Ruspetro Regulatory News (RPO)

Ruspetro plc

14 August 2015

Ruspetro plc (the "Group")

Results for the six months to 30 June 2015

London, 14 August 2015: Ruspetro plc (LSE: RPO) announces its first half 2015 results and an update on its operations.

HIGHLIGHTS

- Average daily production for the first half of 2015 increased by 16% to 3,914 bopd (H1 2014: 3,366 bopd)

- Revenues of US$24.0 million in the first half of 2015 (H1 2014: US$27.8 million) with the decline due to lower realised oil prices

- EBITDA of US$2.7 million in the first half of 2015 (H1 2014: US$4.2 million)(1)

- Two multi-stage fractured horizontal wells and one deviated well drilled and completed during the first half of 2015 to complete development well campaign at Pad 23b

- Total production in first half of 2015 exceeded the minimum covenant requirement of the Group's US$100.0 million Development Facility provided by Public Joint Stock Company "Bank Otkritie Financial Corporation" ("Otkritie")

- The Group has achieved major reductions in well costs while drilling longer horizontal reservoir sections. Well 210, the most recent multiple fractured horizontal well, was drilled and completed with 10 fracs for a total cost of approximately US$5.4 million

- The Group concluded a new 18 month prepayment facility with Glencore Energy UK Limited ("Glencore") in May 2015 for up to US$30.0 million. The new facility renews the prepayment facility entered into in March 2014 which was fully repaid to Glencore as planned

RESULTS SUMMARY

(1) Earnings before interest, taxes, depreciation and amortisation ("EBITDA") defined as profit before income tax with finance costs, depletion, depreciation and amortisation, foreign exchange income and other expenses added back.

Enquiries:

Ruspetro plc

John Conlin, Chief Executive Officer +44 (0)20 7318 1630

Alexander Betsky, Finance Director +44 (0)20 7318 1630

Finlay Thomson, Investor Relations +44 (0)79 7624 8471

FTI Consulting

Ben Brewerton, George Parker +44 (0)20 3727 1000

About Ruspetro

Ruspetro plc is an independent oil and gas development and production company, with assets in the Western Siberia region of the Russian Federation. Our mission is to unlock the tight oil reservoirs in our asset base while building a leading regional independent E&P company in a safe and environmentally responsible manner for the long-term benefit of our shareholders.

OUTLOOK

- Ruspetro will commence an appraisal and development campaign in October using two newly contracted rigs to build on the successful development well campaign in the area of Pad 23b on the Pottymsko-Inginsky ("PI") licence block

- The initial focus will be on appraising the most promising areas of Group's licences with a combination of deviated and horizontal appraisal wells, designed to mature a portfolio of horizontal development wells to be drilled in 2016 and 2017.

- Given the uncertainties inherent in an appraisal campaign, the Group is about to contract two new drilling rigs that have the capability to deliver the programme wells, and can be moved more quickly than is standard in Western Siberia. One is a heavy rig which can drill and complete development wells (long horizontal wells with multi-stage fracturing) and the other is a lighter unit for appraisal wells with a data acquisition focus but which can also drill 500 metre long horizontal appraisal and production wells.

- The Group will continue to strive to drive down well capex through design and technology innovation and capitalising where possible on softening services pricing due to reductions in regional activity.

- The Group also plans to construct additional processing and power facilities to accommodate anticipated production levels of 10,000 bopd in late 2016.

- Acknowledging the possibility of oil prices staying lower for longer than earlier forecasts, the Group is working to achieve operating profitability at current oil price levels. In particular, the Group is targeting the following economic benchmarks:

o Unit Development Cost of less than US$10/bbl (2);

o Cash production operating costs per barrel of oil produced of less than US$8/bbl compared with US$12/bbl in 1H 2015.

(2) Unit Development Cost is defined as well capex divided by estimated ultimate oil recovery of a well.

OPERATIONAL REVIEW

Horizontal Well Programme

The Group completed its development well campaign in the area of Pad 23b on the PI licence block in 2Q 2015. The 2015 drilling campaign comprised two multi-stage fractured horizontal wells 212 and 210, plus one deviated well 218.

The horizontal well programme implemented over the last year has prepared the Group for the future development of its assets. The campaign has augmented the Group's technological and operational capabilities, enhanced its risk-based decision making and extensive scenario-planning techniques.

