30 Sep 2008 07:00
RNS Number : 6298E
Urals Energy Public Company Limited
30 September 2008
Urals Energy Public Company Limited
('Urals Energy' or the 'Company')
30th September, 2008
Interim Results
Urals Energy, a leading independent exploration and production company with operations in Russia, today announces its interim results for the six months ended 30 June 2008.
Highlights
Operations
·; Average daily production for the period was 7,800 bopd (including production to April 22, 2008 from the divested KOMI assets.)
·; Commencement of successful drilling campaign in Dulisma with 2 drilling rigs
o Tested appraisal well 105 at rate of 1,280 bopd
o Two additional horizontal production wells spudded and scheduled for completion in Q4 ‘08
o Contract for another two drilling rigs awarded to begin drilling in Q1 2009
·; Substantial progress in development of Dulisma field infrastructure
o 24 kilometres of export pipeline constructed
o Major equipment installed at Central Processing Facility (CPF)
o Subsequent to period end awarded tender for Central Transfer Facility (CTF) construction
·; Continued development of Taas Yuriakh
o Drilled additional horizontal side track wells for production (a total of 12 will be completed by end September)
o Acquisition and processing of 250 km² of 2D (Kurungsky license) and 200 km² of 3D (Central block) seismic
o Tenders issued for drilling and services (a contract was placed with a drilling contractor for a BU 3000 rig which was mobilised after the reporting period, with a second rig under negotiation)
o Procurement of the license for the overlying gas reserves and usage thereof for fuel requirements, thus avoiding the need for diesel or crude oil for this purpose, while correspondingly reducing lifting cost
Reserves
·; 107% increase in 2P reserves to 1,202 MMBOE ( H1 07: 579 MMBOE)
o Taas Yuriakh acquisition contributing 253 MMBBLS
o Upward revision of Dulisma reserves resulting in 81% increase to 842 MMBBOE
·; 117% increase in C1 and C2 oil reserves (Russian classification) for Taas Yuriakh to 900 MMBBLS (317 MMBBLS net to Urals)
·; Confirmed licence rights to overlying gas in Taas Yuriakh
o Reserves estimated at 6.3tcf C1 + C2 (2.2 TCF net to Urals) by the Russian State Reserve Committee.
o Auditors DeGolyer and MacNaughton yet to assess gas reserves on Taas Yuriakh
Financial
·; 94.6% increase in gross revenues to US$110.7 million due to higher crude oil prices and increased sales volumes
·; Operating loss decreased to US$3.1 million from US$22.2 million due to higher crude oil prices and resumed production and sales of crude oil from Dulisma, combined with a decrease in Selling, General and Administrative (SG&A) expenses
·; Financing of capital program of US$59.5 million with the majority spent on the development of Dulisma
·; Ongoing negotiations with Sberbank regarding the $140 million Dulisma development loan, and the extension of the initial 1-year maturity of the $500 million Taas Acquisition loan and the $130 million Dulisma development loan by 2 and 5 years respectively. The company is targeting a mutually satisfactory result before November 2008.
Corporate
·; Gross proceeds from sale of Komi properties of US$93.5 million
·; Continuing to proceed with divestiture of all remaining non-core assets with a view to finalizing these transactions by end Q1, 2009
Outlook
·; Near term priority to reach mutually satisfactory conclusion in negotiations with Sberbank regarding loan facilites
·; On track to meet revised production targets of 56,000 bopd in 2012 and 67,000 bopd in 2015
·; Operational programme in Dulisma contemplates ESPO connection in September 2009
Leonid Y. Dyachenko, Chief Executive, commented:
“During the first half of 2008 the Company continued to make good progress with the development of its key strategic operations in East Siberia.
“With an ongoing active programme set to continue for the remainder of the year and beyond, the Company remains firmly on track and focused on realising its operational targets and full potential.”
Enquiries:
| Pelham PR | | |
| Mark Antelme Evgeniy Chuikov | | +44(0)20 3178 6242 / +44(0)752 5951 011 +44(0)20 3008 5506 / +44(0)7894 608 606 |
| | | |
Chief Executive’s Statement
During the first half of 2008 the Company continued to make good progress with the development of its key strategic assets in East Siberia.
Following the Taas Yuriakh acquisition in 2007 and further reserve upgrades at Dulisma, compared to the equivalent period last year the Company’s 2P reserves rose by 107% to 1,202 MMBOE (H1 07: 579 MMBOE). This is also reflected in a 137% increase in the PV10 of the Company’s 2P reserves to $3.2 billion.
Average daily production for the period was 7,800 bopd, (including production until April 22 from the now divested KOMI assets).
A successful drilling campaign commenced at Dulisma with two drilling rigs. Appraisal well 105 is now producing, having tested at 1,280 bopd and two additional production wells spudded and scheduled for completion by the year end.
The development of the Dulisma field infrastructure has progressed substantially. Key developments include the construction of 24km of export pipeline and the installation of equipment at the Central Processing Facility. Since the period end, the Company has awarded the tender for the construction of the Central Transfer Facility, which will tie in with the new ESPO trunk system. The target remains to produce 27,000 bopd in 2011.
Further development progress has also been made at the Taas field, including the drilling of additional horizontal side-track production wells and the acquisition and processing of 2D and 3D seismic at the Kurungsky license and Central block respectively. This data will allow for further depletion planning. Tenders have now been issued for drilling and services and the license for the use of the overlying gas reserves as a fuel supply has been procured.
At Petrosakh’s Okruzhnoye Field, Sakhalin Island, an excellent flowing oil well (#52) was drilled and completed. Well # 52 further demonstrated the value of Ural’s wider asset base and the Company’s commitment to maximising existing value.
In keeping with our stated strategy of disposing of non strategic assets, the Company successfully sold its KOMI project for a consideration of $93.5 million. Urals will continue to actively pursue further disposal opportunities for non-core assets.
The Company continues to negotiate with Sberbank regarding the $140 million Dulisma development loan, and the extension of the initial 1-year maturity of the $500 million Taas Acquisition loan and the $130 million Dulisma development loan by 2 and 5 years respectively.
Dulisma Operational Update
The Dulisma field development is comprised of multi-well drilling pads with flow lines to the CPF where oil will flow into the 73km export pipeline to the CTF, providing oil metering at the Transneft ESPO trunk system.
The Russian Company, OAO SibKompletkMontageNaladka, was selected for constructing the CTF which is the last facility required for start up to ESPO.
In addition, the Company awarded a drilling rig contract to ZAO L- Burenie for two-315 ton drilling rigs to begin drilling by March 2009. The Company’s Dulisma subsidiary owns three drilling rigs, two of which are currently drilling and the third is being mobilised to the field to begin operations in December 2008. This will bring to five the number of rigs to be used for drilling operations in Dulisma.
Meanwhile, the Company is gathering reservoir data by conducting production flow rate and shut-in pressure tests in various wells for reservoir management planning. The Company is working with the international consulting firm, DeGolyer and MacNaughton on geological and reservoir modeling and simulations to refine the reservoir management plan.
During the testing phase, the production rate from the Dulisma field is 1,500 to 1,800 bopd and is currently sold through a temporary pipeline operated by a neighboring production company. Before connection to ESPO, production will be in the range of 4,000 to 7,000 bopd transported through the temporary pipeline and trucking.
Upon connection to ESPO, the Company plans to produce 8000 bopd increasing production to 12,000 bopd in the end of 2009 and to 27,000 bopd in 2011. Additionally, the Company is assessing the value of limited gas off-take and gas processing to extract natural gas liquids while producing the main oil rim.
Financial Results
The six months ended 30 June 2008 were characterised by high crude oil market prices, resulting in an increase in gross revenues to $110.7 million, compared to $56.9 million for the same period in 2007. Revenues were also positively impacted by higher crude oil sales volumes, which increased to 187.4 thousand tons from 157.7 during the six months ended 30 June 2008 and 2007, respectively.
Included within gross revenues during the first six months of 2008 were crude oil, purchases totalling 48.4 thousand tonnes made from Dinyu, NizhneomrinskayaNeft and Michayuneft, and which were further resold to the third parties after these subsidiaries were divested in April 2008. There were no deliveries of crude oil exported from Arcticneft during the reporting period, resulting in 25.7 thousand tons of crude oil that remained in stock until July 2008, when it was shipped. Arcticneft is highly dependent on weather conditions as it can only ship crude oil during the summer and fall period from July to December.
Gross profit
| In thousand US dollars | Period ended 30 June | |
| | 2007 | 2008 |
| | | |
| Gross revenues (excluding crude oil for resale) | 56,922 | 81,518 |
| Less Export duties and excise tax | 12,515 | 20,107 |
| Less cost of sales (excluding cost of purchased crude oil) | 36,694 | 41,552 |
| | | |
| Gross profit | 7,713 | 19,859 |
| Gross profit margin | 17% | 32% |
Gross profit (net revenues less cost of sales) from operating activity increased from $7.7 million to $19.9 million as a result of increased volumes of production due to both the resumption of production and sales at Dulisma, where the Company doesn’t pay Mineral Extraction Tax, and the increase in crude oil prices. Elsewhere the increase in prices was off-set by higher Mineral Extraction Tax, which rose in line with crude oil market prices.
Resale of purchased oil
| Resale of crude oil (in thousand US dollars) | Period ended 30 June | |
| | 2007 | 2008 |
| | | |
| Crude oil | | |
| Export sales | 0 | 18,174 |
| Domestic sales (Russian Federation) | 0 | 11,057 |
| | | |
| Total revenues from resale of purchased oil | 0 | 29,231 |
| | | |
| Cost of purchased oil | 0 | 28,649 |
| Net margin | | 582 |
| | | 2.0% |
Following the divestiture of subsidiaries in the Komi Republic, the Group continued to re-sell crude oil produced by these subsidiaries on the export and domestic markets. The total cost of this purchased crude amounted to $28.7 million during the six months ended 30 June 2008. Also the Company charged a commission on these operations, which was included in gross revenues in these financial statements. The profit margin on these operations is substantially lower than for the self-produced oil, as the price of purchased crude oil also includes a seller’s mark-up. There were no such operations with the Komi subsidiaries in 2007.
