PGR.L Regulatory News (PGR)

26 June 2020

Phoenix Global Resources plc

("Phoenix" or the "company")

Final results for the year ended 31 December 2019

Phoenix Global Resources plc (AIM: PGR; BCBA: PGR), the upstream oil and gas company offering its investors direct exposure to Argentina's Vaca Muerta shale formation and other unconventional resources, announces its final results for the year ended 31 December 2019 and the publication of its 2019 Annual Report and Accounts.

Summary

¹Adjusted EBITDAX excludes non-recurring operating expenses

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About Phoenix

Phoenix Global Resources is an independent oil and gas exploration and production company focused on Argentina and listed on both the London Stock Exchange (AIM: PGR) and the Buenos Aires Stock Exchange (BCBA: PGR). The Company has over 0.9 million licenced working interest acres in Argentina (of which approximately 0.7 million are operated), 29.8 million boe of working interest 2P reserves and average working interest production of 9,236 boepd in 2019. Phoenix has significant exposure to the unconventional opportunity in Argentina through its approximately 0.6 million working interest acres with Vaca Muerta and other unconventional potential.

Annual reportOn 2 July 2020, the Company will be posting to shareholders a copy of the audited annual report for the year ended 31 December 2019 together with the notice for a General Meeting, to be held at the offices of Phoenix Global Resources at King's House, 10 Haymarket, London SW1Y 4BP at 12.00 pm on 30 July 2020. The annual report will be made available on the Company's website at www.phoenixglobalresources.com.

CHAIRMAN'S STATEMENT

Dear shareholders,

The company's strategic objective in 2019 was to create additional value in its substantial portfolio of unconventional oil and gas assets through continued appraisal and development activity in key prospective areas, an objective that was progressed in the year.

Continued appraisal and development of our core prospective assets

We saw success at Mata Mora where the drilling and completion of the first two horizontal wells delivered initial production volumes in excess of pre-drill estimates. The success at Mata Mora has confirmed the block as a commercial unconventional prospect in the oil and condensate window of the Vaca Muerta.

At Puesto Rojas the company secured the first ever unconventional licence to be issued by the Province of Mendoza. The award of the licence recognises the substantial evaluation work undertaken at Puesto Rojas in the last several years and, importantly, provides the platform for future work on the development of the unconventional resources on the concession.

Testing at Mata Mora was extended beyond the initial plan as we worked though analysis of initial production results and detailed analysis of well performance. This extended testing has provided us with additional subsurface information that will be used in planning future wells and preparing for the pilot development project at Mata Mora.

In addition, the results from the initial vertical five-well development campaign at Puesto Rojas were mixed. Three wells were unsuccessful, and information obtained during drilling and completion showed that the targeted folded Agrio formation is significantly more complex than the seismic surveys had indicated. The outcome of the limited campaign and the additional information gained from it has confirmed the development of the Vaca Muerta formation using horizontal wells and the non-folded Agrio horizontal development as the areas of focus for future activity at Puesto Rojas.

Recent events

Unfortunately, notwithstanding the progress made in the year, recent events mean the company is currently faced with several challenges. On a macro level it faces economic uncertainty in Argentina following a change of government in December 2019 and as a result of the continuing negotiations by the government to restructure the country's debt. This political and economic uncertainty has been compounded by the impact of COVID-19 and the global collapse in demand for oil that caused oil prices to collapse in the first half of 2020.

Currency and inflation

The economic environment in Argentina continued to be volatile in 2019 as the Peso suffered further significant devaluation and full-year price inflation exceeded 50%. The company benefits from a degree of protection as the oil and gas industry operates in a primarily Dollar-based environment and Phoenix sources its primary funding in US Dollars outside Argentina. Nevertheless, the company is affected by aspects of government fiscal policy. These measures can include short-term intervention on commodity prices to curb price inflation for fuel at the pumps or tariffs on production such as the notional export tariff introduced in 2019 that impact realised prices for domestic sales.

A change in government

December 2019 saw a change in government in Argentina following the presidential elections in October 2019 where the Frente de Todos party was returned to government under the leadership of Alberto Fernandez. The initial primary vote held in August had foreshadowed this result with Fernandez securing an unexpectedly large margin of victory over the incumbent Cambiemos coalition, headed by the then President Macri.

Immediately following the result of the August primary, the already weakened Peso suffered further significant and immediate devaluation driven by uncertainty in international markets over what the newly elected government's position would be in regard to the US$57.0 billion standby credit agreement.

Potential new legislative support for key industries

The new administration has announced its intent to provide explicit economic and regulatory support to four key sectors of the economy, being agriculture, oil and gas, mining, and intellectual services. These are the sectors considered to have the greatest potential to positively impact the Argentine economy. An imperative in reversing the fortunes of the economy is the reduction of and potential reversal in the current significant balance of payments deficit.

In May 2020, the Argentine government issued a decree establishing a fixed realised Medanito price of US$45.00/bbl. This pricing will remain in place in the Argentine domestic market until the Brent crude benchmark sustains a price of US$45.00/bbl or above for 10 consecutive days. The issuance of the decree demonstrates the intention of the government to support the industry where possible.

The impact of COVID-19

The start to 2020 has been dominated by the emergence of the COVID-19 virus and its rapid development as a life-threatening global pandemic. Almost universally, the governmental response to the pandemic has been one of containment through lock-down, quarantine or self-isolation for substantially all citizens.

This has resulted in an almost total shut-down of non-essential industrial and commercial activity and a cessation of substantially all discretionary travel worldwide. The sudden and profound reduction of activity globally has resulted in a significant reduction in demand for energy translating to record low prices for oil and gas and, in turn, rendering many development projects financially unviable.

As the virus begins to reach a perceived peak in a number of countries, the focus of policy response is turning to when and to what extent lock-down measures can be progressively lifted such that economic and industrial activity can be recommenced and economies effectively restarted.

Demand led commodity price drops typically reverse more quickly than those driven primarily by excess supply and whilst this is promising, the timetable to resumption of normal levels of activity is unclear and could be some way off.

Current operations

The company has currently shut-in production of crude oil from its operated licences due to demand constraints. The company has developed and is progressively implementing a plan that involves a significant reduction in both operating and administrative costs. The cost reduction actions being taken mean the company will be in a significantly better position to produce oil economically at lower oil prices and with a positive contribution to cash flow when production recommences. The company will then focus on the continued development of its unconventional assets.

Our major shareholder, Mercuria, is supportive of the cost reduction plan and has extended short-term debt facilities to facilitate its implementation and execution. Mercuria has written to the company stating its intention to continue to provide financial support to the company of up to $37 million in order that the company may continue to operate and service the company's liabilities as they fall due in the next 12 months whilst the company assesses the timing of work plans and capital commitments. Mercuria has agreed to meet the company's cash needs for this period and not demand repayment of the existing loan within the next 12 months whilst in discussion with the company to restructure the existing loan agreement. The letter, which by its nature is not legally binding, represents a letter of comfort stating Mercuria's current intention to continue to provide support.

