G3 Exploration Regulatory News (G3E)

30 Sep 2019

G3 Exploration LTD.

("G3E", "G3 Exploration" or the "Company")

Interim Results for the Six Months Ended 30 June 2019

Financial and Operational highlights

2019H1 HIGHLIGHTS

• Disposition plan concluded and being implemented on the Producing assets to focus on Exploration.

• Progress Overall Development Plan work program for GDG-GCZ asset.

2019H1 RESULTS

Financial: Continued stable EBITDA generation from Producing Green Dragon Gas Assets

• Reported revenue includes assets held for sale within Green Dragon Gas (GDG).

• Revenue of US$11.0m (2018: US$13.7m).

• EBITDA of GDG of US$7.2m (2018: US$8.7m) at a constant 65% margin.

• Cash generated from group total operating activities during the period of US$0.5m (2018: cash used US$0.2m).

• Net loss for the period of US$7.0m (2018: net loss of US$6.3m), primarily due to interest charges.

2019 OUTLOOK

Recapitalize balance sheet and drive development Program

G3 Exploration

• Conclude evolution to exploration and development business.

• GDG divesture and dividend in specie.

• Repay two bond creditors from the GDG proceeds.

• Progress ODP plan for GDG-GSS asset.

• Deliver first gas in Guizhou Block (GGZ).

CHAIRMAN'S STATEMENT

While our challenges continue, I am pleased to report continued operational progress across our two producing commercial blocks in Shanxi as well as our six exploration blocks in Anhui, Guizhou, Jiangxi and Shanxi. 

Our focus as a Group continues to be on resurrecting the balance sheet through the sale of the producing assets through a dividend in specie of our wholly owned subsidiary Green Dragon Gas ("GDG"). The trade sale processes led by Citibank and Credit Suisse during the period concluded with a viable alternative on selling one of the fields but with an unknown timing to close due to conditions beyond the potential buyers control.

GDG has engaged an experienced bank and advisors to conclude a Reserve Based Loan ("RBL") of up to $250m, which has become a viable option to it following the approval of the Overall Development Plan ("ODP"). The proceeds from the RBL are expected to be sufficient to pay the intergroup loan to G3E enabling the dividend in specie to be concluded. Once independent, GDG maintains its plan to proceed onto a public listing.

Upon receipt of loan repayment proceeds from GDG, the Company expects to have successfully restructured its balance sheet, should be debt free and can proceed onto its exploration focused business plan. G3 Exploration shall in turn use these receipts to settle its outstanding debt, including to its Nordic Bond holders and Convertible Bond holders.

G3E has invested approximately $270m in its exploration portfolio which has a 2P value of over $816m. We are eager to focus on this portfolio and systematically migrate this portfolio into commercial production and thereafter farm-outs or sales. Each of these transactions should provide the shareholders a dividend. Our current portfolio in China provides a solid five year backlog of projects. The most advanced of these, the Guizhou exploration block (GGZ), is expected to commence test gas sales before the end of this year.

GDG Jincheng, Shanxi based team has worked closely with CNPC-PetroChina on progressing the GCZ production block to further development. The block continued its commercial gas sales while the collaborative Joint Operating Team concluded its Overall Development Plan. The plan approved by the Chinese government, permits the drilling of 147 wells by yearend 2020, of which 32 wells have been completed. We are pleased to see 99 wells now selling gas with the most recent daily gas production of 5.88 MMCF or 2.15 BCFPY. The implementation of the ODP has successfully reversed the filed decline as anticipated.

The GSS block met its objective of increasing gas sales from the 588 gas sales wells. The CNOOC-CUBCM team increased with gas sales well from 354 to 482 of the total 1,128 wells drilled which resulted in an exit gas sales rate of 2.98 BCFPY. This was complemented by our own operated wells which maintained a 1.49 BCFPY exit gas sales rate. This provides for GSS attaining a gas sales rate of 4.47 BCFPY. Cumulative gas sales in the first half year is 1.72 BCF and we expect gas sales to continue increasing as the balance of the drilled wells are placed on line and from the resulting de-watering of the basin which will assist gas flow.

