JKX.L Regulatory News (JKX)

JKX Oil & Gas plc

('JKX' or the 'Company')

HALF-YEARLY RESULTS

 FOR

THE SIX MONTHS ENDED 30 JUNE 2015

Operational Highlights

· Average production of 8,611 boepd (2014: 10,126 boepd)

· Development drilling suspended in Ukraine due to negative investment climate

· Award of extension to Elizavetovskoye production licence in Ukraine to include West Mashivske prospect

· Tubing replacement programme underway in Russia

· Russian plant capacity modifications approved by Russian authorities

· Hernad production permit applications in Hungary on-going

Key Financials

· Revenue: $44.4m (2014: $74.3m)

· Operating costs down 24% at $12.1m (2014: $15.9m)

· Production taxes up 18% at $20.8m (2014: $17.6m)

· Loss from operations: $7.3m (2014: $2.4m profit)

· Loss per share: 8.01cents (2014: earnings 4.95 cents)

· Operating cash flow: $3.5m (2014: $31.1m)

· Capital expenditure: $4.2m (2014: $21.4m)

· Cash resources: $22.4m (31 December 2014: $25.9m)

Outlook

· Potential resumption of development drilling in Ukraine in second half of 2015

· Russian plant capacity modifications to increase capacity to 60 MMcfd by year end

· Completion of first tubing replacement programme in Russia scheduled for second half of 2015

· Completion of Hungarian production permitting

· Two exploration wells scheduled in Slovakia in fourth quarter of 2015

JKX Chief Executive, Dr Paul Davies, commented:

"Both our subsidiaries in Ukraine and Russia have remained under pressure during the first half of 2015. Revenues declined significantly primarily due to a sharp fall in oil and gas realisations and lower production volumes. Development drilling in Ukraine was suspended because of the government's intervention in the gas sales market including the introduction of punitive rates of production tax, foreign exchange controls and government-imposed restrictions on the sale of gas. However, the Company has maintained a positive operating cash flow.

In Russia, production remained constrained due to the previously reported tubing failures. The first replacement programme is now underway and making good progress, with the second planned to begin in the second half of the year. Expansion of the Russian production facilities will take place at the same time.

We are making vigorous efforts to restore a positive investment climate in Ukraine for independent oil and gas producers and believe these are slowly making headway. Restrictions on the sale of our gas were lifted in February, and there is an increasing indication that production tax rates might fall during the second half of the year. If the economic environment improves, we plan to resume development drilling on the Elizavetovskoye field.

Sustainability of operations, cash conservation and asset protection continue to be at the centre of our strategy. The Group has demonstrated resilience, with the fundamental strength of its business giving the Board confidence in our ability to return the Group to profitability when external conditions improve."

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Chairman's Statement

The first half of 2015 has been a difficult period for your Company with significantly lower international oil and gas prices, punitive fiscal policies in our major Ukrainian market and economic sanctions on our developing Russian market. Notwithstanding these challenges, I am pleased to report that your Company has continued to produce from its Ukrainian and Russian fields and maintain a positive operating cash flow, albeit with a reduced level of activity and a lower cost base.

Performance

In the first half of the year, average production decreased to 8,611 boepd, principally as a result of the suspension of development drilling in Ukraine due to the deterioration of the investment climate, and government intervention in the gas sales market. Consequently, further development of the Elizavetovskoye field has been put on hold although workover operations have continued in our mature Ukrainian fields resulting in only a modest production decline over the period. In Russia, production continues to be constrained to approximately 30 MMcfd due to the tubing failures in two of our five production wells. A Russian operated rig is now on location and good progress is being made with the first tubing replacement programme.

The significant fall in half-year revenue to $44.4million is primarily due to a sharp fall in both oil and gas realisations resulting from lower international oil and gas prices, exacerbated by lower production volumes and devaluation of both the Ukrainian and Russian currencies. Fortunately, both currencies have now stabilised. This is addressed more fully in the Financial Review.

I was pleased to report in my 2014 Chairman's Statement that an independent reserve review of our licence portfolio by DeGolyer & McNaughton ('D&M') as of 31 December 2014 concluded that we had increased our Group 2P reserves base to 97.7 MMboe. A field-by-field breakdown is contained in the Operations Review together with the D&M evaluations of Group 3P reserves and Contingent and Prospective resources.

Dividend

The Board continues to review its dividend policy. Taking into account the Group's capital commitments, forecast cash flows and debt servicing schedules, the Board has concluded that it is not appropriate at a time of tight liquidity to award an interim dividend. It will review its dividend policy in the circumstances prevailing at the year end.

Outlook

The Board and senior management are focused on maintaining cash generative operations in both Ukraine and Russia and managing a reduced capital expenditure programme.

In Ukraine, the unfavourable investment climate (including the introduction of punitive rates of production tax, foreign exchange controls and government-imposed restrictions on the sale of our gas production during the three months to 28 February 2015) has forced the Company to severely curtail its planned 2015 capital investment programme in Ukraine until the economic parameters for investment improve. The unfavourable investment climate includes risks which, if realised, may impact the going concern status of the Company and is addressed in note 2 to the financial information.

Notwithstanding the above, we believe our lobbying efforts with the Ukrainian Government, the UK Government, the EU and various multi-lateral agencies to restore a positive investment climate for independent oil and gas producers in Ukraine are slowly bearing fruit. The government-imposed restrictions on the sale of our gas production were lifted at the end of February, and there is now a growing indication that production tax rates may fall during the second half of the year. However, no schedule has yet been given for the lifting of foreign exchange controls. If the economic parameters for investment do improve in the coming months, we have plans in place to resume development drilling promptly on the Elizavetovskoye field and the West Mashivske prospect.

The Company has commenced international arbitration proceedings against Ukraine under the Energy Charter Treaty and the investment treaties between Ukraine and the United Kingdom and the Netherlands respectively. These proceedings have now been consolidated under the UNCITRAL Arbitration Rules and a tribunal constituted. JKX is seeking compensation for losses suffered due to Ukraine's treaty violations. I am pleased to report that, under these consolidated proceedings, the tribunal issued an Interim Award on 23 July 2015 requiring the Government of Ukraine to limit the collection of rental fees on gas produced by JKX's Ukrainian subsidiary, Poltava Petroleum Company, to a rate of 28% (the rate currently applicable under Ukrainian law is 55%).