Selling, General and Administrative expenses decreased during the six months ended 30 June 2008 by $6.4 million. This was primarily due to an absence of non-recurring expenses related to separation expenses paid to certain top managers of the Group, who left the Group during the six months ended 30 June 2007.
In the current period the Company reported an operating loss of $3.1 million as compared to the loss of $22.2 million reported at 30 June 2007.
Gain from the change in fair value of financial derivatives increased from $1.1 million to $18.0 million during 2008. The increase is primarily due to the change in fair value of the put option liability, which decreased from $118.7 at 31 December 2007 to $96.2 million at 30 June 2008, resulting in a gain which was partly off-set by the impairment of the call option, which was reduced to nil. The fair values of the call and put options as at the valuation date of 31 December 2007 were estimated at $5.1 million and $118.7 million, respectively, based on the equity value derived from the long-term discounted cash flows model by applying cost of capital and some other parameters attributable to analogous to Taas Yuriakh traded companies, since the shares of Taas are not traded on the market. For the purposes of these financial statements the Group has reviewed the long-term model of discounted cash flows to asses the change in Taas Yuriakh equity value, and re-value the financial instruments as required by IFRS. As a result of changes in macroeconomic parameters, primarily the long-term oil price forecast, the equity value of Taas Yuriakh has increased. This change resulted in a decrease of the put option value, classified as a financial instrument in this interim condensed consolidated financial from $118.7 million to $96.2 million as of 31 December 2007 and 30 June 2008, respectively. With respect to the call option, management has not assigned any value to this financial derivative, as the Group is not planning to exercise this option but rather plans to use funds available to the Group for value creation through the ongoing development of the Dulisma oil field. Furthermore, given current market conditions, the Group’s ability to sell this option to a third party prior to its expiration in January 2009 is uncertain. Therefore, for the purposes of this interim condensed consolidated financial report, management have discounted the value of the call option to nil, from $5.1 million as of 31 December 2007, and recognised a loss on the revaluation of the financial derivative in the Statement of Income. The write down does not result in any loss of cash-flow for the Group.
Interest expenses increased primarily because of total interest accrued for the $500 million and $130 million Sberbank loans in the amount of $43.7 million, and the accretion of the issuance costs under the Sberbank loans in the amount of $10.6 million. Interest income increased during the six months of 2008 as compared to six months of 2007 primarily due to the interest income received from the loans issued to Taas Yuriakh, and also interest on the promissory notes deposited with Sberbank, which were used to secure interest payments under the $500 million loan agreement.
Operating cash flows before changes in working capital increased because of an increase in net revenues and a decrease in selling, and general and administrative expenses. However, the total cash generated from operations decreased as compared to the first six months in 2007. This was primarily due to the increase in volumes of crude oil held in stock as of 30 June 2008 compared to 30 June 2007.
For the first six months of 2008 the Group generated $41.4 million from investing activity. This was driven by the receipt of proceeds from the divestiture of certain subsidiaries located in the Komi Republic of Russian Federation. The total proceeds net of transaction costs amounted to $93.1 million. Also the Group recognised income of $3.6 million with respect to the sale of the Komi subsidiaries.
Cash used for the purchases of property, plant and equipment increased by $25.7 million. This increase primarily relates to the development of the Dulisma field and was used for the construction of the pipe-line from the field to the tie-in to ESPO, construction of Central Processing Facility, as well as drilling and construction of other infrastructure in the field.
Loans issued during the six month period amount to $26.6 million. The majority of this amount represents loans issued to the equity investee Taas Yuriakh, which was acquired at the end of 2007. The loans were given for the development of the Srednebotuobinskoye field, repayment of old outstanding loans to third parties and to finance the acquisition of promissory notes to secure interest payments to Sberbank in accordance with the $600 million loan agreement for the development of Taas Yuriakh.
During the six months ended 30 June 2008 the Group classified certain subsidiaries as assets held for sale. Such classification is governed by the IFRS if the Company is expecting to realise the benefits from the assets not through ongoing operations, but through the sale of those assets. At 30 June 2008 following the decision of Group to sell Chepetskoye NGDU during 2008 and an announced sale of CNPSEI, which is connected to the transaction with the other Komi subsidiaries, these subsidiaries were classified as assets held for sale and recorded as current assets and current liabilities in the attached financial statements.
Sberbank and liquidity
All of the Company’s bank debt at 30 June and at 30 September 2008 was comprised of two Sberbank loans:
1. $500 million Taas acquisition loan bearing interest of 14% per annum with initial 1-year maturity expiring in November 2008 with the possibility of a 2-year extension if certain conditions precedent are met. Annual interest payments should be prepaid in the form of the purchase of Sberbank promissory notes for the amount of $70 million in November 2007, 2008 and 2009. The purchase of promissory notes in November 2008 to prepay interest under this loan for 2009 is one of the two outstanding conditions for the extension of the maturity of the loan. The second condition is signing of a loan agreement for a $140 million loan for continued development of Dulisma. The Company believes it has met all Conditions Precedent to availability of such $140 million loan.
The borrower of this loan is Urals Energy LLC, Russia, and UEPCL’s 35.329% of interest in Tass is pledged under this loan. In addition to that certain founding shareholders of Urals Energy have pledged to Sberbank 6 535 966 shares of UEPCL, worth $ 22 million at the time of the pledge. Also, Ashmore’s 10.497% interest in Taas is pledged under this loan.
2. $130 million Dulisma field development loan bearing interest of 14% per annum with initial 1-year maturity expiring in November 2008 with the possibility of a 5-year extension if certain conditions precedent are met. The conditions precedent are the same as for the maturity extension of the $500 million Taas acquisition loan. The borrower of this loan is ZAO Dulisma, and UEPCL’s 100% of interest in Dulisma is pledged under this loan. In addition to that, certain founding shareholders of Urals Energy have pledged to Sberbank 8 897 402 shares of UEPCL, worth $28 million at the time of the pledge.
The Company believes it is capable of maintaining its liquidity at an adequate level and meeting its financial obligations if it receives the incremental $140 million loan and obtains the extension for the other Sberbank loans maturing in November 2008. The Company is targeting mutually satisfactory result of the negotiations with Sberbank before November 2008. Investors should refer to Note 4 in the notes to the interim results for further information on the liquidity position of the Company.
Ongoing seasonal deliveries of oil to the export markets from Kolguev (Arcticneft) and Sakhalin (Petrosakh) islands contribute to the Company’s liquidity. Next shipment of 27,500 tonnes from Petrosakh is scheduled for the first week of October.
Management and Personnel
Effective from 1 May 2008 Bob Maguire resigned as a non-executive director in order to devote more time to his other business interests which have increased since he joined Urals’ Board.
Outlook
Urals Energy is well placed to further build upon its unique position in East Siberia, with its attractive fiscal regime and easy access to the fast growing Asia-Pacific markets.
Finalising financing arrangements with Sberbank is the near term priority and should ensure that Company liquidity is sound and sources of financing for the Company’s projects are available.
The Company is continuing with its aggressive development programme at its core assets and is on track for combined Taas and Dulisma revised production targets of 56,000 bopd in 2012 and 67,000 bopd in 2015.
