JKX.L Regulatory News (JKX)

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

Half-Yearly Results

For the six months ended 30 June 2018

Key Financials

Revenue: $42.4m (2017: $36.8m)

Other cost of sales: $9.9m (2017: $11.6m)

Profit from operations before exceptional items: $7.4m (2017: $2.3m loss)

Exceptional costs: $3.0m (2017: $3.1m)

Profit for the period: $1.9m (2017: $7.7m loss)

Profit per share: 1.10 cents (2017: 4.46 cents loss)

Operating cash flow: $15.3m (2017: $4.0m)

Capital expenditure: $4.6m (2017: $10.4m)

Total unrestricted cash balance: $7.5m (31 December 2017: $6.9m)

For further information please contact EM Communications:

Stuart Leasorleasor@em-comms.comT: +44 20 7002 7860M: +44 7703 537721

Chairman's statement

Dear Shareholder,

I am pleased to present the results for the six month period ended 30th June 2018 and I would like to take this opportunity to thank our shareholders for their support shown towards the Board at the EGM in March 2018 and at the AGM held on 25th June 2018. A stable and effective board is a cornerstone in delivery of the strategic aims which I set out clearly in my Chairman's Statement contained in the 2017 Annual Report. I believe that we have the right mix of experience and background diversity around the board table to enable us to restore growth and enhance shareholder value.

I am pleased to be able to report a net profit of $1.9m in the six months ended 30 June 2018 (H1 2017 net loss of $7.7m) and I believe that this demonstrates that the strategic focus of the Board is showing signs of progress although much remains to be done.

We have now engaged in the issue of quarterly trading updates in order to seek better engagement with all our shareholders. Operational and financial alignment continues to be thoroughly overhauled along with a continuing review of our internal controls. An improving cash position coupled with strong cost control initiatives will help to reduce our debt position and restore the balance sheet. Steps are being taken towards the "right sizing" of the Group, although this inevitably involves further reductions in staff numbers.

We have relinquished our Slovakian licence and we are also making progress towards the disposal of our interests in Hungary and as a consequence we are now focussed purely on our interests in Ukraine and Russia as our main areas of operation.

Production of both oil and gas has increased across the Group and enhancement and workover activity is at a high level in Ukraine with full details contained in the Operational Review.

In recent years, YGE experienced some problems with workovers of wells on the Koshekhablskoye field. To address these, YGE has carried out a comprehensive tender exercise, resulting in a contract for a new, fit-for-purpose rig at commercially attractive rates. YGE will carry out a thorough inspection of the rig by an independent expert at start-up and is strengthening its technical supervisory expertise. The new rig is expected to be mobilised in 4Q 2018 and will start with a workover of well 5, with the aim of re-instating this important producer. If the contractor performs well, the same rig and crew will be used to carry out further workovers, leading to a significant increase of YGE's gas production, which can be accommodated by the existing gas plant.

We continue to build and develop the executive team and, in the meantime, the Board continues to play an active role in the management and leadership of the Group. I wish to thank the staff of JKX for their hard work and loyalty which hopefully will help to deliver a better future for the business and all its stakeholders. Good governance remains at the heart of all that we do and the Board will continue to enhance our governance procedures wherever possible.

Stability of the Group is the key to building a better future for our shareholders. I believe that the Board has initiated the right strategy to deliver future growth but there remains much hard work to achieve and deliver our strategic goals.

Hans Jochum Horn

Chairman

27 July 2018

Poltava Petroleum Company General Director's statement

The second half of 2017 saw PPC start a work programme of enhancement activities, fully financed using its own operating cash flow without the use of external financing. This work continues and includes side-tracks, ESP installation, deepening, perforation of new targets, re-entering old wells and also the drilling of one new well. The focus is on lower risk projects that use proven technology on well understood reservoirs that have proved their ability to produce oil and gas, and that require moderate capital investment. In order to diversify risk, the projects are carried out across all of PPC's fields instead of being focused in one particular area. Enhancement activities are also carried out, not just on our own wells, but also on wells of third parties, which we operate under service agreements with UkrGasVidobuvannya (hereinafter "UGV") and under lease agreements with NAK Nadra Ukrayini and Ukrnafta. 

We have successfully completed the workovers of wells NN43, M158, I105, R15, NN 76, R22 and R3 during the first half of the year and also started the drilling of well E308, our first new well for four years. In addition to our own rig we have been using two contractors' rigs for workovers and another for drilling, meaning that we have been using four rigs simultaneously for the first time in our history.

The results of this work, combined with more favourable commodity prices, are having a positive effect on our revenue, profitability and cash flow. We continue to be a high profile seller in our market, with most of our sales being through the Ukrainian Energy Exchange.

Tragically there was a fatality during the half year when an operator monitoring testing of a well suffered a fall from which he did not recover. This incident has been thoroughly investigated by us and by the Ukrainian authorities and appropriate measures have been taken to prevent a recurrence of this type of incident. An initiative has been started to improve HSE standards across the organizational structure, covering different areas: building up the corporate culture so that health and safety is embedded at all levels with quality control over contractors, provision of appropriate equipment for all activities undertaken, personnel training and others.

Work is underway to improve our performance. A new scheme of staff motivation has been implemented, based on specific KPIs for each department and each particular employee and changes are being made to the organizational structure, making it more fit for purpose and cost effective. A new ERP system has been introduced to assist in better management of our costs and more effective use of our assets and we are buying raw materials from third parties to use spare capacity of our LPG plant to generate additional income.

Victor Gladun

PPC General Director

27 July 2018

Yuzhgazenergie General Director's statement

All four producing wells of the Koshekhablskoye field were in production throughout the first half of 2018, which contributed to higher production compared to the same period of the previous year (2018: 5,088 boepd, 2017: 4,654 boepd). Periodic acid treatments have been performed on Well 27 and Well 25 to maintain production rates and production for the half year was as expected.

No workover operations were performed during the first half of 2018. A three well workover programme has been developed for 2018 and 2019 in order to increase production and mitigate field development risks, and a drilling contractor has been selected to carry it out. The programme includes workovers of Wells 5 and 18, which are currently not producing, and Well 20 which is one of the current producers. High-quality chrome tubing has already been purchased to be run in Well 20, which will significantly extend uninterrupted production from this well. Development of the programme has included careful assessment of the technical and geological risks involved and profitability and payback analysis, as well as the conducting of a thorough tender process to select a suitable contractor. While the programme is planned to be financed from our own operational cash flow, we have been in communication with banks and external financing is expected to be available if required. Workover of Well 5 is scheduled to start in November 2018.

We have not experienced any significant technical issues with either the producing wells or the gas plant during the half year and have successfully passed all regulatory inspections during the period. There have not been any injury related incidents.

YGE remains fully in compliance with all licence obligations and I am pleased to report that we have obtained approval from the Ministry of Natural Resources and Environment of the Russian Federation (ROSNEDRA) to amend YGE's subsoil licence in order to defer Callovian obligations until 2025.

Alexander Bogdanov

YGE General Director

27 July 2018

Operational review

Group production

In 1H 2018 group average production was 8,728 boepd (1H 2017: 8,598 boepd), comprising 47.3 MMcfd of gas (1H 2017: 46.9 MMcfd) and 837 bopd of oil and condensate (1H 2017: 780 bopd), an overall increase in production of 1.5%. The fact that JKX overall production increased, beating the natural decline of its mature fields, is a first result of the revised strategy of focusing on enhancement activities in core assets.