In Russia, completion of the first of the two tubing replacement programmes is scheduled for the second half of the year, with plans in place to initiate the second tubing replacement shortly thereafter. Expansion of the Russian production facilities to 60 MMcfd to handle production from five production wells will take place within the same period.

In Hungary, applications for production permits encompassing the most promising discoveries within our 100% owned Hernad licences will also be completed in the second half of the year. Discussions are currently under way with potential partners for a number of the permits.

Despite the deterioration in relations between Ukraine and Russia and the current unrest in eastern Ukraine, our ability to operate in Poltava and Adygea has not been compromised to date. I will keep shareholders informed if there is any change to our operating position. I am grateful to our Ukrainian and Russian staff for continuing to perform professionally over this difficult period, and thank our shareholders for their ongoing support.Chief Executive's Statement

Performance highlights

The performance highlights for the period are:

· Average production of 8,611 boepd (2014: 10,126 boepd)

· Development drilling suspended in Ukraine due to negative investment climate

· Award of extension to Elizavetovskoye production licence in Ukraine to include West Mashivske prospect

· Tubing replacement programme under way in Russia

· Russian plant capacity modifications approved by Russian authorities

The first half of the year saw a slowdown in the Company's development operations with average daily production falling 15% to 8,611 boepd. This was primarily the result of the suspension of development drilling due to negative fiscal changes imposed by the Ukrainian Government on independent oil and gas producers, coupled with its imposition of sales restrictions in the first quarter of the year.

In line with international prices, oil realisations weakened significantly in the period averaging $49.87/bbl (2014: $92.39/bbl). Average gas realisations declined to $4.46/Mcf (2014:$5.64/Mcf), reflecting both the reduction in Ukrainian gas prices and the impact of devaluation of the Russian rouble. LPG realisations in Ukraine also weakened substantially to $448/tonne (2014: $808/tonne).

The combination of lower production levels and reduced commodity prices resulted in a 40% fall in half-year revenues to $44.4million (2014: $74.3million). Despite a major 24% reduction in operating costs, the punitive rise in production taxes levied by the Ukrainian Government resulted in an operating loss for the period of $7.3million (2014: $2.4 million profit). However, your Company is able to report a small positive operating cash flow of $3.5million (2014: $31.1million).

The negative changes in the Ukrainian fiscal environment have forced the Board to suspend the Company's capital investment programme of its Ukrainian subsidiary. Group capex for the first half-year has reduced by 80% to $4.2million (2014: $21.4million), which has allowed liquidity to be maintained with only a modest reduction in end-of-period cash resources to $22.4million (31 December 2014: $25.9million).

Ukraine

The suspension of development drilling in Ukraine at the beginning of the year required a step-up of work-over activities on the existing well stock in order to minimise the natural production decline. The success of the programme is detailed in the following Operational Review. However, government-imposed restrictions on gas sales to industrial customers continued throughout the first two months of 2015 and required the Company to shut-in a proportion of its gas production. Following this unprecedented intervention of the Ukrainian Government in the industrial sector of the gas market, access to the gas market continued to be constrained throughout the remainder of the period and resulted in our inability to return to full production.

The Skytop drilling rig was demobilised at the beginning of the year but is currently stacked at the Elizavetovskoye field location and could be available to restart development drilling if the Government takes an early decision to remove the current impediments to further capital investment.

The political unrest in the east of Ukraine has been closely monitored throughout the period and I am pleased to report that office and field operations in Poltava have not been affected.

Russia

Tubing failures in two of the five production wells at the Koshekhablskoye field have continued to constrain production to approximately 30 MMcfd from the remaining three wells. A Russian rig was mobilised to the field early in the year and in May began the first tubing replacement programme in well-27. It is anticipated that this work will be completed in the second half of the year and the rig will continue with the second tubing replacement in well-5.

Periodic acid treatments have been performed during the period to maintain production rates in the three producing wells. The completion design will be modified when the current carbon steel tubing is eventually replaced by corrosion-resistant tubing with the aim of reducing the frequency of acidisation programmes required.

The Russian authorities issued their approval of the upgrade project for expansion of the plant capacity to 60 MMcfd during the period which will permit the project to be completed in the second half of the year. 

Hungary, Slovakia

Good progress was achieved during the period on the preparation of applications for production permits over the most prospective areas of our 100%-owned Hernad exploration licences. Three applications were filed in the first half of the year with a further three applications to be filed in the coming months.

In Slovakia, two exploration wells are scheduled to be drilled on our exploration licences in the fourth quarter of the year.

Current and future activity

Sustainability of operations, cash conservation and asset protection continue to be the keynotes of our strategy. Consequently, activity in the second half of the year will continue to focus on maintaining production from our Ukrainian and Russian fields with activities being fully funded from cash flow.

Resumption of development drilling in Ukraine will depend on an improvement in the investment climate including reduction in the current excessive levels of production tax and easing of foreign currency restrictions. There are indications that production tax levels may fall during the second half of the year which could lead to an early restart of the development drilling programme on the Elizavetovskoye field and its West Mashivske extension.

In Russia, work will continue on the well-27 tubing replacement, the cost of which is covered by our insurance policy. The plant upgrade in Russia will be completed prior to well-27 coming back on-stream. A decision on proceeding thereafter with the tubing replacement in well-5 will be made at the end of the third quarter.

Production in the second half of the year is anticipated to be maintained in excess of 8,000 boepd. Gas realisations are anticipated to be lower in Ukraine in the second half of the year, although Russian gas realisations in Roubles have increased by 7.5% from 1st July 2015.

The first half of 2015 has been a difficult time for our industry and particularly for our Company with its major operations in politically conflicted areas. I thank all management and staff for their hard work and our stakeholders for their continued support.