Urals Energy Public Company Limited
Interim Condensed Consolidated Balance Sheets (unaudited)
(presented in US$ thousands)
| | | 30 June 2008 | 31 December 2007 |
| | Note | ||
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents | | 22,504 | 28,400 |
| Accounts receivable and prepayments | | 38,879 | 38,771 |
| Promissory notes receivable | 14 | 30,238 | 64,581 |
| Current income tax prepayments | | 824 | 905 |
| Inventories | | 40,839 | 21,464 |
| Non-current assets held-for-sale | 6 | 35,137 | 133,363 |
| Total current assets | | 168,421 | 287,484 |
| | | | |
| Non-current assets | | | |
| Property, plant and equipment | | 584,772 | 540,745 |
| Financial derivatives | 11 | - | 5,103 |
| Intangible assets | | 1,405 | 1,816 |
| Other non-current assets | | 35,219 | 19,649 |
| Investment in joint venture | | 907,900 | 911,433 |
| Loan receivable from joint venture | 12, 15 | 29,869 | 2,264 |
| Deferred tax assets | | 2,875 | 1,925 |
| Total non-current assets | | 1,562,040 | 1,482,935 |
| Total assets | | 1,730,461 | 1,770,419 |
| | | | |
| Liabilities and equity | | | |
| Current liabilities | | | |
| Accounts payable and accrued expenses | | 29,429 | 23,397 |
| Income tax payable | | 3,615 | 2,079 |
| Other taxes payable | | 2,300 | 2,900 |
| Other taxes provision | | 553 | 529 |
| Financial instruments | 11 | 96,200 | 118,657 |
| Short-term borrowings and current portion of long-term borrowings | 14 | 624,440 | 614,031 |
| Advances from customers | 13 | 54,381 | 55,179 |
| Liabilities associated with non-current assets held-for-sale | 6 | 5,952 | 27,477 |
| Current liabilities before warrants classified as liabilities | | 816,870 | 844,249 |
| Warrants classified as liabilities | 11 | 644 | 1,326 |
| Total current liabilities | | 817,514 | 845,575 |
| | | | |
| Long-term liabilities | | | |
| Long-term borrowings | | - | 29 |
| Long term finance lease obligations | | 1,067 | 1,164 |
| Dismantlement provision | | 1,265 | 1,448 |
| Deferred tax liability | | 97,200 | 93,835 |
| Total long-term liabilities | | 99,532 | 96,476 |
| Total liabilities | | 917,046 | 942,051 |
| | | | |
| Equity | | | |
| Share capital | 7 | 1,122 | 990 |
| Share premium | 7 | 635,406 | 625,111 |
| Difference from conversion of share capital into USD | 7 | (113) | - |
| Translation difference | | 55,601 | 49,919 |
| Retained earnings | | 119,632 | 150,744 |
| Equity attributable to shareholders of Urals Energy Public Company Limited | | 811,648 | 826,764 |
| Minority interest | | 1,767 | 1,604 |
| Total equity | | 813,415 | 828,368 |
| Total liabilities and equity | | 1,730,461 | 1,770,419 |
| | | | |
Approved on behalf of the Board of Directors on 29 September 2008
| _________________________________________________ L.Y. Dyachenko Chief Executive Officer | __________________________________________ V.G. Sidorovich Chief Financial Officer |
Urals Energy Public Company LimitedInterim Condensed Consolidated Statement of Income (unaudited)(presented in US$ thousands)
| | | Six months ended 30 June: | |
| | Note | 2008 | 2007 |
| | | | |
| | | | |
| Gross revenues | 8 | 110,749 | 56,922 |
| Less: excise taxes | | (195) | (539) |
| Less: export duties | | (19,912) | (11,976) |
| Revenues | | 90,642 | 44,407 |
| | | | |
| Operating costs | | | |
| Cost of production | 9 | (70,201) | (36,694) |
| Selling, general and administrative expenses | 10 | (23,505) | (29,910) |
| Total operating costs | | (93,706) | (66,604) |
| | | | |
| Operating (loss) profit | | (3,064) | (22,197) |
| Finance income (expense) | | | |
| Interest income | 14 | 3,169 | 1,450 |
| Interest expense | 14 | (55,414) | (12,531) |
| Foreign currency gains | | 9,571 | 2,846 |
| Gain from disposal of assets held for sale | 6 | 3,629 | - |
| Loss from joint venture operations | | (3,535) | - |
| Change in fair value of financial derivatives | 11 | 18,036 | 1,112 |
| Total finance expense | | (24,544) | (7,123) |
| Loss before tax | | (27,608) | (29,320) |
| Income tax benefit (charge) | | (3,418) | 265 |
| Loss for the period | | (31,026) | (29,055) |
| | | | |
| (Loss) profit for the period attributable to: - Minority interest | | 86 | (12) |
| - Shareholders of Urals Energy Public Company Limited | | (31,112) | (29,043) |
| | | | |
| Loss per share of profit attributable to shareholders of Urals Energy Public Company Limited: | | | |
| - Basic loss per share (in US dollar per share) | 7 | (0.1750) | (0.2450) |
| - Diluted loss per share (in US dollar per share) | 7 | (0.1750) | (0.2450) |
| | | | |
| Weighted average shares outstanding attributable to: | | | |
| - Basic shares | | 177,824,274 | 118,546,479 |
| - Diluted shares | | 177,824,274 | 118,546,479 |
| | | | |
Urals Energy Public Company Limited
Interim Condensed Consolidated Statements of Cash Flows (unaudited)
(presented in US$ thousands)
| | | Six months ended 30 June: | |
| | | 2008 | 2007 |
| Cash flows from operating activities | | | |
| Loss before income tax | | (27,608) | (29,320) |
| Adjustments for: | | | |
| Depreciation and depletion | | 11,144 | 10,601 |
| Share-based payments | | 4,297 | 6,695 |
| Interest income | | (3,169) | (1,450) |
| Interest expense | | 55,414 | 12,531 |
| Foreign currency gains | | (9,571) | (2,846) |
| Gain from disposal of assets held for sale | | (3,629) | - |
| Loss from joint venture operations | | 3,535 | - |
| Change in fair value of financial derivatives | | (18,036) | (1,112) |
| Other | | 64 | (124) |
| | | | |
| Operating cash flows before changes in working capital | | 12,441 | (5,025) |
| (Increase) in inventories | | (25,197) | (13,823) |
| (Increase)/decrease in accounts receivables and prepayments | | 25 | (1,944) |
| Increase in accounts payable and accrued expenses | | 17,669 | 7,079 |
| Increase/(decrease) in advances from customers | | (854) | 15,606 |
| Increase/(decrease) in other taxes payable | | (1,098) | 2,465 |
| | | | |
| Cash generated from operations | | 2,986 | 4,358 |
| | | | |
| Interest received | | 879 | 579 |
| Interest paid | | (44,566) | (3,208) |
| Income tax paid | | (1,995) | (876) |
| Net cash (used in)/generated from operating activities | | (42,696) | 853 |
| | | | |
| Cash flows from investing activities | | | |
| Proceeds from sale of subsidiaries | | 93,125 | - |
| Purchase of property, plant and equipment | | (59,487) | (33,780) |
| Repayment of promissory notes | | 35,002 | - |
| Loans issued | | (26,617) | - |
| Acquisition of joint venture | | (578) | - |
| Purchase of intangible assets | | (43) | (822) |
| Net cash (used in)/generated from investing activities | | 41,402 | (34,602) |
| | | | |
| Cash flows from financing activities | | | |
| Proceeds from borrowings, net of borrowing costs | | 18,000 | 142,289 |
| Repayment of borrowings | | (18,000) | (65,054) |
| Repayment of loan organization fees | | (10,000) | - |
| Cash proceeds from issuance of ordinary shares, net of associated costs | | 5,892 | - |
| Purchase of financial derivative | | - | (20,457) |
| Finance lease principal payments | | (222) | (211) |
| Cash proceeds from exercise of options | | 125 | - |
| Net cash (used in)/generated from financing activities | | (4,205) | 56,567 |
| Effect of exchange rate changes on cash and cash equivalents | | 22 | 30 |
| Net increase/(decrease) in cash and cash equivalents | | (5,477) | 22,848 |
| Cash and cash equivalents at the beginning of the period | | 28,779 | 33,082 |
| Сash and cash equivalents at the end of the period | | 23,302 | 55,930 |
| Cash and cash equivalents at the end of the period of the Group, excluding those classified as held for sale | | 22,504 | - |
| Cash and cash equivalents at the end of the period of the assets classified as held for sale | | 798 | - |
Urals Energy Public Company Limited
Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited) (presented in US$ thousands)
| | Share capital | Share premium | Difference from conversion of share capital into USD | Cumulative Translation Adjustment | Retained earnings | Equity attributable to Shareholders of Urals Energy Public Company Limited | Minority interest | Total equity |
| | | | | | | | | |
| Balance at 1 January 2007 | 633 | 401,448 | - | 22,445 | 37,022 | 461,548 | 1,428 | 462,976 |
| | | | | | | | | |
| Effect of currency translation | - | - | - | 7,849 | - | 7,849 | 28 | 7,877 |
| Loss for the period | | | | | (29,043) | (29,043) | (12) | (29,055) |
| Total recognized income (loss) | - | - | - | 7,849 | (29,043) | (21,194) | 16 | (21,178) |
| | | | | | | | | |
| Issuance of restricted stock | 8 | (8) | - | - | - | - | - | - |
| Exercise of options | - | 20 | - | - | - | 20 | - | 20 |
| Share-based payment | - | 6,675 | - | - | - | 6,675 | - | 6,675 |
| | | | | | | | | |
| | | | | | | | | |
| Balance at 30 June 2007 | 641 | 408,135 | - | 30,294 | 7,979 | 447,049 | 1,444 | 448,493 |
| | | | | | | | | |
| | | | | | | | | |
| Balance at 1 January 2008 | 990 | 625,111 | - | 49,919 | 150,744 | 826,764 | 1,604 | 828,368 |
| | | | | | | | | |
| Effect of currency translation | - | - | - | 19,162 | - | 19,162 | 77 | 19,239 |
| Accumulative translation adjustment relating to disposed subsidiaries | - | - | - | (13,480) | 13,480 | - | - | - |
| Loss for the period | - | - | - | - | (44,592) | (44,592) | 86 | (44,506) |
| Total recognized income (loss) | - | - | - | 5,682 | (31,112) | (25,430) | 163 | (25,267) |
| | | | | | | | | |
| Issuance of shares | 19 | 5,998 | - | - | - | 6,017 | - | 6,017 |
| Share-based payment | - | 4,297 | - | - | - | 4,297 | - | 4,297 |
| Conversion of share capital into USD | 113 | - | (113) | - | - | - | - | - |
| | | | | | | | | |
| | | | | | | | | |
| Balance at 30 June 2008 | 1,122 | 635,406 | (113) | 55,601 | 119,632 | 811,648 | 1,767 | 813,415 |
| | | | | | | | | |
Note 1: Activities
Urals Energy Public Company Limited (“Urals Energy” or the “Company” or “UEPCL”) was incorporated as a limited liability company in Cyprus on 10 November 2003. Urals Energy and its subsidiaries (the “Group”) are primarily engaged in oil and gas exploration and production in the Russian Federation and processing of crude oil for distribution on both the Russian and international markets.
The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34, CY-1066, Nicosia, Cyprus. UEPCL’s shares are traded on the AIM (Alternative Investment Market) Market operated by the London Stock Exchange.
The Group comprises UEPCL and the following main subsidiaries and joint venture:
| | | 30 June 2008 | 31 December 2007 |
| Exploration and production | | | |
| ZAO Petrosakh (“Petrosakh”) | Sakhalin | 97.2% | 97.2% |
| ZAO Arcticneft (“Arcticneft”) | Nenetsky | 100.0% | 100.0% |
| OOO CNPSEI (“CNPSEI”) | Komi | 100.0% | 100.0% |
| ZAO Chepetskoye NGDU (“Chepetskoye”) | Udmurtia | 100.0% | 100.0% |
| OOO Dinyu (“Dinyu”) | Komi | - | 100.0% |
| OOO Oil Company Dulisma (“Dulisma”) | Irkutsk | 100.0% | 100.0% |
| OOO Nizhneomrinskaya Neft | Komi | - | 100.0% |
| OOO Taas-Yuryakh Neftegazdobycha (“Taas”) | Sakha-Yakutia | 35.3% | 35.3% |
| | | | |
| Management company | | | |
| OOO Urals Energy | Moscow | 100.0% | 100.0% |
| | | | |
Note 2: Seasonality
The Group’s producing subsidiaries, ZAO Petrosakh and ZAO Arcticneft, operate on Sakhalin and Kolguev Islands, respectively, and are not connected to the State owned pipeline monopoly, Transneft. Accordingly, the majority of their production is exported by tanker. Due to severe weather conditions, shipping tankers can generally only load during the period of June through late December. Outside this period, oil is either stored or processed and sold on the local market. During the six months ended 30 June 2008, Petrosakh and Arcticneft produced 49.8 and 19.5 thousand tons of crude oil, respectively, and sold 46.4 and 0.3 thousand tons of crude oil and oil products, respectively. During the six months ended 30 June 2007, Petrosakh and Arcticneft produced 66.9 and 20.4 thousand tons of crude oil, respectively, and sold 51.9 and 0.6 thousand tons of crude oil and oil products, respectively. During 2008 crude oil export sales from ZAO Petrosakh commenced in June 2008 and crude oil export sales from ZAO Arcticneft commenced in July 2008. Crude oil and oil products in stock at 30 June 2008 were 14.6 thousand tons and 25.7 thousand tons in Petrosakh and Arcticneft, respectively, and 12.7 thousand tons and 8.8 thousand tons, respectively, at 31 December 2007.
