Kistos Holdings Regulatory News (KIST)

30 May 2023

Kistos Holdings plc

("Kistos", "the Company", or the "Group")

Full-year results for the year ended 31 December 2022

Kistos (LSE: KIST), the low carbon intensity gas producer pursuing energy opportunities in line with the energy transition, is pleased to provide a summary of its audited full-year results for the year ended 31 December 2022. A copy of the Company's full audited annual report and accounts will be made available shortly on the Company's website at www.kistosplc.com.

2022 Highlights

· On a pro forma basis, the Group production averaged 10.6 kboe/d (2021: 4.3 kboe/d), reflecting a full-year contribution from the Q10-A gas field offshore the Netherlands, and almost six months production from the Greater Laggan Area ("GLA") offshore the UK.

· Adjusted pro forma EBITDA, which includes a full 12-month contribution from the GLA, was €517.2 million (2021: €102.9 million).

· Completed the acquisition of a 20% interest from TotalEnergies E&P UK Limited ("TotalEnergies") in the GLA, more than doubling Kistos' net daily production.

· Year-end 2P reserves of 12.7 MMboe increased to 36.3 MMboe on completion of the Mime Petroleum A.S. ("Mime") transaction.

12 months ended 31 December 2022

1. Pro forma figures include the GLA as if it had been acquired on 1 January 2022. The acquisition completed on 10 July 2022. Pro forma figures for 2021 include the results of Kistos NL1 and Kistos NL2 as if they had been acquired on 1 January 2021.

2. Comparative information has been restated to align with current year allocation methodology.

3. Total production rate includes gas, oil and natural gas liquids and is rounded to the nearest 100 barrels of oil equivalent per day. Actual production rates include impact from acquired businesses only from date of acquisition completion.

4. Non-GAAP measure. Refer to Appendix B to the financial statements for definition and calculation.

5. Certain pro forma equivalents are not applicable or meaningful. The GLA acquisition comprised the purchase of interests in an unincorporated joint arrangement with no pre-existing IFRS income statement, balance sheet or cash flow statement from which to derive pro forma information.

Financial

Strong cash generation in both halves of the year, with movements in gas prices and production rates offsetting each other

· Profit after tax of €73 million, including €44 million of impairment charges relating to exploration assets in the Netherlands, €27 million of gains from changes and releases in acquisition contingent consideration balances, and a total tax charge of €228 million.

· The tax charge (resulting in an effective tax rate for 2022 of 89.8%) includes impact of the Energy Profits Levy in the UK and the EU Solidarity Contribution Tax in the Netherlands.

· Cash balances on 31 December 2022 of €212 million (31 December 2021: €77 million) and net cash of €130 million (31 December 2021: net debt of €73 million).

· Retired 46% of outstanding debt by repurchasing €68 million of Nordic Bonds, leaving €82 million outstanding.

· Capital expenditure on a cash basis, excluding business acquisitions, was €19.5 million.

Operational

Increasing the Group's production base with organic and inorganic growth

· Year-end 2P reserves of 12.7 MMboe increased to 36.3 MMboe on completion of the Mime Petroleum A.S. (Mime) transaction.

· Drilling of the Benriach exploration well (Kistos 25%) approved and was spudded in March 2023.

· Estimated Scope 1 CO2 emissions from our operated activities offshore were less than 0.01 kg/boe in 2022 (excluding necessary flaring during drilling campaigns)

Outlook

Transforming Kistos into an influential independent North Sea E&P across three proven energy markets

· Mime acquisition completed in May 2023, adding 2P reserves of 23.6 mmboe and 2,000 boe/d of production in 2023, increasing to over 15,000 boe/d in 2025 once the Jotun FPSO is onstream.

· The Mime acquisition provides a platform for growth on the Norwegian Continental Shelf

· Kistos is ready to sanction the Edradour West and Glendronach developments in the GLA (subject to JV partner approval), utilising investment allowance under the terms of the UK Energy Profits Levy. If approved, Edradour West development programme anticipated to commence by year-end 2023.

Andrew Austin, Executive Chairman of Kistos, commented:

"Kistos' accelerated evolution over the course of 2022 has been driven by targeted value-accretive acquisitions which have provided both immediate and longer-term upside for the Group. Our entry into the UKCS, followed this year by Norway, has created a diversified and flexible portfolio across multiple jurisdictions.

The Group benefited from strong commodity prices resulting in significant cash generation, which will allow us to continue to capitalise on the exploration, appraisal, and development opportunities within our portfolio. However, these strong commodity prices have resulted in authorities imposing so-called windfall taxes on our operations. This is difficult to comprehend, given that greenhouse gas emissions associated with imported hydrocarbons are typically much higher than those associated with those produced locally. This tax instability has already resulted in Kistos and companies with international asset portfolios cancelling or scaling back North Sea projects and diverting capital elsewhere, with significant implications for local energy security of supply.

In particular, the imposition of the retrospective and regressive Solidarity Contribution Tax on our Netherlands profits means that the Group, and other energy industry participants in the EU, will find it difficult to justify future material investments and developments due to the risk of confiscation of profits should oil or gas prices rise again. We believe our Dutch subsidiary is out of scope of the charge, but have nonetheless made a provision for it in these results, pending further clarification and the outcome of legal challenges from other parties.

From a standing start in 2020, we have built an excellent platform, and we will seek to deploy further capital in the right opportunities or make distributions to shareholders. The instability of the fiscal regimes in which we operate has prompted us to review our investment options and, as we have already demonstrated with our entry into Norway, our pipeline of business development opportunities includes assets in jurisdictions other than the UK and the Netherlands in which we can continue to generate substantial returns for investors."

Enquiries

Notes to editors

Kistos Holdings plc was established to acquire and manage companies in the energy sector engaging in the energy transition trend. The Company has undertaken a series of transactions including the acquisition of a portfolio of highly cash generative natural gas production assets in the Netherlands from Tulip Oil Netherlands B.V. in 2021. This was followed in July 2022, with the acquisition of a 20% interest in the Greater Laggan Area (GLA) from TotalEnergies, which includes four producing gas fields and a development project. In May 2023 Kistos completed the acquisition of Mime Petroleum A.S. adding 24 MMboe of 2P reserves and significant production.

Kistos is a low carbon intensity gas producer with Estimated Scope 1 CO2 emissions from our operated activities offshore of less than 0.01 kg/boe in 2022 (excluding necessary flaring during drilling campaigns).

Executive Chairman's Statement

After completing its first acquisition in May 2021, Kistos has built on that platform in 2022 with the acquisition of a 20% working interest in the GLA from TotalEnergies.

Located offshore of the UK, west of Shetland, the GLA acquisition approximately doubled our production when it completed in July 2022. With natural gas representing c.90% of GLA output, the deal was consistent with our ambition to build a portfolio of assets with a role to play in the energy transition. Development and exploration upside was also added to the portfolio.

In the 12 months to the end of December 2022, net production from Q10-A gas field offshore the Netherlands (Kistos 60% and operator) averaged 4,700 boe per day (2021: 5,000 boe per day pro forma). The drilling programme we commenced in July 2021 - shortly after taking control of the asset which was completed in February 2022 - achieved its aim of minimising the natural decline in production; although the appraisal well drilled on the Q11-B gas discovery failed to encounter gas in the primary Slochteren target (but did successfully test gas from the Bunter and Zechstein formations).

A further drilling campaign at Q10-A was initiated in November 2022 and departed in March 2023 having safely completed its work programme. The Kistos technical team, with the assistance of external consultants, is undertaking a detailed evaluation of the campaign results and future production enhancement options, and we are evaluating the potential for further drilling campaigns in the future. This is being done with a view to accelerating production and maximising recovery from Q10-A, especially now the decision has been taken to continue utilising the P15-D platform for export.

This was announced alongside our interim results in September 2022. As we stated then, it substantially reduces future capital expenditure and eliminates the risk of production interruptions resulting from the work to install a new export route. In addition, changes to the tax environment have made investment less attractive. For those reasons, it was the right decision economically. However, because Q10-A will remain reliant on the availability of older infrastructure that we don't control, cessation of production is likely to occur in the 2030s rather than the 2040s. This was a major contributor to the reduction in Group proved and probable reserves in 2022.

Production from GLA in 2022 averaged 5,900 boe per day from acquisition (6,200 boe per day net to Kistos on a pro forma basis). This was in line with expectations, with onshore processing at the Shetland Gas Plant (SGP) allowing for very reliable operations. On a pro-forma basis, the acquisition contributed €250 million of Adjusted EBITDA in 2022. The headline cost of acquiring these assets was US$125 million, based on an effective economic date of 1 January 2022. The final firm cash consideration payment was US$43 million, the difference being the post-tax cashflows generated from the assets between the effective economic date and the completion date of 10 July 2022.

Having completed three acquisitions to date, we remain focused on building the business and we continue to evaluate a pipeline of business development opportunities, which includes geographies other than the Netherlands and the UK. Nevertheless, if we are to add value for shareholders, it is critical that we maintain our financial discipline and avoid overpaying for assets. Hence, the Board will consider making cash distributions to shareholders if attractive opportunities cannot be identified. It is in this context we decided not to pursue a proposed combination with Serica Energy last summer. While both the Kistos and Serica Boards agreed on the strong industrial logic of a combination, terms could not be agreed that the Board believed fully reflected the value of Kistos.

