PTR.L Regulatory News (PTR)

PetroNeft Resources plc

25th September 2020

PetroNeft Resources plc ('PetroNeft' or 'the Company')

2019 Final Results

PetroNeft (AIM: PTR) an oil & gas exploration and production company, operating in the Tomsk Oblast, Russian Federation, is pleased to report its final results for the year ended 31st December 2019.

Highlights

· Significant technical, operational and financial progress in 2019 driven by new leadership team and stronger local input.

· Gross 2019 production 1,614bopd (1,955bopd 2018), rising to 1,727bopd in August 2020. Focused well management, monitoring and intervention program steadily improved overall field performance at Lineynoye.

· Increased potential of License 67 beginning to emerge due to increased focus and careful re-interpretation of data

· Successful Convertible debt and post year end equity issues with strong shareholder and director support.

· Loss for the year $6.4M (2019) reduced from $7.56M (2018).

· Reduction in costs at all levels; corporate costs reduced by 47%, from $1.512M (2018) to $0.807M (2019).

· Due to the COVID-19 pandemic, the Company intends to publish its half year report for the six months ended 30 June 2020 by 31st October 2020.

David Sturt, Chief Executive Officer of PetroNeft Resources plc, commented 

'2019 was an important year for the company as we laid the foundations for future growth by improving our understanding of our assets, reducing costs at all levels and identifying low risk low capital opportunities such as the mini refinery at Linenoye, Sibkrayevskoye pipeline and transformation of Licence 67 to a production asset.

Moving into 2020, like many other companies we are facing challenges arising from oil market volatility and COVID, however due to the steps taken in 2019 combined with the dedication of our staff and support

of our stakeholders we are well placed to continue to develop the company and reestablish the true value of the assets."

For further information, contact:

The information contained in this announcement has been reviewed and verified by Mr. David Sturt, Chief Executive Officer and Executive Director of PetroNeft, for the purposes of the Guidance Note for Mining and Oil & Gas Companies issued by the London Stock Exchange in June 2009. Mr. Sturt holds a B.Sc. Degree in Earth Sciences from Kingston University and an MSc. in Exploration Geophysics from The University of Leeds. He is a member of the Petroleum Exploration Society Great Britain and has over 35 years' experience in oil and gas exploration and development.

Glossary

Chairman's Statement

Dear Shareholders as I write to you the world and in particular the energy sector is experiencing unprecedented challenges. The rapid spread of Coronavirus at the start of 2020 has led to tragic consequences across the globe, which combined with the break-up of the OPEC+ agreement, has led to significant demand destruction while supply is rising.

However, we remain confident in the capacity of the human race to overcome the Coronavirus challenge, and of our industry to adapt and transform itself to maintain supplies to meet recovering demand over time. As a company we moved to restrict all international company travel to protect our staff who are crucial to our plans to develop the company further, as well as introducing additional procedures at our offices and field sites to ensure work could continue safely. Thankfully, we have had no direct COVID cases within our business to date.

2019 saw considerable changes for the company with the appointment of David Sturt as the new Chief Executive Officer. David had been a Non-Executive Director of the Company since 2016 and brings over 35 years of international experience in upstream oil and gas industry gained working on projects in Europe, CIS, Africa, South America, and SE Asia. As David assumed his position, Karl Johnson stepped down as the interim CEO. I would like to thank Karl for his work as interim CEO after the retirement of Dennis Francis in 2018. Karl returned to his previous role as Vice President of Operations and Company Secretary.

Change has continued as we entered 2020. Maxim Korobov, who served as a Non-Executive Director since 2016 resigned from our Board of Directors. I am deeply appreciative of all the time and effort Maxim devoted to the work of the Board. At the same time the Directors decided to appoint Daria Shaftelskaya, who is another major shareholder in our company, to join the Board and Pavel Tetyakov, who has been Vice President of Business Development since 2016, was appointed as an Executive Director. I look forward to continuing working with both Daria and Pavel in the future.

Strategy Review

While the external environment continues to be challenging, the company remains committed and focused on working towards a long-term strategy of delivering value to shareholders through rigorous cost control, optimising the allocation of its capital and increasing production where possible.