In addition to the GSS producing block, the CNOOC/CUCBM partnership spreads across five exploration blocks namely; GSN, GFC, GPX, GQY-A and GQY-B. Our exploration team has been in advanced discussions with our partner on the next two year exploration plan for each of the blocks. We expect the parties to conclude such plan and begin implementation before yearend.

On 25 September 2019, the Nordic Bond Trustee called a Bond Holders informational conference on 30 September 2019. The Bond Trustee intends to provide Bondholders with information on the current status of the Bond and to allow its recently appointed receivers to the Company's subsidiary Greka Gas China Ltd., to provide an update on the restructuring options currently being considered with the Company.

We look forward to a full repayment of all our bonds in the near future which has been an operational distraction for almost two years. Once completed, we can get back on track with our long-term objectives. Thereafter, I look forward to monetizing the value which we have developed over the past two decades in our producing assets, developing our exploration assets and committing to incremental geographies where our deep knowledge in CBM is of accretive value to our shareholders.

Randeep S. Grewal

Founder & Chairman

Condensed Consolidated Statement of Comprehensive Income

Six months ended 30 June 2019

Condensed Consolidated Statement of Financial Position

At 30 June 2019

Condensed Consolidated Statement of Changes in Equity

Six months ended 30 June 2019

Condensed Consolidated Statement of Cash Flows

Six months ended 30 June 2019

Notes to Condensed Interim Financial Statements

1 GENERAL INFORMATION

The condensed financial information for the six months ended 30 June 2019 and 30 June 2018 is unaudited and does not constitute a set of statutory financial statements. The consolidated unaudited interim financial information set out in this report represents the consolidated financial statements of G3E Ltd. and its subsidiary companies (together referred to as the 'Group'). The condensed consolidated financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2018, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"). The comparative financial information for the full year ended 31 December 2018 presented here is not the Group's full annual accounts for that period but has been derived from the annual financial statements for that period. The auditors' report on those accounts was unqualified and includes reference to a matter to which the auditors drew attention by way of material uncertainty related to going concern paragraph on the Group's ability to continue as a going concern without qualifying their report. The condensed consolidated financial information has not been audited or reviewed by the Company's auditors.

2 ACCOUNTING POLICIES

All accounting policies adopted in the preparation of the condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2018, except as described below.

None of the new standards or amendments to standards and interpretations applicable during the period has had a material impact on the financial position or performance of the Group. The Group has not early adopted any standard, interpretation or amendment that was issued but is not yet effective.

In preparing these condensed consolidated financial statements, the Group has adopted all the applicable extant accounting standards issued by the IASB and all the applicable extant interpretations issued by the IFRIC and adopted by the EU up to 30 June 2019.

The following accounting standards, amendments and interpretations, which had no significant impact on these condensed consolidated financial statements, became effective in the current reporting period as adopted by the EU through the European Financial Reporting Advisory Group ('EFRAG'):

Leases

On 1 January 2019, the Group adopted IFRS 16 'Leases' using the 'modified retrospective approach', which did not result in a classification or measurement adjustment to retained earnings on transition or a restatement of comparative information. The standard changes the identification of leases and how they will be recognised, measured and disclosed by lessees, requiring the recognition of a right-of-use asset and liability for the future lease payments on the balance sheet. The standard requires the right-of-use asset to be depreciated over the duration of the lease term and shown within operating profit in the income statement, with the interest cost associated with the financing of the asset included within interest expense. In applying the transition requirements and provisions of the new standard, the Group reviewed its lease contracts, which mainly relate to leased office buildings, and the right-of-use asset and related liability was found to be immaterial. The standard does not apply to leases to explore for or use natural resources, such as mining licences and rights.

The Group has elected not to recognise right-of-use assets and lease liabilities for leases which have low value, or short-term leases with a duration of 12 months or less. The payments associated with such leases are charged directly to the income statement on a straight-line basis over the lease term.

