Last checked at 21 Apr 2009 07:00
CADOGAN PETROLEUM PLC
Preliminary Results for the Year Ended 31 December 2008
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Cadogan Petroleum plc an independent oil and gas exploration, development and production company with onshore gas, condensate and oil assets in Ukraine, announces its preliminary results for the year ended 31 December 2008.
Principal Developments
Developments in 2008
Post year end events
Enquiries
| Cadogan Petroleum plc | +44 20 7245 0801 |
| Ian Baron, Interim Chief Executive Officer | |
| Alex Sawka, Chief Financial Officer |
| Pelham PR | |
| James Henderson | +44 20 7337 1501 |
| Evgeniy Chuikov | +44 20 7337 1513 |
| Philip Dennis | +44 20 7337 1516 |
Chairman's Statement
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Introduction
The second quarter of 2008 closed with the Company's initial public offering ('IPO') which was intended to allow the Group to develop the licence areas it had previously acquired in Ukraine. Unfortunately this aim was significantly impacted by the well documented challenges to two of the Group's licences and certain operational difficulties. The latter, in particular, required the Group to modify its work programmes and to defer bringing key fields on stream, causing delays to revenues originally anticipated at the time of the IPO.
In March 2009 the Board appointed Ian Baron as Interim Chief Executive Officer to undertake both a detailed review of the operations and an evaluation of the exploration potential and commercial viability of the Group's assets. The Board anticipates that this review will take approximately three months, during which time both capital expenditure and operating expenses will be limited to certain testing and evaluation activities.
Ian Baron, who is a former non-executive Director of the Company, has over 30 years international upstream oil and gas experience. He has worked in several countries in the former Soviet Union and the Board considers him to be well qualified to evaluate the options available to the Group.
Operations summary
The Group's asset portfolio consists of acquired interests in 11 licence areas covering 14 fields in Ukraine.
Testing of the wells in the Poltava region in eastern Ukraine has provided a significant volume of data and operations on several wells are now at a stage where they can be temporarily suspended to allow evaluation of this information. Contingent on results from this analysis, a decision will be taken as to both the commercial viability of the oil and gas zones tested and the possible development alternatives. While this evaluation is underway, drilling operations will continue only on Borynya #3 in western Ukraine, where we recently saw encouraging test results in a secondary target above the main objective. Drilling of Borynya #3 will require the use of only one rig and will significantly reduce the Group's capital commitments.
Political and licence issues
During 2008 the Group was faced with indirect challenges to the Zagoryanska and Pirkovskoe licences. The Group immediately embarked on an extensive programme of court hearings and political lobbying to protect its interests. Despite a number of successful court hearings, in February 2009 the High Administrative Court of Ukraine ruled in favour of the original challenge to the Pirkovskoe licence. The Group has lodged a further appeal in the Supreme Court of Ukraine, the highest judicial body in the Country.
In support of Cadogan's position, on 30 March 2009, the General Prosecutor's Office of Ukraine submitted a case to the Supreme Court of Ukraine arguing that the High Administrative Court had been mistaken in reaching its decision and that the ruling should be declared invalid. The Directors believe that, notwithstanding the uncertainties described above, the validity of the Group's licences are expected to be reconfirmed.
On 7 October 2008 Cadogan entered into a co-operation agreement with the Ministry for Environmental Protection of Ukraine, under which the Ministry agreed to support Cadogan in the conversion of exploration licences to production licences and to protect Cadogan's rights to its existing licences.
On 15 January 2009 the Group successfully extended its licence for the Zagoryanska area. The exploration and development licence was extended by five years to April 2014.
Overview of financial position
At the date of this report, the Group has current cash and cash equivalents of approximately £53.9 million, of which £7.6 million is committed to the construction of two gas treatment plants. As part of its strategic review, the Board is exploring the possibility to augment its funds by selling surplus assets including one or both of the gas treatment plants as well as other inventory that has been acquired.
The Directors believe that the capital available at the date of the issue of this preliminary announcement, together with income to be generated from future operations are sufficient for the Group to continue in operational existence for the foreseeable future.
Outlook
Having reduced operations from five active rigs to one, management will undertake an analysis of the operational data gathered and incorporate the results of the analysis into a revised programme of operations. In parallel, the Board will review its strategic alternatives in respect to its assets in Ukraine. This review will allow the Board to assess all options open to the Company, which it plans to have completed by the end of the second quarter or early in the third quarter of 2009. In the meantime, we will continue to exert tight controls over costs and cash flows.
Operations Review
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The Group owns and operates working interests in 11 gas, condensate and oil exploration and production licences throughout east and west Ukraine. These assets lie in two of the three hydrocarbon basins in Ukraine with extensive gas transportation infrastructure: the Carpathian Basin and the Dnieper-Donets Basin. The fields are easily accessible and in close proximity to the Ukrainian gas distribution infrastructure.
In western Ukraine the Group has interests in six exploration and development and two production licences within the Carpathian Basin. In eastern Ukraine, the Group operates the Pokrovskoe, Zagoryanska and Pirkovskoe licences in the Poltava region. These licences lie in the Dnieper-Donets basin, a prolific oil and gas basin which accounts for 90 per cent of Ukraine's current oil and gas current production. The Group's primary focus is on the major fields, Borynya and Bitlya, within the Bitlyanska licence and the Pokrovskoe, Zagoryanska and Pirkovskoe fields.
