19 Mar 2012 07:40
Exillon Energy plc
Preliminary unaudited results for the year ended 31 December 2011
19 March 2011
Exillon Energy plc ("Exillon") (EXI.LN), a London listed independent oil producer with assets in two oil-rich regions of northern Russia, Timan-Pechora ("Exillon TP") and West Siberia ("Exillon WS"), today issues its preliminary unaudited results for the year ended 31 December 2011.
Production Growth
- Average daily oil production increased by 90% from 4,656 bbl/day in 2010 to 8,884 bbl/day in 2011. Exillon publishes production reports on a monthly basis and in February 2012 average production was 11,584 bbl/day.
- We had previously expected to reach a production level of 17,000 bbl/day by the end of June 2012. We now believe that this level is more likely to be achieved by the end of 2012. This delay has been caused by a number of operational difficulties, including slower than expected mobilization of rigs.
- We currently plan to drill an additional 12 wells in Exillon WS and 11 wells in Exillon TP in 2012.
Reserves Growth
- In January 2012 we announced that total proved ("1P") recoverable reserves had increased by 12% to 125 million barrels and total proved plus probable ("2P") reserves had increased by 11% to 265 million barrels. Total proved plus probable plus possible ("3P") reserves decreased by 9% to 400 million barrels.
- We expect reserves growth to continue in 2012 as a result of our ongoing programme of appraisal and exploration.
Financial Results
- EBITDA increased by 314% from US$4.7 million in 2010 to US$19.5 million in 2011. We define EBITDA as earnings before interest, tax, depletion and depreciation, adjusted to exclude foreign exchange loss, loss on write-off of non-current assets and share based compensation costs.
- Our net loss for the year, which includes depreciation costs, foreign exchange translation effects, loss on disposal of non-current assets and share based compensation costs, increased to US$10.0 million from US$3.6 million.
- We generated positive operating cashflows of US$34.1 million in 2011, compared to negative operating cashflow of US$6.7 million in 2010.
- Exillon raised US$146.1 million of equity in 2011. Our cash balance was US$117.6 million at 31 December 2011 and US$122.7 million as of 16 March 2012.
Mark Martin, Chief Executive Officer, said:
"During 2011 Exillon increased oil production by 90%, EBITDA by 314% and 2P reserves by 12%. During 2012 we intend to continue to invest in order to achieve further increases in production, EBITDA and reserves.
"We look forward to meeting our shareholders at our Capital Markets Day which is being held later today in London."
Contact Details:
Tom Blackwell
Email: Blackwell@mcomgroup.com
Tel: +44 207 920 2330
Chief Executive's Report
Operations
During 2011 we successfully increased production by 90% to 3,242,503 bbl from 1,700,309 bbl in 2010.
In December 2011, we reached a new record average monthly production level of 11,055 bbl/day.
In addition, a number of key infrastructure projects were completed, including:
Exillon WS
·; Construction of oil filling station in line with all project documentation in Exillon WS
·; Construction of the first stage of oil processing facility on the EWS II field
·; Installation of 3MW gas power generators on the EWS I field with 12.1 km of electricity lines. However these generators are not yet operating at designed capacity
·; 20.3 km of all season roads allowing for year-round access to major fields in Exillon WS
·; 10.8 km of infield pipelines enabling production from isolated well pads
·; Construction of second stage oil processing facility on EWS I field is in progress
·; Construction of the first stage of the Transneft oil terminal is in progress
Exillon TP
·; Installation of a 1MW gas power generator, doubling capacity to 2 MW
·; Infrastructure completed for water injection system: water well drilled and connected by 3.6 km high-pressure pipeline to an injection well (Well #1VV); water injection has started
·; Construction of an independent oil processing facility is in progress
Financial
Exillon has maintained a strong financial position, having raised US$146.1 million in equity and (after the reporting period) doubling its US$50 million loan to US$100 million. Increased production helped us to significantly increase our revenue. Revenue in 2011 reached US$203.0 million (up from US$84.8 million in 2010).
Outlook
In 2012 we are planning to continue our drilling programme in Exillon WS and to significantly expand our drilling programme in Exillon TP.
We are also planning to acquire and process additional seismic information across our fields in order to improve our understanding of the assets and identify new opportunities. This exploration will be carried out in both our established assets and our new acquisitions in Exillon TP.
In addition, we will complete infrastructure projects such as an entry point to the Transneft system that will allow us to drive operating costs down further.
Mark Martin
CEO
Exillon Energy
MATERIAL EVENTS AND TRANSACTIONS
Management Structure
During 2011 we made several senior management appointments.
In April 2011, we appointed David Herbert as a Non-Executive Chairman of the Board. David has more than 20 years experience in investment banking, including most recently as Managing Director and Head of International Corporate Finance at ING Bank N.V. David also has considerable experience in the oil and gas industry, having worked for more than 10 years at BP, where he served in a variety of senior management positions.
In June 2011, we appointed Mark Martin as Chief Executive Officer and Member of the Board of Directors. Mark has more than 20 years experience in investment banking. He has significant oil and gas experience, including in Central and Eastern Europe and the FSU, and has advised on numerous high-profile and successful M&A and capital raising initiatives on behalf of oil and gas clients in the region. Mark is permanently based in Moscow.
In December 2011, we appointed Henry Wolski as Senior Vice President, Production Operations. Henry has more than 30 years experience in the oil & gas industry and has spent most of the past 20 years working in Russia and Kazakhstan. A Canadian citizen, he speaks fluent Russian and brings with him broad experience of large scale projects with specific focus in drilling, completion and workover supervision, production and reservoir management as well as considerable expertise in management, supervision and design of hydraulic fracturing and acidizing stimulation operations.
Loan Facility
Exillon Energy agreed a term loan facility with Credit Suisse on 3 February 2012. It was utilised entirely on 16 March 2012. The US$100 million facility has a LIBOR plus 6% interest rate and a term of 5 years. The loan replaces the previous US$50 million facility which had an interest rate of LIBOR plus 7%.
Placing of Shares
In April 2011 we placed 23,438,000 of new ordinary shares to institutional investors at 400 pence per share, resulting in net proceeds of US$146.1 million.
The Exillon "free float" as defined by FTSE is now 68%.
Production
In December 2011, we reached a new record average monthly production level of 11,055 bbl/day, an increase of 65% over the December 2010 level (6,686 bbl/day).
In 2011, average production reached 8,884 bbl/day, an increase of 90% over the comparable period in 2010 (2010: 4,656 bbl/day).
OPERATIONAL REVIEW
Exillon TP
Exillon TP production increased from 1,050,997 barrels in 2010 to 1,163,296 bbl in 2011, equivalent to an increase of average monthly production from 2,879 bpd to 3,187 bpd.
In 2011 we drilled our first new well (Well 76) in Exillon TP since our IPO in 2009, and are currently drilling our second (Well 7601). We expect Exillon TP to form a major part of our drilling programme in 2012.