Operational Review

Group production

Group production reduced significantly in the first half of 2015 as a number of production wells in Ukraine were shut-in as a result of government-imposed restrictions on gas sales to industrial customers. Although these restrictions were lifted at the end of February, disruption to the Ukrainian gas market has continued throughout the remainder of the period and resulted in our inability to return to full production. The tubing failures in wells 27 and 5 in the Koshekhablskoye field have continued to constrain production in Russia below plant capacity throughout the first half of the year. Repair of well-27 is currently underway and scheduled for completion in the second half of the year

Group average production in the first half of 2015 was 8,611 boepd, comprising 46.6 MMcfd of gas and 851 bpd of oil and condensate, a 15% decrease on the average for the first half of 2014. Hungarian oil and gas production ceased in late 2013 and JKX is now the 100% owner of the Hajdunanas field and is filing for six mining permits (production licences) within the now relinquished Hernad exploration area.

Ukraine

Novo-Nikolaevskoye licences

Production

Average production from the Novo-Nikolaevskoye group of fields in the first half of 2015 was 2,546 boepd comprising 10.6 MMcfd of gas and 777 bpd of oil and condensate, a 24% decrease on the average for the first half of 2014.

Development drilling and other well activity

The investment climate in Ukraine deteriorated sharply in the fourth quarter of 2014 and the decision was taken to cease all capital investment in the country until conditions improved. The Skytop N-75 rig completed drilling operations at the end of December 2014 and the rig was released. The drilling contractor has kept the rig stacked in Ukraine on the Elizavetovskoye field pending new work. Limited operations are being undertaken by the TW-100 workover rig and it has carried out two recompletions and two abandonments in the period.

· Well recompletions in the period comprised re-running the completion in well IG-140 to facilitate entry of coil tubing to the horizontal section and resetting the completion in well IG-106 to permit additional perforations to be made.

· Exploration well Z-04 in the Zaplavskoye licence was plugged and abandoned and work has begun on plugging well R-12 on the Rudenkovskoye field prior to expiry of its lease later this year.

· Wireline operations have focussed on the clearance of wax and salt build up in the production tubing of a number of wells. A sustained programme in the period, particularly during the winter months, has ensured that oil production in particular has exceeded expectations.

· The seismic merge and reprocessing project integrated the seismic surveys acquired in 1999, 2009 and 2012. The results provided a unified volume which will allow uninterrupted mapping of the prospects and producing fields across the Novo Nikolaevskoye area. The new merged volume represents a significant improvement in signal quality compared to the original data.

Production facilities

Operations at the main production facility and the LPG plant continued smoothly throughout the period with routine work continuing on plant optimisation, re-routing flowlines to reduce back pressure, and wax clearance of flowlines to enhance production from the available well stock.

Elizavetovskoye Production Licence

The Elizavetovskoye gas field commenced production in January 2014.

Production Licence extension

A westward licence extension to the Elizavetovskoye production licence to include the West Mashivske prospect was awarded in the second quarter of 2015. The licence is valid until 2034 and the additional area of 33.9 square kilometres brings the total area of the licence up to 104.7 square kilometres.

Production

Average production from the Elizavetovskoye field in the first half of 2015 was 1,594 boepd comprising 9.4 MMcfd of gas and 28 bpd of condensate, a 3% increase on the average for the first half of 2014. The relatively dry Elizavetovskoye wells E-301 and E-302 were used as swing producers throughout the period to adjust gas export volumes to the market demand.

Drilling and development activity

There was no drilling activity on the Elizavetovskoye field during the period although there are plans in place for additional development drilling on the Elizavetovskoye field and West Mashivske should the investment climate improve significantly. The Skytop rig is stacked at the proposed E-305 drilling location.

The Elizavetovskoye production facility was upgraded at the end of 2014 to expand capacity and meet the recently revised hydrocarbon dew point specifications in the export pipeline. The K-3000 compressor was commissioned in early 2015 and is being used to ensure maximum possible input to the export line.

Zaplavskoye exploration licence activity

Work is continuing on the evaluation of the Visean V25/26 sandstone traps and the Devonian sandstone and Visean carbonate structural closures with the aim of working these up for future drilling should the economic climate change.

Russia

Koshekhablskoye licence

Production

Average production from the Koshekhablskoye field in the first half of 2015 was 4,470 boepd comprising 26.5 MMcfd of gas and 45.6 bpd of condensate, a 15% decrease on the average for the first half of 2014. The production figures remain lower than plant capacity due to the continuing loss of production from well-27 and well-05 throughout the period.

Workover and well stimulation activity

Production from crestal well-20 in the period ranges from 15-20 MMcfd subject to routine acid treatment using coiled tubing. The north flank well-25 has been producing 10-14 MMcfd again with routine acidising. The deep east-flank well-15 cycles between 0.9 MMcfd and 1.5 MMcfd, with fluid build-up being cleared periodically.

The well-27 tubing replacement operation began in the second quarter and work is in progress to restore the pressure integrity of the well prior to running the new tubing string.

Facilities

Average production over the period of 26.5 MMcfd allowed the Gas Processing Facility ('GPF') to operate comfortably within its current design capacity of 40 MMcfd.

Plans are in place to increase the plant capacity to 60 MMcfd. This entails changes to a number of the vessels, replacement of some valves and pipework and improvements to the operating procedures. Documentation for the plant capacity increase has been passed by the Industrial Safety Expertise and the project has been registered with the Russian authorities. Plant modifications are scheduled for Q3 2015.

Licence obligations

The obligation to re-enter and sidetrack well-09 to re-drill the full Callovian reservoir sequence and, if successful, test the Callovian V unit has been deferred until 2017.

Georgievskoye exploration licence

The 170.7 sq. km Georgievskoye exploration licence, adjoining the Koshekhablskoye production licence, was relinquished at the end of 2014.

Hungary

Licences

In late 2014 JKX exchanged its 25% beneficial interest in a 15.6 sq km section of the Sarkad Mining Plot for a further 50% interest in the Hernad I & II Exploration Licences and the Hajdunanas IV Mining Plot. JKX is now the operator for these areas with 100% equity.

Hajdunanas field

Production from the Hajdunanas and Gorbehaza fields (JKX now 100%) was suspended in 2013 by the then operator. JKX is currently reviewing plans and seeking a farm-in partner to participate in the further development of the Hajdunanas field.