The directors believe they will be able to agree the restructure of the existing debt with Mercuria and formalise an agreement for new funding and that the group and company can continue as a going concern for the foreseeable future. The application of the going concern basis of preparation of the financial statements included in this annual report is based on the letter that has been received from Mercuria and the ongoing discussions with the Mercuria principals and accordingly, the directors continue to adopt the going concern basis for accounting in preparing the 2019 financial statements. However, the directors recognise that if financial support over the next 12 months from Mercuria were not to be available and the company is unable to restructure the existing loan agreement from Mercuria or obtain funding from alternative sources, this gives rise to a material uncertainty that may cast significant doubt on the group's and company's ability to continue as a going concern.

Summary

These are truly unprecedented time with disruption on the demand and supply side. The board believes it can leverage this situation and take this opportunity to examine the cost base in detail. The company is fundamentally an unconventional oil and gas exploration company and has excellent assets in this space. The companies that will be successful in the future will be those with a low-cost base and strong balance sheet. The board recognises that significant investment will be required in the coming years to develop these assets and enhance value and acknowledges this may include third-party partners and local debt providers in the funding mix to support this development.

Unprecedented times, require unprecedented painful decisions to be made and whilst the steps we have agreed to take will be challenging to implement, the board believes this will result in a cost base from which it can leverage the company's interests in its high quality unconventional oil and gas assets and be in a position to create long-term value for shareholders.

It goes without saying that I take this opportunity on behalf of your board to extend my sincere thanks to our teams for their continued dedication and hard work in what has been a challenging period for us all. In particular, I would like to thank all of the departing staff and directors who have made significant contributions during the time they have been with the company and I am sincerely sorry to see them go. I wish them all the best for the future. We all understand the challenges faced by the Company and the difficult actions we are faced with in this environment.

Sir Michael Rake

Non-executive chairman

26 June 2020

OPERATING REVIEW

Mata Mora - operated, core

The drilling and completion of the first two unconventional horizontal Vaca Muerta wells at Mata Mora is a milestone for Phoenix and demonstrates value in the asset.

Initial unconventional horizontal wells targeting Vaca Muerta

The first horizontal well at Mata Mora, MM.x-1001, was spud in late 2018 and completed drilling operations in early January 2019. On conclusion of drilling, the well was cased and cemented with completion to be undertaken simultaneously with MM.x-1002, the second horizontal commitment well at Mata Mora. MM.x-1002 was spud from the same pad as MM.x-1001 in late January 2019 and drilling of the horizontal section concluded at the end of March 2019.

The vertical section of MM.x-1002 reached a total depth of 3,170 metres with the lateral section extending to a horizontal length of 2,058 metres. Like MM.x-1001, the well was successfully geo-steered with 95% of the lateral section maintained within a seven-metre window in the La Cocina horizon of the Vaca Muerta formation.

The wells were unconventionally completed in May 2019 in simultaneous zipper-frac operation where frac stages are applied in an alternate sequence along the length of the two wells. This technique was developed in the North American shale industry and is designed optimise the stimulated rock volume via stress-shadowing whilst minimising the risk of communication of the completion fluid (or 'frac hits') between fracs stages applied to adjacent wells in high intensity drilling operations. Frac hits can have a positive, negative or neutral impact but where negative they can manifest in a 'parent-child' relationship between wells with production losses observed in one well when production is increased on an adjacent well.

A total of 80 frac stages were successfully completed across the two Mata Mora wells with an average of four stages completed per day. The rate of deployment of frac stages is expected to increase with future wells. On conclusion of the frac operation, both wells were placed on flowback during which the frac fluids used in the wells are recovered and initial oil volumes are produced. Both the produced oil volumes and fluid recovery increased through the flowback period as the choke valves were conservatively opened on the wells.

Extended well testing providing valuable subsurface and production information

Whilst both Mata Mora wells saw production rates of up to 1,000 bopd in initial testing it was noted that when the choke aperture was progressively opened on one well thereby increasing its production, offsetting production losses were noted on the other. This production behaviour suggests a level of ongoing communication between the wells, separate from expected interference that would occur during completion operations.

In early Q3 2019, both wells were choked back and put on extended test. As part of that testing, a production logging tool was run along the length of each well that confirmed the frac stages applied to the wells are connected to the well-bore and that fluid is flowing in each stage across both wells. This indicates that, whilst there may be some communication between the wells, the individual frac stages themselves are all performing.

As of February 2020, the choke stages were being managed on each well and are being progressively opened in small increments in order to reduce wellhead pressure ahead of the potential installation of pumps on both wells, dependent on well performance in the interim.

The communication issues experienced on MM.x-1001 and MM.x-1002 have caused a re-evaluation of the optimal spacing for future unconventional lateral wells at Mata Mora. Where the initial two wells have spacing of 250 metres, future wells will be drilled with projected spacing of between 300 and 400 metres between adjacent laterals.

Optimising well spacing to maximise production potential and total ultimate oil recovery at the same time as minimising the risk of interference between wells is key to determining the most economic development plan for a field.

Confirming Mata Mora as a commercial prospect

As of 31 March 2020, total cumulative production from the two Mata Mora wells was more than 240,000 bbls of 37 API crude generating sales proceeds of US$8.7 million.

In early April, the Mata Mora wells were shut in under force majeure conditions. The significant reduction in demand for fuel because of COVID-19 had caused YPF to shut in several of its refineries and hence there was no route to market from the field. Production is expected to resume in 2020 when the impact of the pandemic on fuel demand eases and commercial markets return.

The work performed to date and the well results from the initial lateral wells at Mata Mora have confirmed that the block is a commercial prospect for development.

Puesto Rojas area - operated, core

Production

Puesto Rojas, including the Cerro Mollar Oeste and Cerro Mollar Norte concessions, is an important area in terms of current production and future potential. The area consistently delivered approximately 1,500 boepd of production in 2019. Most existing production is derived from conventional well stock however the focus of development work going forward will be on the multiple unconventional opportunities present at Puesto Rojas.

The Puesto Rojas area is significant in terms of acreage and contains several formations and horizons with potential for unconventional development.

Award of licence

In April 2019, Mendoza province awarded the company the first unconventional concession ever issued by the province. The unconventional concession covers the Puesto Rojas block and has a primary term of 35 years and carries a lower royalty rate than the conventional concession

The unconventional concession contains a requirement for a pilot development phase with certain works to be completed by June 2022. On conclusion of the pilot phase the company has the option to either move into unconventional development at Puesto Rojas or to revert the unconventional concession without specific penalty and to resume conventional development activity on the block under the conventional concession.

Completion of appraisal campaign

In Q1 2019, the final well of the 2018/2019 unconventional appraisal campaign, CDM-3012, was completed and put on artificial lift. Concurrently, the previously drilled CDM-3004 well was also completed and put on flowback. The 2018/19 unconventional appraisal campaign comprised a total of eight wells with a combination of full and limited tests of various horizons undertaken over the course of the campaign.