The Group's reserves and resources base, includes 27.7 mmboe proved reserves ('1P'), 83.0 mmboe proved plus probable reserves ('2P'), 156.1 mmboe proved, plus possible and probable ('3P') reserves, 334.5 mmboe contingent resources ('2C') and 280.5 mmboe prospective resources ('P50'). The reserves and resources are comprised of 72 per cent gas, 27 per cent condensate and one per cent oil.
The Board's intention is to continue active engagement with Ukrainian authorities to facilitate the transition from exploration to production licences.
Bitlyanska licence area
The Bitlyanska exploration and development licence covers an area of 390 square kilometres and expires in December 2009. The Group has a 96.5 per cent to 97.1 per cent working interest, varying on production. There are three hydrocarbon discoveries in this licence area; Bitlya, Borynya and Vovchenska. The Borynya and Bitlya fields hold 188.6 mmboe (2007: 188.6 mmboe) and 114.0 mmboe (2007: 114.0 mmboe) of contingent resources respectively, while no reserves and resources have yet been attributed to the Vovchenska field.
Key field developments
Borynya #3
The well was spud on 15 December 2007 and is drilling at 3,883 metres, with first intermediate casing being set at 1,611 metres. Drilling operations continue with a proposed TD of 5,200 metres. Recent drill stem testing of an intermediate zone at a depth of 3,653 metres in a secondary target above the main objective have provided very promising results. The test of a seven metre sand interval in the Golovetsky formation resulted in a maximum rate of 128,000 cubic metres of gas per day with condensate during a limited duration drill stem test.
The Borynya #3 well is designed to test the main target reservoir in the Verchovinsky formation at a projected depth below 4,800 metres.This interval in the Borynya #2 well tested 400,000 cubic meters of gas per day in an open hole test before the tests failed due to formation blocking the test tool. The possible extent of the Borynya structure is currently poorly defined as there is a lack of adequate seismic data due to the complex geology and the challenges of acquiring good seismic results in the terrain of the Borynya region.
Bitlya #2
Initial infrastructure is in place, pending a decision to commence exploratory drilling. This is a 3,000 metre normally pressured gas field which has already been drilled by the Bitlya #1 well. This well established the presence of hydrocarbons in a structure identified by Soviet era 2D seismic that has been re-processed and re-interpreted using modern geophysical techniques.
Facilities and infrastructure programme
A new gas processing plant is currently being constructed in Dubai, and will be imported into Ukraine if testing results confirm the commercial viability of the field. Alternatively, other viable methods of handling the gas output will be considered allowing the Group to market the plant to augment its funds.
Pokrovskoe licence area
The Group has a 100 per cent working interest in the Pokrovskoe licence which holds 58.6 mmboe (2007: 58.6 mmboe) of prospective resources. The exploration licence covers 49.5 square kilometres and runs until August 2011. There is a four well and 3D seismic work commitment. The processing of the previously acquired 3D seismic data over the entire field is now complete and the two wells, Pokrovskoe #1 and Pokrovskoe #2, have been drilled with initial testing currently underway.
Key field developments
Pokrovskoe #2
This well is the first exploration well drilled on the Pokrovskoe structure and was spud in late 2006. During drilling and coring operations across the Visean (V17 to V22) formations, there was strong gas influx into the well bore. The well will be temporarily suspended at 5,185 metres. The main objectives of this well are to determine the productivity of the upper and lower Visean formations and to potentially convert prospective resources to reserves. The results of Porkovskoe #2 will also determine future operation on Porkovskoe #1 located within the same field.
Pokrovskoe #1
This is the second exploration well on the licence, which was spud in early 2008. The well will be temporarily suspended at 4,988 metres pending evaluation of operational data obtained from the well so far.
Zagoryanska licence
The Group has a 90 per cent working interest in the Zagoryanksa licence area, which holds 44.5 mmboe (2007: 44.4 mmboe) of contingent and prospective resources and is located immediately to the east of the Pirkovskoe licence. The exploration and production licence covers 49.6 square kilometres. In January 2009 the Group received a five year extension for this licence which now expires in April 2014. The required work programme includes: (1) the acquisition of 3D seismic data across the field which was completed in the first quarter of 2009; (2) the testing of well #3 which is currently in progress; (3) workover of well #2 which is already included in the 2009 work programme; and (4) the drilling of an appraisal well. The final conclusion of the work programme is not required to be completed before the end of the license period.
Key field developments
Zagoryanska #3
The well has been drilled to a TD of 5,110 metres in the lower Visean (V26). The well will now be temporarily suspended in order to evaluate the data after completing an acid fracture test in the lower Visean. Several potential gas bearing reservoirs were tested in the Carboniferous. Following completion of this well, management will consider completing the workover of two previously drilled wells (Zagoryanska #2 and #8).
Pirkovskoe licence
The Group has a 97 per cent working interest in the Pirkovskoe licence which holds 82.4 mmboe (2007: 79.7 mmboe) of proved and probable reserves, 73.0 mmboe (2007: 68.9 mmboe) of possible reserves and 190.6 mmboe (2007: 194.96 mmboe) of contingent and prospective resources. The exploration and appraisal licence covers 71.6 square kilometres and runs until October 2010.
Key field developments
Pirkovskoe #1
This well was the first appraisal well in the Pivnichna block in the northern part of the Pirkovskoe licence. The well has now reached a TD of 5,723 metres in the Devonian D3. After testing the Devonian and lower Carboniferous, the well will be temporarily suspended at 5,723 metres. The well tested several shallower Carboniferous reservoirs which were oil and gas bearing but have not yet been deemed commercial.
