Cadogan Petroleum
plc
Annual Results for
year ended 31 December 2018
The Board of Cadogan Petroleum plc,
(“Cadogan” or “the Company”), is pleased to announce the Company’s
annual results for the year ended 31
December 2018.
Key Financial Highlights of 2018:
- Profit for the year: $1.2 million
(2017: loss of $1.6 million)
- Average realised price: 51.3$/boe (2017: 41.6$/boe)
- Gross revenues[1]: $14.7 million
(2017: $15.1 million)
- Gross profit: $1.9 million (2017:
$2.1 million)
- G&A[2]: $4.8 million (2017: $5.0 million)
- Profit per share: 0.5 cents
(2017: loss of 0.7 cents)
- Net cash[3] at year end: $35.2
million (2017: $37.6
million)
Key Operational Highlights of 2018:
- Production: 91,085 boe (2017: 56,516 boe), a 61% increase
year-on-year
- 130% increase in production from the key Monastyretska licence,
located in Western Ukraine
- Gas trading profit of $0.7
million (2017: $1.3 million,
which included $0.4 million of
interest on receivables)
- Service business profit of $0.06
million (2017: loss of $0.03
million), net of services provided to the group[4]
- No LTI/TRIs’[5],[6]
- Secured ISO 14001 and 45001 certifications.
Post Period Events:
- €13.4 million loan provided to Proger, with an option to
convert into an effective 22% equity interest, offers growth
exposure as well as diversification
- Blazh-10 well has encountered 207 meters of the Yamna target
formation, at a depth 50 meters higher than prognosis and in the
predicted sub vertical setting. Cores taken from the upper
part of the Yamna and a preliminary interpretation of the open hole
logs suggested that the entire Yamna section could potentially be
oil bearing. The well was being prepared for testing at the time
this report was finalized.
Cadogan has successfully delivered in making Ukraine its platform for growth by monetising
the value of its legacy assets, both core and non-core. In doing so
Cadogan has achieved profitability, which is a testimony to the
degree of transformation the company has gone through over the last
few years. Further testimonies to Cadogan’s transformational
journey are the drilling of well Blazh-10, which took a fraction of
the time normally required to drill these wells by other operators,
and the loan agreement with Proger S.p.a.
Group Overview
The Group has continued to maintain exploration and production
assets, to conduct gas trading operations and to operate an oil
service business in Ukraine.
Cadogan’s assets are concentrated in the West of the country, far
away from the zone of military confrontation with Russia. Gas trading includes the importing of
gas from Slovakia, Hungary and Poland and local purchasing and sales with
physical delivery of natural gas. The oil services business focuses
on work-over operations, civil works services and other services
provided to Exploration and Production (“E&P”) companies in
Ukraine.
Our business model
We aim to increase value through:
- Maintaining a robust balance sheet, monetising the remaining
value of our Ukrainian assets and supplementing E&P cash flow
with revenues from gas trading and oil services
- Pursuing farm-outs to progress investments in Ukrainian
licences
- Sourcing additional assets to diversify Cadogan’s portfolio,
both geographically and operationally
The Group has continued to actively pursue its strategy of
portfolio re-loading and geographical diversification and while
looking for the right opportunity to invest has committed part of
its cash into a 2-years, high yield loan with Proger S.p.a. which
has an option to convert (and in that case interest will not be
paid).
Both gas trading and the service business optimise the use of
existing available resources, such as cash as working capital for
trading and equipment and competences for the service business and
continue to contribute to the Group’s goal of being cash neutral,
while actively searching for value accretive opportunities.
Ukraine
West
Ukraine
The Group continued to produce oil and gas from its licences in
the West Ukraine. Average net
production in 2018 was 250 boepd, a 61% increase over the
production of the previous year. While gas production remained
stable until the Cheremkhivsko-Strupkivska licence suspension
(May 2018), oil production from the
Monastyretska licence increased by 130%, driven by a successful
work-over and stimulation campaign on the three producing wells.
All three wells are rented from the companies which drilled them in
the past and are currently producing with sucker rod
pumps.
The Group continued to produce gas from the Debeslavetske and
Cheremkhivske gas fields through the year, while preparing for an
exit from gas operations as they had become marginally, if at all,
profitable, given the punitive tax regime (subsoil-use tax set at
70%). The exit was finalized at the end of the year with the
assignment of the Group interest in the Debeslavetske and the
Cheremkhivske fields to WestGasInvest LLC and the assignment of the
Group’s interest in WestGasInvest LLC to PJSC Nadra Ukrayny.
