TIDMGKP
RNS Number : 4990K
Gulf Keystone Petroleum Ltd.
11 April 2018
11 April 2018
Gulf Keystone Petroleum Ltd. (LSE: GKP)
("Gulf Keystone", "GKP", "the Group" or "the Company")
2017 Full Year Results Announcement
Strong commercial and operational delivery throughout the
year
Profit for the first time since entry to Kurdistan
Gulf Keystone, operator of the Shaikan Field in the Kurdistan
Region of Iraq ("Kurdistan"), today announces its results for the
year ended 31 December 2017.
Highlights to 31 December 2017 and post reporting period
Operational
-- Strong safety performance during 2017; 3 million man-hours
without a Lost Time Incident achieved.
-- Average gross production of 35,298 barrels of oil per day
("bopd") - in the middle of 32,000-38,000 bopd guidance for the
year.
-- Plant uptime of 99% in 2017.
-- Shaikan production for Q1 2018 averaged 31,588 bopd.
-- Gross production guidance for 2018 is set at 27,000-32,000 bopd.
Financial
-- Signing of the Crude Oil Sales Agreement, which was announced
in January 2018, represents a key milestone for the Company.
-- Moved to a more transparent invoicing mechanism with the MNR;
payment now linked to international oil price and total production
at Shaikan.
-- Profit for the first time since entry to Kurdistan - net
profit of $14.1 million (2016: net loss of $17.4 million).
-- Revenue of $172 million (2016: $194 million).
-- The cash component of revenue increased by 28% to $157 million from $122 million in 2016.
-- Positive cash flow driven by steady operating activities,
payments from KRG and limited investment.
-- 11 payments received during 2017 from the KRG amounting to
$132 million net (2016: $114 million net to GKP).
-- Cash balance of $160 million as at 31 December 2017 (2016: $93 million).
-- Continued cost optimisation, with additional initiatives to
lower costs achieved against stable production.
-- Reduction of operating costs per barrel year-on-year to $2.8/bbl (2016: $3.5/bbl).
-- Further reduction of G&A to $21.3 million from $25.5 million in 2016.
-- GKP has received payments in Q1 2018 from the KRG totalling
$75.1 million gross ($59.3 million net).
-- Robust financial position as at 10 April 2018, with cash
balance of $203 million against $100 million of debt.
Corporate developments
-- Jaap Huijskes assumes the role of Non-Executive Chairman, as of today.
-- Updated KPIs were introduced in 2017, as part of GKP's
continued efforts to achieve high standards of corporate
governance.
Outlook
-- The Crude Oil Sales Agreement is an important commercial
event and moves the business closer to finalising commercial
negotiations with the MNR
-- Subject to finalising certain commercial and contractual
matters, the Company is ready to resume investment into Shaikan in
2018.
Jón Ferrier, Gulf Keystone's Chief Executive Officer, said:
"We are pleased to have reported a net profit for the year of
$14.1 million, compared with a net loss of $17.4 million in 2016.
We made considerable commercial progress during the year and into
2018, with the signing of the Shaikan Crude Oil Sales Agreement
being a key milestone for the Company.
We were pleased to achieve average gross production of 35,298
bopd at Shaikan, in the middle of our target guidance of
32,000-38,000 bopd for 2017. We are confident that once we are able
to restart investment into Shaikan we will be able to lift
production towards our near-term target of 55,000 bopd, a step
towards the full field development.
I would like to thank our shareholders for their support, our
hosts the Kurdistan Region of Iraq, and all Gulf Keystone
employees, for their commitment and professionalism during 2017. I
would also like to welcome our incoming new Chairman, Jaap
Huijskes, and reiterate our thanks to his predecessor, Keith
Lough."
The Company will hold a live audio webcast and conference call
for analysts at 10:00 (BST) today, 11 April 2018.
The webcast will be available on the Company's website:
http://www.gulfkeystone.com/
Enquiries:
Gulf Keystone Petroleum: +44 (0) 20 7514 1400
Jón Ferrier, CEO
Sami Zouari, CFO
Celicourt Communications: +44 (0) 20 7520 9266
Mark Antelme
Jimmy Lea
or visit: www.gulfkeystone.com
Notes to Editors:
-- Gulf Keystone Petroleum Ltd. (LSE: GKP) is a leading
independent operator and producer in the Kurdistan Region of Iraq
and the operator of the Shaikan field with current production
capacity of 40,000 barrels of oil per day
-- Further information on Gulf Keystone is available on its website www.gulfkeystone.com
Disclaimer
This announcement contains certain forward-looking statements
that are subject to the risks and uncertainties associated with the
oil & gas exploration and production business. These statements
are made by the Company and its Directors in good faith based on
the information available to them up to the time of their approval
of this announcement, but such statements should be treated with
caution due to inherent risks and uncertainties, including both
economic and business factors and/or factors beyond the Company's
control or within the Company's control where, for example, the
Company decides on a change of plan or strategy. This announcement
has been prepared solely to provide additional information to
shareholders to assess the Group's strategies and the potential for
those strategies to succeed. This announcement should not be relied
on by any other party or for any other purpose.
CHAIRMAN'S STATEMENT
Throughout 2017 and into 2018, Gulf Keystone has, with
continuing support from the Kurdistan Regional Government ("KRG")
and the Ministry of Natural Resources of the KRG ("MNR"), made
considerable progress, reflecting the strong alignment of economic
interests between operators and Kurdistan. Everyone stands to
benefit from the responsible development of the region's natural
resources, including Shaikan, one of its most-prized oil
fields.
During much of 2017, Kurdistan was buffeted by the political
complexities of the region, including the war against ISIS, which
for Kurdistan has come at a considerable human and economic cost.
In the broader region there were the well-publicised issues
impacting both Syria and Turkey. The Kurdish independence
referendum that was held in September 2017 contributed to yet more
uncertainty for the area where we operate.
The significance of these macro factors, which are clearly out
of our control, were profound for our business and our efforts to
both create a climate for investment and build deeper liquidity in
our shares. This year has seen considerable political and economic
uncertainty, leading to a significant drain on the region's
financial and other resources.
From an operational perspective, Shaikan continued to perform
well throughout 2017. From a commercial perspective, as we have
highlighted in recent communications, Gulf Keystone has been
seeking clarity around the contractual framework in which it
operates. Whilst work remains to be done, the very important
Shaikan crude oil export sales agreement ("Crude Oil Sales
Agreement"), which was worked on during 2017 and announced in
January 2018, represented a major milestone for the Company. The
successful implementation of the Crude Oil Sales Agreement is an
important commercial event for the Company and moves the business
closer to finalising its commercial negotiations and restarting
investment into Shaikan. We remain optimistic about shortly
arriving at a satisfactory outcome with our partners: the MNR and
MOL.
Concurrent to the ongoing negotiations with the MNR, the team
has been readying the Company for the future, with substantial
technical and commercial work completed. Having closed the year
with a cash balance of $160 million, and the plans put in place to
deliver the target of increasing production to 55,000 bopd, the
Company has the means to move swiftly towards delivering more value
from the field for all stakeholders.
We strive to keep our shareholders abreast of progress and take
our responsibilities in this regard extremely seriously. Whilst the
Company has been busy working on both the updated Field Development
Plan ("FDP") and advancing discussions with its partners, it is
only appropriate to provide updates to the market once items are
concluded and can be described clearly. We appreciate the absence
of news flow may feel frustrating for investors.
An updated and comprehensive suite of Key Performance Indicators
("KPIs") were introduced for the Company in 2017 as part of our
continued efforts to achieve high standards of corporate
governance, and to support both our commitment to transparency and,
of course, alignment between our staff and our shareholders. We are
also committed to ensuring a greater focus on diversity across all
our teams, improving the development of all employees and promotion
of women and local employees into positions of seniority.
The KPIs for 2017 are described in the Remuneration Committee
Report, which is in the Annual Report.
I would like to thank our shareholders for their ongoing support
through what the Board recognises has not been an easy period. We
would also like to thank our hosts, the government and people of
Kurdistan who have helped enable continuous operations throughout
this challenging year. It has been an unsettling time for our staff
in London, and particularly for those in Erbil and in the field.
There has been uncertainty for many, both at work and at home, and,
on behalf of the Board, I thank all our staff for their deep
professionalism, stoicism and good grace throughout. It has been
said before, but my belief is that Gulf Keystone has a strong
future ahead of it. As I finish my tenure as Chairman, which has
been a privilege, I would like to wish good fortune to all those
connected with Gulf Keystone. I am delighted to be handing over the
role of Chairman to Jaap Huijskes. Jaap has already demonstrated
his enormous value to the Board and the Company as a whole, as a
Non-Executive Director, and I know his experience and skills will
serve him well in his new role.
Keith Lough
Chairman
10 April 2018
EXECUTIVE REVIEW
In January 2018, the Company was very pleased to announce the
signing of the Crude Oil Sales Agreement. This marked a key
milestone for Gulf Keystone, breaking the pattern of receiving a
gross fixed amount of US$15 million per month. We have now moved to
a transparent invoicing mechanism where monthly payments are linked
to both the international oil price and actual production from the
Shaikan field. The Crude Oil Sales Agreement confirms a discount
for export sales of approximately $22 per barrel for quality and
transportation, which is in line with other crude oil sales
agreements in the Kurdistan Region of Iraq. As a result of this, we
have seen a significant improvement in monthly receipts which have
averaged approximately US$21 million (gross) per month for recent
payments covering the three months from October to December
2017.
Throughout 2017, the Company achieved average gross production
of 35,298 bopd, around the midpoint of our 32,000-38,000 bopd
guidance for the year. This result is testament to the reliable
nature of the field and the professionalism and commitment of the
team, who maintained plant uptime of 99% with zero Lost Time
Incidents ("LTIs") in 2017.
In February 2017, the Company was informed that the MNR would
begin exporting all Shaikan crude production via trucks to Turkey.
This was a temporary measure and did not have a direct commercial
bearing on the Company. By November 2017, the MNR had resumed
exporting the majority of Shaikan's crude via the export pipeline
to Turkey, clear evidence of the suitability and quality of the
Shaikan crude within the Kurdish blend, with the remainder being
sold domestically.
Due to the regular payment cycle, now long established and in
line with our peers, payments under the Crude Oil Sales Agreement,
and a tight control on costs, the Company has a strong balance
sheet with a cash position of $160m as at 31 December 2017.
Moreover, the Company is posting a net profit of $14.1m against a
net loss of $17.4m in 2016.
We continue to have constructive dialogue with the MNR on
contractual and commercial matters. Subject to finalising these
matters, and the subsequent budgetary approvals with our partners,
the MNR and MOL, we are looking forward to resuming investment in
Shaikan in 2018. This should enable us to meet our stated near to
medium-term target of achieving an uplift in gross production to
55,000 bopd, then moving towards the longer-term target of gross
production of 100,000 bopd.
Our 2018 plans envisage hooking-up Production Facility 2
("PF-2") via a 400 metre spur pipeline to the Atrush export
pipeline which ultimately connects to the main oil line to Turkey.
This pipeline link will improve netbacks by reducing the Company's
trucking requirements, as well as lowering the health, safety,
security and environment ("HSSE") risks associated with road
movements.
Gross production guidance for 2018 has been set at 27,000-32,000
bopd. This guidance takes into account plant and export
availability and the potential to install new downhole pumps in
certain wells, as part of the investment programme required to
increase production to 55,000 bopd.
As we finalise the investment plans to move into the next phase
of development of the Shaikan field, the Company will continue to
evaluate options to optimise its capital structure for the benefit
of the company and its shareholders.
The safety of our staff, and those close to our operations,
remains our number one priority and the Company is pleased to
report that we had no LTIs reported in 2017 and our facilities
remained secure throughout the reporting period.
We would like to take this opportunity to thank Keith Lough, who
is stepping down from the role of Chairman, for his service to the
Company. Keith has made a considerable contribution to GKP,
steering the business through its financial restructuring in 2016
and overseeing the strengthening of GKP's balance sheet since then.
We wish him every success in the future.
We would also sincerely like to thank our hosts, the Kurdistan
Region of Iraq, and all Gulf Keystone employees, whose
professionalism and commitment to GKP has been of the highest
order.
We face the future with confidence and look forward to further
developing the Shaikan field for the benefit of all.
Jón Ferrier
Chief Executive Officer
Sami Zouari
Chief Financial Officer
10 April 2018
OPERATIONAL REVIEW
Operating performance from the Shaikan field in 2017 was strong,
following a similarly good year in 2016. Safety performance
remained excellent and the Company has recently achieved three
million working hours without a Lost Time Incident ("LTI").
Production volumes increased slightly compared to last year, mainly
due to excellent plant availability, which stood at over 99%. The
field continues to perform in line with expectations and there has
been no gas or water break-through to date.