Pirkovskoe #2
This well has now reached 4,580 metres, but has been put on temporary suspension until the results of Pirkovskoe #1 have been received.
Pirkovskoe #460
Initial well testing, included within the Group's field development programme obligations, was completed in December 2007. Test results indicated, that poor casing was causing the well to produce at lower than anticipated rates as well as water influx from surrounding horizons. As a result, the well has been plugged and will be abandoned.
Facilities and infrastructure programme
The Group owns the Kraznozayarska gas treatment plant, on the Pirkovskoe licence area, which is connected to the UkrTransGas system. Its capacity was upgraded in July 2007 to 300,000 cubic metres per day of gas and 150 tonnes per day of condensate. In addition, a new gas processing plant is currently being constructed in Dubai, and will be imported into Ukraine if testing results confirm the commercial viability of the field and the future success of the licence is certain. Alternatively, other viable methods of handling the gas output will be considered allowing the Group to market the plant to augment its funds.
Minor fields
The Group has a number of minor assets all located in western Ukraine. These include the following:
An exploration and development licence and production licence, containing 0.5 mmboe of proved, probable and possible reserves (2007: 0.5 mmboe). This licence is currently producing 168.8 boepd.
A production licence containing 0.1 mmboe of proved, probable and possible reserves (2007: 0.1 mmboe). This licence is currently producing 65.6 boepd.
An exploration and development licence, containing 20.0 mboe of proved, probable and possible reserves (2007: 20.0 mmboe) and 10.3 mmboe (2007: 10.3 mmboe) prospective resources. This licence is currently producing 4.52 boepd.
An exploration and development licence, containing 0.2 mmboe of proved, probable and possible reserves (2007: 0.2 mmboe), 1.5 mmboe (2007: 1.5 mmboe) of contingent resources and 2.5 mmboe (2007: 2.5 mmboe) prospective resources. This licence is currently producing 19.2 boepd.
An exploration and development licence, containing 1.4 mmboe of contingent resources (2007: 1.4 mmboe).
An exploration and development licence, containing 2.9 mmboe (2007: 2.9 mmboe) prospective resources.
An exploration and development licence, with no booked reserves or resources.
Capital expenditure on minor fields will depend on economic viability of the fields, current and forecasted oil and gas prices, and the opportunities for diversifying exploration and appraisal risk and obtaining additional capital through potential farm-outs.
Financial Review
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Income statement
The Group, being in an exploration and development stage, in 2008 continued to operate at a loss, recognising a loss before tax of £22.8 million (2007: £15.0 million). Revenue of £1.8 million (2007: £0.7 million) consisted of the sale of gas from well testing and from the producing wells in the Debeslavetska and Cheremkhivskoe minor fields. To the extent that revenue arises from test production during an evaluation programme, an amount is charged from evaluation costs to cost of sales, to reflect a zero margin. This has resulted in a gross loss from the Group's hydrocarbon sales of £0.2 million (2007: profit £0.1 million).
Administrative expenses of £25.4 million (2007: £13.4 million) consist of staff costs, professional fees, Directors' remuneration, depreciation charges for the Group's property, plant and equipment and its other intangible assets, any currency effects from operating transactions or from the currency-related restatement of the value of monetary assets or liabilities and the impact of any adjustments to the carrying value of VAT assets on the Group's consolidated balance sheet. In addition to recurring administrative expenses, £6.4 million of consultancy fees were incurred to defend the legal challenges indirectly associated with the Pirkovskoe and Zagoryanska licences and also to extend the Zagoryanska licence, £4.4 million of professional costs were recognised in relation to the IPO, £0.8 million relates to the provision of VAT recoverable relating to Ukraine operations and £0.2 million (2007: £4.2 million) relating to equity-settled share based payment transactions.
Investment revenue increased during the year to £2.9 million (2007: £0.3 million) due mainly to interest income earned on funds held.
Cash flow statement
Following the completion of Cadogan's IPO in June 2008, the Group raised total net proceeds of approximately £145.0 million. In addition, total net proceeds of £26.4 million (2007: £55.1 million) were raised through private equity fundraising. Expenditure of £39.3 million (2007: £17.5 million) on intangible exploration and evaluation assets and £32.7 million (2007: £4.6 million) on property, plant and equipment represents the Group's continued focus on the development and exploration of its oil and gas assets in Ukraine. During 2008, the Group completed the acquisition of LLC Mercor, an operating company that holds an interest in JAA #17 on the Zagoryanska licence, and in which the Group already held an interest in via its previous acquisition of Radley Investments Limited. The total cash consideration for the acquisition was £2.3 million.
Balance sheet
As at 31 December 2008, the Group had a net cash and cash equivalents of £72.0 million (2007: £14.0 million) and no external borrowings. Intangible exploration and evaluation assets of £52.1 million (2007: £28.7 million) represent the carrying value of the Group's investment of exploration and appraisal assets throughout Ukraine. The property, plant and equipment balance of £39.5 million at 31 December 2008 (2007: £22.7 million), relates primarily to the cost of developing fields with commercial reserves and bringing them into production. Net assets have increased by £140.1 million to £208.3 million at 31 December 2008 from £68.2 million at 31 December 2007 which is principally due to the proceeds raised from the Company's IPO and private equity financing in the first six months of 2008.