Importantly, while we assess other potential acquisitions, we are pursuing the organic growth opportunities within our existing portfolio. During 2022, the Orion oil field development project completed the Concept Assess phase and moved into the Concept Select phase and we expect to submit a Field Development Plan (FDP) and permitting requests to the authorities before the end of this year. In addition, we remain mindful of the opportunity to develop the Q11-B gas discovery but at present work is on hold due to the uncertainty surrounding the tax regimes in the Netherlands. This has caused us to fully impair the value of the assets until such time as there is sufficient fiscal clarity or incentives available to encourage investment in energy security.

In the UK, the Board of Directors has approved Kistos' participation in the Benriach exploration well, (Kistos 25%) west of Shetland. The well was spudded in March 2023, targeting 638 Bcf (operator's gross P50 resource estimate) with results expected in mid-2023. The Board is also ready to sanction the Edradour West and Glendronach developments in the GLA, west of Shetland, with a decision by the joint-venture partners as to the order and timing of developments expected to be taken later in 2023 to allow further technical reviews to be undertaken with the aim of reducing costs.

Central to our operations is our health, safety and environmental (HSE) performance. While our overall performance was positive, we did suffer one lost time incident in early 2022 on the Borr drilling rig, but we did not suffer any medical treatment cases and there was no increase in first aid cases. This was despite having drilling rigs on location for more than six months of the year.

Following an upgrade of the wind turbines in 2021, the renewably powered Q10-A platform maintained its excellent emissions intensity track record during 2022 with Scope 1 CO2 emissions of less than 0.01 kg per boe (excluding necessary flaring during drilling campaigns). CO2 emissions from GLA during the period remained below the average for the UK North Sea at 11.9 kg per boe (Scope 1 and Scope 2) and substantially below the level attributable to imported liquefied natural gas (LNG).

Given that the greenhouse gas emissions associated with imported hydrocarbons are typically much higher than those associated with locally produced hydrocarbons, the imposition of so-called windfall taxes on Europe's upstream oil and gas industry is difficult to comprehend. This is all the more so when the negative implications of these measures for energy security of supply are also considered. We have already seen companies with international asset portfolios cancelling North Sea projects and diverting capital overseas, and the instability of the fiscal regimes in which we operate has prompted us to review our investment options.

We are particularly disappointed by the Dutch authorities' retrospective implementation of the EU's Solidarity Contribution Tax, which imposes an additional 33% charge on so-called 'surplus profit' made in 2022. Surplus profit is defined as anything more than 120% of a company's average annual profit from 2018-2021 inclusive. Firstly, and by their very nature, retrospective taxes go against the long-standing consensus that one of the key characteristics of a taxation system is that it should have a principle of certainty. Secondly, on a company level, the Solidarity Contribution Tax unfairly impacts companies such as Kistos, that had hedged some or all their 2022 gas sales below spot prices, whereas the counterparties that enjoyed profits on the other side of these hedges have not been subjected to the tax. Finally, the mechanism by which the tax is calculated, by reference to so-called 'baseline' profits for the years 2018 to 2021 inclusive, covers some of the lowest commodity prices in the last decade and, in the case of Kistos, years in which the Group's Dutch subsidiary realised losses or minimal profits due to it being in a pre-production phase.

The imposition of this regressive tax means that the Group, and the other energy industry participants in the EU, will find it difficult to justify future material investments and developments due to the risk of confiscation of profits should oil or gas prices rise again. As in the case of Kistos, this has had an immediate effect on investment being allocated to the Netherlands, such as not proceeding with the reroute of production from Q10-A, which in turn affects our 2P reserve base. We understand the implementation of the Solidarity Contribution Tax is subject to legal challenges by other parties, and, separately, we believe there is an argument that our Dutch subsidiary is out of scope of the charge. This is because the Board of Directors is of the opinion that under DAS 270 of Dutch GAAP (the relevant accounting standard), the revenue threshold for Kistos NL2 to be liable for the Solidarity Contribution has not been met. However, as there is no history or precedent for this tax being audited or collected by the Dutch tax authorities, the Group has applied IFRIC 23, 'Uncertainty over Income Tax Treatments' and recorded a liability of €46.9 million relating to the Solidarity Contribution Tax in the current tax charge for the year.

Alongside several of our counterparties in the sector, we are lobbying the UK and Dutch Governments to address our concerns and take action that will save jobs, reduce carbon emissions, reduce the balance of payments deficit and minimise dependence on energy imports. We hope they will listen and act accordingly, but we cannot be certain of that. Therefore, as stated earlier, our focus has to be elsewhere, and our pipeline of business development opportunities now includes assets in jurisdictions other than the UK and the Netherlands.

To that effect, in April 2023 we announced that we had reached a conditional agreement to acquire Mime Petroleum A.S. (Mime). The transaction completed in May, and marks our entry into the Norwegian Continental Shelf (NCS), adding 24 MMboe of 2P reserves plus 30 MMboe of 2C resources, primarily oil. In terms of production, Mime will add over 2,000 boe/d immediately and help to boost Group output to in excess of 15,000 boe/d in 2025 once the Jotun FPSO (on the Balder X development) is onstream. The transaction will also act as a platform for growth for Kistos and Mime in Norway.

Adjusted EBITDA for 2022 was €380.0 million (2021: €78.9 million) while adjusted pro forma EBITDA, which includes a full 12-month contribution from the GLA, was €517.2 million (2021: €102.9 million). This was split evenly between the first half and the second half of the year, with movements in gas prices and production rates offsetting each other. Hence, we ended the year with net cash of €130.4 million (2021: net debt of €72.7 million), which was achieved after paying for the GLA acquisition and cash capital expenditure of €19.5 million (2021: €20.0 million).

Finally, I would like to thank our employees and contractors for their work and commitment to the Company and to thank our suppliers, co-venturers and others for their continued support. From a standing start in the fourth quarter of 2020, we have built an excellent platform and we will seek to deploy further capital in the right opportunities or make distributions to shareholders. Although we do not set explicit long-term targets for reserves or production, our focus for which we are well-placed is to continue generating substantial returns for investors and look forward to reporting further progress during 2023.

Operating Review

2022 was an important year for Kistos, as our acquisition of a 20% interest in the GLA consolidated our position as an operating business with significant reserves, production and technical expertise.

Our Dutch assets contributed a full 12 months of production to the Group for the first time and the pro forma Group average gas production rate was 1.52 million Nm3 per day (net to Kistos) compared with 0.73 million Nm3 per day on a pro forma basis in 2021. Average daily production was higher in the first half of the year owing to a planned maintenance shutdown on the P15-D platform in the third quarter of the year.

On 31 January 2022, Kistos entered into an agreement with TotalEnergies to acquire assets including:

· 20% working interests in the producing Laggan, Tormore, Edradour and Glenlivetgas fields, located offshore the UK, west of Shetland.

· 20% interest in the undeveloped Glendronach gas field.

· 25% interest in block 206/4a, which contains the 638 Bcf (operator's gross P50 resource estimate) Benriach prospect.

· 20% interest in the SGP.

The consideration payable in respect of the acquisition comprised initial cash consideration of US$125 million (at the effective economic date of 1 January 2022) plus certain contingent payments. These payments relate to the average day-ahead gas price at the National Balancing Point in 2022 and to the potential development of Benriach.

Kistos expected production from the GLA to approximately double Group output. In the event, it exceeded that expectation and, on a pro forma basis, delivered an average of 0.83 Nm3 per day net to Kistos, which represented 54% of the Group total. Uptime in 2022 was excellent, at over 95% excluding planned maintenance.

Drilling campaigns

During 2022, we were engaged in two drilling campaigns. The first commenced with the arrival of Borr Drilling's Prospector-1 jack-up drilling rig at the Q10-A field in mid-July 2021. It continued until February 2022. The outcome of this programme was:

· A flow test of the Q10-A Orion oil discovery.

· A sidetrack of the Q10-A-04 well, which was not producing, to a new location in the Slochteren formation.

· A series of production-enhancing workovers on existing producing wells at the Q10-A gas field.

· An appraisal well on the Q11-B gas discovery (which flowed gas from the Bunter and Zechstein formations, although failed to encounter gas in the primary Slochteren target)

The second campaign commenced in October 2022 with the arrival at Q10-A of the Valaris 123 jack-up drilling rig. This ended in March 2023 and focused on mitigating recovery from Q10-A by accelerating the recovery of hydrocarbons from certain reservoirs and improving the stability of other producing wells.

An important part of the acquisition in the Netherlands in 2021 was gaining access to a highly skilled workforce and an operating capability. It is a tribute to the team that we had only one Lost Time Incident in more than nine months of drilling and testing across two separate campaigns.

Gas producing assets

Q10-A (Kistos 60% and operator)

From May 2021 to July 2022, Q10-A was Kistos' principal producing asset. It straddles the Q07 and Q10-A production licences approximately 20 km offshore the Netherlands and received development approval in January 2018. Little more than a year after the project was sanctioned, commercial gas production was achieved in February 2019.

The facilities comprise a remotely operated, unmanned platform with six well-slots, located in relatively shallow water of approximately 21 metres. The platform was designed to have as small a carbon footprint as possible, with on-board wind turbines and solar panels providing most of its power. Furthermore, any visits to the platform are carried out by boat rather than by helicopter.