Ukraine

Progress with achieving access to third party wells has continued in 1H 2018. These wells were R22, R3 and R11 all located in the North of the Rudenkivske licence and giving us a low cost opportunity to evaluate the Visean reservoirs in this part of the field. R22 and R3 have both been successfully worked over giving valuable gas production (see the Rudenkivske section). R11 is currently being worked over.

Novomykolaivske licences, production statistics and development activities

Production overview

Average production from the Novomykolaivske group of fields in 1H 2018 was 2,327 boepd (1H 2017: 2,509 boepd) comprising 9.4 MMcfd of gas (1H 2017: 10.9 MMcfd) and 756 bopd of oil and condensate (1H 2017: 699 bopd). The gas production is 13% lower in 1H 2018 compared to 1H 2017 as the enhancement programme has only partially offset natural decline. The oil production was 8% higher in 1H 2018 compared to 1H 2017 mainly due to the successful electrical submersible pump (ESP) installation in IG105.

Ignativske Field

Average production from the Ignativske field in 1H 2018 was 1,055 boepd (1H 2017: 914 boepd) comprising 4.1 MMcfd (1H 2017: 3.5 MMcfd) and 377 bopd (1H 2017: 337 bopd). Production increases are the result of the enhancement programme which commenced near the end of 2017. The following enhancement activities were carried out on wells in the Ignativske licence during 1H 2018:

An ESP was installed in IG105 in late January which increased the oil rate from 53 bopd to 122 bopd. The well is currently producing 75 bopd.

NN43, a leased well, was worked over in January to test the Tournaisian clastics in Ignativske. The well is currently producing 0.2 MMcfd on gas lift.

NN10, a leased well testing the Devonian close to the boundary of the Ignativske and Rudenkivske licences, requires a repeat workover due to water influx, before the gas zone can be perforated.

Movchanivske Fields

Average production from the Movchanivske field in 1H 2018 was 689 boepd (1H 2017: 661 boepd) comprising 2.8 MMcfd (1H 2017: 3.0 MMcfd) and 228 bopd (1H 2017: 168 bopd). Natural decline was offset by the one enhancement carried out in these fields in the first half of 2018.

The M158 sidetrack was successfully drilled in 58 days. Encouraging hydrocarbon shows were encountered in the shallow Devonian but only minor gas shows in the deep Devonian. 5m of perforations were shot in the shallow Devonian, which gave an initial oil rate of 106 bpd and an initial gas rate of 0.5 MMcfd. The production rate has since dropped to 77 bopd of oil and 0.1 MMcfd and the well requires regular wax cutting. The pressure in the shallow Devonian was at the upper range of expectations, 3200 psi. Work is ongoing to find a follow-up sidetrack to target remaining oil in this field.

Novomykolaivske Field

Average production from the Novomykolaivske field in 1H 2018 was 326 boepd (1H 2017: 425 boepd) comprising 1.3 MMcfd (1H 2017: 1.8 MMcfd) and 112 bopd (1H 2017: 131 bopd). The majority of this decline is due to an increase in water cut from 48% in 1H 2017 to 85% in H2 2018 in NN80. The following enhancement activities were carried out on wells in the Novomykolaivske field during 1H 2018:

The tubing was pulled in NN76 and rerun due to a blockage. Prior to the workover there had been no production from this well since September 2017. Following the workover in March production has resumed at an average of 12 bopd and 0.14 MMcfd.

NN78 was abandoned.

NN74 was recompleted from the V15 to the V16, using a dual packer system to isolate the water producing V15. The well was producing 0.3 MMcfd with the aid of gas lift but is currently shut-in due to high water production.

Rudenkivske Field

Average production from the Rudenkivske field in 1H 2018 was 256 boepd (1H 2017: 490 boepd) comprising 1.3 MMcfd (1H 2017: 2.6 MMcfd) and 39 bopd (1H 2017: 62 bopd). The significant reduction in production between 1H 2017 and 1H 2018 is a result of natural decline. However, due to the enhancement activities on wells in the Rudenkivske licence during 1H 2018 outlined below, average daily production for June amounted to 489 boepd.

Workover of the state owned well R3 in the Rudenkivske licence was successfully completed in June and the well is currently producing at 4.1 MMcfd with a wellhead pressure of 943 psi on a 40/64th" choke. Natural decline of production from this well has started in July. As part of the workover, old parted tubing was recovered together with a fish in the form of an old perforating gun. Initially the V26 was perforated over 8.5m, however due to lack of pressure response a further four metres of perforations were added in the V24 with a further three metres of perforations in V24 planned in the near future. 

R22, a UGV well, was successfully worked over in March and April and achieved an initial oil and gas rate of 30 bopd and 1.0 MMcfd. Production of gas and oil has since declined to 0.6 MMcfd of gas and 3 bopd. This well was the first of a three well campaign to test the Visean reservoirs in the North of the field.

A workover of R15, a leased well, was successful. The initial oil and gas rate from this well were 52 bopd and 0.2 MMcfd respectively, before declining to 33 bopd and 0.1 MMcfd at end of June. Currently the well is not producing as it shares a flowline with the high pressure R3 well.

NN22 and NN47 were abandoned.

Currently R11, a UGV well in the Rudenkivske field, is being worked over to further evaluate the Visean sands in the Northern part of Rudenkivske.

Production facilities

Operations at the main processing facility, the LPG plant and the oil loading facility continued smoothly throughout the year.

Elyzavetivske Production Licence

Production

Average production from the Elyzavetivske field in 1H 2018 was 1,164 boepd (1H 2017: 1,257 boepd) comprising 6.9 MMcfd of gas (1H 2017: 7.4 MMcfd) and 16 bopd of condensate (1H 2017: 19 bopd), an overall 7% decrease in production between 1H 2017 and 1H 2018. The decrease is a result of the pressure decline in the field, only partially offset by the following enhancement during 2018: 

EM52 was worked over to set a plug across the deeper G-sands reservoirs and re-perforate the Permian carbonate. The current producing rate is 0.7 MMcfd,

Development and drilling

Operational problems led to significant delays in drilling and completing well E308. This well is targeting the Permian carbonate and will accelerate production from this reservoir.

Production facilities

The Elyzavetivske production facility continues to operate efficiently. Preparation for the development of the West Mashivske asset will continue in 2H 2018 with the laying of an 8km flowline from this field to the PPC owned Elyzavetivske plant. The purchase of 8.1km of flowline for the first part of the flowline connecting the West Mashivske asset with the Elyzavtivske plant has been completed and the majority of the land allotment and approvals for the laying of the flowline has been completed in 1H 2018.

Russia

Koshekhablskoye licence

Production

Average production from the Koshekhablskoye field in 1H 2018 was 5,146 boepd (1H 2017: 4654 boepd) comprising 30.5 MMcfd of gas (1H 2017: 27.6 MMcfd) and 50 bopd (1H 2017: 50 bopd) of condensate, an 11% increase on the average for 1H 2017. This increase in production is due to Well 25 being offline for four months in 1H 2017.