Key performance indicators
The Group monitors its performance implementing its strategy with reference to clear targets set out for four key financial and one key non-financial performance indicators ('KPIs'):
These KPIs are applied on a Group wide basis. The Group's performance in 2008 against these targets is set out in the table below, together with the prior year performance data. No changes have been made to the source of data or calculation used in the year apart from note 1 below. A review of the Group's strategic alternatives is currently underway with an intention to improve the Group's performance and to develop appropriate targets going forward.
| | Unit | 2008 | 2007 |
| Financial KPIs | | | |
| Average production (working interest basis) (1) | boepd | 263 | 291 |
| 2P reserves (2) | mmboe | 83.0 | 80.4 |
| Finding and development cost per barrel (3) | £ | 16.13 | 0.64 |
| Realised price per 1,000 cubic metres (4) | £ | 104.1 | 77.6 |
| Non-financial KPIs | | | |
| Lost time incidents (5) | Incidents | 1 | 1 |
Economic environment
In late 2007 and early 2008, the Group undertook a restructuring of a number of its key licences. The Group is now permitted to sell gas produced from the restructured assets at the higher domestic and industrial gas market rates rather than the lower residential capped rate.
There are four principal drivers to Ukrainian product prices: (1) World and European prices for oil, gas and condensate; (2) external geopolitical pressure, principally from Russia, in the form of Gazprom's expectations of gas prices for imports into Ukraine; (3) internal Ukraine markets reacting to a reduction in price subsidies and internal supply shortages; and (4) internal politics and the distribution of energy costs throughout the Ukrainian economy. Ukraine has a significant supply and demand gap for gas that is filled principally by imports, with internal annual gas production and annual gas consumption being approximately 20 bcm and 75 bcm, respectively. As a result, there is significant scope to close the supply and demand gap through improved energy efficiencies and increased domestic production. Given this high level of dependence, Russia has significant influence on local gas prices. The gas pricing environment however continues to improve, as Russia continues to raise the price at which it sells to Ukraine.
During 2008, the cost of gas imports to Ukraine remained stable resulting in Ukrainian internal sales to industry being set a maximum of USD179.5 per thousand cubic metres ('mcm'), exclusive of value added tax ('VAT'). During the second half of 2008, the discussions between Russia and Ukraine regarding prices for 2009 and beyond became increasingly acrimonious and entrenched. During January 2009, following the significant reductions in transit supplies to Europe, the gas pricing negotiations were concluded, whereby Ukraine will now pay European prices for gas imports (less a 20% discount in 2009). The Ukrainian government has announced that the maximum price for gas sold to industry in 2009 will be set at USD262 per mcm (exclusive of VAT). It is forecast that Ukrainian import prices will fully converge with western European netback prices in 2010. This adds to the potential profitability of the Group and makes Ukraine a more profitable and attractive region to explore and develop.
Related party transactions
No related party transactions have taken place in 2008 that have materially affected the financial position or the performance of the Group during the period.
Commitments
In July 2008, the Group entered into agreements to build two gas treatment plants; the first to process the anticipated production from the Bitlyanska licence area (containing the Bitlya and Borynya fields) and the second to process the anticipated production from the Pirkovskoe field. The total cost for the two gas processing plants is USD54.4 million (£37.6 million), of which USD10.9 million (£7.6 million) is currently outstanding. Final payment of USD10.9 million (£7.6 million) relating to both plants is expected to be paid by the end of the third quarter of 2009.
Treasury
The Group continually monitors its exposure to currency risk. It maintains a portfolio of cash and cash equivalent balances in both USD and GBP held primarily in the UK and holds these mostly in term deposits depending on the Group's operational requirements. Production revenues from the sale of hydrocarbons are received in the local currency in Ukraine ('UAH') and to date, funds from such revenues have been held in Ukraine for further use in operations rather than being remitted to the UK. Funds are primarily converted to USD and transferred to the Company's subsidiaries to fund operations at which time the funds are converted to UAH. Some payments are made on behalf of the subsidiaries from the UK.
Statement of Reserves and Resources
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| Working interest basis (1) | ||||
| Gas bcf | Condensate mmbbl | Oil mmbbl | Total mmboe | |
| Proved and probable reserves | ||||
| At 1 January 2008 | 320.0 | 22.0 | 0.8 | 80.4 |
| Revisions | 11.0 | 0.7 | - | 2.7 |
| Production | (0.5) | - | - | (0.1) |
| At 31 December 2008 | 330.5 | 22.7 | 0.8 | 83.0 |
| Possible reserves | ||||
| At 1 January 2008 | 268.0 | 20.0 | 0.8 | 69.0 |
| Revisions | 16.0 | 1.2 | - | 4.1 |
| At 31 December 2008 | 284.0 | 21.2 | 0.9 | 73.1 |
| Contingent resources | ||||
| At 1 January 2008 | 1,583.0 | 48.0 | 1.5 | 334.4 |
| Revisions | 0.2 | - | - | 0.1 |
| At 31 December 2008 | 1,583.2 | 48.0 | 1.5 | 334.5 |
| Prospective resources | ||||
| At 1 January 2008 | 1,210.0 | 51.3 | 15.7 | 283.7 |
| Revisions | (18.0) | - | - | 3.24 |
| At 31 December 2008 | 1,192.0 | 50.2 | 15.7 | 280.5 |
| Total reserves and resources (mmboe) | 3,389.6 | 142.1 | 18.9 | 771.1 |
All of the Group's reserves and resources estimates are based on independent reserve reports produced by an independent reservoir engineer, Gaffney, Cline & Associates Ltd. The figures as at 1 January 2008 and 31 December 2008 were obtained from reports prepared on 31 January 2008 and 30 November 2008, respectively.