As for the Group's completion technology, the standard Western Siberian well design concept involving a small number of relatively large hydraulic fractures (as employed in the first horizontal well on Pad 23b) has evolved into a fit-for-purpose design with a greater number of smaller fractures tuned to the geological setting with input from "Real-Time" logging data. The technology underpinning this design has proved reliable and cost effective (as demonstrated by the Group's last horizontal well - well 210).

In addition, the Group achieved major reductions in well costs in drilling longer horizontal reservoir sections. This was facilitated by advanced mathematical modelling, daily monitoring of well construction performance, innovative drilling and completion techniques, intelligent well design, and implementation of effective services contracting strategies, aided by the beneficial devaluation of the Ruble exchange rate against the US Dollar. Well 210, Group's most recent multiple fractured horizontal well, completed with 10 fractures, was drilled and completed for a total cost of approximately US$5.4 million.

Reservoir Management

During the first half of 2015, the on-going reservoir management programme has been tuned to match encouraging waterflooding results. The Group currently has six active injector wells in the main production area of the field. A comprehensive tracer campaign has been initiated to assist in further optimisation of the waterflood. In particular, seven different tracer agents were deployed in all of the active injector wells, after which water samples were taken from 23 producing wells in order to clarify reservoir connectivity and refine the waterflood pattern. As a result of the tracer campaign, the Group adjusted its water injection volumes to enhance waterflooding effectiveness.

Palyanovo Licence Block

In February 2014, the Group took the decision to suspend condensate production from its Palyanovsky licence in order to preserve gas for future commercialisation. The Group is currently in negotiations with potential partners about a range of opportunities to commercialise its hydrocarbon resources.

Meanwhile, the Group is preparing its application to the Russian Federal Subsurface Resources Agency (Rosnedra) for the extension of its existing Palyanovo Licence, which is due to expire in December 2015. Upon review of the application, the licence is expected to be extended for 20 years.

FINANCIAL REVIEW

Revenues

Revenues (gross revenues from oil sales less export duty) were US$24.0 million in the first half of 2015, compared with US$27.8 million in the first half of 2014. The drop in revenues was driven by a 46% decline in the average realised blended oil price, offset by a 30% increase in sales volumes, reflecting a 16% increase in production and a carry-over of 2014 crude oil inventory sold in 2015.

Cost of sales

The cost of sales, including depreciation and production-related taxes was US$26.4 million for the first half of 2015, compared with US$23.0 million for the first half of 2014. The increase was primarily driven by a US$2.2 million increase in Mineral Extraction Tax ("MET") as a result of firstly, increase of MET with simultaneous decrease of export duty (widely known as the tax manoeuvre), and secondly, the 16% increase in liquids production for the period. Other reasons for the increase included a US$2.2 million increase in depletion expense as a result of higher production as well as a reduction in the volume of proved developed reserves in 2014 and a US$1.7 million increase due to a faster turnover of own crude oil than in the prior period. Offsetting the above increases to cost of sales were a US$2.7 million reduction of production-related operating expenses and direct payroll expenses, partially achieved due to the devaluation of the Russian Ruble. 

Selling, general, and administrative ("SGA") expenses

SGA expenses include oil transportation costs, payroll expenses, rent, professional services, depreciation, IT and telephony, and other expenses.

SGA expenses for the first half of 2015 amounted to US$7.6 million, down 37% or US$4.6 million from US$12.2 million in the first half of 2014. The decrease resulted from savings of US$2.4 million in payroll expense and share-based compensation, as well as savings of US$0.5 million in oil transportation expenses due to lower export volumes, with additional savings of US$1.7 million in professional services, rent, depreciation and other expenses. Approximately half of the above combined savings have been achieved due to the 65% devaluation of the Russian Ruble from the previous period.

EBITDA

EBITDA was US$2.7 million in the first half of 2015, compared with US$4.2 million in the first half of 2014. The drop in EBITDA was primarily driven by lower netback (2) due to the 46% decline in the average realised blended oil price, an increase in MET, offset by additional gross profit contribution from a 16% increase in liquids production, lower export duty due to the falling trend of oil prices, as well as lower SGA expenses and production-related operating expenses, partially achieved through a devaluation of the Russian Ruble.

(2)Netback is defined as revenues from oil sales less export duty less transportation expenses.

Comprehensive loss for the year and foreign exchange

The Group recorded a loss of US$19.0 million for the first half of 2015, compared with a loss of US$39.8 million for the first half of 2014. The loss for the first half of 2015 includes a foreign-exchange gain of US$2.6 million, compared with a foreign exchange loss of US$9.1 million in the first half of 2014. The Group's operating companies, whose functional currency is the Russian Ruble, have borrowings in US dollars. After deducting the foreign-exchange effects in both years, the Group's loss would have been US$21.6 million in the first half of 2015, compared with a loss of US$30.6 million in the first half of 2014.