2018 also witnessed the exit from the shale gas project,
following Eni’s decision to abandon the initiative.
The Group has retained the Bitlyanska licence, where it drilled
the Vovche-2 well. The well was drilled on time and budget and
produced water with not-commercial quantities of oil when tested.
The well is being monitored and periodically lifted as part of a
pilot production scheme, which represents the remaining commitment
to be fulfilled. In parallel the Company continues to actively
pursue a farm-in to complete the appraisal of the already
discovered gas condensate resources.
East
Ukraine
The conversion of the Pirkovska licence from exploration into
production has not been awarded. The application was initially
impacted by a dispute between central and regional authorities on
the distribution of gas royalties, which brought the award process
in the region to a halt. The Company has subsequently replied in a
timely fashion to the comments related to the filed documents,
which were returned for different reasons a number of times. As a
result of the initial stall and of the subsequent iterations the
Pirkovska licence has not been awarded within the three years’ time
that the law assigns to the incumbent holder to convert it. The
asset had been impaired in the past, nevertheless the Group is
assessing all of its options in the broader context of its business
in Ukraine.
Subsidiary businesses
Gas trading operations continued, with sales in Ukraine of both imported and locally produced
gas. Despite lower volumes, margins remained healthy.
Finally, the Group continued providing oil services through its
wholly-owned subsidiary Astroservice LLC. Upon completion of the
work-over campaign on the Monastyretska wells, Astroservice LLC was
able to secure a multi-well contract for its rig, which is deployed
in a field operated by one of the largest Ukrainian oil and gas
companies.
Italy
The Group owns 90% interest in Exploenergy s.r.l., an Italian
company, which has filed applications for two exploration licences
(Reno Centese and Corzano), located in the Po Valley region
(Northern Italy). The leads
identified on these licences have combined un-risked prospective
resources estimated to be in excess of 60 bcf of gas.
Activity through the year focused on maintaining the liaison
with the central and regional authorities and on updating the
Environmental Impact Studies by implementing the suggestions
received from the authorities. Attempts to meet the relevant
Minister, in order to understand what else, if anything, is
required to move forward the application, were unsuccessful.
In February 2019, the Italian
Parliament approved a moratorium of 18 months in the award of new
licences and a 25-fold increase of licence fees. Exploenergy has
subsequently reduced its activity to the minimum required to fulfil
its statutory obligations. It has also identified areas which can
be voluntarily released in order to mitigate the impact of higher
fees, when licences are awarded, with a minimum impact on their
exploration potential.
Strategic Report
The Strategic Report has been prepared in accordance with
Section 414A of the Companies Act 2006 (the “Act”) and presented
hereunder. Its purpose is to inform stakeholders and help them
assess how the Directors have performed their legal duty under
Section 172 of the Act to promote the success of the Company.
Principal activity and status of the
Company
The Company is registered as a public limited company
(registration number 05718406) in England and Wales. Its principal activity is oil and gas
exploration, development and production; the company also conducts
gas trading and provides services to other E&P operators.
The Company’s shares have a standard listing on the Official
List of the UK Listing Authority and are traded on the main market
of the London Stock Exchange.
Key performance indicators
The Group monitors its performance through five key performance
indicators (“KPIs”):
- to increase oil, gas and
condensate production measured on the number of barrels of oil
equivalent produced per day (“boepd”);
- to decrease administrative
expenses;
- to increase the Group’s basic
earnings per share;
- to maintain no lost time
incident; and
- to grow and geographically
diversify the portfolio.
The Group’s performance in 2018 against these KPI’s is set out
in the table below, together with the prior year performance
data.