Average monthly oil production in December 2011 reached 3,314 bbl/day.
Exillon WS
Exillon WS production increased from 649,312 barrels in 2010 to 2,079,207 bbl in 2011, equivalent to an increase of average monthly production from 1,779 bpd to 5,697 bpd.
In Exillon WS we drilled 23 wells during the period (one exploration, five appraisal, three water injection, thirteen producers and one water supply well).
Average monthly oil production in December 2011 reached 7,741 bbl/day
FINANCIAL REVIEW
Summary
The Group maintained a strong financial position in 2011 due to rising production levels, improved efficiency and a successful issuance of new shares. In April 2011, the Group issued 23,438,000 of new shares with total gross proceeds of US$153.4 million. Costs related to the issuance of new shares amounting to US$7.3 million were recorded in the share premium account as directly attributable to the equity cost.
EBITDA increased by 314% from US$4.7 million in 2010 to US$19.5 million in 2011.
Net loss for the year, which includes depreciation costs, foreign exchange translation effects, loss on write-off of non-current assets and share based compensation costs, amounted to US$10.0 million compared to US$3.6 million in 2010.
Revenue
The Group's revenue for the year ended 31 December 2011 increased by 139% over a comparable period in 2010 and amounted to US$203.0 million (2010: US$84.8 million), of which US$122.9 million or 61% came from export sales of crude oil and US$80.1 million or 39% came from domestic sales of crude oil. This increase in revenue is attributable to:
·; An increase in production leading to increase in sale volumes from 1,673,127 bbl in 2010 to 3,170,715 bbl in 2011or 89%; and
·; An increase in average commodity prices: the Group achieved an average oil price of US$108/bbl (2010: US$74/bbl) for export sales and US$41/bbl (2010: US$30/bbl) for domestic sales, reflecting strengthening and stabilising crude oil prices during the period.
Operating Results
Operating costs excluding depreciation, depletion and amortisation increased to US$80.4 million or 39% of the Group's revenue (2010: US$34.4 million or 40% of the Group's revenue) following an increase in production of 90% to 3,242,503 bbl (2010: 1,700,309 bbl). The difference between the production volumes and sales volumes is due to the change in the oil inventory balance during the year. The increase in production costs is mainly related to the growth of mineral extraction tax from US$23.5 million in 2010 to US$64.5 million in 2011, as a result of both higher production volumes and increased average commodity prices in 2011 used in the calculation of the tax.
The Group's depreciation, depletion and amortisation costs primarily relate to the depreciation of proven and probable reserves and other production and non-production assets. In 2011, these costs totalled US$13.8 million (2010: US$6.7 million) or 6.8% of the Group's revenue (2010: 7.9%). The increase in DD&A costs is driven by higher production volumes, while being partially offset by increased reserves.
Selling expenses for 2011 of US$84.1 million (2010: US$36.3 million) or 41.4% of the Group's revenue (2010: 42.8%) is comprised of export duties of US$65.6 million (2010: US$28.9 million), which represented 53% of the Group's export sales (2010: 49%); transportation services of US$16.9 million (2010: US$6.7 million) and other selling expenses of US$1.6 million (2010: US$0.7 million). Transportation services include services provided by Transneft and transportation services from oil field to oil filling station. In 2011, average export duty rate increased by 28% from US$317.5 per tonne to US$406.6 per tonne following the increase of crude oil prices. Export duty is reviewed by the Russian government on a monthly basis and is based on a formula that takes into account the average Urals price prevailing in the market between 15th and 15th of the months prior to the month of delivering the crude.
Administrative expenses (excluding share-based compensation expenses and share issuance costs) totalled US$19.0 million (2010: US$11.4 million) amounting to 9% of the Group's revenues (2010: 13%). This is explained by an increase in headcount leading to an ensuing increase in salaries and business travel.
In 2011, interest income increased to US$1.3 million (2010: US$0.1 million) resulting from surplus cash being held in interest bearing treasury accounts and investments in highly liquid short-term marketable securities.
Loss on disposal of property, plant and equipment in the amount of US$2.2 million incurred in relation to the write-off of non-current assets following the process of a corporate restructuring, which refers to the transfer of licences between the subsidiaries.
In 2011, income tax expense of US$2.9 million (2010: US$0.14 million) comprised an income tax charge of US$2.5 million (2010: US$0.32 million) and a deferred tax charge of US$0.4 million (2010: US$0.46 million). The basic corporate income tax rate in the Russian Federation is 20%. The reduced rate of 16% was applied to Exillon WS in 2011 in compliance with local tax legislation.
It should be noted that - in accordance with IFRS - a foreign exchange loss in the amount of US$6.7 million has been included in the net expense of the Group arising from the revaluation of foreign currency monetary items (cash and cash equivalents, accounts receivable and payable, other assets) using the closing rate at the reporting date. A larger foreign exchange loss of US$26.4 million has been applied directly to the consolidated statement of financial position as the part of translation reserve being the result of the translation of the Company's net investment in its foreign operations.
As a result of the above, the Group reported a loss after tax of US$10.0 million compared to a loss of US$3.6 million for the year ended 31 December 2010. The positive effect of increased production and higher crude prices was offset by growth in depreciation and depletion, foreign exchange loss and loss on disposal of non-current assets. Despite these losses, the Group continues to be well funded and able to finance its ongoing operational programme.
Financial Position
In April 2011, the Group issued 23,438,000 of new shares at a value of US$146.1 million net of transaction fees to fund exploration and development activity. Total equity as at 31 December 2011 was US$521.9 million compared to US$408.0 million at the beginning of the year.
In May 2011, as part of its ongoing treasury and cash management operations, the Group purchased AAA-rated (S&P) Eurobonds issued by EBRD for a total consideration of US$15.4 million. These bonds have a nominal value of RUR 410 million, annual coupon rate of 6% and matured in February 2012.
The Group ended the year in a strong financial position with US$117.6 million of cash and cash equivalents (2010: US$56.3 million) with outstanding borrowings of US$49.0 million (2010: US$47.9 million), equivalent to a net cash position of US$68.6 million (2010: US$8.4 million).
An increase in the cost of property, plant and equipment has been driven by the drilling of wells and extensive field developments in Exillon WS and the purchase of the ETP VII licence.
Cash Flow
Cash generated from operating activities in 2011 was US$34.1 million, compared to a US$6.7 million outflow in 2010. The increase is driven by higher production and sales volumes. It was also positively affected by payment terms for tax payments to the Russian Government; an increase in trade and other payables following the adoption of post-payment scheme with contractors for drilling works and a decrease in trade and other receivables due to the introduction of prepayment scheme dealing with customers. The negative impact relates to the increase in inventory balances because of the expansion of Group's operations in 2011 and the requirements of its major provider of transportation services, Transneft.