In assessing the application of IFRS 16, the Group considered the following practical expedients:

• The previous determination of whether a contract is, or contains, a lease pursuant to IAS 17 'Leases' and IFRIC 4 'Determining whether an Arrangement contains a Lease' has been maintained for existing contracts;

• Right-of-use assets or lease liabilities for leases where the lease term ends within 12 months of the date of initial application have not been recognised;

• Initial direct costs from right-of-use assets have been excluded; and

• Hindsight was used when assessing the lease term.

2.1 Basis of preparation and going concern

The Company has a convertible loan note liability of $61.5 million, which is due for repayment on 31 December 2020. On 14 November 2018 an extension to the one-time early redemption option was agreed with the note holder such that it is now exercisable at any time up to 20 November 2019, and would require early repayment of the whole amount due no earlier than 20 November 2019. The option to require early repayment is at the note holder's sole discretion, which has been exercised due to the Nordic Bondholder Trustee's recent action. Further details of the terms of the instrument are included in note 13.

The Company has a bond liability of $117.2 million, which was due for repayment in November 2017. The bond has not been repaid, and the due date has passed. The Bond Trustee representing a majority of the outstanding bond, are in ongoing discussions with the Company regarding amongst other things negotiating the repayment of the outstanding bond amount. As announced by the Company on 25 September 2019, the Bond Trustee has called a Bond Holders informational conference on 30 September 2019. The bond Trustee intends to provide Bondholders with information on the current status of the Bond and to allow its recently appointed receivers to the Company's subsidiary Greka Gas China Ltd., to provide an update on the restructuring options currently being considered with the Company. Further details of the terms of the instrument are included in note 14.

The Company also has other payables due to third parties of approximately $13.0 million (2018: $12.9 million), due immediately. The Company is managing these payables through continuing negotiation with suppliers.

The Company also has certain capital expenditure requirements in some of its exploration blocks during the exploration period. Further details are included in note 19.

In considering the appropriateness of the going concern basis, the Board gave consideration to the following:

On 29 March 2019, the Company has announced its intention to declare a dividend in-specie for its discontinued upstream operation, Green Dragon Gas (GDG). G3E shareholders on the register as of the effective date 29 March 2019 will receive a direct interest in GDG.

GDG has engaged an experienced bank and advisors to conclude a Reserve Based Loan ("RBL") of up to $250m, which has become a viable option to it following the approval of the Overall Development Plan ("ODP"). The proceeds from the RBL are expected to be sufficient to pay the intergroup loan to G3E enabling the dividend in specie to be concluded. Once independent, GDG maintains its plan to proceed onto a public listing.

Upon receipt of loan repayment proceeds from GDG, the Company expects to have successfully restructured its balance sheet, should be debt free and can proceed onto its exploration focused business plan. G3 Exploration shall in turn use these receipts to settle its outstanding debt, including to its Nordic Bond holders and Convertible Bond holders.

The Company notes that discussions continue with the Bondholders and Note Holder. The receivers appointed by the Nordic Bondholder Trustee will provide an update on the restructuring options currently being considered with the Company.

The Company expects to use the proceeds from the repayment of intergroup loan to G3E to repay all of the Company's debts. Based on the above, the Company expects to be able to meet its liabilities as they fall due for a period not less than one year.

However, as at the date of this report, there can be no certainty that the RBL of GDG will be successful, there can also be no certainty on the course of action to be taken by the Bondholders and Note Holder.

Notwithstanding the discussions regarding the GDG RBL, the Directors, in accordance with Financial Reporting Council guidance in this area, conclude that at this time there is material uncertainty that such finance can be procured and failure to do so might cast significant doubt upon the Group's ability to continue as a going concern and that the Group may therefore be unable to realise their assets and discharge their liabilities in the normal course of business. These Financial Statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

3 REVENUE AND SEGMENTAL INFORMATION

The Group's reportable segments are as set out below. The operating results of each of these segments are regularly reviewed by the Group's chief operating decision-makers in order to make decisions about the allocation of resources and assess their performance.