We estimate the Scope 1 emissions related to our production activities offshore the Netherlands were less than 0.01 kg CO2e/boe in 2021 and 2022. Produced gas is exported through a dedicated 42 km pipeline to the TAQA-operated P15-D platform, where it is processed for onward transportation to shore. Following a thorough review in 2022 of potential alternative export routes, and in light of recent tax changes, a decision was taken to continue using P15-D. This reduces future capital expenditure and removes the risk of interruptions to production caused by the project. However, Q10-A's continued reliance on P15-D means it is now likely to cease production in the early 2030s rather than in the 2040s.

Greater Laggan Area (Kistos 20%)

The producing Greater Laggan Area (GLA) gas fields are in water depths of approximately 300 to 625 metres and are located up to 125 km north-west of the Shetland Islands. Development approval was originally granted in 2010 and first gas was achieved at the Laggan and Tormore fields during 2016. The Glenlivet and Edradour fields received development approval in 2015 and subsequently came on-stream in 2017.

The fields are tied back to the onshore SGP by a 140-kilometre pipeline network, which represents the longest subsea-to-shore system in the UK North Sea. The SGP is located on the north coast of the main island of the Shetland Islands. When the hydrocarbons arrive onshore, the liquids (condensates) are removed and piped to the nearby Sullom Voe Terminal, while the gas is processed at SGP before being exported to the St Fergus Gas Terminal in Scotland.

In 2022, the CO2 emissions intensity from GLA production (on a Scope 1 and Scope 2 basis) was approximately 12 kg per boe, well below the UK average for offshore gas fields of 22 kg per boe. As production from the GLA naturally declines (prior to any incremental production coming on stream) this intensity ratio is anticipated to increase in 2023. The joint venture operator is evaluating energy efficiency and electrification options at the SGP during 2023 to further reduce the asset's carbon intensity.

Development projects

Netherlands: Q10-A Orion (Kistos 60% and operator)

Kistos drilled an appraisal well at the Q10-A Orion oil field in 2021 and successfully flow tested an 825-metre horizontal section of the reservoir at a rate of 3,200 b/d. The result led to a decision to commence the Concept Assess phase of development planning for the field. This involved building new static and dynamic reservoir models before evaluating several development concepts with a view to creating a shortlist of options to take forward into a more detailed phase of work.

Concept Assess was successfully completed in the second half of 2022. This led to three development concepts being taken forward to the Concept Select phase of the project, which commenced in early 2023. This is expected to be completed later in 2023, potentially enabling a Final Investment Decision (FID) to be taken by the end of the year.

Netherlands: Q11-B (Kistos 60% and operator)

The Q11-B appraisal well was suspended in February 2022. Although it failed to produce gas from its primary target, this disappointment was tempered by successful tests from the Zechstein and Bunter formations. These outcomes, combined with adverse changes to the Dutch fiscal regime, have meant that there is currently no material expenditure on these licences budgeted or planned, and as such the amounts relating to Q11-B have been fully impaired.

GLA: Glendronach (Kistos 20%)

The Glendronach field was discovered in 2018 and is part of the GLA. It is anticipated that the field will be developed with a single well tied back to existing infrastructure. It is expected to extend the life of the GLA, but FID was deferred by the joint-venture partner in the second half of 2022. It is now undertaking further technical reviews with the aim of reducing the cost of the project and Kistos anticipates FID will be taken in the second half of 2023.

Exploration

GLA: Benriach (Kistos 25%)

Drilling of the Benriach exploration prospect, operated by our partner TotalEnergies, commenced at the end of Q1 2023 and is targeting an operator-estimated P50 gross recoverable resources of 638 Bcf (110 Mmboe), being 160 Bcf (28 Mmboe) net to Kistos. Kistos' share of the cost of the well on a dry-hole basis is forecast to be c.€18 million pre-tax or c.€3 million post tax.

Other

UK 33rd Round (Kistos 25%)

Kistos is part of a TotalEnergies-led joint venture that has re-applied for six blocks or part-blocks in the GLA as part of the UK Government's 33rd Offshore Oil and Gas Licensing Round. The acreage covers 24km2 and includes the Ballechin exploration prospect.

M10/M11 and other NL licences (Kistos 60%)

During the first half of 2022, Kistos applied for the M10a and M11 (Kistos 60%) licences north of the Wadden Islands to be extended beyond 30 June 2022. Historically, Kistos has had licences extended past their expiry date but, on this occasion and in common with some other operators with similar licences, the Company was informed that the extension had not been granted by the Dutch authorities.

Kistos subsequently engaged in discussions with the Dutch authorities and lodged an appeal against this decision. This included full details of our rationale for doing so plus a draft FDP to which the Board of Directors is willing to commit capital. We are awaiting the outcome of the appeal, which was heard in December 2022. As a result of this, the balance relating to M10/M11 of €7.5 million has been impaired in full, although this was offset by a release of contingent consideration payable of the same amount.

Outside of the M10/M11 area, in January 2023 Kistos was awarded the P12b, Q13b and Q14 licences covering a total acreage of 507 km2 adjacent to the existing Q10 block.

Reserves

Kistos exited 2021 with 2P reserves of 18.1 Mmboe in the Netherlands while our 20% interest in the GLA contained a further 6.2 Mmboe at the same date. Since then, our reserves have been impacted by the economic implications of fiscal changes in the UK and the Netherlands. Therefore, while there has been some reduction in technical reserves due to reservoir performance, economic reserves have been materially impacted.

Pro forma production in 2022 was 4.0 Mmboe while the decision to continue exporting via P15-D, for the reasons stated above, reduced reserves by a further 4.3 Mmboe. This is because it is expected to result in Q10-A ceasing production earlier than under an alternative export route, due to limitations on the existing infrastructure. Net downward revisions to previous reserves estimates, which relate primarily to the Q10-A reservoir proving to be tighter than originally thought, amounted to 3.3 Mmboe. Overall, these movements led to Kistos ending 2022 with 2P reserves of 12.7 Mmboe.

Acquisition of Mime

After the period end, in April 2023 Kistos entered into an agreement to acquire 100% of the share capital of Mime Petroleum A.S (Mime), and completed the transaction on 22 May 2023. The consideration for the transaction is US$1 plus the issue of up to 6 million warrants exercisable into new Kistos ordinary shares at a price of 385p each. 3.6 million of the warrants can be exercised between completion of the transaction and 18 April 2028. The balance will be exercisable from 1 June 2025 until 18 April 2028. A payment to Mime's bondholders of up to US$45MM in 2025 is contingent on certain operational milestones being achieved.

Overview of Mime

Mime is headquartered in Oslo, Norway. It has an experienced management team and is focussed on development and production projects on the Norwegian Continental Shelf (NCS). It holds a 10% interest in the Balder joint venture (comprising the Balder and Ringhorne fields) and a 7.4% stake in the Ringhorne East unit, all operated by Vår Energi A.S.A.

Based on operator estimates, 2P reserves at Balder and Ringhorne were 23.6 Mmboe net to Mime at the end of 2022. In addition, Kistos estimates Mime has net 2C resources of 29.8 Mmboe, largely comprised of additional upside in Balder and Ringhorne plus the 2021 King oil discovery

Mime's share of production from Balder and Ringhorne is expected to be over 2,000 boe/d in 2023. This will increase significantly once the Balder X project is onstream, with production for the enlarged Group expected to be over 15,000 boe/d in 2025 once the Jotun Floating Production Storage and Offloading vessel (FPSO) is onstream.

Balder X comprises the Balder Future and Ringhorne Phase IV drilling projects and is designed to extend the life of the Balder Hub. It includes upgrading the Jotun FPSO, which is more than 70% complete and is forecast by the operator to sail away in 2024.

Scope 1 and Scope 2 CO2 emissions from the Balder Hub are expected to fall by more than 50% to approximately 7.5kg per boe once Balder X is onstream. This is well below both the global and the North Sea average.

Acquisition terms and consideration

Following completion and restructuring of Mime's existing bonds, the additional debt assumed by the Group will total $225 million, comprising:

· $120 million of Super Senior bonds, which will attract interest of 9.75% per annum, 4.50% of which is payable in cash and 5.25% of which is payable-in-kind in the form of additional Super Senior bonds. The maturity date of the Super Senior bonds is 17 September 2026.

· $105 million of so-called "MIME02" bonds, which will attract an interest rate of 10.25% payable-in-kind. The maturity date of the MIME02 bonds is 10 November 2027.

A contingent payment of $45 million will be made to the MIME02 bondholders in the event 500,000 bbl (gross) have been offloaded and sold from the Jotun FPSO by 31 December 2024. This will decline to $30 million from 1 January 2025 to 28th February 2025, to $15 million from 1 March 2025 to 31 May 2025, and to zero thereafter.

If 500,000 bbl (gross) has not been offloaded and sold from the Jotun FPSO by 31 May 2025, the holders of Mime's Nordic Bonds will be allocated up to 2.4 million warrants exercisable into Kistos ordinary shares at a price of 385p each. The warrants can be exercised between 30 June 2025 and 18 April 2028. Simultaneously, up to 1.9 million of the 5.5 million warrants issued as consideration for the Mime shares will be cancelled.

Financial Review

1. Pro forma figures include the GLA as if it had been acquired on 1 January 2022. The acquisition completed on 10 July 2022. Pro forma figures for 2021 Include the results of Kistos NL1 and Kistos NL2 as If they had been acquired on 1 January 2021.

