ZOL.L Regulatory News (ZOL)

Embargoed: 0700hrs, 26 September 2017

Zoltav Resources Inc.

("Zoltav" or the "Company")

Half Year Report for the Six Months Ended 30 June 2017

Zoltav (AIM: ZOL), the Russia-focused oil and gas exploration and production company, announces results for the six months ended 30 June 2017. The full report is available to download from the Investor Relations section of the Company's website at www.zoltav.com.

Financial Highlights

· Zoltav delivered a 33% increase in net profits to RUB 69 million (USD 1.19 million) (H1 2016: RUB 52 million or USD 0.74 million) 

· Revenue decreased by 8% to RUB 924 million (USD 15.98 million) (H1 2016: RUB 1,003 million or USD 14.28 million), due to a 10% decline in daily production

· Operating profit decreased by 12% to RUB 202 million (USD 3.49 million) (2016: RUB 230 million or USD 3.28 million) 

· EBITDA was broadly maintained at RUB 420 million (USD 7.26 million) (H1 2016: RUB 430 million or USD 6.12 million)

o Cost efficiencies helped improve the EBITDA margin by 2% to 45% of revenue

· Reduced borrowing by a further RUB 150 million (USD 2.59 million) of the principal amount (RUB 1,860 million or USD 30.66 at 31 December 2016) - in line with all covenants

· Total cash at period end was RUB 348 million (USD 5.89 million) (at 31 December 2016: RUB 294 million or USD 4.85 million)

Operational Highlights - Bortovoy Licence

· Western Gas Plant produced an average of 7,480 boe/d (1,021 toe/d) (H1 2016: 8,270 boe/d (1,128 toe/d))

o 10% decline in production as a result of the underperformance of Karpenskoye Well 117 and Zhdanovskoye Well 108

o Drilling programme for Western Fields reviewed and plans implemented to restore Western Gas Plant to full capacity by year end

o Plans include drilling of sidetracks from existing well stock, with first two sidetracks expected to be operational by year end

· Company focused on further increasing efficiency at the Western Gas Plant to partially offset the negative impact from Wells 117 and 108

o Eliminated necessity for two planned plant shutdowns which occurred in H1 2016

o Implemented zero-based budgeting programme resulting in a further 30% reduction in expenses

· Interpretation of 3D seismic data acquired over the Devonian structure in the North Mokrousovskoye field expected to be completed by March 2018

Operational Highlights - Koltogor Licences

· Company considering options for the commercialisation of the Koltogor Licences including potential partnerships

Corporate Highlights

· Lea Verny, previously Independent Non-executive Director, replaced Marcus Rhodes as Independent Non-executive Chairman on 22 March 2017

· Eduard Sleyn appointed as Group CEO (non-board position) on 15 May 2017

· Kirill Suetov appointed as Group Director of Finance (now CFO) (non-board position) on 1 January 2017

Lea Verny, Independent Non-executive Chairman, commented:

"Zoltav's operational priorities remain that of using the Western Gas Plant at Bortovoy to its full capacity - to which it is expected to return by the end of 2017 - as well as driving EBITDA and operating cash flow through operational efficiencies. That the Company was able to achieve a materially improved net profit in the first half, despite reduced production levels, is an encouraging signal of what can be achieved when production is normalised by the end of the year.

In the longer term, Zoltav believes there is substantial potential for the development of the deeper, Devonian structures at Bortovoy. Interpretation of 3D seismic data acquired over the Devonian structure in the North Mokrousovskoye field is ongoing and expected to be completed by March 2018."

Note:

- USD:RUB conversions for H1 2017 at a rate of 1:59.0855 (based on 30 June 2017 exchange rate) and 1:57.8366 (average for H1 2017)

- USD:RUB conversions for H1 2016 at a rate of 1:64.2575 (based on 30 June 2016 exchange rate) and 1:70.2282 (average for H1 2016)

- USD:RUB conversions for 31 December 2016 at a rate of 1:60.6569 (based on 31 December 2016 exchange rate)

Market Abuse Regulation (MAR) Disclosure

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement.

Contacts:

About Zoltav

Zoltav is an oil and gas exploration and production company focused on Russia.

Zoltav holds the Bortovoy Licence in the Saratov region of South Western Russia, a 3,215 square kilometre area along the northern margin of the Pre-Caspian basin, one of the largest hydrocarbon basins in the CIS.

The Bortovoy Licence contains a number of productive gas fields, a processing plant and significant exploration prospectivity. It holds Proved plus Probable reserves of 750 bcf (21.3 bcm) of gas and 3.8 mmbbls (484 mT) of oil and condensate. In 2016, the Bortovoy Licence produced approximately 3.3 mmboe (450 mToe).