Capital investments during the year was US$97.3 million (2010: US$48.0 million) representing the drilling of wells and the development of infield infrastructure.
Cash flow from financing activities was US$145.1 million (2010: US$76.7 million). This inflow relates to the net proceeds of US$146.1 million from the issue of new shares. The cash proceeds will be used to finance drilling and infrastructure related projects in Exillon WS and Exillon TP. During the year, the Group paid US$3.7 million of loan interest, of which US$2.7 million was capitalised.
Disclaimer
This statement may contain forward-looking statements concerning the financial condition and results of operations of the Group. Forward-looking statements are statements of future expectations that are based on the management's current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. No assurances can be given as to future results, levels of activity and achievements and actual results, levels of activity and achievements may differ materially from those expressed or implied by any forward-looking statements contained in this report. The Company does not undertake any obligation to update publicly or revise any forward-looking statement as a result of new information, future events or other information.
exillon energy plc
consolidated statement of comprehensive income (UNAUDITED)
For the year ended 31 December | |||||
Note | 2011 | 2010 | |||
$'000 | $'000 | ||||
Revenue | 3, 4 | 202,971 | 84,787 | ||
Cost of sales | 5 | (93,778) | (40,821) | ||
GROSS PROFIT | 109,193 | 43,966 | |||
Selling expenses | 6 | (84,124) | (36,302) | ||
Administrative expenses | 7 | (23,388) | (11,909) | ||
Foreign exchange loss | (6,744) | (625) | |||
Other (expense)/income, net | 8 | (2,417) | 2,046 | ||
OPERATING LOSS | (7,480) | (2,824) | |||
Finance income | 1,328 | 61 | |||
Finance cost | (953) | (982) | |||
LOSS BEFORE INCOME TAX | (7,105) | (3,745) | |||
Income tax (expense)/credit | (2,892) | 143 | |||
NET LOSS FOR THE YEAR | (9,997) | (3,602) | |||
OTHER COMPREHENSIVE EXPENSE: | |||||
Currency translation differences recognised directly in equity | (26,373) | (2,678) | |||
TOTAL COMPREHENSIVE LOSS FOR THE YEAR | (36,370) | (6,280) | |||
Loss per share for profit attributable to the equity holders of the Company | |||||
- Basic ($) | 9 | (0.07) | (0.03) | ||
- Diluted ($) | 9 | (0.07) | (0.03) | ||
exillon energy plc
consolidated statement of FINAncial Position (UNAUDITED)
As at 31 December | |||||
Note | 2011 | 2010 | |||
|
|
| $'000 |
| $'000 |
ASSETS: |
|
|
|
|
|
Non-current assets: | |||||
Property, plant and equipment | 10 | 523,423 | 469,394 | ||
Intangible assets | 127 | 115 | |||
523,550 | 469,509 | ||||
Current assets: | |||||
Inventories | 11 | 2,823 | 1,504 | ||
Trade and other receivables | 12 | 13,686 | 8,407 | ||
Other current assets | 13 | 16,648 | 4,034 | ||
Cash and cash equivalents | 117,567 | 56,297 | |||
150,724 | 70,242 | ||||
TOTAL ASSETS | 674,274 | 539,751 | |||
LIABILITIES and equity: | |||||
Equity: | |||||
Share capital | 17 | 1 | 1 | ||
Share premium | 17 | 272,116 | 126,034 | ||
Other invested capital | 68,536 | 68,536 | |||
Retained earnings | 171,232 | 177,051 | |||
Translation reserve | 10,021 | 36,394 | |||
521,906 | 408,016 | ||||
Non-current liabilities: | |||||
Provision for decommissioning | 14 | 5,153 | 3,949 | ||
Deferred income tax liabilities | 65,592 | 69,273 | |||
Long-term borrowings | 16 | 45,767 | 47,147 | ||
116,512 | 120,369 | ||||
Current liabilities: | |||||
Trade and other payables | 15 | 22,344 | 7,020 | ||
Taxes payable | 10,241 | 3,587 | |||
Short-term borrowings | 16 | 3,271 | 759 | ||
35,856 | 11,366 | ||||
TOTAL LIABILITIES AND EQUITY | 674,274 | 539,751 | |||
exillon energy plc
consolidated statement of changes in equity (UNAUDITED)
Note | Share capital | Share premium | Other invested capital | Retained earnings | Translation reserve | Total equity |
| ||||||
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
| |||||||
Balance at 1 January 2010 | 1 | 95,783 | 68,536 | 180,421 | 39,072 | 383,813 |
| ||||||
|
| ||||||||||||
Comprehensive income |
| ||||||||||||
Net loss for the year | - | - | - | (3,602) | - | (3,602) |
| ||||||
Other comprehensive income |
| ||||||||||||
Translation difference | - | - | - | - | (2,678) | (2,678) |
| ||||||
Total comprehensive income | - | - | - | (3,602) | (2,678) | (6,280) |
| ||||||
Ordinary shares issued for cash | 17 | - | 32,190 | - | - | - | 32,190 |
| |||||
Share based payment charge | - | - | - | 232 | - | 232 |
| ||||||
Share issue costs | 17 | - | (1,939) | - | - | - | (1,939) |
| |||||
Transactions with owners | - | 30,251 | - | 232 | - | 30,483 |
| ||||||
| |||||||||||||
Balance at 31 December 2010 | 1 | 126,034 | 68,536 | 177,051 | 36,394 | 408,016 |
| ||||||
Comprehensive income |
| ||||||||||||
Net loss for the year | - | - | - | (9,997) | - | (9,997) | |||||||
Other comprehensive income |
| ||||||||||||
Translation difference | - | - | - | - | (26,373) | (26,373) | |||||||
| |||||||||||||
Total comprehensive income | - | - | - | (9,997) | (26,373) | (36,370) |
| ||||||
Ordinary shares issued for cash | 17 | - | 153,406 | - | - | - | 153,406 |
| |||||
| |||||||||||||
Share based payment charge | - | - | - | 4,178 | - | 4,178 |
| ||||||
Share issue costs | 17 | - | (7,324) | - | - | - | (7,324) |
| |||||
Transactions with owners | - | 146,082 | - | 4,178 | - | 150,260 |
| ||||||
| |||||||||||||
Balance at 31 December 2011 | 1 | 272,116 | 68,536 | 171,232 | 10,021 | 521,906 |
|
exillon energy plc
consolidated statement of cash flow (UNAUDITED)
| For the year ended 31 December | ||||
| Note | 2011 | 2010 | ||
| $'000 | $'000 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||
Loss before income tax | (7,105) | (3,745) | |||
Adjustments for: | |||||
Depreciation, depletion and amortisation | 10 | 13,795 | 6,670 | ||
Loss on write-off of property, plant and equipment | 2,249 | 84 | |||
Finance income | (1,328) | (61) | |||
Finance cost | 953 | 982 | |||
Foreign exchange loss | 6,744 | 625* | |||
Operating cash flow before working capital changes | 15,308 | 4,555 | |||
Changes in working capital: | |||||
Increase in inventories | (1,546) | (447) | |||
Decrease/(increase) in trade and other receivables | 797 | (9,078) | |||
Increase/(decrease) in trade and other payables | 15,671 | (3,740) | |||
Increase in taxes payable | 3,893 | 1,990 | |||
Cash generated from/(used in) operations | 34,123 | (6,720) | |||
Interest received | 932 | 61 | |||
Income tax paid | (2,639) | - | |||
Net cash generated from/(used in) operating activities | 32,416 | (6,659) | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||
Purchase of property, plant and equipment | (97,266) | (47,967) | |||
Interest paid (capitalised portion) | (2,712) | - | |||
Purchase of Eurobonds | (15,399) | - | |||
Net cash used in investing activities | (115,377) | (47,967) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||
Proceeds from share issuance | 17 | 146,082 | 30,251 | ||
Proceeds from borrowings | 16 | - | 47,147 | ||
Interest paid | (978) | - | |||
Repayment of loan from related parties | - | (740) | |||
Net cash from financing activities | 145,104 | 76,658 | |||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 62,143 | 22,032 | |||
Translation difference | (873) | (15) | |||
Cash and cash equivalents at beginning of the year | 56,297 | 34,280 | |||
Cash and cash equivalents at end of the year | 117,567 | 56,297 | |||
*Foreign exchange loss in the amount of $625 thousand was reclassified from changes in working capital to operating cash flow before working capital changes to provide consistency with the presentation for the year ended 2011.