There has been no new Competent Persons Report ("CPR") during
2017, so the 31 August 2016 report by ERC Equipoise ("ERCE"), along
with the letter update received in April 2017, remain the last
official reserves position. ERCE confirmed remaining 2P reserves as
at 31 December 2016 of 615 MMstb and production in 2017 was 12.9
MMstb. We anticipate a review to the CPR once an update to the
field development plan is ready.
The Company continued throughout 2017 to improve efficiency and
reduce gross production costs per barrel. In 2017 production costs
were, $2.8/bbl, down from $3.5/bbl in 2016 (figures exclude
capacity building charges).
We are discussing a comprehensive investment programme for 2018
with the MNR and MOL, that is designed to ensure that we return
production to nameplate capacity of 40,000 bopd and then increase
it to 55,000 bopd in the near term. The proposed work programme
also includes a pipeline tie-in from PF-2 into the export pipeline,
a Front End Engineering Design ("FEED") study for gas reinjection
and a FEED study for development of the deeper Triassic reservoir,
from which we have yet to produce.
HSSE
HSSE performance was once again strong with no LTIs in 2017 and
only two recordable incidents, which was the same as our
performance in 2016.
To ensure that our HSSE performance remains strong in the future
we have put considerable effort into initiatives designed to make
sure that we have a proactive approach to safety. To that end, we
completed 99% of the planned HSSE work programme for 2017, which
included activities, such as a revised HSSE management system,
process safety monitoring, workforce training and emergency
response.
We are very proud of the fact that we are considered by many in
Kurdistan to be at the forefront of HSSE performance and
practices.
Our commitment to maintaining a high local proportion of the
Company's workforce was continued with 82% of positions being
local. Furthermore, as training and experience has been gained we
were able to promote local personnel into more senior positions via
Gulf Keystone's Competency Based Framework ("CBF"). In 2017, a
total of 25 promotions for local personnel took place.
Production
Gross Shaikan production guidance for 2017 was 32,000 to 38,000
bopd, so we were pleased to be in the middle of that range with an
average daily production of 35,298 bopd, slightly up on 2016. Gross
total production for 2017 increased by 1.4% compared with 2016
(12.9 MMstb from 12.7 MMstb in 2016).
This achievement was greatly helped by stable production rates
and constantly high export availability, averaging 99%. The export
route was changed by the MNR in February 2017 to road tanker
transportation all the way to the Mediterranean coast in Turkey,
rather than the previous arrangement of injecting the crude into
the export pipeline at Fishkhabour. Despite the change, the
operation proved to be very reliable and worked well and safely for
all involved. In November 2017, we were directed to return to the
original arrangement of using the export pipeline for the majority
of the Shaikan production, with the remainder being sold
domestically.
The field's observed natural pressure decline is in line with
predicted performance and consistent with the reserves stated in
the CPR, however we will require further investment in wells and
facilities to maintain production at nameplate capacity of 40,000
bopd. The production average for Q1 2018 was 31,588 bopd with only
minor export disruptions. Due to the deferral of the investment
programme sought for 2017, the gross Shaikan production guidance
for 2018 is being set at 27,000 to 32,000 bopd, and the uncertainty
relates mainly to the exact performance of the wells at lower
reservoir pressures ahead of the installation of downhole
pumps.
In 2017, considerable work was done to optimise the existing
field development plan. This plan has the same key elements of
expansion but makes more use of the potential to debottleneck and
grow production at the existing production facilities as well as
the installation of new facilities in the future. The proposed
investment programme is designed to return daily production to
40,000bopd as quickly as possible and begin modifications to the
plant to increase nameplate capacity to 55,000 bopd during 2019,
with an estimated gross capex range over the period of $175 million
to $215 million, including a 25% contingency. The increase in the
guidance compared to last year is primarily due to the addition of
three Jurassic wells in the expansion to 55,000 bopd. These have
been brought forward from the full field development to gain more
reservoir understanding, assure a sustained increased plateau
production and benefit from drilling efficiencies and costs savings
from a single campaign.
The eventual target of the FDP will now be 100,000 bopd (rather
than the 110,000 bopd previously envisaged), but this no longer
involves the need for significant new facilities to develop the
Jurassic production capacity, as there is more potential to expand
the existing facilities than previously thought. The existing
production facilities can be further de-bottlenecked to reach
75,000 bopd and this will be quicker and more cost effective than
construction of a new site for Jurassic production. The Company
will provide further budgetary guidance as appropriate in due
course. Cumulative production to date is 48 MMstb or approximately
8% of the 2P.
Reserves
Shaikan is performing in line with expectations; measured
pressure decline and the absence of water or gas breakthrough
support the geological interpretations of the field, providing the
Company with increasing confidence in its understanding. This means
reduced uncertainty and allows us to more easily optimise the
recovery and required well numbers. As mentioned above, an update
to the CPR is expected in due course.
Stuart Catterall
Chief Operating Officer
10 April 2018
Consolidated Income Statement
For the year ended 31 December 2017
Notes 2017 2016
$'000 $'000
----- --------- ---------
Continuing operations
Revenue 2 172,372 194,409
Cost of sales 3 (126,996) (142,827)
--------- ---------
Gross profit 45,376 51,582
General and administrative
expenses (21,304) (25,536)
--------- ---------
Profit from operations before
exceptional items 4 24,072 26,046
Interest revenue 2 702 100
Finance costs 7 (11,023) (60,182)
Impairment expense 10 - (215,658)
Gain on debt extinguishment 16 - 222,455
Other gains 6 314 9,931
--------- ---------
Profit/ (loss) before tax 14,065 (17,308)
Tax credit/ (charge) 8 61 (127)
--------- ---------
Profit/ (loss) after tax
for the year 14,126 (17,435)
--------- ---------
Profit/ (loss) per share
(cents)
Basic 9 6.16 (30.82)
Diluted 9 6.12 (30.82)
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
2017 2016
$'000 $'000
------ --------
Profit/ (loss) for the year 14,126 (17,435)
Items that may subsequently
be reclassified to profit
or loss:
Exchange differences on translation
of foreign operations 1,281 (2,901)
------ --------
Total comprehensive profit/
(loss) for the year 15,407 (20,336)
====== ========
Consolidated Balance Sheet
As at 31 December 2017
Notes 2017 2016
$'000 $'000
----- --------- ---------
Non-current assets
Intangible assets 10 63 99
Property, plant and equipment 11 417,473 489,379
Deferred tax asset 18 403 310
417,939 489,788
--------- ---------
Current assets
Inventories 13 17,190 15,971
Trade and other receivables 14 61,710 41,565
Cash and cash equivalents 160,456 92,870
--------- ---------
239,356 150,406
--------- ---------
Total assets 657,295 640,194
========= =========
Current liabilities
Trade and other payables 15 (57,038) (56,284)
Provisions 17 (7,197) (7,461)
(64,235) (63,745)
--------- ---------
Non-current liabilities
Other borrowings 16 (97,067) (98,886)
Provisions 17 (24,107) (23,794)
--------- ---------
(121,174) (122,680)
--------- ---------
Total liabilities (185,409) (186,425)
--------- ---------
Net assets 471,886 453,769
========= =========
Equity
Share capital 19 229,430 229,430
Share premium account 19 920,728 920,728
Exchange translation reserve (3,018) (4,299)
Accumulated losses (675,254) (692,090)
--------- ---------
Total equity 471,886 453,769
========= =========
The financial statements were approved by the Board of Directors
and authorised for issue on 10 April 2018 and signed on its behalf
by:
Jón Ferrier
Chief Executive Officer
Sami Zouari
Chief Financial Officer
Consolidated Statement of Changes in Equity
For the year ended 31 December 2017
Attributable to equity holders of
the Company
Share Exchange Convertible
Share premium translation Accumulated bonds Total
Notes capital account reserve losses reserve equity
$'000 $'000 $'000 $'000 $'000 $'000
Balance at 1
January 2016 9,781 834,619 (1,398) (686,520) 10,179 166,661
---------- --------- ------------- ------------ ------------ ---------
Net loss for
the year - - - (17,435) - (17,435)
Other comprehensive
loss for the
year - - (2,901) - - (2,901)
---------- --------- ------------- ------------ ------------ ---------
Total comprehensive
loss for the
year - - (2,901) (17,435) - (20,336)
---------- --------- ------------- ------------ ------------ ---------
Share-based
payment expense 22 - - - 1,686 - 1,686
Share conversion
and issue, net
of issue cost 19 219,649 86,109 - - - 305,758
Transfer of
convertible
bond reserve 16 - - - 10,179 (10,179) -
Net loss for
the year - - - (17,435) - (17,435)
---------- --------- ------------- ------------ ------------ ---------
Balance at 31
December 2016 229,430 920,728 (4,299) (692,090) - 453,769
---------- --------- ------------- ------------ ------------ ---------
Net profit for
the year - - - 14,126 - 14,126
Other comprehensive
profit for the
year - - 1,281 - - 1,281
---------- --------- ------------- ------------ ------------ ---------
Total comprehensive
profit for the
year - - 1,281 14,126 - 15,407
---------- --------- ------------- ------------ ------------ ---------
Share-based
payment expense 22 - - - 2,710 - 2,710
Balance at 31
December 2017 229,430 920,728 (3,018) (675,254) - 471,886
========== ========= ============= ============ ============ =========
Consolidated Cash Flow Statement
For the year ended 31 December 2017
Notes 2017 2016
$'000 $'000
----- -------- --------
Operating activities
Cash generated in operations 20 85,300 49,619
Interest received 702 100
Reinstated notes coupon payments 16 (10,111) -
Net cash generated from operating activities 75,891 49,719
-------- --------
Investing activities
Purchase of intangible assets - (123)
Purchase of property, plant and equipment (8,856) (9,557)
Net cash used in investing activities (8,856) (9,680)
-------- --------
Financing activities
Proceeds on issue of share capital and conversion 19 - 23,535
Cost incurred on the Restructuring - (13,884)
Net cash from financing activities - 9,651
-------- --------
Net increase in cash and cash equivalents 67,035 49,690
Cash and cash equivalents at beginning of year 92,870 43,641
Effect of foreign exchange rate changes 551 (461)
Cash and cash equivalents at end of the year
being bank balances and cash on hand 160,456 92,870
======== ========
Summary of Significant Accounting Policies
General information
The Company is incorporated in Bermuda (registered address:
Cumberland House, 9(th) Floor, 1 Victoria Street, Hamilton,
Bermuda). On 25 March 2014, the Company's common shares were
admitted, with a standard listing, to the Official List of the
United Kingdom Listing Authority ("UKLA") and to trading on the
London Stock Exchange's Main Market for listed securities.
Previously, the Company was quoted on AIM, a market operated by the
London Stock Exchange. In 2008, the Company established a Level 1
American Depositary Receipt programme in conjunction with the Bank
of New York Mellon, which has been appointed as the depositary
bank. The Company serves as the holding company for the Group,
which is engaged in oil and gas exploration and production,
operating in the Kurdistan Region of Iraq and the Republic of
Algeria.
Adoption of new and revised Standards
Amendments to IFRSs that are mandatorily effective for the
current year
In the current year, the Group has applied a number of
amendments to IFRSs issued by the International Accounting
Standards Board (IASB) that are mandatorily effective for an
accounting period that begins on or after 1 January 2017. Their
adoption has not had any material impact on the disclosures or on
the amounts reported in these financial statements.
Amendments The Group has adopted the amendments
to IAS 7 Disclosure to IAS 7 for the first time in
Initiative the current year. The amendments
require an entity to provide disclosures
that enable users of financial
statements to evaluate changes
in liabilities arising from financing
activities, including both cash
and non-cash changes. The Group's
liabilities arising from financing
activities consist of borrowings
(note 16). The application of
these amendments has had no impact
on the Group's consolidated financial
statements.
----------------------- ------------------------------------------
Amendments The Group has adopted the amendments
to IAS 12 Recognition to IAS 12 for the first time in
of Deferred the current year. The amendments
Tax Assets clarify how an entity should evaluate
for Unrealised whether there will be sufficient
Losses future taxable profits against
which it can utilise a deductible
temporary difference. The application
of these amendments has had no
impact on the Group's consolidated
financial statements, as the Group
already assesses the sufficiency
of future taxable profits in a
way that is consistent with these
amendments.
----------------------- ------------------------------------------
Annual Improvements The Group has adopted the amendments
to IFRSs 2014-2016 to IFRS 12 included in the Annual
Cycle Improvements to IFRSs 2014-2016
Cycle for the first time in the
current year. The other amendments
included in this package are not
yet mandatorily effective and
they have not been early adopted
by the Group. IFRS 12 states that
an entity need not provide summarised
financial information for interests
in subsidiaries, associates or
joint ventures that are classified
(or included in a disposal group
that is classified) as held for
sale. The amendments clarify that
this is the only concession from
the disclosure requirements of
IFRS 12 for such interests.
