916; 31 December 2016: 172,125,916) and the loss for the relevant period.

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 periods ended 30 June 2017 and 31 December 2016. 13,266,244 (31 December 2016: 13,925,410) potentially dilutive ordinary shares associated with the convertible bonds (Note 8) have been excluded as they are antidilutive in 2017 however they could be dilutive in future periods.

There were 1,059,650 outstanding share options at 30 June 2017 (31 December 2016: 2,168,450), of which 1,059,650 (31 December 2016: 1,341,750) had a potentially dilutive effect. All of the Group's equity derivatives were anti-dilutive for the period ended 30 June 2017.

The diluted loss per share for the six months ended 30 June 2017 is based on 172,125,916 (30 June 2016: 172,125,916; 31 December 2016: 172,125,916) ordinary shares calculated as follows:

Loss	30 June 2017 $'000	30 June  2016 $'000	31 December 2016 $'000
Loss for the purpose of basic and diluted earnings per share (loss for the period/year attributable to the owners of the parent):
-Before exceptional item	(4,967)	(7,034)	(7,462)
-After exceptional item	(7,683)	(10,089)	(37,115)

 

Number of shares	30 June 2017	30 June 2016	31 December 2016
Basic weighted average number of shares	172,125,916	172,125,916	172,125,916
Weighted average of dilutive potential ordinary shares:
-Share options	-	-	-
-Convertible bonds 2020 (see Note 8)	-	-	-
Weighted average number of shares for diluted earnings per share	172,125,916	172,125,916	172,125,916

16. Dividends

No interim dividend for the six months to 30 June 2017 is being paid or proposed (2016: nil).

17. Reconciliation of loss from operations to net cash generated from operations

	Six months to 30 June 2017 $000	Six months to 30 June 2016 $000	Year to 31 December 2016  $000
Loss from operations	(5,298)	(5,820)	(34,754)
Depreciation, depletion and amortisation	10,520	11,168	19,764
Impairment of property, plant and equipment/intangible assets	-	-	2,000
Exceptional item - increase in production based taxes provision	1,824	-	24,340
Exceptional item - increase in remuneration and severance costs provision	1,440	-	-
Exceptional item - (decrease)/increase in onerous lease provision	(184)	-	594
Foreign exchange loss on exceptional items	1,482	-	-
Loss on disposal of property, plant and equipment	578	24	311
Share-based payment (credit)/charge	(63)	23	48
Cash generated from operations before changes in working capital	10,299	5,395	12,303
Changes in working capital	(6,272)	2,433	4,735
Net cash generated from operations	4,027	7,828	17,038

18. Capital commitments

Under the work programmes for the Group's exploration and development licenses the Group had committed $1.0m to future capital expenditure on drilling rigs and facilities as at 30 June 2017 (30 June 2016: $0.8m; 31 December 2016: $3.3m).

19. Related-party transactions

Key management compensation amounted to $0.9m for the six months ended 30 June 2017 (2016: $4.5m). Administrative expenses also include an exceptional item of $1.4m with regards to severance costs to the Chief Executive Officer and Chief Financial Officer who were both removed from the Board of Directors following the Company's AGM on 30 June 2017. 2016 remuneration and severance costs of $2.5m comprised payments to the previous Board members made on 28 January 2016 (see Note 13) in addition to bonus payments made to the previous Board of $1.4m in respect of the year ended 31 December 2015, also paid in January 2016.

Vladimir Tatarchuk and Vladimir Rusinov were appointed to the Board on 28 January 2016 and were thought to have a beneficial interest in Convertible Bonds with principal amount of $3.4m at 30 June 2017 (31 December 2016: $3.4m), which are held by Proxima. During the first half of 2017, in accordance with the terms and conditions of the restructured Bonds, redemptions of Proxima's bonds of principal amount $0.4 m were made in respect of prior accretion amounts (31 December 2016: $1.4m under the Bondholder Put Option) (see Note 8 and 9) and Bond interest payments of $0.1m (31 December 2016: $0.3m) were made to Proxima in relation to their Bond holding.

Since the Annual General Meeting on 30 June 2017 Vladimir Rusinov has no longer been a member of the Board of Directors.

 

 

 

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                Riverside Energy Kft

Hryvnia           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

Sq. km             Square kilometre

TD                    Total depth

$                       United States Dollars

UAH                 Ukrainian Hryvnia

US                    United States

VAT                  Value Added Tax

YGE                 Yuzhgazenergie LLC

 

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

 

 

Directors and advisors

 

Directors

Paul Ostling
Vladimir Tatarchuk

Alan Bigman

Bernie Sucher

Company Secretary

Nadia Cansun

Registered office

6 Cavendish Square, London
W1G 0PD

Registered in England Number: 3050645

Registrars

Equiniti
Aspect House, Spencer Road
Lancing, West Sussex BN99 6DA

Principal bankers

Bank of Scotland plc
The Mound, Edinburgh EH1 1YZ

Independent auditors

PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
1 Embankment Place, London WC2N 6RH

Stockbrokers

Stockdale Securities Limited

Beaufort House, 15 St. Botolph Street

London, EC3A 7BB

Public relations  

EM Communications

25 Southampton Buildings
London, WC2A 1AL

 

We welcome visits to our website www.jkx.co.uk

 

 

Cautionary statement about
forward looking statements

 

The half yearly financial report contains certain forward looking statements with respect to the financial position, results of operations and business of the Group. Examples of forward looking statements include those regarding oil and gas reserves estimates, anticipated production or construction commencement dates, costs, outputs, demand, trends in commodity prices, growth opportunities and productive lives of assets or similar factors. The words "anticipate", "estimate", "plan", "believe", "expect", "may", "should", "will", "continue", or similar expressions, commonly identify such forward looking statements.

Forward looking statements involve known and unknown risks, uncertainties, assumptions and other factors that are beyond the Group's control. For example, future oil and gas reserves will be based in part on long-term price assumptions that may vary significantly from current levels. These may materially affect the timing and feasibility of particular developments. Other factors include the ability to produce and transport products profitably, demand for products, the effect of foreign currency exchange rates on market prices and operating costs, activities by governmental authorities, such as changes in taxation or regulation, and political uncertainty.

Given these risks, uncertainties and assumptions, actual results could be materially different from any future results expressed or implied by these forward looking statements which speak only as at the date of this report. Except as required by applicable regulations or by law, the Group does not undertake any obligation to publicly update or revise any forward looking statements, whether as a result of new information or future events. The Group cannot guarantee that its forward looking statements will not differ materially from actual results.