exillon energy plc
notes to the financial statements (UNAUDITED)
1. Background
The principal activity of the Company and its subsidiaries (together "the Group") is exploration, development and production of oil. The Group's production facilities are based in the Republic of Komi and the Khanty-Mansiysk Region of the Russian Federation. The Group's structure is provided in Note 19.
Exillon Energy plc (the "Company" or the "Parent") is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the Isle of Man. The company was formed on 27 March 2008. Its registered address is Fort Anne, South Quay, Douglas, Isle of Man, IM1 5PD.
As at 31 December 2011, the main shareholder has 30.2% (2010: 49.9%) in the Company's outstanding issued share capital.
The Group's operations are conducted primarily through its subsidiaries, Exillon TP and Exillon WS.
2. basis of preparation
The financial information in this announcement does not constitute the Group's annual accounts for the years ended 31 December 2011 or 2010. The preliminary results for the year ended 31 December 2011 have been extracted from unaudited consolidated financial statements. The financial information for the year ended 31 December 2010 is derived from the annual report for that year.
The consolidated financial statements of Exillon Energy plc have been prepared in accordance with International Financial Reporting Standards ("IFRS"), International Financial Reporting Interpretation Committee ("IFRIC") interpretations and on the historical cost basis with the exception of share based payments, that are incorporated at fair value.
The Group believes that it has sufficient financial resources to manage its business risks successfully despite the current uncertain economic outlook. The Company's forecasts and projections, taking account of reasonable changes in trading performance (including oil price), show that the Company should be able to operate with its current cash holdings.
The Directors have a reasonable expectation that the Group has adequate resources to continue operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
The financial information included in this report has been prepared on the basis of all IFRSs and Interpretations adopted by the International Accounting Standards Board ("IASB") that are mandatory for periods ending 31 December 2011.
The IFRS financial information has been drawn up on the basis of accounting policies consistent with those applied in the financial statements for the year to 31 December 2010, except for IAS 24 (Revised) ' Related party disclosures' which is mandatory for 2011.
Foreign currency translation - Transactions in foreign currencies are initially recorded in the functional currency at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency at the rate of exchange ruling at the balance sheet date. All differences are taken to the statement of comprehensive income.
On consolidation, assets and liabilities denominated in foreign currencies are translated into US dollars at closing rates of exchange. Trading results of subsidiary undertakings are translated into US dollars at average rates of exchange. The Group uses average monthly rates published by the Central Bank to translate trading results denominated in roubles into US dollars. Differences resulting from the retranslation of the opening net assets and the results for the year are taken to reserves.
The Group used the following exchange rates for conversion of roubles to US dollars:
For the year ended 31 December | ||||
2011 | 2010 | |||
Closing rates of exchange | 32.1961 | 30.4769 | ||
Effective annual average rates of exchange | 29.3865 | 30.3765 | ||
The exchange rate of UAE Dirham (AED) to US dollar has been held constant for the last several years at a rate of 3.675 AED for one US dollar.
3. segmental analysis
Management has determined the operating segments based on the reports reviewed by the Directors that make the strategic decisions for the Company, who are deemed to be the chief operating decision maker(CODM).
Exillon Energy plc manages its business as three operating segments, Exillon WS, Exillon TP andRegional Resources.
·; Exillon TP: oil company based in the Timan-Pechora basin in the Komi Republic in the Russian Federation. The revenue is derived from extraction and sale of crude oil.
·; Exillon WS: oil company based in Western Siberia in the Russian Federation. The revenue is derived from extraction and sale of crude oil.
·; Regional Resources: oil trading company based in Moscow in the Russian Federation.
Segmental information for the Group for the year ended 31 December 2011 is presented below:
Exillon TP | Exillon WS | Regional Resources | Other | Intersegment eliminations | Total | |||||
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 | |||||
Gross segment revenue | 63,282 | 139,689 | 1,088 | - | - | 204,059 | ||||
Inter-segment revenues | - | - | (1,088) | - | - | (1,088) | ||||
Revenue | 63,282 | 139,689 | - | - | - | 202,971 | ||||
Selling expenses | (18,071) | (67,022) | - | - | 969 | (84,124) | ||||
Net back | 45,211 | 72,667 | - | - | 969 | 118,847 | ||||
EBITDA | 8,308 | 18,976 | (12) | (7,786) | - | 19,486 | ||||
Depreciation and depletion | 6,269 | 7,254 | 114 | 158 | - | 13,795 | ||||
Operating profit/(loss) | 316 | 11,562 | (106) | (19,252) | - | (7,480) | ||||
Finance income | (43) | (86) | (96) | (1,103) | - | (1,328) | ||||
Finance cost | 78 | 312 | - | 563 | - | 953 | ||||
Capital Expenditure | 20,534 | 75,919 | 351 | 462 | - | 97,266 | ||||
Total assets | 211,386 | 339,412 | 14,211 | 109,265 | - | 674,274 |
Segmental information for the Group for the year ended 31 December 2010 is presented below:
Exillon TP | Exillon WS | Regional Resources | Other | Intersegment eliminations | Total | |||||||
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 | |||||||
Gross segment revenue | 58,288 | 26,499 | 1,046 | - | - | 85,833 | ||||||
Inter-segment revenues | - | - | (1,046) | - | - | (1,046) | ||||||
Revenue | 58,288 | 26,499 | - | - | - | 84,787 | ||||||
Selling expenses | (29,208) | (8,038) | - | - | 944 | (36,302) | ||||||
Net back | 29,080 | 18,461 | - | - | 944 | 48,485 | ||||||
EBITDA | 13,856 | 5,528 | 121 | (15,659) | - | 3,846 | ||||||
Depreciation and depletion | 5,276 | 564 | - | 23 | - | 5,863* | ||||||
Operating profit/(loss) | 8,960 | 3,921 | 58 | (15,763) | - | (2,824) | ||||||
Finance income | (19) | (26) | - | (16) | - | (61) | ||||||
Finance cost | 48 | 120 | - | 814 | - | 982 | ||||||
Capital Expenditure | 4,177 | 37,884 | 148 | 5,758 | - | 47,967 | ||||||
Total assets | 200,091 | 277,104 | 2,168 | 60,388 | - | 539,751 | ||||||
* Depreciation for the year ended 31 December 2010 was calculated in compliance with RAS; the reconciliation to IFRS depreciation is provided below.