2. Non-IFRS measure. Refer to Appendix B to the financial statements for definition and calculation.

3. Certain pro forma equivalents not applicable. The GLA acquisition comprised the purchase of Interests In an unincorporated joint arrangement with no pre-existing IFRS Income statement, balance sheet or cash flow statement from which to derive pro forma Information

Production and revenue

Gas production on a working interest basis totalled 391 million Nm3 (10.6 kboe/d total hydrocarbon production) in the year to 31 December 2022 (2021: 145 million Nm3 gas production, and 4.3 kboe/d total hydrocarbon production). This 270% increase reflected a full year contribution from the Q10-A, versus seven months in 2021, and almost six months production from our interest in the GLA. On a pro forma basis, Kistos gas production significantly increased in 2022 from 268 million Nm3 (5.0 kboe/d total hydrocarbon production) to 556 million Nm3 or (10.9 kboe/d total hydrocarbon production).

The Group's average realised gas price during the period was €98.7/MWh versus €57.4/MWh in 2021 and this, combined with higher production, resulted in total revenue from gas sales increasing by 459% year-on-year to €411.5 million. This includes the impact of the hedging programme in the Netherlands which ended in March 2022, whereby 300,000 MWh was hedged at €25/MWh. On a pro forma basis, these figures were €93.8/MWh and €568.4 million. Revenue from natural gas liquids (NGL) and crude oil sales was €nil but €10.7 million on a pro forma basis, reflecting the timing of liftings in the periods. This compared with €0.1 million and €0.6 million on a pro forma basis in 2021.

Costs

GLA inevitably costs more to operate than Q10-A, with the fields lying in much deeper water, further from shore and a much greater distance to the market. Hence, unit opex costs for the period on a consolidated level increased from €3.7 per MWh in 2021 to €5.8 per MWh in 2022. On a pro forma basis, there was a more pronounced increase from €3.2 per MWh in 2021 to €6.9 per MWh in 2022 reflecting a full year of higher GLA operating costs.

During 2022, Kistos incurred pre‑FID development expenses of €1.8 million (2021, €4.5 million) on potential alternative evacuation routes for the Q10-A platform in addition to progressing development on Orion. As FID was not taken on the alternative evacuation routes, and Orion is still subject to FID, these costs have been expensed in the profit and loss account. Following the decision to continue exporting Q10-A gas via the P15-D platform, no further expenditure is anticipated in 2023.

Adjusted EBITDA

1. Pro forma figures include results from GLA as if it had been acquired on 1 January 2022, and, for 2021, as if the Tulip Oil acquisition had completed on 1 January 2021. The acquisitions completed on 10 July 2022 and 20 May 2021 respectively.

Adjusted EBITDA was €380.0 million or €81.9 per MWh equivalent of production in 2022. Both figures were substantially ahead of the comparable figures for the period to 31 December 2021 of €78.9 million and €47.5 per MWh equivalent respectively, primarily driven by the material increase in commodity prices during the period. On a pro forma basis, Adjusted EBITDA was €517.2 million or €76.7 per MWh equivalent of production versus €102.9 million or €33.4 per MWh equivalent in 2021.

The impairments primarily relate to the Q11-B and Q10-B assets (€36.8 million), which have been impacted by changes to the fiscal regime introduced by the Dutch tax authorities during 2022. These have introduced uncertainty into what was previously a stable and predictable fiscal regime and, unlike equivalent measures in the UK, do not incentivise licence holders to invest further by means of enhanced deductions for investment capital expenditure. Pending further clarity on these measures and whether they are to be extended, there is currently no substantive expenditure on these licences budgeted or planned. As such, there is no longer sufficient certainty over whether the carrying value can be recovered from future development the amounts relating to Q11-B have been fully impaired.

Additionally, a charge of €7.5 million was recognised against the M10/M11 licences. This has been impaired because, as at the balance sheet date, the Group's application to renew the relevant licence had not been approved and there is uncertainty as to whether the Group would be successful in its appeal and/or re-application. As the Group no longer holds the licences, the contingent consideration payable to seller, which would have crystallised upon taking forward further development, has been derecognised resulting in an offsetting €7.5 million gain.

Capital expenditure

Consistent with our growth plans and to ensure we maximise the value of our asset portfolio, capital expenditure in 2022 was €19.5 million (2021 €20.0 million) on a cash basis. The majority of this related to our two drilling campaigns. With FID for Glendronach delayed, and Orion still in the Concept Select phase, capital expenditure in 2023 will not ramp up as much as we originally expected. Out of currently anticipated cash spend of €40-45 million, approximately three-quarters relates to the Dutch drilling campaign that completed in March 2023 or to the pre-tax costs of the Benriach exploration well. On a post-tax basis, we expect the Benriach costs to be c.15% of the pre-tax costs, as a result of the interaction between capital expenditure and the EPL. Kistos expects Mime's capital expenditure for the full year 2023 to be up to $130 million. Tax relief is available on this expenditure at a rate of 78% and is expected to result in a cash tax refund in December 2024.

Profit/loss before tax

Operating profit for the period was €276.3 million (2021: operating loss of €62.8 million) and a profit before tax of €254.1 million (2021: loss before tax of €73.9 million). This figure was after impairments of €44.5 million (2021: €121.0 million), and net finance costs of €22.1 million (2021: €11.1 million), including interest charges of €10.5 million associated with Kistos NL2's Nordic Bonds and a non-cash loss on redemption of €6.4 million relating to repurchases of €68.4 million of Nordic Bonds during the period (arising as the bonds were repurchased at a small premium to par).

Balance sheet

At the end of 2022, the Group held cash and cash equivalents of €212.0 million (31 December 2021, €77.3 million) and net cash of €130.4 million (31 December 2021, net debt of €72.7 million). The increase in net cash of over €200 million was achieved after capital expenditure and acquisition cash outflows of €67.0 million and bond repurchases of €71.8 million, and reflected a 605% increase year-on-year in operating cash flow from €48.0 million to €290.5 million.

Taxation

The effective tax rate for the Group in 2022 was 89.8% (2021: 45.7%). The increase was driven by the introduction, and subsequent increase and extension, of the Energy Profits Levy in the UK and the imposition of the Solidarity Contribution Tax in the Netherlands. The latter is a one-off tax levied on so-called 'surplus profits' generated in 2022. The Group paid €65.7 million in cash taxes in 2022 (2021, €0.9 million), all relating to Dutch tax liabilities. Due to the timing of the GLA acquisition, no cash corporation tax was due or paid during 2022 in the UK.

As a result of the above, higher gas prices during the year, and adverse changes to the fiscal regime in the UK and the Netherlands, our current tax liability has increased from €15.0 million at the end of 2021 to €143.1 million at the end of 2022. This includes €46.9 million in respect of the Solidarity Contribution Tax. The payment of these liabilities and the normalisation of the timing of our tax payments will impact operating cash flow in 2023 and 2024.

The Group understands the introduction and implementation of the Solidarity Contribution Tax is subject to legal challenges by other parties. Furthermore, due to differences between DAS 270 of Dutch GAAP (the relevant revenue recognition standard for determining if the tax is due) and IFRS 15, the Group believes it has strong arguments that its Dutch subsidiary is out of scope of this tax (see note 6.3 to the financial statements). Therefore, it is not certain at this stage if the Group will be required to settle this tax liability, notwithstanding the inclusion of the tax charge as a liability in these financial statements.

Cash flow

ESG Outlook and Non-Financial Performance

Environment

Acting on climate change

We believe that natural gas has an important role to play in the energy transition, bridging the gap on the journey from fossil fuels to a renewable, zero-carbon future. To that end, we continue to explore ways to produce gas with a very low carbon footprint in an environmentally benign way as we seek to support the UK's and the Netherlands' net zero ambitions. In 2022 plans were made to invest to increase the wind generation capacity on our Q10-A offshore gas production platform by installation of a third wind turbine. This will be implemented during 2023.

Direct emissions and air quality

Our Scope 1 emissions levels are minimal, thanks to the solar panels and wind turbines that power the Q10-A platform. In 2022, we estimate the Scope 1 emissions related to our activities offshore the Netherlands were 0.002 kg CO2e/boe excluding flaring. This represents a 55% reduction compared to 2021 mainly due to the increased use of renewable wind energy for the platform as opposed to the use of the standby diesel generator for power. Including flaring undertaken during our drilling campaign, we estimate the figure to be 0.279 kg CO2e/boe. Including Scope 2 emissions, which relate primarily to the combustion of gas in compressors on the P15-D platform that used to process and export the gas production from Q10-A, we estimate the comparable figures to be 13.8 kg CO2e/boe and 14.1 kg CO2e/boe respectively.

Across the Q10-A platform in the Netherlands and the GLA offshore the UK, where Kistos has a non-operated interest, the Company's Scope 1 and Scope 2 emissions are significantly below the North Sea average. Furthermore, they are estimated to be c.62% lower than the CO2 emissions associated with imported liquefied natural gas (LNG).

We have also implemented a programme to identify and prevent methane leaks from our operations with annual inspections, exceeding the four-year inspection requirement.

In our 2021 report, we published a number of goals related to reducing the GHG emissions from our offices and direct operations. In 2023, we plan to refurbish our office in The Hague. This will include the installation of an improved ventilation system, double glazing, and more energy efficient lighting and appliances.