We also continue to receive interest in our assets and business from a range of industry participants, however any sales process would take significant time and thus our strategy has two strands - business and cost optimisation and focussed engagement with buyers.

These two strategies are mutually supportive, as an improvement in production and reserves will increase attractiveness and interest in our assets, leaving us more in control of the company's destiny. I am particularly pleased that we are now moving to transform Licence 67 from an exploration to a producing asset and look forward to seeing more news on this through 2020.

With the evolution of this new strategy, we have been able to stabilise the financial position of the company by extending the Petrogrand AB loan, raising a convertible loan in mid-2019 and successfully completing a share placement at the end of 2019.

The amount of the Petrogrand AB loan was increased from US$2 million to US$2.5 million and the redemption date was extended from 15th December 2019 to 15th December 2020. The redemption date can also now be extended at our option provided we make a repayment of 20% of the loan on or before 15th December 2020. In such circumstances the final redemption date would be the earliest of (a) 15th December 2021 or (b) the date of completion of the License 61 sale or (c) the date of completion of License 67 sale.

In June of 2019, $1.3M was raised through the issuance of a convertible loan note with a group of 5 lenders, 3 of which are related parties. Interest on the loan is at LIBOR plus 8% and the lenders can at their discretion elect to convert up to 65% of their debt amount into Ordinary equity shares up to the date of final maturity which is 31st December 2020. If not redeemed at the final maturity date, or otherwise extended by consent of the holders the interest rate becomes LIBOR plus 11%.

Finally, there was a successful capital raise at the end of 2019. Overall, we were able to raise capital in the amount of US$2.12 million, by the issuance 107,755,037 Ordinary Shares at £0.015 which represented a 58% premium to the previous closing price.

The placement had strong support from institutional and other investors with strong Board participation representing approximately 44% of the placing.

Outlook

During the early stages of the Covid pandemic, international travel was forbidden, field shift schedules were extended to minimize cross over of personnel, and we set about upgrading and revising our HSE protocols to meet the challenges faced by the pandemic so that when production restarted, our staff and suppliers/contractors could operate in a safer environment. Through this period, we minimized cash outgoings by working with our contractors and service providers to reschedule key payments, our staff took voluntary salary reductions in some cases with 50% reduction of the Tomsk office payroll and 30% for the field personnel payroll. With our oil offtakers we worked on a prepayment basis. We kept a minimum crew on in the fields to ensure ongoing maintenance programs could be continued. I am pleased that our operations are now back to normal and we are seeing production volumes increasing year on year with approximately 7.8% and July year on year increasing by 17%.

The outlook remains challenging due to the combination of the Coronavirus outbreak and turbulence in the oil price. These events continue to affect the market capitalization of the company and my belief is that, in common with many other small listed oil companies, there is a significant discrepancy between our stock price and the long-term value of the company's assets and reserves. We are committed to narrowing that gap and are actively examining all available options with an increasing emphasis on continuing to develop our assets cost effectively. Our workovers and water flood optimization programs have stabilized our production rate and arrested the long-term production decline from our existing fields. We continually focus on cost optimization and administrative expenses are down 47% year on year. We continue to negotiate with key contractors and suppliers in securing better pricing to boost margins per barrel. The completion of the mini oil processing unit at License 61 should further reduce operating costs. On License 67 I am particularly looking forward to seeing this asset being transformed from an exploration to a production asset in 2021 following the successful extended test of the C4 well at the Cheremshanskoye field. I am very proud of the hard work that our PetroNeft and Stimul-T personnel have put in to achieve these results, but I also believe significant further scope exists.

Licence 61 and 67 Reserves

Independent reserve consultants Ryder Scott completed an assessment of petroleum reserves on Licence 61 and 67 as at 1 January 2016. As we initiate production from Licence 67, combined with improved knowledge of our assets in Licence 61, we are aiming to generate an update third party assessment of the company's reserves in 2021.