The transfer prices between operating segments are on an arm's length basis in a manner similar to transactions with third parties.
The Group's management assesses the performance of the operating segments based on EBITDA which is calculated as follows: operating result plus depletion and depreciation, plus/minus foreign exchange gain/loss and plus/minus other significant one-off income/(expenses).In 2011, other significant one-off items included loss arising on write-off of non-current assets following the corporate restructuring. The measure also excludes the effects of equity-settled share-based payments.
In 2010, EBITDA was reported to the CODM including foreign exchange gain/loss and the effect of share-based payments due to the insignificance of these items; the effect of those changes in the measurement method is provided below.
Net back is defined as revenue less selling expenses.
Reconciliation of operating (loss)/profit to EBITDA for the year ended 31 December 2011 is presented below:
Exillon TP | Exillon WS | Regional Resources | Other | Intersegment eliminations | Total | |||||||
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 | |||||||
Operating profit/(loss) | 316 | 11,562 | (106) | (19,252) | - | (7,480) | ||||||
Foreign exchange (gain)/loss | (37) | (329) | (20) | 7,130 | - | 6,744 | ||||||
Share based payment charge | - | - | - | 4,178 | - | 4,178 | ||||||
Loss on write-off of property, plant and equipment | 1,760 | 489 | - | - | - | 2,249 | ||||||
Depreciation and depletion | 6,269 | 7,254 | 114 | 158 | - | 13,795 | ||||||
EBITDA | 8,308 | 18,976 | (12) | (7,786) | - | 19,486 | ||||||
Reconciliation of operating profit/(loss) to EBITDA for the year ended 31 December 2010 is presented below (excluding foreign exchange gain/loss and the effect of share-based payments):
Exillon TP | Exillon WS | Regional Resources | Other | Intersegment eliminations | Total | |||||||
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 | |||||||
Operating profit/(loss) | 8,960 | 3,921 | 58 | (15,763) | - | (2,824) | ||||||
Foreign exchange loss/(gain) | 610 | 352 | 30 | (367) | - | 625 | ||||||
Share based payment charge | - | - | - | 232 | - | 232 | ||||||
Depreciation and depletion | 4,896 | 1,607 | 63 | 104 | - | 6,670 | ||||||
EBITDA | 14,466 | 5,880 | 151 | (15,794) | - | 4,703 | ||||||
Reconciliation of operating profit/(loss) to EBITDA for the year ended 31 December 2010, as previously presented in the 2010 annual report, is presented below (including foreign exchange gain/loss and the effect of share-based payments):
Exillon TP | Exillon WS | Regional Resources | Other | Intersegment eliminations | Total | |||||||
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 | |||||||
Operating profit/(loss) | 8,960 | 3,921 | 58 | (15,763) | - | (2,824) | ||||||
Depreciation and depletion | 4,896 | 1,607 | 63 | 104 | - | 6,670 | ||||||
EBITDA | 13,856 | 5,528 | 121 | (15,659) | - | 3,846 | ||||||
In 2010, for management purposes depreciation calculated in accordance with Russian Accounting Standards (RAS) was reported to the CODM. IFRS depreciation is calculated based on fair value of Property, plant and equipment as it was measured in the business combination, while RAS calculations are based on historical costs. Another principal difference of calculation relates to the usage of the straight-line method for Property, plant and equipment related to oil and gas production activities in RAS instead of use of the unit-of-production method used in IFRS. In 2011, depreciation calculated in accordance with IFRS is used for management purposes and reported to the CODM. The reconciliation of depreciation is presented below:
| ||||
2010 | ||||
| $'000 | |||
Depreciation calculated in compliance with RAS | 5,863 | |||
IFRS adjustments | 807 | |||
Depreciation calculated in compliance with IFRS | 6,670 | |||
Activities by geographical areas
The Group derives its revenue from export and domestic sales with allocation of revenue on the basis of the customer's location:
For the year ended 31 December | ||||
2011 | 2010 | |||
$'000 | $'000 | |||
Domestic sales | ||||
Russian Federation | 80,057 | 26,177 | ||
Export sales | ||||
Switzerland | 27,630 | 33,520 | ||
Germany | 95,284 | 22,084 | ||
Hungary | - | 3,006 | ||
122,914 | 58,610 | |||
Total | 202,971 | 84,787 | ||
In 2011, the Group earned revenues each exceeding 10% of Group's revenues from four major customers of $95,284 thousand and $27,630 thousand (both attributable to export sales) and $25,780 thousand and $25,362 thousand (both attributable to domestic sales), reported by Exillon WS and Exillon TP segments.
In 2010, the Group earned revenues each exceeding 10% of Group's revenues from three major customers of $33,520 thousand and $22,084 thousand (both attributable to export sales) and $14,753 thousand (attributable to domestic sales) reported by Exillon WS and Exillon TP segments.
As at 31 December 2011 and 31 December 2010, non-current assets located outside the Russian Federation were insignificant.
4. revenue
For the year ended 31 December | ||||
2011 | 2010 | |||
$'000 | $'000 | |||
Export sales of crude oil | 122,914 | 58,610 | ||
Domestic sales crude oil | 80,057 | 26,177 | ||
| ||||
| 202,971 | 84,787 | ||
5. cost of sales
For the year ended 31 December | ||||
2011 | 2010 | |||
$'000 | $'000 | |||
Minerals extraction tax | 64,507 | 23,536 | ||
Depreciation and depletion | 13,421 | 6,454 | ||
Salary and related taxes | 4,543 | 2,583 | ||
Licence maintenance cost | 3,007 | 1,635 | ||
Materials | 2,485 | 1,323 | ||
Oil treatment and in field transportation | 1,224 | 3,607 | ||
Current repair of property, plant and equipment | 1,951 | 735 | ||
Taxes other than income tax | 1,885 | 687 | ||
Operating lease | 933 | 243 | ||
Bad debt expense | 195 | - | ||
Unused vacation reserve | 73 | - | ||
| 94,224 | 40,803 | ||
Change in finished goods | (446) | 18 | ||
| 93,778 | 40,821 | ||
In 2011, bad debt expense amounted to $195 thousand with $177 thousand attributable to prepayments (Note 13) and the remaining amount to trade and other receivables (Note 12).