Group Review
|
Unit |
2018 |
2017 |
2018
vs 2017 |
|
|
|
|
|
Average production
(working interest basis) 1 |
boepd |
250 |
155 |
+ 95 |
Overhead
(G&A) |
$ million |
4.8 |
5.0 |
(0.2) |
Basic profit/(loss)
per share 2 |
cents |
0.5 |
(0.7) |
+1.45 |
Lost time incidents
3 |
incidents |
0 |
0 |
|
Geographic
diversification |
new assets |
14 |
1 |
|
1. Average production is calculated as
the average daily production during the year
2. Basic profit/(loss) per ordinary
share is calculated by dividing the net profit/(loss) for the year
attributable to equity holders of the parent company by the
weighted average number of ordinary shares during the year
3. Lost time incidents relate to the
number of injuries where an employee/contractor is injured and has
time off work (IOGP classification)
4. Loan agreement with Proger
Management & Partners with its option to convert. The loan was
signed in February 2019
Chairman’s Statement
Unlike the past, I want to open my statement by recognizing the
excellent work done by Cadogan in 2018. Oil production has been
further increased to levels not seen since 2011, the marginal gas
operations have been disposed of for an interesting consideration
and in doing so the company has achieved profitability.
Profitability was last achieved in 2011 and at that time it was the
result of the capital injected by Eni in order to farm-in into the
Zagoryanska and Pokrovskoe exploration licences. My own and the
whole Board’s commendation goes to the Management and staff of
Cadogan for delivering this result.
Unlike Cadogan, Ukraine cannot
consider 2018 a good year. The efforts to reform the country made
limited progress and the key issues of reforms and transparency
continued to remain on many tables, including those opened with
international financial institutions. The political and economic
outlook remains uncertain and the run out to the presidential
election, scheduled at the end of Q1 2019, did little to reduce
this uncertain future.
Though further steps were made towards improving the
transparency in the way licences are managed, such as the launch of
tenders, the unpredictability in the outcome of the approval
processes continued to characterize the E&P industry, with the
award of new licences and/or the conversion of existing ones often
denied or unreasonably delayed, particularly in the East of the
Country This has created unnecessary distractions to the local
operators and has done little to improve the country image and risk
perception with foreign investors. Cadogan ‘s licences in the East
of Ukraine were not an exception:
Pirkovska’s application was shuffled back and forth multiple times
and eventually no answer, either positive or negative, was given
within the three years of exclusive right. Pirkovska licence has
now become open and actually included in one of the PSA, which are
being offered for public tenders. The company is assessing all its
options to safeguard its rights. The situation in the West of the
country, and in particular in Lviv region, is substantially better
with fourteen applications approved out of the 17 submitted in the
last three years.
In this contest of lingering uncertainty, Cadogan achieved an
important result in its strategy of diversifying its portfolio. The
loan agreement with Proger, negotiated in 2018 and announced at the
beginning of 2019, diversifies both the geographic and the industry
risk of its portfolio, while creating for its shareholders an
exposure to a Company with material growth potential at a balanced
level of risk; it also offers both companies the benefit of
potential operational synergies for the development of their
respective businesses. Cadogan’s cash position after this
transaction remains strong with enough funds to make other
investments when the right opportunity arises.
Cadogan throughout 2018 has continued to consistently deliver on
its strategy of monetizing the value of its legacy assets while
pursuing diversification of its portfolio. In a context that has
remained challenging the company has shown that it can operate at
high industry standards, meet and exceed operational targets and,
as a result, has substantially increased revenue from production.
Higher production combined with strict spending discipline and a
lean, efficient organization represent a solid foundation on which
the company can build a future as a profitable entity with a
realizable growth at a manageable level of risk.
Zev Furst
Non-Executive Chairman
23 April 2019
Chief Executive’s Review
2018 was a good year for Cadogan. The Company returned to
profitability after 7 years recording a $1.2
million profit driven by the positive contributions of the
three businesses, by $1.7 million of
gains associated with recovery of impaired receivables and
supplemented by a $1.715 million
gross[7] income associated with the exit from the WGI JV. This
achievement is the result of multiple efforts, including:
· E&P
operations brought firmly into profitability, with revenue growth
driven by a 61% increase in production;
· a strict
discipline in controlling costs and pursuing efficiency;
· another good
year for gas trading, with a healthy margin;
· the work-over
campaign on Monastyretska wells completed using the resources of
the Group service company, and
· effective
efforts to recover past receivables, some of which were previously
impaired as they were deemed of no value.
2018 also witnessed two important events for Cadogan,
namely:
· the resumption
of drilling operations after some three and a half years in order
to fulfil the remaining licence commitments; one well was drilled
in Bitlyanska, on time and budget, and contracts were negotiated
and awarded to drill the other, deeper well in Monastyretska.