Zoltav also holds the Koltogor E&P Licence, a 528 square kilometre area in the Khantiy-Mansisk Autonomous Okrug of Western Siberia, one of Russian's most prolific oil producing regions. The Koltogor E&P Licence contains the Koltogor oil field with Proved plus Probable reserves of 79.2 mmboe (10.8 mToe). Additionally, Zoltav holds Koltogor E&P Licence 10, a 167 square kilometre area due west of the Koltogor E&P Licence, containing the West Koltogor oil field.

For further information on Zoltav or to sign up for our news alert service visit: www.zoltav.com.

Chairman's statement

I am pleased to report that Zoltav delivered a 33% increase in net profits in the first half of 2017 to RUB 69 million (H1 2016: RUB 52 million). This material growth in the bottom line was achieved despite an 8% drop in revenues to RUB 924.45 million (H1 2016: RUB 1,003.39 million) as a result of a 10% decline in daily production.

Production during the period from the Company's Bortovoy Licence in Saratov was impacted by the performance of two wells: Karpenskoye Well 117, from which production was stopped in early January 2017 due to water cut; and Zhdanovskoye Well 108 which, despite the application of acids to enhance well performance, is currently producing at lower rates than previously estimated. As a result, the Western Gas Plant produced an average of 7,480 boepd (1,021 toepd) compared to 8,270 boepd (1,128 toepd) in H1 2016.

In order to partially offset the negative impact from Wells 117 and 108, the Company focused on further increasing plant efficiency. We achieved this by eliminating the necessity for two plant shutdowns which occurred in the equivalent period last year; and through the implementation of a zero-based budgeting programme that resulted in a further 30% reduction in expenses.

Despite the lower production volumes in the first half, EBITDA was broadly maintained at RUB 420 million (H1 2016: RUB 430). Cost efficiencies helped improve the EBITDA margin by 2% to 45% of revenue.

The underperformance of the newly drilled Zhdanovskoye Well 108 resulted in the decision to suspend the drilling programme on the Western Fields in order to evaluate new and improved geological targets for keeping the Western Gas Plant at full capacity over the mid to long term.

Instead, in order to return the Western Gas Plant to full capacity in the short term, management has implemented a programme focused on drilling sidetracks from existing wells which are approximately 30% less expensive than new wells. This programme will include the assembly of two well-head compressors and the construction of a 2km looping pipeline to overcome hydraulic resistance. Management expects the first of these sidetracks, on Zhdanovskoye Well 30, to be operational during Q4 2017; and a further sidetrack, on Karpenskoye Well 13, to be operational by the end of the year.

These first two sidetracks are expected to return the Western Gas Plant to full production capacity by the end of 2017. A third sidetrack, on Karpenskoye Well 21, will be completed by February 2018.

The Company is currently considering different options for the commercialisation of the Company's Koltogor Licences, in the Khantiy-Mansisk Autonomous Okrug, including potential partnerships. The Russian Mineral Extraction Tax (MET) incentive attached to Bazhenov shale structures continues to make a development of the Koltogor fields economically viable.

Looking ahead, Zoltav's operational priorities remain that of using the Western Gas Plant at Bortovoy to its full capacity (to which it is expected to return by the end of 2017) as well as driving EBITDA and operating cash flow through operational efficiencies. That the Company was able to achieve a materially improved net profit in the first half, despite reduced production levels, is an encouraging signal of what can be achieved when production is normalised by the end of the year.

In the longer term, Zoltav believes there is substantial potential for the development of the deeper, Devonian structures at Bortovoy. A 3D seismic programme over the Devonian structure in the North Mokrousovskoye field was substantially completed by the end of the first half of this year and seismic interpretation is ongoing.

Lea Verny

Non-executive Chairman

25 September 2017

Review of operations

Production

Production from Zoltav's Western Gas Plant at Bortovoy averaged 7,480 boepd (1,021 toepd) during H1 2017, a 10% decline when compared to 8,270 boepd (1,128 toepd) in H1 2016.

Average daily production during H1 2017 was 42.6 mmcf/d (1.2 mmcm/d) of gas and 368 bbls/d (47 T/d) of oil and condensate (H1 2016: 46.6 mmcf/d (1.32 mmcm/d) of gas and 512 bbls/d (64 T/d) of oil and condensate).

Overall in H1 2017, the Company produced:

- Natural gas: 7,711 mmcf (218.455 mmcm) or 175,340 mtoe (1,285 mboe) (H1 2016: 8,429 mmcf (238,783 mmcm) or 191,656 mtoe (1,405 mboe))

- Oil and condensate: 66,552 bbls (8,478 t) (H1 2016: 91,068 bbls (11,601 t))

The decline in production volumes during the first half was a result of two underperforming wells. The Karpenskoye Well 117 was shut down in early January 2017 due to water cut. The newly drilled Zhdanovskoye Well 108 was put on production in March 2017 and delivered materially lower gas production than anticipated, despite acid treatment.