Exploration and appraisal

Hernad licences

The Hernad I & II Exploration Licences expired in April 2015 and JKX (100%) has now submitted three mining plot applications to cover known hydrocarbon accumulations in the licences and has received consent to submit a further three. These mining plots will enable JKX to carry out appraisal and development activity over a 20 year period.

JKX is currently seeking a farm-in partner, or partners, to participate in this activity.

Turkeve IV Mining Plot

The Turkeve IV Mining Plot (JKX 50%) of 10 sq. km has been approved for the productive area around the Ny-7 well. However, the high CO2 content has prevented direct access to the pipeline network and the operator is developing a mechanism to lower the CO2 content to an acceptable level.

Slovakia

Exploration

JKX holds a 25% equity interest in the Svidnik, Medzilaborce and Snina exploration licences in the Carpathian fold belt in north east Slovakia. A programme of magneto-telluric geophysical surveys combined with seismic re-interpretation has led to the identification of a number of shallow prospects across the licences. The operator is planning to drill two of these prospects in the fourth quarter of 2015.

JKX Reserves & Resources

Consultants DeGolyer & MacNaughton ('D&M') have completed their evaluation of the JKX reserves and resources position at the end of 2014.

P+P (2P) Reserves 

Proved and Probable (2P) group reserves rose from 94.2 MMboe at year end 2013 to 97.7 MMboe at year-end 2014. The changes are shown on a field by field basis in the table below:

JKX P+P+P (3P) Reserves 

D&M also carried out a full assessment of the upside potential in each field, the "Possible" reserves. These possible reserves are shown below together with the total 2P reserves for each field:

JKX Contingent Resources 

A further category, known as contingent resources, has also been evaluated by JKX and D&M. These contingent resources are those volumes of hydrocarbons which are potentially recoverable from known accumulations but which are not currently considered to be commercially recoverable. The categories of 1C, 2C or 3C are used to reflect the range of uncertainty. These contingent resources are tabulated below.

JKX Prospective Resources 

Finally, D&M has evaluated JKX's exploration potential and categorised the potential resources of the undrilled prospects in the company's portfolio. Undrilled prospects inevitably carry an element of technical risk and it is usual to summarise them under unrisked potential and risked potential resources. It should be noted that less well defined leads and prospects with little expectation of being drilled are excluded from such a list.

1Probability of economic success

Financial performance

1Earnings before interest, tax, depreciation and amortisation ('EBITDA') is a non-IFRS measure and calculated using loss from operations of $7.3m (2014: $2.4m) and adding back depreciation, depletion and amortisation and exceptional items of $13.4m (2014: $23.3m). 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.

2Total cash is Cash and cash equivalents plus Restricted Cash.

3Net cash/(debt) is Total cash less Borrowings.

4 Return on average capital employed is the annualised Profit for the period divided by average capital employed.

Financial Review

The Company's financial performance for the six months ending 30 June 2015 has been severely impacted by the deteriorating economic conditions and geopolitical situation in Ukraine compounded by continuing low oil and gas prices. The Group recorded a loss for the period of $13.8m (2014: profit $8.5m).

Revenue

Group revenues were $44.4m (2014: $74.3m), which is $29.9m (42%) lower than in 2014 due to lower oil and gas production and realisations in both Ukraine and Russia.

Average sales volume declined 16.0% to 7,863 boepd (2014: 9,364 boepd) comprising:

· 3,752 boepd (2014: 4,554 boepd) sold in Ukraine, a decline of 17.6% and

· 4,111 boepd (2014: 4,810 boepd) sold in Russia, a decline of 14.5%.

Average Group oil realisations were 40.7% lower at $51.71/bbl (2014: $92.39/bbl), in line with trends in international oil prices.

Russian gas sales made up 52% of the Group's volumes sold (2014: 49%); Ukrainian gas sales contributed 48% (2014: 51%). The increased proportion of lower-priced Russian gas, in addition to the weakening of the Ukrainian Hryvnia and Russian Rouble against the US Dollar (when compared with the prior period), resulted in an overall reduction in Group gas realisations of 20.9% to $4.46/Mcf (2014: $5.64/Mcf).

Although Ukrainian LPG revenues were affected by lower gas production and weaker LPG prices, LPG contributed $2.2m (2014: $4.8m) to Group revenue.

Ukraine - gas sales and realisations

Gas sales volumes were 13.5% lower at 2,989 boepd (2014: 3,456 boepd). This was a result of reduced gas production to 3,336 boepd (2014: 3,903 boepd), an inability to sell normal levels of gas in January and February 2015 due to restrictions imposed by the Ukrainian Government, and the suspension of all drilling activity in Ukraine until the investment climate improves.

Whilst the maximum gas price increased from an average of 3,801 UAH in 2014 to 6,852 UAH in 2015, US Dollar gas realisations in Ukraine were reduced due the devaluation of the Hryvnia from UAH10.6/$ during 1H 2014 to UAH21.8/$ during 1H 2015. Although the Ukrainian state regulator makes periodic adjustments for Hryvnia/$ exchange rate fluctuations, there is a time lag between devaluation and adjustments to the official industrial gas tariff.

The maximum gas price was set at UAH6,600 per Mcm ($8.89/Mcf) on 1 June 2015 to take account of both the current tariff and the Hryvnia/US$ exchange rate. In June, our realised gas price in Ukraine was approximately $7.7/Mcf.

Ukraine - oil sales and realisations

Oil sales volumes were 30.7% lower at 762 boepd (2014: 1,099 boepd) as a result of the expected decline in production volumes. Oil production volumes continue to follow a natural decline profile and recent new well production from our Elizavetovskoye field is predominantly gas.

Oil realisations reduced from $94.21/bbl in 2014 to $51.06/bbl due to the weakening of Brent prices from an average of $108.90/bbl during the 1H of 2014 to 57.80/bbl during the 1H of 2015.

Russia - sales and realisations

Both gas sales volumes and US Dollar realisations decreased in Russia in the period. Gas production decreased by approximately 14.5% to 4,470 boepd (2014: 5,226 boepd) as a result of the lost production from wells 5 and 27. Average gas realisations decreased by 36.6% to $1.68/Mcf (2014: $2.64/Mcf) due to the devaluation of the Russian Rouble to an average of 58.144 Roubles/US$ (2014: 35.0824 Roubles/US$).

