ADES.L Regulatory News (ADES)

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ADES International Holding Ltd

1H2018 Results Update

London, 3 September 2018

http://www.rns-pdf.londonstockexchange.com/rns/4957Z_1-2018-9-3.pdf 

ADES International Holding Ltd Results for the six-month period ended 30 June 2018

(London & Dubai, 3 September 2018) ADES International Holding ("ADES" or "the Group"), the London-listed company providing offshore and onshore oil and gas drilling and production services in the Middle East and Africa through its subsidiaries, announced today its results for the six-month period ended 30 June 2018.

1H2018 Headline Figures

Summary Income Statement

1 Adjusted EBITDA is calculated as Operating Profit for the year before depreciation and amortisation, employee benefit provision and other provisions and impairment of assets under construction  

2 Utilisation rate is calculated based on assets under contract

3 1H2017 figures have been restated owing to a change in accounting treatments.

4 Normalised EBITDA excludes a one-off bargain purchase gain on acquisitions of USD 11.7 million recorded in 1H 2018 from the Adjusted EBITDA 

Financial Highlights

· Revenue decreased 9.3% year-on-year to USD 79.7 million in 1H2018. Compared to its previous period, revenue grew by 14.3% from USD 69.7 million in 2H2017.

· Gross profit decreased 7.4% year-on-year to USD 39.2 million in 1H2018 from USD 42.3 million in 1H2017.

· Adjusted EBITDA increased by 4.5% year-on-year to USD 49.5 million in 1H2018 from USD 47.4 million in 1H2017. This includes a one-off bargain purchase gain of USD 11.7 million related to acquisitions concluded in 1H2018. Factoring out this one-off gain, Normalised EBITDA recorded a 20.3% year-on-year decrease to USD 37.8 million in 1H2018. Meanwhile, normalised EBITDA saw a 13.4% increase in the first six months of 2018 when compared to 2H2017.

· Net profit grew by 10.5% year-on-year to USD 21.4 million in 1H2018 from USD 19.3 million in 1H2017 supported by the bargain purchase gain and despite a one-off USD 4.2 million finance charge recognised in 1H2018 related to transaction cost of previous syndication facilities.

· Earnings per share was down 9.1% year-on-year due to an increase in total number of shares related to ADES' two capital increases following the IPO and the Nabors rigs acquisition.

· Cash balances including cash equivalents stood at USD 119.2 million at 30 June 2018, supported by funds raised at the IPO and continued operations.

· Net debt stood at USD 174.3 million as at 30 June 2018, following the USD 450 million syndication secured in March 2018 and the USD 140 million secured in May 2018.

Operational Highlights

· Exemplary safety record achieving over 2.3 million man hours with a Recordable Injury Frequency Rate ("RIFR") (per 200,000 working hours) of 0.62, below the IADC worldwide standard rate of 0.65 as of 30 June 2018 on the back of a combined c.34,000 hours of training delivered across its three markets for the first half the year.

· 1H2018 utilisation rate of 80%, which takes into account the implemented recertification and upgrading projects on Admarine III in Egypt and Admarine 262 & 655 in the KSA. Had recertification and upgrade works not taken place, ADES' utilisation rate would have reached 90% in 1H2018, in-line with company's six-year average utilisation rate that is above the current average Middle East Jack-up utilisation rate of 65%5. The Group's utilisation rate nonetheless saw a slight rise in the first six months of 2018 compared to 70% recorded in 2H2017.

· Contract renewals for Admarine VI with General Petroleum Company (GPC) for a two-year period with the option to extend the contract for a further two years, marking the third consecutive renewal for Admarine VI.

· Contract extensions for Admarine II and Admarine IV with the Gulf of Suez Petroleum Company (GUPCO) for a further nine and six months, respectively.

· Finalised the acquisition of three operational offshore jack-up rigs located in the KSA from Nabors Industry Ltd ("Nabors") in June 2018, bringing the number of the Group's offshore rigs under contract to 14.

· Total Backlog stood at USD 491.8 million as at 30 June 2018 on the back of new acquisitions, contract renewals and contract extensions.

 5 Source: Clarksons Research - Offshore Drilling Rig Monthly (May, 2018)

Current Trading and Outlook

· The Group signed a definitive agreement with Weatherford International plc ("Weatherford") for the acquisition of 31 onshore drilling rigs in July 2018, which is expected to conclude before year-end.

· Total backlog is expected to reach USD 1.35 billion by year-end, with the Weatherford acquisition expected to generate c. USD 750 million and renewals expected to contribute an addition c. USD 200 million, during the upcoming 6 months.

· The two acquisitions are expected to generate a combined annual revenue of USD 210 million, which would exceed total annual revenues in FY17 alone, while the above renewals are expected to add a further USD 40 million once executed.

· Post completion of the Weatherford acquisition, ADES expects Net Debt to be less than 2.5x annualized EBITDA.

· Continued tendering activities in existing markets, including KSA and Algeria, as well as in newly penetrated markets such as Southern Iraq. ADES will also continue leveraging its increased tendering capacity resulting from strategic agreements with leading shipyards, its agreement signed with Vantage drilling to provide deep-water drilling assets and from the Weatherford deal, expected to close before year-end, with 11 of the 31 acquired rigs currently uncontracted.

· During 2H2018 ADES expects to record solid revenue growth driven by the Nabors acquisitions, which have already started generating revenue and with their impact to be weighted towards 2H2018 earnings, as well as an increase in utilisation of existing fleet rigs including Admarine III, Admarine 262 and Admarine 655.

· Favorable market conditions underpinned by strong global market dynamics will drive oil demand growth, with oil prices forecasted to remain above USD 70 per barrel in the coming years6. This is expected to drive up utilisation and day-rates, with the MENA region expected to capture a significant share of global growth, favouring markets in which ADES operates.