The shutdown of Well 117, the underperformance of Well 108 and the cancellation of a planned well, Zhdanovskoye Well 109, had an estimated combined negative impact on gas production in the first half of approximately 2,506 mmcf (71 mmcm).

An enhanced focus on operational efficiency to eliminate any impact on profitability as a result of the production decline allowed Zoltav to avoid two planned plant shutdowns (which had occurred in the first half of 2016). Furthermore, work on optimisation of propane compressors and hydraulic and heat balance resulted in additional condensate production.

The Company signed a contract with a Chinese manufacturer for the supply of well-head compressors to assemble on the Karpenskoye field by the end of this year, giving rise to an estimated 128,843 boe (17,567 toe) of additional production annually. Should the first well-head compressor prove as successful as anticipated, two further well-head compressors are expected to be ordered in 2018.

Development

Bortovoy

The underperformance of the newly drilled Zhdanovskoye Well 108 caused management to reevaluate the forward drilling programme (including Zhdanovskoye Well 109) in order to plan new and improved geological targets for keeping the Western Gas Plant at full capacity over the mid to long term.

Over the short term, this will be achieved through the drilling of sidetrack wells on existing well stock.

- The sidetrack from Zhdanovskoye Well 30 will be finished in October 2017 with forecasted daily production of 6,001 mcf (170 mcm) or 1,000 boepd (136 toepd).

- The sidetrack from Karpenskoye Well 13 will be finished in December 2017 with forecasted daily production of 5,648 mcf (160 mcm) or 941 boepd (128 toepd).

- The sidetrack from Karpenskoye Well 21 will be drilled for oil and will be finished in February 2018 with forecasted daily production of 236 bbls/d (30 T/d).

With the current development plan, management estimates the Western Gas Plant will be returned to full capacity by the end of this year.

A 120 sq km 3D seismic study over the Devonian structure in the North Mokrousovskoye field was substantially completed during the first half, slightly behind schedule. As a result, interpretation is expected to be completed by March 2018. The outstanding 20 sq km area does not influence the interpretation exercise and will be completed during autumn 2017 or with the next seismic study. The Company is planning to commission an additional 507 sq km of 3D seismic on the Western Fields in order to further assess the development potential of the Devonian structures.

Koltogor

The Company is currently considering different options for the commercialisation of the Koltogor assets including partnerships.

Group Reserves under PRMS as per latest report of DeGolyer and MacNaughton (May 2014):

The Company is planning to reevaluate reserves upon completion of seismic studies and interpretation in late 2018/early 2019.

Conversion rates

Tonnes of crude oil produced are translated into barrels using conversion rates reflecting oil density from each of the fields. Crude oil and liquid hydrocarbons expressed in barrels are translated from tonnes using a conversion rate of 7.85 barrels per tonne. Translations of cubic feet to cubic metres are made at the rate of 35.3 cubic feet per cubic metre. Translations of barrels of crude oil and liquid hydrocarbons into barrels of oil equivalent ("boe") are made at the rate of 1 barrel per boe and of cubic feet into boe at the rate of 290 cubic feet per boe.

Financial review

Management's continued focus on profit generation from the Western Gas Plant at Bortovoy, combined with rigorous costs optimisation, enabled Zoltav to generate RUB 69 million of net profit in the first half of 2017. EBITDA slightly decreased by 2% at RUB 420 million, as a result of a temporary decline in production.

Revenue

The Group's revenues in H1 2017 decreased by 8% to RUB 924.45 million, compared to RUB 1,003.39 million in H1 2016.

84.8% of revenue was derived from gas sold to Mezhregiongaz, a Gazprom subsidiary, at the transfer point on entry to the Central Asia - Centre gas pipeline system. The gas prices are fixed in a contract with Mezhregiongaz and are subject to indexation. The Russian Government approved a 3.9% gas price increase from 1 July 2017 and accordingly the Company signed an addendum to its contract with Mezhregiongaz. We anticipate that a further increase of 2% in gas price indexation will be approved by the Russian Government in June 2018 which will further benefit the Company.

The remaining revenue was from oil and condensate sold directly at the Western Gas Plant through a tender process to a small number of different buyers. The Company is diversifying its portfolio of buyers to reduce dependence on its main purchaser (which represented approximately 85% of oil and condensate purchases in H1 2017 compared to approximately 93% in H1 2016). This had a positive impact on average oil and condensate sales price realisations which were RUB 2 thousand per bbl (RUB 15.81 thousand per tonne) in H1 2017 compared to RUB 1.54 thousand per bbl (RUB 12 thousand per tonne) in H1 2016.