Note 3: Basis of Presentation
The consolidated interim condensed financial information has been prepared in accordance with International Accounting Standard No. 34, Interim Financial Reporting (“IAS 34”). This consolidated interim condensed financial information should be read in conjunction with the Company consolidated financial statements as of and for the year ended 31 December 2007 prepared in accordance with International Financial Reporting Standards (“IFRS”). The 31 December 2007 consolidated balance sheet data has been derived from the audited financial statements.
Use of estimates. The preparation of consolidated interim condensed financial information in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities as of the reporting date and during the reporting period. Estimates have principally been made in respect to fair values of financial assets and financial liabilities, impairment provisions, asset retirement obligation and deferred income taxes. Actual results may differ from such estimates.
Functional and presentation currency. The United States dollar (“US dollar or US$ or $”) is the presentation currency for the Group’s operations as management have used the US dollar accounts to manage the Group’s financial risks and exposures, and to measure its performance. Financial statements of the Russian subsidiaries are measured in Russian Roubles, their functional currency.
Translation to functional currency. Monetary balance sheet items denominated in foreign currencies have been remeasured using the exchange rate at the respective balance sheet date. Exchange gains and losses resulting from foreign currency translation are included in the determination of profit or loss. The US dollar to Russian Rouble exchange rates were 23.46 and 24.55 as of 30 June 2008 and 31 December 2007, respectively.
Translation to presentation currency. The Group’s financial statements are presented in US dollars in accordance with IAS 21 (revised 2003), The Effects of Changes in Foreign Exchange Rates. The results and financial position of each group entity having a functional currency different from the presentation currency (the functional currency of none of which is a currency of a hyperinflationary economy) are translated into the presentation currency as follows:
(i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet. Goodwill and fair value adjustments arising on the acquisitions are treated as assets and liabilities of the acquired entity.
(ii) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions).
(iii) All resulting exchange differences are recognised as a separate component of equity.
When a subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity, the exchange differences deferred in equity are reclassified to statement of income.
Reclassifications. Certain reclassifications have been reflected in the six months ended 30 June 2007 amounts to conform to this interim condensed consolidated financial information. The table below discloses the amounts before and after reclassification. Management believes that the current presentation is preferable to that presented in prior years.
| | As originally reported | Following reclassification or adjustment |
| | | |
| Cost of purchased crude oil | 34 | 767 |
| Unified production tax | 14,203 | 17,268 |
| Depreciation and depletion | 7,900 | 10,601 |
| Wages and salaries including payroll taxes | 6,614 | 10,962 |
| Materials | 3,165 | 3,697 |
| Other taxes | 1,075 | 1,350 |
| Energy services | 486 | 610 |
| Other | 3,217 | 4,923 |
| Change in finished goods | - | (13,484) |
| | | |
| Total cost of production | 36,694 | 36,694 |
At 31 December 2007, $22,422 thousand of materials and suppliers intended for construction of fixed assets were reclassified from inventories to property, plant and equipment. The reclassifications were made to conform to current year presentation.
| | As originally reported | Following reclassification or adjustment |
| | | |
| Inventories | 43,886 | 21,464 |
| Property, plant and equipment | 518,323 | 540,745 |
Note 4: Going concern
A substantial portion of the Group's consolidated net assets of $813.4 million comprise undeveloped mineral deposits requiring significant additional investment. The Group is dependent upon external debt to fully develop the deposits and realize the value attributed to such assets.
During 2007, the Group attracted $630 million in financing from Sberbank in the form of current borrowings (Note 14). As a result, at 30 June 2008 the Group’s current liabilities exceeded current assets by $649.1 million.According to the Group's borrowing agreements with Sberbank, after the Group meets several technical condition precedents, Sberbank is obliged to extend the maturity of borrowings of $500.0 million by two years from the original maturity and the remaining $130 million loan by 5 years from the original maturity. At the date of this interim condensed consolidated financial information there are two conditions precedent that remain outstanding; the most significant is the need for the Group to sign a loan agreement for an additional $140 million loan from Sberbank for the development of Dulisma. Management is currently negotiating the terms of this agreement with Sberbank. As of the date of preparation of this interim condensed consolidated financial information, Sberbank has not committed to providing this loan.
In addition to obtaining the additional $140 million loan and extending the maturity of the Sberbank borrowings, management intends to meet its investing cash flow needs through cash generated from its producing properties and from proceeds from divestiture of certain non-core assets.
As at the balance sheet date and the date of signing this interim condensed consolidated financial information, there is uncertainty as to whether the $140 million loan will be granted and thus whether the terms of the $130 million and $500 million loans will be extended. Further, due to the deterioration in conditions in the credit markets (see note 16) access to immediate alternative sources of long term funding is problematic. Consequently, there exists a material uncertainty whether the Group can continue as a going concern. Management is currently discussing the receipt and extension of the aforementioned loans. Based on discussions to date, management considers that the application of the going concern assumption is appropriate.
Except as discussed below, the principal accounting policies followed by the Group are consistent with those disclosed in the financial statements for the year ended 31 December 2007.
Certain new standards and interpretations have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2008 or later periods and which the Group has not early adopted.
Beginning 1 January 2008, the Group has adopted the following interpretations:
§ IFRIC 11, IFRS 2 – Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007). IFRIC 11 addresses accounting for certain transactions an entity may enter into to satisfy rights to equity instruments previously granted to employees. Additionally it provides guidance on accounting for rights to equity instruments of a parent company granted for employees of a subsidiary in the subsidiary’s separate financial statements;
§ IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008). IFRIC 12 gives guidance on the accounting by operators for public-to-private service concession arrangements;
§ IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008). IFRIC 14 addresses the measurement of defined benefit plan assets and accounting for an obligation under a minimum funding requirement.
The adoption of these interpretations, if applicable, had an insignificant effect on the Group’s consolidated interim condensed financial information.
Recently, the International Accounting Standards Board published the following new standards and interpretations which have not been early adopted by the Group:
§ IAS 1, Presentation of Financial Statements (revised September 2007; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances;
§ IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). IFRS 8 requires an entity to report financial and descriptive information about its operating segments and specifies how an entity shouldreport such information. The Group is currently assessing what impact the new standard will have on its consolidated financial statements;
§ IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree’s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, goodwill will be measured as the difference at acquisition date between the fair value of any investment in the business held before the acquisition, the consideration transferred and the net assets acquired. Acquisition-related costs will be accounted for separately from the business combination and therefore recognized as expenses rather than included in goodwill. An acquirer will have to recognize at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognized in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. The Group is currently assessing what impact the new standard will have on its consolidated financial statements;
§ Amendment to IAS 32 and IAS 1, Puttable financial instruments and obligations arising on liquidation (effective from 1 January 2009). The amendment requires classification as equity of some financial instruments that meet the definition of a financial liability. The Group is currently assessing what impact the new standard will have on its consolidated financial statements;
§ IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority interests”) even if this results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Group is currently assessing what impact the new standard will have on its consolidated financial statements;
§ Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group is currently assessing what impact the new standard will have on its consolidated financial statements;
§ IAS 23 (Revised), Recognition of Borrowing Costs. The revision removed the option of immediately recognizing as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. The revised standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after 1 January 2009. The Group is currently assessing what impact the new standard will have on its consolidated financial statements;
§ Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments issued in May 2008 consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as noncurrent under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Group is currently assessing what impact the new standard will have on its consolidated financial statements;
§ Amendment to IFRS 1 and IAS 27, Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (revised May 2008; effective for annual periods beginning on or after 1 January 2009). The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognized in profit or loss rather than as a recovery of the investment. The Group is currently assessing what impact the new standard will have on its consolidated financial statements;
§ Amendment to IAS 39, Financial Instruments: Recognition and Measurement. Entities are required to apply the amendment retrospectively for annual periods beginning on or after 1 July 2009, with earlier application permitted. The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The Group is currently assessing what impact the new standard will have on its consolidated financial statements;
§ IFRIC 13, Customer loyalty programmers, effective for annual periods beginning on or after 1 July 2008. The Group is currently assessing what impact the new interpretation will have on its consolidated financial statements;
§ IFRIC 15, Agreements for the construction of real estate, effective for annual periods beginning on or after 1 January 2009. The Group is currently assessing what impact the new interpretation will have on its consolidated financial statements;
§ IFRIC 16, Hedges of a net investment in a foreign operation, effective for annual periods beginning on or after 1 October 2008. The Group is currently assessing what impact the new interpretation will have on its consolidated financial statements.
Note 6: Non-current assets held for sale
As of 31 December 2007, the assets and liabilities related to Dinyu, Michayuneft, Nizhneomrinskaya Neft and CNPSEI have been presented as held for sale following the approval of the Group’s Board of Directors in December 2007 to sell these subsidiaries. In April 2008, the Group completed the sale of Dinyu, Michayuneft and Nizhneomrinskaya Neft for $93.1 million subject to a possible working capital adjustment that management believes will be insignificant. As a result of the sale of Dinyu, Michayuneft and Nizhneomrinsakya Neft the Group recognized a gain of $3.6 million. As part of the sale and purchase agreement, CNPSEI was also included in the list of assets to be disposed; however, this transaction is not complete at the date of this interim condensed consolidated financial information as it is subject to an unfulfilled condition precedent. Management believes that this transaction will be completed during 2008 and therefore, CNPSEI is classified with assets held for sale as of 30 June 2008.