Operational energy use

Our Q10-A platform is unmanned and is powered sustainably using solar energy and wind turbines. Compared to using diesel generators, Kistos estimates this saved approximately 41 tonnes of CO2 emissions. Similarly, the Company estimates that its policy of conducting offshore visits via boat rather than helicopter saved more than 21 tonnes of CO2 emissions. We continue to reduce CO2 emissions through the reduced reliance on standby diesel power generation.

Spills and incidents

We have robust processes in place to prevent major accidents and avoid spillages at sea, as well as clearly defined mitigation and clean-up procedures should an unexpected incident occur. Until we have developed a 'no flaring' policy, we limit gas flaring as much as is practicable. During 2022, we experienced one overflow into an in-field separator at the onshore Hemrik facility. An investigation was launched immediately but, in line with our goal to have zero operational spills, no contaminants escaped into the environment.

Effluents and waste

We strictly adhere to guidelines compliant with EU REACH regulations in preventing the use of certain chemicals and materials that are considered harmful to the environment. In 2022, we continued to strive to reduce waste from our direct operations, in support of our goal to recycle more than two-thirds of our waste in our direct operations.

Biodiversity

We employ people to watch bird migrations and inform us when flaring during drilling operations can be conducted safely without affecting local wildlife. We also limit the ultrasonic sounds from our operations to prevent harm to local marine life and take specialist advice to keep seals away from our platforms. Striving to make a net positive impact on biodiversity throughout our direct operations, in 2022 we continued to explore practical steps to achieve this goal..

Social

Health and safety

Having incorporated third-party contractors into our safely culture, our HSE performance remains strong. In pursuit of our goal of zero harm to people in our direct operations, we had just one Lost Time Incident in 2022, as well as one incident of non-compliance, one near miss and one identified (non-reportable) hazard during six months of drilling and testing operations. The strict protocols and rigorous testing procedures we have in place to keep our employees and contractors safe have also ensured that our operations and offices have not been disrupted by COVID-19.

Employment

As a result of policies brought in during the pandemic, we now have a more flexible working environment for all employees. However, we remain mindful of the need for direct interactions and networking to support the professional development of our people. Therefore, a comprehensive employee satisfaction survey was conducted in 2022.

This was positive overall and confirmed that Kistos' employees experience a high degree of job satisfaction and appreciate the working atmosphere. Teamwork is good and people feel a high degree of job security, and a large majority of staff perceive their roles to necessary and useful. Vertical trust towards management has continued to grow following the integration of Tulip Oil into the Group.

We have taken action to address areas of concern identified by the survey, including issues with ergonomics and perceived workload. Furthermore, we have started work on setting up a comprehensive competence management system, through which we can demonstrate that Kistos has the competencies to perform our operations in a safe and professional manner.

Diversity, equality and inclusion

Diversity, equality and inclusion (DEI) is important to us. We have a roughly 75:25 male/female split across our workforce and we aim to enhance our approach to equality and equity across our business by developing a corporate DEI strategy. In 2022, we reviewed our policies to ensure equality and equity for all in our direct operations.

Stakeholder engagement

As well as ongoing dialogue with our employees and contractors, partners, suppliers and investors, all our activities require the involvement of the relevant regulatory bodies, the State Supervisor of Mines (SodM) in the Netherlands and the North Sea Transition Authority (NSTA) in the UK. We also work closely with Element NL and OEUK, which represent the interests of extractive companies operating in the Netherlands and UK respectively.

Other important stakeholder groups include the coastal communities who live near our operations, TotalEnergies as the operator of the GLA assets, listings agencies such as the Alternative Investment Market (AIM) and the Financial Conduct Authority (FCA), and the coastguards who patrol the waters in which our offshore assets are situated.

Governance

Governance

The Board is responsible for setting the Company's strategic aims, defining the business plan and strategy, and managing Kistos' financial and operational resources. Overall supervision, acquisition, divestment and other strategic decisions are determined by the Board. In conjunction with other Executive Directors, our Executive Chairman is charged with day-to-day responsibility for the implementation of the Company's strategy.

Risk management

Kistos identifies, assesses and manages the risks critical to its success. Overseeing these risks benefits the Group and protects its business, people and reputation. We use the risk management process to provide reasonable assurance that the risks we face are recognised and controlled. This approach enables the organisation to achieve its strategic objectives and create value.

Ethics, anti-corruption and bribery

We foster a culture that promotes ethical and responsible behaviour. We also work in locations where bribery and corruption are unlikely but nevertheless, we remain vigilant to the risk.

Funding and investment

Management regularly reviews the Group's cash forecasts and its covenants to ensure an adequate headroom of cash availability. Each project has a clear delivery framework with a responsible project lead. Delivery against the project objectives, timeline and cost are regularly monitored. Risks being faced are discussed and where appropriate risk mitigation steps implemented.

Procurement practices and sustainability of suppliers

We treat suppliers equally, without discrimination, promoting a 'one-team' culture. Where applicable, we work with suppliers pre-qualified for oil and gas operations. Kistos ensures any risks and costs borne by suppliers undertaking activities that support our business are proportional to the scope of the work.

Economic performance

Price volatility is both an opportunity and a risk to our business. While we benefit financially from the current rise in the price of gas, we still need to consider the wider impacts in terms of fuel poverty, the effect on manufacturing and the fertiliser industry.

Operations in sensitive or complex locations

The Group manages such risks in the context of upcoming developments through engagements with stakeholders. Where necessary, alternative options are also considered to allow for risk mitigation. External consultants with experience in managing these developments are employed to help complement the existing team skills.

Principal Risks and Risk Management

Kistos identifies, assesses and manages the risks critical to its success

Overseeing these risks benefits the Group and protects its business, people and reputation. We use the risk management process to provide reasonable assurance that the risks we face are recognised and controlled. This approach enables the organisation to achieve its strategic objectives and create value. Depending on the nature of the risk, we may elect to accept the risk, manage it with controls or other mitigating actions, transfer the risk to others or remove risk as much as possible by ceasing those activities giving rise to the risks. The Directors confirm they have carried out a robust assessment of the principal risks facing the Group, including those that would significantly adversely impact its strategy, business model, future performance or liquidity.

Consolidated Financial Statements

Consolidated income statement

Consolidated statement of other comprehensive income

Consolidated balance sheet

The notes on pages [xx] to [xx] are an integral part of these financial statements and were approved by the Board of Directors on [xx] 2023.

Andrew Austin Executive Chairman

Consolidated statement of changes in equity

Consolidated cash flow statement

Notes to the Consolidated Financial Statements

Section 1 General information and basis of preparation

Kistos Holdings plc (the Company) is a public company, limited by shares, incorporated and domiciled in the United Kingdom and registered in England and Wales under the Companies Act 2006 (registered company number 14490676). The nature of the Company and its consolidated subsidiaries' (together, the 'Group') operations and principal activity is the exploration, development and production of gas and other hydrocarbon reserves principally in the North Sea and creating value for its shareholders through the acquisition and management of companies or businesses in the energy sector.

1.1 Basis of preparation and consolidation

The financial statements have been prepared under the historical cost convention (except for derivative financial instruments and contingent consideration assumed in a business combination, which have been measured at fair value,) in accordance with UK-adopted International Accounting Standards, in conformity with the requirements of the Companies Act 2006 and in accordance with the requirements of the Alternative Investment Market (AIM) Rules.

These financial statements represent results from continuing operations, there being no discontinued operations in the periods presented.

Kistos Holdings plc, a company registered in England and Wales under the Companies Act 2006 with registered company number 14490676, was incorporated on 17 November 2022 in England and Wales and its shares, with effect from 22 December 2022, are publicly traded on AIM in London. On 22 December 2022, by means of a Scheme of Arrangement, the Company became the new parent company for the Kistos Group of companies; the previous parent company being Kistos plc (a company registered in England and Wales under the Companies Act 2006 with registered company number 12949154). Following the Scheme of Arrangement, shareholders in Kistos plc received the same number and nominal value of Kistos Holdings plc ordinary shares. As the owners of the original parent had the same absolute and relative interests in the net assets of the original group and the new group immediately before and after the reorganisation, these consolidated financial statements of Kistos Holdings plc are presented as if the Company headed the new group for all of the current and prior reporting period. The change in parent company and legal capital of the group has been reflected in the statement of changes in equity.

These consolidated financial statements cover the calendar year 2022, which ended at the balance sheet date of 31 December 2022. The comparative period is the long period of account from 14 October 2020 to 31 December 2021.

1.2 Going concern

These financial statements have been prepared in accordance with the going concern basis of accounting. The forecasts and projections made in adopting the going concern basis take into account forecasts of commodity prices, production rates, operating and general and administrative (G&A) expenditure, committed and sanctioned capital expenditure, and the timing and quantum of future tax payments.

The Group's cash balances as at the end of April 2023 (the latest practicable date of preparing these financial statements) was €268 million. To assess the Group's ability to continue as a going concern, management evaluated cash flow forecasts for the period to December 2024 (the going concern period), by preparing a base case forecast and various downside sensitivities.