Acid jobs were conducted on Well 27 in February and May and an acid job was carried out on Well 25 in February. Both Well 25 and Well 27 have been successfully acidized at the beginning of July. Well 20 experienced a sharp decline in production during April and May when the production declined by 0.5 MMcfd, but production has since stabilised at 10.2 MMcfd.

Development and drilling

No workovers were carried out during 1H 2018. In June 2018, the JKX board approved a multi-well workover programme (re-instating well 5, repair well 20 and re-activating well 18) and mobilisation of a suitable rig has commenced. Well operations are planned to commence in 4Q 2018. If successful, workover of wells 5 and 18 would increase the producing well stock from 4 to 6 wells.

Production facilities

There were no changes to the facilities in 1H 2018.

Hungary

The process of divesting the Company's assets in Hungary is ongoing.

Production

Average production from the Hadjunanas field in Hungary in 1H 2018 was 91 boepd (1H 2017: 178 boepd). The 49% decline in production is a result of continuing decline of Hn-1 through the first half of the year.

Health and Safety (HSE)

1H 2018 saw one serious incident occur on the PPC operated assets. An operator, while monitoring the testing of R15 suffered a fall which unfortunately he did not recover from. This tragic event was investigated thoroughly by PPC as well as the Ukrainian authorities, and appropriate measures were taken to prevent a recurrence of this type of accident. There were no other reported incidents in the first half of 2018.

Financial performance

Pre-exceptional earnings before interest, tax, depreciation and amortisation ('EBITDA') is a non-IFRS measure and calculated using profit from continuing operations of $4.4m (2017: $5.3m loss) and adding back depreciation, depletion and amortisation and exceptional items of $10.1m (2017: $13.6m). EBITDA is an indicator of the Group's ability to generate operating cash flow that can fund its working capital needs, service debt obligations and fund `capital expenditures.

Cash and cash equivalents do not include Restricted Cash.

Net cash/(debt) is cash and cash equivalents less Borrowings (excluding derivatives).

Return on average capital employed is the annualised profit/(loss) for the period divided by average capital employed.

Financial review

Results for the period

A marginal profit is being reported for the half year for the first time since 2014. The profit of $1.9m for the first half of 2018 compares favourably to the loss of $7.7m for the first half of 2017. Results for both periods include significant exceptional charges in relation to movements in the provision for disputed rental fees for 2010 and 2015 in Ukraine ($2.9m in the first half of 2018 and $1.8m in the first half of 2017).

Revenue

*Note that Hungary as a segment is presented as assets held for sale.

Total revenue for the first half of 2018 is $43.2m, 13.7% higher than the $38.0m reported for the first half of 2017. The increase is primarily due to the higher commodity prices in both Ukraine and Russia, as well as the 1.5% increase in total Group production from 1,556 Mboe in the first half of 2017 to 1,579 Mboe in the first half of 2018. Gas sales prices and netbacks are still significantly higher in Ukraine than in Russia. 

Ukraine revenues

The $4.3m increase in total revenues was due to higher sales prices, as shown in the table, and higher oil sales volumes. These positive factors were offset by the decrease in gas sales volumes.

The average gas sales price in the first half of 2018 as compared to that in the first half of 2017 was 20.1% higher in dollar terms (2018: $7.89/Mcf, 2017: $6.57/Mcf) and 22.6% higher in Hryvnia terms (2018: 7,419 UAH/Mcm, 2017: 6,052 UAH/Mcm). This is in line with international market trends.

Total gas sales volumes decreased 11.5% from 86,154 Mcm in the first half of 2017 to 76,261 Mcm in the first half of 2018, primarily due to the gas production volume having decreased 10.8% from 93,728 Mcm in 2017 to 83,628 Mcm in 2018. The two main factors for the lower production were the natural declines of the Elyzavetivske field and Novomykolaivske complex which were only partially offset by the enhancement activities that were recommenced in late 2017. For more detail please refer to the Operational review.

The increase in average oil sales price from $57.45/bbl in the first half of 2017 to $70.53/bbl in the first half of 2018 also reflects international market trends. Total oil sales volumes increased 7.0% from 117,541 barrels in the first half of 2017 to 125,822 barrels in the first half of 2018. This is in line with oil production volume having increased 7.4% from 130,037 barrels in the first half of 2017 to 139,696 barrels in the first half of 2018. Our Ukrainian subsidiary still held 43,775 barrels of oil inventory at the end of the reporting period, available for sale in the second half of 2018.

LPG sales volumes were 5,189 tonnes in the first half of 2018 compared to 5,149 tonnes in the first half of 2017, with sales prices being similar in the two periods.

A portion of production comes from wells owned by third parties, operated under service agreements with UkrGasVidobuvannya and under lease agreements with NAK Nadra Ukrayini and Ukrnafta. This production is subject to sale in the normal way, with payments being made to the well owners in accordance with the service and lease agreements.

Russia revenues

The $1.2m increase in total revenues from $7.9m in the first half of 2017 to $9.1m in the first half of 2018 is mainly due to higher gas production volumes (2017:141,592 Mcm, 2018:156,475 Mcm). This increase was supplemented by a slight increase of the average sales price in dollar terms from $1.66/Mcf in the first half of 2017 to $1.72/Mcf in the first half of 2018 due to a 3.9% rise in the average rouble gas sales price on 1 July 2017. On 1 July 2018 the average rouble gas sales price increased by 3.8% in line with expectations.

Hungary revenues

Hungarian gas and condensate sales, which recommenced in February 2017 and made up 1% of the Group's volumes sold in 2018, are expected to continue until the disposal process is complete.

Cost of sales

Exceptional items

The provision for disputed rental fees, in respect of claims for additional rental fees for the years 2010 and 2015, was increased by $2.9m in the first half of 2018 as set out in Note 13. The total provision as at 30 June 2018 was $42.7m, as set out in further detail in Note 15. 

A final hearing in relation to rental fee demands for 2010 is expected before the end of 2018. Hearings in relation to the majority of rental fee demands for 2015 are expected in the remainder of 2018 and 2019.

Cost of sales before exceptional items

Cost of sales before exceptional items for the first half of 2018 totalled $26.8m (2017:$30.5m). This includes:

$9.9m of operating costs, which is lower than $11.6m recorded in the first half of 2017 partly because of staff reductions.

$10.1m of production taxes, which is $1.2m higher than in the first half of 2017. In Ukraine, production tax expense (before exceptional charges) increased by $1.1m from $8.0m to $9.1m mainly due to an increase in the average border gas price which is the basis for calculating gas production taxes (UAH7,372 per Mcm in 2018 compared to UAH6,115 per Mcm in 2017). Only $0.9m of the total production taxes relate to Russia where the mineral extraction tax rate for wells deeper than 5,000m has remained at 328 Roubles/Mcm.

$6.9m of depreciation, depletion and amortisation ('DD&A') charge.

The lower cost of sales reported in the second half of 2017 compared to the first half of 2018 reflect that the enhancement activities currently being undertaken were not recommenced until late in 2017. 

Administrative expenses

Administrative expenses before exceptional items

Administrative expenses before exceptional items of $6.0m in the first half of 2018 compare favourably to those of $6.5m for the same period of 2017 and $15.5m for the full year of 2017. This reflects increased efforts to control costs. Cost benefits of reductions of staff and other administrative costs as part of a right sizing exercise to ensure that resources are appropriate to the needs of the Group will be more visible when the full year results are reported for 2018. 2018 administrative expenses include $0.5m of professional fees in relation to the forensic investigation of payment of legal expenses in Ukraine, which may be considered non-recurring.