Cadogan strengthened its operational team in order to meet these
challenges with the right level of expertise.
· the end
of Cadogan’s producing gas operations, which were assigned to
Westgasinvest LLC (WGI) for a nominal consideration. These
operations had become unprofitable, given the 70% royalty, and the
shut-down of the Cheremkhivske field, while waiting for the renewal
of its production licence. This assignment was part of an
agreement with Eni and Nadra Ukrayny on the terms and conditions of
Eni’s exit from WGI. In this agreement Cadogan agreed (ii) to
transfer its own shares in WGI to Nadra Ukrayny for a nominal
consideration and (iii) to transfer its shares in the company
operating the Debeslavetska and Cheremkhivsko-Strupkivska gas
licences to WGI, also for a nominal consideration, and received a
termination fee of $1.715 million
from Eni as part of the overall agreement.
For Ukraine 2018 was another
difficult year, as the Country remained embroiled in its
confrontation with Russia and
continued to be economically challenged. The country has made some
progress towards modernisation of its oil & gas legislative
framework but has been unable to create an environment conducive to
the significant investments, which the country needs to increase
its domestic production. In this uncertain context, Cadogan has
remained one of the few, if not the only, truly foreign investor
operating in Ukraine’s E&P sector.
Cadogan’s application to convert the Pirkovska exploration
licence reached the end of the three-year period granted to secure
its conversion into a production licence without receiving the
approval for its conversion. This is a reflection of the
uncertainties that still impact the E&P industry in
Ukraine. The application was
returned six times, initially rejected by the Poltava Regional
Council due to its dispute with the Central Government over the
split of royalties and then returned by the Licencing Authority for
reasons whose legal ground is doubtful. Cadogan has fulfilled all
the obligations, submitted the documents in due time, answered the
requests from the Authority in a timely way and is now considering
its options.
Against this challenging background, Cadogan has performed well
in 2018. In particular:
- the average production rate through the year increased up to
250 boepd, the highest level in the last seven years, and this
increase was achieved with minimal capital deployment; and
- the profit of E&P business segment in 2018 was 58% higher
than the prior year, out-performing the 23% increase in the average
realized price over the same period of time.
Other highlights of 2018 and the period since year end are:
- a 61% increase in production, from 56,516 boe in 2017 to 91,085
boe this year;
- a 4% reduction of overhead (G&A), from $5.0 million in 2017 to $4.8 million this year; this is in addition to
the 11% reduction achieved in 2017 and the 15% reduction in
2016;
- a good year for trading which generated a healthy margin whilst
leveraging a limited amount of Cadogan’s financial resources;
- a multi-well external contract won by Astroservice LLC which
started generating revenue in late 2018;
- a robust balance sheet, with $35.2
million of net cash, kept mostly in UK banks;
- another year without LTIs’; and
- a €13.385 million convertible loan to Proger Managers &
Partners which was negotiated in the latter part of the year and
completed in February 2019 and which
gives the Company potential exposure to growth while diversifying
its portfolio.
In summary, Cadogan has successfully delivered on both pillars
of its strategy, which is to make Ukraine its platform for growth by monetising
the value of its legacy assets while using its strong balance sheet
to diversify its portfolio.
Core operations
Cadogan has continued to safely and efficiently produce from its
fields in the West of Ukraine. Oil
production has increased by 130% over the previous year, while gas
production has remained constant.
The performances of wells located on the Monastyretska licence
have been monitored and the gathered data used to calibrate an
integrated study for the producing reservoir. The study highlighted
significant upside potential from infill drilling and the
implementation of a water injection scheme, thus confirming
management’s opinion that the field potential had been
underestimated in the past. The study predicts that infill
drilling can add up to 2.3 million barrels (MBbl) to the cumulative
production of a “do-nothing” scenario with a further 2.1 MBbl
coming from the implementation of water injection. Future
cumulative production of a “do-nothing” scenario, i.e. from the
three existing wells only, is predicted to be 1.2 MBbl and is in
line with the current estimation of 2P reserves.
On the Bitlyanska licence, Cadogan drilled Vovche-2 well. The
well did not deliver commercial quantities of oil when tested and
was then put under monitoring under a pilot production scheme. In
parallel the company has continued its effort to identify a
farminee available to fund the activity necessary to confirm the
upside of the high-pressure gas condensate deep target.