Balance sheet

Non-current assets have increased by US$12.0 million as a result of additional capital expenditure accrued during the period. Current assets are in line with the Group's 31 December 2014 reported balance sheet. 

Borrowings have increased from the year end by US$25.4 million to US$272.5 million, reflecting US$28.2 million drawn down of the Group's existing bank facilities with Otkritie, partly offset by repayments of the principal amount of US$1.7 million and US$1.2 million related to the payment and amortisation of the arrangement fees.

The Group's current liabilities decreased by US$7.8 million as a result of paying down accrued interest on a shareholder loan in the amount of US$5.0 million and a decrease in trade payables by US$1.6 million due to payments to contractors. Within current liabilities between 31 December 2014 and 30 June 2015 there was a US$1.8 million net decrease in prepayments to Glencore as a result of the Group's new US$22.5 million export facility drawn down in May of 2015, of which US$5.0 million is classified as long-term liabilities, offset by the full repayment of three prepayment facilities with Glencore and Energo Resurs LLC, a Russian company affiliated with Glencore, in the amount of US$19.3 million during the first half of 2015. A further US$7.5 million will be available to the Group in November subject to meeting monthly production of 4,100 bopd and certain export sales obligations.

Cash flow

In the first half of 2015, the Group generated a net cash inflow from operating activities of US$3.4 million, resulting from positive operating cash flow of US$2.6 million and a positive cash contribution from changes in working capital of US$0.8 million.

During the first half of 2015, the Group spent US$16.1 million on investment activities. This consisted of US$12.3 million in the construction of new wells, US$2.1 million on infrastructure-related capital expenditures, US$0.7 million on development studies, US$0.5 million on the purchase of intangible and other assets and US$0.5 million in capitalised staff costs.

The Group received loan proceeds of US$28.2 million from Otkritie, repaid US$1.7 million in principal amount and paid US$6.6 million in interest. Additionally, the Group repaid US$5.0 million of accrued interest on a shareholders loan.

Cash balances at the end of the period were US$11.6 million compared to US$12.0 million at the end of 2014.

Financing the Group's current operations and future development

Following the Group's financial restructuring achieved in December of 2014, along with the satisfaction of the 30 June 2015 production covenants which was a condition for the Group to draw down the second US$50.0 million of its US$100.0 million development facility from Otkritie (subject to continuing to meet the drawdown conditions), the Group is able to continue the implementation of its horizontal well programme in the near future.

The terms for its restructured debt finance require the Group to achieve certain annualised EBITDA and production targets that will be tested quarterly from January 2016. The current projections prepared by management for the purposes of preparation of these financial statements show that the Group would breach its covenants for the year ending 31 December 2015 and four consecutive quarters ending 31 March 2016. The principal reason for this is the substantial decline of the oil price: during preparation and approval of the Facility Agreements between July and September of 2014, the Brent price exceeded US$100 per barrel, whilst the current price of Brent is near US$50 per barrel. To mitigate this risk as disclosed in the 2014 annual report, management is in negotiations with Otkritie to revise the covenants to a level within its current macroeconomic and production forecasts. The Group has also received, in August 2015, a written confirmation from Otkritie that the bank has no intention to take any actions to accelerate the repayment of the loans as a result of the possible breach of covenants for the periods referred to above. The outcome of such negotiations cannot be certain and, therefore, the directors recognise that this represents a material uncertainty which may cast significant doubt over the Group's ability to continue as a going concern.

Taking into account all considerations relevant to the Group's financial position, including contingent liabilities referred to in Note 18 to the interim condensed consolidated financial statements, management considers it appropriate that the financial statements should be prepared on a going concern basis.

BUSINESS RISKS

The Group continuously monitors major financial, operational, strategic, and external risks to identify and properly manage them.

During the first half of 2015 the Group continued to experience the impact of high volatility of the oil price and US$ / Russian Ruble exchange rate, which the management views as key external risks also in the second half of 2015. Operationally, it will be crucial for the Group to successfully and cost-effectively implement its current appraisal campaign to identify sufficient suitable development well targets and significantly increase the Group's production in 2016 and beyond. The importance of the above external and operational uncertainties is more pronounced when considering the Group's existing debt facility covenants.