Cost of sales and G&A costs

The Group's operational and G&A costs decreased by 32% to RUB 108 million (H1 2016: RUB 158 million), mostly driven by maintenance optimisation and staff reduction. The Company shut down heavy compressor 1540 and redirected its associated gas flow, which allowed it to avoid maintenance costs and turn off two out of three power generated units which are also maintenance heavy. The procurement team identified a Russian substitute for an expensive foreign catalyst which was previously used in the sulphur production unit. Furthermore, the Company significantly decreased the administrative personnel headcount both in Moscow and Saratov, with the senior management team fully relocated to Saratov to lead day-to-day operations.

Total cost of sales was RUB 585.4 million (H1 2016: RUB 578.2 million). This comprised RUB 192.2 million of mineral extraction tax (H1 2016: RUB 206.1 million), RUB 217.8 million of depreciation and depletion of assets (H1 2016: RUB 201 million) and RUB 175.4 million of other cost of sales (H1 2016: RUB 171 million). Other cost of sales comprised operating expenses from the Bortovoy operating company, Diall Alliance, which rose by 3% due to a RUB 14.1 million adjustment which relates to the interpretation of property tax incentives from the Saratov regional tax authorities which had been accrued by the Company. The Company is seeking clarification from the tax authorities and, in the event of a positive decision, will reverse the adjustment. Operational materials and supplies decreased by 19% to RUB 38.4 million, compared with RUB 47.5 million in H1 2016.

Operating profit

Zoltav achieved an operating profit for H1 2017 of RUB 201.91 million, compared to RUB 229.5 million in H1 2016.

Finance costs of RUB 117 million (H1 2016: RUB 138 million) are mainly represented by interest on the remaining RUB 1,710 million Sberbank facility.

Profit before tax

Zoltav generated RUB 99.04 million of profit before tax, compared to RUB 107.27 million in H1 2016.

Taxation

Production based tax for the period was RUB 192.2 million (H1 2016: RUB 206.1 million) which is recognised in the cost of sales. The MET tax formula is based on multi-component gas composition, average gas prices and reservoir complexity and maturity. The effective MET rate applicable for the period was flat at RUB 24/mcf or RUB 838/mcm (H1 2016: RUB 23/mcf or RUB 813/mcm).

In addition to production taxes, the Group was subject to a 2.2% property tax which is based on the net book value of Russian assets calculated for property tax purposes. Property tax on the major part of the Bortovoy operating company's assets, including the Western Gas Plant, is paid at a reduced tax rate of 0.1%, in line with tax incentives for regional investment projects. A RUB 14.1 million adjustment was made as the Company is seeking clarification from the tax authorities concerning the effective tax period for using the incentive. In the event of a positive decision, the Company will reverse the adjustment.

The income tax charge for the year was RUB 30.0 million (H1 2016: RUB 55.6 million). The significant change is explained by the income tax asset used in the period.

Net profit

The net profit recorded was RUB 69 million, which compares to RUB 52 million in H1 2016 due to the positive impact of lower income tax charge.

Cash

Net cash generated from operating activities was RUB 369.60 million (H1 2016: RUB 361.76 million).

Diall Alliance successfully serviced its credit facility with PJSC Sberbank and repaid a further RUB 150 million of the principal amount (RUB 1,860 million at 31 December 2016) according to its schedule. The Company remains in line with the covenants of its credit facility agreement.

The Group has sufficient liquidity to fund its current programme to maintain plant capacity at the Western Gas Plant.

Total cash at the end of the period was RUB 347.77 million.

Kirill Suetov

CFO

25 September 2017

Statement of Directors' responsibilities

The Directors confirm that, to the best of their knowledge, these condensed consolidated interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union, and that the interim management report includes a fair review of the information required by the Disclosure and Transparency rules 4.2.7R and 4.2.8R, namely:

- an indication of important events that have occurred in the first six months and their impact on the condensed consolidated financial statements, and description of the principal risks and uncertainties for the remaining six months of the financial year; and

- material related party transactions in the first six months and any material changes in related party transactions described in the Last Annual report.

A list of Directors is maintained on the Zoltav Resources Inc. website: www.zoltav.com.

For and on behalf of the Board:

Lea Verny

Non-executive Chairman

25 September 2017

Report on Review of Interim Financial Information

Translation of original Russian version

To the shareholders and Board of Directors of Zoltav Resources Inc.

Introduction

We have reviewed the accompanying interim condensed consolidated financial statements of Zoltav Resources Inc. and its subsidiaries, which comprise the interim condensed consolidated statement of financial position as at 30 June 2017, interim condensed consolidated statement of comprehensive income, interim condensed consolidated statement of changes in equity and interim condensed consolidated statement of cash flows for the six-month period then ended and selected explanatory notes (interim financial information). Management of Zoltav Resources Inc. is responsible for the preparation and presentation of this interim financial information in accordance with IAS 34, Interim Financial Reporting. Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information is not prepared, in all material respects, in accordance with IAS 34, Interim Financial Reporting.