The Ryder Scott reserves report estimates total Proved and Probable ("2P") reserves for Licence 61 at that time at 102.92 mmbbls. PetroNeft's net interest in these reserves is 50%. As shown in the table below, PetroNeft's share of the combined Licence 61 and Licence 67 reserves is 104.55 mmbbls 3P, 63.9 mmbbls 2P and 16.1 mmbbls P1 as at 1 January 2020 following adjustment of the Ryder Scott numbers for production. While we have not yet asked Ryder Scott to prepare an updated report for Licence 67 following the C-4 result we have had reserves approved by the State Reserves Committee (GKZ) for C1 + C2 reserves of 2.5 mmtons (this is approximately equal to 2P reserves of 19.26 mmbbls). The reserves approved are in the Upper Jurassic (J1) and Lower Jurassic (J14) intervals.

We have had good exploration success in the past and feel we can add further reserves with additional appraisal at Emtorskaya in the near term and Traverskaya and Tuganskaya in the medium term.  In the longer term we expect to grow our reserves further with continued exploration and appraisal on our two Licence areas. Numerous prospects have been seismically defined but not yet drilled, particularly in the southern half of Licence 61. 

· Licence 61 as at 31 December 2019 (Ryder Scott report as at 1 January 2016, adjusted for 2016-2019 production).

· Reserves reflect just PetroNeft's 50% share of reserves for each licence.

· All oil in discovered fields is in the Upper Jurassic section.

· Reserves were determined in accordance with the Society of Petroleum Engineers ("SPE") Petroleum Resources Management System ("PRMS") rules.

These numbers do not include 19.26 mmbbls (gross) C1+C2 reserves which were audited by GKZ (Russian State Reserves Committee) for the Cheremshanskoye field in Licence 67. Russian State C1+C2 is approximately equivalent to 2P under the PRMS classification system.

Review of PetroNeft loss for the year

The loss after taxation for the year was US$6,042,454 (2018: US$7,561,762). The loss included the share of joint venture's net loss in WorldAce Investments of US$7,510,318 (2018: US$6,339,613) which arose mainly due to the loss in margins as Revenues declined from US$31,369,968 to US$24,852,620 in 2019. In addition, the share of joint venture's net loss in Russian BD Holdings B.V. increased to US$664,455 (2018: US$508,757).

Revenue

Revenue in 2019 and 2018 includes income as operator of both licences, and the revenue of PetroNeft's wholly owned subsidiary, Granite Construction, in respect of construction services provided in relation to both joint ventures.

Income of PetroNeft Group as Operator of Licence 61 and Licence 67

PetroNeft performs the role of operator for both the licence 61 and 67 joint ventures. This means that PetroNeft employees and management are responsible for the day to day running of both Licences. Major strategic and financial decisions relating to the Licences require unanimous approval by both shareholders in the respective joint venture agreements.

As operator, PetroNeft is entitled to charge certain administrative, management and technical costs to the joint ventures. The costs associated with this revenue are included in cost of sales.

In 2019 PetroNeft Group charged a total of US$678,161 (2018: US$846,859) to the joint ventures in respect of management services. PetroNeft also owns a construction company, Granite Construction, which carries out ad hoc construction projects such as well pads and on-site accommodation on both Licences as well as maintaining the winter road network each year. In 2019 Granite Construction charged the WorldAce Group US$765,407 (2018: US$920,215) in respect of these services.

Administrative expenditure showed a notable reduction year over year of 47%. In 2017 the Company implemented a cost cutting program across the Group and the Directors and management agreed to reduce and defer significant portions of their remuneration; as at 31 December 2019 a total of US$1,278,068 (2018: US$934,041) had been deferred by the Directors and senior management - see Note 15 for details (Of this, a total of $531,268 was settled through director participation in the January 2020 equity issue). 

Finance Income

Most of the Finance Income relates to interest receivable on loans to joint ventures. During 2019 PetroNeft recognised interest income of US$3,802,594 (2018: US$3,686,373) on its loans to WorldAce Group and US$469,974 (2018: US$387,686) on its loans to Russian BD Holdings B.V. In 2018, because of early adoption of amendments to IAS 28 in respect of Long-term Interest in

Associates and Joint Ventures the Group recognised Financial asset Impairment allowance of US$3,109,501 given the uncertainties relating to WorldAce. The Company considers no additional impairment should be provided in 2019. For more details see Note 15.