The Group continues to face a variety of other internal and external risks which have not changed significantly since the year end. A summary of these risks can be seen in the 2014 Annual Report and Accounts which is available on Group's website (www.ruspetro.com).

DIRECTORS RESPONSIBILITY STATEMENT

The Directors confirm that to the best of their knowledge:

a) the condensed financial statements have been prepared in accordance with International Accounting Standards (IAS) 34 "Interim Financial Reporting"; and

b) the Interim Management Report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

c) the Interim Management Report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

A list of the current Directors is maintained on the Ruspetro plc website:www.ruspetro.com.

By order of the Board,

Disclaimer

This statement contains certain forward-looking statements that are subject to the usual risk factors and uncertainties associated with the oil and gas exploration and production business. Whilst the Group believes the expectations reflected herein to be reasonable in light of the information available to them at this time, the actual outcome may be materially different owing to factors beyond the Group's control or otherwise within the Group's control where, for example, the Group decides on a change of plan or strategy. Accordingly no reliance may be placed on the figures contained in such forward-looking statements.

Independent review report to Ruspetro plc

Report on the unaudited interim condensed consolidated financial statements

Our conclusion

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

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

What we have reviewed

The interim condensed consolidated financial statements, which are prepared by Ruspetro plc, comprise:

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

· the unaudited interim condensed consolidated statement of profit and loss and statement of other comprehensive income for the period then ended;

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

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

· the explanatory notes to the unaudited interim condensed consolidated financial statements.

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

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

What a review of condensed consolidated financial statements involves

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

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

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

Responsibilities for the unaudited interim condensed consolidated interim financial statements and the review

Our responsibilities and those of the directors

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

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

Emphasis of matter 

In forming our conclusion on the financial statements, which is not modified, we have considered the adequacy of the disclosures made in note 2 to the unaudited interim condensed consolidated financial statements concerning the Group's ability to continue as a going concern. This ability is dependent on whether the Group can renegotiate its debt covenants successfully. This condition indicates the existence of a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

PricewaterhouseCoopers LLP

Chartered Accountants

14 August 2015

Aberdeen

Notes:

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

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

Ruspetro plc

Unaudited Interim Condensed Consolidated Statement of Profit or Loss and Other Comprehensive Income

for the six months ended 30 June 2015

(presented in US$ thousands, except otherwise stated)

Ruspetro plc

Unaudited Interim Condensed Consolidated Statement of Financial Position

as at 30 June 2015

(presented in US$ thousands, except otherwise stated)

Ruspetro plc

Unaudited Interim Condensed Consolidated Statement of Changes in Equity

for the six months ended 30 June 2015

(presented in US$ thousands, except otherwise noted)

Ruspetro plc

Unaudited Interim Condensed Consolidated Statement of Cash Flows

for the six months ended 30 June 2015

(presented in US$ thousands, except otherwise stated)

Ruspetro plc

Notes to the Interim Condensed Consolidated Financial Statements for the six months ended 30 June 2015

(all tabular amounts are in US$ thousands unless otherwise noted)

1. Corporate information

The interim condensed consolidated financial statements of Ruspetro plc (the 'Company' or 'Ruspetro') and its subsidiaries, together referred to as 'the Group' for the six months ended 30 June 2015 were approved by its Board of Directors on 13 August 2015.

The Company was incorporated in the United Kingdom on 20 October 2011 as a public company under the provisions of the Companies Act 2006. The Company's registered office is 58 Grosvenor Street, London, W1K 3JB, United Kingdom.

These unaudited interim condensed consolidated financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2014 were approved by the board of directors on 30 April 2015 and delivered to the Registrar of Companies. The report of the auditors on those accounts is unqualified and contained an emphasis of matter paragraph but did not contain any statement under section 498 of the Companies Act 2006.

The principal activities of the Group are exploration for and production of crude oil. The operating subsidiaries of the Group - OJSC INGA and OJSC Trans-oil (hereinafter referred to as INGA and Trans‑oil respectively) hold three licences for exploration for, and extraction of, crude oil and natural gas in the Khanty-Mansiysk region of the Russian Federation.

2. Basis of preparation

The Group's interim condensed consolidated financial statements for the six months ended 30 June 2015 have been prepared in accordance with IAS 34, "Interim financial reporting" as adopted by the European Union. The interim condensed consolidated financial statements are prepared under the historical cost convention.

The interim condensed consolidated financial statements are presented in US dollars (US$) and all values are rounded to the nearest thousand unless otherwise indicated.

The interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements of the Company for the year ended 31 December 2014, which have been prepared in accordance with IFRS.

Adoption of the new or revised standards

The IASB has issued a number of new and revised IFRS. Adoption of amendments to the standards listed below had no significant influence on the Group's accounting policy, financial position or financial result of the Group:

(i) Not endorsed by the European Union

Amendments

· Annual Improvements to IFRSs 2014 (effective for annual periods beginning on or after 1 January 2016).

Going concern

These interim condensed consolidated financial statements are prepared on a going concern basis, which presumes that the Group will be able to realise its assets and discharge its liabilities in the normal course of business in the foreseeable future.

At the reporting date the Group had net current liabilities of US$4,473 thousand, which included cash in hand of US$11,629 thousand.

The Group's continuing operations are dependent upon its ability to make further investments in field development in order to grow its hydrocarbon production and sales. In the short term, this field development is planned to involve, in particular, the drilling of a number of horizontal wells, the success of which will only be known with certainty once each well is completed. In the light of these results, the nature and extent of the Group's drilling programme may change over time, with a consequent change in investment requirements.

Accordingly, the ability of the Group to generate sufficient cash from operations may be materially affected by the results of the Group's current appraisal activity and the success of future drilling activities, as well as by a number of economic factors to which the Group's financial forecasts are particularly sensitive, such as crude oil prices, the level of inflation in Russia, and foreign exchange rates.

The Group finances its exploration and development activities using a combination of cash in hand, operating cash flow generated mainly from the sale of crude oil production, prepayments from forward oil sale agreements and additional debt or equity financing as required.

In particular, the Group attained a level of production in the six-months period ended 30 June 2015 required as a condition in order for the Group to be able to unlock a further US$50 million under the Development Facility from OJSC "Bank Otkritie Financial Corporation" ("Otkritie").

The credit facilities obtained from Otkritie contain certain covenants which the Group needs to meet to avoid acceleration of the debt repayment schedule. The two key covenants relate to EBITDA and production volume targets.

The current projections prepared by management for the purposes of preparation of these financial statements show that the Group would breach its covenants for the year ending 31 December 2015 and four consecutive quarters ending 31 March 2016. The principal reason for this is the substantial decline of the oil price: during preparation and approval of the Facility Agreements between July and September of 2014, the Brent price exceeded US$100 per barrel, whilst the current price of Brent is near US$50 per barrel. To mitigate this risk as disclosed in the 2014 annual report, management is in negotiations with Otkritie to revise the covenants to a level within its current macroeconomic and production forecasts.

The Group has also received, in August 2015, a written confirmation from Otkritie that the bank has no intention to take any actions to accelerate the repayment of the loans as a result of the possible breach of covenants for the periods referred to above. The outcome of such negotiations cannot be certain and, therefore, the directors recognise that this represents a material uncertainty which may cast significant doubt over the Group's ability to continue as a going concern.

However, on the basis of the assumptions and cash flow forecasts prepared, and taking into account contingent liabilities referred to in Note 18, management has assumed that the Group will continue to operate within both available and prospective facilities. Accordingly, the Group interim condensed consolidated financial statements are prepared on the going concern basis and do not include any adjustments that would be required in the event that the Group were no longer able to meet its liabilities as they fall due.

3. Summary of significant accounting policies

The principal accounting policies followed by the Group and the critical accounting estimates in applying accounting policies are consistent with those disclosed in the consolidated financial statements of the Group for the year ended 31 December 2014. There were no revisions in the accounting policies and estimates in these interim condensed consolidated financial statements for the period of at least of twelve months of these interim condensed consolidated financial statements.

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these interim condensed consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2014, with the exception of changes in estimates that are required in determining the provision for income taxes.

Interim period income tax expense is accrued using the tax rate that would be applicable to expected total annual earnings, that is, the estimated average annual effective income tax rate applied to the pre-tax income of the interim period.

Foreign currency translation

The US$ to RUR exchange rates were RUR55.52 and RUR56.26 as at 30 June 2015 and 31 December 2014, respectively and the average rates for the six months ended 30 June 2015 and 2014 were RUR58.03 and RUR35.03, respectively. The US$ to GBP exchange rates were US$0.64 and US$0.64 as at 30 June 2015 and 31 December 2014, respectively and the average rates for the six months ended 30 June 2015 and 2014 were US$0.66 and US$0.60, respectively. The decrease in the US$ to RUR exchange rate for the six months ended 30 June 2015 has resulted in a gain of US$2,574 thousand in the interim condensed consolidated statement of profit or loss and other comprehensive income and an adjustment of US$2,380 thousand in other comprehensive income (refer to Notes 10 and 11).