 6 JP Morgan equity research note - July 2018

Commenting on the half-year performance, Dr. Mohamed Farouk, Chief Executive Officer of ADES International said:

"Our performance during the first half of the year reflects ADES' increasing efficiency and ability to extract higher value from its operations. Despite the temporary pullback on our top-line due to upgrades and recertification works on a number of rigs, the Group's gross profit margin expanded one percentage point to 49.2% in 1H2018 as opposed to 1H2017, while ADES' bottom-line grew 10.5% year-on-year to USD 21.4 million. Yet it is important to note that our revenues and EBITDA increased by 14% and 13%, respectively in the first six months of 2018 compared to 2H2017.

At the time of listing in May 2017, our intended use of proceeds was to fully capitalise on our proven, low-cost structure and differentiated operating model, and to rapidly scale-up operations in a soft oil market. Our goal was simple: to deliver risk-adjusted returns to our shareholders and safeguard long-term business continuity. I am pleased to report that following a transformational period in ADES' development we have delivered on every front. Over the course of the previous 18 months and following our successful IPO, we secured two debt facilities totalling USD 590 million, finalised the acquisition of three ultra-shallow offshore drilling jack-up rigs from subsidiaries of Nabors, and significantly expanded our onshore capabilities by signing a definitive agreement with Weatherford for the acquisition of 31 onshore drilling rigs - which once finalised will see our total backlog reach USD 1.35 billion. In parallel, we continued to pursue organic growth opportunities through the renewal of existing contracts, new contract awards and increased tendering activity. We are pleased that we are delivering on this strategy in all respects, which together with our pursuit of smart acquisitions deliver a robust value-accretive business model and investment proposition.

Following a period of aggressive growth, our Group today is well-equipped in terms of assets, manpower, and regional footprint to fully capitalise on the market's uptrend. We are also cognisant that the sudden growth in business and expansion in operational capacity needs to be managed in a sustainable manner. To this end, management will implement a comprehensive strategy aimed at the successful integration of our newly acquired assets and personnel into the enlarged ADES Group, ensuring we stay true to our promise of delivering top-quality services in accordance with the highest safety standards."

Conference Call

ADES' management team will present the 1H2018 Results and will be available for a Q&A session with analysts and investors today at 14:00 BST. For conference call details, please email ades@instinctif.com.

ADES International Holding

Hussein Badawy

Investor Relations Officer

ir@adesgroup.com

+2 (0)2527 7111

Instinctif

About ADES International Holding (ADES)

ADES International Holding extends oil and gas drilling and production services through its subsidiaries and is a leading service provider in the Middle East and Africa, offering onshore contract drilling as well as workover and production services. Its over 1,400 employees serve clients including major national oil companies ("NOCs") such as Saudi Aramco and Sonatrach as well as joint ventures of NOCs with global majors including BP and Eni. While maintaining a superior health, safety and environmental record, the Group currently has a fleet of thirteen jack-up offshore drilling rigs, three onshore drilling rigs, a jack-up barge, and a mobile offshore production unit ("MOPU"), which includes a floating storage and offloading unit. For more information, visit investors.adihgroup.com.

Shareholder Information

LSE: ADES INT.HDG

Bloomberg: ADES:LN

Listed: May 2017

Shares Outstanding: 42.2 million

Forward-Looking Statements

This communication contains certain forward-looking statements. A forward-looking statement is any statement that does not relate to historical facts and events, and can be identified by the use of such words and phrases as "according to estimates", "aims", "anticipates", "assumes", "believes", "could", "estimates", "expects", "forecasts", "intends", "is of the opinion", "may", "plans", "potential", "predicts", "projects", "should", "to the knowledge of", "will", "would" or, in each case their negatives or other similar expressions, which are intended to identify a statement as forward-looking. This applies, in particular, to statements containing information on future financial results, plans, or expectations regarding business and management, future growth or profitability and general economic and regulatory conditions and other matters affecting the Group.

Forward-looking statements reflect the current views of the Group's management ("Management") on future events, which are based on the assumptions of the Management and involve known and unknown risks, uncertainties and other factors that may cause the Group's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. The occurrence or non-occurrence of an assumption could cause the Group's actual financial condition and results of operations to differ materially from, or fail to meet expectations expressed or implied by, such forward-looking statements.

The Group's business is subject to a number of risks and uncertainties that could also cause a forward-looking statement, estimate or prediction to differ materially from those expressed or implied by the forward-looking statements contained in this prospectus. The information, opinions and forward-looking statements contained in this communication speak only as at its date and are subject to change without notice. The Group does not undertake any obligation to review, update, confirm or to release publicly any revisions to any forward-looking statements to reflect events that occur or circumstances that arise in relation to the content of this communication.

Chief Executive Officer's Report

Our performance during the first half of the year reflects ADES' increasing efficiency and ability to extract higher value from its operations. Despite the temporary pullback on our top-line due to upgrades and recertification works on a number of rigs, the Group's gross profit margin expanded one percentage point to 49.2% in 1H2018 compared to the same period last year. Meanwhile, ADES' bottom-line grew 10.5% year-on-year to USD 21.4 million, with an associated margin expansion of five percentage points to 26.8% for the six-month period. It is important to note that our revenues and EBITDA increased by 14% and 13% respectively in the first six months of 2018 compared to 2H2017. This performance is the result of a carefully implemented strategy informed by market insights, which have guided ADES since our decision to go to market with our IPO in May 2017.

We are confident that this momentum will carry forward into the second half of this year as the recent Nabors acquisition and the commencement of new projects across several of our existing rigs begin to generate additional revenue for the Group.

At the time of listing, our intended use of proceeds was to fully capitalise on our proven, low-cost structure and differentiated operating model, and to rapidly scale-up operations in a soft oil market. Our proposition covered both organic and inorganic growth avenues and entailed securing additional debt liquidity to maximise our return on equity; increase our purchasing power to execute accretive acquisitions; and accelerate our growth plans with the aim of growing our backlog to the USD 1 billion mark. Our goal was simple: to deliver risk-adjusted returns to our shareholders and safeguard long-term business continuity. I am pleased to report that following a transformational period in ADES' development over the course of the previous 18 months, we have delivered on every front.