In January 2008 the Group implemented a plan to divest ZAO Chepetskoye NGDU, which is expected to be sold during 2008. Therefore, the Group has also classified Chepetskoye as non-current assets held for sale in this interim condensed consolidated financial information.
Below is a breakdown of assets and liabilities of non-current assets classified as held for sale.
| | 30 June 2008 | 31 December 2007 |
| | | |
| Cash and cash equivalents | 798 | 379 |
| Accounts receivable and prepayments | 932 | 2,166 |
| Current income tax prepayments | 73 | 288 |
| Inventories | 1,313 | 3,313 |
| Property, plant and equipment | 31,643 | 126,052 |
| Intangible assets | 248 | 262 |
| Deferred tax assets | - | 726 |
| Other non-current assets | 130 | 177 |
| Total non-current assets held for sale | 35,137 | 133,363 |
| | | |
| Accounts payable and accrued expenses | 739 | 2,515 |
| Income tax payable | - | 1 |
| Other taxes payable | 1,790 | 3,099 |
| Advances from customers | - | 57 |
| Long-term borrowings | - | 41 |
| Dismantlement provision | 494 | 2,638 |
| Deferred tax liability | 2,929 | 19,126 |
| Total liabilities directly associated with non-current assets classified as held for sale | 5,952 | 27,477 |
Note 7: Equity
Redenomination of shares. Following the adoption of the Euro on 1 January 2008 as the official currency of the Republic of Cyprus, replacing the Cyprus Pound, the Company was obliged to convert its authorised and issued share capital first to Euro and subsequently was permitted to change to any other approved currency. On 22 January 2008 following the Extraordinary General Meeting, the Company converted its shares first into Euro and subsequently into US dollars. As a result of this at 22 January 2008 the authorised share capital was changed to $1,890 thousand divided into 300 million shares of $0.0063 each and the issued share capital was changed to $1,103 thousand divided into 175.1 million shares of $0.0063 each. The effect of this redenomination was to increase share capital by $113 thousand.
At 30 June 2008 authorised share capital was $1,890 thousand divided into 300 million shares of $0.0063 each and issued share capital was $1,122 thousand divided into 178.1 million shares of $0.0063 each.
Shares issued for cash. In January 2008, Morgan Stanley, the Group’s nominated adviser of a private placement in December 2007, executed an option for 5% of overallotment of UEPCL shares in the amount of 1,643,000 shares. Proceeds from the overallotment issuance totalled $5.9 million net of transaction costs of $0.3 million.
| Date of Grant | Number of shares (thousand of shares) | Share capital | Share premium | Difference from conversion of share capital into USD |
| | | | | |
| Balance at 1 January 2007 | 175,120 | 990 | 625,111 | - |
| | | | | |
| Shares issued for cash | 1,643 | 10 | 5,882 | - |
| Shares issued under restricted stock plans | 754 | 5 | (5) | - |
| Early vested shares issued under restricted stock plans | 460 | 3 | (3) | - |
| Shares issued under option agreement | 167 | 1 | 124 | - |
| Share-based payment under restricted stock plans | - | - | 4,297 | - |
| Conversion of share capital into USD | - | 113 | - | (113) |
| | | | | |
| Balance at 30 June 2008 | 178,144 | 1,122 | 635,406 | (113) |
Restricted Stock Plan. In February 2006, the Group’s Board of Directors approved a Restricted Stock Plan (the “Plan”) authorizing the Compensation Committee of the Board of Directors to issue restricted stock of up to five percent of the outstanding shares of the Group. Restricted stock grants entitle the holder to shares of stock for no consideration upon vesting. There are no performance conditions beyond continued employment with the Group. Upon adoption, the Group granted restricted stock awards in the amount of 1,332,355 shares of which during 2007 145,952 shares were forfeitured. Also, of the initially granted in 2007 restricted stock of 3,075,393 shares, 75,275 granted shares were cancelled as a result of retirement of certain employees of the Company.
In March 2008, the Group substantially granted an additional 2,281,677 shares of restricted stock.
The total costs associated with the restricted stock granted during the six months ended 30 June 2008, during the years ended 31 December 2007 and 2006, were $7.9 million, $20.1 million and $5.9 million, respectively, based upon the market value of the Group’s shares on the date of grant. Such amounts are being recognized over the vesting period of the respective awards. During the six months ended 30 June 2008 and 2007, $4.3 million and $6.7 million, respectively, of expense related to share-based payments were recognized in the consolidated statements of income. Such expense for the six months ended 30 June 2007 includes $3.0 million of expense related to restricted stock granted to the Group’s former chief executive officer, who resigned in April 2007. As part of the former chief executive officer’s severance package, all unvested restricted stock grants were immediately vested.
As of 30 June 2008, the number of unvested restricted stock grants and their respective vesting dates are presented in the table below.
| Date of Grant | January 2008 | January 2009 | January 2010 | January 2011 | Total |
| | | | | | |
| Total Restricted Stock Granted as of 31 December 2007 | 753,588 | 798,931 | 715,530 | 45,344 | 2,313,393 |
| | | | | | |
| Restricted Stock Granted in 2008 | - | 760,559 | 760,559 | 760,559 | 2,281,677 |
| Issuance in 2008 | (753,588) | - | - | - | (753,588) |
| Total Restricted Stock Granted as of 30 June 2008 | - | 1,559,490 | 1,476,089 | 805,903 | 3,841,482 |
Share options granted. In September 2005, the Group granted options to purchase 20,000 shares at an exercise price of GBP 2.40 per share to one of its non-executive directors. These options were granted for zero consideration. All of these options remain unexercised. The fair value of this option was evaluated at $7 thousand. The options vest on 30 September 2006, 2007 and 2008 in equal parts and expire on 30 September 2009. No option had been exercised at the date of this interim condensed consolidated financial information.
During 2005, the Group granted a share-based award to one of its officers who is no longer with the Group. Under the award, the officer had the option to purchase a certain number of the Group’s shares at a share price equal to $131.0 million divided by the number of the Group’s shares that are issued and outstanding at both 1 August 2006 and 1 August 2007. The option is in two parts comprised of the number of shares that can be purchased for a payment of $125 thousand on 1 August 2006 and of $125 thousand on 1 August 2007, which are the respective vesting dates of the two parts of the award. The Group estimated the total fair value of the award to be $120 thousand.
During the six months ended 30 June 2008, 167 thousand shares were issued as a result of execution of the award. The option was executed in full in February 2008, when the Group issued 167,000 shares to the former officer. Overall the Group issued 280 thousand shares in accordance with that plan.
Earnings per share. For the six months period ended 30 June 2008 and 30 June 2007, basic and diluted earnings per share and the corresponding weighted average shares outstanding used in each calculation are identical as all potentially dilutive instruments are antidilutive for the periods presented.
Note 8: Revenues
| | Six months ended 30 June: | |
| 2008 | 2007 | |
| Crude oil | | |
| Export sales | 64,267 | 29,769 |
| Domestic sales (Russian Federation) | 37,913 | 18,495 |
| Petroleum (refined) products – domestic sales | 7,639 | 8,313 |
| Trading commission | 190 | - |
| Other sales | 740 | 345 |
| Total gross revenues | 110,749 | 56,922 |
Note 9: Cost of Production
| | | Six months ended 30 June: | |
| | | 2008 | 2007 |
| Cost of purchased crude oil | | 28,650 | 767 |
| Unified production tax | | 25,298 | 17,268 |
| Depreciation and depletion | | 11,144 | 10,601 |
| Wages and salaries including payroll taxes | | 12,737 | 10,962 |
| Materials | | 3,226 | 3,697 |
| Other taxes | | 1,632 | 1,350 |
| Energy services | | 734 | 610 |
| Other | | 6,526 | 4,923 |
| Change in finished goods | | (19,746) | (13,484) |
| | | | |
| Total cost of production | | 70,201 | 36,694 |
Note 10: Selling, General and Administrative Expenses
| | | Six months ended 30 June: | |
| | | 2008 | 2007 |
| Wages and salaries | | 7,707 | 13,362 |
| Share-based payments | | 4,297 | 6,695 |
| Audit and professional consultancy fees | | 3,229 | 3,114 |
| Transport, loading and storage services | | 2,673 | 3,057 |
| Office rent and other expenses | | 1,243 | 1,566 |
| Trip expenses and communication services | | 849 | 364 |
| Other | | 3,507 | 1,752 |
| | | | |
| Total selling, general and administrative expenses | | 23,505 | 29,910 |
Included within wages and salaries and share-based payments for the six months ended 30 June 2007 are $5.3 million and $2.5 million, respectively, related to severance costs for a key executive (Note 15). There were no such expenses incurred during the six months ended 30 June 2008.
Note 11: Financial derivatives and financial instruments
| | 30 June 2008 | 31 December 2007 |
| | | |
| Non-current assets | | |
| Financial derivatives | - | 5,103 |
| | | |
| Current liabilities | | |
| Financial instruments | 96,200 | 118,657 |
| Warrants classified as liabilities | 644 | 1,326 |
As part of acquisition of Taas, which was completed in December 2007 the Company also acquired a call option from the Taas sellers and wrote a put option to an affiliate of the Ashmore Investment Management Limited (“Ashmore”) a Taas shareholder, for additional interests in Taas of 4.182% and 10.479%, respectively. The call option to acquire the additional 4.182% of Taas is exercisable by the Company in January 2009, with a strike price of $70.0 million, plus 11.95% per annum from the Taas closing date to the date of payment of the call option price, payable in cash. The put option is exercisable by the Ashmore affiliate over the period from December 2008 to December 2012. It provides the Ashmore affiliate with a right to sell a 10.479% stake in Taas to the Company either: 1) for cash consideration of $175.0 million plus interest accrued at 14% until the exercise date, or, 2) at the holder’s discretion, the number of shares of Urals Energy equal to $83.5 million plus 14% interest for the 15 day trading period immediately following the Taas deal announcement in November 2007 (the “Valuation Period”), such shares to be valued at an average of the closing mid-market prices for the Valuation Period; plus a cash amount that is equal to the exercise date value of the number of Urals Energy shares that are determined as having been equal to $91.5 million plus 14% interest for the Valuation Period, again valued at an average of the closing mid-market prices for the Valuation Period.