Net finance charges

Finance costs, mainly comprising convertible bond interest, decreased from $1.5m to $1.4m due to the reduction in principal outstanding in February 2018.

Finance income of $0.3m comprises income from bank deposits (2017: $0.2m). 

Taxation

The total tax charge for the half year is $0.8m (2017: $1.0m) comprising a current tax charge of $1.9m (2017: $1.9m) which relates to Ukraine and a deferred tax credit of $1.1m (2017: credit $0.9m).

Cash flows

The unrestricted cash balance has increased slightly from $6.9m at the start of the year to $7.5m at 30 June 2018, even after the bond principal, accretion and interest payment of $6.9m made in February 2018.

Cash generated from operations in the first half of the year was $15.3m, including cash from operating activities from discontinued operations (2017: $4.0m). Interest paid during the period comprised $1.1m bond interest (2017: $0.6m). Income tax paid in the period amounted to $1.7m (2017: $1.9m) and related to profits earned by our Ukrainian subsidiary.

Of the $6.5m total cash spent on investment projects during the first half of 2018 (2017: $10.3m), $3.7m was spent on enhancement projects and new drilling in Ukraine and $1.2m relates to purchase of Marubeni chrome tubing by YGE. 

Net cash outflow from financing activities in the period mainly relates to the $5.8m of amortisation and accretion payment to the bondholders in February 2018. No dividends were paid to shareholders in the period (2017: nil).

The resultant increase in cash and cash equivalents in the half year before adjusting for foreign exchange effects was $0.4m (2017: decrease $10.2m).

Liquidity

The financing of the remaining bond payments is within the operating cash flow capabilities of the Company. The remaining payments are as follows: $0.8m in August 2018, $6.0m in February 2019, $0.4m in August 2019 and $5.8m in February 2020.

Our operating subsidiary in Ukraine still maintains a 12 month revolving credit line from Tascombank for UAH150 million, equivalent to $5.7m as at 30 June 2018, which remains undrawn. As noted above, our Ukrainian subsidiary also held 43,775 barrels of oil inventory available for sale at the end of the half year.

Going concern

Both the Ukrainian and the Russian assets have positive cash flow and the Group's liquidity is forecast to improve through the second half of 2018 and 2019. As noted above, at current market prices and planned production levels, operating cash flow is sufficient to cover the bond repayment schedule. There are sensitivities related to issues such as sales prices, and technical and geological risks, and material uncertainties regarding disputed rental fees with the Ukrainian Government. In case of unfavourable conclusion of disputed rental fees in respect of both 2010 and 2015 and potential demands for immediate settlement, if they were to occur, the Group does not currently have sufficient cash resources to settle the claims (see Note 2 to the consolidated interim financial statements).

Ben Fraser

Chief Financial Officer

27 July 2018

Risks and uncertainties

The Group continuously monitors major strategic, operational, financial and external risks it faces and determines the appropriate course of action to manage these risks. Key risks and uncertainties which may impact the Group's performance have not changed materially from those stated on pages 32 to 40 of the Group's 2017 Annual Report.

Financial risk management

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

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

Tax legislation

The taxation systems in emerging markets where Group companies operate are relatively new and are characterised by frequently changing legislation, which might be subject to interpretation. Taxes are subject to review and investigation by local authorities, who are enabled by law to impose substantial fines, penalties and interest charges. In Ukraine and the Russian Federation a tax year remains open for review by the tax authorities during subsequent three calendar years.

Management believes that it has adequately met and provided for tax liabilities based on its interpretation of existing tax legislation. However, the relevant tax authorities may have differing interpretations and the effects on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.

The Company has persistently defended its position in Ukrainian courts regarding the Rental Fee charges levied for 2010 and 2015. The Company's Ukrainian subsidiary, PPC, has recognised total provisions of $42.7 million (including interest and penalties, see Note 15).

Reservoir performance

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

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

Our investment in development projects or workovers of old wells is subject to uncertainty inherent in exploring and developing hydrocarbon reserves and resources. Accurate reservoir performance forecasts are critical in achieving the desired economic returns and to determine the availability and allocation of funds. In modelling reservoir performance, we rely on multiple sources of data, some of which are decades old (reflecting the time when certain wells were originally drilled) and therefore could be not accurate.

Commodity prices - Russia and Ukraine

Company policy is not to hedge commodity price exposure on oil, gas, LPG or condensate and therefore any change in prices would have a direct effect on the Group's trading results. We are subject to risk of unfavourable international oil and gas price movements that can be affected by political developments in Russia and Ukraine. In Russia, the government sets certain gas tariffs to which the Company's Russian subsidiary, Yuzhgazenergie LLC ('YGE') has pegged its gas sales price. The tariff has increased by 3.8% starting from July 2018.

Ukrainian gas prices have recently been aligned with those across Europe that exhibit significant volatility and seasonality. Since Ukraine stopped purchasing gas from Russia directly, domestic gas prices were at a premium to those in Europe. Change in gas import flows may have impact on gas prices in Ukraine, and a prolonged period of low gas prices would impact the Group's liquidity.

Environmental, asset integrity, and safety incidents

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

Technical failure, non-compliance with existing standards and procedures, accidents, natural disasters and other adverse conditions in our operational locations, could lead to injury, loss of life, damage to the environment, loss of containment of hydrocarbons and other hazardous material, as well as the risk of fires and explosions. Failure to manage these risks effectively could result in loss of certain facilities, with the associated loss of production, or costs associated with mitigation, recovery, compensation and fines, or loss of operating licence.

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

Corporate governance

The Group has major operations in Ukraine, Russia and the United Kingdom. Such a complex structure requires rigorous governance and control procedures to be in place to ensure an appropriate level of financial discipline and controls, as well as delegation of authority along the corporate and management structure.

Over the past few years, the Group has gone through several major Board and management changes, changes of advisors and contractors, and a significant reduction of staff across its operations. These changes require additional efforts to ensure proper implementation of governance, controls, and financial discipline procedures.

The Board and the executive team are in the process of revising and approving governance and control procedures. In the meantime, existing controls have been strengthened significantly with executives and the Board reviewing and approving all significant contracts, payments, and investment decisions.

Statement of Directors' responsibilities

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

an indication of important events that have occurred in the first six months of 2018 and their impact on the condensed set of financial information, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

material related party transactions in the first six months of 2018 and any material changes in related party transactions described in the last Annual Report.

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

On behalf of the Board

Hans Jochum HornChairman27 July 2018

Independent review report to JKX Oil & Gas plc

Report on the condensed consolidated interim financial information

Our conclusion

We have reviewed JKX Oil & Gas plc's condensed consolidated interim financial information (the "interim financial statements") in the half-yearly report of JKX Oil & Gas plc for the 6 month period ended 30 June 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Emphasis of matter

Without modifying our conclusion on the interim financial statements, we have considered the adequacy of the disclosure made in note 2 to the interim financial statements concerning the group's ability to continue as a going concern. At 30 June 2018, the Group has recorded a provision of $43 million in relation to additional Rental Fees which may become immediately due and payable in Ukraine as a result of unfavourable outcomes in one or more of the ongoing court proceedings. This condition, along with the other matters explained in note 2 to the financial statements, indicates the existence of a material uncertainty which may cast significant doubt about the group's ability to continue as a going concern. The interim financial information does not include the adjustments that would result if the group was unable to continue as a going concern.