----------------------- ------------------------------------------
New and revised IFRSs in issue but not yet effective
At the date of authorisation of these financial statements, The
Group has not applied the following new and revised IFRSs that have
been issued but are not yet effective and in some cases had not yet
been adopted by the EU:
IFRS 9 Financial Instruments
IFRS 15 Revenue from Contracts with Customers
(and the related Clarifications)
IFRS 16 Leases
IFRS 17 Insurance Contracts
IFRS 2 (amendments) Classification and Measurement
of Share-based Payment Transactions
IFRS 4 (amendments) Applying IFRS 9 Financial Instruments
with IFRS 4 Insurance Contracts
IAS 40 (amendments) Transfers of Investment Property
IFRS 10 and Sale or Contribution of Assets
IAS 28 (amendments) between an Investor and its Associate
or Joint Venture
Annual Improvements Amendments to IFRS 1 First-time
to IFRSs 2014-2016 Adoption of International Financial
Cycle Reporting Standards and IFRS 28
Investments in Associates and
Joint Ventures
IFRIC 22 Foreign Currency Transactions
and Advanced Consideration
IFRIC 23 Uncertainty over Income Tax Treatments
The directors do not expect that the adoption of the Standards
listed above will have a material impact on the financial
statements of the Group in future periods, except as noted
below:
IFRS 9 Financial Instruments
The Group will adopt IFRS 9 Financial Instruments for the year
commencing 1 January 2018. IFRS 9 addresses the classification,
measurement and recognition of financial assets and financial
liabilities, introduces a new impairment model for financial
assets, as well as new rules for hedge accounting. It replaces the
old standard of IAS 39 in its entirety.
The Group has performed an assessment of potential impact of
adopting IFRS 9 based on the financial assets and financial
liabilities as at the date of initial application of IFRS 9 (1
January 2018) and has concluded that the adoption of IFRS 9 will
not have a material impact on the financial statements of the
Group.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 establishes a single comprehensive model for entities to
use in accounting for revenue arising from contracts with
customers. IFRS 15 will supersede the current revenue recognition
guidance including IAS 18 Revenue, IAS 11 Construction Contracts
and the related Interpretations when it becomes effective for
accounting periods beginning on or after 1 January 2018. The group
is required to adopt IFRS 15 for the year ending 31 December
2018.
The core principle of IFRS 15 is that an entity should recognise
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or
services. Specifically, the Standard introduces a 5-step approach
to revenue recognition:
-- Step 1: Identify the contract(s) with a customer
-- Step 2: Identify the performance obligations in the contract
-- Step 3: Determine the transaction price
-- Step 4: Allocate the transaction price to the performance obligations in the contract
-- Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Under IFRS 15, an entity recognises revenue when (or as) a
performance obligation is satisfied, i.e. when 'control' of the
goods or services underlying the particular performance obligation
is transferred to the customer.
Far more prescriptive guidance has been added in IFRS 15 to deal
with specific scenarios. Furthermore, extensive disclosures are
required by IFRS 15.
In April 2016, the IASB issued Clarifications to IFRS 15 in
relation to the identification of performance obligations,
principal versus agent considerations, as well as licensing
application guidance.
The Group recognises revenue from the following major
sources:
-- sales of crude oil, and
-- transportation services provided to third parties in relation
to the transport of their share of the crude oil
The Group has performed an assessment of the potential impact of
adopting IFRS 15 based on the revenue relationships as at the date
of initial application of IFRS 15 (1 January 2018) and has
concluded that the adoption of IFRS 15 will not have a material
quantitative impact on the financial statements of the Group.
IFRS 16 Leases
IFRS 16, which has not yet been endorsed by the EU, introduces a
comprehensive model for the identification of lease arrangements
and accounting treatments for both lessors and lessees. IFRS 16
will supersede the current lease guidance including IAS 17 Leases
and the related interpretations when it becomes effective for
accounting periods beginning on or after 1 January 2019. The Group
currently expects to adopt IFRS 16 for the year ending 31 December
2019. No decision has been made about whether to use any of the
transitional options in IFRS 16.
The Group has performed a preliminary assessment of the
potential impact of adopting IFRS 16 based on the current leases
and has concluded that the adoption of IFRS 16 should not have a
material impact on the financial statements of the Group. The Group
will perform a further assessment of the potential impact of
adopting IFRS 16 as at 31 December 2018.
Statement of compliance
The financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRSs") as adopted by
the European Union.
Basis of accounting
The financial statements have been prepared under the historical
cost basis, except for the valuation of hydrocarbon inventory and
the valuation of certain financial instruments, which have been
measured at fair value, and on the going concern basis.
Equity-settled share-based payments were initially recognised at
fair value, but have not been subsequently revalued. The principal
accounting policies adopted are set out below.
Going Concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Chairman's Statement, the Chief Executive
Officer's Statement and the Operational Review. The financial
position of the Group at the year end and its cash flows and
liquidity position are included in the Financial Review.
The Group has seen a significant improvement in the pattern of
cash receipts from the Ministry of Natural Resources of the
Kurdistan Regional Government of Iraq ("MNR"), with the total
receipts of $132 million net to the Group in 2017 and further net
receipts of $61.5 million in the first quarter of 2018 in relation
to 2017 sales.
Following the relinquishment of the Ber Bahr block in July 2017,
the Group has focused on its core asset, the Shaikan block. The
Group's improved liquidity is expected to allow the implementation
of the Group's near term investment plan to maintain production at
40,000 bopd with the potential to increase production to 55,000
bopd. This is subject to the approvals of the MNR and MOL Hungarian
Oil & Gas plc ("MOL"), the continuation of the regular payment
cycle from the MNR and a commercially acceptable investment
environment.
The option to delay the Reinstated Notes interest payments, the
improvements in oil revenues receipts and prudent cost management
give the Group the financial flexibility and capability to meet its
working capital requirements.
The Group continues to closely monitor and manage its liquidity
risk. Cash forecasts are regularly produced and sensitivities run
for different scenarios including, but not limited to, changes in
commodity prices, different production rates from the Shaikan
block, costs contingencies, disruptions to revenue receipts, etc.
The Group has taken appropriate action to reduce its cost base and
has $203 million of free cash as at 10 April 2018. The Group's
forecasts, taking into account the risks applicable to the Group,
show that the Group will be able to have sufficient financial
headroom for the 12 months from the date of approval of the 2017
Annual Report and Accounts.
Based on the analysis performed, the directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. Thus, they
continue to adopt the going concern basis of accounting in
preparing the annual Financial Statements.
Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and enterprises controlled by the Company
(its subsidiaries) made up to 31 December each year. Control is
achieved where the Company has the power to govern the financial
and operating policies of an investee entity so as to obtain
benefits from its activities.
Joint arrangements
The Group is engaged in oil and gas exploration, development and
production through unincorporated joint arrangements; these are
classified as joint operations in accordance with IFRS 11. The
Group accounts for its share of the results and net assets of these
joint operations. In addition, where the Group acts as operator to
the joint operation, the gross liabilities and receivables
(including amounts due to or from non-operating partners) of the
joint operation are included in the Group's balance sheet.
Sales and interest revenue
The recognition of revenue, particularly the recognition of
revenue from export sales of crude oil, is considered to be a key
accounting judgement.
Under the Production Sharing Contract for the Shaikan Block
between the Kurdistan Regional Government of Iraq ("KRG") and Gulf
Keystone Petroleum Limited ("GKPI") and Texas Keystone Inc. and
Kalegran Limited (a subsidiary of MOL) signed on 6 November 2017 as
amended by subsequent agreements ("Shaikan PSC"), all oil is sold
to the KRG, who in turn resell the oil either for export in the
pipeline at Fishkhabour or by trucking it to domestic customers.
The selling price is determined in accordance with the principles
of the Shaikan PSC, based on the Brent crude price less a quality
discount and transportation costs.
As the payment mechanism for sales is developing within the
Kurdistan Region of Iraq, the Group currently considers that
revenue can best be reliably measured when the cash receipt is
assured. The assessment of whether cash receipt is reasonably
assured is based on management's evaluation of the reliability of
the KRG's payments to the international oil companies operating in
the Kurdistan Region of Iraq. In January 2018, the Group entered
into a crude oil export sales agreement with the KRG ("Crude Oil
Sales Agreement"). This Crude Oil Sales Agreement specifies the
delivery point, pricing, KRG's contribution to transportation costs
and payment terms relating to export sales of crude oil and it is
effective from 1 October 2017 until 31 December 2018.
The value of sales revenue is determined after taking account of
the following:
-- The point of sale for export sales from 15 November 2017
onwards is the point that the crude oil is unloaded into the export
pipeline at Fishkhabour;
-- The point of sale for export sales prior to 15 November 2017
and for domestic sales is at the Shaikan facility;
-- GKP recognises revenue for its share of the revenue on a
cash-assured basis and these amounts of recognised revenue may be
lower than the Company's entitlement under the Shaikan PSC, giving
rise to unrecognised revenue amounts;
-- From 15 November 2017 onwards, the group has performed
transportation services in respect of the KRG's share of export oil
sales. It recharges all of these transportation costs at nil
mark-up to the KRG and these recharged transportation costs are
recognised as revenue; and
-- Under the Shaikan PSC and the bilateral agreement between
GKPI and the MNR signed on 16 March 2016 ("Bilateral Agreement"),
the Group is entitled to offset certain costs (including capacity
building payments and production bonuses) against amounts owed by
the KRG to GKPI. In these instances, the group recognises revenue
and a reduction in the liability to the KRG.
To the extent that revenue arises from test production during an
evaluation programme, an amount is charged from evaluation costs to
cost of sales so as to reflect a zero net margin.
Income tax arising from the Company's activities under its
production sharing contract is settled by the KRG on behalf of the
Company. However, the Company is not able to measure the amount of
income tax that has been paid on its behalf and, therefore, the
notional income tax amounts have not been included in revenue or in
the tax charge.
Interest revenue is accrued on a time basis, by reference to the
principal outstanding and at the effective rate of interest
applicable, which is the rate that exactly discounts estimated
future cash receipts through the expected life of the nancial asset
to that asset's net carrying amount on initial recognition.
Property, plant and equipment other than oil and gas
interests
Property, plant and equipment are stated at cost less
accumulated depreciation and any accumulated impairment losses.
Depreciation is provided at rates calculated to write each asset
down to its estimated residual value over its expected useful life
as follows:
Fixtures and - 20% straight-line
equipment
Intangible assets other than oil and gas interests
Intangible assets, other than oil and gas assets, have finite
useful lives and are measured at cost and amortised over their
expected useful economic lives as follows:
Computer software - 33% straight-line
Oil and gas assets
The Group has changed its accounting policy for oil and gas
assets from modified full cost to successful efforts. This change
resulted in the write off of the costs associated with the Sheikh
Adi and Ber Bahr blocks which have been relinquished and in the
process of relinquishment, respectively, by the Group. The benefit
of this voluntary change in the accounting policy is ensuring that
the balance sheet reflects only the assets that will bring future
economic benefits to the Group. In addition, the successful efforts
method is more widely adopted by listed oil companies and
therefore, the change in the policy will make the Group's financial
statements more comparable to those of its peers (note 25).
Pre-licence costs
Costs incurred prior to having obtained the legal rights to
explore an area are expensed directly to the income statement as
they are incurred.
Exploration and evaluation costs
The Group follows the successful efforts method of accounting
for exploration and evaluations ("E&E") costs. Expenditures
directly associated with evaluation or appraisal activities are
initially capitalised as intangible asset in cost pools by well,
field or exploration area, as appropriate. Such costs include
licence acquisition, technical services and studies, seismic
acquisition, exploration and appraisal well drilling, payments to
contractors, interest payable and directly attributable
administration and overhead costs.
These costs are then written off as exploration costs in the
income statement unless the existence of economically recoverable
reserves has been established and there are no indicators of
impairment.
E&E costs are transferred to development and production
assets within property, plant and equipment upon the approval of a
development programme by the relevant authorities and the
determination of commercial reserves existence.
Development and production assets
Development and production assets are accumulated on a
field-by-field basis and represent the cost of developing the
commercial reserves discovered and bringing them into production,
together with the E&E expenditures incurred in finding
commercial reserves transferred from intangible E&E assets as
outlined above.
The cost of development and production assets includes the cost
of acquisition and purchases of such assets, directly attributable
overheads, and costs for future restoration and decommissioning.
These costs are capitalised as part of the property, plant and
equipment and depreciated based on the Group's depreciation of oil
and gas assets policy.
Depreciation of oil and gas assets
The net book values of producing assets are depreciated
generally on a field-by-field basis using the unit of production
("UOP") basis which uses the ratio of oil and gas production in the
period to the remaining commercial reserves plus the production in
the period. Production associated with unrecognised export sales
revenue is included in the DD&A calculation. Costs used in the
calculation comprise the net book value of the field, and any
further anticipated costs to develop such reserves.
Commercial reserves are proven and probable ("2P") reserves
together with, where considered appropriate, a risked portion of 2C
contingent resources, which are estimated using standard recognised
evaluation techniques. The estimate is regularly reviewed by
independent consultants.