Loss from operations

Loss from operations for the period was $7.3m (2014: pre-exceptional profit $5.8m) representing $13.1m decrease. This was the result of a $29.9m decrease in Group revenues, a $7.6m decrease in total cost of sales and $9.3m decrease in the Group's administrative expenses and foreign exchange effects.

Cost of sales

Total cost of sales for the period decreased by $7.7m to $45.5m (2014: $53.2m before exceptional items) due to:

· lower operating costs ($3.8m)

· a lower depreciation, depletion and amortisation ('DD&A') charge ($7.0m) and

· an increase in production based taxes ($3.2m).

Operating manpower costs decreased significantly by $1.3m to $2.7m (2014: 4.0m) due to both a reduction in staff and the effects of Hryvnia devaluation. Other operating costs such as field vehicle and travel costs, raw materials, chemicals and lubricants, catering and field camp running costs reduced from $3.7m in 2014 to $1.7m in 2015 due to reduced drilling activity. Lastly, Russian property tax charges have decreased by approximately $0.8m to $0.7m (2014: 1.5m) due to the reduced value of the Russian assets subject to property tax.

The DD&A charge reduced by $7.0m, largely as a result of lower production. The Group's depletion rate reduced to $8.12/boe (2014: $10.72/boe) following a write-up in remaining reserves at the year end and lower asset carrying values resulting from impairments recognised in Ukraine and Russia. For the purposes of testing for impairment of the Group's non-current assets in 2015, the Company has taken account of developments since the tests for impairment at the 2014 year end and no impairment triggers were noted.

Production based taxes increased by $3.2m, which are considered further below.

Exceptional charge

There have been no exceptional items in 2015 (2014: $3.3m). The exceptional item recognised in 1H 2014 was a result of one-off costs incurred in Russia to kill well-27.

Administrative expenses and foreign exchange

The Group's administrative expenses decreased significantly in the period to $6.6m (2014: $10.1m). This is largely due to a reduction in staff costs throughout the Group.

Foreign exchange losses decreased by $5.8m to a gain $0.5m (2014: $5.3m loss) due to lower volatility in the Rouble/US$ and Hryvnia/US$ rates during the period. During 1H 2014, the loss related to the devaluation of Hyrvnia-based current assets.

Finance costs

Finance costs increased to $2.4m (2014: $1.6m) comprising convertible bond interest $2.9m (2014: $2.8m) less amounts capitalised in respect of borrowings used to construct property, plant and equipment of $0.6m (2014: $1.5m). Capitalised interest reduced by $0.9m as the development of assets using proceeds from the bonds declined.

The $4.0m charge (2014: $6.1m credit) for the fair value movement on the derivative liability represents the change in fair value of the conversion option associated with the convertible bond. The bonds have a conversion option which becomes more valuable to the bond holder as the Company's share price nears or exceeds the fixed conversion strike price (76.29 pence). As the Company's share price has increased from 12.00 pence at 31 December 2014 to 27.50 pence at 30 June 2015, a charge has been recognised that represents the increase in fair value of the potential liability of the Company to settle any conversion options that may be exercised in future periods.

Taxation

The total tax charge for the year was $0.8m (2014: credit $1.3m) comprising a current tax charge of $2.2m (2014: $3.0m) and a deferred tax credit of $1.4m. The deferred tax credit reflects the recognition of a Russian deferred tax asset in respect of a small proportion of the local tax losses available for offset against future profits.

Production taxes

Production based tax expense for the year was $20.8m (2014: $17.6m), representing an 18.4% increase which has been recognised in cost of sales.

Production taxes - Ukraine

Production taxes in Ukraine have remained at 55% for gas and 45% for oil throughout 2015.

During 2014, the Ukrainian Government increased the production tax rate for gas from 25% to 28% from 1 April and then in July passed emergency legislation to increase the gas production tax rate from 28% to 55% of the maximum gas price published monthly by the Ministry of Economy, which was effective from 1 August 2014.

Oil tax rates increased at the same time from 39% to 45%.

Production taxes - Russia

The gas and condensate mineral extraction tax ('MET') rate applicable in 1H 2015 was 292 Roubles/Mcm (1H 2014: 471 Roubles/Mcm).

In addition to production taxes, our Russian subsidiary is subject to a 2.2% property tax which is based on the net book value of our Russian assets calculated for property tax purposes. This amounted to $0.7m in the period (2014: $1.5m). The charge is included in other cost of sales.

Loss for the period

Loss for the period was $13.8m (2014: $8.5m profit after an exceptional charge; $11.2m profit pre-exceptional charge). Basic loss per share was 8.01 cents (2014: earnings 4.95 cents).

Cash flows

Cash generated from operations was $3.5m (2014: $31.1m). The reduction is as a result of the $9.7m reduction in profit from operations for the reasons described above adjusted for a $7m decrease in non-cash DD&A charges for the year and a $11.3m cash outflow due to changes in working capital. Working capital increased in 2014 largely due to the receipt of the remaining Russian VAT incurred in prior years on the cost of construction of the plant.

Income tax paid in the period decreased to $0.6m (2014: $3.8m), due to lower profits earned by our Ukrainian subsidiary. Interest paid during the period comprised $1.6m (2013: $1.8m), in respect of financing charges on the convertible bond.

Whilst net cash generated from operating activities was $24.2m less than the same period in 2014, this was substantially offset by the $17.0m reduced capital investment programme during the first half of 2015 in both Russia and Ukraine. As a result there was a small net cash inflow from investing activities of $0.02m (2014: $20.7m).

Net cash outflow from financing activities in the period mainly relates to the $4.2m repayment of the bond in addition to a $1.5m repayment of the Credit Agricole working capital facility.

No dividends were paid to shareholders in the period (2014: nil).

Cash and cash equivalents

The resultant decrease in cash and cash equivalents in the period before adjusting for foreign exchange effects was $4.2m (2014: cash increase of $4.8m). Net cash and cash equivalents at the end of the period was $22.1m (31 December 2014: $25.4m).