Consolidated Income Statement
For the year ended 31 December 2008
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| | Notes | 2008 £’000 | 2007 £’000 |
| CONTINUING OPERATIONS | | | |
| Revenue | | 1,792 | 665 |
| Cost of sales | | (1,966) | (611) |
| Gross (loss)/ profit | | (174) | 54 |
| | | | |
| Administrative expenses: | | | |
| IPO fees expensed | | (4,399) | - |
| Other administrative expenses | | (20,990) | (13,427) |
| Other operating expenses | | - | (1,855) |
| Operating loss | | (25,563) | (15,228) |
| | | | |
| Investment revenue | | 2,850 | 278 |
| Finance costs | | (56) | (28) |
| Loss before tax | | (22,769) | (14,978) |
| | | | |
| Tax | 6 | (514) | (221) |
| Loss for the year | 5 | (23,283) | (15,199) |
| | | | |
| Attributable to: | | | |
| Equity holders of the parent | | (22,445) | (15,197) |
| Minority interest | | (838) | (2) |
| | | (23,283) | (15,199) |
| | | | |
| Loss per ordinary share | | £ | £ |
| Basic and diluted | 7 | (0.16) | (0.14) |
Consolidated Balance Sheet
As at 31 December 2008
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| Note | 2008 £'000 | 2007 £'000 | |
| ASSETS | |||
| Non-current assets | |||
| Goodwill | 2,508 | 2,804 | |
| Intangible exploration and evaluation assets | 52,136 | 28,687 | |
| Other intangible assets | 144 | 13 | |
| Property, plant and equipment | 39,543 | 22,733 | |
| Other receivables | 18,866 | 3,060 | |
| 113,197 | 57,297 | ||
| Current assets | |||
| Inventories | 8,156 | 1,654 | |
| Trade and other receivables | 21,489 | 1,686 | |
| Cash and cash equivalents | 72,026 | 13,957 | |
| 101,671 | 17,297 | ||
| Total assets | 214,868 | 74,594 | |
| LIABILITIES | |||
| Non-current liabilities | |||
| Deferred tax liabilities | (1,238) | (967) | |
| Long-term provisions | (469) | (399) | |
| (1,707) | (1,366) | ||
| Current liabilities | |||
| Trade and other payables | (4,325) | (3,055) | |
| Current tax liabilities | (55) | - | |
| Other financial liability | - | (1,583) | |
| Current provisions | (450) | (375) | |
| (4,830) | (5,013) | ||
| Total liabilities | (6,537) | (6,379) | |
| Net assets | 208,331 | 68,215 | |
| EQUITY | |||
| Share capital | 8 | 6,933 | 4,169 |
| Share premium account | 250,373 | 78,028 | |
| Shares to be issued | - | 2,260 | |
| Accumulated deficit | (43,963) | (21,518) | |
| Cumulative translation reserves | (10,625) | (492) | |
| Other reserves | 6,247 | 5,564 | |
| Equity attributable to equity holders of the parent | 208,965 | 68,011 | |
| Minority interest | (634) | 204 | |
| Total equity | 208,331 | 68,215 |
Consolidated Cash Flow Statement
For the year ended 31 December 2008
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| Notes | 2008 £'000 | 2007 £'000 | |
| Net cash outflow from operating activities | 10 | (41,169) | (12,286) |
| Investing activities | |||
| Acquisition of subsidiaries | 9 | (2,416) | (18,357) |
| Purchases of property, plant and equipment | (32,668) | (4,601) | |
| Purchases of intangible exploration and evaluation assets | (39,319) | (17,494) | |
| Purchase of other intangible assets | (149) | (9) | |
| Proceeds from sale of property, plant and equipment | 5 | 261 | |
| Interest received | 2,761 | 268 | |
| Net cash used in investing activities | (71,786) | (39,932) | |
| Financing activities | |||
| Proceeds from issue of shares | 171,404 | 55,061 | |
| Proceeds from shares to be issued | - | 2,584 | |
| Cash received from minority shareholders on incorporation of subsidiaries | - | 9 | |
| Net cash from financing activities | 171,404 | 57,654 | |
| Net increase in cash and cash equivalents | 58,449 | 5,436 | |
| Effect of foreign exchange rate changes | (380) | (167) | |
| Cash and cash equivalents at beginning of year | 13,957 | 8,688 | |
| Cash and cash equivalents at end of year | 72,026 | 13,957 |
Consolidated Statement of Changes in Equity
For the year ended 31 December 2008
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| | Share capital £’000 | Share premium account £’000 | Shares to be issued £’000 | Accumulated deficit £’000 | Cumulative translation reserves £’000 | Other reserves £’000 | Minority interest £’000 | Total £’000 |
| As at 1 January 2007 | 2,571 | 23,743 | - | (6,321) | (157) | 1,019 | - | 20,855 |
| | | | | | | | | |
| Issue of equity shares | 1,598 | 57,505 | - | - | - | - | - | 59,103 |
| Equity shares to be issued | - | - | 2,260 | - | - | - | - | 2,260 |
| Minority interest on incorporation of subsidiaries | - | - | - | - | - | - | 9 | 9 |
| Minority interest on acquisition of subsidiary | - | - | - | - | - | - | 197 | 197 |
| Expenses of issue of equity shares | - | (2,919) | - | - | - | - | - | (2,919) |
| Share-based payments | - | (301) | - | - | - | 4,545 | - | 4,244 |
| Net loss for the year | - | - | - | (15,197) | - | - | (2) | (15,199) |
| Exchange translation differences on foreign operations | - | - | - | - | (335) | - | - | (335) |
| | | | | | | | | |
| As at 1 January 2008 | 4,169 | 78,028 | 2,260 | (21,518) | (492) | 5,564 | 204 | 68,215 |
| | | | | | | | | |
| Issue of equity shares | 2,709 | 179,423 | - | - | - | - | - | 182,132 |
| Equity shares to be issued | 55 | 2,205 | (2,260) | - | - | - | - | - |
| Expenses of issue of equity shares | - | (9,145) | - | - | - | - | - | (9,145) |
| Share-based payments | - | (138) | - | - | - | 683 | - | 545 |
| Net loss for the year | - | - | - | (22,445) | - | - | (838) | (23,283) |
| Exchange translation differences on foreign operations | - | - | - | - | (10,133) | - | - | (10,133) |
| | | | | | | | | |
| As at 31 December 2008 | 6,933 | 250,373 | - | (43,963) | (10,625) | 6,247 | (634) | 208,331 |
Notes to the Consolidated Financial Statements
For the year ended 31 December 2008
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Cadogan Petroleum plc (the 'Company', together with its subsidiaries the 'Group'), is incorporated in Great Britain under the Companies Act 1985, who began trading on the London Stock Exchange on 23 June 2008.