T.L. Okolotina

Partner

Ernst & Young LLC

25 September 2017

Interim condensed consolidated statement of comprehensive income

for the six months ended 30 June 2017

(in '000s of Russian rubles, unless otherwise stated)

* The amounts shown here do not correspond to the interim condensed consolidated financial statements for the six months ended 30 June 2016 due to change of presentation currency as described in Note 2.5.

Interim condensed consolidated statement of financial position

as at 30 June 2017

(in '000s of Russian rubles, unless otherwise stated)

Interim condensed consolidated statement of cash flows

for the six months ended 30 June 2017

(in '000s of Russian rubles, unless otherwise stated)

* The amounts shown here do not correspond to the condensed consolidated financial statements for the six months ended 30 June 2016 due to change of presentation currency as described in Note 2.5.

Interim condensed consolidated statement of changes in equity

for the six months ended 30 June 2017

(in '000s of Russian rubles, unless otherwise stated)

* The amounts shown here do not correspond to the condensed consolidated financial statements for the six months ended 30 June 2016 due to change in presentation currency as described in Note 2.5.

Notes to the interim condensed consolidated financial statements

(in '000s of Russian rubles, unless otherwise stated)

1. Background

1.1 The Company and its operations

Zoltav Group (the Group) comprises Zoltav Resources Inc. (the Company), together with its subsidiaries:

The Company was incorporated in the Cayman Islands on 18 November 2003.The principal activities of the Company and its subsidiaries is the acquisition, exploration, development and production of hydrocarbons in the Russian Federation. The Company's shares are listed on the Alternative Investment Market of the London Stock Exchange.

1.2 Russian business environment

The Group's operations are located in the Russian Federation.

Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government.

The Russian economy has been negatively impacted by a decline in oil prices and sanctions imposed on Russia by a number of countries. The Rouble interest rates remained high. The combination of the above resulted in reduced access to capital, a higher cost of capital and uncertainty regarding economic growth, which could negatively affect the Group's future financial position, results of operations and business prospects. Management believes it is taking appropriate measures to support the sustainability of the Group's business in the current circumstances.

2. Significant accounting policies

2.1 Basis of preparation

These interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 "Interim Financial Reporting", as adopted by the European Union. Accordingly, these interim condensed consolidated financial statements do not include all the information and disclosures required for a complete set of financial statements, and should be read in conjunction with the Group's annual consolidated financial statements for the year ended 31 December 2016, which were prepared in accordance with International Financial Reporting Standards, as adopted by the European Union.

Operating results for the six-month period ended 30 June 2017 are not necessarily indicative of the results that may be expected for the year ending 31 December 2017.

2.2 Going Concern

The consolidated financial statements have been prepared on a going concern basis as the Directors have concluded that the Group will continue to have access to sufficient funds in order to meet its obligations as they fall due for at least the foreseeable future as explained further in the Directors Report. The Group's current liabilities exceed current assets by 60,354 as at 30 June 2017. For mitigation factors, please, see Note 12.1.

2.3 Disclosure of impact of new and future accounting standards

In the preparation of the interim condensed consolidated financial statements, the Group followed the same accounting policies and methods of computation as compared with those applied in the complete consolidated financial statements for year ended 31 December 2016. In the six-month-period ended 30 June 2017 no new standards, interpretations or amendments were adopted by the Group.

2.4 Segment reporting

The Management of the Company analyses the segment information based on IFRS numbers. As of June 30, 2017 the Company has one segment - revenue from gas and oil products sales which generates all of its revenues. The segment has all of its assets located in the Russian Federation. Management has therefore determined that the operations of the Group comprise one operating segment and the Group operates in only one geographic area - the Russian Federation. Segment financial indicators are considered based on EBITDA and net profit results. During 6 month 2017 the Company generated 84.8% of its revenue from Gazprom Mezhregiongaz Saratov LLC (2016: 85.8%).

2.5 Foreign currency translation

a) Functional and presentation currency

The functional currency of the Group entities is the Russian ruble ("RUB"), the currency of the primary economic environment in which the Group operates.

Starting from 1 January 2016, the presentation currency was changed from US dollar ("USD") to the RUB, which the Board considers more representative for users of these financial statements to better assess the performance of the Group.

A change in presentation currency is a change in accounting policy which is accounted for retrospectively. The financial information included in the Group's consolidated financial statements for the six months ended 30 June 2016 previously reported in US dollar has been restated into RUB using the procedures outlined below:

- Assets and liabilities for each balance sheet date are translated at the closing rate at the date of that balance sheet;

- Share capital and other equity components are translated at historic rates;

- Income and expenses are translated at exchange rates at the dates of the transactions (or at average exchange rates that approximate the translation using the rate of the actual transaction dates).