Our decision to tap equity markets alongside securing two debt facilities in March and May 2018 totalling USD 590 million - of which USD 240 million was utilised in refinancing existing debt and funding working capital needs - allowed us to negotiate and swiftly close value-accretive acquisitions at the opportune moment in a favourable oil price environment.

In June 2018, we finalised the acquisition of three ultra-shallow offshore drilling jack-up rigs from subsidiaries of Nabors, cementing ADES' position amongst industry leaders in the region. The newly acquired rigs, which are currently contracted by Aramco, supplemented ADES' backlog by an additional USD 140 million and are expected to generate USD 60 million in additional annual revenue.

Again in July 2018 we significantly expanded our onshore capabilities by signing a definitive agreement with Weatherford for the acquisition of 31 onshore drilling rigs. This landmark transaction is a turning point in ADES' growth story and one that springboards us from a leading oil and gas services provider to a top-tier regional player. Our expansion in the onshore space will allow us to capitalise on existing pre-qualifications in privileged markets with high barriers to entry and limited number of bidders. The transaction will significantly strengthen our presence in Algeria and Saudi Arabia and further expand our footprint across MENA with 12 of the acquired rigs located in Kuwait and two in Southern Iraq. Meanwhile, our enlarged fleet in Algeria and KSA will see us increasingly benefit from economies of scale with an improvement in operating leverage and a positive impact on the Group's margins.

When finalised, the acquisition is expected to add USD 750 million to ADES' backlog and will complement an additional USD 200 million expected from renewals, bringing our total backlog to USD 1.35 billion, triple its existing level and exceeding our 2018 target. The Weatherford acquisition will generate annual additional revenues of USD 150 million, while contract renewals are set to add a further USD 40 million.

In light of our ongoing fleet expansion, we have earmarked from existing liquidity capital outlays of USD 84 million over the next two years which includes USD 40 million in refurbishment and modernisation CAPEX associated with the Group's upcoming acquisition of 31 rigs from Weatherford. The estimated outlays also account for annual maintenance CAPEX for our operating assets of USD 1 million per offshore rig and USD 400,000 per onshore rig. This is in-line with ADES' historical average and its strategy to continuously invest in the up-keep of its fleet, with all our rigs being ABS-certified as of date.

Our ability to deliver on our growth plans was also buoyed by a strong performance at our existing operations. In parallel to pursuing smart acquisition opportunities, ADES' growth strategy is also driven by the continuous renewal of existing contracts, whilst simultaneously securing new awards through increased participation in tendering activity to increase our market share. To that end, we kicked off 2018 with the successful extension of three major contracts in the Gulf of Suez area, including the extension of existing contracts for Admarine II and Admarine IV with The Gulf of Suez Petroleum Company (GUPCO). The extensions mark the fifth consecutive contract renewal for both rigs. ADES also renewed its existing contract for Admarine VI with the General Petroleum Company (GPC), securing a multi-million dollar revenue stream for ADES for the next two years with the option of a further extension for an additional two years. ADES' continued ability to extend and renew existing contracts with high-profile clients in Egypt not only strengthens our market-leading position in the country, but is also testament to the quality of our services and exemplary safety record.

Over the last six months, the Group has also successfully carried out a variety of initiatives which will further strengthen our future tendering capacity. We secured a number of exclusive marketing agreements which enable the Group to obtain new contracts in harsher environments, further diversifying our revenue streams without incurring the additional capital expenditure associated with high-spec rigs. Additionally, 11 of the 31 rigs acquired from Weatherford are currently uncontracted, providing us with increased future tendering capacity and growth potential.

Outlook

Following a period of aggressive growth, our Group today is well-equipped in terms of assets, manpower, and regional footprint to fully capitalise on the market's uptrend. We have acquired the necessary capacity at attractive valuations and cemented our leading position as a top-tier player just as the market begins to harden with rising oil prices and an upward trajectory for day rates and tendering activity.

Management is also cognisant that the sudden growth in business and expansion in operational capacity needs to be managed in a sustainable manner. To this end, management will implement a comprehensive strategy aimed at the successful integration of our newly acquired assets and personnel into the enlarged ADES Group, ensuring we stay true to our promise of delivering top-quality services in accordance with the highest safety standards. Designed in collaboration with top-tier global consultants, our integration strategy encompasses three phases, including 1) a research and design phase to identify areas for development, set target goals and outline integration risks and mitigates; 2) a mobilisation phase to establish transformation offices and define KPIs to track performance; and 3) an implementation phase to launch our transformation initiatives, monitor and track new systems and adjust or redesign policies as needed. ADES is also working with HSE consultants to review the Group's safety procedures as we seek to maintain our exemplary safety record.

Additionally, as part of our commitment to safeguarding the interest of all our stakeholders, including our valued shareholders, employees and communities where we operate, we retained the services of a top-tier consultant to strengthen our corporate governance framework and ensure that ADES adheres to the highest standards of responsible conduct in all areas of the business. We believe this is a natural and essential next step to nurture investor confidence, add transparency and maintain the Group's integrity during this new phase of exponential growth. We are confident that ADES will continue to exceed its 2018 targets in the coming months and further strengthen its position as a regional leader in the oil and gas services industry.

Dr. Mohamed Farouk, Chief Executive Officer

Operational & Financial Review

Revenue

Consolidated revenues decreased 9.3% year-on-year to USD 79.7 million in 1H2018, weighed down by lower utilisation of the Group's employed rigs from 87% to 80%. Lower utilisation resulted from the recertification and upgrading projects performed on Admarine 262 in KSA and Admarine III in Egypt, as well as contract expiry of ADES II rig in Algeria, which is currently in re-tendering process. Additionally, the decrease also reflects discounts on daily rates announced and provided to clients during 2017. Despite this, revenues saw a 14% increase during the period compared to the previous six months as rig utilisation rates increased to 80% year-to-date from 70% recorded during 2H2017 and 78% recorded during the full year. The Group expects the positive momentum to carry on into 2H2018 driven by additional revenue generated by the three recently purchased rigs from Nabors and the start of new projects across several of ADES' existing rigs.