What we have reviewed

The interim financial statements comprise:

the Condensed Consolidated Statement of Financial Position as at 30 June 2018;

the Condensed Consolidated Income Statement and Condensed Consolidated Statement of Comprehensive Income for the period then ended;

the Condensed Consolidated Statement of Cash Flows for the period then ended;

the Condensed Consolidated Statement of Changes in Equity for the period then ended; and

the explanatory notes to the interim financial statements.

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

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

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

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

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

What a review of interim financial statements involves

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

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

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

PricewaterhouseCoopers LLP

Chartered Accountants

London

27 July 2018

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

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

GROUP FINANCIAL STATEMENTS

Condensed consolidated income statement

1 Prior period/year numbers were restated as a result of application of IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" to Group's operations in Hungary. Please refer to Note 11 for details.

Condensed consolidatedstatement of comprehensive income

GROUP FINANCIAL STATEMENTS

Condensed consolidatedstatement of comprehensive income

GROUP FINANCIAL STATEMENTS

Condensed consolidatedstatement of financial position

GROUP FINANCIAL STATEMENTS

Condensed consolidatedstatement of changes in equity (unaudited)

GROUP FINANCIAL STATEMENTS

Condensed consolidatedstatement of cash flows

GROUP FINANCIAL STATEMENTS

Notes to the interim financial information

1. General information and accounting policies

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

The condensed consolidated interim financial information incorporate the results of JKX Oil & Gas plc and its subsidiary undertakings as at 30 June 2018 and was approved by the Directors for issue on 27 July 2018.

This condensed consolidated interim financial information does not constitute accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2017 were approved by the Board of Directors on 27 April 2018 and delivered to the Registrar of Companies. The report of the auditors on those accounts while unqualified contained an emphasis of matter which drew attention to the existence of a material uncertainty which may cast significant doubt about the Company's ability to continue as a going concern.

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

2. Basis of preparation

This condensed consolidated interim financial information for the six months ended 30 June 2018 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2017 which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union. A copy of the annual financial statements is available on the Company's corporate website (www.jkx.co.uk) or from the Company's registered office.

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

Going concern

The majority of the Group's revenues, profits and cash flow from operations are currently derived from its oil and gas production in Ukraine, rather than Russia.

The Company's Ukrainian subsidiary, Poltava Petroleum Company ('PPC') has made provision for potential liabilities arising from separate court proceedings regarding the amount of production taxes ('Rental Fees') paid in Ukraine for certain periods since 2010, which total approximately $42.7 million (including interest and penalties, see Note 15 to the interim consolidated financial information). PPC continues to contest these claims through the Ukrainian legal system.

In addition, in 2015 and as detailed in Note 15, the Company and its wholly-owned Ukrainian and Dutch subsidiaries commenced international arbitration proceedings against Ukraine under the Energy Charter Treaty and BIT seeking a repayment of Rental Fees that PPC has paid on production of oil and gas in Ukraine since 2011, in addition to damages to the business.

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

Taking into account the damages awarded to the Company and the Ukrainian court proceedings against PPC in respect of production taxes, there is a net shortfall of $30.6 million owed by the Group to Ukraine. Should PPC lose the claims against it in respect of production taxes due for 2010 and 2015, and the Ukrainian Authorities demand immediate settlement, the Group does not currently have sufficient cash resources to settle the claims and this would affect its ability to meet its obligations to creditors and bondholders.

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

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

However, based on the Group's cash flow forecasts, the Directors believe that the combination of its current cash balances, expected future production and resulting net cash flows from operations, as well as the availability of additional courses of action with respect to financing and/or negotiation with Ukraine for the settlement of any successful production tax claim, mean that it is appropriate to continue to adopt the going concern basis of accounting in preparing the interim consolidated financial information. The financial information does not include the adjustments that would result if the Group was unable to continue as a going concern.

3. Accounting policies

The accounting policies adopted are consistent with those used in the annual financial statements for the year ended 31 December 2017 and those expected to be applied in the 31 December 2018 annual financial statements. Taxes on income in the interim period are accrued using the tax rate that would be applicable on expected total annual earnings. There were no new standards, interpretations or amendments to standards issued and effective for the period which materially impacted the Group.

Management have commenced an assessment of the impact of IFRS 16 "Leases", which is mandatory from 1 January 2019 and expect to conclude the impact assessment in the second half of 2018.

During the period the Group adopted the following new accounting policies:

Non-current assets held for sale and discontinued operations

A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale.

Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, financial assets within the scope of IFRS 9, which are specifically exempt from this requirement.

Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet.

Any gain or loss from disposal, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the Consolidated financial statements and related notes for all periods presented. Comparatives in the balance sheet are not represented when a non-current asset or disposal group is classified as held for sale. Comparatives are represented for presentation of discontinued operations in the Statement of cash flow and Statement of income. Further information on discontinued operations and non-current assets held for sale can be found in note 11 "Discontinued operations and assets classified as held for sale".

The following new standards became applicable for the current reporting period:

IFRS 9 Financial Instruments

IFRS 15 Revenue from Contracts with Customers

There were no retrospective adjustments as a result of adopting these standards. The Group amended accounting policies applied from 1 January 2018 are disclosed below.

IFRS 9 Financial Instruments

Classification

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

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

those to be measured at amortised cost

Trade receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Company analysed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortized cost measurement under IFRS 9. Therefore, reclassification for these instruments is not required. For assets measured at fair value, gains and losses will either be recorded in profit or loss or OCI.

The Group reclassifies debt investments when and only when its business model for managing those assets changes.

Trade and other receivables

Trade and other receivables are recognised initially at their transaction price in accordance with IFRS 15 and are subsequently measured at amortised cost, reduced by any provision for impairment. Any impairment is recognised in the income statement within 'Administrative expenses'. The Group applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. Expected credit losses are assessed on a forward looking basis. The loss allowance is measured at initial recognition and throughout its life at an amount equal to lifetime ECL.

Based on the review of the historic occurrence of credit losses and given the short-term nature of trade and other receivables and the Group's active management of credit risk, the Group did not recognise credit losses in the current period. The outlook for the oil and gas industry is not expected to result in a significant change in the Group's exposure to credit losses.

IFRS 15 Revenue from contracts with customers

Revenue recognition

Revenue from contracts with customers is recognized when or as the Group satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when the customer obtains control of that good or service. The transfer of control of oil, natural gas, LPG, and other items sold by the Group usually coincides with title passing to the customer and the customer taking physical possession. The Group principally satisfies its performance obligations at a point in time and the amounts of revenue recognized relating to performance obligations satisfied over time are not significant. The accounting for revenue under IFRS 15 does not, therefore, represent a substantive change from the Group's current practice for recognizing revenue from sales to customers.

4. Segmental analysis

The Group has one single class of business, being the exploration for, appraisal, development and production of oil and gas reserves. Accordingly the reportable operating segments are determined by the geographical location of the assets.

There are four (2017: four) reportable operating segments which are based on the internal reports provided to the Chief Operating Decision Maker ('CODM'). Ukraine and Russia segments are involved with production and exploration; the 'Rest of World' are involved in exploration, development and production and the UK is the home of the head office and purchases material, capital assets and services on behalf of other segments.