The appraisal campaign resulted in the identification of the shallow folded 'tight' Agrio formation as the primary near-term development target at Puesto Rojas given the formation can be accessed using comparatively lower cost unconventionally competed vertical wells meaning it could potentially provide robust production returns in the short to medium term.

Unconventional development campaign

Three new vertical Agrio development wells were drilled and completed as part of the initial 2019 development campaign. CDM-3011 was the first well in the campaign followed by CDM-3014 and then CDM-3025 from the same pad as CDM-3011. In addition to the newly drilled wells, the CDM-3012 and CDM-3007 wells that were drilled as part of the appraisal campaign were recompleted as development wells in the folded Agrio.

The results of the development campaign have been mixed with only CDM-3007 and CDM-3012 currently producing at economic rates, though below pre-drill estimates. The CDM-3011, CDM-3014 and CDM-3025 wells, although producing, have been determined as uncommercial in the folded Agrio.

Unconventional development at Puesto Rojas

Horizontal development of the Vaca Muerta and non-folded Agrio formations remain the primary medium-term objective at Puesto Rojas. Prior to its completion in the folded Agrio, several swab tests were performed on CDM-3007 to determine the production contributions of each of the Vaca Muerta layers penetrated by the well. In addition, a further workover was performed on CDM-3023 where the Vaca Muerta layers were isolated and each layer tested for flow rates.

The results of this work in the Vaca Muerta formation will be used to plan future horizontal wells in the formation at Puesto Rojas.

Other Puesto Rojas area drilling activity

Two commitment wells, LP.a-09 and LP-07 were drilled in the year and are awaiting completion. The wells satisfy the licence commitment for the field though the completion and testing of the wells will likely be delayed following the recent fall in the Brent benchmark price.

An additional commitment well, ML.x-1001 was drilled on the Mallin Largo field contained within the sizeable Rio Atuel licence. The well was not successful in its target objective but provided information to help interpret the nature of the folded Agrio at Mallin Largo continuing into Puesto Rojas.

Gas to power project - removing production constraints

In August 2019 the company commissioned the construction of a gas to power plant at Puesto Rojas. Associated gas is produced as a by-product of oil production at Puesto Rojas and whilst modest amounts of gas in early production can be flared, this is not a solution in a larger scale long-term development project.

As a responsible operator, the company has commissioned a modular gas to power plant at Puesto Rojas to convert associated gas to electricity that can be sold into the electricity grid.

The conversion of gas to power using lean burn technology results in reduced emissions of greenhouse gases and provides a relatively clean source of power for domestic, commercial or industrial use and mitigates constraints on oil production where associated gas is present.

Chachahuen Sur and Cerro Morado Este - non-operated, core

Enhanced recovery, Chachahuen Sur

The focus of activity at the relatively mature Chachahuen Sur concession remains on the ongoing waterflood and tertiary pilot recovery programmes aimed at arresting or slowing natural production decline at the field. Improved and upgraded water handling systems were commissioned during 2019 to both improve the quality of injected water and the rate at which water can be injected into the oil-bearing formations.

In addition to the waterflood project at Chachahuen Sur, a tertiary recovery project using polymer-injection has been proposed by the operator, YPF. The proposal is based on production results to date and the properties of the oil being produced at Chachahuen together with the nature of the reservoir itself and production behaviour observed on neighbouring fields. The objective of polymer injection is to arrest production decline and, potentially, increase absolute production.

The use of polymer injection typically enhances waterflood performance by increasing the viscosity of injected water and thereby increasing the sweep efficiency through the reservoir. This results in a greater volume of oil being pushed toward the producing wells and increasing production.

The proposed tertiary injection project would initially involve polymer injection in six wells with the potential to expand the project if results from the pilot are positive.

Appraisal drilling, Cerro Morado Este

YPF's focus in the Chachahuen area has been related to ongoing delineation drilling at Cerro Morado Este. A total of 23 delineation wells were drilled in the year with encouraging results for large-scale development of the asset.

The evaluation work undertaken on the reservoir at Cerro Morado Este to date has shown that the block has high potential for enhanced production through waterflood. This determination is supported by analysis of waterflood performance of neighbouring analogue fields, including at Chachahuen Sur.

A proposal for an initial waterflood pilot using three injection wells has been made by YPF. In addition to the continued drilling of development wells, should the results of the initial pilot be positive, it is expected that the operator will continue with the expansion of waterflood across the concession.

Potential for additional acreage

The Cerro Morado Este concession currently covers an area of 45,467 acres. Based on 3D seismic studies on neighbouring areas, an extension to the concession of an additional 25,699 acres has been requested to the province.

Corralera - operated, core

The Corralera licence carries an initial commitment for two horizontal wells to be drilled before April 2021. Corralera is situated in the gas and condensate window for Vaca Muerta in Neuquén province. As with at Mata Mora, the province owned oil company, Gas y Petróleo de Neuquén, is a 10% partner in the project.

Work undertaken in 2019 related to drilling has been focused on determining well design and identifying the best landing zone for the well. Work has also been ongoing related to the design of the completions to be deployed in the wells together with the method of doing so.

Groundworks to prepare the drill site are largely complete.

Santa Cruz Sur - non-operated, non-core

The sale of Santa Cruz Sur reflects the company's focus on its core assets and contributed modest proceeds for reinvestment in core activity.

On 13 November 2019, the company announced the completion of the sale to Echo Energy plc of its 70% non-operated interest in five mature conventional production blocks comprising the Santa Cruz Sur assets.

The Santa Cruz Sur assets are in the Austral basin in south Argentina and their sale is in line with the company's strategy to refocus Phoenix's portfolio to focus the company's resources on the development of its significant unconventional oil and gas portfolio in its primary areas of operation in Mendoza and Neuquén provinces.

Average daily production to the date of sale was approximately 2,500 boepd of which approximately 1,950 boepd or 75% was derived from comparatively lower-value gas production.

Rio Cullen, Las Violetas - non-operated, non-core

The Rio Cullen/Las Violetas ('RCLV') group of assets are in Tierra del Fuego in the southernmost part of Argentina with all production derived from conventional formations.

In February 2017, the SM.x-1001 well was drilled as an initial exploration well in the Tobifera formation in the San Martin field and was reported as Argentina's most productive oil well in 2019. In Q4 2019, the well produced at an average of rate of 2,025 bpd. In January 2020, however, the level of water cut in the well increased rapidly to more than 50% of total production and the well was shut in. In March 2020, production tests were undertaken in the middle and upper Tobifera as part of the further evaluation of the well with water volumes recorded in each section, both of which were subsequently abandoned. The SM.x-1002 well continues to produce strongly from the Tobifera formation. A third well in the formation, SM.x-1003, produces at lower rates with a frac job undertaken in early 2019 being unsuccessful in increasing production.