Revenue by Country

Egypt contributed 56% of total revenue at USD 44.3 million in 1H2018, up from 53% in 1H2017, as Admarine VIII and 88 began operations and drove the slight increase in the country's contribution to the Group's top-line. However, the Group's revenue in Egypt decreased by 5% year-on-year in 1H2018 due to upgrade projects performed on Admarine III, along with previously announced daily rate discounts.

In Algeria, where the Group currently has two onshore rigs, revenue decreased by 54% year-on-year to USD 5.7 million in 1H2018, with the region's contribution to top-line decreasing by 7 percentage points to 7% during the period. The decrease followed the expiration of the ADES II contract, with the rig currently in the re-tendering process. It is worth noting that the Group's acquisition of Weatherford's rigs in Algeria supports the already strong position of ADES II in the tendering process owing to its competitive cost structure.

In KSA, operations contributed 37% to the Group's top-line driven by a 3% year-on-year increase in revenue to USD 29.6 million. The Group recorded revenue contributions from 19 days of operations from the recently acquired Nabors rigs. The full impact of the Nabors acquisition is expected to be weighted towards 2H2018 earnings as the rigs began operations on 12 June 2018. Overall, KSA operations witnessed a marginal decrease in utilisation rates on the back of upgrade projects performed on Admarine 262 and 655 rigs.

Revenue by Segment

Drilling & Workover (81% of revenues in 1H2018)

Maintaining our focus on providing services to customers in the development and production phases, particularly well maintenance and workover services, has allowed the Group to benefit from long-term contracts that are largely sustainable in a sub-sector that is less susceptible to oil price fluctuations. Drilling & Workover, which includes onshore and offshore drilling as well as workover services, is the Group's main source of revenue, contributing 81% to total revenue in 1H2018.

MOPU (16% of revenues in 1H2018)

MOPU services, which contributed 16% to total revenue during 1H2018, were first introduced by ADES in February 2016 with Admarine I, a converted modified jack-up rig equipped with production and process facilities and an FSO, which is used as a storage unit. Admarine I, located in Egypt, is currently under contract with Petrozenima to process, store and offload crude oil.

Jack-Up Barge & Projects (1% of revenues in 1H2018)

As part of its offshore offerings, ADES owns an offshore jack-up barge, Admarine II, which is currently leased to GUPCO in the Gulf of Suez area in Egypt. Projects revenue is primarily generated from contracting fees charged to clients for outsourcing various operating projects, such as maintenance, construction and repair services, to third party personnel. Revenue from the Group's jack-up barge and projects contributed 1% to total revenue in 1H2018.

Others (2% of revenues in 1H2018)

Other revenue, which includes catering revenue and the rental of essential operating equipment that the client has not supplied, recorded USD 1.3 million in 1H2018, representing 2% of total revenues.

Gross Profit

Gross profit for 1H2018 booked USD 39.2 million, down 7.4% year-on-year from USD 42.3 million in 1H2017. This is, however, slower than the 9.3% decrease in revenues for the same period. This led to a slight increase in gross profit margin to 49.2%, up from the 48.2% recorded in the first half of 2017.

Operating Profit

ADES' operating profit for the first half of the year was USD 36.3 million, up by 11.0% year-on-year from USD 32.7 million recorded in 1H2017. The increase came as ADES booked a one-off bargain purchase gain from its Nabors acquisition of USD 11.7 million, representing the difference between the fair value of USD 96.1 million and acquisition price of USD 84.4 million.

The Group's EBITDA similarly benefited from the one-off bargain purchase gain and recorded USD 49.5 million in 1H2018, up 4.5% year-on-year. Normalised EBITDA, which excludes the one-off gain, recorded a 20.3% year-on-year decrease to USD 37.8 million, while Normalised EBITDA margin stood at 47.4% in 1H2018 versus 53.9% in the same period last year. The decline in Normalised EBITDA was due to the decrease in the Group top-line by 9.3% during the first half of the year, combined with a slight increase in the administrative expenses as a percentage of total revenue. Despite this, normalized EBITDA saw a 13% increase in the first six months of 2018 compared to the second half of 2017. It is worth noting that the Group expects an improvement in margins going forward as it benefits from economies of scale of its enlarged operating fleet in KSA and Algeria, with fixed G&A costs set to drive improvement in operating leverage.

Net Finance Charges

ADES' finance cost amounted to USD 14.4 million in 1H2018, representing a 76.6% year-on-year increase from USD 8.2 million in 1H2017. The increase was largely driven by a USD 4.2 million charge recognised in 1H2018 related to the unamortised portion of the transaction cost relevant to the previous syndication facilities. Higher finance costs were also driven by increased debt utilisation, with the Group withdrawing USD 241.5 million of its recently secured USD 450.0 million syndicated facility. Amounts withdrawn were directed at refinancing previous long- and short-term working capital facilities.

In addition, the Group recorded a finance income of USD 2.0 million in 1H2018, mainly related to a net-of-tax return from investing in Egyptian Treasury Bills; this partially offsets the increase in finance cost, bringing net charges to USD 12.4 million in 1H2018. The Group expects net finance costs to increase going forward as it further utilises its debt facilities to fund acquisitions.

Net Profit

Net profit reached USD 21.4 million in 1H2018, up 10.5% year-on-year and with a 4.8 percentage-point expansion in net profit margin to 26.8%. Improved bottom-line profitability was driven by the recorded bargain purchase gain from Nabors acquisition and comes despite the one-off finance charge related to previous syndication facilities.

Balance Sheet

Assets

Total assets stood at USD 696.7 million as at 30 June 2018, representing a 19.0% increase from the USD 587.9 million recorded at 31 December 2017. Net fixed assets grew by USD 107.0 million during the six-month period, closing at USD 429.4 million in 1H2018 compared to USD 322.4 million as at year-end 2017. This increase was driven by capital expenditures related to upgrade works performed on ADES' rigs, as well as the acquisition of the three Nabors rigs for USD 83 million.

Accounts receivable increased to USD 82.2 million as at 30 June 2018, up from USD 66.0 million as at 31 December 2017. The increase was driven primarily by one of ADES' clients that is going through a capital restructure phase, completion of which will see the client reduce their outstanding balance.