Total cash resources and undrawn bank facilities at the end of the period were $22.1m compared to a total of $38.9m at 31 December 2014 which included $13.5m of the undrawn Credit Agricole facility. The Credit Agricole working capital facility expired at the end of June 2015 and discussions are currently underway to renew this facility.

Liquidity

The Group employs a number of financial instruments to manage the liquidity associated with the Group's operations. These include cash and cash equivalents, together with receivables and payables that arise directly from our operations.

Separate from these, the main financial instrument of the Group is the $40 million guaranteed unsubordinated convertible bond which was placed in Q1 2013 with institutional investors. The bond matures in 2018 however bondholders have the right to require the Company to redeem all remaining outstanding bonds in 2017. The bonds have an annual coupon of 8 per cent per annum payable semi-annually in arrears. The bonds terms and conditions contain an annual put option each February until maturity. None of the bondholders exercised their option to put 10% of the outstanding principal of the bonds in February 2014. Bonds with a principal amount of $4m were redeemed on 19 February 2015 in addition to an early redemption premium of $0.2m in accordance with the terms and conditions of the bond. Further information on the terms and conditions of the bonds is included in notes 9 and 10 to the financial information.

As previously noted, discussions are currently underway to renew the Group's working capital facility with Credit Agricole.

Liquidity remains a key risk for the Group, as noted below in the principal risks section and in note 2 to the financial information.

Outlook

Oil and gas prices are forecast to remain subdued for the remainder of 2015. The Group's cost base is benefiting from the devaluation of the Hryvnia and Rouble, although this may be offset by inflation in future periods. The Group has suspended its capital investment programme in Ukraine until the investment conditions improve and the currency restrictions are lifted. We have minimised operational and administrative costs accordingly. As a result, the Group expects to generate net cash flows from operations throughout 2015.

JKX applied for interim measures under the bilateral investment treaties that exist between Ukraine and the United Kingdom and the Netherlands, respectively. 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 JKX's Ukrainian subsidiary, Poltava Petroleum Company, to a rate of 28% (the rate currently applicable under Ukrainian law is 55%). The Interim Award, which is binding on Ukraine as a matter of international law, will remain in effect until the final ruling which will be issued following the arbitration hearing which is expected to take place in July 2016.  

The Group's performance in 2015 has demonstrated the resilience and strength of its business and gives the Board confidence in its ability to return to profitability when external conditions improve.

Risks and uncertainties

The Group continuously monitors the major strategic, operational, financial and external risks it faces and determines the appropriate course of action to manage these risks. The key risks and uncertainties which may impact the Group's performance have not changed materially from those stated on pages 52 to 61 of our 2014 Annual Report.

Financial risk management

The main financial risk faced by the Group relate to the availability of funds to meet business needs and debt servicing requirements (liquidity risk). The significant factors which are outside the control of management and which can have a significant impact on the business remain the political uncertainty and potential changes to the taxation, regulatory and business environment in Ukraine as it attempts to fund its deficit, its external debt and the ongoing military conflict.

These are the critical factors to consider when addressing the issue of whether the Group is a going concern (see note 2).

The principal risks and uncertainties for the remaining six months of 2015 are identified as being:

Liquidity

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

As explained more fully in note 2, two Ukrainian Government decrees, which were issued in 2014 without warning and with immediate legal effect and which remain in place, continue to have a significant adverse financial effect on the Group.

In an attempt to fund its deficit, the external debt and the ongoing military conflict, there is a risk Ukraine may default on its obligations and/or introduce new decrees to increase Government funds from independent companies operating there which would reduce the Group's profits and cash flows.

There remain material uncertainties throughout the remainder of 2015 that could further adversely impact the financial position of the Group relating to the risk that currency restrictions will extended through 2016 such that the Group is unable to repatriate cash from Ukraine, and of the Group's net oil and gas realisations deteriorating materially from those forecast. It is unclear whether either or both of these risks will be realised.

The Board has taken steps to streamline the organisation in the most practical way possible without compromising safety and reliability.

The Group has a significant obligation of $10 million which may become payable pursuant to its $40 million Convertible Bond in February 2016 (see notes 9 and 10 to the condensed consolidated interim financial information) if Bondholders exercise their put option at that time. However the Directors believe that there is a reasonable basis to mitigate the effects of such eventualities through further operational and cash management measures and other restructuring options which are currently being assessed.

Political uncertainty and regulatory risk

The Group's business is principally carried out in Ukraine and Russia. Over 95% of the Group's oil and gas assets are located in Ukraine and Russia and the gas that we produce is sold into their domestic markets. The Group's development expenditure continues to be underpinned by cash flows from Ukraine.

Recent civil conflict, political instability and ongoing military action in parts of Ukraine have negatively impacted the economy and relations with the Russian Federation resulting in recent Ukraine sovereign risk rating downgrades by all credit agencies.

Escalating geopolitical tensions have had an adverse effect on the Ukrainian financial market. The ability of companies and financial institutions with assets in Ukraine to obtain funding from the international capital markets has been hampered as a result of decreased appetite for Ukrainian credit exposure. Any continuing or escalating military action in eastern Ukraine could have a further adverse effect on the economy. In addition, Ukraine will probably need additional external financial support through 2015.

The military action in Ukraine has not impacted the Group's operations to date and we continue to closely monitor the situation.

Changes in law or the regulatory environment including fiscal interpretation and the possibility of immediate implementation could have a sudden material adverse effect on the Group's operations and financial position. 

Tax legislation

In Ukraine, our subsidiary, Poltava Petroleum Company, continues to defend itself in court against action initiated by the tax authorities regarding production related taxes for certain periods through to 31 December 2010 (see note 14 to the condensed consolidated interim financial information).

Management's interpretation of tax legislation in Ukraine as applied to the transactions and activities of the Group may at times not coincide with that of the tax authorities and therefore the tax authorities may challenge transactions and the Group may be assessed for additional taxes, penalties and fines. Other risks include a weak judicial system that is susceptible to outside influence.