Translation has been performed using the exchange rates set by the Central Bank of the Russian Federation.

b) Transactions and balances

Transactions in foreign currencies are initially recorded by the Group's entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition.

Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date.

Differences arising on the settlement or translation of monetary items are recognised in profit or loss with the exception of monetary items that are designated as part of the hedge of the Group's net investment of a foreign operation. These are recognised in statement of comprehensive income ("OCI") until the net investment is disposed of, at which time the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in OCI.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of the gain or loss on the change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in OCI or profit or loss are also recognised in OCI or profit or loss, respectively).

c) Group companies

Loans between Group entities and related foreign exchange gains or losses are eliminated upon consolidation.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities on the acquisition are treated as assets and liabilities of foreign operation and translated at the spot rate of exchange at the reporting date.

The period-end exchange rates and the average exchange rates for the respective reporting periods are indicated below.

2.6 Assets and liabilities not measured at fair value but for which fair value is disclosed

Fair values analysed by level in the fair value hierarchy of assets and liabilities of the Group not measured at fair value are as follows:

The fair value of borrowings and other non-current payables are based on cash flows discounted using a market rate. For borrowings: a rate of 10.74% (2016: 11.93%) is used, for long-term payables: a rate of 7.95% (2016: 8.26%) is used. The fair values are within level 2 of the fair value hierarchy.

3. Revenue

The Group's operations comprise one class of business being oil and gas exploration, development and production and all revenues are from one geographic region, the Saratov Region in the Russian Federation. Companies incorporated outside of Russia provide support to the operations in Russia.

Revenue is primarily from the sale of three products:

All gas sales are made to one customer, Gazprom Mezhregiongaz Saratov LLC, under a long-term contract effective until 31 December 2020 with terms reviewed annually. Condensate and oil are sold to local buyers. The sales of all products are denominated in RUB.

4. Income Tax

The Group calculates the period income tax expense using the tax rate that would be applicable to the expected total annual earnings. The major components of income tax expense in the interim condensed consolidated statement of comprehensive income are:

Origination and reversal of temporary differences in the period mainly relates to the property, plant and equipment, exploration and evaluation assets and provisions.

Reconciliation between expected and actual taxation charge is provided below.

The Group's income was subject to tax at the following tax rates:

The Group is subject to Cayman income tax, otherwise the majority of the Group's operations are located in the Russian Federation. Thus 20% tax rate is used for theoretical tax charge calculations. Effective tax rate changed due to significant decrease of expenses on Zoltav Resources Inc., which are subject to 0% tax rate.

5. Exploration and evaluation assets

The additions during six months 2017 are mostly represented by seismic works at North Mokrousovskoye field (during six months 2016: exploration and production license acquisition at West Koltogor oil field).

In management's opinion, as at 30 June 2017 there were no non-compliance issues in respect of the licences that would have an adverse effect on the financial position or the operating results of the Group.

6. Property, plant and equipment

7. Share capital

8. Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to owners of the Company by the weighted average number of ordinary shares in issue during the year.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has share options and warrants as dilutive potential ordinary shares.

9. Share-based payments

At 30 June 2017, the Company had a total of 1,952,500 outstanding share options (31 December 2016: 1,952,500).

10. Borrowings

In 2014, the Group entered into non-revolving credit facility agreement with Sberbank of Russia OJSC with a maximum facility amount of 2,400,000. Contractual currency is RUB. The facility was drawn down in full in 2014. The maturity date is 30 April 2021, being the 7-year anniversary of the facility entered into. The Group is obliged to repay the principal amount of the loan in 24 tranches commencing on 11 May 2015 and on a quarterly basis from then on with a final repayment tranche payable on the maturity date. The interest rate is 10.98% per annum. Sberbank may unilaterally amend the interest rate in the event of increases in the refinancing rate of the Central Bank of Russia. The Group paid an upfront commission on the facility of 1% of the facility amount (24,000) and there is a drawdown charge of 0.25% per year on the balance of the facility not drawn by the Group within the established timeframe. The Group has the option to prepay the loan in whole or in part at any time, subject to the payment of a fee. The Group provided certain warranties and representations to Sberbank in the agreement. The agreement contains certain loan covenants and events of default which are customary for a facility of this type. In December 2015 the Group signed an amendment altering covenants. The Group is in compliance with all covenants as of 30 June 2017 and 31 December 2016. The loan is secured by the Group, such security being granted pursuant to various pledge and mortgage deeds entered into by the Group on or about the date of the Sberbank Facility. The carrying value of property, plant and equipment pledged as of 30 June 2017 amounted to 2,768,339 (31 December 2016: 2,901,916).