Liabilities

Total liabilities stood at USD 335.1 million as at 30 June 2018, representing a 24.2% increase from USD 269.9 million recorded as at 31 December 2017. Interest-bearing loans and borrowings increased by USD 134.1 million to close the six-month period at USD 289.2 million compared to USD 155.2 million at 31 December 2017.

ADES withdrew USD 241.5 million from the USD 450 million syndicated facility to refinance existing long- and short-term debt. Meanwhile, a further USD 70 million were withdrawn from the USD 140 million syndicated facility to finance the acquisition of three operational offshore jack-up rigs from Nabors. The acquisition was finalised in June 2018.

Net Debt increased from USD 75.5 million as at 31 December 2017 to USD 174.3 million as at 30 June 2018, mainly driven by the partial use of the recently secured syndicated facilities.

Principal Risks and Uncertainties

As in any corporation, ADES is exposed to risks and uncertainties that may adversely affect its performance. The Board and senior management agree that the principal risks and uncertainties facing the Group include political and economic situation in Egypt, Algeria, KSA and the rest of the Middle East, foreign currency supply and associated risks, changes in regulation and regulatory actions, environmental and occupational hazards, failure to maintain the Group's high quality standards and accreditations, failure to retain or renew contracts with clients, failure to recruit and retain skilled personnel and senior management, pricing pressures and decreased business activity in the oil and gas industry, among others.

Going Concern

The Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, the Directors continue to adopt the going concern basis in preparing the condensed financial statements. The Group's Financial Statements for the half year ended 30 June 2018 are available on the Group's website at investors.adihgroup.com

Statement of Directors' Responsibilities

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

· The preliminary financial information, which has been prepared in accordance with International Financial Reporting Standards ("IFRS"), give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and

· The preliminary announcement includes a fair summary of the development and performance of the business and the position of the Group.

After making enquiries, the Directors considered it appropriate to adopt the going concern basis in preparing the consolidated financial statements.

A list of current directors of the Company is maintained on the Group's website at investors.adihgroup.com.

On behalf of the Board

Dr. Mohamed Farouk

Chief Executive Officer

Terms and Definitions

Adjusted EBITDA - Operating profit for the year before depreciation and amortisation, employee benefit provision and other provisions and impairment of assets under construction

Backlog - The total amount payable to the Company, based on firm commitments represented by signed drilling and services contracts, during the remaining term of an existing contract plus any optional client extension provided for in such contract, assuming the contracted rig will operate (and thus receive an operating day rate) for all calendar days both in the remaining term and in the optional extension period

KSA -The Kingdom of Saudi Arabia

MENA - The Middle East and North Africa

Normalised Net Profit - Net Profit for the year before the one-time IPO expense of USD 5.1 million during FY2017

Recordable Injury Frequency Rate (RIFR) - The number of fatalities, lost time injuries, cases or substitute work and other injuries requiring medical treatment by a medical professional per 200,000 working hours

Utilisation Rate - The Company's calculation of its utilisation rate refers to its measure of the extent to which its assets under contract and available in the operational area are generating revenue under client contracts. The Company calculates its utilisation rate for each rig by dividing Utilisation Days by Potential Utilisation days under a contract.

Net Debt - Total interest-bearing loans and borrowings minus cash and cash equivalents.

ADES International Holding Ltd.

and its Subsidiary

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

30 JUNE 2018

REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TO THE SHAREHOLDERS OF ADES INTERNATIONAL HOLDING LTD. AND ITS SUBSIDIARY

Introduction

We have reviewed the accompanying interim condensed consolidated statement of financial position of ADES International Holding Ltd. (the "Company") and its subsidiary (the "Group") as of 30 June 2018 and the related interim condensed consolidated statements of comprehensive income, changes in equity and cash flows for the six-months period then ended, and explanatory notes. Management is responsible for the preparation and presentation of these interim condensed consolidated financial statements in accordance with International Accounting Standard 34 Interim Financial Reporting ("IAS 34"). Our responsibility is to express a conclusion on these interim condensed consolidated financial statements based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, 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 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.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34.

For Ernst & Young

Anthony O'Sullivan

Partner

Registration No: 687

2 September 2018

Dubai, United Arab Emirates

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months period ended 30 June 2018 (Unaudited)

The attached notes 1 to 21 form part of these interim condensed consolidated financial statements.

*Certain amounts shown here do not correspond to the interim condensed consolidated financial statements for the period ended 30 June 2017 and reflect adjustments made, refer to Note 2.5.

INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2018

The attached notes 1 to 21 form part of these interim condensed consolidated financial statements.

These interim condensed consolidated financial statements were approved and authorised for issue on 2 September 2018 by the Board of Directors and signed on their behalf by:

_______________________ _______________________

Dr. Mohamed Farouk. Mr. Ahmed El Khatib

Chief Executive Officer Chief Financial Officer

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months period ended 30 June 2018 (Unaudited)

The attached notes 1 to 21 form part of these interim condensed consolidated financial statements.

INTERIM CONDENSED CONSOLIDATED STATEMENT CASH FLOWS

For the six months period ended 30 June 2018 (Unaudited)

The attached notes 1 to 21 form part of these interim condensed consolidated financial statements

*During the period, the Group obtained loans and borrowings in the amount of USD 204.4 million through non-cash direct settlement of loans outstanding as at 31 December 2017 by banks.

**During the period, the Group issued shares to acquire certain assets for the amount of USD22.1 million (Note 4).

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As at 30 June 2018 (Unaudited)

1 BACKGROUND

ADES International Holding Ltd (the "Company") was incorporated and registered in the Dubai International Financial Centre (DIFC) on 22 May 2016 with registered number 2175 under the Companies Law - DIFC Law No. 2 of 2009 (and any regulations thereunder) as a private company limited by shares. The Company's registered office is at level 5, Index tower, Dubai International Financial Centre, P.O. Box 507118, Dubai, United Arab Emirates. The principal business activity of the Company is to act as a holding company and managing office. The Company and its subsidiary (see below) constitute the Group (the "Group"). The Company is owned by ADES Investments Holding Ltd., a company incorporated on 22 May 2016 under the Companies Law, DIFC Law no. 2 of 2009.