These uncertainties could have a material adverse effect on the Group's financial position, results of operations and liquidity. The Group's condensed consolidated interim financial information does not include any adjustments to reflect the possible future effects on the recoverability, and classification of assets or the amounts or classifications of liabilities that may result from these tax uncertainties.

Commodity prices - Russia and Ukraine

Our policy is not to hedge commodity price exposure on oil, gas, LPG or condensate and therefore any change in prices will have a direct effect on the Group's trading results. We are exposed to international oil and gas price movements which can be affected by political developments in Russia and Ukraine. In Russia and Ukraine, the respective governments set the gas prices at which we can sell our gas.

In Ukraine, the regulated gas price is based on its border price which in turn is driven by the price used in the gas purchase contracts that Ukraine has with other countries.

In Russia, there was no official increase in the regulated maximum industrial price in 2014 however the Company was successful in achieving a 4.2% increase in the gas sales price from our buyer. From 1 July 2015 the regulated maximum industrial price has increased by 7.5% as has the price at which we sell gas to our buyer.

A prolonged period of low gas prices in Ukraine would impact the Group's liquidity and would reduce shareholder returns and the share price. In addition, a reduction in the future gas prices in Ukraine and/or lower than expected future gas price increases in Russia could lead to impairment of the Group's oil and gas assets.

Health, Safety and Environment

As we continue with the development and monetisation of our oil and gas reserves, we are exposed to a wide range of significant health, safety, security and environmental risks influenced by the geographic range, operational diversity and technical complexity of our exploration and production activities.

There are risks of technical failure, accidents, natural disasters and other adverse conditions where we operate, which 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.

 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 management 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 2015 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 2015 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

Dr Paul Davies Cynthia Dubin

Chief Executive Finance Director

28 July 2015

Independent review report to JKX Oil & Gas plc

Report on the condensed consolidated interim financial information

Our conclusion

We have reviewed the condensed consolidated interim financial information, defined below, in the half-yearly report of JKX Oil & Gas plc for the six months ended 30 June 2015. Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated interim financial information is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

This conclusion is to be read in the context of what we say in the remainder of this report.

Emphasis of matter

In forming our conclusion on the condensed consolidated interim financial information, which is not modified, we have considered the adequacy of disclosures in note 2 to the condensed consolidated interim financial information concerning the Group's ability to continue as a going concern which indicates the existence of material uncertainties which, if realised, may adversely impact the Group's ability to service its potential Bondholder put option payments in February 2016. The uncertainties relate to the risk that (i) currency restrictions in Ukraine will be extended through 2016 such that the Group is unable to repatriate cash from Ukraine; and (ii) gas or oil net realisations deteriorate materially from those forecast. These risks, as explained in note 2 to the condensed consolidated interim financial information indicate the existence of material uncertainties which may cast significant doubt about the Group's ability to continue as a going concern. The 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 condensed consolidated interim financial information, which is prepared by JKX Oil & Gas plc, comprise:

· the condensed consolidated income statement and the condensed consolidated statement of comprehensive income for the period ended 30 June 2015;

· the condensed consolidated statement of financial position as at 30 June 2015;

· the condensed consolidated statement of changes in equity for the period then ended;

· the condensed consolidated statement of cash flows for the period then ended; and

· the explanatory notes to the condensed consolidated interim financial information.

As disclosed in note 2, 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.

The condensed consolidated interim financial information 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 and Transparency Rules of the United Kingdom's Financial Conduct Authority.

What a review of condensed consolidated financial information 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 Ireland) 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 condensed consolidated interim financial information.

Responsibilities for the condensed consolidated interim financial information and the review

Our responsibilities and those of the directors

The half-yearly report, including the condensed consolidated interim financial information, 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 and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express to the company a conclusion on the condensed consolidated interim financial information 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 and Transparency Rules of the 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.

PricewaterhouseCoopers LLP

Chartered Accountants

London

28 July 2015

Condensed Consolidated Income Statement

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Financial Position

Condensed Consolidated Statement of Changes in Equity (unaudited)

Condensed Consolidated Statement of Cash Flows

Notes to the interim financial information

1. General information and accounting policies

JKX Oil & Gas plc (the ultimate parent of the Group) is a public limited company listed on the London Stock Exchange and incorporated in England. 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 2015 and was approved by the Directors for issue on 28 July 2015.

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 2014 were approved by the Board of Directors on 19 March 2015 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 2015 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 2014 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.

During the second half of 2014, three Ukrainian Government decrees were issued without warning and with immediate legal effect which:

· increased the rate of gas production tax payments on oil and gas from 39% and 28% to 45% and 55% respectively;

· instituted currency restrictions, initially until 1 December 2014 but later extended a further three times to March 2015, June 2015, and now until 3 September 2015; and

· directed major industrial gas buyers to acquire their gas solely from the Ukraine state-owned gas company from 1 December 2014 through to 28 February 2015.

The first two decrees which continue to be in effect have had a significant adverse financial impact on the Group, along with the decline in international oil prices which remain low, having fallen precipitously since June 2014, together lowering oil and gas net realisations.

As a result the Board has streamlined the organisation in the most practical way possible but without compromising safety and reliability. Capital expenditure and operating costs have been minimised in all key operational and administrative areas, and consequently the Group remains cash generative from operations. Nonetheless, the Board is maintaining a reduced operational capability in Ukraine such that, if the production tax rates are restored to normal levels and the currency restrictions are not extended, then the Group's planned investment programme in Ukraine can be swiftly restored.

JKX applied for interim measures under the bilateral investment treaties that exist between Ukraine and the United Kingdom and the Netherlands, respectively. 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 JKX's Ukrainian subsidiary, Poltava Petroleum Company, to a rate of 28% (the rate currently applicable under Ukrainian law is 55%). The Interim Award, which is binding on Ukraine as a matter of international law, will remain in effect until the final ruling which will be issued following the arbitration hearing which is expected to take place in July 2016.

The Group has a significant obligation of $10 million which may become payable pursuant to its $40 million Convertible Bond in February 2016 (see notes 9 and 10 to the condensed consolidated interim financial information) if Bondholders exercise their put option at that time. However the Directors believe that there is a reasonable basis to mitigate the effects of such eventualities through further operational and cash management measures and other restructuring options which are currently being assessed.