The test in the upper Tobifera section in the 1,871 to 1,876-metre interval showed an average production rate of 1,576 bpd over seven days with lower water cut. The well was subsequently shut in due to a COVID-19 outbreak at the Chilean ENAP terminal which is the export delivery point that production from RCLV is currently trucked to for sale.

The main evacuation route for crude from RCLV is normally by sea using tankers to offtake production. This option is currently not available because the loading buoy is shut down for maintenance and repair work. Production and sales from the San Martin field is expected to resume in October when the repair, maintenance work and tests on the buoy are due to conclude.

The company has commenced marketing of the non-core RCLV assets which are now classified as held for sale.

Malargüe - non-operated, non-core

In May 2019, the Province of Mendoza ratified its decision to deny the second exploration permit for the Malargüe area, in which the company participates on a non-operated basis and where the operator is YPF. During the first exploration period one well was drilled on the block and was deemed a dry hole. The block, though large in terms of overall acreage, was judged to have prospects for unconventional resources in only a relatively small area of the overall licence.

CHIEF FINANCIAL OFFICER'S REPORT

Revenue and gross margin

Revenue for the period was US$129.4 million (2018: US$177.0 million), comprising revenue from oil sales of US$114.7 million (2018: US$154.5 million) and revenue from gas sales of US$14.8 million (2018: US$22.5 million).

The reduction in oil revenue between periods resulted from a combination of a reduction in the realised price per barrel and lower sales volumes period-on-period.

The average realised oil sales price in 2019 was US$47.96/bbl, a 19% decline on the average price of US$59.26/bbl in 2018. Realised prices achieved by the company are indirectly linked to Brent. The average Brent crude price fell period-on-period by 10%, from an average of US$71/bbl in 2018 to an average of US$64/bbl in 2019, driving the reduction in the Argentine realised prices.

The larger reduction (than Brent) in the realised price has resulted from intervention by the Argentine government in the oil market across the period. The export retention tax, which was implemented in September 2018, has resulted in a discount being applied to domestic crude prices based on export parity, and has equated to an approximate downward impact of 10% on prices in 2019.

During the second half of the year the government issued decrees fixing both the Brent reference price for sales and the US Dollar ('Dollar') to Argentine Peso ('Peso') exchange rate. This new legislation was introduced after both the Merval index and Dollar to Peso exchange rate fell dramatically following the result of the Argentine presidential primary elections announcement in August 2019. The legislation fixed the crude oil and gasoline prices for 90 days at a Brent reference price of US$59/bbl and set a Dollar to Peso exchange rate of 45.19, rising to 46.69 then 51.2 in three dated stages. The final Dollar to Peso exchange rate set of 51.2 is around 14% lower than the year-end exchange rate of 59.9.

All domestic oil sales contracts, whilst Dollar based, are settled in Peso, therefore this legislation has had a direct impact on the company's realised revenues, although the decline in revenue has been partially offset by lower Peso denominated costs.

Average daily oil sales in the period were 6,550 bopd compared to 7,060 bopd in 2018. The majority of the reduction has resulted from natural decline not offset by production from new wells at Puesto Rojas and Chachahuen. At Puesto Rojas the company's focus in the period was the completion of the folded Agrio unconventional development campaign, which saw four new wells completed and four new wells drilled and completed during 2019. The campaign did not yield the pre-drill production estimates and a number of the wells were shut in pending further evaluation at period end.

The reduction in oil sales at Puesto Rojas has been somewhat offset by Mata Mora coming online in Q3 2019, contributing an additional 140,000 bbls of operated sales volume by period end.

Gas revenues arise mostly in the non-operated segment and declined by US$7.7 million in the year compared to 2018. The reduction was driven by a 19% decline in the realised price from an average of US$4.10/MMcf in 2018 to an average of US$3.32/MMcf in 2019 and was further compounded by the sale of Santa Cruz Sur ('SCS') in November. The higher price observed in the prior period resulted from a cold spike in the weather during Q2 2018 which increased demand. In the second half of 2018 the gas market started to become oversupplied, predominately caused by the continued development of the Vaca Muerta bringing new supply streams onto the market. This change in economics has reduced the seasonal variations in the gas curve, and consequently the higher prices previously obtained during the winter months have not been realised in 2019.

Operating costs

Operating costs increased period-on-period at US$18.69/boe in 2019 compared to US$17.66/boe in 2018. The increase was driven by Puesto Rojas, where conventional wells experienced natural decline and new unconventional wells on the whole did not perform to pre-drill estimates. The fall in sales and production also meant that the fixed element of production cost was spread over lower volumes, resulting in higher operating costs on a per barrel basis. The operating cost achieved at Mata Mora in early production was US$22.77/boe, also contributing to the cost increase due to the $/boe realised being higher than both the 2018 and 2019 average. As the Mata Mora block is further developed it is expected that the $/boe operating cost will reduce.

Other operating costs

Other operating costs before impairment and one-off charges were US$38.0 million compared to US$55.1 million in 2018. The reduction in cost was primarily due to the hedging losses realised in 2018 of US$7.6 million (2019: US$nil) and a one-off share-based payment expense of US$5.5 million (2019: US$nil).

A non-recurring loss of US$56.8 million was realised in 2019 comprising US$29.0 million loss on sale of non-current assets, US$20.2 million loss on termination of licences and a US$7.6 million impairment charge.

The loss on sale of non-current assets resulted from the sale of SCS to Echo Energy plc in November 2019. SCS formed part of the group's non-operated asset portfolio and the sale was in furtherance of the group's strategy to divest of non-core conventional operations. Total consideration received for the sale was US$8.5 million split between cash proceeds of US$7.0 million and equity of US$1.5 million.

The loss on termination of licences was driven by the termination of the Chañares Herrados exploitation concession. In May 2019, the Province of Mendoza issued a decree terminating the concession, which was held by the company's joint venture partner, Chañares Energía S.A., due to its failure to fulfil work commitments. The company has no intention of participating in the re-tender process for the licence and will cease to hold any rights in the block once a new concessionaire is appointed. The carrying value of the Chañares Herrados asset was consequently written off and a corresponding US$15.8 million non-cash loss was recognised. It is noted that a new concessionaire was not identified in 2019, therefore the company continued to participate in the concession during the year with the 12-month results from Chañares Herrados included within gross margin for the period. On 9 April 2020, the company gave a notice of termination of the joint venture agreement to Chañares Energía S.A., which took immediate effect.

An additional US$2.4 million non-cash loss was recorded in respect of the Vega Grande concession in the operated segment. This area is not part of the company's core operations and is currently not producing. Management therefore made the decision not to request the extension of the licence. A US$2.0 million non-cash loss was also recorded in respect of the Malargüe concession in the non-operated segment, where the application for the second exploration permit made by the operator, YPF, was denied by the Province of Mendoza.