The Company owns Advanced Energy System (ADES) (S.A.E.) (the "Subsidiary") that was established as an Egyptian joint stock company in Egypt and whose shares are not publicly traded.

The Group is a leading oil and gas drilling and production services provider in the Middle East and Africa. The Group services primarily include offshore and onshore contract drilling and production services. The Group currently operates in the United Arab Emirates, Egypt, Algeria and the Kingdom of Saudi Arabia. The Group's offshore services include drilling and work over services and Mobile Offshore Production Unit (MOPU) production services, as well as accommodation, catering and other barge-based support services. The Group's onshore services primarily encompass drilling and work over services. The Group also provides projects services (outsourcing various operating projects for clients, such as maintenance and repair services).

In 2016, pursuant to a reorganisation plan (the "Reorganisation") the ultimate shareholders of the Subsidiary:

(i) Established the Company as a new holding company with share capital of USD 1,000,000 and made an additional capital contribution of USD 30,900,000 for additional shares that were allotted on 23 March 2017.

(ii) Transferred their shareholdings in Advanced Energy System (ADES) (S.A.E.) to the Company for a total consideration of USD 38,520,807 comprising of cash of USD 29,710,961 and the assumption of shareholder obligation of USD 8,809,846.

On 9 May 2017, the Company made an offer of 14,756,258 offer shares of par value USD 1.00 each at an offer price of USD 16.50 per ordinary share and admission to the standard listing segment of the official list and to trading on the London Stock Exchange through an Initial Public Offering ("IPO"). The Company was accordingly listed on the London Stock Exchange and its shares were traded with effect from 12 May 2017.

2 SIGNIFICANT ACCOUNTING POLICIES

2.1 BASIS OF PREPARATION

The interim condensed consolidated financial statements of the Group for the six months period ended 30 June 2018 have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting.

These interim condensed consolidated financial statements have been prepared on the historical cost basis. The consolidated financial statements are presented in United States Dollars ("USD"), which is the Company's functional and presentation currency.

The interim condensed consolidated financial statements do not contain all information and disclosures required for full financial statements prepared in accordance with International Financial Reporting Standards and should be read with the Group's annual financial statements as at 31 December 2017. The results for the period ended 30 June 2018 are not necessarily indicative of the results that may be expected for the financial year ending 31 December 2018.

2.2 BASIS OF CONSOLIDATION

Subsidiaries

The consolidated financial statements comprise the financial statements of the Company and its subsidiary as at 30 June 2018. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has:

(a) Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee)

(b) Exposure, or rights, to variable returns from its involvement with the investee, and

(c) The ability to use its power over the investee to affect its returns

Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

(a) The contractual arrangement with the other vote holders of the investee

(b) Rights arising from other contractual arrangements

(c) The Group's voting rights and potential voting rights

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.

Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the consolidated financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Subsidiaries are fully consolidated from the date of acquisition or incorporation, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The Consolidated financial statements of the subsidiaries are prepared for the same reporting period as the Group, using consistent accounting policies.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:

- Derecognises the assets (including goodwill) and liabilities of the subsidiary

- Derecognises the carrying amount of any non-controlling interests

- Derecognises the cumulative translation differences recorded in equity

- Recognises the fair value of the consideration received

- Recognises the fair value of any investment retained

- Recognises any surplus or deficit in profit or loss

- Reclassifies the parent's share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities

Business combination

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owner of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of acquiree's identifiable net assets. Acquisition related costs are expensed as incurred.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gain or losses arising from such re-measurement are recognised in profit or loss. Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IFRS 9.

Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of profit or loss.

Associates and joint ventures

An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The considerations made in determining significant influence or joint controls are similar to those necessary to determine control over subsidiaries.

2.3 NEW STANDARDS AND INTERPRETATIONS

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2017, except for the adoption of new standards and interpretations as of 1 January 2018. These new standards and interpretations did not have any major impact on the accounting policies, financial position or performance of the Group.

The Group did not early adopt any standard, interpretation or amendment that was issued but is not yet effective.

The Group applies, for the first time, IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments. As required by IAS 34, the nature and effect of these changes are disclosed below.

Several other amendments and interpretations apply for the first time in 2018, but do not have an impact on the interim condensed consolidated financial statements of the Group.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract.

The Group adopted IFRS 15 using the modified retrospective approach. The Group has assessed its contracts with customer and is of the view that the adoption of IFRS 15 does not have any impact on the timing of revenue recognition and the amount of revenue to be recognised. Therefore there was no material effect of adopting IFRS 15 on the retained earnings.

IFRS 9 Financial Instruments

IFRS 9 replaces the provision of IAS 39 that related to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting.

The adoption of IFRS 9 Financial instruments from 1 January 2018 resulted in changes in accounting policies with no changes to the amount recognised in the financial statements which are described below.

a) Classification and measurement

IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. However, it eliminates the previous IAS 39 categories for financial assets of held to maturity, loans and receivable and available for sale.

The Group's management has assessed which business model apply to the financial assets held by the group and has classified its financial instruments into the appropriate IFRS 9 categories. The reclassification criteria based on IFRS 9 did not have any impact on the classification or measurement of the financial assets.

b) Impairment

The adoption of IFRS 9 has changed the Group's accounting policy for impairment losses for financial assets by replacing IAS 39's incurred loss approach with a forward-looking expected credit loss (ECL) approach.

IFRS 9 requires the Group to record an allowance for ECLs for all loans and other debt financial assets not held at FVPL.

ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive. The shortfall is then discounted at an approximation to the asset's original effective interest rate.

For trade and other receivables, the Group has applied the standard's simplified approach. The Group has established a matrix that is based on the Group's historical credit loss experience, adjusted for forward looking factors specific to the debtors and the economic environment.

Based on its assessment, the Group concluded that the application of IFRS 9 has no material impact on its condensed consolidated interim financial information.