The outstanding principal amount of the facility as of 30 June 2017 was 1,710,000 (31 December 2016: 1,860,000). The credit facility debt is measured at amortised cost, using the effective interest method.

11. Decommissioning and environmental restoration provision

The decommissioning and environmental restoration provision represents the net present value of the estimated future obligations for abandonment and site restoration costs which are expected to be incurred at the end of the production lives of the gas and oil fields which is estimated to be within 20 years.

This provision has been created based on the Group's internal estimates. Assumptions based on the current economic environment have been made which the directors believe are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon future market prices for the necessary dismantlement works required, which will reflect market conditions at the relevant time. Furthermore, the timing is likely to depend on when the fields cease to produce at economically viable rates. This in turn will depend upon future oil prices and future operating costs, which are inherently uncertain.

The provision reflects two liabilities: one is to dismantle the property, plant and equipment assets and the other is to restore the environment. The decommissioning part of the provision is reversed when an oil well is abandoned and corresponding capitalised costs are expensed. The environmental part of the provision is reversed when the expenses on restoration are actually incurred.

The provision is reversed when the corresponding capitalised costs directly attributable to an exploration and evaluation asset are expensed as it is determined that a commercial discovery has not been achieved and the restoration of the corresponding environment has been completed.

The Group reviews the application of inflation rates used for the provision estimation each half-year end. The inflation rate used in the estimation of the provision as of 30 June 2017 was 4.5% in 2017, decreasing to 3.6% in 2036 (as of 31 December 2016: 5.8% in 2017, decreasing to 4.0% in 2036). The discount rates used to determine the decommissioning and environmental restoration provision are based on Russian government bond rates. As of 30 June 2017 discount rate varies from 7.9% to 8.1% (as of 31 December 2016: from 8.53% to 8.57%) depending on expected period of abandonment and site restoration for each gas and oil fields.

12. Financial instruments and financial risk management

The Group has exposure to the following risks from its use of financial instruments:

- Liquidity risk;

- Market risk;

- Credit risk.

This note presents information about the Group's exposure to each of the above risks, the Group's objectives, policies and processes for measuring and managing risk, and the Group's management of capital. Further quantitative disclosures are included throughout this consolidated financial statements.

The Group's risk management policies deal with identifying and analysing the risks faced by the Group, setting appropriate risk limits and controls, and monitoring risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, through its internal policies, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

12.1 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 monitors the risk of cash shortfalls by means of current liquidity planning. The Group's approach to managing liquidity is to ensure, as far as possible, 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. This approach is used to analyse payment dates associated with financial assets, and also to forecast cash flows from operating activities. The contractual maturities of financial liabilities are presented including estimated interest payments.

The Group's current liabilities exceed current assets by 60,354 as at 30 June 2017. Starting from 1 July 2017, the Group budgeted flat sales, together with further reduction of administrative and operating expenses, that will lead to EBITDA generation sufficient to cover the liquidity gap. For additional liquidity risk mitigation the Group holds a preferential term sheet and draft credit agreement for 100,000 limit line with a Russian bank.

With all the above the Group management considers the liquidity risk as low.

The table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted payments:

12.2 Market risk

Market risk includes interest risk and foreign currency exchange rate risk.

a) Interest risk

The Group has exposure to interest risk since the Group's subsidiary, Diall Alliance LLC, entered into a non-revolving credit facility agreement with Sberbank and, according to the terms of the agreement, Sberbank may unilaterally amend the interest rate in the event of increases in refinancing rates of the Central Bank of Russia. Sberbank had not amended the interest rate by the reporting date.

b) Foreign currency exchange rate risk

The Group does not have any significant exposure to foreign currency risk, as no significant sales, purchases or borrowings are denominated in a currency other than the functional currency.

The Group's operations are carried in the Russian Federation, where all of its revenue, costs and financing from both Sberbank and intra-group lending are denominated in RUB. As a result there is no exposure at the operating subsidiary level to foreign currency exchange risk movements.

12.3 Credit risk

Credit risk arises principally from the Group's financial investments, trade and other receivables and cash and cash equivalents. It is the risk that the value of the Group's investments will not be recovered and the risk that the counterparty fails to discharge its obligation in respect of the Group's trade and other receivables and cash balances. The maximum exposure to credit risk equals the carrying value of these items in the financial statements.

The Group is largely dependent on one customer (Gazprom Mezhregiongaz Saratov LLC) for a significant portion of revenues. Gazprom Mezhregiongaz Saratov LLC accounted for 84.8% and 85.9%, of the Group's total revenue during six months 2017 and2016, respectively. The loss or the insolvency of this customer for any reason, or reduced sales of the Group's principal product, could significantly reduce the Group's ongoing revenue and/or profitability, and could materially and adversely affect the Group's financial condition. The credit rating assigned to Gazprom by Standard & Poor's is BB+. To manage credit risk and exposure to the loss of the key customer, the Group has entered into a long-term contract with Gazprom Mezhregiongaz Saratov LLC, effective till 31 December 2020. As for the smaller customers, the Group imposes minimum credit standards that the customers must meet before and during the sales transaction process.