Finance Costs

Finance costs relate to interest payable on loans from Petrogrand AB and on a separate convertible loan of US$1.3million concluded on the 24th June 2019. The convertible loan is unsecured, with a maturity date of 31st December 2020. Interest charges on the loan are LIBOR plus 8%. The loan from Petrogrand AB was increased by a further US$500,000 and has a revised maturity date of 15th December 2020. The redemption date can also now be extended at PetroNeft's option provided the company makes a repayment of 20% of the loan on or before 15th December 2020. In such circumstances the final redemption date would be the earliest of (a) 15th December 2021 or (b) the date of completion of the License 61 sale or (c) the date of completion of License 67 sale. Petrogrand AB is also entitled to a share in the proceeds of any sale of assets.

The obligation and liability shall survive the repayment or mandatory repayment of the Petrogrand AB loan and shall continue to be secured by the floating charge over the assets of PetroNeft. The fees will be paid upon the completion of the sale of License 61 or License 67, on or before 31st December 2022.

Review of Statement of Financial Position as at 31st December 2019.

Financial assets- loans to joint ventures.

The Statement of Financial Position reports an increase in Financial Assets, loans to joint ventures of US$2,065,912. During the year PetroNeft advanced loans totalling US$980,500 to Russian BD Holdings B.V. Group to support the continued development of the Capex program and the operations. Interest Income from WorldAce Investment Limited of US$3,802,594 and US$469,974 from Russian Holdings B.V. Group was accrued but not paid. The total advances and fee income were offset by the share of losses of PetroNeft's joint venture operations WorldAce Investment Limited of US$ 2,997,106 and Russian BD Holdings B.V. Group of US$ 181,558. For more details see Notes 6 and 7.

Trade and Other Receivables.

There was a significant increase in Trade and Other Receivables. As at 31st December 2019, US$ 1,136,940 (2018: US$249,280). The primary reason for the growth in receivables was the increase in the receivable amounts owning from PetroNeft's Joint Venture businesses, which increased to US$1,005,991, (2018: US$170,627). Of the Joint venture trade receivable outstanding, WorldAce Investments Limited owed US$818,010 (2018: US$130,469) and Russian BD Holdings B.V. Group owed US$187,981 (2018: US$40,158). For more details see Notes 10 and 15.

Called Up Share Capital and Share Premium Account.

During 2019 a total of 13,884,594 Ordinary Shares was issued in satisfaction of Directors fees owing to two directors. Total compensation of US$200,000 was settled by issue of shares to Dennis Francis, who had resigned as Director in December 2018. On becoming Chief Executive Officer on March 25th, 2019, PetroNeft settled outstanding Directors fees owed to David Sturt in the sum of €44,806 at a premium to par value of US$ 0.0068. For more details see Note 12.

Interest Bearing Loans and Borrowings:

Movement in Interest Bearing Loans and Borrowings can be accounted for as follows. In March 2019, PetroNeft secured an additional loan amount of US$500,000 from Petrogrand AB, increasing the total principal advances to US$2.5 million. The interest on the increased loan was LIBOR plus 9%. Due for redemption on December 15th 2019, by mutual agreement between the parties it was agreed to extend out the maturity date to 15th December 2020 and on the proviso that interest accrued and not yet paid up to that time would be rolled up into a revised principal sum due of US$2,872,148 and thereafter monthly interest accruing as and from 16th December would be paid within 7 calendar days of month end , for the prior month.

In June 2019, PetroNeft secured loans from a group of 5 lenders, 3 of which are related parties. The total of the loans provided was US$1.3 million. A condition of the loans was that the lenders at any time may convert up to 65% of their loan advance into ordinary equity shares of PetroNeft. The date of maturity of the loans is 31st December 2020. Interest on the loans is LIBOR plus 8%. For more details see Notes 13 and 15.