Transfer prices between segments are set on an arm's length basis in a manner similar to transactions with third parties. Segment revenue, segment expense and segment results include transfers between segments. Those transfers are eliminated on consolidation.

Segment results and assets include items directly attributable to the segment. Segment assets consist primarily of property, plant and equipment, inventories and receivables. Capital expenditures comprise additions to property, plant and equipment.

1 Total assets and liabilities exclude assets and liabilities of disposal group classified as held for sale. Please refer to Note 11 for details.

5. Property, plant and equipment and other intangible assets

During the period the Group acquired $4.6 additional assets in Ukraine and Russia (2017: $19.3m in Ukraine, Russia and Hungary) , with 100% in respect of Group's oil and gas producing and development assets (2017: 51% in respect of Group's oil and gas producing and development assets and 49% spent on intangible assets).

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

6. Other receivable

The non-current receivable consists of VAT recoverable as a result of expenditures incurred in Russia. The receivable is expected to be recovered between two and five years (2017: two and five years).

7. Cash

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

Restricted cash

At 30 June 2018 $0.5m (31 December 2017: $0.3m) relates to funds received by the Trustees of the JKX Death in Services scheme pending distribution to the beneficiaries. At 30 June 2018 restricted cash does not include restricted cash held in Hungary, it is included under "assets held for sale" in the Statement of financial position. At 31 December 2017 $0.2m of the cash held in Hungary at K & H Bank Zrt was restricted as under the Hungarian Mining Act. The Group is required to deposit cash to cover compensation for any land damage and the costs of recultivation, including environmental damage of the waste management facilities.

8. Borrowings

1At 30 June 2018 current liabilities included $6.7m out of which $0.8m is due to bondholders on 19 August 2018.

Convertible bonds due 2020

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

Prior to restructuring the Bonds had an annual coupon of 8 per cent per annum payable semi-annually in arrears.

The Bonds are convertible into ordinary shares of the Company at any time from 1 April 2013 up until seven days prior to their maturity on 19 February 2018 (prior to restructuring) at a conversion price of 76.29 pence per Ordinary Share, unless the Company settles the conversion notice by paying the Bondholder the Cash Alternative Amount (see below). 

Convertible bonds restructured on 3 January 2017

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

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

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

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

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

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

19 February 2017 the Company made the first payment to Bondholders of $1.9m, 12.0% of the principal amount of the Bonds, in respect of prior accretion amounts and in accordance with the terms and conditions of the Bond. On 19 February 2018 the Company made a payment of the first instalment to Bondholders of $5.3m (33% of the principal amount of the Bonds), together with final accretion payment of $0.5m (3.0% of the principal amount of the Bonds) and $1.1m interest payment in accordance with the terms and conditions of the Bond.

The revised terms and conditions of the Bond was considered to be a modification and therefore the difference in the amortised cost carrying amount at the modification date was recognised through a change in the effective interest rate at the modification date through to the end of the revised estimated term of the Bond. Interest, after the deduction of issue costs is charged to the income statement using an effective rate of 17.3% (18.0% prior to restructuring).

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

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

In accordance with IFRS 9, following a modification or renegotiation of a financial liability that does not result in de-recognition, the Group is required to recognise any modification gain or loss immediately in profit or loss. Any gain or loss is determined by recalculating the gross carrying amount of the financial liability by discounting the new contractual cash flows using the original effective interest rate. The difference between the original contractual cash flows of the Bond and the modified cash flows discounted at the original effective interest rate is trivial and hence there was no impact on adoption of IFRS 9 on 1 January 2018.

Cash Alternative Amount

At the option of the Company, the conversion notice in respect of the Bonds can be settled in cash rather than shares, the Cash Alternative Amount payable is based on the Volume Weighted Average Price of the Company's shares prior to the conversion notice.

Credit facility

On 15 December 2017, PPC, our subsidiary in Ukraine, has secured a 12 month revolving credit line from Tascombank for UAH150 million. At 30 June 2018 the total short-term line of credit amounted to $5.7m at an exchange rate of $1: 26.19 Hryvnia (31 December 2017: $5.3m at an exchange rate of $1: 28.07 Hryvnia). The amount outstanding at 30 June 2018 and 31December 2017 was nil, so the undrawn portion totaled $5.7m (31 December 2017: $5.3m). The facility will be available through 14 December 2018.

The main terms and conditions of the revolving credit line are as follows:

drawdowns can be made either in USD or UAH;

interest rate cost for USD drawn down is 10%;

interest rate cost for UAH drawn down: 17.5% to 30 days, 18.0% 31 to 90 days, 20.75% 91 to 180 days, 22.5% 181 to 365 days;

borrowing above UAH90m, equivalent to $3.4m at 30 June 2018 will require a corporate guarantee from JKX Oil & Gas Plc;

assets with a market value of UAH355m, equivalent to $13.6m at 30 June 2018 (31 December 2017: $12.6m) have been identified for use as a collateral, collateral is to be provided only on drawdown;

amount borrowed will be repaid during the last 4 months, by equal-sized monthly payments, to be effected on the last day of the month/the last day of the credit limit period.

The credit facility of $5.7m (31 December 2017: $5.3m) includes two financial covenants:

to keep gross margin at no less than 50% during the period of the credit facility agreement, based on PPC's financial reporting results;

starting from the first quarter of 2018 and during the period of the credit facility agreement, PPC is to maintain the following ratio as per the financial reporting: ratio between financial (interest) debt and EBITDA (adjusted to the annual value) at no more than 3.0.

9. Derivatives

Convertible bonds due 2020 - embedded derivatives

Bondholder Put Option - cancelled 3 January 2017

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

At 31 December 2016 current liabilities included $16.8m in respect of the put option available to bondholders on 19 February 2017. On 3 January 2017, this put option was cancelled as part of the Bond restructuring as detailed in Note 8.

Company Call Option

The Company can redeem the Bonds at any time in full but not in part at their principal amount plus one semi-annual coupon plus any accrued interest. If the Bonds are called prior to 19 February 2020, the redemption price will also include an additional U.S. $6,000 per Bond.

The Company can redeem the Bonds any time in full but not in part at their principal amount plus any accrued interest if the aggregate principal amount of the Bonds outstanding is less than 15% of the aggregate principal amount originally issued.

Fixed exchange rate

The Sterling-US Dollar exchange rate is fixed at £1/$1.5809 for the conversion and other features.

10. Financial instruments

Fair values of financial assets and financial liabilities - Group

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

Financial liabilities measured at amortised cost are carried at $12.8m (31 December 2017: $22.0m). The Group's borrowings at 30 June 2018 relate entirely to the convertible bond due 2020.

Fair value hierarchy

Derivatives

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

The main assumptions used in valuation of the derivative conversion option as at 31 December 2017 were:

underlying share price of: £0.11;

£/US$ spot rate of 1.3513;

historic volatility of 56.29%;

risk free rate based on the maturity which is 2.14 year US Treasury rate of 1.874%, 1.14 year US Treasury rate of 1.831% and 0.14 year US Treasury rate of 1.302% ).

A 10% increase/decrease in Company's historic share price volatility would have resulted in an increase in the fair value loss for the year to 31 December 2017 of $0.01m and a decrease in the fair value loss that would bring derivative's fair value to nil, assuming that all other variables remain constant.