For the year ended 31 December 2010 in field transportation costs for chemicals and spare parts of $1,275 thousand have been reclassified from oil treatment and in field transportation to licence maintenance cost to provide consistency with the measurement method introduced for the year ended 31 December 2011.
6. selling expenses
For the year ended 31 December | ||||
2011 | 2010 | |||
$'000 | $'000 | |||
Export duties | 65,617 | 28,855 | ||
Transportation services | 16,879 | 6,750 | ||
Other expenses | 1,628 | 697 | ||
| ||||
| 84,124 | 36,302 | ||
7. administrative expenses
For the year ended 31 December | ||||
2011 | 2010 | |||
$'000 | $'000 | |||
Salary and related taxes | 10,986 | 6,110 | ||
Share based payment charge | 4,178 | 232 | ||
Business travel | 2,298 | 1,063 | ||
Consulting services | 1,767 | 1,477 | ||
Operating lease | 1,120 | 595 | ||
Communication services | 421 | 323 | ||
Depreciation and amortisation | 374 | 216 | ||
Bank services | 210 | 186 | ||
Share issuance costs | 195 | 237 | ||
Insurance | 192 | 113 | ||
Current office maintenance | 156 | 31 | ||
Unused vacation reserve | 143 | 21 | ||
Recruitment services | 140 | 4 | ||
Accounting fees | 137 | 177 | ||
Admission and annual fees to LSE | 107 | 37 | ||
Secretary services | 11 | 177 | ||
Other expenses | 953 | 910 | ||
| ||||
| 23,388 | 11,909 | ||
Share issuance costs expensed for the year ended 31 December 2011 and for the year ended 31 December 2010 related to professional and other services. Costs of $7,324 thousand have been taken to equity (2010: $1,939 thousand) (Note 17).
8. other (eXPENSE)/income, net
For the year ended 31 December | ||||
2011 | 2010 | |||
$'000 | $'000 | |||
Loss on write-off of property, plant and equipment | (2,249) | - | ||
Penalties received | 126 | 516 | ||
Debt forgiveness | - | 972 | ||
Income on inventory sales | - | 692 | ||
Other expense | (294) | (134) | ||
| ||||
| (2,417) | 2,046 | ||
Penalties were received from third parties as a result of non-compliance with contractual terms.
9. earnings per share
Basic earnings per share ('EPS') is calculated by dividing net profit for the year attributable to ordinary equity shareholders of the Group by the weighted average number of ordinary shares outstanding during the period.
The following reflects the income and adjusted share data used in the EPS computations:
For the year ended 31 December | ||||
2011 | 2010 | |||
$'000 | $'000 | |||
Net loss attributable to equity shareholders of the Group | (9,997) | (3,602) | ||
Number of shares: | ||||
Weighted average number of ordinary shares | 149,362,361 | 126,827,625 | ||
Adjustments for: | ||||
- Shares additionally issued for share awards | 2,338,723 | 1,255,205 | ||
Weighted average number of ordinary shares for diluted earnings per share | 151,701,084 | 128,082,830 | ||
| ||||
Basic ($) | (0.07) | (0.03) | ||
Diluted ($) | (0.07) | (0.03) | ||
10. Property, plant and equipment
Oil and gas properties | Exploration and Evaluation Assets | Buildings and construction | Machinery, equipment, transport and other | Construction in progress | Total | |
$'000 | $'000 | $'000 | $'000 | $'000 | $'000 | |
Historical Cost | ||||||
31 December 2009 | 393,083 | - | 8,331 | 4,564 | 27,948 | 433,926 |
Additions | 2,940 | 5,295 | 1,219 | 2,761 | 37,025 | 49,240 |
Transferred from construction in progress | 10,530 | - | 17 | - | (10,547) | - |
Disposals | - | - | - | (103) | - | (103) |
Translation difference | (2,757) | 81 | (58) | (27) | (713) | (3,474) |
31 December 2010 | 403,796 | 5,376 | 9,509 | 7,195 | 53,713 | 479,589 |
Additions | 15,005 | 1,302 | 392 | 3,704 | 82,184 | 102,587 |
Transferred from construction in progress | 44,045 | - | 1,331 | 32,975 | (78,351) | - |
Disposals | (1,074) | - | (39) | (160) | (818) | (2,091) |
Translation difference | (24,456) | (317) | (797) | (2,565) | (6,210) | (34,345) |
31 December 2011 | 437,316 | 6,361 | 10,396 | 41,149 | 50,518 | 545,740 |
Accumulated depreciation and depletion | ||||||
31 December 2009 | (2,830) | - | (296) | (448) | - | (3,574) |
Charge for the period | (5,160) | - | (474) | (1,036) | - | (6,670) |
Disposals | - | - | - | 19 | - | 19 |
Translation difference | 23 | - | 5 | 2 | - | 30 |
31 December 2010 | (7,967) | - | (765) | (1,463) | - | (10,195) |
Charge for the period | (9,175) | - | (748) | (3,872) | - | (13,795) |
Disposals | - | - | - | 16 | - | 16 |
Translation difference | 1,214 | - | 104 | 339 | - | 1,657 |
31 December 2011 | (15,928) | - | (1,409) | (4,980) | - | (22,317) |
| ||||||
Net book value | ||||||
31 December 2009 | 390,253 | - | 8,035 | 4,116 | 27,948 | 430,352 |
31 December 2010 | 395,829 | 5,376 | 8,744 | 5,732 | 53,713 | 469,394 |
| ||||||
31 December 2011 | 421,388 | 6,361 | 8,987 | 36,169 | 50,518 | 523,423 |
Included within oil and gas properties as of 31 December 2011 is $3,747 thousand (2010: $2,829 thousand) relating to decommissioning costs and $4,432 thousand (2010: 175 thousand) relating to borrowing costs capitalised during the period. Total borrowing costs incurred during the period amounted to $4,820 thousand (2010: $989 thousand) with annual effective capitalisation rate equal to 88.3% (2010: 17.7%).
Exploration and Evaluation Assets as of 31 December 2011 are attributable to the ETP VI licence acquired in February 2010 and ETP VII licence acquired in December 2011. Construction in progress relates to the construction of infield infrastructure and drilling of oil wells commenced during the year ended 31 December 2011.