2.4 CHANGES IN ACCOUNTING POLICIES

Financial Instruments - accounting policies applied from 1 January 2018

Classification and measurement of financial assets

Classification

From 1 January 2018, the group classifies its financial assets in the following measurement categories:

· Those to be measured subsequently at fair value (either through OCI, or through profit or loss), and

· Those to be measured at amortised cost

The classification depends on the entity's business model for managing the financial assets and the contractual terms of the cash flows and is determined at the time of initial recognition.

For assets measured at fair value, gain and losses will either be recorded in profit or loss or OCI. For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for equity investment at fair value through other comprehensive income (FVOCI). The group reclassifies debt investments when and only when its business model for managing those assets changes.

Measurement

At initial recognition, the group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

Debt Instruments

Subsequent measurement of debt instruments depends on the group's business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the group classifies its debt instruments:

· Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/ (losses), together with foreign exchange gains and losses. Impairment losses are presented as separate line item in the statement of profit or loss. This category includes Group's trade and other receivables.

· FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets' cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses when are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other gain/(losses) and impairment expenses are presented as separate line item in the statement of profit or loss.

· FVPL: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognised in profit or loss and presented net within other gains/(losses) in the period in which it arises.

Equity Instrument

The group subsequently measures all equity investments at fair value. Where the group's management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognised in profit or loss as other income when the group's right to receive payment is established.

Changes in the fair value of financial assets at FVPL are recognised in other gain/(losses) in the statement of profit or loss as applicable. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.

Impairment

From 1 January 2018, the group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk.

For trade receivables, the group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivable. The Group has established a matrix that is based on the Group's historical credit loss experience, adjusted for forward looking factors specific to the debtors and the economic environment.

For other debt financial assets, the ECL is based on the 12-month ECL. The 12-month ECL is the portion of lifetime ECLs that results from default events on a financial instrument that are possible within 12 months after the reporting date. However, when there has been a significant increase in credit risk since origination, the allowance will be based on the lifetime ECL.

Revenue recognition - accounting policies applied from 1 January 2018

Revenue recognition

The Group recognises revenue from contracts with customers based on a five step model as set out in IFRS 15.

Step 1. Identify contract(s) with a customer: A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations and sets out the criteria for every contract that must be met.

Step 2. Identify performance obligations in the contract: A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer.

Step 3 Determine the transaction price: The transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

Step 4. Allocate the transaction price to the performance obligations in the contract: For a contract that has more than one performance obligation, the Group allocates the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the Group expects to be entitled in exchange for satisfying each performance obligation.

Step 5. Recognise revenue when (or as) the Group satisfies a performance obligation.

The Group satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

a) The Group's performance does not create an asset with an alternate use to the Group and the Group has as an enforceable right to payment for performance completed to date.

b) The Group's performance creates or enhances an asset that the customer controls as the asset is created or enhanced.

c) The customer simultaneously receives and consumes the benefits provided by the Group's performance as the Group performs.

For performance obligations where one of the above conditions are not met, revenue is recognised at the point in time at which the performance obligation is satisfied.

When the Group satisfies a performance obligation by delivering the promised goods or services it creates a contract based asset on the amount of consideration earned by the performance. Where the amount of consideration received from a customer exceeds the amount of revenue recognised this gives rise to a contract liability.

Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes and duty. The Group assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent.

Revenue is recognised to the extent it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably.

2.5 COMPARATIVE INFORMATION

In Q4 2017, the Group conducted a detailed review of the costs incurred for the projects under progress which resulted in identification of capital expenses amounting to USD 1.3 million directly related to the projects under construction which were expensed in the interim condensed consolidated financial statements for the period ended 30 June 2017. The Group also identified accrued expenses which were erroneously overstated in the interim condensed consolidated financial statements for the period ended 30 June 2017. The Group management corrected these adjustments in the financial statements for the year ended 31 December 2017.

The Group management have corrected the comparative information for the period ended 30 June 2017 for the above adjustments.

Also, certain comparative figures have been reclassified in order to conform to the presentation for the current period and to improve the quality of information previously presented. Such reclassifications do not affect previously reported net profit or total equity.

The table below summarises the adjustments and reclassifications for the accounts affected:

Impact on the interim condensed consolidated statement of comprehensive income

No third year comparative information is presented on the grounds of materiality.

3 SEGMENT INFORMATION

Management has determined the operating segments based on the reports reviewed by the Chief Executive Officer (CEO) that are used to make strategic decisions. The CEO considers the business from a geographic perspective and has identified four geographical segments. Management monitors the operating results of its segments separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on profit or loss before intersegment charges.

*COGS included bareboat charter agreements between Egypt and both KSA and Algeria "Lease agreement"

4 BUSINESS COMBINATIONS

Acquisition of three rigs from Nabors Drilling International II Limited

On 12 June 2018, the Group acquired three jack-up drilling rigs, located in the Kingdom of Saudi Arabia, in their entirety, including all spare parts, equipment and inventory, from Nabors Drilling International II Limited (Nabors). The Group acquired these rigs to expand its operations in the Kingdom of Saudi Arabia. The acquisition has been accounted for using the acquisition method.

Identifiable net assets acquired

The fair value of the identifiable net assets of these rigs as at the date of acquisition were:

*Additional clarifications and analysis is required to determine the acquisition date fair value of property and equipment. Thus, the property and equipment may be subsequently adjusted, with a corresponding adjustment to gain from bargain purchase prior to 12 June 2019 (one year after the transaction).

**In accordance with the purchase and sale agreement, the Group issued 1,590,852 fully paid shares to Nabors, valued at the price as quoted on the London Stock Exchange on 12 June 2018.

5 REVENUE

* Projects income represents services relating to outsourcing various operating projects for clients such as maintenance and repair services. 

6 COST OF REVENUE

7 INCOME TAX

The Group operates in jurisdictions which are subject to tax at higher rates than the statutory corporate tax rate of 0%, which is applicable to profits in Algeria and Kingdom of Saudi Arabia where the applicable tax rate is 26% and 20% respectively. In addition to statutory corporate tax rate of 26%, the operations in Algeria are also subject to 15% Branch tax on accounting profit.