The financial information contained within this preliminary announcement for the years ended 31 December 2008 and 2007 does not represent statutory accounts within the meaning of Section 240 of the Companies Act 1985, but is derived from those accounts. Statutory accounts for the year ended 31 December 2008 will be delivered to the Registrar of Companies following the Company's Annual General Meeting in June 2009. The comparable financial information is based upon the statutory accounts for the year ended 31 December 2007, which have been delivered to the Registrar of Companies. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under Section 237(2) or (3) of the Companies Act 1985, but included a matter of emphasis in relation to the current status of legal proceedings contesting the validity of certain of the Group's licences in Ukraine in 2008 (refer to note 2(b) below) and the Group's ability to continue as a going concern in 2007.
2. Basis of preparation
The financial information has been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and has been prepared on the basis of the accounting policies set out in the Group's 2007 statutory accounts.
Whilst the financial information in this preliminary announcement has been prepared in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS. A copy of the full financial statements prepared in accordance with IFRS has been published and is available on the Company's website.
The preliminary announcement was approved by the Board on 20 April 2009.
The Group's business activities, together with the factors likely to affect future development, performance and position are set out in the Business Review. The financial position of the Group, its cash flow and liquidity position are described in the Financial Review.
The Group's cash position remains strong at £72.0 million at 31 December 2008, with no external debt financing to date and the Directors believe that the capital available at the date of the issue of this preliminary announcement, together with income to be generated from future operations are sufficient for the Group to manage its business risks successfully despite the current uncertain economic outlook.
The Group's forecasts and projections, taking into account reasonably possible changes in operational performance, start dates and flow rates for commercial production and the price of hydrocarbons sold to Ukrainian customers, show that there are reasonable expectations that the Group will be able to operate on funds currently held and those generated internally, for the foreseeable future, without the requirement to seek external financing.
As the Group engages in oil and gas exploration and development activities, the most significant risk faced by the Group is further delays encountered in achieving commercial production from the Group's major fields. If further delays are encountered, however, capital curtailments and other measures to preserve cash such as farming out a portion of the Group's interests in its oil and gas licences may become necessary and could realistically be undertaken. Whilst such curtailments and other measures if undertaken could have an adverse effect on the Group over the longer term, including putting certain of its licence interests potentially at risk if the licence obligations are not able to be fulfilled, there would not be any significant doubt over the Group's ability to continue as a going concern for the foreseeable future.
The Group is currently faced with legal challenges associated with its interests in the Pirkovskoe and Zagoryanska licences, which could adversely affect the cash flows of the Group if Cadogan was not successful in defending its position. In the event that the Group lost these licences or made a strategic decision not to pursue these licences any further, this impact alone will not affect the Group's ability to operate as a going concern.
After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and financial statements.
The Group is currently involved in legal proceedings, surrounding the validity of the Pirkovskoe and Zagoryanska licences. On 17 June 2008, the Poltava Regional Commercial Court ('Poltava Court') made written rulings, following a hearing on 12 June 2008, in favour of Poltavanaftogazgeology ('PNG'), a subsidiary of the Group's joint venture partner, NJSC Nadra Ukraine, a state-owned company ('Nadra'), in relation to the earlier licences held by PNG, relating to the Pirkovskoe and Zagoryanska fields. The court rulings: (a) declared as invalid the licences re-registered to the Nadra (which were subsequently re-registered to the Group; and (b) recognised as valid the earlier licences held by PNG.
On 28 July 2008, the Ministry of Environmental Protection of Ukraine (the 'Ministry') issued an order, making reference to the decisions of the Poltava Court on 17 June 2008, in favour of PNG, invalidating the Group's licences for its Pirkovskoe and Zagoryanska fields.
The following developments have occurred as a result of legal action taken by the Group to protect its licences:
The Directors consider there to be only one business segment, the exploration and development of oil and gas revenues and only one geographical segment, being Ukraine.
4. Dividend
The Directors do not recommend the payment of a dividend for the year (2007: £nil).