11. Inventories
As at 31 December | |||
2011 | 2010 | ||
$'000 | $'000 | ||
Crude oil | 1,141 | 324 | |
Spare parts | 1,222 | 830 | |
Fuel | 273 | 227 | |
Chemicals | 187 | 123 | |
| 2,823 | 1,504 | |
12. trade and other receivables
As at 31 December | |||
2011 | 2010 | ||
$'000 | $'000 | ||
Trade receivables | 1,912 | 1,626 | |
Allowance for doubtful debts | (141) | (136) | |
Net trade receivables | 1,771 | 1,490 | |
Taxes recoverable | 9,779 | 4,304 | |
Other receivables | 2,136 | 2,613 | |
Current trade and other receivables | 13,686 | 8,407 | |
In determining the recoverability of a trade receivable, the Company considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. Accordingly, the management of the Group believes that there is no further credit provision required in excess of the allowance for doubtful debts.
13. other assets
As at 31 December | ||||
2011 | 2010 | |||
| $'000 | $'000 | ||
Eurobonds | 13,561 | - | ||
Prepayments (net of provision of $177 thousand (2010: nil)) | 5 | 2,200 | 1,841 | |
Prepaid expenses | 790 | 695 | ||
Loans to employees | - | 1,352 | ||
Other | 97 | 146 | ||
Current other assets | 16,648 | 4,034 | ||
On 6 May 2011, the Group purchased Eurobonds issued by EBRD for the total consideration of $15,399 thousand. The financial instruments are denominated in RUR with the fixed interest rate of 6% and matured in February 2012(Note 20).
Included within Loans to employees as of 31 December 2010 are one-year interest-free loans provided to the employees and receivables from the employees for accommodation prepayments made by the Company for them. Loans of $140 thousand were forgiven as part of a bonus for achievement of production indicators. The remaining amount was fully repaid by employees during the year ended 31 December 2011.
14. provision for decommissioning
As at 31 December | ||||
2011 | 2010 | |||
$'000 | $'000 | |||
Balance at the beginning of the year | 3,949 | 2,704 | ||
Additions | 2,553 | 2,140 | ||
Change in estimates | (1,469) | (1,105) | ||
Unwinding of the present value discount | 390 | 168 | ||
Translation difference | (270) | 42 | ||
| ||||
Balance at the end of the year | 5,153 | 3,949 | ||
In accordance with the licence agreements the Group is liable for site restoration, clean up and abandonment of the wells upon completion of their production cycle. The provision for future site restoration relates to obligations to restore the oilfields after use. All of these costs are expected to be incurred at the end of the life of wells in a range between 2027 and 2038. They depend on the estimated lives of the wells, the scale of any possible contamination and the timing and extent of corrective actions.
The unwinding of the discount related to future site restoration and abandonment reserve is included within finance costs. Management believes that this estimate of the future liability is appropriate to the size of the fields.
15. trade and other payables
As at 31 December | ||||
2010 | 2010 | |||
$'000 | $'000 | |||
Trade payables | 13,633 | 3,768 | ||
Advances received | 7,329 | - | ||
Salary payable | 719 | 1,683 | ||
Other payables | 663 | 791 | ||
Purchase of well | - | 778 | ||
Current trade and other payables | 22,344 | 7,020 | ||
16. borrowings
As at 31 December | ||||
2011 | 2010 | |||
$'000 | $'000 | |||
Credit Suisse | 49,038 | 47,906 | ||
Total borrowings | 49,038 | 47,906 | ||
Less: current portion | (3,271) | (759) | ||
| ||||
Long-term portion | 45,767 | 47,147 | ||
There is no material difference between the carrying amount and fair value of borrowings.
Credit Suisse - On 10 September 2010, the Group agreed a loan facility of $50 million with a term of 3.5 years. Interest is charged at LIBOR plus 7%. At 31 December 2011, the outstanding balance of $45,767 thousand was recognised net of the unamortised borrowing costs of $1,735 thousand. The amortisation of borrowing costs for 2011 was $1,118 thousand.
The loan is free of any equity related components and the interest is payable quarterly with the first payment made in January 2011.
The first repayment of principal amount was made in January 2012 in compliance with the repayment schedule.
In March 2012 the existing loan facility was replaced by a $100 million loan facility with a term of 5 years. The loan bears an interest rate at LIBOR plus 6% and is repayable in equal quarterly instalments from March 2014 (Note 20).
The loan is secured by a pledge of the 100% shares of certain Group's subsidiaries (Note 19): Exillon TP, Exillon WS, Regional Resources LLC, Ucatex Oil LLC, Kayumneft CJSC, Nem Oil CJSC, Komi Resources CJSC, Actionbrook Limited, Claybrook Limited, Diamondbridge Limited, Lanarch Limited, Halescope Limited, Vitalaction Limited, Corewell Limited, Touchskope Limited, Silo Holdings Limited and Exillon Finance Limited.
The loan is also secured with future revenue under export contracts and cash balances from bank account opened in CJSC Bank Credit Suisse (Moscow).
17. share capital
The amount of share capital available for issue at the date of these consolidated financial statements and the issued share capital of the Company are as follows:
Note | Number (allotted and called up) | Share capital | Share Premium | |
$'000 | $'000 | |||
As at 31 December 2009 | 125,520,829 | 1 | 95,783 | |
Issuance of shares | 12,552,082 | - | 30,251 | |
As at 31 December 2010 | 138,072,911 | 1 | 126,034 | |
Issuance of shares | 23,438,000 | - | 146,082 | |
As at 31 December 2011 | 161,510,911 | 1 | 272,116 |
The total number of allotted ordinary shares is 161,510,911 with a par value of $0.0000125 each.
Issuance of new shares - on 24 June 2010, the Company issued 12,552,082 of new shares with a par value of $0.0000125 each at £1.70 for total proceeds of £21,339 thousand or $32,190 thousand. Costs related to the issuance of new shares taken against share premium amounted to $1,939 thousand.
On 21 April 2011, the Company issued 23,438,000 of new shares with a par value of $0.0000125 each at £4 for total proceeds of £93,752 thousand or $153,406 thousand. Costs related to the issuance of new shares taken against share premium amounted to $7,324 thousand.
18. COMMITMENTS AND CONTINGENCIES
Capital commitments - The Group has capital commitments outstanding against major contracts.