The fair values of the call and put options as at the valuation date of 31 December 2007 were estimated at $5.1 million and $118.7 million, respectively, based on the equity value derived from the long-term discounted cash flows model by applying certain parameters attributable to analogous to Taas since the shares of Taas are not traded on the market.
For the purposes of this interim condensed consolidated financial information the Group has reviewed the long-term model of discounted cash flows to asses the change in Taas equity value and revalue the financial instruments as required by IFRS. As a result of changes in macroeconomic parameters, primarily long-term oil price forecast, the equity value of Taas has increased.
This change resulted in a decrease of the put option value classified as financial instrument in this interim condensed consolidated financial information from $118.7 million to $96.2 million as of 31 December 2007 and 30 June 2008, respectively. With respect to the call option, management has not assigned any value to this financial derivative, as the Group is not planning to exercise this option but rather plans to use funds available to the Group for value creation through the ongoing development of the Dulisma oil field. Furthermore, given current market conditions, the Group’s ability to sell this option to a third party prior to its expiration in January 2009 is uncertain. Therefore, for the purposes of this interim condensed consolidated financial information, management have discounted the value of the call option to nil, from $5.1 million as of 31 December 2007, and recognised a loss on the revaluation of the financial derivative in the statement of income. The write down does not result in any loss of cash-flow for the Group.
The net change in these financial instruments value, as well as change in the value of the Warrants classified as liabilities, amounted to $18.0 million, which is recorded as a gain from changes in the fair value of financial derivatives in the statement of income.
Note 12: Loans receivable from joint venture
Pursuant to the Sberbank acquisition loan (Note 14), the Group provided long-term financing in the amount of $28.6 million to Taas (Note 15). The loans are unsecured, bear interest of 12% and mature in February 2015. These loans were part of the shareholders agreement and were provided by all shareholders in the proportion to holdings at the date of the transaction. These funds were used for the purchase of promissory notes, payment for loan organization fees, repayment of other pre-existing loans and financing of development activity. As of 30 June 2008 all loans granted are fully performing. The fair value of the loans approximates the carrying amount of the loans at the balance sheet dates.
Note 13: Advances from customers
| | | |
| 30 June 2008 | 31 December 2007 | |
| Petraco | 46,804 | 32,011 |
| Galaform | 7,480 | 22,407 |
| Other | 97 | 761 |
| Total advances from customers | 54,381 | 55,179 |
Petraco Revolving Prepayment Agreement. In July 2007, the Group entered into a five year revolving prepayment agreement with Petraco. Under the terms of the agreement, prepayments shall be made in one or more advances against specified future deliveries of agreed volumes of crude oil to be sold to Petraco. The total aggregate amount of all prepayments outstanding at any given time shall not exceed 70% of the estimated value of the aggregate estimated deliveries under the off-take contract for the next succeeding eight month period or a maximum $50.0 million. Each individual prepayment advance must be reimbursed by the specified future deliveries which must occur within eight months from the date of the relevant advance. All prepayment amounts outstanding as of 1 January 2009 shall be reimbursed in full before any additional prepayments may be requested or made, provided that following the full reimbursement of such outstanding prepayments, additional prepayments may be requested and made thereafter through to the expiration of the agreement in July 2012. The agreement does not have any financial covenants but does contain cross-default provisions in the event the Group is in default of any of its other borrowing agreements. Interest on the prepayments accrues at LIBOR plus 4.75% on prepayments for which the related volumes have not been delivered, and LIBOR plus 1% on prepayments for which the related volumes have been delivered, in order to mirror normal commercial payment terms. Subsequent to the year-end the maximum borrowing base was increased to $60.0 million, the period of the deliveries was reduced to six months and the interest rate was increased by 25 basis points and amounted to LIBOR plus 5%.
An additional drawdown of $10.0 million from Petraco was received in April 2008.
Galaform domestic crude oil prepayment agreement. In November 2007, the Group received an interest free prepayment from a domestic off-taker, Galaform, for the amount of RR 550.0 million ($22.4 million). The prepayment was secured with the domestic crude oil deliveries from the resources of Dinyu, CNPSEI, Michayuneft, Nizhneomrinskaya Neft and Chepetskoye NGDU and remains secured with domestic crude oil deliveries from CNPSEI and Chepetskoye NGDU. The prepayment is due to be settled starting from November 2008 and should be fully repaid in April 2009.
Following the sale of three of the five properties, the Group repaid to Galaform RR 374.6 million ($14.9 million) of prepayments for crude oil deliveries outstanding at 31 December 2007 thus reducing the balance down to RR 175.4 million ($7.5 million).
Note 14: Borrowings
Short-term borrowings. Short-term borrowings were as follows at 30 June 2008 and 31 December 2007:
| | 30 June 2008 | 31 December 2007 |
| Sberbank acquisition loan | 500,000 | 500,000 |
| - loan organization fees | (5,183) | (14,678) |
| Sberbank field development loan | 130,000 | 130,000 |
| - loan organization fees | (504) | (1,415) |
| Other | 127 | 124 |
| Total short-term borrowings | 624,440 | 614,031 |
Sberbank acquisition loan. In December 2007, the Group entered into a loan agreement with the Savings Bank of the Russian Federation (“Sberbank”) in the amount of $500.0 million to finance the acquisition of its participation interest in Taas. The loan bears interest of 14% per annum payable monthly. The interest payments are secured with interest bearing promissory notes acquired from Sberbank that will be redeemed as payment for interest. According to the loan agreement, the loan matures in November 2008. However, if the Group meets certain technical conditions, the loan can be extended until November 2010, repayable in full in one installment. The Group incurred loan organisation fees of $6.250 million (or 1.25% of the loan amount), which are recorded net against the loan balance in the consolidated balance sheet and which are being amortised over the life of the loan using the effective interest method. The Group will be subject to a 3.9% penalty for any early repayments of the loan.
Additionally, the Group contracted to pay $10.0 million in fees to Ashmore in exchange for a pledge of 10.5% of Ashmore’s share in Taas to Sberbank in support of the Group’s acquisition loan. The payment was rendered in 2008. The Group also pledged its stakes in Petrosakh and Arcticneft to Ashmore to secure the obligations of the Group under the put option described in Note 11, to protect against a default under the Sberbank $500 million acquisition loan due to Ashmore’s pledge of its stake in Taas to secure such acquisition loan and to protect against other material adverse events affecting the Group. The Group may secure the release of the pledge over Articneft and Petrosakh in favour of Ashmore by either securing the release of Ashmore’s pledge of its shares in Taas that secure the acquisition loan or by paying Ashmore the amount called for under the put option agreement..
The Group guaranteed its obligations under the Sberbank loan by pledging its interest in Taas. Additionally, other shareholders of Taas and of the Group have pledged a portion of their shares in Taas and in UEPCL as collateral for the Group’s obligations under the loan.
Also, according to the loan agreement the Group has to secure interest payment for the next year by Sberbank promissory notes, which should be acquired by the Group and pledged in the deposit with Sberbank. In November 2007 the Group acquired $70.0 million of promissory of which $5.8 million were released in December 2007 and $35.0 million through the period from January to June 2008 to make a repayment of interest on due dates. The outstanding promissory notes receivable was $30.2 million as at 30 June 2008 which included $29.2 million of principal amount of promissory notes and $1.0 million of interest receivable. The promissory notes are considered to be fully performing as of the date of this interim condensed consolidated financial information.
Sberbank Dulisma field development loan. In November 2007, the Group entered into a loan agreement with Sberbank in the amount of $130.0 million bearing interest of 14% per annum payable quarterly and maturing in November 2008. The Group incurred loan organization fees of $1.625 million (1.25% of the facility amount) which are recorded net against the loan balance in the consolidated balance sheet and which are being amortised over the life of the loan using the effective interest method. If the Group meets certain technical conditions, the loan can be extended for six years with 15 equal quarterly principal installments payable starting May 2010.
The Group pledged 100% of its shares in Dulisma as collateral for its obligations under the loan. Additionally, major shareholders of the Group agreed to pledge UEPCL shares to Sberbank as additional collateral.
On 16 September 2008 the Group received a notification from Sberbank that the market value of UEPCL shares pledged as collateral for the Dulisma field development loan and the Taas acquisition loan had fallen below the threshold established in the loan agreement. Sberbank has requested additional UEPCL shares be pledged to make up for the shortfall. Management are currently negotiating the matter with Sberbank and are confident a resolution can be reached with no adverse impact to the Group.
Management believes that the Group was in compliance with all covenants in the existing loan agreements as of the date of this interim condensed consolidated financial information.
Evrofinance Mosnarbank. In February 2008 the Group borrowed $18.0 million from the Evrofinance Mosnarbank to fulfil its obligation to make a loan to Taas in the amount of $18.0 million in accordance with the Joint-venture agreement connected to the acquisition. The loan bore 12% interest and was to mature in August 2008. In May 2008, the loan was repaid in full.
Weighted average interest rate. The Group’s weighted average interest rates on short-term borrowings were 14.0%and 12.1% for the six months ended 30 June 2008 and 2007, respectively.