4. Segment reporting

Management views the operations of the Group as one operating segment. Should the Group diversify its operations the financial reporting will be adjusted to reflect such change.

For business segments reporting purposes, the Company's Board of directors evaluates performance of the Group on the basis of different measures, including, production volumes, related revenues, capital expenditures, operating expenses per barrel and others.

5. Revenue

Other revenue includes proceeds from third parties for crude oil transportation.

For the six months ended 30 June 2015 and 2014, revenue from export sales of crude oil amounted to US$7,459 thousand and US$10,913 thousand, respectively.

6. Cost of sales

7. Selling and administrative expenses

Oil transportation costs represent the cost of transferring oil to export customers through the 'Transneft' pipeline system.

8. Other expenses, net

Other expenses, net, mainly consist of an insurance claim settlement received and an impairment charge of other assets.

In 2015 the Group received an insurance claim settlement in total amount of US$1,800 thousand. Impairment of financial instruments was recognised in total amount of US$1,868 thousand (see Note 13).

9. Income tax

Income tax expense is recognised based on management's estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual tax rate used for the year to 31 December 2015 is -3.5% (the estimated tax rate for the six months ended 30 June 2014 was 11%). The change is mainly due to the recognition of deferred tax assets on tax losses.

10. Property, plant and equipment

For the six months ended 30 June 2015, additions to construction in progress are primarily made up of additions to production facilities as well as additions to infrastructure. As at 30 June 2015, the construction in progress balance mainly represents production wells and oil production infrastructure not finalised (e.g. pads, roads, etc.).

The Group's property, plant and equipment in total amount of US$12,621 was pledged under the Development and Credit Facility agreements with Otkritie as at 30 June 2015 (31 December 2014: nil).

11. Mineral rights and other intangibles

Intangible assets of the Group are not pledged as security for liabilities and their titles are not restricted.

12. Trade and other receivables

Trade receivables are mainly denominated in US$ and are not past-due or impaired. Other receivables and prepayments are mostly RUR denominated and relate to counterparties with no history of delays in settlements. VAT recoverable is used either to offset against amounts due for mineral extraction tax or is recovered in cash. The VAT is recovered within three to six months from its initiation, following a review by the tax authorities.

As at 30 June 2015 and 31 December 2014, the Group has impaired prepayments amounting to US$52 thousand and US$129 thousand, respectively. In determining the recoverability of trade and other receivables, the Group considers any change in the credit quality of the receivable from the date credit was initially granted up to the reporting date.

13. Other current assets

In November 2014 the Group entered into an agreement to purchase promissory notes denominated in RUR. Due to the change of management estimation of recoverable amount of these promissory notes at the reporting date, the Group recognised an impairment loss in amount of US$1,868 thousand.

14. Cash and cash equivalents

Cash balances generally carry no interest. The Group holds its cash with Otkritie (Moody's rating Ba3/ b1/NP (Negative) at 30 June 2015), Sberbank (Moody's rating Ba2/ ba2/NP (Negative) at 30 June 2015), Bank of America (Moody's rating A1/baa2/P-1 (Stable) at 30 June 2015), Citibank (Fitch's rating BBB-/bbb-/F3 (Negative) at 30 June 2015) and Bank of Cyprus (Moody's rating Caa3/caa3/NP (Stable) at 30 June 2015).

15. Shareholders' equity

Share capital

Share capital authorised, issued and paid in consisted of 870,112,016 ordinary shares with a par value of GBP 0.10 each at 30 June 2015 and 31 December 2014.

16. Borrowings

Otkritie credit facilities Under the terms of the Group's Restructuring, completed in December 2014, the Group obtained a loan from Otkritie in the amount of US$150,000 thousand on 8 December 2014, pursuant to a loan agreement dated 14 November 2014. The loan is repayable in November 2019, bears interest at 8% per annum and is subject to certain covenants, including EBITDA and production targets.

14 November 2014 loan agreements for US$100,000 thousand and US$44,700 thousand were entered into with Otkritie for the Group's field development and for general working capital purposes respectively. As at 30 June 2015, facilities in total amount of US$20,818 and US$7,206 were drawn down under these agreements, respectively (31 December 2014: nil).