The activity in Italy has been
limited to routine housekeeping as the uncertainty before the
general election and then the program of the current government
coalition has left no room to progress the applications at
present.
Non E&P operation
Trading had a positive year notwithstanding a difficult start,
with changes in the trading team personnel and a continuation of
increased competition. Additionally, the market witnessed unusual
trends in gas prices with prices in summer exceeding those in
winter, which created challenging trading conditions. Against this
backdrop, results were encouraging, with $0.7 million of profit which supplemented E&P
revenues.
Oil services conversely contributed a limited amount of cash, as
they were used primarily to serve the Group’s well’s operations.
The company competed for and won a tender for a multi-well program
and was able to contract its rig for the later part of the year to
one of the largest Ukrainian operators.
Outlook
The Company intends to build on the results of 2018 to continue
delivering solid operational and financial performance.
Gas operations, which had become unprofitable, have been
relinquished and the company will concentrate on the conversion of
its two licences and on its oil operations, which is where the
value is focused within the current portfolio. The Blazh-10 well
encountered 207 meters of Yamna, the reservoir formation, reached
its final depth at 3,394 m, was
logged and is now being prepared for testing. The Company expect to
put it on production if well test confirms that oil can be produced
in commercial quantities, thus contributing to another step change
in the oil production.
The Company will also continue to maintain strong cost
discipline, to trade gas, to offer service to other E&P
operators and to seek to recover cash from previously impaired
items. As part of its cost discipline the Company will continue to
streamline its complex corporate architecture by liquidating
companies which represent a legacy of its past and serve little
purpose.
The loan agreement with Proger with its option to convert,
offers growth exposure as well as diversification. With a
cash position that remains strong, the Company has the funds to
make investments when the right assets or opportunity arises.
Nearly 90 investment opportunities were assessed in the past years
and management will continue to actively pursue additional
opportunities for diversification that adds shareholder value
whilst remaining disciplined in its approach.
Lastly, I wish to express my own and the entire Board’s
appreciation to the men and women of Cadogan who with their
dedication, ingenuity and loyalty to the Company have contributed
to the positive results in 2018, and more generally, to the
successful and continuing transformation of the Company.
Guido Michelotti
Chief Executive Officer
23 April 2019
Operation Review
Overview
At 31 December 2018, the Group
held working interests in three conventional gas, condensate and
oil exploration and production licences in the west of Ukraine. All these assets are operated by the
Group and are located in the Carpathian basin in close proximity to
the Ukrainian gas distribution infrastructures.
Summary of the Group’s licences (as at 31 December
2018) |
Working
interest (%) |
Licence |
Expiry |
Licence type(1) |
99.2 |
Monastyretska |
November 2019 |
E&D |
99.8 |
Bitlyanska |
December 2019 |
E&D |
99.2 |
Debeslavetska(2) |
November 2026 |
Production |
54.2 |
Cheremkhivska(2) |
expired on May
2018 |
Production |
|
|
|
|
- E&D = Exploration and Development
- The Cheremkhivska licence expired on May
2018 and its renewal had not been granted by year end.
Cadogan’s interest in the Debeslavetska and Cheremkhivska licences
were assigned to WGI in January
2019.
East
Ukraine
The company continued pursuing its right to obtain the Pirkivska
production licence in the three-year time frame allowed for
conversion from the previous exploration licence. The applications
for the award of 20-year production licence was repeatedly
submitted for approval, but the approval was not granted within the
three years’ time limit to secure conversion which lapsed in the
year.
West
Ukraine
The Bitlyanska licence covers an area of 390 square kilometres.
Bitlyanska, Borynya and Vovchenska are three hydrocarbon
discoveries in this licence area. The Borynya and Bitlya fields
holds 3P reserves, contingent recoverable resources and prospective
resources. Vovchenska field holds contingent recoverable
resources.
Borynya 3 well, was kept on hold, monitored and routinely
bled-off for an eventual re-entry and stimulation.
The Vovche 2 well was successfully drilled and produced water
with uncommercial quantities of oil when tested. The well is being
monitored and periodically lifted as a part of pilot production
scheme. The company has fully met its licence commitments.