Interest expense and income. Interest expense and income for the six months ended 30 June 2008 and 2007 comprised the following:
| | Six months ended 30 June: | |
| | 2008 | 2007 |
| | | |
| Short-term borrowings | | |
| Sberbank | | |
| - interest at coupon rate | 43,666 | - |
| - accretion of issuance costs | 10,649 | - |
| Other short-term borrowings | - | 56 |
| Evrofinance | | |
| - interest at coupon rate | 408 | - |
| | | |
| Total interest expense associated with short-term borrowings | 54,723 | 56 |
| | | |
| Long-term borrowings | | |
| BNP Paribas Subordinated Loan | | |
| - interest at coupon rate | - | 628 |
| - commitments and break up cost | - | 26 |
| - accretion of issuance costs and discount associated with warrants | - | 1,694 |
| | | |
| BNP Paribas Reserve Based Loan Facility | | |
| - interest at coupon rate | - | 2,176 |
| - commitments | - | 348 |
| - accretion of issuance costs | - | 2,127 |
| | | |
| Goldman Sachs | | |
| - interest at coupon rate | - | 5,567 |
| - accretion of issuance costs | - | 457 |
| | | |
| Total interest expense associated with long-term borrowings | - | 13,023 |
| | | |
| Finance leases | 128 | 136 |
| Less capitalised borrowing costs | (2,367) | (1,267) |
| Change in dismantlement provision due to passage of time | 73 | 218 |
| Interest on advance from Petraco Oil Company Limited | 2,803 | 316 |
| Other interest | 54 | 49 |
| Total interest expense | 55,414 | 12,531 |
| | | |
| Interest income | | |
| JP Morgan Liquidity Fund | - | (76) |
| Related party loans issued (Note 15) | (1,642) | (67) |
| Sberbank promissory notes | (1,384) | - |
| Bank deposit | (41) | (1,307) |
| Other | (102) | - |
| Total interest income | (3,169) | (1,450) |
| Total finance costs | 52,245 | 11,081 |
Note 15: Balances and Transactions with Related Parties
For the purposes of this interim condensed consolidated financial information, parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24, Related Party Disclosures, which also treats key management personnel as related parties. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Balances and transactions with related parties.
| | Six months ended 30 June: | |
| 2008 | 2007 | |
| Interest income from Taas, net | (1,294) | (3) |
| Interest income, net | (348) | (64) |
| Rental fees paid | 35 | - |
| | | |
| | As of: | |
| | 30 June 2008 | 31 December 2007 |
| Loans issued to Taas | 28,573 | 2,261 |
| Interest receivable from Taas | 1,296 | 3 |
| Loans receivable | 5,554 | 5,372 |
| Interest receivable | 695 | 347 |
| Accounts and notes receivable | 59 | 48 |
| | | |
| Advances from and payables to related parties | (74) | (113) |
| | | |
| | | |
Accounts receivable and accounts payable. The Group purchases certain geological and other technical services from and leases office space to companies owned by directors and management. The resulting accounts receivable and payable balances are unsecured and are expected to be settled in cash or, in the case of accounts receivable, by the provision of services.
Loans and interest receivable. Included in loans and interest receivable at 30 June 2008 and 31 December 2007 were loans receivable of $4,377 thousand and $3,793 thousand, respectively from the Group’s senior management team. Subsequent to 30 June 2008 of the $4,377 thousand, $305 thousand of principal and interest was repaid.
Within loans receivable the largest part relates to a short-term loan provided to one of the senior managers of the company in the amount of $4,022 thousand, including accrued interest of $292 thousand. The loan bears 15% interest and matures on 30 September 2008. The loan is secured against real estate owned by that employee.
Additionally, loans receivable include amounts due by OOO Komineftegeophysica in the amount of $866 thousand, where major shareholders of the Group hold the majority of shares. The loans bear interest from 5% to 15%. These loans are not secured, however, in the ordinary course of business and on market terms Komineftegeophysica provides geological and geophysical services to the Group companies.
Other loans and receivable balances are short-term in the nature, immaterial individually and expire during 2008.
Compensation to senior management. The Group’s senior management team comprises 14 people whose compensation totalled $7,833 thousand and $16,049 thousand for the six months periods ended 30 June2008 and 2007, respectively, including salary and bonuses of $3,536 thousand and $9,374 thousand respectively, and stock compensation of $4,297 thousand and $6,675 thousand, respectively, and no other compensation was paid for both periods.
Resignation of key executive. In April 2007, one of the Group’s key executives resigned. In connection with his resignation, the executive received termination benefits totalling approximately $7.8 million, comprising approximately $2.5 million of expense associated with accelerating the vesting of 430,140 shares of restricted stock originally scheduled to vest between 2007 and 2010 and termination payments and other miscellaneous cash benefits totalling approximately $5.3 million.
The expenses associated with accelerated vesting and the other miscellaneous cash benefits were recorded within share-based payments and wages and salaries in selling, general and administrative expenses in the interim condensed consolidated financial information (Note 10).
There were no such expenses incurred during six months ended 30 June 2008.
Note 16: Contingencies, Commitments and Operating Risks
Operating environment. The Russian Federation continues to display some characteristics of an emerging market economy. These characteristics include, but are not limited to, the existence of a currency that is not yet fully convertible in most countries outside of the Russian Federation, and relatively high inflation. The tax and customs legislation within the Russian Federation is subject to varying interpretations and changes that can occur frequently.
The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments.
Sales and royalty commitments. In accordance with the sale and purchase agreement to acquire Petrosakh, the Group agreed to pay a perpetual royalty to the previous shareholders of $0.25 per ton of crude oil produced from the currently unproved off-shore licensed area. There has been no production from the area since acquisition date.
Oilfield licenses. The Group is subject to periodic reviews of its activities by governmental authorities with respect to the requirements of its oil field licenses. Management of the Group correspond with governmental authorities to agree on remedial actions, if necessary, to resolve any findings resulting from these reviews. Failure to comply with the terms of a license could result in fines, penalties or license limitations, suspension or revocations. Management believes any issues of non-compliance will be resolved through negotiations or corrective actions without any materially adverse effect on the financial position or the operating results of the Group.
Management believes that proved reserves should include quantities, which are expected to be produced after the expiry dates of the Group’s production licenses. These licenses expire between 2008 and 2067, with the most significant licenses expiring between 2012 and 2067.
The principal licenses of the Group and their expiry dates are:
| Field | License holder | License expiry date |
| | | |
| Okruzhnoye | Petrosakh | 2012 |
| Peschanozerskoye | Arcticneft | 2067 |
| Dulisminskoye | Dulisma | 2019 |
| Srednebotuobinskoye | Taas-Yuryakh Neftegazdobycha | 2016 |
| Kurungsky | Taas-Yuryakh Neftegazdobycha | 2032 |
| | | |
Management believes the licenses may be extended at the initiative of the Company and management intends to extend such licenses for properties expected to produce subsequent to their license expiry dates.
Management currently does not believe that any of its significant exploration or production licenses are at risk of being withdrawn by the licensing authorities. Additionally, management currently plans to complete all the required exploration or development work, as appropriate, within the timetables established in the licenses.
Taxation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.
Management believes that its interpretation of the relevant legislation is appropriate and the Group's tax, currency and customs positions will be sustained. Where management believes it is probable that a position cannot be sustained, an appropriate amount has been accrued for in this interim condensed consolidated financial information.
Insurance policies. The Group insured all of its major assets, including oil in stock, plant and equipment, transport and machinery with a total limit of $110.1 million. Also, a liability insurance policy, covering property, plant and equipment, hazardous objects, including environmental liability, was put in place with a total limit of $10.5 million and directors and officers liability with total limit up to $100.0 million. Staff and personal insurance includes casualty, medical and travel insurance for losses of up to $4.3 million. The associated expenses are included within selling, general and administrative expenses in the condensed consolidated statement of income.
Restoration, rehabilitation and environmental costs. The Group companies have operated in the upstream and refining oil industry in the Russian Federation for many years and its activities have had an impact on the environment. The enforcement of environmental regulations in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligation related thereto. The outcome of environmental liabilities under proposed or future legislation, or as a result of stricter enforcement of existing legislation, cannot reasonably be estimated at present, but could be material. Under the current levels of enforcement of existing legislation, management believes there are no significant liabilities in addition to amounts which are already accrued and which would have a material adverse effect on the financial position of the Group.
Legal proceedings. The Group is involved in a number of court proceedings (both as a plaintiff and a defendant) arising in the ordinary course of business. In the opinion of management, there are no current legal proceedings or other claims outstanding, which could have a material effect on the result of operations or financial position of the Group and which have not been accrued or disclosed in this interim condensed consolidated financial information.
Recent volatility in global financial markets. Since the second half of 2007 there has been a sharp rise in foreclosures in the US subprime mortgage market. The effects have spread beyond the US housing market as global investors have re-evaluated their exposure to risks, resulting in increased volatility and lower liquidity in the fixed income, equity, and derivative markets. The volume of wholesale financing has significantly reduced since August 2007. Such circumstances may affect the ability of the Group to obtain new borrowings and refinance its existing borrowings at terms and conditions that applied to similar transactions in recent periods. Debtors of the Group may also be affected by the lower liquidity situation which could in turn impact their ability to repay their amounts owed. Management is unable to reliably estimate the effects on the Group's financial position of any further possible deterioration in the liquidity of the financial markets and their increased volatility.
Other capital commitments. At 30 June 2008, the Company had no significant contractual commitments for capital expenditures.