Finance income and costs

Net finance costs were lower in 2019 at US$24.7 million compared to US$26.6 million in 2018. The decline in cost was driven by a US$6.2 million reduction in the net FX loss realised in the period, offset by a US$5.3 million increase in interest on borrowings. Interest charges rose due to the increase in the loan balance in the year. The FX losses primarily arise on Peso denominated balances held by the company. Significant devaluation of the Peso has been experienced across both 2018 and 2019. The Peso devalued by 97% across 2018 compared to 59% across 2019, leading to lower FX losses recognised in the current period.

Taxation

A US$21.0 million taxation credit was recognised in 2019, compared to a US$16.8 million taxation charge in 2018. The main driver of the taxation credit in the current period is the deferred tax benefit from loss before tax, principally the non-recurring losses recorded in 2019.

Balance sheet

At 31 December 2019, the group had net assets of US$222.7 million, a decrease of US$113.5 million compared to 31 December 2018.

Property, plant and equipment ('PP&E') is US$42.0 million lower in 2019 compared to 2018. This decline has resulted from the disposal of SCS (US$37.1 million), the termination of the Chañares Herrados licence (US$15.8 million), impairment charges of US$2.5 million, the write-off of US$3.6 million exploration expenses and depreciation, depletion and amortisation ('DD&A') of US$66.1 million, offset by US$100.7 million of additions. Additions to PP&E predominately related to the unconventional drilling campaign at Puesto Rojas, drilling investment in the Chachahuen area and the acquisition of an additional 4.4% share in the Rio Cullen and Las Violetas concessions.

A US$43.3 million transfer from intangible assets was made to PP&E related to the costs of the MMx-1001 and MMx-1002 development wells at Mata Mora following their completion in the period and the subsequent determination of commercial reserves.

Assets of US$17.6 million were also reclassified as 'held for sale'. The reclassification relates to certain non-core and non-operated assets where board approval for sale has been obtained and the company is engaged in an active programme for sale of the assets within the next 12 months.

Intangible assets decreased by US$14.5 million in the period predominately as a result of the US$43.3 million transfer made to PP&E at Mata Mora, a US$5.1 million impairment charge and a US$4.3 million write-off in relation to the licence relinquishments at Vega Grande and Malargüe, offset by US$39.1 million of additions. Additions to intangibles in the period predominately related to the conclusion of drilling and completion of the MMx-1001 well and the drilling and completion of the MMx-1002 well at Mata Mora.

Working capital

Current assets comprise inventories, trade and other receivables and cash. Inventories increased by US$0.9 million to US$18.2 million at 31 December 2019, with trade receivables increasing by US$3.8 million to US$39.3 million at 31 December 2019. Trade and other receivables primarily consist of receivables from the sale of oil and gas whose value fluctuates related to the timing of the payments received for invoices over the year-end period.

Current liabilities mostly comprise trade and other payables for equipment and services. Trade and other payables declined by US$9.9 million to US$44.8 million at 31 December 2019. At 31 December 2018, the company was part way through the FY18 unconventional completions campaign at Puesto Rojas which concluded during H1 2019 and resulted in higher payables over the 2018 year-end. No substantial drilling or completion works were ongoing at 31 December 2019.

Financing and liquidity

At 31 December 2019, the group had cash on hand of US$11.0 million (31 December 2018: US$21.1 million). Total borrowings in the period increased by US$103.3 million from US$200.3 million at 31 December 2018 to US$303.6 million at 31 December 2019. The increase mostly resulted from the drawdown of an additional US$96.0 million of funds from the revolving convertible credit facility in place with Mercuria and the capitalisation of US$15.5 million of accrued interest. Borrowings held in Argentina of US$8.0 million were repaid during the year.

Funds advanced under the credit facilities have been used to invest in exploration, evaluation and development work across the company's core licence areas and to satisfy an element of general corporate costs.

At 31 December 2019, a total facility of US$285.0 million was available to the company, with a total of US$278.0 million drawn down under the facility.

Funding status and going concern

The company has currently shut-in production of crude oil from its operated licences due to a significant reduction in demand. The company has developed and is progressively implementing a plan that involves a significant reduction in both operating and administrative costs. The cost reduction actions being taken mean the company will be in a significantly better position to produce oil economically at lower oil prices and with a positive contribution to cash flow when production recommences. The company will then focus on the continued development of its unconventional assets.

Our major shareholder, Mercuria, is supportive of the cost reduction plan and has extended short-term debt facilities to facilitate its implementation and execution. Mercuria has written to the company stating its intention to continue to provide financial support to the company of up to $37 million in order that the company may continue to operate and service the company's liabilities as they fall due in the next 12 months whilst the company assesses the timing of work plans and capital commitments. Mercuria has agreed to meet the company's cash needs for this period and not demand repayment of the existing loan within the next 12 months whilst in discussion with the company to restructure the existing loan agreement. The letter, which by its nature is not legally binding, represents a letter of comfort stating Mercuria's current intention to continue to provide support.

The directors believe they will be able to agree the restructure of the existing debt with Mercuria and formalise an agreement for new funding and that the group and company can continue as a going concern for the foreseeable future. The application of the going concern basis of preparation of the financial statements included in this annual report is based on the letter that has been received from Mercuria and the ongoing discussions with the Mercuria directors and accordingly, the directors continue to adopt the going concern basis for accounting in preparing the 2019 financial statements. However, the directors recognise that if financial support over the next 12 months from Mercuria were not to be available and the company is unable to restructure the existing loan agreement from Mercuria or obtain funding from alternative sources, this gives rise to a material uncertainty that may cast significant doubt on the group's and company's ability to continue as a going concern.

Dividend

Given the company's high growth objectives, the directors do not recommend the payment of a dividend.

Outlook and COVID-19

The emergence of COVID-19 as a global pandemic has had a significant impact on the operations of the company. This has primarily resulted from the significant reduction in the demand for oil, which has seen crude oil prices drop to historic price lows. Within Argentina, the over-supply of crude in the market has resulted in YPF, the state-controlled Argentine energy company, notifying its customers that it will be suspending the purchase of oil until further notice. This has caused the refineries to which the company sells its oil to stop accepting deliveries and as a result, management has made the decision to shut-in the majority of operations until the impact the pandemic is having on the economy is reduced and current global restrictions begin to be lifted.

To manage this evolving situation in the short term, the company has substantially reduced its capital expenditure programmes for 2020. The company has also assessed its cost base in detail, targeting a significant reduction in operating and general and administrative costs to be implemented through the remainder of 2020. It is also holding discussions with Mercuria to renegotiate the terms of the convertible revolving credit facility.

While the short-term impacts on the company will be significant, we believe that when the COVID-19 infection rate slows and the pandemic is brought under control, the global economy will start to ramp up again and the supply glut in the oil markets will be reversed.

We are confident that with the cost measures we are currently putting in place, Phoenix will be positioned to continue to operate and develop our licences in the Vaca Muerta in the medium and long term.