Impairment of tangible and intangible non-current assets
At each balance sheet date, the Group reviews the carrying
amounts of its tangible and intangible assets to determine whether
there is any indication that those assets have suffered an
impairment loss. If any such indication exists, the recoverable
amount of the asset, or group of assets, is estimated in order to
determine the extent of the impairment loss (if any).
For other assets where the asset does not generate cash flows
that are independent from other assets, the Group estimates the
recoverable amount of the cash-generating unit to which the asset
belongs.
Recoverable amount is the higher of fair value less costs to
sell and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the asset for
which the estimates of future cash flows have not been
adjusted.
Any impairment identified is immediately recognised as an
expense.
Borrowing costs
Borrowing costs directly relating to the acquisition,
construction or production of qualifying assets, which are assets
that necessarily take a substantial period of time to get ready for
their intended use or sale, are capitalised and added to the cost
of those assets, until such time as the assets are substantially
ready for their intended use or sale.
Investment income earned on the temporary investment of specific
borrowings pending their expenditure on qualifying assets is
deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in the income statement
in the period in which they are incurred.
Taxation
The tax expense represents the sum of the tax currently payable
and deferred tax.
The tax currently payable is based on taxable profit for the
year. Current tax assets and liabilities are measured at the amount
expected to be recovered from or paid to the taxation authorities,
based on tax rates and laws that are enacted or substantively
enacted by the balance sheet date.
As described in the Revenue accounting policy section above, it
is not possible to calculate the amount of notional tax to be shown
in relation to any tax liabilities settled on behalf of the Group
by the KRG.
Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in
the computation of taxable profit, and is accounted for using the
balance sheet liability method. Deferred tax liabilities are
generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which
deductible temporary differences can be utilised. Such assets and
liabilities are not recognised if the temporary difference arises
from the initial recognition of goodwill or from the initial
recognition of other assets and liabilities in a transaction that
affects neither the taxable profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part assets to be recovered.
Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset is
realised based on tax laws and rates that have been enacted or
substantively enacted by the balance sheet date. Deferred tax is
charged or credited in the income statement, except when it relates
to items charged or credited directly to equity, in which case the
deferred tax is also recognised in equity.
Foreign currencies
The individual financial statements of each company are
presented in the currency of the primary economic environment in
which it operates (its functional currency). For the purpose of the
consolidated financial statements, the results and the financial
position of the Group are expressed in US dollar, which is the
functional currency of the Group, and the presentation currency for
the consolidated financial statements.
In preparing the financial statements of the individual
companies, transactions in currencies other than the entity's
functional currency are recorded at the rates of exchange
prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in
foreign currencies are retranslated at the rates prevailing on the
balance sheet date. Non-monetary assets and liabilities carried at
fair value that are denominated in foreign currencies are
translated at the rates prevailing at the date when the fair value
was determined. Gains and losses arising on retranslation are
included in the income statement for the year.
On consolidation, the assets and liabilities of the Group's
foreign operations which use functional currencies other than US
dollars are translated at exchange rates prevailing on the balance
sheet date. Income and expense items are translated at the average
exchange rates for the period. Exchange differences arising, if
any, are recognised in other comprehensive income and accumulated
in equity in the Group's translation reserve. On the disposal of a
foreign operation, such translation differences are reclassified to
profit or loss.
Inventories
Inventories, except for hydrocarbon inventories, are valued at
the lower of cost and net realisable value. Hydrocarbon inventories
are recorded at net realisable value with changes in hydrocarbon
inventories being adjusted through cost of sales.
Financial instruments
Financial assets and financial liabilities are recognised on the
Group's balance sheet when the Group has become a party to the
contractual provisions of the instrument.
Trade receivables
Trade receivables are measured at amortised cost using the
effective interest method less any impairment.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand
deposits and other short-term highly liquid investments that are
readily convertible to a known amount of cash and are subject to an
insignificant risk of changes in value.
Liquid investments
Liquid investments comprise short-term liquid investments with
maturities of three to twelve months maturity.
Financial assets at fair value through profit and loss
Financial assets are held at fair value through profit and loss
("FVTPL") when the financial asset is either held for trading or it
is designated at FVTPL. Financial assets at FVTPL are stated at
fair value, with any gains or losses arising on re-measurement
recognised in profit or loss. The net gain or loss recognised in
profit or loss incorporates any dividend or interest earned on the
financial asset and is included in the other gains and losses line
in the income statement.
Derivative financial instruments
The Group may enter into derivative financial instruments
including foreign exchange forward contracts to manage its exposure
to foreign exchange rate risk.
Derivatives are initially recognised at fair value at the date a
derivative contract is entered into and are subsequently
re-measured to their fair value at each balance sheet date. The
resulting gain or loss is recognised in the profit or loss
immediately unless the derivative is designated and effective as a
hedging instrument, in which event the timing of the recognition in
profit or loss depends on the nature of the hedge relationship.
A derivative with a positive fair value is recognised as a
financial asset whereas a derivative with a negative fair value is
recognised as a liability. A derivative is presented as a
non-current asset or a non-current liability if the remaining
maturity of the instrument is more than twelve months and it is not
expected to be realised or settled within twelve months. Other
derivatives are presented as current assets or current
liabilities.
Impairment of financial assets
Financial assets, other than those valued at FVTPL, are assessed
for indicators of impairment at each balance sheet date. Financial
assets are impaired where there is objective evidence that, as a
result of one or more events that occurred after the initial
recognition of the financial asset, the estimated future cash flows
of the investment have been impacted.
For certain categories of financial asset, such as trade
receivables, assets that are assessed not to be impaired
individually are subsequently assessed for impairment on a
collective basis. Objective evidence of impairment for a portfolio
of receivables could include the Group's past experience of
collecting payments, an increase in the number of delayed payments
in the portfolio past the average credit period, as well as
observable changes in local or national economic conditions that
correlate with default on receivables.
Financial liabilities and equity
Financial liabilities and equity instruments are classified
according to the substance of the contractual arrangements entered
into. An equity instrument is any contract that evidences a
residual interest in the assets of the Group after deducting all of
its liabilities.
Equity instruments
Equity instruments issued by the Company are recorded at the
proceeds received, net of direct issue costs, which are charged to
share premium.
Convertible bonds
The net proceeds received from the issue of convertible bonds
are split between a liability element and an equity component at
the date of issue. The fair value of the liability component is
estimated using the prevailing market interest rate for similar
non-convertible debt. The difference between the proceeds of issue
of the convertible bonds and the fair value assigned to the
liability component, representing the embedded option to convert
the liability into equity of the Group, is included in equity, as a
convertible bond reserve and is not re-measured. The equity portion
is amortised over the life of the bond to accumulated losses
reserve within equity. The liability component is carried at
amortised cost using the effective interest method until
extinguished upon conversion or at the instrument's maturity
date.
Issue costs are apportioned between the liability and equity
components of the convertible bonds based on their relative
carrying amounts at the date of issue. The portion relating to the
equity component is charged directly against equity.
The interest expense on the liability component is calculated by
applying the prevailing market interest rate for similar
non-convertible debt to the liability component of the instrument.
The difference between this amount and the interest paid is added
to the carrying amount of the convertible bonds.
Borrowings
Interest-bearing loans and overdrafts are recorded at the fair
value of proceeds received, net of transaction costs. Finance
charges, including premiums payable on settlement or redemption,
are accounted for on an accrual basis and are added to the carrying
amount of the instrument to the extent that they are not settled in
the year in which they arise. The liability is carried at amortised
cost using the effective interest rate method until maturity.
Trade payables
Trade payables are stated at amortised cost. The average
maturity for trade and other payables is one to three months.
Provisions
Provisions are recognised when the Group has a present
obligation as a result of a past event which it is probable will
result in an outflow of economic benefits that can be reliably
estimated.
Decommissioning provision
Provision for decommissioning is recognised in full when damage
is done to the site and an obligation to restore the site to its
original condition exists. The amount recognised is the present
value of the estimated future expenditure for restoring the sites
of drilled wells and related facilities to their original status. A
corresponding amount equivalent to the provision is also recognised
as part of the cost of the related oil and gas property. The amount
recognised is reassessed each year in accordance with local
conditions and requirements. Any change in the present value of the
estimated expenditure is dealt with prospectively. The unwinding of
the discount is included as a finance cost.
Share-based payments
Equity-settled share-based payments to employees and others
providing similar services are measured at the fair value of the
entity instruments at the grant date. Details regarding the
determination of the fair value of equity-settled share-based
transactions are set out in Note 22. The fair value determined at
the grant date of the equity-settled share-based payments is
expensed on a straight- line basis over the vesting period, based
on the Group's estimate of equity instruments that will eventually
vest. At each balance sheet date, the Group revises its estimate of
the number of equity instruments expected to vest as a result of
the effect of non-market based vesting conditions. The impact of
the revision of the original estimates, if any, is recognised in
profit or loss such that the cumulative expense reflects the
revised estimate, with a corresponding adjustment to equity
reserve.
For cash-settled share-based payments, a liability is recognised
for the goods or services acquired, measured initially at the fair
value of the liability. At each balance sheet date until the
liability is settled, and at the date of settlement, the fair value
of the liability is re-measured, with any changes in fair value
recognised in profit or loss for the period. Details regarding the
determination of the fair value of cash-settled share-based
transactions are set out in Note 22.
Leasing
Rentals payable under operating leases are charged to the income
statement on a straight-line basis over the term of the relevant
lease.
Critical accounting estimates and judgements
In the application of the Group's accounting policies, which are
described above, the Directors are required to make judgements,
estimates and assumptions about the carrying amounts of assets and
liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical
experience and other factors that are considered to be relevant.
Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period or in the period of revision and future periods if
the revision affects both current and future periods.
Accounting estimates
Carrying value of producing assets
Oil and gas assets within property, plant and equipment are held
at historical cost value, less accumulated depreciation and
impairments.
Producing assets are tested for impairment whenever indicators
of impairment exist. Management assesses whether such indicators
exist, with reference to the criteria specified in IAS 36
Impairment of Assets, at least annually.
As at 31 December 2017, an internal valuation of the Shaikan
field was performed, providing further support in relation to the
conclusion that no indicators of impairment existed.
The assumptions and estimates in the valuation model
include:
- Commodity prices that are based on latest internal forecasts,
benchmarked with external sources of information, to ensure they
are within the range of available analyst forecasts and the
long-term corporate economic assumptions thereafter;
- Discount rates that are adjusted to reflect risks specific to
individual assets and the region;
- Commercial reserves and the related production and payment profiles; and
- Timing of revenue receipts.
Operating costs and capital expenditure are based on financial
budgets and internal management forecasts. Cost assumptions
incorporate management experience and expectations, as well as the
nature and location of the operation and the risks associated
therewith. Underlying input cost assumptions are consistent with
related output price assumptions.
In line with the Group's accounting policy on impairment,
management performs an impairment review of the Group's oil and gas
assets annually with reference to indicators as set out in IAS 36.
The Group assesses its group of assets called cash generating units
(CGU) for impairment if events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Where
indicators are present, management calculates the recoverable
amount using key assumptions such as future oil and gas prices,
estimated production volume, pre-tax discount rates that reflect
the current market assessment of the time value of money and risks
specific to the asset, commercial reserves, inflation and
transportation fees. The key assumptions are subject to change
based on the current market trends and economic conditions. The
CGU's recoverable amount is the higher of the fair value less cost
of disposal and value in use. Where the CGU's recoverable amount is
lower than the carrying amount, the CGU is considered impaired and
is written down to its recoverable amount. The Group's sole CGU at
31 December 2017 was Shaikan with a carrying value of $416.9
million. No impairment indicator was identified as at 31 December
2017.
Reserves estimates
Commercial reserves are determined using estimates of
oil-in-place, recovery factors and future oil prices. Future
development costs are estimated using assumptions as to numbers of
wells required to produce the commercial reserves, the cost of such
wells and associated production facilities, and other capital and
operating costs. Reserves estimates principally affect the
depreciation, depletion and amortisation charges, as well as
impairment assessments.
Significant accounting judgement
Revenue
The recognition of revenue, particularly the recognition of
revenue from exports, is considered to be a key accounting
judgement. The Group began commercial production from the Shaikan
field in July 2013 and historically made sales to both the domestic
and export market. However, as the payment mechanism for sales to
the export market is currently developing within the Kurdistan
Region of Iraq, the Group considers that revenue can be only
reliably measured when the cash receipt is assured. The assessment
of whether cash receipts are reasonably assured is based on
management's evaluation of the reliability of the MNR's payments to
the international oil companies operating in the Kurdistan Region
of Iraq. The Group also recognised payables to the MNR that were
offset against amounts receivable from the MNR for previously
unrecognised revenue in line with the terms of the Shaikan PSC.
The judgement is not to recognise revenue in excess of the sum
of the cash receipt that is assured and the amount of payables to
the MNR that can be offset against amounts due for previously
unrecognised revenue in line with the terms of the Shaikan PSC,
despite the Group being entitled to additional revenue under the
terms of the Shaikan PSC. Any future agreements between the Company
and the KRG might change the amounts of revenue recognised.