Note 17: Financial Risks
The accounting policies for financial instruments have been applied to the line items below:
| | | |
| | At 30 June 2008 | At 31 December2007 |
| Financial assets | | |
| | | |
| Investments held-to-maturity: current assets | | |
| Promissory notes | 30,238 | 64,581 |
| Total investments held-to-maturity | 30,238 | 64,581 |
| | | |
| Loans and receivables: current assets | | |
| Cash and cash equivalents | 22,504 | 28,400 |
| Trade receivables | 10,340 | 8,846 |
| Total loans and receivables: current assets | 32,844 | 37,246 |
| | | |
| Measured at fair value – non-current assets | | |
| Financial derivatives | - | 5,103 |
| Total non-current assets measured at fair value | - | 5,103 |
| | | |
| Loans and receivables: non-current assets | | |
| Loans receivable: non-current | 29,869 | 2,264 |
| Total loans and receivables | 29,869 | 2,264 |
| | | |
| Financial liabilities | | |
| | | |
| Measured at fair value – current liabilities | | |
| Derivative financial instruments | 96,200 | 118,657 |
| Warrants classified as liabilities | 644 | 1,326 |
| Total current liabilities measured at fair value | 96,844 | 119,983 |
| | | |
| Measured at amortized cost: current liabilities | | |
| Trade and other payables | 28,552 | 22,362 |
| Short-term borrowings and current portion of long-term borrowings | 624,440 | 614,031 |
| Total current liabilities measured at amortized cost | 652,992 | 636,393 |
| | | |
| Measured at amortized cost: non-current liabilities | | |
| Long-term borrowings | - | 29 |
| Total long-term liabilities measured at amortized cost | - | 29 |
| | | |
Financial risk management objectives and policies. In the ordinary course of business, the Group is exposed to market risks from fluctuating prices on commodities purchased and sold, credit risk, liquidity risk, currency exchange rates and interest rates. Depending on the degree of price volatility, such fluctuations in market price may create volatility in the Group’s financial results. As an entity focused upon the exploration and development of oil and gas properties, the Group’s overriding strategy is to maintain a strong financial position by securing access to capital to meet its capital investment needs.
The Group’s principal risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to these limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities.
Market risk. Market risk is the risk that changes in market prices and rates, such as foreign exchange rates, interest rates, commodity prices and equity prices, will affect the Group’s financial results or the value of its holdings of financial instruments. The primary objective of mitigating these market risks is to manage and control market risk exposures. The Group is exposed to market price movements relating to changes in commodity prices such as crude oil, gas condensate, petroleum products and natural gas (commodity price risk), foreign currency exchange rates, interest rates, equity prices and other indices that could adversely affect the value of the Group’s financial assets, liabilities or expected future cash flows.
(a) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from various exposures in the normal course of business, primarily with respect to the US dollar. Foreign exchange risk arises primarily from commercial transactions, and recognized assets and liabilities when such transactions, assets and liabilities are denominated in a currency other than the functional currency.
The Group’s overall strategy is to have no significant net exposure in currencies other than the Russian rouble or the US dollar.
The carrying amounts of the Group’s financial instruments are denominated in the following currencies (all amounts expressed in thousands of US dollars at the appropriate 30 June 2008 and 31 December 2007 exchange rates):
| At 30 June 2008 | Russian rouble | US dollar | GB pound | Euro | CY pound | Total | |
| | | | | | | | |
| Financial assets | | | | | | | |
| | | | | | | | |
| Non-current | | | | | | | |
| Loans receivable | - | 29,869 | - | - | - | 29,869 | |
| | | | | | | | |
| Current | | | | | | | |
| Cash and cash equivalents | 7,703 | 14,730 | 65 | 6 | - | 22,504 | |
| Accounts receivable | 4,030 | 6,310 | - | - | - | 10,340 | |
| Promissory notes | - | 30,238 | - | - | - | 30,238 | |
| | | | | | | | |
| Financial liabilities | | | | | | | |
| | | | | | | | |
| Current | | | | | | | |
| Accounts payable and accrued expenses | (14,932) | (13,620) | - | - | - | (28,552) | |
| Financial derivatives | - | (96,200) | - | - | - | (96,200) | |
| Short-term borrowings and current portion of long-term borrowings | (66) | (624,374) | - | - | - | (624,440) | |
| Warrants classified as liabilities | - | - | (644) | - | - | (644) | |
| Net exposure at 30 June 2008 | (3,265) | (653,047) | (579) | 6 | - | (656,885) | |
| At 31 December 2007 | Russian rouble | US dollar | GB pound | Euro | CY pound | Total |
| | | | | | | |
| Financial assets | | | | | | |
| | | | | | | |
| Non-current | | | | | | |
| Financial derivatives | - | 5,103 | - | - | - | 5,103 |
| Loans receivable | - | 2,264 | - | - | - | 2,264 |
| | | | | | | |
| Current | | | | | | |
| Cash and cash equivalents | 2,968 | 5,414 | 17,948 | 2,064 | 6 | 28,400 |
| Accounts receivable | 3,079 | 5,767 | - | - | - | 8,846 |
| Promissory notes | - | 64,581 | - | - | - | 64,581 |
| | | | | | | |
| Financial liabilities | | | | | | |
| | | | | | | |
| Non-current | | | | | | |
| Long-term borrowings | - | - | (29) | - | - | (29) |
| | | | | | | |
| Current | | | | | | |
| Accounts payable and accrued expenses | (3,169) | (19,193) | - | - | - | (22,362) |
| Derivative financial instruments | - | (118,657) | - | - | - | (118,657) |
| Short-term borrowings and current portion of long-term borrowings | (63) | (613,968) | - | - | - | (614,031) |
| Warrants classified as liabilities | - | - | (1,326) | - | - | (1,326) |
| Net exposure at 31 December 2007 | 2,815 | (668,689) | 16,593 | 2,064 | 6 | (647,211) |
(b) Commodity price risk
The Group’s overall commercial trading strategy in crude oil and related products is centrally managed. Changes in commodity prices could negatively or positively affect the Group’s results of operations.
The Group sells all its crude oil and petroleum products under spot contracts. Crude oil sold internationally is based on benchmark reference crude oil prices of Brent dated, plus or minus a discount for quality and on a transaction-by-transaction basis for volumes sold domestically. As a result, the Group’s revenues from the sales of liquid hydrocarbons are subject to commodity price volatility based on fluctuations or changes in the crude oil benchmark reference prices. Presently, the Group does not use commodity derivative instruments for trading purposes to mitigate price volatility.
(c) Cash flow and fair value interest rate risk
The Group is not significantly exposed to cash flow and fair value interest rate risk on its financial liabilities as most of its financial liabilities bear fixed rates of interest. However, changes in market interest rates impact the fair values of fixed rate financial liabilities or future cash flows in the case of variable financial liabilities. Management does not have a formal policy on the proportion of the Group’s exposure to interest rate risk on its financial liabilities.
At 30 June 2008 and 31 December 2007, the Group’s interest rate profiles for interest-bearing financial liabilities were:
| | 30 June 2008 | At 31 December 2007 |
| At variable rate | - | - |
| At fixed rate | 624,440 | 614,060 |
| Total interest bearing financial liabilities | 624,440 | 614,060 |
To the degree possible, the Group centralizes the cash requirements and surpluses of controlled subsidiaries and the majority of their external financing requirements, and applies, on its consolidated net debt position, a funding policy to optimize its financing costs and manage the impact of interest-rate changes on its financial results in line with market conditions.
Credit risk. Credit risk refers to the risk exposure that a potential financial loss to the Group may occur if a counterparty defaults on its contractual obligations.
Credit risk is managed on a Group level and arises from cash and cash equivalents, including short-term deposits with banks, promissory notes, loans issued as well as credit exposures to customers, including outstanding trade receivables and committed transactions. Cash and cash equivalents are deposited only with banks that are considered by the Group at the time of deposit to minimal risk of default.
The Group’s domestic trade and other receivables consist of a large number of customers, spread across diverse industries and geographical areas. All of the Group’s export crude oil sales are made to the only customer Petraco, with whom the Group was trading for the past several years (see Note 13). A majority of domestic sales of petroleum products are made on a prepayment basis. Although the Group does not require collateral in respect of trade and other receivables, it has developed standard credit payment terms and constantly monitors the status of trade receivables and the creditworthiness of the customers. The maximum exposure to credit risk is represented by the carrying amount of each financial asset exposed to credit risk.
Liquidity risk. Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. In managing its liquidity risk, management aims to maintain adequate cash reserves and debt facilities, continuously monitoring forecast and actual cash flows and striving to balance cash from operations with the maturity profiles of financial assets and liabilities.
The Group prepares various financial plans (monthly, quarterly and annually) to ensure that the Group has sufficient cash on demand to meet expected operational expenses, financial obligations and investing requirements for a period of 30 days or more. The Group has a number of short term facilities that may be converted into long term debt at the Group's discretion after the completion of certain technical condition precedents. The conversion of these loans is in accordance with existing loan agreements - this matter is discussed further in Note 4. Additionally, the Group may consider selling some of the non-core assets or issue additional equity to fund future development or acquisitions.
The following tables summarize the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments, including interest payments:
| At 30 June 2008: | Less than 1 year | Between 1 and 2 years | Between 2 and 5 years | After 5 years | Total |
| | | | | | |
| Debt at fixed rate | | | | | |
| Principal | 630,127 | - | - | - | 630,127 |
| Interest | 727 | - | - | - | 727 |
| | | | | | |
| Warrants classified as liability | 644 | - | - | - | 644 |
| Financial instruments | 96,200 | - | - | - | 96,200 |
| Accounts payable and accrued expenses | 27,825 | - | - | - | 27,825 |
| Total financial liabilities | 755,523 | - | - | - | 755,523 |
| At 31 December 2007 | Less than 1 year | Between 1 and 2 years | Between 2 and 5 years | After 5 years | Total |
| | | | | | |
| Debt at fixed rate | | | | | |
| Principal | 630,124 | 29 | - | - | 630,153 |
| Interest | 967 | - | - | - | 967 |
| | | | | | |
| Warrants classified as liability | 1,326 | - | - | - | 1,326 |
| Financial instruments | 118,657 | - | - | - | 118,657 |
| Accounts payable and accrued expenses | 21,395 | - | - | - | 21,395 |
| Total financial liabilities | 772,469 | 29 | - | - | 772,498 |
Capital management. The primary objectives of the Group’s capital management policy is to ensure a strong capital base to fund and sustain its business operations through prudent investment decisions and to maintain investor, market and creditor confidence to support its business activities.
For the capital management, the Group manages and monitors its liquidity on a corporate-wide basis to ensure adequate funding to sufficiently meet group operational requirements. The Group controls all external debts at the Parent level, and all financing to Group entities for the operating and investing activity is facilitated through inter-company loan arrangements, except for the specific project financing, which are taken on the subsidiary level.
There were no changes to the Group’s approach to capital management during the reporting period.
This information is provided by RNS
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