Kevin Dennehy

Chief financial officer

26 June 2020

Consolidated income statementFor the year ended 31 December 2019

The above consolidated income statement should be read in conjunction with the accompanying notes.

Consolidated statement of comprehensive incomeFor the year ended 31 December 2019

The above items will not be subsequently reclassified to profit and loss. There are no impairment losses on revalued assets recognised directly in equity.

The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.

Consolidated statement of financial positionAt 31 December 2019

The above consolidated statement of financial position should be read in conjunction with the accompanying notes.

Consolidated statement of changes in equityFor the year ended 31 December 2019

The above statement of consolidated changes in equity should be read in conjunction with the accompanying notes.

Consolidated statement of cash flowsFor the period ended 31 December 2019

The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 

1. GENERAL INFORMATION

The financial information set out in this announcement does not comprise the group's statutory accounts for the years ended 31 December 2019 or 31 December 2018.

The financial information has been extracted from the audited statutory accounts of the company for the year ended 31 December 2019, which were approved by the directors on 26 June 2020. The auditors reported on these accounts; the report was unqualified and did not contain a statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

The company has produced its statutory accounts for the year ended 31 December 2019 in accordance with International Financial Reporting Standards as adopted by the European Union and in accordance with the group's accounting policies consistent with those set out in the 2018 statutory accounts. 

The statutory accounts for the year ended 31 December 2018 have been delivered to the Registrar of Companies and those for the year ended 31 December 2019 will be delivered to the Registrar of Companies in due course.

2. basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, the associated interpretations issued by the IFRS Interpretations Committee (together 'IFRS') and the Companies Act 2006.

Going concern

The group principally generates cash from its existing conventional oil and gas production operations. Nevertheless, it was formed with the stated intention of undertaking a significant exploration, evaluation and development programme focused on the group's unconventional oil and gas assets in Argentina, including the Vaca Muerta formation. To date, the funding required to support the activities of the group has been provided by Mercuria Energy Group.

The company is currently faced with several challenges. On a macro level it faces economic uncertainty in Argentina following a change of government in December 2019 and as a result of the continuing negotiations by the government to restructure the country's debt. This political and economic uncertainty has been compounded by the impact of COVID-19 and the global collapse in demand for oil that caused oil prices to collapse in the first half of 2020.

As a result of the fall in the demand for oil and the collapse in oil prices, the company has shut-in production of crude oil from its operated licences. The company has developed and is progressively implementing a plan that involves a significant reduction in both operating and administrative costs. The cost reduction actions being taken mean the company will be in a significantly better position to produce oil economically at lower oil prices and with a positive contribution to cash flow when production recommences. The company will then focus on the continued development of its unconventional assets.

Our major shareholder, Mercuria, is supportive of the cost reduction plan and has extended short-term debt facilities to facilitate its implementation and execution. Mercuria has written to the company stating its intention to continue to provide financial support to the company of up to $37 million in order that the company may continue to operate and service the company's liabilities as they fall due in the next 12 months whilst the company assesses the timing of work plans and capital commitments. Mercuria has agreed to meet the company's cash needs for this period and not demand repayment of the existing loan within the next 12 months whilst in discussion with the company to restructure the existing loan agreement. The letter, which by its nature is not legally binding, represents a letter of comfort stating Mercuria's current intention to continue to provide support.

The directors believe they will be able to agree the restructure of the existing debt with Mercuria and formalise an agreement for new funding and that the group and company can continue as a going concern for the foreseeable future. The application of the going concern basis of preparation of the financial statements included in this annual report is based on the letter that has been received from Mercuria and the ongoing discussions with the Mercuria directors and accordingly, the directors continue to adopt the going concern basis for accounting in preparing the 2019 financial statements. However, the directors recognise that if financial support over the next 12 months from Mercuria were not to be available and the company is unable to restructure the existing loan agreement from Mercuria or obtain funding from alternative sources, this gives rise to a material uncertainty that may cast significant doubt on the group's and company's ability to continue as a going concern.

The financial statements do not include any adjustments that would be required if the group and company were unable to continue as a going concern.

3. Segment information

The group's executive management team comprising the interim chair of the executive committee, the chief financial officer and the chief operating officer has been determined collectively as the chief operating decision maker for the group. The information reported to the group's executive management team for the purposes of resource allocation and assessment of segment performance is split between those assets which are operated by the group and those which are not.

The strategy of the group is focused on the development of its unconventional operated assets in the Vaca Muerta and other unconventional opportunities in Argentina, while optimising its operated conventional production assets. The group also participates in joint arrangements as a non-operated partner. The group identifies its non-operated assets which are focused on the exploitation and development of the Vaca Muerta as core to its operations, with those focused on exploiting conventional oil and gas resources as non-core. Operated and non-operated assets of the group have therefore been determined to represent the reportable segments of the business. The third segment 'corporate', primarily relates to administrative costs, financing costs and taxation incurred in running the business which are not directly attributable to one of the identified segments.

In 2019, the group redefined its segments to better reflect how the executive management team receives and reviews information on the business. As such, the 2018 comparatives have been restated in the period to match the updated definition.

The group's executive management primarily uses a measure of earnings before interest, tax, depreciation and exploration expenses ('EBITDAX') to assess the performance of the operating segments. However, the executive management team also receives information about segment revenue and capital expenditure on a monthly basis.

Exploration costs incurred in the operated segment include US$3.4 million related to the write-off of an unsuccessful exploration well at the Atamisqui concession which was previously being held as suspended. Exploration costs in the non-operated segment include US$0.4 million related to geological or geophysical work at the Chachahuen concession that is not related to a specific prospect and is general in nature.

Exploration costs incurred in the operated segment included US$4.8 million related to the write-off of an unsuccessful exploration well at the Laguna el Loro concession. The well satisfied the commitments associated with the licence which has now been relinquished. The remaining US$0.8 million exploration costs in the operated segment related to geological or geophysical work that was not related to a specific prospect or area and was general in nature.

Exploration costs incurred in the non-operated segment of US$3.4 million related to the company's share of costs related to the unsuccessful Orkeke well drilled by the company's partner, ROCH S.A.

There are no intersegment revenues in either period presented. The significant majority of oil and gas sales are made to the Argentina state-owned oil company, YPF.

4. PROPERTY, PLANT AND EQUIPMENT

Additions

An amount of US$0.9 million has been capitalised to other fixed assets in the period in relation to the right-of-use asset calculated on the adoption of IFRS 16 in the period. The asset will be depreciated on a straight-line basis over the life of the underlying lease contracts.

In August 2019, the company entered a new finance lease contract for the provision of power generators at the Puesto Rojas concession. An amount of US$5.9 million was capitalised as a right-of-use asset to assets under construction on commencement of the lease. The right-of-use asset will be transferred to development and production assets and depreciated following completion of the asset in 2020.

Additions to property, plant and equipment in the year ended 31 December 2019 include US$0.3 million of interest capitalised in respect of qualifying assets (2018: US$0.7 million). The total amount of interest capitalised within property, plant and equipment at 31 December 2019 is US$3.1 million (2018: US$2.8 million).