Notes to the Consolidated Financial Statements
1. Segment information
For the purposes of resource allocation and assessment of
segment performance, the Group is organised into three regional
business units - Algeria, Kurdistan and the United Kingdom. These
geographical segments are the basis on which the Group reports its
segmental information. The chief operating decision maker is the
Chief Executive Officer. He is assisted by the Chief Financial
Officer and senior management team.
The accounting policies of the reportable segments are
consistent with the Group's accounting policies.
Each segment is described in more detail below:
- Kurdistan Region of Iraq: the Kurdistan segment consists of
the Shaikan and the Erbil office which provides support to the
operations in Kurdistan, as well as segmental information relating
to the previously held Akri-Bijeel, Sheikh Adi and Ber Bahr
blocks;
- United Kingdom: the UK segment provides geological,
geophysical and engineering services to the Gulf Keystone Group;
and
- Algeria: the Algerian segment consists of the Algiers office
and the Group's operations in Algeria.
Corporate manages activities that serve more than one segment.
It represents all overhead and administration costs incurred that
cannot be directly linked to one of the above segments.
United
31 December 2017 Algeria Kurdistan Kingdom Corporate Elimination Total
$'000 $'000 $'000 $'000 $'000 $'000
---------------------------- -------- ---------- --------- ---------- ------------ ---------
Revenue
Oil sales - 171,203 - - - 171,203
Transportation
revenue - 1,169 - - - 1,169
Inter-segment
sales - - 4,337 - (4,337) -
-------- ---------- --------- ---------- ------------ ---------
Total revenue 172,372 4,337 - (4,337) 172,372
Cost of sales
Production costs - (46,042) - - - (46,042)
Oil and gas properties
depreciation expense - (79,785) - - - (79,785)
Transportation
costs - (1,169) - - - (1,169)
-------- ---------- --------- ---------- ------------ ---------
Gross profit /
(loss) - 45,376 4,337 - (4,337) 45,376
General and administrative
expenses
Allocated general
and administrative
expenses (63) (5,387) (6,476) (12,110) 3,429 (20,607)
Depreciation and
amortisation expense - (145) (280) - - (425)
Profit / (loss)
from operations (63) 39,844 (2,419) (12,110) (908) 24,344
Interest revenue - 432 - 270 - 702
Finance costs - (714) - (10,309) - (11,023)
Other gains /
(losses) - 323 - (281) - 42
-------- ---------- --------- ---------- ------------ ---------
Profit / (loss)
before tax (63) 39,885 (2,419) (22,430) (908) 14,065
Tax expense - - 61 - - 61
(Loss) / profit
after tax (63) 39,885 (2,358) (22,430) (908) 14,126
======== ========== ========= ========== ============ =========
Capital expenditure - 43,578 - - - 43,578
Total assets 31 582,192 14,105 57,335 3,632 657,295
======== ========== ========= ========== ============ =========
During 2017, the total allocated general and administrative
expenses of $20.6 million (2016: $25.0 million) included costs that
are recoverable under the terms of the Shaikan PSC amounting to
$5.4 million (2016: $9.2 million).
United
31 December 2016 Algeria Kurdistan Kingdom Corporate Elimination Total
$'000 $'000 $'000 $'000 $'000 $'000
----------------------------- -------- ---------- --------- ---------- ------------ ----------
As
restated
(note
25)
Revenue
Oil sales - 194,409 - - - 194,409
Inter-segment
sales - - 5,542 - (5,542) -
-------- ---------- --------- ---------- ------------ ----------
Total revenue 194,409 5,542 - (5,542) 194,409
Cost of sales
Production costs - (61,191) - - - (61,191)
Oil and gas properties
depreciation
expense - (81,636) - - - (81,636)
Gross profit
/ (loss) - 51,582 5,542 - (5,542) 51,582
General and administrative
expenses
Allocated general
and administrative
expenses (843) (9,222) (6,439) (13,447) 4,993 (24,958)
Depreciation
and amortisation
expense - (295) (283) - - (578)
Profit / (loss)
from operations (843) 42,065 (1,180) (13,447) (549) 26,046
Interest revenue - - 16 84 - 100
Finance income/
(costs) - (700) - (59,915) 433 (60,182)
Impairment charge - (215,658) - - - (215,658)
Gain on debt
extinguishments - - - 222,455 - 222,455
Other gains 181 3,963 - 5,787 - 9,931
-------- ---------- --------- ---------- ------------ ----------
Profit / (loss)
before tax (662) (170,330) (1,164) 154,964 (116) (17,308)
Tax expense - - (127) - - (127)
(Loss) / profit
after tax (662) (170,330) (1,291) 154,964 (116) (17,435)
======== ========== ========= ========== ============ ==========
Capital expenditure - 9,454 138 - - 9,592
Total assets 38 546,163 12,864 75,675 5,454 640,194
-------- ---------- --------- ---------- ------------ ----------
Geographical information
The Group's information about its segment assets (non-current
assets excluding deferred tax assets and other financial assets) by
geographical location is detailed below:
2017 2016
$'000 $'000
--------------- ------- -------
Algeria - -
Kurdistan 417,536 488,893
Bermuda - -
United Kingdom 512 585
------- -------
417,536 489,478
======= =======
Information about major customers
Included in revenues arising from the Kurdistan segment are
revenues of approximately $172.4 million which arose from sales to
the Group's largest customer (2016: $194.4 million from largest
customer).
2. Revenue
2017 2016
$'000 $'000
----------------------- ------- -------
Oil sales 171,203 194,409
Transportation revenue 1,169 -
------- -------
172,372 194,409
Interest revenue 702 100
173,074 194,509
======= =======
The Group accounting policy for revenue recognition is set out
in the Summary of Significant Accounting Policies above, with
revenue recognition on a cash-assured basis.
During 2017, the cash-assured values recognised as oil sales
were the group's share of the $15m received in respect of sales in
each of the first nine months of the year and the invoiced revenue
for the last three months of the year amounting to $156.3m (2016:
$121.8m). The cost offset revenue recognised was $14.9m (2016:
$72.6m). The oil sales price was calculated using the monthly Brent
price less an average discount of $20.3 (2016: $20.2) per barrel
for quality and transportation costs.
3. Cost of Sales
2017 2016
$'000 $'000
--------------------------------------- ------- -------
Oil production costs 46,042 61,191
Depreciation of oil and gas properties 79,785 81,636
Transportation costs 1,169 -
126,996 142,827
======= =======
Oil production costs represent the Group's share of gross
production expenditure for the Shaikan field for the year and
include capacity building charges of $17.2 million (2016: $18.0
million), but no Shaikan PSC production bonus was payable in 2017
(2016: $8.0 million). All costs are included with no deferral of
costs associated with unrecognised sales in accordance with the
Group's revenue policy. Production and depreciation, depletion and
amortisation ("DD&A") costs related to revenue arrears
recognised in 2017 and 2016 have been charged to the income
statement in prior periods when the oil was lifted.
A unit-of-production method, based on full entitlement
production, commercial reserves and costs for Shaikan field full
development, has been used to calculate the DD&A charge for the
year. Commercial reserves are proven and probable ("2P") reserves,
estimated using standard recognised evaluation techniques.
Production and reserves entitlement associated with unrecognised
sales in accordance with the Group's revenue policy have been
included in the full year DD&A calculation.
4. Profit/ (loss) from operations
2017 2016
$'000 $'000
------------------------------------- ------- -------
Profit/ (loss) from operations
has been arrived at after charging/
(crediting):
Depreciation of property, plant
and equipment (note 11) 80,163 82,176
Amortisation of intangible assets
(note 10) 47 38
Credit in relation to Excalibur
litigation (note 6) - (3,188)
Staff costs (see note 5) 22,770 24,228
Auditor's remuneration for audit
services (see below) 219 173
Operating lease rentals (note
21) 2,924 3,936
2017 2016
$'000 $'000
-------------------------------------------------------- ------- -------
Fees payable to the Company's
auditor for the audit of the
Company's annual accounts 192 154
Fees payable to the Company's
auditor for other services to
the Group
* audit of the Company's subsidiaries pursuant to
legislation 27 19
------- -------
Total audit fees 219 173
Other assurance services (half
year review) 67 73
Corporate finance services 5 454
Tax services (advisory) - 9
Total fees 291 709
======= =======
5. Staff costs
The average monthly number of employees (including Executive
Directors) for the year was as follows:
2017 2016
Number Number
--------------------------------------- ------- -------
Office and management 72 80
Technical and operational 222 229
294 309
======= =======
Employee benefits recognised as
an expense during the year comprised:
2017 2016
$'000 $'000
Wages and salaries 18,478 20,929
Social security costs 1,672 2,044
Share-based payment (see note 22) 2,620 1,255
22,770 24,228
======= =======
6. Other gains
2017 2016
$'000 $'000
--------------- ------ ------
Other gains 272 6,876
Exchange gains 42 3,055
314 9,931
====== ======
In 2017, other gains consisted of the release of the
decommissioning liability relating to the Ber Bahr block of $0.3
million.
In 2016, other gains consisted of the release of the
decommissioning liability relating to the Akri Bijeel block of $3.7
million and the receipt of an additional repayment of costs
incurred in relation to Excalibur Ventures LLC litigation of $3.2
million. On 18 November 2016, the Court ordered that the appeals be
dismissed and the sum of $3.2 million (GBP2.6 million) was received
by the Group in January 2017. As at 31 December 2016, this was
included in other receivables in Note 14.
7. Finance costs
2017 2016
$'000 $'000
-------------------------------------- ------ ------
Interest payable in respect of
convertible bonds (see note 16) - 22,203
Interest payable in respect of
other bonds (see note 16) - 35,232
Reinstated notes interest capitalised
(see note 16) 10,309 2,481
Unwinding of discount on provisions
(see note 17) 714 699
Capitalised finance costs - (433)
11,023 60,182
====== ======
8. Tax
2017 2016
$'000 $'000
-------------------------------------- ------- -------
Corporation tax
Current year charge - -
Adjustment in respect of prior
years - 1
Deferred UK corporation tax income
/ (expense) (see note 18) 61 (128)
------- -------
Tax income / (expense) attributable
to the Company and its subsidiaries 61 (127)
======= =======
Under current Bermudian laws, the Group is not required to pay
taxes in Bermuda on either income or capital gains. The Group has
received an undertaking from the Minister of Finance in Bermuda
exempting it from any such taxes at least until the year 2035.
Any corporate tax liability in Algeria is settled out of
Sonatrach's share of oil under the terms of the Algerian PSCs and
is therefore not reflected in the tax charge for the year.
In the Kurdistan Region, the Group is subject to corporate
income tax on its income from petroleum operations under the
Kurdistan PSCs. The rate of corporate income tax is currently 15%
on total income. Under the Shaikan PSC, any corporate income tax
arising from petroleum operations will be paid from the KRG's share
of petroleum profits. Due to the uncertainty over the payment
mechanism for oil sales in Kurdistan, it has not been possible to
measure reliably the taxation due that has been paid on behalf of
the Group by the KRG and therefore the notional tax amounts have
not been included in revenue or in the tax charge. This is an
accounting presentational issue and there is no taxation to be
paid.
The tax currently payable is based on taxable profit for the
year earned in the United Kingdom by the Group's UK subsidiary. UK
corporation tax is calculated at 19.25% (2016: 20.00%) of the
estimated assessable profit for the year of the UK subsidiary.
Deferred tax is provided for due to the temporary differences
which give rise to such a balance in jurisdictions subject to
income tax. During the current period no taxable profits were made
in respect of the Group's Kurdistan PSC, nor were there any
temporary differences on which deferred tax is required to be
provided. As a result, no corporate income tax or deferred tax has
been provided for Kurdistan in the period.
All deferred tax arises in the UK.
The income / (expense) for the year can be reconciled to the
profit / (loss) per the income statement as follows:
2017 2016
$'000 $'000
------------------------------------ ------- ---------
Profit / (loss) before tax 14,065 (17,308)
======= =========
Tax at the Bermudian tax rate of - -
0% (2016: 0%)
Effect of different tax rates of
subsidiaries operating in other
jurisdictions 61 (127)
------- ---------
Tax credit / (charge) for the year 61 (127)
======= =========
9. Profit / (loss) per share
The calculation of the basic and diluted profit/(loss) per share
is based on the following data:
2017 2016
$'000 $'000
------- --------
Profit / (loss)
Profit / (loss) after tax for the
purposes of basic and diluted loss
per share 14,126 (17,435)
======= ========
2017 2016
Number Number
(000s) (000s)
Number of shares
Basic weighted average number of
shares 229,317 56,565
The Group followed the steps specified by IAS 33 in determining
whether potential common shares are dilutive or anti-dilutive.