Credit risk - Group

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

The maximum financial exposure due to credit risk on the Group's financial assets, representing the sum of cash and cash equivalents, trade receivables and other current assets, as at 30 June 2018 was $ 11.3m (31 December 2017: $10.8m).

Capital management - Group

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

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

Net debt

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

The capital structure of the Group is as follows:

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

Liquidity risk - Group

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

Significant restrictions

Temporary capital controls were established by the National Bank of Ukraine ('NBU') on 1 December 2014 in an attempt by the Ukrainian government to safeguard the economy and protect foreign exchange reserves in the short term.

On 4 March 2015 a number of new NBU Resolutions were implemented with immediate effect (NBU No. 160 dated 3 March 2015; Resolution of the NBU No. 161 dated 3 March 2015; Resolution of the NBU No. 154 dated 2 March 2015).

The Resolutions extended the currency control restrictions implemented in Ukraine on 1 December 2014 and introduced additional measures which have the impact of restricting the remittance of funds to foreign investors under certain conditions and bans the transfer of Hryvnia to purchase Ukrainian Government bonds.

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

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

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

The maturity analysis for financial liabilities was as follows:

Interest rate risk profile of financial assets and liabilities - Group

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

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

11. Discontinued operations and assets classified as held for sale

In early February 2018 the Group announced its intention to exit its oil and gas operations in Hungary and initiated an active programme to locate a buyer for its subsidiary JKX Hungary BV which 100% owns Riverside Energy Kft, based in Hungary. Preparation of marketing materials and target investor list was complete in Q1 2018, and the marketing process was commenced in Q2 2018. It is anticipated that binding bids are received in Q3 2018 and sale may complete within the next 12 months.

The associated assets and liabilities are consequently presented as held for sale in the financial statements at 30 June 2018.

The financial performance and cash flow information presented are for periods ended 30 June 2018 and 30 June 2017.

The following assets and liabilities were reclassified as held for sale in relation to the discontinued operation as at 30 June 2018

12. Share capital

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

Of which the following are shares held in treasury:

Treasury shares and Employee Benefit Trust

The Company did not purchase any treasury shares during the period (2017: nil). There were no treasury shares used in the period (2017: nil) to settle share options.

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

None of these shares were used during the period (2017: nil) to settle share options. At the period end JKX Employee Benefit Trust held 5,000,000 shares in JKX Oil & Gas plc.

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

13. Provisions

The provision for disputed rental fees, is in respect of a claim against PPC for additional rental fee for the period August to December 2010 and January to December 2015. $2.9m was recognised as a charge in the half-year 2018 consolidated income statement and relates to interest accrued during 2018, out of which $1.2m relates to August to December 2010 liability and $1.7m to January to December 2015. Both claims are being contested in the Ukrainian courts (see Note 15). The amount is denominated in Ukrainian Hryvnia ('UAH') and is stated above at its US$-equivalent amount using the rate at 30 June 2018 of UAH26.19/$ (2017: UAH 28.07/$). The provision at 30 June 2018 includes the total value of the claims plus interest and penalties. The Board believes that the claims are without merit under Ukrainian law and the Company will continue to contest it vigorously. No contingent liabilities exist in respect of Ukrainian production taxes.

2018 onerous lease provision concerns the Group's liability for onerous lease contracts relating to its London office. Following a reduction in London office staff in 2016, three out of the four floors of the occupied building became surplus to requirements. Subsequently, two out of three floors have been assigned to new tenants. The provision has been determined as the present value of the unavoidable costs relating to rents and rates to the end of the lease terms, net of the expected sub-lease income, discounted at 6.5% (2017: 6.5%). The remaining life of the leases at 30 June 2018 was 3.5 years (2017: 4 years).

In early February 2018 the Board approved a decision to withdraw from Slovakia. On 16 March 2018 the Company gave a formal notice of relinquishment of Svidnik, Medzilaborce and Snina exploration licences to the other parties in the joint venture. The provision for closure costs, represents the amount set aside to cover the costs to be received in the final joint venture statement in 3rd quarter of 2018.

Non-current provisions

14. Exceptional items

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

1 Please see Note 13 for details

Exceptional items -information at 30 June 2017

Exceptional charges of $3.1million comprised the following:

$2.5 million of severance costs and additional remuneration which the previous Board approved and paid prior to the General

Meeting on 28 January 2016; 

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

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

15. Taxation

No UK tax liability has arisen during the six months ended 30 June 2018 (2017: $nil) due to the availability of tax losses. The current tax charged in the period relates to Ukrainian corporation tax which has arisen in the Group's subsidiary, Poltava Petroleum Company. Taxes charged on production of hydrocarbons in Ukraine, Russia and Hungary are included in cost of sales.

Factors that may affect future tax charges

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

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

The corporation tax rate in Ukraine for 2018 is 18% (2017: 18%).

Taxation in Ukraine - production taxes

Since Poltava Petroleum Company's ('PPC's') inception in 1994 the Company has operated in a regime where conflicting laws have existed, including in relation to effective taxes on oil and gas production.

In order to avoid any confusion over the level of taxes due, in 1994, PPC entered into a licence agreement with the Ukrainian State Committee on Geology and the Utilisation of Mineral Resources ('the Licence Agreement') which set out expressly in the Licence Agreement that PPC would pay royalties on production at a rate of only 5.5% of sales value for the duration of the Licence Agreement.

Pursuant to the Licence Agreement, PPC was granted an exploration licence and four 20-year production licences, each in respect of a particular field. In 2004, PPC's production licences were renewed and extended until 2024, Subsoil Use Agreements were signed and attached to the licences and operations continued as before.

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

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

Rental Fees paid since 2011

In 2011, new laws were enacted which established new mechanisms for the determination of the Rental Fee. Notwithstanding the Exemption Letter, in January 2011 PPC began to pay the Rental Fee in order to avoid further issues with the Ukrainian authorities but without prejudice to its right to challenge the validity of the demands.

International arbitration proceedings

In 2015, the Company and its wholly-owned Ukrainian and Dutch subsidiaries commenced arbitration proceedings against Ukraine under the Energy Charter Treaty, the bilateral investment treaties between Ukraine and the United Kingdom and the Netherlands, respectively. In these proceedings, the Company sought repayment of more than $180 million in Rental Fees that PPC paid on production of oil and gas in Ukraine since 2011, in addition to damages to the business.

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

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

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

In March 2017, Ukraine's Ministry of Justice filed a claim with the High Court of the United Kingdom naming JKX as a defendant in an application seeking to set aside the arbitration award for damages against Ukraine and in favour of JKX.

In October 2017 the High Court of the United Kingdom, ordered that the application brought by Ukraine seeking to set aside the recent Uncitral arbitration award against Ukraine and in favour of JKX be dismissed. The Government of Ukraine is therefore still liable to pay to JKX the sum of USD11.8 million plus interest and costs of USD0.3 million in relation to subsidiary claims, as previously ordered. The Judge also ordered that Ukraine should pay JKX's costs of $83,638.