Exploration costs

Exploration costs written off in 2019 include US$3.4 million related to the write-off of an unsuccessful exploration well in the operated segment that was previously being held as suspended.

Termination of licences

In May 2019, the Province of Mendoza issued a decree terminating the concession for the Chañares Herrados block held by the company's joint venture partner, Chañares Energía S.A., as a result of its failure to fulfil work commitments. The decree took immediate effect and the company has no intention of participating in the re-tender process. The carrying value of the asset has consequently been written off at 31 December 2019, causing a US$15.8 million loss to be realised in the non-operated segment.

Disposals

In November 2019, the company sold its 70% working interest in the Santa Cruz Sur ('SCS') licences to Echo Energy plc ('Echo'). SCS forms part of the group's non-operated asset portfolio, being conventional oil production operated by ROCH S.A. On sale, the net non-current assets related to SCS of US$34.2 million were written off to the gain/loss on sale calculation.

Assets held for sale

Assets held for sale relate to certain non-core development and production assets in the non-operated segment with a net book value of US$17.6 million and exploration and evaluation assets held within intangible assets with a net book value of US$0.6 million. An additional amount of US$0.4 million has been disclosed as held for sale in current liabilities in relation to the ARO provision associated with these assets. Board approval for the sale of these assets has been given and the company has engaged in an active programme for the sale of the assets within 12 months of the reporting date.

Exploration costs

Exploration costs written off in 2018 of US$3.4 million include the company's share of costs related to the unsuccessful Orkeke well drilled by the company's partner, ROCH S.A., in the non-operated segment in 2018.

Impairment

The company defines the key indicators of impairment in relation to its oil and gas assets within its accounting policies. When a specific impairment trigger is identified during a period, the company will complete an impairment review of the associated CGU.

The company also assessed its licence interests for potential impairment on an annual basis by comparing the book value of each asset to its respective NPV10 value that is independently assessed by the external reservoir engineers using the Petroleum Resources Management System guidance. The NPV10 value is calculated based on a discounted cash flow model using a discount rate of 10%.

The calculation includes several key assumptions, including oil and gas prices and reserve estimates, which the company defines as key impairment indicators within its accounting policy. Where the NPV10 value is lower than the carrying value of an asset an impairment test is performed.

Assets are tested for impairment by calculating their value-in-use using a discounted cash flow model or their fair value less costs of disposal, whichever is determined to be the higher. The impairment test uses several assumptions but is most sensitive to assumptions related to oil and gas prices, discount rate and production volumes.

The NPV10 impairment trigger assessment showed that the Atamisqui concession was potentially impaired. An impairment test was performed using a discounted cash flow model and an impairment charge of US$2.5 million was determined to be required at 31 December 2019. The impairment charge is reflective of the mature nature of the asset and the lower oil price environment observed towards the end of 2019.

In the prior year, a potential impairment was identified at the La Brea concession, however following completion of an impairment review, no impairment charge was considered necessary. During 2019, it was identified that the La Brea concession will share a single offtake point for production with Puesto Rojas and therefore it has been included in the same CGU as Puesto Rojas in 2019. The NPV10 impairment trigger assessment completed for this CGU during 2019 did not indicate any potential impairment.

Post year-end considerationsDuring 2020, the Brent crude benchmark price has fallen dramatically, primarily due to a significant reduction in demand for fuel caused by the COVID-19 pandemic and consequent travel and economic restrictions introduced. The Brent price recovered somewhat during May and June 2020, though current pricing remains significantly lower than the 2019 full year average Brent price of US$64.30/bbl.

In assessing for potential impairment conditions at 31 December 2019, we considered, amongst other factors, Gaffney, Cline and Associates's 2019 2P NPV10 calculations provided as part of their independent assessment of reserves and resources at 31 December 2019. The 2P NPV10 values were taken as a proxy for fair value and compared to the carrying value of the company's oil and gas assets on a CGU-by-CGU basis. A deficit of NPV10 compared to carrying value could be an indicator of impairment. These calculations were based on a US$65.00/bbl Brent reference price with a 1.5% accretion over time.

Because of the current lower oil price environment brought about by the COVID-19 situation, the company has carried additional 2019 2P NPV10 calculations and has performed sensitivity analysis based on a change in oil price, whilst maintaining the consistency of other inputs into the model. There are many other variables to consider in these calculations when undertaking a formal impairment review and hence the outcome of the sensitivity analysis performed is not necessarily indicative of potential impairment in the same amount.

In May 2020, the Argentine government issued a decree establishing a fixed realised Medanito price of US$45.00/bbl. This pricing will remain in place in the Argentine domestic market until the Brent crude benchmark sustains a price of US$45.00/bbl or above for 10 consecutive days. The company has, therefore, performed a sensitivity to evaluate the potential impact on asset carrying values if a flat long term US$45.00/bbl price was applied in the 2019 NPV10 calculations. Applying the revised flat pricing assumption gives a 2P NPV10 value that is approximately US$300 million lower than the comparable measure included in the independent assessment of reserves and resources at 31 December 2019.

Notwithstanding, it should be noted that the sensitivity analysis performed is a mathematical exercise and focuses only on a change in price and, for instance, does not take into account potential cost reductions, efficiencies or deferrals that could be achieved. In addition, the medium to long-term forward curve for Brent pricing currently shows future prices significantly above the US$45/bbl used in the sensitivity analysis. Therefore, the results of this analysis should not be taken as indicating actual potential impairment of an equivalent amount.

The company will be carrying out a full impairment assessment at 30 June 2020 as part of its preparation of its half year results.

5. Intangible assets

Exploration and evaluation assets are primarily the group's licence interests in exploration and evaluation assets located in Argentina. The exploration and evaluation assets consist of both conventional and unconventional oil and gas properties.

Additions

Additions to intangible assets during the period predominately relate to the conclusion of the drilling of the MMx-1001 well, the drilling of the MMx-1002 well and subsequent flowback and other testing and completion works completed at Mata Mora. Additions also included costs associated with securing the group's interest in the Corralera Noroeste concession.

The costs associated with the MMx-1001 and MMx-1002 wells were transferred to development and production assets within property, plant and equipment on completion of flowback and determination of commercial reserves. The remaining exploration and evaluation costs associated with the Mata Mora licence will be held as intangibles until the license area is commercially developed.

Disposals

A US$2.3 million loss on relinquishment has been recognised in respect to the Vega Grande concession in the operated segment. The licence area is not part of the company's core operations and is currently not producing. Management therefore made the decision not to request the extension of the concession when it became due for renewal during the period.

An additional US$2.0 million loss on relinquishment has been recognised in respect to the Malagüe concession in the non-operated segment. In May 2019, the Province of Mendoza ratified its decision to deny the application for the second exploration permit for the area with the current operator, YPF. The company subsequently appealed the decision and made a separate application for the exploration permit, in which the company would assume operatorship on the licence. In Q4 2019, this application was also denied, following which management elected to write off the asset.