Reconciliation of dilutive shares:
2017 2016
Number Number
(000s) (000's)
-------------------------------------- ------- --------
Number of shares
Basic number of ordinary shares
outstanding 229,317 56,565
Effect of dilutive potential ordinary
shares 1,595 -
Diluted number of ordinary shares
outstanding 230,912 56,565
------- --------
The average number of ordinary shares in issue excludes shares
held by Employee Benefit Trustee ("EBT") and the Exit Event
Trustee.
The diluted number of ordinary shares outstanding including
share options is calculated on the assumption of conversion of all
potentially dilutive ordinary shares. During the year ended 31
December 2017, there were 460,000 (2016: 460,000) share options
that were excluded from the calculation of diluted earnings,
because they were anti-dilutive.
10. Intangible assets
Exploration and Computer
evaluation costs software Total
$'000 $'000 $'000
----------------------------------------- ----------------- --------- ---------
Year ended 31 December 2016
Opening net book 235,695 14 235,709
Other movements related to the
relinquishment of Sheikh Adi (20,037) - (20,037)
Additions - 138 138
Write offs (215,658) - (215,658)
Amortisation charge - (38) (38)
Foreign currency translation differences - (15) (15)
----------------- --------- ---------
Closing net book value - 99 99
At 31 December 2016
Cost - 1,053 1,053
Accumulated amortisation - (954) (954)
----------------- --------- ---------
Net book value - 99 99
----------------- --------- ---------
Year ended 31 December 2017
Opening net book value - 99 99
Amortisation charge - (47) (47)
Foreign currency translation differences - (11) (11)
Closing net book value - 63 63
======= =======
At 31 December 2017
Cost - 1,064 1,064
Accumulated amortisation -(1,001) (1,001)
------- -------
Net book value - 63 63
======= =======
In March 2016, the Group relinquished the Sheikh Adi block. As
part of the agreement for relinquishment of the Sheikh Adi block,
the MNR released the Group from its obligations to pay past PSC
payments due with the exception of $10.0 million relating to
reduced PSC bonuses due on the declaration of commerciality. This
will be offset against the past costs associated with the Shaikan
Government Participation Option. This is included in the Other
creditors in Note 15.
During 2016, expenditure amounting to $215.7 million relating to
the Sheikh Adi block was written off upon relinquishment and
included in the impairment expense in the Consolidated Income
Statement.
The net book value at 31 December 2017 includes intangible
assets relating to computer software. The amortisation charge of
$47,000 (2016: $38,000) for computer software has been included in
general and administrative expenses.
11. Property, plant and equipment
Oil and Fixtures Total
Gas and $'000
Properties Equipment
$'000 $'000
----------------------------- ----------- ---------- ---------
Year ended 31 December
2016
Opening net book value 560,835 1,343 562,178
Additions 9,435 19 9,454
Depreciation charge (81,636) (540) (82,176)
Foreign currency translation
differences - (77) (77)
Closing net book value 488,634 745 489,379
=========== ========== =========
At 31 December 2016
Cost 685,087 5,743 690,830
Accumulated depreciation (196,453) (4,998) (201,451)
----------- ---------- ---------
Net book value 488,634 745 489,379
=========== ========== =========
Year ended 31 December
2017
Opening net book value 488,634 745 489,379
Additions 8,059 114 8,173
Depreciation charge (79,785) (378) (80,163)
Foreign currency translation
differences - 84 84
Closing net book value 416,908 565 417,473
========= ======= =========
At 31 December 2017
Cost 693,146 5,941 699,087
Accumulated depreciation (276,238) (5,376) (281,614)
--------- ------- ---------
Net book value 416,908 565 417,473
========= ======= =========
The net book value of oil and gas properties at 31 December 2017
is comprised of property, plant and equipment relating to the
Shaikan block and has a carrying value of $416.9 million (2016:
$488.6 million).
The additions to the Shaikan asset during the year include costs
for various studies and production facilities improvement
projects.
The DD&A charge of $79.8 million on oil and gas properties
(2016: $81.6 million) has been included within cost of sales (note
3). The depreciation charge of $0.4 million on fixtures and
equipment (2016: $0.5 million) has been included in general and
administrative expenses.
For details of the key assumptions and judgements underlying the
impairment assessment and the depreciation, depletion and
amortisation charge, refer to the "Critical accounting estimates
and judgments" section of the Summary of Significant Accounting
Policies.
12. Group Companies
Details of the Company's subsidiaries and joint operations at 31
December 2017, and 31 December 2016, are as follows:
Name of subsidiary Place Proportion Proportion Principal
of incorporation of ownership of voting activity
interest power
held
-------------------------- ------------------- -------------- ----------- -----------------
Gulf Keystone
Petroleum (UK)
Limited
6th floor
New Fetter Place Geological,
8-10 New Fetter geophysical
Lane United and engineering
London EC4A 1AZ Kingdom 100% 100% services
-------------------------- ------------------- -------------- ----------- -----------------
Gulf Keystone
Petroleum International
Limited
Cumberland House
9th floor, 1 Victoria
Street Exploration
PO Box 1561 and evaluation
Hamilton HMFX activities
Bermuda Bermuda 100% 100% in Kurdistan
-------------------------- ------------------- -------------- ----------- -----------------
Gulf Keystone
Petroleum Numidia
Limited
Cumberland House
9th floor, 1 Victoria
Street
PO Box 1561 Exploration
Hamilton HMFX and evaluation
Bermuda Bermuda 100% 100% activities
-------------------------- ------------------- -------------- ----------- -----------------
Gulf Keystone
Petroleum HBH
Limited
Cumberland House
9th floor, 1 Victoria
Street
PO Box 1561 Exploration
Hamilton HMFX and evaluation
Bermuda Bermuda 100% 100% activities
-------------------------- ------------------- -------------- ----------- -----------------
Shaikan Petroleum
Limited
Cumberland House
9th floor, 1 Victoria
Street
PO Box 1561 Exploration
Hamilton HMFX and evaluation
Bermuda Bermuda 100% 100% activities
-------------------------- ------------------- -------------- ----------- -----------------
Name of joint Place Proportion Proportion Principal
operation of incorporation of ownership of voting activity
interest power
held(2)
---------------- ------------------- -------------- ----------- -----------------
Production
and development
Shaikan Kurdistan 80%(1) 33.3% activities
---------------- ------------------- -------------- ----------- -----------------
Exploration
and evaluation
Sheikh-Adi (3) Kurdistan 100% 50% activities
---------------- ------------------- -------------- ----------- -----------------
Exploration
and evaluation
Ber Bahr (4) Kurdistan 40% 33.3% activities
---------------- ------------------- -------------- ----------- -----------------
(1) 75% is held directly by Gulf Keystone Petroleum
International Limited, with 5% held in trust for Texas Keystone,
Inc. ("TKI") until formal transfer of the share is completed.
(2) Proportion of voting power is as defined in the individual
Production Sharing Contracts (PSC). The above are joint operations
based on the voting rights as set out in each PSC.
(3) Relinquished effective 16 March 2016
(4) Relinquished effective 13 July 2017
13. Inventories
2017 2016
$'000 $'000
-------------------------------- ------- -------
Warehouse stocks and materials 14,569 14,814
Crude oil 2,621 1,157
------- -------
17,190 15,971
======= =======
Inventories at 31 December 2017 include write downs to net
realisable value of $0.4 million (2016: $2.9 million).
14. Trade and other receivables
2017 2016
$'000 $'000
-------------------------------- ------- -------
Trade receivables 57,887 36,000
Other receivables 3,260 4,976
Corporation tax receivable 1 -
Prepayments and accrued income 562 589
------- -------
61,710 41,565
======= =======
Trade receivables comprise amounts due from the MNR for revenue
less capacity building payments for the four months from September
2017 to December 2017 totalling $57.9 million as at 31 December
2017 (2016: $36.0 million), which has all been received subsequent
to the year end. This included past due trade receivables of $42.6
million (2016: $24.0 million).
Included within other receivables for 2017 is an amount of $0.4
million (2016: $0.4 million) being the deposits for leased assets
which are receivable after more than one year. There are no
receivables from related parties as at 31 December 2017 (2016:
$nil) (see note 23). No impairments of receivables have been
recognised during the year (2016: $nil).
The Directors consider that the carrying amount of trade and
other receivables approximates to their fair value and no amounts
are provided against them.
15. Trade and other payables
Trade and other payables principally comprise amounts
outstanding for trade purchases and ongoing costs.
The Directors consider that the carrying amount of trade
payables approximates their fair value.
2017 2016
$'000 $'000
----------------- ------ ------
Trade payables 2,687 2,922
Other payables 26,168 26,917
Accrued expenses 28,183 26,445
57,038 56,284
====== ======
There is $2.0 million interest payable included in the accrued
expenses as at 31 December 2017 (2016: $nil) (see note 16).
In accordance with the Bilateral Agreement, the Group received
payments during 2016 from the MNR in excess of entitlements under
the Shaikan PSC amounting to $16.2 million and the amount of the
Sheikh Adi PSC bonus that was payable on the declaration of
commerciality was reduced to $10.0 million. Both of these
liabilities are included in Other payables, but these liabilities
form part of the ongoing Shaikan PSC amendment negotiations and it
is likely that they will be offset against unrecognised revenue
arrears, because, under the Shaikan PSC and the Bilateral
Agreement, the Group is entitled to offset certain costs against
amounts owed by the KRG to GKPI. In these instances, the group
recognises revenue that has previously been unrecognised and a
reduction in the liability to the KRG.
16. Long term borrowings and warrants
On 14 October 2016, the Company successfully completed a balance
sheet restructuring ("Balance Sheet Restructuring") which reduced
the Company's debt from over $600 million to $100 million through
the partial conversion of the Guaranteed Notes and full conversion
of the Convertible Bonds to Common Shares in the Company.
The impact of the Balance Sheet Restructuring on the long term
borrowing was as follows:
a) The Company's convertible debt securities issued in 2012 and
2013 consisting of $325 million convertible bonds due on October
2017 carrying a coupon of 6.25% payable on a bi-annual basis (the
"Convertible Bonds") were extinguished as a result of the Balance
Sheet Restructuring. The related accrued interest payable of $20.2
million was also cancelled in consideration for 4,585,192,303
shares with a fair value of GBP0.012 ($0.0144) per share on 14
October 2016.
The Company's three-year senior guaranteed notes of $250 million
("Guaranteed Notes"), carrying a coupon of 13% per annum payable on
a bi-annual basis and freely tradeable, and the related accrued
interest payable of $32.3 million were extinguished in
consideration for 15,031,035,578 Common Shares at a fair value
price of GBP0.012 ($0.0144) per share. In addition, Reinstated
Notes of $100 million were issued by the Company (see note
16b).
The extinguishment of the Convertible Bonds and the Guaranteed
Notes resulted in a net gain of $222.4 million as included in the
Consolidated Income statement.
b) On 14 October 2016, the Company issued $100 million of new
guaranteed notes ("Reinstated Notes"). The unsecured Reinstated
Notes are guaranteed by Gulf Keystone Petroleum International
Limited, the Company's subsidiary and their terms are the same as
the Guaranteed Notes subject to the following amendments:
- Maturity date is 18 October 2021. At any time prior to
maturity, the Reinstated Notes are redeemable in part or full at
par and can therefore be refinanced without any prepayment
penalty;
- The Company has the option to defer its interest payments
until the maturity of the Reinstated Notes in PIK at 13% or pay in
cash at 10% until 18 October 2018. From 19 October 2018, the
Company is mandatorily liable to pay interest in cash at 10%;
- The aggregate principal amount of the Reinstated Notes shall
be increased by the amount of such PIK interest on the date such
interest is due and interest will accrue on the increased principal
amount from such date;
- The Company will be permitted to raise up to $45 million of
additional indebtedness at any time on market terms to fund capital
and operating expenditure;
- Certain other amendments, including inter alia, the removal of
security, removal of the Debt Service Reserve Account requirement
and the extension of the grace periods in respect of certain events
of default under the Reinstated Notes; and
- Cost of $12.0 million incurred in relation to the Balance
Sheet Restructuring was expensed.
The liabilities associated with the Reinstated Notes are
presented in the following table:
2017 2016
$'000 $'000
-------------------------------------- -------- ---------
Liability component at 1 January 98,886 555,374
Liability component of the guaranteed
notes at issue
Interest charged during the year - 57,435
Interest paid during the year (10,111) -
Extinguishment of liability and
related interest during the year - (612,809)
Issue of Reinstated Notes at fair
value - 96,405
Reinstated notes interest capitalised
during the year 10,309 2,481
Liability component at 31 December 99,084 98,886
======== =========
Liability component reported in:
2017 2016
$'000 $'000
-------------------------------- ------- -------
Current liabilities: (see note
15) 2,017 -
Non-current liabilities 97,067 98,886
99,084 98,886
======= =======
As part of the Balance Sheet Restructuring, the interest payable
relating to Convertible Bonds and Guaranteed Notes was
extinguished. The interest charged was computed until 13 October
2016 by applying the effective rates on an annual basis to the
liability component for the period. The effective interest rates
for the initial $275 million convertible bond issue in October 2012
and the $50 million tap issue in October 2012 is 9.26% and 7.20%,
respectively. The effective interest rate for the 2014 Notes is
19.7%. The interest capitalised on the Reinstated Notes was
calculated using the effective interest rate of 12.11%.