Egyptian corporations are normally subject to corporate income tax at a statutory rate of 22.5% however the Company has been registered in a Free Zone in Alexandria under the Investment Law No 8 of 1997 which allows exemption from corporate income tax.

8 PROPERTY AND EQUIPMENT

*During the year ended 31 December 2017, management revised estimated useful life of rigs from 15 years to 27 years based on the technical assessment effective from 1 January 2017, which resulted in a decrease of depreciation charge by the amount of USD 8,605,090 for the full year in the consolidated financial statements for the year ended 31 December 2017. The effect of this change is accounted for prospectively and the depreciation charge for the period ended 30 June 2017 is not retrospectively adjusted

9 EQUITY INSTRUMENTS AT FAIR VALUE THROUGH OCI

The Group acquired the investment on 30 March 2015 from AMAK Drilling and Petroleum Services Co. (a related party) at par value. Egyptian Chinese Drilling Company is a Joint Stock Company operating in storing and renting machinery and all needed equipment to the petroleum industry.

The Group recognised dividends of USD 1,225,000 from Egyptian Chinese Drilling Company during the year ended 31 December 2015 which is outstanding as at 30 June 2018 (note 11).

This investment is measured at cost less any impairment as its fair value cannot be reliably measured. The Group has treated this investment as equity instruments at fair value through OCI - no recycling as the legal formalities for change in the articles of association is not complete and accordingly, has no representation on the Board. The completion of these formalities will result in the accounting of this investment from available for sale financial asset to an associate/ joint arrangement.

On 5 July 2018, the Group entered into the Shareholders' agreement with XIBU Drilling Engineering Company Ltd, a major shareholder of Egyptian Chinese Drilling Company, and other shareholders, which will enable the Group to have certain level of control over ECDC through appointing three Directors as representative of the Group. This is subject to finalisation of updating the incorporation documents of ECDC as per the terms of the Shareholders' agreement.

Fair value hierarchy

10 ACCOUNTS RECEIVABLE

Trade receivables are non-interest bearing and are generally on terms of 30 to 90 days after which trade receivables are considered to be past due. Unimpaired trade receivables are expected on the past experience to be fully recoverable. It is not the practice of the Group to obtain collateral over receivables and the vast majority are, therefore, unsecured.

The movement in impairment of trade receivables is as follows:

As at 30 June, the aging analysis of un-impaired trade receivables is as follows:

11 PREPAYMENTS AND OTHER RECEIVABLES

* Accrued revenue represents services rendered but not yet billed at the reporting date.

** Other receivables and deposits mainly includes prepaid insurance.

12 BANK BALANCES AND CASH

* Treasury bills represent short-term investment made by the Group with original maturity less than 90 days. The Group had invested in July 2017 for an amount of USD 119,797,343 with a maturity period ranging from 78 to 85 days. This investment matured in October 2017 and was re-invested with an amount of USD 124,889,042. The Group earned interest income of USD 2,032,444 from its investment in treasury bills for the period ended 30 June 2018. No such short term investments existed as at 30 June 2018.

13 TRADE AND OTHER PAYABLES

14 INTEREST-BEARING LOANS AND BORROWINGS

14 INTEREST-BEARING LOANS AND BORROWINGS (continued)

*Saudi Arabian Interbank Offered Rate

The Group has secured interest-bearing loans and borrowings as follows:

Bank credit facilities

1. Credit facility 5 is granted by the Egyptian Gulf Bank (EGB) with an overdraft facility limit amounting to EGP 45,000,000 which is secured by promissory note.

2. Credit facility 7 is granted by the Al Ahli Bank of Kuwait (ABK) with an overdraft facility limit amounting to USD 3,000,000 which is secured by promissory note.

Loan 3 - Syndication

On 22 March 2018, the Group has signed a syndication loan agreement arranged by Merrill Lynch International and EBRD with total amount of USD 450 million divided over eleven banks. The loan is divided into four tranches, the purpose and the use of each facility is described as follows:

a) Tranche A

For refinancing existing financial indebtedness in full (including the payment of the fees, costs and expenses incurred under or in connection with the transaction documents). Tranche A was utilised during the period ended 30 June 2018 to settle Loan 1 and Loan 2.

b) Tranche B

New working capital purposes and to refinance certain existing working capital facilities. Tranche A was utilised during the period ended 30 June 2018.

c) Tranche C

Capital expenditure for the acquisition of the new rigs and mobile offshore production units. Tranche C has not been utilised as at 30 June 2018.

d) Tranche D "Murabaha Facility"

The Group shall apply the amount of all utilisations under the Murabaha Facility towards the capital expenditure for the acquisition of the new rigs and mobile offshore production units. Tranche D has not been utilised as at 30 June 2018.

Tranche A is a medium-term loan over 5 years, includes an 18 months grace period and is paid semi-annually in un-equal instalments starting from 22 September 2019 and the last instalment will be on 22 March 2023. Tranche B will be settled with bullet repayment on 22 March 2023.

Loan 3 - Syndication is secured by the rigs Admarine II, Admarine III, Admarine IV, Admarine V, Admarine VI, Admarine VIII, Admarine 88, Admarine 261, Admarine 262, Admarine 266, and ADES 3 and all related collection bank accounts and insurance proceeds collection bank accounts.

Ijara Loan

On 22 May 2018, the Group has signed "Musharakah" agreement and "Ijara" agreement with Alinma Bank to finance the acquisition of the new rigs and related capital expenditure. The Musharakah facility amount is USD 200 million, of which 70% is financed by Alinma Bank and 30% by the Group. On 11 June 2018, the Group obtained USD 70 million from Alinma Bank withing the framework of "Musharakah" facility to finance the acquisition of three rigs from Nabors (Note 4) and subsequent capital expenditures.

The Medium-term loan over 6 years includes a 2 year grace period and is paid semi-annually in equal instalments starting from 10 June 2020 and the last instalment will be on 10 June 2024.

Ijara loan is secured by the rigs purchased from Nabors (Note 4).

15 PROVISIONS