Loans from shareholders of the Company The Group has a number of US$ denominated loans obtained from the Shareholders of the Company. All of these loans are unsecured and the interest rate on most of these loans is Libor +10% per annum. In May 2015 interest in total amount of US$5,000 thousand was repaid under the one of the Shareholders' loan agreements.

17. Trade and other payables

Trade and other payables are denominated primarily in Russian roubles, except for the advance received from Glencore Energy UK Ltd. ("Glencore") in the amount of US$15,000 thousand, which is denominated in US$. The long-term part of the advance in the amount of US$5,000 is presented in the statement of financial position as other long-term liabilities.

On 7 May 2015 the Group signed a prepayment agreement with Glencore, which renewed prepayment facility with Glencore entered into in August 2013 and amended in March 2014. The sum of prepayment received from Glencore in May 2015 amounted to US$22,500 thousand with additional US$7,500 thousand available to the Company in six months depending on the Group's ability to meet certain production targets. The facility is for a period of eighteen months and requires the Group to deliver a minimum of 37,350 barrels per month of crude oil to Glencore.

18. Capital commitments and other contingencies

Legal contingencies

As at 30 June 2015 the Group had received a claim from Schlumberger Logelco Inc. in the amount of US$7,000 thousand. Management disputes this claim and shall take all necessary steps to protect the position of the Group.

Capital commitments

As at 30 June 2015, the Group had contractual commitments for capital expenditures of US$3,426 thousand (31 December 2014: US$2,360 thousand).

License commitments

The Group's exploration and production licences require certain operational commitments. These include performance criteria certain of which have not been fully met during 2014. The Directors note that breach of licence performance conditions has not given rise to any material fines or penalties in the six-months period ended 30 June 2015. Furthermore, management has been undertaking particular actions to meet required licence performance criteria. The Directors also note that the Group's production programme has been inspected by the Russian licensing authorities subsequent to 31 December 2014 and that no material fines or penalties have resulted.

Liquidity of subsidiary undertakings

In accordance with the legal framework in the Russian Federation, creditors and tax authorities may initiate bankruptcy procedures against an entity with negative net assets. Ruspetro LLC, the Company's subsidiary holding entity in Russia, as at 30 June 2015 reported net liabilities under Russian GAAP. However, no such bankruptcy procedures have been initiated either by the creditors or the tax authorities against them. The Directors consider its net liability position to be normal given its still early stage of development.

Operating risks and contingencies

Pledge of shares and promissory notes

On the opening of its credit facilities with Otkritie, the Group provided to Otkritie as collateral its shares in INGA and Trans-oil.

Operating Environment of the Group

The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to varying interpretations. The political and economic turmoil witnessed in the region, including the developments in Ukraine have had and may continue to have a negative impact on the Russian economy, including weakening of the Rouble and making it harder to raise international funding. At present, there is an ongoing threat of sanctions against Russia and Russian officials the impact of which, if they were to be implemented, are at this stage difficult to determine. The financial markets are uncertain and volatile. These and other events may have an significant impact on the Group's operations and financial position, the effect of which is difficult to predict. Management has assessed the ability of the Group to continue as a going concern as well as possible impairment of the Group's long-term assets by considering the current economic environment and outlook. The future economic and regulatory situation may differ from management's current expectations.

Environmental matters

The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage.

19. Related party disclosures

Compensation of key management personnel of the Group

Key management includes Executive and Non-executive Directors of the Group. The compensation paid or payable to key management for employee services is shown below:

All related party transactions are on an arm's-length basis and no financial period end balances have arisen as result of these transactions.

Loans from related parties

The Group has a number of loans from shareholders of the Company with the following balances:

The effective interest rates of loans received are disclosed in Note 16.

Transactions with other related parties

Ruspetro LLC leased an office space in a building from a company, in which one of its shareholders has an interest, for an annual rent and service charge of RUR36,401 thousand (US$628 thousand) (excluding VAT). The lease will terminate on 14 September 2015 or earlier, when a long-term lease agreement is entered into between the parties. Ruspetro Russia leased parking places at the office building from the same company for an annual rent and service charge of RUR2,029 thousand (US$35 thousand) (excluding VAT). This lease will terminate on 1 October 2021.

20. Financial risk management objectives and policies

The Group's principal financial liabilities comprise accounts payable, bank borrowings and other loans. The main purpose of these financial instruments and liabilities is to manage short term cash flow and raise finance for the Group's capital expenditure programme. The Group has various financial assets such as accounts receivable and cash, which arise directly from its operations.