Key Financial Metrics - WorldAce Group

Because of the equity method of accounting for joint ventures that applies to PetroNeft's interest in WorldAce, listed below are the metrics which are an extraction from the audited financial statements of the WorldAce Group and give an indication as to the performance of Licence 61:

Net Loss - WorldAce Group

PetroNeft's share of the net loss of WorldAce Group for the full year increased from to US$6,339,613 to US$7,510,318 in 2019. The increase in the loss for the year before taxation can be attributed to a reduction in production of 17%, coupled with a decline in the average price per barrel of 6% in 2019 versus 2018. The margin lost was somewhat mitigated by a cost reduction program resulting in Administrative expenses falling from $3,121,826 in 2018 to $2,624,057 in 2018. Of the US$9,523,954 in interest payable by WorldAce, US$9,276,617 is Joint Venture Partner Loan interest, of which US$3,802,595 is payable to PetroNeft.

Revenue, Cost of Sales and Gross Margin - WorldAce Group

Gross Revenue from oil sales was US$24,852,620 for the year (2018: US$31,369,968). Cost of sales includes depreciation of US$1,936,923 (2018: US$2,472,676), which was lower mainly due to lower production. Part of the reason for lower production was due to extensive data acquisition which required shutting down several wells to acquire bottom hole pressure data and injection logging information. This short-term reduction should help to achieve greater results over the lifetime of the field.

The gross margin declined during the year due to lower production volumes and the average price per barrel was 6% weaker in 2019 versus 2018. Operating costs per barrel (cost of sales excluding depreciation and Mineral Extraction Tax) were higher at US$13.82 (2018: US$10.68 per barrel) due to lower production. We would expect the gross margin to improve in future periods as our facilities and field operations are fully staffed and can handle additional production from the Sibkrayevskoye oil field once it comes online. We produced 589,165 barrels of oil (2018: 713,603 barrels) in the year and sold 594,057 barrels of oil (2018:

706,395 barrels) achieving an average oil price of US$41.84 per barrel (2018: US$44.41 per barrel). All oil was sold on the domestic market in Russia.

Finance Costs - WorldAce Group

Gross Finance costs of US$9,523,954 (2018: US$9,183,206) mainly relates to interest on loans from PetroNeft and Oil India.

Taxation - WorldAce Group

There is no tax payable in 2019 or 2018.

Current and Future Funding of PetroNeft Group

While there were consolidated net current liabilities at the year-end of US$4,633,370 (2018: US$2,831,843), the Company has consistently demonstrated its ability to secure Shareholder funding and proactively work with its lenders in obtaining loan maturity extensions. In particular, the last equity funding in January 2020 demonstrated the continued support of institutional investors and the Directors. The Company continues to drive its cost cutting program across the Group and the Directors and management have agreed to reduce and defer significant portions of their remuneration. Note 15 outlines the amounts owed to the Board and management in this regard.

In January 2018, the Company agreed a secured loan facility for up to US$2 million with Swedish company Petrogrand AB The loan was due to mature on 31 December 2018, however, in March 2019 the Company agreed an increase in the facility by US$500,000 to US$2.5 million and a revised maturity date of 15th December 2020 which may be extended by mutual consent if certain milestones are met. The borrower can exercise the option to extend if the borrower pays 20% of the loan balance outstanding on or before the redemption date of 15th December 2020. The revised terms include an extension to the entitlement of the lender to a bonus on the sale of either or both Licence 61 and Licence 67 if they are sold by 31st December 2021 of $2.5M. When this loan was extended in March 2019, this bonus entitlement period was also extended by one year to 31st December 2022.

In June 2019, the Company agreed a new convertible loan for US$1.3 Million with a different group of investors which matures on 31st December 2020. This new loan is partially convertible into Ordinary shares of PetroNeft (up to 65% of the principal) at a price per Ordinary Share of US$0.01547. As previously announced the Company has engaged a financial advisor with the aim to test the market for both of its licences. This process is ongoing and the level of interest and the calibre of companies in the process to date is encouraging. Over the past 2 years the asset acquisition market in Russia has seen increased activity, especially for the larger domestic companies, albeit that activity has diminished due to the onset of the Covid 19 pandemic. In the event of a possible sale, it is expected that both loan facilities would be repaid from the proceeds of sale of one of the Licences.