The loss for the year has been arrived at after charging:
| 2008 £'000 | 2007 £'000 | |
| Depreciation of property, plant and equipment | 1,044 | 598 |
| Amortisation of other intangible assets | 23 | 1 |
| Loss on disposal of property, plant and equipment | 112 | 7 |
| Consultancy fees | 6,358 | - |
| Staff costs | 3,715 | 6,217 |
| Net foreign exchange losses | 1,482 | 539 |
Consultancy fees relate to consultancy fees paid in order to defend the legal issues over the Pirkovskoe and Zagoryanska licences and with the successful extension of the Zagoryanska licence.
| 2008 £'000 | 2007 £'000 | |
| Current tax | 392 | 9 |
| Deferred tax | 122 | 212 |
| 514 | 221 |
The Group's operations are conducted primarily outside the UK. The most appropriate tax rate for the Group is therefore considered to be 25% (2007: 25%), the rate of profit tax in Ukraine which is the primary source of revenue for the Group. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
The taxation charge for the year can be reconciled to the loss per the income statement as follows:
| 2008 £'000 | 2008 % | 2007 £'000 | 2007 % | |
| Loss before tax | ||||
| Continuing operations | (22,769) | 100 | (14,978) | 100 |
| Tax credit on loss at Ukraine corporation tax rate of 25% | (5,692) | 25 | (3,744) | 25 |
| Permanent differences | 4,054 | (18) | 2,394 | (16) |
| Foreign exchange on operating activities | (545) | 2 | - | - |
| Tax losses generated in the year not yet recognised | 592 | (2) | 1,571 | (10) |
| Temporary differences | 2,134 | (9) | - | - |
| Utilisation of deferred tax asset not previously recognised on losses | (29) | - | - | - |
| Tax expense and effective tax rate for the year | 514 | (2) | 221 | (1) |
Basic loss per ordinary share is calculated by dividing the net loss for the year attributable to Ordinary equity holders of the parent by the weighted average number of Ordinary shares outstanding during the year. The calculation of the basic and diluted loss per share is based on the following data:
| Losses | 2008 £'000 | 2007 £'000 |
| Loss for the purposes of basic loss per share being net loss attributable to equity holders of the parent | (22,445) | (15,197) |
| Number of shares | 2008 Number '000 | 2007 Number '000 |
| Weighted average number of Ordinary shares for the purposes of basic loss per share | 139,721 | 106,165 |
| 2008 £ | 2007 £ | |
| Loss per Ordinary share | ||
| Basic and diluted | (0.16) | (0.14) |
Dilutive loss per Ordinary share equals basic loss per Ordinary share as, due to the losses incurred in 2008 and 2007, there is no dilutive effect from the subsisting share warrants and share options.
Authorised and issued equity share capital
| 2008 | 2007 | |||
| Number '000 | £'000 | Number '000 | £'000 | |
| Authorised | ||||
| Ordinary shares of £0.03 each (2007: Ordinary shares of £0.01 each) | 1,000,000 | 30,000 | 600,000 | 6,000 |
| Issued | ||||
| Ordinary shares of £0.03 each (2007: Ordinary shares of £0.01 each) | 231,092 | 6,933 | 416,941 | 4,169 |
The Company has one class of Ordinary shares which carry no right to fixed income. On 10 June 2008, the authorised share capital was increased by £24.0 million by the creation of an additional 800 million Ordinary shares of £0.03 each.
Issued equity share capital
| Ordinary shares of £0.03 Number | |
| At 1 January 2007 | 85,692,956 |
| Shares issued | 52,373,998 |
| On acquisition of Ramet Holdings Ltd | 913,333 |
| At 1 January 2008 | 138,980,287 |
| Allotment of shares | 92,111,447 |
| At 31 December 2008 | 231,091,734 |
On 10 June 2008, the Company consolidated every three Ordinary shares at £0.01 each in the capital of the Company into one Ordinary share of £0.03 each. During the period, the Company issued an additional 92,111,447 Ordinary shares at £0.03 each, as follows:
The information shown above in (a) to (e) has been restated to reflect the share consolidation that took place on 10 June 2008.
LLC Mercor
On 16 January 2008, LLC Astro-Energy ('Astro-Energy'), a wholly-owned subsidiary of the Group, signed an agreement to acquire a 99.991 percent interest in LLC Mercor ('Mercor') for a cash consideration of US$4.35 million. On the same date, LLC Astroinvest-Ukraine ("Astroinvest-Ukraine"), a wholly-owned subsidiary of the Group, signed an agreement to acquire the remaining 0.009 per cent interest in Mercor for US$490. Approval of this acquisition was received from the Anti-Monopoly Committee of Ukraine on 28 February 2008.
Mercor holds an interest in JAA #17 on the Zagoryanska Licence, in which an interest was previously acquired by the Group through the purchase of Radley Investments Limited. As a result of the acquisition of Mercor, Astro-Energy and Astroinvest-Ukraine together hold a 54.5 per cent interest in JAA #17.