Rental Fee demands

The Group currently has two claims (2017: two) for additional Rental Fees being contested through the Ukrainian court process. These arise from disputes over the amount of Rental Fees paid by PPC for certain periods since 2010, which in total amount to approximately $42.7 million (31 December 2017: $37.1 million) (including interest and penalties), as detailed below. All amounts are being claimed in Ukrainian Hryvnia ('UAH') and are stated below at their US$-equivalent amounts using the year end rate of $1:UAH26.19 (2017: $1: UAH 28.1).

August - December 2010: approximately $13.4 million (31 December 2017: $11.3 million) (including $8.7 million (31 December 2017: $6.8 million) of interest and penalties). On 11 March 2014 PPC won the case in the Poltava Court. The tax office appealed and the Kharkiv Appellate Administrative Court reversed the earlier decision. PPC then lost an appeal in the High Administrative Court of Ukraine and the Supreme Court rejected PPC's application for the appeal. PPC has discovered that there were in fact certain procedures that were not followed regarding the tax notifications that formed the basis of the original claims against PPC. Certain documentation was found to be missing from the files of the tax authorities. In April 2017 the Poltava Circuit Administrative Court found in favour of PPC and cancelled the tax notification decisions on the grounds that due process had not been followed. On 1 June 2017 the Kharkiv Appellate Administrative Court upheld the judgment of the Poltava Circuit Administrative Court. The tax authorities filed a cassation complaint. On 5 February 2018 the tax authorities' appeal against the decision was dismissed. A final hearing in relation to these rental fee demands is expected before the end of 2018.

January - December 2015: approximately $29.3 million (31 December 2017: $25.8 million) (including $13.0 million (31 December 2017: $11.2 million) of interest and penalties). Following the commencement of international arbitration proceedings at the beginning of 2015 (see above), from July 2015 PPC reverted to paying a 28% Rental Fee for gas production (instead of the revised official rate of 55%) as a result of the awards granted under the arbitration. PPC also declared part of its Rental Fee payments at 55% for the first 6 months of 2015 as overpayments and consequently stopped paying the Rental Fee for gas in order to align the total payments made in 2015 with the 28% rate awarded made under the arbitration proceedings. The Ukrainian tax authorities have issued PPC with claims for the difference between 28% and 55%. PPC is in the process of court hearings in respect of the claims, although the Company considers such claims to be in direct violation of the Interim Award received from the arbitration tribunal, noted above. In addition, in April 2016, the tax authorities issued PPC with a separate demand for $0.1 million of penalties and interest on unpaid Rental Fees for the period of August-October 2015. PPC also filed lawsuits against the tax authorities to cancel the application of such additional penalties and interest. On 25 July 2018 a hearing at the Poltava Circuit Administrative Court in respect of one of the claims was adjourned until 15 August 2018. It is expected that hearings in respect of the majority of these claims will be held in the remainder of 2018 and 2019.

An exceptional charge of $2.9 million has been charged to the Consolidated income statement in the half year (2017: $1.8 million) relating to interest accrued on the August - December 2010 and January - December 2015 claims.

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

16. Earnings/(loss) per share

The calculation of earnings/(loss) per ordinary share for the six months ended 30 June 2018 is based on the weighted average number of shares in issue during the period of 172,125,916 (31 December 2017: 172,125,916) and the profit/(loss) for the relevant period.

In accordance with IAS 33 (Earnings per share) the effects of dilutive potential have been included when calculating dilutive earnings per share for the period ended 30 June 2018 (31 December 2017 loss per share, hence antidilutive). 10,080,134 (31 December 2017: 13,266,244) potentially dilutive ordinary shares associated with the convertible bonds (Note 8) have been included as they are dilutive at 30 June 2018 (31 December 2017: antidilutive, hence excluded).

There were 1,059,650 outstanding share options at 30 June 2018 (31 December 2017: 1,059,650), of which 1,059,650 (31 December 2017: 1,059,650) had a potentially dilutive effect. All of the Group's equity derivatives were dilutive for the period ended 30 June 2018.

The diluted earnings per share for the six months ended 30 June 2018 is based on 183,265,700 (30 June 2017: 172,125,916; 31 December 2017: 172,125,916) ordinary shares calculated as follows:

17. Dividends

No interim dividend for the six months to 30 June 2018 is being paid or proposed (2017: nil).

18. Reconciliation of profit/ (loss) from operations to net cash generated from operations

19. Capital commitments

Under the work programmes for the Group's exploration and development licences the Group had no commitments to future capital expenditure on drilling rigs and facilities at 30 June 2018 (30 June 2017: $1.0m; 31 December 2017: nil).

20. Related-party transactions

Key management compensation amounted to $0.5m for the six months ended 30 June 2018 (2017: $0.9m).

Vladimir Tatarchuk and Vladimir Rusinov were appointed to the Board on 28 January 2016 and were thought to have a beneficial interest in Convertible Bonds with principal amount of $2.3m at 30 June 2018 (31 December 2017: $3.4m), which are held by Proxima.

In February 2018, the following redemptions were made in relation to Proxima's bond holding and in accordance with the terms and conditions of the restructured Bonds (see Notes 8 and 9):

$1.1m in respect of first instalment of the principal;

$0.1m in respect of prior accretion amounts (2017: $0.4m);

$0.2m Bond interest payment (2017: $0.4m).

Glossary

2P reserves Proved plus probable

3P reserves Proved, probable and possible

P50 Reserves and/or resources estimates that have a 50 per cent probability of being met or exceeded

AFE Authorisation For Expenditure

AIFR All Injury Frequency Rate

Bcf Billion cubic feet

Bcm Billion cubic metres

Bcpd Barrel of condensate per day

Boe Barrel of oil equivalent

Boepd Barrel of oil equivalent per day

Bopd Barrel of oil per day

Bpd Barrel per day

Bwpd Barrels of water per day

Cfpd Cubic feet per day

EPF Early Production Facility

GPF Gas Processing Facility

HHN Riverside Energy Kft

Hryvnia The lawful currency of Ukraine

HSECQ Health, Safety, Environment, Community and Quality

KPI Key Performance Indicator

LIBOR London InterBank Offered Rate

LPG Liquefied Petroleum Gas

LTI Lost Time Injuries

Mbbl Thousand barrels

Mboe Thousand barrels of oil equivalent

Mcf Thousand cubic feet

MMcfd Million cubic feet per day

MMbbl Million barrels

MMboe Million barrels of oil equivalent

PPC Poltava Petroleum Company

Roubles The lawful currency of Russia

Sq. km Square kilometre

TD Total depth

$ United States Dollars

UAH Ukrainian Hryvnia

US United States

VAT Value Added Tax

YGE Yuzhgazenergie LLC

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

Directors and advisors

Directors

Hans Jochum HornAdrian CoatesMichael BakunenkoChristian BukovicsVladimir RusinovAndrey ShtyrbaVladimir Tatarchuk

Company Secretary

Jeremy Rhodes 

Registered office

6 Cavendish Square

LondonW1G 0PD

Registered in England Number: 03050645

Registrars

EquinitiAspect House, Spencer RoadLancing, West Sussex

BN99 6DA

Independent auditors

PricewaterhouseCoopers LLPChartered Accountants and Statutory Auditors1 Embankment Place

London

WC2N 6RH

Advisors

SPARK Advisory Partners Limited5 St. John's LaneLondonEC1M 4BH

Public relations

EM Communications

6 Snow Hill

London

EC1A 2AY

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

Cautionary statement aboutforward looking statements

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

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

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