Credit risk related to cash and cash equivalents is reduced by placing funds with banks with acceptable credit ratings.

To limit exposure to credit risk on cash and cash equivalents management's policy is to hold cash and cash equivalents in reputable financial institutions. During six months 2017 cash was held mainly with Bank Otkritie, Sberbank and Gazprom Bank. As of 30 June 2017 the Group hold cash and cash equivalents in the amount of 339,000 at Bank Otkritie. Due to sanation procedures at Bank Otkritie, started by the Central Bank of Russia in August 2017, the Group fully withdrew cash and cash equivalents from this bank without losses and transferred them to Gazprombank (Moody's rating Ba2).

12.4 Capital management

The Group considers its capital and reserves attributable to equity shareholders to be the Group's capital. In managing its capital, the Group's primary long-term objective is to provide a return for its equity shareholders through capital growth. Going forward, the Group may seek additional investment funds and also maintain a gearing ratio that balances risks and returns at an acceptable level, while maintaining a sufficient funding base to enable the Group to meet its working capital needs. Details of the Group's capital are disclosed in the interim statement of changes in equity.

There have been no significant changes to management's objectives, policies or processes in the period, nor has there been any change in what the Group considers to be capital.

The Group companies are in compliance with externally imposed capital requirements as of 30 June 2017 and 31 December 2016.

13. Commitments and contingencies

13.1 Capital commitments

Capital expenditure contracted for at the end of the reporting period but not yet incurred at 30 June 2017 was 90,998, net of VAT (31 December 2016: 249,723, net of VAT).

13.2 Insurance

The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not generally available. The Group's insurance currently includes cover for damage to or loss of assets, third-party liability coverage (including employer's liability insurance), in each case subject to excesses, exclusions and limitations. However, there can be no assurance that such insurance will be adequate to cover losses or exposure to liability, or that the Group will continue to be able to obtain insurance to cover such risks. Until the Group obtains adequate insurance coverage there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Group's operations and financial position.

13.3 Litigation

The Group has been involved in a number of court proceedings (both as a plaintiff and as a defendant) arising in the normal course of business. In the opinion of management there are no current legal proceedings or other claims outstanding which could have a material adverse effect on the results of operations, financial position or cash flows of the Group and which have not been accrued or disclosed in these financial statements.

As at 31 December 2016, the Group was engaged in litigation proceedings as a defendant. During six months 2017 all litigations were terminated. No provision for litigations was accrued as at 30 June 2017 (31 December 2016: 3,454).

13.4 Taxation contingencies

Russian tax, currency and customs law allows for various interpretations and is subject to frequent changes. Management's interpretation of legislation as applied to the Company's transactions and activities may be challenged by regional or federal authorities.

2017-2016 saw continued implementation of mechanisms aimed at countering the use of low tax jurisdictions and aggressive tax planning structures introduced in 2015. In addition, the procedure for determining thin capitalization went through significant changes in 2016.

These changes and recent trends in applying and interpreting certain provisions of Russian tax law indicate that the tax authorities may take a tougher stance in interpreting legislation and reviewing tax returns. The tax authorities may thus challenge transactions and accounting methods that they have never challenged before. As a result, significant taxes, penalties and fines may be accrued. It is not possible to determine the amounts of constructive claims or evaluate the probability of a negative outcome. Tax audits may cover a period of three calendar years immediately preceding the audited year. Under certain circumstances, the tax authorities may review earlier tax periods.

The Group estimates its possible tax risks other than remote tax risks that are determined by management as not likely to result in additional taxes approximate 8,940 (31 December 2016: 0). No provision for such risks was accrued.

13.5 Environmental matters

The Group's operations are in the upstream oil and gas industry in the Russian Federation and its activities may have an impact on the environment. The enforcement of environmental regulations in the Russian Federation is evolving and the enforcement stance of government authorities is continually being reconsidered. The Group periodically evaluates its obligations related thereto. The outcome of environmental liabilities under proposed or future legislation, or as a result of stricter interpretation and 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 already accrued as a part of the decommissioning provision and which would have a material adverse effect on the financial position or results of the Group.

14. Related party transactions

During the period there were no operations with related parties, except for key management remunerations.

The remuneration of key management comprised of salary and bonuses in the amount 13,585 (6 months 2016: 38,557).

15. Events after the reporting date

There were no events after the reporting date that require disclosures in Group's interim condensed consolidated financial statements.