The transaction has been accounted for as a business combination using an effective date of 8 April 2008, being the date that the Group gained control of Mercor. For reasons of materiality and practicality, the Group has consolidated Mercor's results from 1 April 2008.
| | Book value £’000 | Fair value £’000 |
| Net assets acquired | | |
| Intangible exploration and evaluation assets | 905 | 2,077 |
| Property, plant and equipment | 21 | 21 |
| Inventories | 160 | 8 |
| Trade and other receivables | 149 | 475 |
| Trade and other payables | (23) | - |
| Non-current provisions | (56) | - |
| Deferred tax asset/(liability) | 14 | (314) |
| | 1,170 | 2,267 |
| Total consideration | | 2,267 |
| Satisfied by: | | |
| Cash | | 2,251 |
| Directly attributable costs | | 16 |
| | | |
| Net cash outflow arising on the transaction | | |
| Cash consideration | | 2,267 |
In presenting the Group's interim financial statements for the period ending 30 June 2008, the fair values of the identifiable assets and liabilities acquired as part of the Mercor acquisition had been assessed on a preliminary basis in accordance with IFRS 3 Business Combinations as valuations on certain identifiable assets and liabilities were not then complete. These valuations are now complete and as a result, the fair values of the identifiable assets and liabilities have been adjusted to reflect management's best estimate.
Management has considered that the purchase consideration equals the aggregate of the fair values of the identifiable assets and liabilities including intangible exploration and evaluation assets of Mercor and therefore no goodwill has been recorded on the acquisition. Deferred tax has been recognised in respect of the fair value adjustments as applicable.
Mercor contributed £2,805 to revenue and a loss of £0.2 million to the Group's loss before tax for the period between the date of acquisition and the balance sheet date.
If the acquisition of Mercor had been completed on the first day of the period to 31 December 2008, Group revenues for the period would have been £1.8 million and Group loss attributable to equity holders of the parent would have been £21.8 million.
Zagoryanska JAA #1
On 18 January 2008, Astro-Energy acquired a 99.91 per cent stake in the Zagoryanska JAA #1 from Profit LLC for cash consideration of US$1 million. The other participant in this joint activity agreement, holding a 0.09 per cent interest, is Poltavanaftogazgeology, a subsidiary of NJSC Nadra Ukraine, a state owned company. Approval of this acquisition was received from the Anti-Monopoly Committee of Ukraine on 25 April 2008.
This acquisition has not been treated as a business combination as defined in IFRS 3 'Business Combinations' as management consider that this was an acquisition of business assets rather than that of a business as defined in IFRS 3.
Ramet Holdings Limited
Additional cash consideration of £0.1 million was paid in 2008 for the acquisition of Ramet Holdings Limited which took place on 26 December 2007.
The total cash consideration, during the year ended 31 December 2008, in respect of the acquisition of LLC Mercor and Ramet Holdings Limited, was £2.4 million.
| 2008 £'000 | 2007 £'000 | |
| Operating loss | (25,563) | (15,228) |
| Adjustments for: | ||
| Depreciation of property, plant and equipment | 1,044 | 598 |
| Depreciation of other intangible assets | 23 | 2 |
| Loss on disposal of property, plant and equipment | 112 | 7 |
| Share-based payments | 205 | 4,244 |
| Effect of foreign exchange rate changes | (4,192) | (155) |
| Operating cash flows before movements in working capital | (28,371) | (10,532) |
| Increase in inventories | (6,494) | (658) |
| Increase in receivables | (7,408) | (603) |
| Increase/(decrease) in payables | 1,383 | (484) |
| Cash used in operations | (40,890) | (12,277) |
| Income taxes paid | (279) | (9) |
| Net cash outflows from continuing operations | (41,169) | (12,286) |
Cash and cash equivalents (which are presented as a single class of assets on the balance sheet) comprise cash at bank and other short term highly liquid investments that are readily convertible to a known amount of cash and which are subject to an insignificant risk of change in value.
Joint activity agreements
The Group has interests in eleven licences for the conduct of its exploration and development activities within Ukraine. Each licence is held with the obligation to fulfil a minimum set of exploration activities within its term and is summarised on an annual basis, including the agreed minimum amount forecasted expenditure to fulfil those obligations. The activities and proposed expenditure levels are agreed with the government licensing authority Nadra.
The minimum required future financing of exploration and development work on fields under the licence obligations are as follow:
| 2008 £'000 | 2007 £'000 | |
| Within one year | 24,475 | 26,895 |
| Between one and five years | 7,399 | 18,821 |
| 31,874 | 45,716 |
A greater level of capital expenditure is, however, budgeted over the above period to achieve the Group's corporate targets.
Ramet Holdings Limited
Under the terms of acquisition of Ramet Holdings Limited, the Group has a contingent liability in relation to the deferred consideration equal to the number of recoverable proven and probable barrels of oil equivalent from the first two wells drilled and tested in the Malynovestske Field (the Malynovestske licence area in the Bogorodchansky Administration District of the Ivano-Frankiviska Administration Region in Western Ukraine). For the purpose of ascertaining the quantity of oil equivalent recoverable, the parties should instruct a suitably qualified and insured independent expert of at least 10 years' standing. Payment shall be made within 30 days of the expert's report and, notwithstanding that report, shall not exceed US$5 million.
Gas processing plants
In July 2008, the Group entered into agreements to build two gas treatment plants; the first to process the anticipated production from the Bitlyanska licence area (containing the Bitlya and Borynya fields) and the second to process the anticipated production from the Pirkovskoe field. The total cost for the two gas processing plants is USD54.4 million (£37.6 million), of which USD10.9 million (£7.6 million) is currently outstanding. Final payment of USD10.9 million (£7.6 million) relating to both plants is expected to be paid by the end of the third quarter 2009. The new gas processing plants are currently being constructed in Dubai, and will be imported into Ukraine if testing results confirm the commercial viability of the fields and the future success of the licences are certain. Alternatively other viable methods of handling the gas output will be considered allowing the Group to market the plants to augment its funds.