The base case going concern assessment assumed the following:

· Q10-A production in line with latest internal forecasts, taking into account the results of the recently completed well intervention campaign which finished in March 2023;

· GLA production in line with latest available operator forecasts;

· Commodity prices based on observable forward curves prevailing at the latest practicable date;

· Committed and contracted capital expenditure only (being primarily the costs of the Benriach well campaign currently underway and Mime's share of Balder X capital expenditure);

· Obligations under Decommissioning Security Agreements (DSAs) for the GLA fields satisfied by the purchase of surety bonds in Q4 2023 (in respect of obligations for 2024) based on the most recent funding requirement and DSA model received from the operator, and at a similar cost to 2023;

· Completion of the acquisition of Mime Petroleum (note 7.5.3) in July 2023 (for which there is only $1 upfront cash consideration, and any contingent consideration expected to be payable January 2025 at the earliest), with the Group assuming Mime's restructured debt from that point and consolidating Mime's expected future cashflows (including revenues from oil production, capital expenditure and corporation tax rebates); and

· Settlement of the €47 million Solidarity Contribution Tax charge in Q2 2024 (notwithstanding that the Group believes it is out of scope of the charge).

This base case forecast demonstrated that the bond covenants (minimum liquidity and leverage ratio) were complied with and that the Group had sufficient cash to meet its obligations throughout the going concern period.

A key assumption within the forecast is the continued availability of surety bonds used to cover obligations under Decommissioning Security Agreements (DSAs). At 31 December 2022, the Group had €27.4 million of surety bonds in issue which are redetermined annually. The next redetermination takes place in June 2023, with renewed bonds (or other arrangements, if applicable) to be put in place by the end of 2023. As part of the going concern assessment the Directors sought advice from surety bond brokers over the Group's ability to renew surety bonds given the combined impact of higher tax and inflation rates adversely impacting the calculation of the amount of security required. Based on the advice received, the Directors are of the view that the surety market will continue to provide security up to the current DSA provisions and those required in the foreseeable future.

Various downside scenarios were also analysed, including reasonably possible commodity price and production downsides, and a scenario where the Group has to fully cover its estimated DSA obligations in cash. Individually these scenarios demonstrated an ability to meet the bond covenants and have sufficient cash available to continue in operational existence in the going concern period. If the estimated DSA obligations were required to be fully covered in cash and either the commodity price or production downside scenarios realised, then it is estimated that, with no mitigating activities undertaken, the Group may fall below its liquidity covenants in or around November 2024. A reverse stress test was also performed, which showed that either a reduction in sales volume or price of approximately 45% (compared to the base case forecast) for the remainder of the going concern period, with all other factors held constant, would result in the liquidity covenants similarly being breached in November 2024. However, as these potential breaches are forecast to occur shortly prior to the receipt of a material Norwegian cash tax rebate anticipated in December 2024, the Group is of the opinion that, should this combination downside scenario crystallise, it would be able to manage its liquidity position and avoid any breach via temporary working capital management. As outlined above, the Group believes the possibility that it will be unable to renew its surety bonds on the same basis as currently posted to be unlikely.

As a result of the above, the Directors have concluded that there is a reasonable expectation that the Group has adequate resources to continue in operational existence throughout the going concern period, and therefore the going concern basis is adopted in the preparation of these financial statements.

1.3 Significant events and changes in the year

The financial performance and position of the group was significantly affected by the following events and changes during the year:

· The acquisition of a 20% interest in the Greater Laggan Area (GLA) producing gas fields and associated infrastructure alongside various interests in certain other exploration licences, including a 25% interest in the Benriach prospect, from TotalEnergies E&P UK Limited in July 2022, arising in the recognition of, among other assets and liabilities, €223.6 million of fixed assets, €115.0 million of decommissioning liabilities and €10.9 million of goodwill (note 2.10);

· A significant increase in average realised sales prices and therefore significantly higher revenue as compared to the prior period due to increased commodity prices (note 2.1);

· The recognition of €44.3 million of impairment charges to exploration and evaluation assets in the Netherlands segment following changes to the tax regimes making it more uncertain that the carrying value of those assets could be recovered through successful development (note 2.8);

· An increase to the unit-of-production depletion charge rate in the Netherlands segment following a revision to the reserves base for depreciation purposes (note 2.6);

· Gains of €27.0 million recognised in the income statement relating changes in contingent consideration payable (note 2.10.2), comprising a €19.5 million fair value gain relating to actualisation of the GLA acquisition payment linked to gas price, and a release of €7.5 million relating to the M10/M11 licence from the Tulip Oil acquisition (the corresponding asset for which was also fully impaired in the period);

· A tax charge of €71.6 million arising from the introduction of the Energy Profits Levy (EPL) in the UK (note 6.2);

· A tax charge of €46.9 million arising from the retrospective imposition of the Solidarity Contribution Tax in the Netherlands (note 6.1 and 6.3);

· A capital reduction resulting in an increase to retained earnings of €50 million, a reduction to share premium of €35 million and a reduction to the merger reserve of €14 million (note 5.3); and

· A capital reorganisation (being the incorporation of Kistos Holdings plc as the new controlling party of the Group) resulting in an increase in the merger reserve to €141.7 million and creation of a capital reorganisation reserve (note 5.3).

1.4 Foreign currencies and translation

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which each entity operates (the functional currency). Transactions in currencies other than the functional currency are translated to the entity's functional currency at the foreign exchange rates at the date of the transactions.

Foreign exchange gains and losses resulting from the settlement of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. All UK-incorporated entities in the Group, including Kistos Holdings plc, have a functional currency of pounds Sterling (GBP). All Dutch-incorporated entities have a functional currency of euros (EUR).

These financial statements are presented in EUR, a currency different to the functional currency of the reporting entity (which is GBP), as a significant proportion of the consolidated results are attributable to subsidiaries whose functional currency is EUR, and the debt issued by members of the Group is denominated in EUR.

All amounts have been rounded to the nearest thousand EUR, unless otherwise stated.

The results and balance sheet of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

· assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet (except for long-term assets and liabilities which are translated at the historical rate);

· income and expenses for each income statement are translated at average exchange rates for the period; and

· all resulting exchange differences are recognised in 'Other comprehensive income'.

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.

1.5 New and amended accounting standards adopted by the Group

The Group has applied the following new accounting standards, amendments and interpretations for the first time:

· Property, Plant and Equipment: Proceeds before intended use - Amendments to IAS 16;

· Reference to the Conceptual Framework - Amendments to IFRS 3;

· Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37); and

· Annual Improvements to IFRS Standards 2018-2020.

The adoption of the changes and amendments above has not had any material impact on the disclosure or on the amounts reported in the financial statements, nor are they expected to significantly affect future periods.

1.6 New and amended accounting standards not yet adopted

A number of other new and amended accounting standards and interpretations have been published that are not mandatory for the reporting period ended 31 December 2022, nor have they been early adopted. These standards and interpretations are not expected to have a material impact on the consolidated financial statements.

1.7 Accounting judgements and major sources of estimation uncertainty

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only the period, or in the period of the revision and future periods if the revision affects both current and future periods.

The following are critical judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have made in the process of applying the Group's accounting policies and that have the most significant effects on the amounts recognised in the financial statements:

· acquisition accounting - definition of a business and assessment of control (note 2.10);

· identification of impairment indicators for fixed assets and goodwill (note 2.8); and

· uncertain tax positions (note 6.3).

The assumptions concerning the future, and other major sources of estimation uncertainty at the balance sheet date that may have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year, are:

· estimated future cash flows from assets used as basis for impairment testing for fixed assets and goodwill (note 2.8);

· estimated quantity of reserves and contingent resources (section 2); and

· the estimated cost for abandonment provisions (note 2.5).

The presumption of going concern is no longer deemed a significant judgement due to the strong cash balances of the Group and projected significant headroom over its debt covenants even taking into account downside sensitivities on commodity prices and production rates. See note 1.2 for further analysis of the assessment of going concern.

1.7.1 Impact of climate change and energy transition on accounting judgements and major sources of estimation uncertainty

The Directors have taken into account climate change and the desire by national and international bodies to transition towards a lower carbon economy were considered in preparing these consolidated Financial Statements. Most immediately, the energy transition is likely to impact future gas and oil prices which in turn may affect the recoverable amount of the Group's assets. The estimate of future cash flows from assets, which includes management's best estimate of future oil prices, is considered a key source of estimation uncertainty. Further details of the key price assumptions are outlined in note 2.8, including sensitivity analysis outlining the amount by which commodity prices would need to change to reduce the recoverable amount to the carrying amount of the assets being tested. Under current forecasts assuming the assets in their current condition, the Group's oil and gas assets are likely to be fully depreciated within five years, during which timeframe it is expected that global demand for gas will remain robust. Accordingly, the impact of climate change on expected useful lives of the Group's current assets is not considered to be a significant judgement or estimate. In addition to oil and gas assets, climate change and energy transition could adversely impact the future development or viability of intangible exploration and evaluation assets. The existence of impairment triggers for such assets under IFRS 6 is considered a critical accounting judgement (see note 2.8).

Section 2 Gas and oil operations

2.1 Revenue

 All revenue in the prior period was attributable to the Netherlands region.

2.2 Segmental information

2.2.1 Segments and principal activities

The performance of the Group is monitored by the Executive Directors (comprising the Executive Chairman, Chief Executive Officer and Chief Financial Officer) on a geographical basis, and therefore there are now two reportable segments identified for the Group's business:

· Netherlands: Comprising the production and sale of gas and other hydrocarbons from the Q10-A field, and the costs associated with exploration, appraisal and development of other Dutch licences; and

· UK: Comprising the production and sale of gas and other hydrocarbons from the Group's interest in the GLA, and the costs associated with exploration, appraisal and development of other licences in the UK North Sea. This segment was created during the year, following the acquisition completed in July 2022 (note 2.10).