For the year ended 31 December 2017, the Company recognised
$10.3 million interest capitalised on the Reinstated Notes (2016:
$2.5 million). Of this amount, $8.3 million was capitalised as part
of Other borrowings in the Consolidated Balance Sheet and $2.0
million interest was accrued on the Reinstated Notes (2016: $nil).
The interest payment method will be reassessed prior to each
interest payment date. Any difference from what was capitalised or
accrued for the year ended 31 December 2017 and the actual interest
payment method selected will be adjusted prospectively.
The Reinstated Notes are traded on the Luxembourg Stock Exchange
and the fair value at the prevailing market price as at the balance
sheet date was:
Market 2017 2016
price
$'000 $'000
------------------- --------- ------- -------
Convertible Bonds n/a - -
2014 Notes n/a - -
Reinstated Notes $0.98241 98,241 97,229
98,241 97,229
======= =======
As of 31 December 2017, the Group's remaining contractual
liability comprising principal and interest based on undiscounted
cash flows at the maturity date of the Reinstated Notes is as
follows:
2017 2016
$'000 $'000
------------------------- ------- -------
Within one year 10,000 -
Within two to five years 130,000 167,241
-------
140,000 167,241
======= =======
As at 31 December 2017, there were no warrants to purchase New
Common Shares of $1.0 each at an exercise price of $81.30 in issue
(2016: 400,000 warrants), as the warrants expired unexercised on 18
April 2017.
17. Provisions
2017 2016
$'000 $'000
Current provisions 7,197 7,461
Non-current provisions 24,107 23,794
31,304 31,255
====== ======
Current Non-current Total
Provisions Provisions
(Algeria (Kurdistan)
and Kurdistan)
Decommissioning provision $'000 $'000 $'000
--------------------------- --------------- ------------ ------
At 1 January 2017 7,461 23,794 31,255
New provisions and changes
in estimates 8 (402) (394)
Unwinding of discount - 715 715
Release of provisions (272) - (272)
At 31 December 2017 7,197 24,107 31,304
=============== ============ ======
The provision for decommissioning is based on the net present
value of the Group's share of expenditure which may be incurred in
the removal and decommissioning of the wells and facilities
currently in place and restoration of the sites to their original
state. This expenditure is estimated to be incurred over the next
twelve months on Algerian assets. The expenditure on the Shaikan
block in Kurdistan is expected to take place over the next 25
years.
The Group relinquished Ber Bahr in July 2017 with no further
liabilities payable by the Group. The balance of the
decommissioning liability of $0.3 million was released and
recognised in other gains in the Consolidated Income Statement
(2016: $nil).
18. Deferred tax asset
The following are the major deferred tax liabilities and assets
recognised by the Group and movements thereon during the current
and prior reporting periods.
Accelerated Share-based Tax losses Total
tax depreciation payments carried $'000
$'000 $'000 forward
$'000
--------------------- ----------------- ----------- ---------- ------
At 1 January 2016 (111) 158 436 483
(Charge)/credit to
income statement 15 (132) (11) (128)
Exchange differences 14 10 (69) (45)
----------------- ----------- ---------- ------
At 31 December 2016 (82) 36 356 310
(Charge)/credit to
income statement 21 92 (52) 61
Exchange differences (7) 8 31 32
----------------- ----------- ---------- ------
At 31 December 2017 (68) 136 335 403
================= =========== ========== ======
19. Share capital
2017 2016
$000s $000s
------------------------------------ ------- -------
Authorised
Common shares of $1 each (2016:
$1 each) 231,605 231,605
Non-voting shares of $0.01 each 500 500
Preferred shares of $1,000 each 20,000 20,000
Series A Preferred shares of $1,000
each 40,000 40,000
------- -------
292,105 292,105
======= =======
Common shares
-------------------------------------------
Share Share
No. of Amount capital premium
shares
000 $'000 $'000 $'000
-------------------- ------------ ---------- -------- -------
Balance 31 December
2015 978,138 844,400 9,781 834,619
Share placement 21,964,819 306,116 219,649 86,467
Share consolidation (22,713,527) - - -
Issue cost of share
placement - (358) - (358)
Balance 31 December
2016 229,430 1,150,158 229,430 920,728
Balance 31 December
2017 229,430 1,150,158 229,430 920,728
============ ========== ======== =======
At 31 December 2017, a total of 0.01 million common shares at
$1.0 each were held by the EBT (2016: 0.1 million at $1.0 each) and
0.1 million shares at $1.0 each were held by the Exit Event Trustee
(2016: 0.1 million at $1.0 each). All 0.11 million common shares
were included within reserves (2016: 0.2 million).
Rights attached to share capital
The holders of the common shares have the following rights
(subject to the other provisions of the Byelaws):
(i) entitled to one vote per common share;
(ii) entitled to receive notice of, and attend
and vote at, general meetings of the Company;
(iii) entitled to dividends or other distributions;
and
(iv) in the event of a winding-up or dissolution
of the Company, whether voluntary or involuntary
or for a reorganisation or otherwise or upon
a distribution of capital, entitled to receive
the amount of capital paid up on their common
shares and to participate further in the
surplus assets of the Company only after
payment of the Series A Liquidation Value
(as defined in the Byelaws) on the Series
A Preferred Shares.
20. Reconciliation of profit from operations to net cash
generated from operating activities
2017 2016
$'000 $'000
------------------------------------------ --------- ---------
Profit from operations 24,072 26,046
Adjustments for:
Depreciation, depletion and amortisation
of property, plant and equipment 80,163 82,176
Amortisation of intangible assets 47 38
Other gains or losses (11) -
Share-based payment expense 2,710 1,255
(Increase)/ decrease in inventories (1,219) 2,573
Increase in receivables (20,125) (22,129)
Increase/ (decrease) in payables (337) (40,522)
--------- ---------
Net cash generated by operations 85,300 49,437
Income tax received - 182
--------- ---------
Net cash generated from operating
activities 85,300 49,619
========= =========
21. Commitments
Operating lease commitments - the Group as a lessee
2017 2016
$'000 $'000
--------------------------------------- ------ ------
Minimum lease payments under operating
leases recognised as expense for
the year 2,924 3,936
====== ======
At the balance sheet date, the Group had outstanding total
commitments under non-cancellable operating leases, which fall due
as follows:
2017 2016
$'000 $'000
--------------------------------------- --------------------- ---------------------
Within one year 1,144 1,805
In the second to fifth years inclusive 1,519 1,617
2,663 3,422
===================== =====================
Operating lease payments represent rentals payable by the Group
for certain of its office and residence properties and facilities
and vehicle rentals in the United Kingdom and the Kurdistan Region
of Iraq. The non-cancellable operating leases within Kurdistan are
for up to one year in duration.
Exploration and development commitments
Due to the nature of the Group's operations in exploring and
evaluating areas of interest and development of assets, it is
difficult to accurately forecast the nature or amount of future
expenditure.
Expenditure commitments on current permits for the Group could
be reduced by selective relinquishment of exploration tenure, by
the sale of assets or by the renegotiation of expenditure
commitments. There is no significant capital commitment expected in
the year ending 31 December 2018 for the Group (2017: $nil).
22. Share-based payments
2017 2016
$'000 $'000
--------------------- ------ ------
Share options charge 2,710 1,686
2,710 1,686
====== ======
Value Creation Plan
On 12 December 2016 the Company awarded performance units under
the 2016 Gulf Keystone Petroleum Value Creation Plan ("VCP") to the
directors and persons discharging managerial responsibilities of
the Company listed below:
Position Number
of units
Executive awarded
------------------ ---------- ----------
Jón Ferrier CEO 386,667
------------------ ---------- ----------
Sami Zouari CFO 306,667
------------------ ---------- ----------
Nadhim Zahawi CSO 226,667
------------------ ---------- ----------
The award of performance units is based on a distribution of one
third of the total awards each during the first year and,
thereafter, 40% for the CEO; 30% for the CFO and 20% for the CSO
for the remainder of the plan, with the remaining 10% available for
future distribution subject to board decision.
Participants in the VCP are selected at the discretion of the
Remuneration Committee. Awards under the VCP are granted in the
form of performance units of which there are a maximum of 1,000,000
available.
The key terms and conditions of the VCP are set out below:
-- Subject to the achievement of performance conditions, the VCP
award may be converted into a number of nil cost options over a
number of shares on five measurement dates over the 5 year life of
the plan.
-- The value of the award is dependent on the extent to which
the actual Total Shareholder Return exceeds the Threshold Total
Shareholder Return at each measurement date.
-- The Threshold Total Shareholder Return (the 'Hurdle') will be
equal to 8% per annum compound growth on each measurement date or
the highest Total Shareholder Return if this is higher than the 8%
compound rate.
-- The VCP limits the value on grant of nil-cost options to $20
million for the whole plan. Once this limit has been reached no
further nil-cost options may be granted on that or any subsequent
measurement date.
-- Vesting of the nil-cost options occurs following the third,
fourth and fifth measurement dates should the performance
parameters be achieved. At the third and fourth measurement date,
50% of earned nil-cost options will vest subject to achievement of
the 'hurdle'.
-- At the fifth measurement date, providing the 'hurdle' has
been achieved i.e. 8% per annum increase in total shareholder
return on a compound basis, 100% of the outstanding nil-cost
options will vest. If the 'hurdle' has not been achieved, then the
outstanding nil-cost options will lapse.
-- Where there is a change of control of the company before 31
December 2017 the terms of the VCP will not apply but the
participants will share awards based on 2% of the value of the sale
consideration less the value provided to employees under the SRP
(described above).
A charge of $1.12 million (2016: $0.06 million) in relation to
the VCP is included in the total share options charge.
Staff Retention Plan
At the 2016 Annual General Meeting, shareholders approved the
adoption of the Gulf Keystone Petroleum 2016 Staff Retention Plan
(SRP), which is designed to reward members of staff through the
grant of share options at a zero exercise price.
The exercise of the awarded options is not subject to any
performance conditions and can be exercised at any time after the
three year vesting period but within ten years after the date of
grant. If options are not exercised within ten years, the options
will lapse and will not be exercisable. If an employee leaves the
company during the three years from the date of grant, the options
will lapse on the date notice to leave is given to the company.
Should an employee be regarded as a good leaver, the options may be
exercised at any time within a period of six months from departure
date.
2017 2016
Number Weighted Number Weighted
of average of average
share options exercise share options exercise
'000 price '000 price
(in pence) (in pence)
----------------- --------------- ----------- --------------- -----------
Outstanding at
1 January 1,402 - 1,402 -
Granted during
the year 611 - - -
Exercised during
the year (325) - - -
Forfeited during
the year (93) - - -
Outstanding at
31 December 1,595 - 1,402 -
Exercisable at - - - -
31 December
=============== =========== =============== ===========
The weighted average share price at the date of exercise for
share options exercised during the period was GBP1.06. The options
outstanding at 31 December 2017 had a weighted average remaining
contractual life of 9 years.
During 2017, 611,000 options were granted to employees under the
Group's staff retention plan.
The inputs into the stochastic (binomial) valuation model were
as follows:
2017 2016
----------------------------------- -------------------- ------
Weighted average opening share
price on date of grant (in pence) 119.47 120.00
The expected volatility was calculated as 97.2% for the January
2017 awards, 94.0% for the early July 2017 awards, 94.1% for the
July 2017 awards and has been based on the Company's share price
volatility averaged for the three years prior to grant date.
The expected weighted average term of the new options is 3
years. The risk free rate for the new options awarded was 0.26% for
January 2017 awards, 0.43% for early July 2017 and 0.32% for late
July 2017.
The weighted average fair value of the options granted in 2017
was GBP1.19 (2016: GBP1.20).
The Company has not made a dividend payment to date and, as
there is no expectation of making payments in the immediate future,
the dividend yield variable has been set at zero for all
grants.
A charge of $0.90 million (2016: $0.04 million) in relation to
the SRP is included in the total share options charge.
Share options outstanding at the end of the year have the
following expiry date and exercise prices:
Expiry date Exercise price
(pence) Options ('000)
2017 2016 2017 2016
11 December 2026 - - 994 -
09 January 2027 - - 350 -
30 June 2027 - - 206 -
30 July 2027 - - 45 -
1,595 -
=========== ======
Equity-settled share option plan
The Group's share option plan provides for an exercise price at
least equal to the closing market price of the Group shares on the
date prior to grant. Awards made under the Group's share option
plan have a vesting period of at least three years except for
awards made under the Long Term Incentive Plan, which vest in equal
tranches over a minimum of three years subsequent to the
achievement of a number of operational and market-based performance
conditions. Options expire if they remain unexercised after a
period of 10 years from the date of grant. The options granted in
2015 were made under the recruitment remuneration policy, vest in
three equal tranches over two years, and expire if they remain
unexercised after a period of 7 years from the date of grant.