The Directors have concluded that it is necessary to draw attention to the material uncertainties relating to the risk that currency restrictions will be extended through 2016 such that the Group is unable to repatriate cash from Ukraine and of our gas or oil net realisations deteriorating materially from those forecast, including as a result of higher rates of tax prevailing. It is unclear whether either or both of these risks will be realised. These specific risks, which represent material uncertainties, may cast significant doubt about the Group's ability to meet its obligations as they fall due and continue as a going concern.

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, the implemented cost reductions as well as the availability of additional courses of action should the need arise, mean that it is appropriate to continue to adopt the going concern basis of accounting in preparing the condensed consolidated interim 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 2014 and those expected to be applied in the 31 December 2015 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.

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 (2014: 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. The 'Rest of World' segment comprises operations in Hungary and Slovakia.

Transfer prices between segments are set on an arms 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.

5. Property, plant and equipment and other intangible assets

During the period the Group acquired $4.2m additional assets (2014: $21.4m) in Ukraine, Russia and Hungary, with 97% (2014: 99%) in respect of Group's oil and gas producing and development assets and 2% (2014: 1%) being spent on intangible 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 (2014: two and five years).

7. Cash

Short term deposits comprise amounts which are held on deposit, but are readily convertible to cash. Ukrainian government US$ treasury bills of $6.0m matured on 7 January 2015.

Restricted cash

At 30 June 2015 $0.3m (31 December 2014: $0.6m) 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. Held-to-maturity financial investments

In October 2014, the Company purchased selected Ukrainian Government US$ treasury bills with a fixed coupon which matured on 11 February 2015 and which were classified as held-to-maturity financial investments at 31 December 2014.

9. Borrowings

Convertible bonds due 2018

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

The Bonds have 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 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).

Interest, after the deduction of issue costs and the inclusion of the redemption premium, will be charged to the income statement using an effective rate of 18.0%.

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 31 March 2011, Poltava Petroleum Company ('PPC'), our subsidiary in Ukraine, entered into a reducing credit facility agreement with Crédit Agricole CIB (France) secured by indemnity provided by the parent company, JKX Oil & Gas plc. The credit facility was for a maximum of the Ukrainian Hryvnia equivalent of $15.0m and expired on 30 June 2015; discussions are currently underway to renew this facility. All provisions contained in the credit facility documentation were negotiated on normal commercial and customary terms for such finance arrangements. The interest was calculated at prevailing Crédit Agricole CIB (France) bank rate plus a margin.

10. Derivatives

Convertible bonds due 2018 - embedded derivatives

Coupon Makewhole

Upon conversion of a Bond prior to 19 February 2016 the Company is required to pay an amount of interest equal to the aggregate interest which would have been payable on the principal amount of the Bond if such Bond had been outstanding until 19 February 2016.

Bondholder Put Option

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

Current liabilities include $10.1m (31 December 2014: $4.1m) in respect of the put option available to bondholders on 19 February 2016 (31 December 2014: 19 February 2015). Bonds with a principal amount of $4m were redeemed on 19 February 2015 in addition to an early redemption premium of $0.2m in accordance with the terms and conditions of the bond. None of the bondholders exercised their option to put 10% of the outstanding principal of the bonds on 19 February 2014.

Company Call Option

The Company can redeem the Bonds early in full but not in part at their principal amount together with accrued interest at any time on or after 19 February 2017 if the Volume Weighted Average Price of the Company's shares over a specified period equal or exceed 130 per cent of the principal amount of the Bonds; or 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.

11. 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 arms 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 $35.7m (31 December 2014: $39.5m). The Group's borrowings at 30 June 2015 relate entirely to the convertible bond due 2018.

Fair value hierarchy

Derivatives

At the period end the Group's derivative financial instrument related to various embedded derivatives within the convertible bonds due in 2018 (note 10). The value of the derivative was calculated at inception and the reporting date using the Monte Carlo simulation methodology and Black-Scholes formula, respectively, and the Company 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 30 June 2015 were:

· underlying share price of: £0.275 (31 December 2014: £0.120);

· £/US$ spot rate of 1.5712 (31 December 2014: £1/$1.5577);

· historic volatility of 98.35% (31 December 2014: 70.70%);

· risk free rate based on 2.64 year (31 December 2014: 3.14 year) US Treasury rate of 0.638% (31 December 2014: 0.897%).

A 10% increase/decrease in Company's historic share price volatility would have resulted in an increase in the fair value loss for the period of $0.9m (31 December 2014: reduction in the fair value gain for the year of $0.3m) and a decrease in the fair value loss of $0.8m (31 December 2014: increase in the fair value gain of $0.2m) respectively, 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, held to maturity financial investments and other current assets, as at 30 June 2015 was $26.1m (31 December 2014: $32.8m).

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 9 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 is the level of indebtedness. The convertible bond includes a financial covenant which limits the Group's indebtedness (excluding the bonds themselves and the $15.0m Credit Agricole facility) 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. During the period/year the Group complied with this financial covenant.

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

Cash and short-term deposits held in Ukraine are subject to local exchange control regulations. These regulations provide for restrictions on exporting capital from Ukraine.

Cash and short term deposits included within this consolidated financial information to which these restrictions apply is $6.7m (31 December 2014: $0.5m).

Temporary capital controls established by the National Bank of Ukraine ('NBU') on 1 December 2014 remain in place 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 initially effective until 3 June 2015 but have subsequently been extended until 3 September 2015.

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 Convertible bonds due 2018 is based on the earliest Put dates for the relevant portions of the Bonds (see note 11) of 19 February 2016 and 2017.

Interest rate risk profile of financial assets and liabilities - Group

The Group is exposed to interest rate risk principally in relation to the balance outstanding on the credit facility with Crédit Agricole CIB (France) where interest is calculated at prevailing Crédit Agricole CIB (France) bank rate plus a margin. At the period end, there were no balances outstanding on this facility (2014: $1.5m).  

Fixed rate interest is charged on the Group's convertible bond (see note 10). The interest rate profile of the 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.

12. Share capital

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