Impairment

The impairment charge of US$5.1 million recorded in the period related to certain licences held on the balance sheet at the business combination date in 2017 which have subsequently been relinquished.

Additions

Additions to intangible assets during 2018 related to amounts paid to secure additional acreage with unconventional exposure as part of open bid rounds held in both the Neuquén and Mendoza provinces. Additions in 2018 also included costs associated with securing the group's interests in the Mata Mora and Corralera blocks and increasing its working interest participation from 27% to 90%.

Exploration costs

Exploration costs written off in 2018 included US$4.8 million related to the write-off of an unsuccessful exploration well at the Laguna el Loro concession. The well satisfied the commitments associated with the licence which has now been relinquished.

Impairment tests for exploration and evaluation assets

Exploration and evaluation assets are subject to impairment testing prior to reclassification as tangible fixed assets where commercially viable reserves are confirmed. Where commercially viable reserves are not encountered at the end of the exploration phase for an area the accumulated exploration costs are written off in the income statement.

Impairment tests for goodwill

Goodwill is monitored by management at the level of the operating segments identified in note 3. A segment level summary of goodwill allocation is presented below.

No goodwill was recognised prior to 2017. All goodwill presented relates to the allocation of technical goodwill arising as a result of accounting for deferred tax on the business combination on 10 August 2017. Goodwill of US$224.2 million that was related to the excess of the purchase consideration given over the fair value of assets acquired and liabilities assumed at the acquisition date was impaired in full on completion of the business combination in 2017.

The carrying value of goodwill has been assessed for impairment at the period end. The discount rate used in the carrying value assessment was the group's calculated weighted average cost of capital of 12.0% (2018: 14.0%). Prices used in the assessment were the Energy Information Administration's forecast of Brent crude prices based on a US$65.00/bbl price with a 1.5% accretion over time and consistent with those used in completing the impairment assessment for the development and production assets.

The assessment determined that the fair value of the assets to which goodwill has been allocated was in excess of their carrying values as at 31 December 2019 and consequently no impairment charge has been recorded in 2019.

6. Borrowings

Secured liabilities and assets pledged as security

Secured liabilities relate to US Dollar denominated loans at a fixed interest rate of 8.0% (2018: interest rate range from 6.2% to 8.25%). At 31 December 2019 the group held no material Argentine Peso denominated loans (2018: US$nil).

Loans from related parties

The related party loan at 31 December 2019 relates to a convertible rolling credit facility ('RCF') provided to the group by Mercuria Energy Netherlands B.V., a subsidiary of the Mercuria Energy Group Limited ('Mercuria').

In February 2018, US$100.0 million of the original Mercuria facility was converted to equity of the company at a price of £0.37 per share. At the same time the facility was restructured as a new convertible RCF in the amount of US$160.0 million with an additional US$100.0 million of new funds made available to the company.

In December 2018, Mercuria advanced an additional US$25.0 million as a Facility B element to the RCF. In February 2019, a further US$50.0 million was made available under this Facility B element. The original loan of US$160.0 million became Facility A.

In May 2019, the amended convertible RCF was further extended to add a Facility C commitment of US$40 million. Facility C was extended in November 2019 by an additional US$10.0 million.

At 31 December 2019, a total facility of US$285.0 million was available to the company, with a total of US$278.0 million drawn down under the facility. All funds drawn down under the amended convertible RCF facility bear interest at three-month LIBOR+4% and are repayable by 31 December 2021.

Mercuria Group has the right to convert all or part of the outstanding principal of Facility A into additional new ordinary shares of the company at a price of £0.45 per share. This conversion right can be exercised at any time from 30 June 2018 until 10 business days prior to the maturity of Facility A. A similar conversion feature exists in relation to Facility B at a price of £0.28 per share exercisable from 30 June 2019 until 10 business days prior to the maturity date and in relation to Facility C at a price of £0.23 per share exercisable from 30 June 2020 until 10 business days prior to the maturity date.

The amended convertible RCF provides for a grace period (interest and principal) from 1 January 2019 to 29 February 2020 and the loan will be amortised in equal quarterly repayment instalments from 31 March 2020 until maturity. The rights to convert Facility B and Facility C are subject to appropriate shareholder resolutions, in relation to the authority to allot and disapplication of pre-emption rights in relation to such shares, having been approved.

Refer to note 8 for changes since the year end.

Fair value

The fair values of the majority of the borrowings held by the group are not materially different to their carrying amounts, since the interest payable on those borrowings is either close to current market rates or the borrowings are of a short-term nature. Differences identified between the fair values and carrying amounts of borrowings are as follows:

The fair values of non-current borrowings are based on discounted cash flows using a current borrowing rate. They are classified as Level 3 fair values in the fair value hierarchy due to the use of unobservable inputs, including own credit risk.

7. Loss per share

Weighted average number of shares used as the denominator

8. Post balance sheet events

Convertible revolving credit facility extension

On 9 March 2020, Facility C of the existing convertible revolving credit facility ('RCF') held with Mercuria was increased by US$6.0 million to US$291.0 million. The terms of this additional facility will be consistent with those of Facility C, bearing interest at a rate of LIBOR+4% and repayable on 31 December 2021. Refer to note 6 for additional details on the company's borrowings.

On 31 March 2020, the company announced that due to the unprecedented market conditions being caused by the current COVID-19 crisis it has reduced its capital expenditure programs for 2020 and is also exploring other cost saving initiatives. As part of these initiatives the company has entered discussions with Mercuria to restructure the existing convertible RCF facility. Whilst these discussions are ongoing, Mercuria has agreed to amend certain terms of the RCF agreement, including extending the interest grace period and first repayment date.

On 15 May 2020, the company announced that it had reached agreement with Mercuria to extend the interest grace period and delay the first repayment date under the RCF agreement to 15 July 2020.

Capex programs and cost saving initiatives

The company is currently faced with several challenges. On a macro level it faces economic uncertainty in Argentina following a change of government in December 2019 and the recent technical default on Argentina's sovereign debt. This political and economic uncertainty has been compounded by the impact of COVID-19 and the consequent governmental response that has led to a significant reduction in demand for fuel resulting in a collapse of oil prices in the first half of 2020.

Given this, the board has taken steps to develop operating plans that conserve or minimise the use of cash by reducing capital expenditure programs and other operating and administrative costs.

Due to significant reduction in demand for oil, the company has shut-in production of crude oil from its operated licences at Puesto Rojas, Atamisqui and Tupungato. In addition, the company has developed a plan that involves a significant reduction in operating and administrative costs. The company has completed the restructure of its US$10.0 million local Argentine debt, restructured its London and Houston offices, reduced the size of the board of directors. In addition, substantially all open capex programmes have been closed and salary reductions of between 30% to 40% have been implemented for all staff.