It is, and has been throughout the six months ended 30 June 2015 and 2014, the Group's policy that no speculative trading in derivatives shall be undertaken.

The main risks that could adversely affect the Group's financial assets, liabilities or future cash flows are commodity price risk, interest rate risk, foreign currency risk, liquidity risk and credit risk. Management reviews and agrees policies for managing each of these risks which are summarised below.

Capital risk management

The Group considers capital to comprise both debt and equity. Total debt comprises long-term and short-term loans and borrowings, as shown in the consolidated statement of financial position. Equity of the Group comprises share capital, share premium, other reserves and retained earnings. Equity of the Group was equal to US$59,146 thousand and US$75,740 thousand as at 30 June 2015 and 31 December 2014 respectively.

Total debt of the Group was equal to US$272,478 thousand and US$247,104 thousand as at 30 June 2015 and 31 December 2014 respectively.

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide adequate levels of financing for its current development and production activities. In order to maintain or adjust the capital structure, the Group may issue new shares, attract new or repay existing loans and borrowings.

The Group manages its capital structure and makes adjustments to it, based on the funds available to the Group, in order to support its construction and production activities. The Group is at the development stage; as such it is dependent on external financing to fund its activities. In order to carry out its planned construction and production activities and pay for administrative costs, the Group will spend its existing capital and raise additional amounts as needed.

There were no changes in the Group's approach to capital management during the period. As at 30 June 2015 the Group is subject to certain covenants (Note 16).

Fair values

The Group has financial instruments carried at fair value only in the 'Level 3' category.

The different levels have been defined as follows:

· Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).

· Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2).

· Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

Carrying amount of financial instruments approaches their fair value.

21. Loss per share

Basic

Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period.

Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to assume conversion of all dilutive potential ordinary shares.

The Company has incurred a loss from continuing operations for the six months ended 30 June 2015 and the effect of considering the exercise of the options on the Company's shares would be anti-dilutive, that is, it would reduce the loss per share.

22. Events after the statement of financial position date

In July 2015 Ruspetro LLC changed its legal form to joint-stock company.

There have been no other material events after the end of reporting period which require disclosure in these consolidated financial statements. 

1. Supplementary information (Unaudited)

Reserve quantity information

The oil, condensate and gas reserves estimate as at 30 June 2015 and 31 December 2014 was made by the Company by adjusting reserves numbers as at 30 June 2014, prepared by DeGolyer and MacNaughton, for actual oil production in the second half of 2014 and first half of 2015. No third party was involved in estimating reserves as at 30 June 2015 and 31 December 2014. The Company plans to engage an independent third party in 2015 to prepare updated reserve information based on the results of horizontal wells completed in 2014 and 2015.

In 2014 the Company suspended production in its Palyanovo licence area, having evaluated it as currently not feasible the commercialisation of gas production and to reduce unnecessary gas flaring.

Reserves information has been prepared in accordance with Petroleum Resources Management System (PRMS) definition and classification system.

Developed reserves are expected quantities to be recovered from existing wells and facilities.

Proved reserves are those quantities of petroleum, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.

Probable reserves are those additional reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than proved reserves but more certain to be recovered than possible reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated proved plus probable reserves (2P). In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate.

Due to the inherent uncertainties and the necessarily limited nature of reservoir data, estimates of reserves are inherently imprecise, require the application of judgement and are subject to change as additional information becomes available.

Management has included within proved reserves significant quantities which the Group expects to produce after the expiry dates of certain of its current production licences. The Subsoil Law of the Russian Federation states that, upon expiration, a licence is subject to renewal at the initiative of the licence holder provided that further exploration, appraisal, production or remediation activities are necessary and provided that the license holder has not violated the terms of the license. Since the law applies both to newly issued and old licences, management believes that licences will be renewed upon their expiration for the remainder of the economic life of each respective field.

Estimated net proved crude oil and condensate reserves for the period ended 30 June 2015 and 30 June 2014, are shown in '000 barrels in the table set out below.

Estimated net proved developed crude oil and condensate reserves as at 31 December 2014 and 30 June 2015 are shown in the table set out below.

Crude oil and condensate reserves

Estimated net proved and probable gas reserves as at 31 December 2014 and 30 June 2015 are shown in the table set out below.

Gas reserves

Crude oil and condensate reserves breakdown

The table below reflects the split of crude oil and condensate as at 30 June 2015 and 31 December 2014.

Crude oil and condensate