Summary

2019 saw the successful re-negotiation of the Petrogrand AB loan and the raising of additional capital at a 58% premium, with support from many of the board members. These events provided the company with financial stability, enabling us to engage in a program of data acquisition, interpretation, and review of all our assets combined with the continual review of our cost base across the company. We are now embarking on an exciting low CAPEX investment program which can deliver significant value particularly on Licence 67 where we are now hopeful of transforming this from an exploration to a production asset towards the end of 2020.

We will continue to test the market to see if greater value can be delivered to our shareholders through a full or partial sale. While this process has attracted interest from a range of companies and is ongoing, we will concentrate our efforts on areas where 2019's performance demonstrates the potential of the business notably, improving the performance of our assets through increased production and cash flow.

Our industry is continuing to experience unstable times, but we have valuable future development targets in both our licences with West Lineynoye, Sibkrayevskoye and Emtorskaya in Licence 61 and Cheremshanskoye and Ledovoye in Licence 67; these assets can be profitable at a wide range of oil prices.

Annual Report and AGM

The Annual Report will be mailed to shareholders and published on the Company's website (www.petroneft.com) on 29th September 2020. Dating and location of the AGM will be notified shortly.

Finally, I know that I speak for all the Directors, management, and staff of the Group in giving sincere thanks to our shareholders for your continued support throughout the past year.

David Golder

Non-Executive Chairman

Notes to the Financial Statements

For the year ended 31 December 2019

1. Basis of Accounting and Presentation of Financial Information.

While the financial information included in this announcement has been prepared in accordance with the Group's accounting policies under International Financial Reporting Standards ("IFRS") as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The Company is distributing the full financial statements that comply with IFRS on 29th September 2020.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2019 or 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's annual general meeting. The auditors have made reports under Section 391 of the Irish Companies Act, 2014 in respect of 2018. Their report was unmodified but did draw attention to the material uncertainty relating to going concern. The 2019 audited financial statements will be distributed to shareholders on 29th September 2020.

Adoption of IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations

A number of amendments and interpretations to IFRS principally the introduction of IFRS 16 "Leases" and IFRIC 23 "Uncertainty over Income Tax Treatments" became effective for, and have been applied in preparing, these Financial Statements. The introduction of these amendments on 1 January 2019 did not result in material changes to the results or financial position of the Group. Full details of the approach taken to the introduction of the new amendments and the impact of adoption will be provided in the full financial statements that comply with IFRS which will be distributed to shareholders on 29th September 2020.

2. Going Concern

As described in the Chairman's Statement, PetroNeft agreed an extension of the loan facility, which was due to mature on 15th December 2019 and an increase of US$500,000 up to US$2.5 million with Swedish company Petrogrand AB, a related party. The revised loan maturity date is 15 December 2020, and maybe extended for a further year if certain milestones are met, at the option of PetroNeft. The loan is secured by way of a floating charge on the assets of PetroNeft. The original loan facility was used for general corporate purposes and to finance the drilling programme in 2018. The increase is being used for general corporate purposes. This loan facility has provided time and space for a more long-term financing solution to be put in place.

In June 2019, the Company agreed another loan facility with a group of five investors for US$1.3 million. This loan matures on 31 December 2020, or such later date as may be agreed, and a portion (up to 65% of the principal) may be repaid via conversion to Ordinary shares of the Company at the option of the lenders at a conversion price of US$0.015477 per share. Three of the five investors are related parties. See Note 14 for details of related party transactions.

In January 2020, the Company completed a successful share issue with both Institutional and other investors. Gross proceeds of US$2.12 million was raised at £0.015 per share at a premium of approximately 58%. The money raised will primarily be used to fund the 2020 capital investment program and demonstrated significant commitment from institutional investors and directors who supported 44% of the placing. 