During the period, the revenue of US$11.0 million (30 June 2018: US$13.7 million) was recognised by the upstream discontinued business. The average RMB/USD exchange rate for the period is 1.3% lower compared to the equivalent period in the prior year. The average RMB/USD exchange rate for the period ended 30 June 2019, and used for translating income statement RMB transactions for the purposes of this financial information was 6.7714 as compared to 6.8610 in the equivalent period of the prior year.

For the period ended 30 June 2019 (unaudited)

For the period ended 30 June 2018 (unaudited)

For the year ended 31 December 2018 (audited)

4 OTHER INCOME AND FINANCE INCOME

5 NON-CURRENT ASSETS HELD-FOR-SALE AND DISCONTINUED OPERATION

The assets and liabilities relating to the carve-out of the producing blocks (GSS & GCZ) of Greka Energy (International) B.V., a 100% wholly-owned subsidiary of the Company, have been presented as held for sale following the board decision to monetise GDG with a declaration of dividend in-specie. Management expects GSS & GCZ blocks to be sold within the next 12 months.

(a) Assets of disposal group classified as held-for-sale

(b) Liabilities of disposal group classified as held-for-sale

(c) Analysis of the results of discontinued operations is as follows:

(d) Cash flow from/(used in) discontinued operations:

6 EARNINGS AND (LOSS) PER SHARE

The calculation of basic and diluted profit/(loss) per share attributable to the owners of the Company is based on the following data:

Profit/(loss) per share is based on the loss attributable to ordinary equity holders of the Company of divided by the weighted average of ordinary shares in issue during the corresponding period.

No separate calculation of diluted profit/(loss) per share has been presented as, at the date of this financial information, no options, warrants or other instruments that could have a dilutive effect on the share capital of the Company were outstanding.

7 DIVIDENDS

The directors do not recommend the payment of an interim dividend during the period ended 30 June 2019 and year ended 31 December 2018.

8 PROPERTY, PLANT AND EQUIPMENT

9 GAS EXPLORATION AND APPRAISAL ASSETS

10 TRADE AND OTHER RECEIVABLES

11 CASH AND CASH EQUIVALENTS

An analysis of the balances of cash and cash equivalents is as follows:

12 TRADE AND OTHER PAYABLES

13 CONVERTIBLE NOTES

As at 30 June 2019, the Company had one (31 December 2018: one) convertible note in issue repayable within 1 year.

Convertible note issued 2014

US$50 million 7% coupon convertible note due 2017

On 2 June 2014, the Company issued a three-year convertible note having a face value of US$50,000,000 with a maturity date of 1 June 2017. The note bears interest at 7% per annum, payable on a semi-annual basis. At the Maturity Date, the total sum of 100% of the outstanding principal amount of the convertible note and the accrued interest shall become payable, unless previously converted or redeemed.

The convertible note can be converted into Ordinary Shares of the Company at the note holder's option at any time prior to the Maturity Date at US$9.34 per share.

Convertible note amendment

US$50 million 10% coupon convertible note due 2020

In December 2016, the Company reached agreement with the note holder to extend the maturity of the US$50 million convertible note entered into in June 2014. Under the agreement, the note remains unsecured, has a revised coupon of 10% and a maturity date extended to 31 December 2020. The Company issued an option for the note holder to require (one-time) early repayment on the original maturity date, the option being exercisable at the discretion of the note holder by 28 April 2017. The conversion price of the note was amended to US$2.83 per share representing a 25% premium over the 13 December 2016 closing price.

During the year ended 31 December 2017, the company reached agreement with the note holder to extend the period during which the put option is exercisable to 20 November 2018. On 14 November 2018, the company reached another agreement with the note holder to extend the period during which the put option is exercisable to 20 November 2019.

At final maturity of the note, the note holder has the right to require the Company to purchase all of its shareholdings up to a maximum limit of 10,775,578 shares or 6.69% of the entire issued share capital of the Company at a price based on the 90 day VWAP calculated as of 31 December 2020 and to be settled prior to 30 April 2021. See the share buyback option liability below.

*Share buyback option liability