Options are forfeited if the employee leaves the Group before the
options vest. The company has not made any awards during 2017 under
this scheme.
2017 2016
Number Weighted Number Weighted
of average of average
share options exercise share options exercise
'000 price '000 price
(in pence) (in pence)
-------------------- --------------- ----------- --------------- -----------
Outstanding at
1 January 360 10,190.0 35,967 101.9
Share Consolidation
(note 19) - - (35,607) 10,088.1
--------------- ----------- --------------- -----------
Outstanding at
1 January 360 10,190.0 360 10,190.0
Granted during - - - -
the year
Forfeited during - - - -
the year
Outstanding at
31 December 360 10,149.7 360 10,190.0
Exercisable at
31 December 360 10,149.7 309 10,599.0
=============== =========== =============== ===========
No options were exercised, granted or cancelled in 2017 (2016:
nil).
The options outstanding at 31 December 2017 had a weighted
average exercise price of GBP102 (2016: GBP102) and a weighted
average remaining contractual life of 3 years (2016: 4 years).
A charge of $0.69 million (2016: $1.59 million) in relation to
the SRP is included in the total share options charge.
Share options outstanding at the end of the year have the
following expiry date and exercise prices:
Expiry date Exercise price
(pence) Options ('000)
2017 2016 2017 2016
13 February 2018 3,000 3,000 11.0 11.0
24 September 2018 3,000 3,000 20.1 20.1
15 March 2019 3,000 3,000 15.9 15.9
30 July 2019 3,000 3,000 10.0 10.0
24 Jun 2020 7,500 7,500 156.3 156.3
22 September 2020 14,750 14,750 2.5 2.5
10 October 2020 17,500 17,500 2.5 2.5
6 February 2021 17,500 17,500 94.4 94.4
19 June 2021 14,625 14,625 5.5 5.5
7 July 2021 14,625 14,625 2.5 2.5
14 July 2021 14,625 14,625 2.5 2.5
21 July 2021 14,625 14,625 5.0 5.0
19 September 2021 15,250 15,250 2.5 2.5
26 October 2021 14,625 14,625 2.5 2.5
21 January 2022 5,500 5,500 15.0 15.0
20 March 2022 19,450 19,450 4.0 4.0
20 March 2022 25,000 25,000 2.5 2.5
8 July 2023 15,875 15,875 2.5 2.5
24 April 2024 9,975 9,975 2.5 2.5
359.7 359.7
======== =======
Bonus shares
All shares in the Company's Executive Bonus Scheme were issued
by 31 December 2014.
Exit Event Awards
On March 2012, the Remuneration Committee recommended that the
Company make cash settled awards to certain Executive Directors and
employees conditional on the occurrence of an Exit Event (as
defined below) up to a maximum amount equivalent to the value of
0.1 million common shares (adjusted for consolidation on 100:1
basis) at the time of an Exit Event, and that a trustee (the "Exit
Event Trustee") be appointed to hold and, subject to the occurrence
of an Exit Event, to sell sufficient common shares to satisfy the
Exit Event Awards.
On 21 March 2012, the Board approved the Exit Event Awards to
certain Executive Directors and employees, subject to the
occurrence of an Exit Event, equivalent to the value of 0.02
million common shares (adjusted for consolidation on 100:1 basis).
The Exit Event Trustee will hold the remaining 0.08 million common
shares (adjusted for consolidation on 100:1 basis) to satisfy any
future Exit Event Awards to full-time employees of the Company and
subsidiary companies, subject to the occurrence of an Exit Event,
with such beneficiaries to be determined in due course. A further
award of 0.01 million common shares (adjusted for consolidation on
100:1 basis) was made to staff in December 2013, with no additional
Exit Event Awards made to Directors. The first tranche of Exit
Event Awards expired in March 2017.
An Exit Event envisages a sale of either the Company or a
substantial proportion (i.e. more than 50%) of its assets.
These share-based payments are measured at the fair value of the
associated liability at the year end. As at 31 December 2017, the
fair value of Exit Event Awards was $nil (2016: $nil) based on the
market value of the shares and the probability of the Exit Event
occurring assessed as of that date.
23. Related party transactions
The Group has a related party relationship with its
subsidiaries. The Company and its subsidiaries, in the ordinary
course of business, enter into various sales, purchase and service
transactions with joint operations in which the Group has a
material interest. These transactions are under terms that are no
less favourable to the Group than those arranged with third
parties.
Remuneration of key management personnel
The remuneration of the Directors and Officers, the key
management personnel of the Group, is set out below in aggregate
for each of the categories specified in IAS 24 Related Party
Disclosures. Those identified as key management personnel include
the Directors of the Company and the following key personnel:
J Barker - HR Director
S Catterall - Chief Operations Officer
U Eminkahyagil - Kurdistan Country Manager
B Demont - Kurdistan Country Manager
K Kelly - Sub-Surface Manager Kurdistan
N Kernoha - Financial Controller
W McAvock - Financial Controller
M Messaoudi - Algeria Country Manager
G Papineau-Legris - Commercial Director
A Robinson - Legal Director & Company Secretary
M Ross - Legal Director & Company Secretary
J Stafford - Vice President Operations
N Zahawi - Chief Strategy Officer
The values below are calculated in accordance with IAS 19 and
IFRS 2.
2017 2016
$'000 $'000
------------------------------ ------ ------
Short-term employee benefits 6,514 5,136
Other allowances - -
Share-based payment - options 1,630 302
8,144 5,438
====== ======
Further information about the remuneration of individual
Directors is provided in the Directors' Emoluments section of the
Remuneration Committee Report.
24. Financial instruments
2017 2016
$'000 $'000
-------------------------- ------- -------
Financial assets
Cash and cash equivalents 160,456 92,870
Loans and receivables 61,148 40,976
221,604 133,846
======= =======
Financial liabilities
Trade and other payables 57,038 41,844
Reinstated Note 97,068 98,886
154,106 140,730
======= =======
All loans and payables, except for the Reinstated Notes, are due
to be settled within one year and are classified as current
liabilities.
The maturity profile and fair values of the Reinstated Notes are
disclosed in note 16. The maturity profile of all other financial
liabilities is indicated by their classification in the balance
sheet as "current" or "non-current". Further information relevant
to the Group's liquidity position is disclosed in the Directors'
Report under "Going Concern".
Fair value hierarchy
In line with IFRS 13 - 'Fair Value Measurement' the Group uses
the following hierarchy for determining the fair value of financial
instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for
identical assets or liabilities;
Level 2: other techniques for which all inputs which have a
significant effect on the recorded fair value are observable,
either directly or indirectly; and
Level 3: techniques which use inputs which have a significant
effect on the recorded value that are not based on observable
market data.
Capital Risk Management
The Group manages its capital to ensure that the entities within
the Group will be able to continue as going concerns while
maximising the return to stakeholders through the optimisation of
the debt and equity balance. The Group is not subject to externally
imposed capital requirements. The capital structure of the Group
consists of cash, cash equivalents, Reinstated Notes and equity
attributable to equity holders of the parent, comprising issued
capital, reserves and accumulated losses as disclosed in Note 19,
the Consolidated Statement of Comprehensive Income and the
Consolidated Statement of Changes in Equity.
Capital Structure
The Group's Board of Directors reviews the capital structure on
a regular basis and makes adjustments to it in light of changes in
economic conditions. As part of this review, the Board considers
the cost of capital and the risks associated with each class of
capital.
On 14 October 2016, the Group successfully completed the Balance
Sheet Restructuring reducing the Group's debt from over $600
million to $100 million of the Reinstated Notes through the partial
conversion of the guaranteed notes and full conversion of the
convertible bonds to the Company's common shares.
Significant Accounting Policies
Details of the significant accounting policies and methods
adopted, including the criteria for recognition, the basis of
measurement and the basis on which income and expenses are
recognised, in respect of each class of financial asset, financial
liability and equity instrument are disclosed in the Summary of
Significant Accounting Policies.
Financial Risk Management Objectives
The Group's management monitors and manages the financial risks
relating to the operations of the Group. These financial risks
include market risk (including commodity price, currency and fair
value interest rate risk), credit risk, liquidity risk and cash
flow interest rate risk.
The Group currently has no currency risk or other hedges against
financial risks as the benefit of entering into such agreements is
not considered to be significant enough as to outweigh the
significant cost and administrative burden associated with such
hedging contracts. The Group does not use derivative financial
instruments for speculative purposes.
The risks are closely reviewed by the Board on a regular basis
and steps are taken where necessary to ensure these risks are
minimised.
Market risk
The Group's activities expose it primarily to the financial
risks of changes in foreign currency exchange rates, oil prices and
changes in interest rates in relation to the Group's cash balances.
The operating currencies of the Group are the pound sterling (GBP),
United States dollar (USD), Algerian dinar (DZD) and Iraqi dinar
(IQD).
The Group's exposure to currency risk is low as the Reinstated
Notes are denominated in USD, which is the main currency for the
Group's transactions, and following the utilisation of sterling
funds from previous equity raises. During the year the majority of
funds raised in the GBP equity issue were converted to USD at the
spot rate, with a small balance being held in GBP to meet GBP
denominated expenditure. Previously, currency hedges were entered
into to address foreign currency risk arising when entering into
funding transactions in GBP.
There have been no changes to the Group's exposure to other
market risks or any changes to the manner in which the Group
manages and measures the risk. The Group does not hedge against the
effects of movement in oil prices. The risks are monitored by the
Board on a regular basis.
Foreign currency risk management
The Group undertakes certain transactions denominated in foreign
currencies, being any currency other than the functional currency
of the Group subsidiary concerned. Hence, exposures to exchange
rate fluctuations arise.
At 31 December 2017, a 10% weakening or strengthening of the US
dollar against the other currencies in which the Group's monetary
assets and monetary liabilities are denominated would not have a
material effect on the Group's net current assets or loss before
tax.
Interest rate risk management
The Group's policy on interest rate management is agreed at the
Board level and is reviewed on an ongoing basis. The current policy
is to maintain a certain amount of funds in the form of cash for
short-term liabilities and have the rest on relatively short-term
deposits, usually between one and three months, to maximise returns
and accessibility. Under the terms of the Reinstated Notes, until
18 October 2018, the Group has the option to defer interest at 13%
or pay in cash at 10%. From 19 October 2018, the Group must pay
interest in cash at 10%.
Interest rate sensitivity analysis
Based on the exposure to the interest rates for cash and cash
equivalents at the balance sheet date, a 0.5% increase or decrease
in interest rates would not have had a material impact on the
Group's loss for the year or the previous year. A rate of 0.5% is
used as it represents management's assessment of the reasonably
possible changes in interest rates.
Credit risk management
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in financial loss to the
Group. As at 31 December 2017, the maximum exposure to credit risk
from a trade receivable outstanding from one customer is $60
million (2016: $36 million).
The credit risk on liquid funds is limited because the
counterparties for a significant portion of the cash and cash
equivalents at the balance sheet date are banks with good credit
ratings assigned by international credit-rating agencies.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with
the Board of Directors. It is the Group's policy to finance its
business by means of internally generated funds, external share
capital and debt. In common with many exploration companies, the
Group raises finance for its exploration and appraisal activities
in discrete tranches to finance its activities for limited periods.
The Group seeks to raise further funding as and when required.
25. Contingent liabilities
The Group has a contingent liability of $27 million (2016: $27
million) in relation to the proceeds from the sale of test
production in the period prior to the approval of the Shaikan Field
Development Plan in July 2013. The Shaikan PSC does not appear to
address expressly any party's rights to this pre-Development Plan
petroleum. This suggests strongly that there must have been some
other agreement, understanding or arrangement between GKP and the
KRG as to how this pre-Development Plan petroleum would be lifted
and sold. The sales were made based on sales contracts with
domestic offtakers which were approved by the KRG. The Group
believes that the receipts from these sales of pre-Development Plan
petroleum are for the account of the Contractor (GKP and MOL),
rather than the KRG and accordingly recorded them as test revenue
in prior years. However, the KRG has requested a repayment of these
amounts and the Group is currently involved in negotiations to
resolve this matter. The Group has received external legal advice
and does not consider that a probable material payment is payable
to the KRG. This contingent liability forms part of the ongoing
Shaikan PSC amendment negotiations and it is likely that it will be
settled as part of those negotiations.
26. Events after the balance sheet date
In early April 2018, considering the current healthy cash
balance and regularity of payments from the MNR, the Group decided
to pay its upcoming Reinstated Notes coupon of $5.0 million at 10%
interest rate on 18 April 2018, even though it has the option to
postpone it to maturity (at 13% interest rate).
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FKKDQBBKBBQD
(END) Dow Jones Newswires
April 11, 2018 02:01 ET (06:01 GMT)
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