The key measure of performance used by the Executive Directors to review segment performance is Adjusted EBITDA (note 2.2.2). They also receive disaggregated information concerning revenue, income tax charge and capital expenditure by segment on a regular basis. Information about measures of total assets and liabilities by segment is not regularly provided to the Executive Directors. Transactions between segments are measured on the same basis as transactions with third parties and eliminate on consolidation.

2.2.2 Adjusted EBITDA

The Executive Directors use Adjusted EBITDA to assess the performance of the operating segments. Adjusted EBITDA is a non-IFRS measure, which management believe is a useful metric as it provides additional useful information on performance and trends. Adjusted EBITDA is not defined in IFRS or other accounting standards, and therefore may not be comparable with similarly described or defined measures reported by other companies. It is not intended to be a substitute for, or superior to, any nearest equivalent IFRS measure.

Adjusted EBITDA excludes the effects of significant items of income and expenditure which may have an impact on the quality of earnings such as provisions for impairment, other non-cash charges such as depreciation and share-based payment expense, transaction costs and development expenditure. A reconciliation of Adjusted EBITDA by segment to profit before tax, the nearest equivalent IFRS measure, is presented below.

Transaction costs in the current period include:

· costs relating to the GLA acquisition; and

· costs incurred on a proposed transaction with Serica Energy plc, which did not proceed.

Transaction costs in the prior period relate to those costs incurred on the Tulip Oil acquisition.

2.2.3 Other segmental disclosures

All Netherlands segment external revenue in the current and prior period was derived from a single external customer. All UK segment revenue in the current year was derived from another single external customer.

2.3 Production costs

Production costs include:

· the export of the gas produced from the Q10-A platform to a third-party platform, P15-D, including treatment tariff, compression tariff, CO2 emission costs and fixed fees;

· operating costs of the Shetland Gas Plant including support and services and emission costs;

· well maintenance expenditures;

· accounting movements in inventory and net realisable value adjustments;

· capacity fees, tariffs and other transportation costs;

· structural and facility-related surveys; and

· G&A allocated to production costs.

2.4 Development expenses

Development expenses include the costs related to pre-Final Investment Decision (pre-FID) expenses incurred on front-end engineering and design related to:

· potential alternative gas export routes from the Q10-A field;

· Concept Assess and Concept Select phases of the Q10 Orion oil field development project; and

· G&A allocated to development expenses.

2.5 Abandonment provision

Abandonment provisions comprise:

· In the Netherlands, the Group's share of the estimated cost of abandoning the producing Q10-A wells, decommissioning the associated infrastructure, plugging and abandoning the currently suspended Q11-B well, and removal and restoration of certain onshore pipelines and corresponding land from historic assets.

· In the UK, the Group's share of the estimated cost of plugging and abandoning the producing and suspended Laggan, Tormore, Edradour and Glenlivet wells, removal of the associated subsea infrastructure, and demolition of the Shetland Gas Plant and restoration of the land upon which the plant is constructed.

The abandonment of the Q10-A wells and associated infrastructure is expected to take place between eight and nine years from the balance sheet date, in 2025 for the Q11-B well (based on the regulatory requirement to abandon the well by that time as, at the balance sheet date, no extension of the licence or production consent had been concluded) and within one year for the onshore pipelines and land restoration. The removal and restoration of onshore pipelines and corresponding land is expected to take place within one year of the balance sheet date.

The abandonment of the UK fields and associated infrastructure is expected to take place between 5 and fourteen years from 31 December 2022 based on current production and commodity price forecasts and sanctioned development plans.

The utilisation of provisions in the period relates to the onshore abandonment of the onshore Donkerbroek-Hemrik location.

Abandonment provisions are initially estimated in nominal terms, based on management's assessment of publicly available economic forecasts and determined using an inflation rate of 2.5% (2021: 1.0%) and a discount rate of 2.5% to 3.5% (2021: 0.5%). The changes in estimates to provisions arises primarily as a result of the increased inflation rate assumed.

The Group has in issue €27.4 million of surety bonds as at 31 December 2022 (2021: nil) to cover its obligations under Decommissioning Security Agreements (DSAs) for the GLA fields and infrastructure. The amount of the bonds required is re-assessed each year, changing in line with estimated post-tax cash flows from the assets, revisions to the abandonment cost, inflation rates, discount rates and other inputs defined in the DSAs.

2.6 Property, plant and equipment

'Assets under construction' relates to wells drilled but not yet producing. The 'Other' category includes office and IT equipment, including assets (primarily office leases) held as right-of-use assets (note 5.2).

'Disposals' represent the removal of fully depreciated assets following the conclusion of the abandonment campaign on the location Donkerbroek Hemrik in Kistos NL1.

2.7 Intangible assets

Exploration and evaluation assets include the exploration licence portfolio acquired as part of the GLA acquisition, and the Orion oil prospect on the Q10-A licence. The Group's licences are outlined in note 2.9.

2.8 Impairment of assets and goodwill

Impairments of property, plant and equipment in the Netherlands segment of €0.3 million relate to a portion of the previously producing A01 well which, at the balance sheet date, had been partially abandoned in preparation for the drilling of a side-track.

Impairments of intangible exploration and evaluation assets in the Netherlands segment of €44.3 million comprise:

- a full impairment of the carrying value attributed to the Q11-B exploration asset (€26.8 million);

- a full impairment of the carrying value attributed to the Q10-B exploration asset (€10.0 million); and

- a full impairment of the carrying value attributed to the M10/M11 exploration asset (€7.5 million).

The Q11-B and Q10-B assets have been impaired due to the scale, manner and nature of additional taxes introduced by the Dutch tax authorities. These increased taxes and levies have introduced uncertainty into what was previously a stable and predictable fiscal regime and, unlike equivalent measures in the UK, do not incentivise licence holders to invest further by means of enhanced deductions for capital expenditure. As budgeted spend on these assets has now been placed on hold pending further clarity on these measures and whether they are to be extended, and taking into account that during the previous year's drilling campaign the Q11-B appraisal well failed to produce gas from its primary target (but did have more successful tests from the Zechstein and Bunter formations), there is no longer sufficient certainty over whether the carrying value can be recovered from future development, therefore the amounts have been impaired in full.

The M10/M11 asset has been impaired because, as at the balance sheet date, the Group's application to renew the relevant licence had not been successful, and there is sufficient uncertainty as to whether the Group would be successful in its appeal and/or re-application. €7.5 million of contingent consideration payable (which would have crystallised upon confirmation by the Group to the vendor of the Group's intention to proceed with the exploitation of the M10/M11 licences by February 2022) has also been derecognised and a corresponding gain recognised as a separate line in profit and loss (see note 2.10.2).

The imposition of cijns in the Netherlands, and re-assessment of reserves on the Q10-A field, were considered by management to be impairment triggers for the Netherlands Production CGU. An impairment test was therefore undertaken, using a value-in-use method, which demonstrated that the recoverable amount exceeded the CGU's carrying amount and therefore no impairment charge was necessary. 

An impairment test was also carried out in respect of the UK Production and Development CGU, with the primary impairment indicator being the introduction, and subsequent increase and extension of, the Energy Profits Levy (increasing the effective tax rate applicable on the CGU from 40% at acquisition to 75%).

The recoverable amount of the CGU was determined by assessing the FVLCOD of the CGU, by way of discounted cash flow projections, in line with how other market participants would typically value such assets. The valuation is level 3 in the fair value hierarchy due to a number of unobservable inputs used in the estimate.

The key assumptions used in determining FVLCOD were as follows:

- NBP gas price of 287p/therm in 2023, 218p/therm in 2024 and 138p/therm in 2025 based on independent forecasts and estimates prevailing at the balance sheet date;

- production rates forecast by the asset operator, with the expected natural decline consistent with past performance, extending to the estimated cessation of production date (i.e. no growth rates applied);

- decommissioning liabilities in line with the carrying value of the provisions at the balance sheet date; and

- a post-tax discount rate of 13% reflecting the specific risks relating to the segment and geographical region.

The costs of disposal were not considered to be material for the purposes of the exercise.

The results of the impairment test were that the recoverable amount exceeded the carrying amount by €86 million. It is estimated that a change to the following key assumptions would result in the recoverable amount being equal to the carrying amount:

- a reduction to the forward gas curve of approximately 60%; or

- a reduction to projected production rate of approximately 60%.

2.9 Joint arrangements and licence interests

The Group has the following interests in joint arrangements that management has assessed as being joint operations. Following acquisition of the GLA assets, Kistos Energy Limited is the non-operational partner in joint arrangements with the operator, TotalEnergies E&P UK. Except where otherwise noted, the interest and status of licences is the same as at the end of the prior period.

1 The Group does not hold the M10/M11 licence at the balance sheet date and is in the process of appealing the non-renewal of the licence.

2 Licence P1453 is split into the portion including and excluding the Benriach area.

3 In process of being relinquished.

4 Acquired during the period.

In January 2023, Kistos NL2 B.V. was awarded the P12b, Q13b and Q14 exploration licences where it will act as operator with 60% interest.