As at 31 December | ||||
Nature of contract: | 2011 | 2010 | ||
$'000 | $'000 | |||
Road construction | 320 | 3,122 | ||
Well construction | 19,090 | 39,823 | ||
Oil reserves development work | 5,341 | 7,653 | ||
Pipeline construction | 18 | 1,510 | ||
Other | 118 | 291 | ||
|
|
|
|
|
Total | 24,887 | 52,399 | ||
Leases - the Group leases wells and associated land plots from government agencies in the Russian Federation. The initial terms on all leases has expired as at 31 December 2011. The lease terms allow for continued lease renewal after expiry of the initial term. At the present time the annual payments arising on the leases are approximately $351 thousand. In continuing to use these wells, the Group relies on Article 621(2) of the Civil Code of the Russian Federation, which states that such leases are renewed for an indefinite term if the tenant continues to use the property after the term of the lease has expired in the absence of objections from the lessor, although either party is entitled to terminate the lease upon three months' notice. The Group believes that the Russian authorities are unlikely to exercise this termination right as the Group has the exclusive right to extract the oil resources underlying the wells and continues to make lease payments. Management expects to continue to pay for the leases until the end of the life of the reserves, in approximately a range between 2027 and 2038.
The Group also leases apartments for offices at Exillon WS and Exillon TP. The initial terms on all leases has expired as at 31 December 2011. The lease terms allow for continued lease renewal after expiry of the initial term. At the present time the annual payments arising on the leases are approximately $294 thousand.
Minimum lease payments were as follows:
As at 31 December | |||
2011 | 2010 | ||
$'000 |
| $'000 | |
Within one year | 644 | 470 | |
Two to five years | 1,402 | 986 | |
Later than five years | 3,856 | 2,959 | |
Total | 5,902 | 4,415 | |
Taxes - Russian tax legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activities of the Group's subsidiaries may be challenged by the relevant federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments in different areas, including general tax deductibility and tax depreciation rules, transfer pricing regulations, application of thin capitalisation rules, etc. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.
Combined with a possible increase in tax collection efforts to respond to budget pressures, the above may lead to an increase in the level and frequency of scrutiny by the tax authorities. In particular, it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed.
Russian transfer pricing legislation introduced on 1 January 1999 provided the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions where the transaction price differs from the market price by more than 20%. Controllable transactions included: transactions with interdependent parties (as determined under the Russian Tax Code), all cross-border transactions (irrespective of whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. There was no formal guidance as to how these rules should be applied in practice. In the past, the arbitration court has governed practice in this area.
In compliance with the new transfer pricing rules, which have been enacted in the Russian Federation from 2012, controllable transactions include export sales exceeding 60 million roubles (approximately $2 million) per calendar year and domestic transactions between related parties exceeding 3 billion roubles (approximately $105 million). The rule of 20% difference between transaction price and market price was abolished. Moreover, the new methods for determining arm's length prices were introduced with elaboration of previous pricing methods to harmonise them with OECD transfer pricing principles. The requirement for formal reporting of controllable transactions and preparation of documentation supporting arm's length prices was incorporated. Currently the impact of these changes cannot be reliably estimated.
The Group includes companies incorporated outside of the Russian Federation. Tax liabilities of the Group are determined on the assumption that these companies are not subject to Russian profits tax because they do not have a permanent establishment in Russia. Russian tax laws do not provide detailed rules on taxation of foreign companies. It is possible that with the evolution of the interpretation of these rules and the changes in the approach of the Russian tax authorities, the non-taxable status of some or all of the foreign companies of the Group in Russia may be challenged. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the entity.
Mineral extraction tax for crude oil is calculated by multiplying the extracted quantity of dewatered, desalted and stabilised oil by the base rate per tonne of crude oil produced and by the adjustment ratiothat reflects changes in the rouble/dollar exchange rate and the depletion rate of the subject field. In January 2012 the base rate was increased to rouble 446 per tonne of crude oil from rouble 419 per tonne in 2011. Moreover, a new coefficient is applicable from 1 January 2012 to reflect the amount of resources for a particular subsoil area.
Export duty is reviewed by the Russian government on a monthly basis and is based on a formula that takes into account the average Urals price prevailing in the market between 15th and 15th of the months prior to the month of delivering the crude oil. In 2011, export duty was levied at the rate of $29.2 per tonne ($4.0 per barrel) plus 65% of the difference between Urals price and $182.5 per tonne ($25.0 per barrel). In October 2011 the index of 65% was decreased to 60%. The impact of these changes cannot be reliably estimated; however, the increase in mineral extraction tax should be partially offset by the amendment in the calculation of export duty.
Environmental matters - The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage.
According to the changes enacted in the Russian Federation from 2012, the utilisation of associated gas emissions for subsoil licence holders was set up at the rate of 95% of total produced gas; while a 5% target limit was introduced for gas flaring. Pollution tax is payable at the increased rates on unutilised gas volumes exceeding this limit. From 2012 the applicable rate has increased fourfold. Currently the Group continues the development of infield infrastructure to enable the use of associated gas as fuel for internal purposes. This will enable the Group to achieve the preset rate of utilisation with a subsequent reduction of pollution tax payments.
19. controlled entities
A list of the Company's principal subsidiaries is set out below:
|
|
|
|
|
| Ownership/ proportion of ordinary shares as at | ||
Name |
| Country of incorporation |
| Principal activity |
| 2011 | 2010 | |
Exillon TP | Russian Federation | Exploration, development and production of oil and gas | 100% | 100% | ||||
Exillon WS | Russian Federation | Exploration, development and production of oil and gas | 100% | 100% | ||||
Regional Resources LLC | Russian Federation | Oil sales and marketing | 100% | 100% | ||||
Ucatex Oil LLC | Russian Federation | Subsoil user | 100% | 100% | ||||
Kayumneft CJSC | Russian Federation | Subsoil user | 100% | 100% | ||||
Nem Oil CJSC | Russian Federation | Subsoil user | 100% | 100% | ||||
Komi Resources CJSC | Russian Federation | Administration | 100% | 100% | ||||
Ucatex Ugra LLC | Russian Federation | Subsoil user | 100% | 100% | ||||
Silo Holdings LLC | BVI | Oil trading | 100% | 100% | ||||
Exillon Finance LLC | Isle of Man | Treasury | 100% | 100% | ||||
Exillon Middle East LLC | UAE | Services and administration | 49%* | 49%* | ||||
* Entities where the Group holds less than 50% interest are consolidated by virtue of the Group having the ability to exercise effective control. There is no Non-Controlling Interest related to 51% not owned by the Group, because in compliance with UAE Legislation the other party is the nominal owner with no ability to exercise any significant influence and no participation interest.
20. Subsequent events
In January 2012 an accelerated charge of $2,250 thousand was recognised in relation to the early vesting of 492,166 share awards to certain senior management who have left the company.
In February 2012 the Group received proceeds of $14,541 thousand comprising the nominal value and accrued interest in relation to Eurobonds issued by EBRD.
In March 2012 the existing Credit Suisse loan facility was replaced by a $100 million loan with a term of 5 years. The loan bears interest at LIBOR plus 6% and is repayable in equal quarterly instalments from March 2014. The net proceeds will be used to finance drilling and infrastructure related projects in Exillon WS and Exillon TP, and to enhance the company's flexibility to develop its recent acquisitions.