In early 2020, the emergence of the Covid-19 pandemic required the company to make several adjustments to operating procedures, investment decisions and staff HSE protocols to protect its employees, joint venture partners and contractors. Production continued with a reduced level of essential field staff, home working was instituted where practicable, staff voluntarily took pay cuts and the Group actively worked with its suppliers and service providers in rescheduling payments to retain maximum financial flexibility. When the restrictions were partially lifted, the Group resumed full scale production in May, and in the months of June through August saw encouraging production volume increases. Year on year increases from August to July was 7.8% and July 2020 production versus the same period in 2019 increased by 17%. With a rebound in oil prices, the ongoing cost saving program and the Mineral Extraction Tax percentage per barrel produced trending lower in 2019 than 2018, the Group's cashflow improved, enabling it to address payables that had been rescheduled, reverse the temporary salary reduction and engage constructively with joint venture partners, current and potential future lenders and investors to support its ongoing investment plans. The Group continuously monitors the ongoing progress and status of the pandemic to ensure it reacts quickly where required; as part of this process the frequency of Board meetings has increased

2. Going concern (continued)

and Board members are closely involved in material cost and investment decisions as well as regular review of the Group's forecast cashflows, short term liquidity and expenditure plans

The Group has analysed its cash flow requirements through to 30th September 2021 in detail The cash flows are highly dependent on the successful extension or re-financing of the Petrogrand AB loan, Convertible Loan and on future production rates and oil prices achieved in its joint-venture undertaking, WorldAce Investments Limited and future cash flows from LLC LIneynoye (Licence 67) once Cheremshanskoye is producing. In addition, the Group, together with its Joint Venture partner OIL India B.V is actively investigating the opportunity to secure debt in the local Russian market for Stimul-T. Currently the Group is engaging with the convertible loan holders with a view to amending the terms of the convertible and extend the redemptions date. Should the Petrogrand AB loan not be extended or re-financed the Group will need additional funding to continue as a going concern.

The Group has put in place cost saving measures and the Board and management have agreed to reduce and defer significant portions of their remuneration. Note 15 outlines the amounts owed to the Board and management in this regard

In 2018 the Company, in conjunction with its joint venture partners engaged financial advisers to evaluate the disposal of License 61 and/or License 67. While there remains significant uncertainty that any transaction will be completed, the Company has seen interest from a range of well-financed industry players.  Company has signed non-disclosure agreements and opened data rooms in relation to the potential sale or farmout of both Licence 61 and 67. However the timeframe to close such a transaction could be at least six months following binding agreement between the parties. The Board is confident that one of these options will ultimately bring a solution.

The above circumstances represent material uncertainties that may cast significant doubt upon the Group and the Company's ability to continue as a going concern. Nevertheless, after making enquiries, and considering the uncertainties described above, the Directors are confident that the Group and the Company will have adequate resources to continue in operational existence for the foreseeable future. The judgement is supported by;

· the strong reserve inventory and improvements in operational performance

· the existing infrastructure in place that can support production volumes up to 14,700 bopd

· a very strong investment case

· the continued support of our Joint Venture and oil marketing partners

· the continuous support of our principal shareholders, as evidenced by their support for both debt and equity issues

· the continuous support of our lenders, both convertible and conventional debt

For these reasons, they continue to adopt the going concern basis in preparing the annual report and accounts.

Accordingly, these financial statements do not include any adjustments to the carrying amount or classification of assets and liabilities that would result if the Group or Company were unable to continue as a going concern.

3. Segment information

The Group has several reporting segments which are shown below. They include segment information on allocation of assets and segment information on revenues by both location and customer.

The risk and returns of the Group's operations are primarily determined by the nature of the activities that the Group engages in, rather than the geographical location of these operations. This is reflected by the Group's organisational structure and the Group's internal financial reporting systems.

Management monitors and evaluates the operating results for the purpose of making decisions consistently with how it determines operating profit or loss in the consolidated financial statements.

Geographical segments

Although the joint venture undertakings WorldAce Investments Limited and Russian BD Holdings B.V. are domiciled in Cyprus and the Netherlands, the underlying businesses and assets are in Russia. Substantially all the Group's sales and capital expenditures are in Russia.

4. Loss per Ordinary Share

Basic loss per Ordinary Share amounts are calculated by dividing net loss for the year attributable to ordinary equity holders of the Parent by the weighted average number of Ordinary Shares outstanding during the year.

The Company has convertible debt instruments in issue that could potentially dilute basic earnings per Ordinary Share in the future as per Notes 13. The Employee Share Options Program are not included as there are no Employee Share Options as of 31st December 2019.