2.10 Business combinations

To continue value creation for shareholders, on 10 July 2022, the Group completed the acquisition of a 20% working interest in the GLA licences, producing gas fields and associated infrastructure alongside various interests in certain other exploration licences, including a 25% interest in the Benriach prospect, from TotalEnergies E&P UK Limited; all comprising working interests in unincorporated joint operations (together, the 'GLA acquisition'). The headline consideration was $125 million based on an effective economic date of 1 January 2022, with the final firm consideration payment being reduced from $125 million by the post-tax cashflows generated from the assets between the effective economic date and the completion date (and other adjustments). The primary reasons for the acquisition were to diversify the Group's production base by gaining exposure to the UK North Sea and potential exploration upside.

The acquisition consideration, management's assessment of the net assets acquired, and subsequent goodwill arising are as follows:

Goodwill arises primarily from the requirements to recognise deferred tax on the difference between the fair value and the tax base of the assets acquired. This fair value uplift is not tax deductible and therefore results in a net deferred tax liability and corresponding entry to goodwill.

Transaction costs of €0.4 million were incurred, recognised within 'General and administrative expenses' in the profit and loss account, and within operating cash flows in the cash flow statement.

The contingent consideration comprises two elements:

· Up to a maximum of $40 million (€39.3 million) payable based on a formula including GLA gas production and average quoted gas prices through 2022. The fair value of this contingent consideration was assessed to be €34.9 million at the acquisition date, based on actual gas prices and production up to the acquisition date, forecast gas production for the balance of the year and an option pricing model using observable forward gas curves as at the acquisition date and forecast gas production for the balance of the year. At the balance sheet date all of the inputs to the contingent consideration calculation were available, and therefore it has been remeasured to the final settlement amount of €15.8 million, which was settled in cash in March 2023. The change in contingent consideration payable was driven primarily by movements in the gas price during the year as compared to the forward gas curves at the acquisition date. This contingent consideration has been classified as level 3 in the fair value hierarchy.

· Upon the successful development of the Benriach area, consideration of $0.25 per MMBtu of the approved net 2P reserves following first gas. The fair value of this contingent consideration was assessed by management to be €3.1 million, estimated based on the operator's P50 estimate of gross recoverable resources (638 Bcf), risk-adjusted to reflect management's assessment of chances of successful discovery and development, and discounted to present value based on the earliest estimated time that the contingent payment could crystallise. As at 31 December 2022, there has been no change in the amount recognised for the liability other than the interest accretion expense of €0.1 million (recognised within finance costs). This contingent consideration has been classified as level 3 in the fair value hierarchy.

2.10.1 Acquisition in prior period

On 20 May 2021, Kistos plc completed the 100% acquisition of Tulip Oil Netherlands B.V. (renamed to Kistos NL1) and Tulip Oil Netherlands Offshore B.V. (renamed to Kistos NL2) for consideration of €155.0 million. The acquisition consideration, management's assessment of the net assets acquired, and subsequent goodwill arising were as follows:

Contingent consideration of €15.0 million payable was recognised on acquisition, and comprised the following:

· €7.5 million payable by February 2022 upon confirmation by Kistos of its intention to proceed with exploitation activities in respect of Vlieland Oil (Orion); and

· €7.5 million payable by February 2022 upon confirmation by Kistos of its intention to retain ownership of the M10/M11 licences.

The contingent consideration in respect of Orion was paid during the current year. Contingent consideration relating to M10/M11 has been derecognised in full because, as at the balance sheet date, the Group had not been successful in its application to renew the relevant licences. Contingent consideration relating to the acquisition which was not recognised on the balance sheet is disclosed in note 7.2.

2.10.2 Movement in contingent consideration payable

The movement of contingent consideration balances is as follows:

2.10.3 Contribution

The GLA acquisition contributed revenue of €125.9 million and a loss after tax of €20.1 million in the period from acquisition. If the acquisition had completed on 1 January 2022, consolidated revenue for the Group would have been €568.4 million. It has been considered impracticable to disclose the impact to consolidated profit and loss after tax if the acquisition had completed on 1 January 2022, due to the complexity of remeasuring the fair value of the acquired assets at 1 January and subsequent impact to depreciation, the complexity of measuring the contingent consideration payable at 1 January and subsequent impact to gain or loss on remeasurement, the combined impact of the above and other factors on the initial deferred tax liability recognised and subsequent deferred tax charge or credit and the lack of available information to determine the timing of certain expenditure for tax and EPL purposes. The impact to Adjusted EBITDA and EBITDA as if the acquisition had completed on 1 January 2022 is disclosed in Appendix B.

2.11 Commitments

As at the reporting dates, the Group had outstanding contractual capital commitments as follows:

Section 3 Income statement

3.1 Earnings per share

3.2 General and administrative expenses

3.3 Employee benefit expenses 

At the end of the period there were 24 employees (2021: 17 employees) of the Group (excluding Non-Executive Directors); 16 (2021: 12) in the Netherlands, two in Germany (2021: nil) and six (2021: five) in the United Kingdom.

The average number of employees in the Group is as follows:

3.4 Share-based payment arrangements

During the year, the Group introduced share-based payment schemes for certain employees, which are outlined below. The total charge in respect of share-based payments for the year was €0.5 million (2021: nil).Share option incentive awards (equity-settled)

On 1 February 2022, the Group established a share option programme that entitles all full-time employees of Kistos plc and Kistos NL2 to purchase shares of Kistos plc. Under this programme, holders of vested options are entitled to purchase shares at the option price of the shares once the options have vested. All options are to be settled by delivery of new shares.

Share option matching awards (equity-settled)

On 1 February 2022, the Group offered certain full-time employees in Kistos plc and Kistos NL2 to participate in an employee share purchase plan. To participate in the plan, the employees are required to buy, or already hold, shares of Kistos plc ('matched shares') with own funds. Under this programme, holders of vested options are entitled to purchase shares at the option price of the shares once the options have vested. All options are to be settled by delivery of new shares.

The key terms and conditions of the arrangements are as follows:

Measurement of fair values

Share option incentive awards (equity-settled)

The fair value of the share option programme has been measured using the Black-Scholes formula. Service and non-market performance conditions attached to the arrangements were not taken into account in measuring fair value.The inputs used in the measurements of the fair values at grant date of the equity-settled share-based payment arrangements were as follows:

Expected volatility has been based on an evaluation of historical volatility of the share price, particularly over the historical period commensurate with the term between the initial public offering of Kistos plc's shares and the grant date(s) of the share-based payment programme(s). No expected dividends were included in the option pricing model as the granting entity has no history of paying dividends. Based on lack of historical data, it is expected that all employees remain in place during the scheme and will have a maximum of 10 years to exercise the options. At 31 December 2022, no employees have left the employer that participate in the share option programme(s).

Following the capital reorganisation, the terms of the share options were modified such that once the share options have vested and upon their exercise, they will be settled in ordinary shares of Kistos Holdings plc instead of Kistos plc. However, as the reorganisation was an exchange of ordinary shares in Kistos Holdings plc for those of Kistos plc (with each share having the same economic and voting rights) it was determined that there was no change to the fair value of share options as a result of this modification.

Reconciliation of outstanding share options As at 31 December 2022 the following share options are outstanding, as the date of the first anniversary has not yet been reached, none of these share options have been vested. Based on the vesting conditions, requiring at least three years of service for the full share options awards, the costs of share-based payments are front-loaded.

Upon vesting of the share options and exercise by the employee, the obligation will be settled by Kistos Holdings plc.

3.5 Interest and other net finance costs

Section 4 Working capital

4.1 Cash and cash equivalents

Cash and cash equivalents consist of bank accounts and restricted cash balances. The restricted funds at the end of 2021 and 2022 relate to a bank guarantee for the office lease in The Hague.

4.2 Trade and other receivables

4.2.1 Accrued income

The accrued income balance of €48.0 million (2021: €40.3 million) represents amounts due to the Group in respect of gas sales revenue which had not been invoiced at the balance sheet date. All accrued income amounts had been invoiced and collected in full within one month of the corresponding reporting date.

Information about the Company's exposure to credit risk and impairment losses for other short-term receivables is included in note 4.6.

4.3 Trade payables and accruals

Trade payables are unsecured and generally paid within 30 days. Accrued expenses are also unsecured and represents estimates of expenses incurred but where no invoice has yet been received. The carrying value of trade payables and other accrued expenses are considered to be fair value given their short-term nature.

4.4 Other liabilities

The interest on bond debt is payable semi-annually. The hedge liability represented the fair value liability in respect of the cash flow hedge for the remaining period of the gas price hedge contract. As at 31 December 2022 the hedge liability is nil, as no hedges are in place in respect of future production.

4.5 Inventory

No inventory was recognised as an expense in the current or prior year. The movement in inventory net realisable value provisions amounted to a charge of €0.8 million (2021: nil).

4.6 Financial instruments and financial risk management

4.6.1 Financial risk management objectives

The Group is exposed to a variety of risks including commodity price risk, interest rate risk, credit risk, foreign currency risk and liquidity risk. The use of derivative financial instruments is governed by the Group's policies approved by the Kistos Board. Compliance with policies and exposure limits is monitored and reviewed internally on a regular basis. The Group does not enter into or trade financial instruments, including derivatives, for speculative purposes.

4.6.2 Financial assets and liabilities carried at fair value

The following table shows the fair values of financial liabilities which are carried at fair value, including their levels in the fair value hierarchy. The Group holds no financial assets recognised and measured at fair value.