.

Ø Petrogrand AB has a floating charge over the assets of the Company.

Ø At 31st December 2019 and 2018, there was no Property, Plant and Equipment Capital Commitments.

 6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited

PetroNeft has a 50% interest in WorldAce Investments Limited ("WorldAce"), a joint venture which holds 100% of LLC Stimul-T, an entity involved in oil and gas exploration and the registered holder of Licence 61. The interest in this joint venture is accounted for using the equity accounting method. WorldAce Investments Limited is incorporated in Cyprus and carries out its activities, through LLC Stimul-T, in Russia.

The balance sheet position of WorldAce shows net liabilities of US$63,968,289 (2018: US$57,974,076) following a loss in the year of US$15,020,636 (2018: US$12,679,226) together with a positive currency translation adjustment of US$9,026,423 (2018: negative US$15,521,586). PetroNeft's 50% share is included above and results in a negative carrying value of US$27,301,740 (2018: US$24,304,633). Therefore, the share of net assets is reduced to Nil and, in accordance with IAS 28 Investments in Associates and Joint Ventures, the amount of US$27,301,740 (2018: US$24,304,633) is deducted from other assets associated with the joint venture on the Balance Sheet which are the loans receivable from WorldAce Investments (see Note 8).

 6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited (continued)

Additional financial information in respect of PetroNeft's 50% interest in the equity-accounted joint venture entity is disclosed below.

Summarised Financial statements of equity-accounted joint venture

Finance costs mainly relate to interest on shareholder loans from Oil India International B.V. and PetroNeft. The details of gross interest accrued on loans to PetroNeft are disclosed in Note 15 Related party disclosures.

The currency translation adjustment results from the movement of the Russian Rouble during the year. All Russian Rouble carrying values in Stimul-T, the 100% subsidiary of WorldAce are converted to US Dollars at each period end. The resulting gain or loss is recognised through other comprehensive income and transferred to the currency translation reserve. The Russian Rouble strengthened against the US Dollar during the year from RUB69.47:US$1 as at 31 December 2018 to RUB61.905: US$1 as at 31 December 2019.

 6. Equity-accounted Investment in Joint Venture - WorldAce Investments Limited (continued)

Interest-bearing loans and borrowings are shareholder loans from Oil India International B.V. and PetroNeft. The details of loans due to PetroNeft are disclosed in Note 8 Financial assets- loans and receivables.

 7. Equity-accounted Investment in Joint Venture - Russian BD Holdings B.V.

PetroNeft Resources plc has a 50% interest in Russian BD Holdings B.V., a joint venture which holds 100% of LLC Lineynoye, an entity involved in oil and gas exploration and the registered holder of Licence 67. The interest in this joint venture is accounted for using the equity accounting method. Russian BD Holdings B.V. is incorporated in the Netherlands and carries out its activities in Russia.

The balance sheet position of Russian BD Holdings B.V. shows net liabilities of US$4,235,793 (2018: US$3,872,680) following a loss in the year of US$1,328,910 (2018: US$1,017,514) together with a positive currency translation of US$965,794 (2018: negative US$1,390,926). PetroNeft's 50% share is included above and results in a negative carrying value of US$2,117,897 (2018: US$1,936,340). Therefore, the share of net assets is reduced to Nil and, in accordance with IAS 28 Investments in Associates and Joint Ventures, the amount of US$2,117,897 (2018: US$1,936,340) is deducted from other assets associated with the joint venture on the Balance Sheet which are the loans receivable from Russian BD Holdings B.V. (Note 8).

 7. Equity-accounted Investment in Joint Venture - Russian BD Holdings B.V. (continued)

Additional financial information in respect of PetroNeft's 50% interest in the equity-accounted joint venture entity is disclosed below

Summarised Financial statements of equity-accounted joint venture

Finance costs comprise of interest on shareholder loans from Belgrave Naftogas B.V. and PetroNeft. The details of gross interest accrued on loans to PetroNeft are disclosed in Note 8 Financial assets- loans and receivables. 

 7. Equity-accounted Investment in Joint Venture - Russian BD Holdings B.V. (continued)