The Monastyretska licence continued to produce oil at an average
production rate of 187 bpd (2017: 81 bpd) from three wells. Such a
substantial increase was achieved by a campaign of successful
work-over and stimulation of the three producing wells. Overall,
the work-over campaign increased oil production from Monastyretska
licence by 130% over 2017.
The Blazhiv-10 commitment was prepared for spudding, relevant
permitting obtained and drilling rig & ancillary equipment
mobilization and rig up were completed in December 2018. The well reached its final depth
at 3,394m and was logged in
April 2019. The Yamna
formation, the formation producing from the three existing wells,
was found 50m higher than prognosis
and 207 m thick; the preliminary
interpretation of the logs and the results of the cores taken in
the upper part suggests the Yamna to be oil bearing. Full log
interpretation and results of the well test will determine net pay
and well deliverability.
The Debeslavetska licence continued producing a stable gas
production rate of 58 boepd (2017: 59 boepd) and the Cheremkhivska
field produced at an average rate of 14 boepd (2017: 15 boepd)
until 15 May 2018 when production
operations were halted due to the renewal of the production licence
not having been received. The fields were transferred to WGI in
January 2019 as part of the
trilateral agreement with Eni and Nadra Ukrayny stipulating terms
and conditions of Eni’s exit from WGI and the shale gas
project.
Gas trading
The Group continued to import gas from Europe via the Slovakian, Hungarian and Polish
borders and to sell it in Ukraine
along with some locally purchased quantities. In 2018, the market
continued to develop towards a better alignment with the European
market and prices for gas showed some anomalies, with the price in
summer being higher than in winter. Larger international trading
houses increased their presence in Ukraine and many large consumers started to
import gas directly from the European suppliers. This reduced the
Company’s market share, but despite the lower volumes sold through
the year, the Company was able to maintain healthy margins. Credit
risk continued to be kept at low level by selling gas on prepayment
basis.
Service
The Group continued providing services through its wholly-owned
subsidiary Astroservice LLC. Services provided were primarily
related to the work-over and stimulation campaign of Monastyretska
wells. A multi-well contract was secured in the second half of the
year and the rig has remained contracted ever since.
Financial Review
Overview
In 2018, the Group increased production and E&P revenues
further, while continuing gas trading activity. The performance of
the Group’s operating divisions delivered a contribution of
$1.2 million (2017: $1.6 million) (Note 5) and the Group recorded a
profit of $1.2 million including the
impact of monetization of non-core and historically impaired
receivables. The Group also resumed drilling operations on its
licences after long pause.
The E&P business positively contributed to the financial
results of the Group, due to a combination of increased production
and higher prices. The service business focused on providing
drilling and work-over services to the subsidiaries of the Group
and the trading business earned a healthy margin despite reduced
volumes. These results have been supplemented by further monetising
of the Group’s assets as noted above, tight control on costs and
optimisation of the working capital cycle.
Net cash decreased to $35.2
million at 31 December 2018
compared to $37.6 million at
31 December 2017. This was mostly due
to prepayments made at the end of 2018 for services related to the
drilling of Blazh-10 well, together with an increased inventory of
gas at the end of the year.
Income statement
Revenues from production almost doubled – increased from
$2.4 million in 2017 to $4.7 million in 2018, mainly due to production
volume increases from 56,516 boe in 2017 to 91,085 boe in 2018 and
an improved pricing environment. E&P cost of sales increased
from $1.7 million in 2017 to
$3.7 million in 2018. These include
production royalties and taxes, fees paid for the rented wells,
depreciation and depletion of producing wells and direct staff and
other costs for exploration and development. Overall, in 2018,
E&P made a positive contribution of $1.0
million (2017: $0.7 million)
to gross profit, representing a positive[8] $0.4 million (2017: profit of $0.3 million) business segment profit.
The oil services business in 2018 focused on internal activities
providing its services, including drilling and work-overs, to the
subsidiaries of the Group. In addition, one external tender was
secured and started delivery during late 2018, which brought a
positive service segment profit for 2018 of $63 thousand (2017: loss of $26 thousand). The contract continues in
2019.
The gas trading business showed positive results in 2018.
Although revenues decreased from $12.7
million in 2017 to $9.9
million in 2018, cost of sales also decreased, from
$11.4 million in 2017 to $9.1 million in 2018, resulting in an overall
contribution to profit of $0.7
million (2017: $1.3 million,
which included $0.4 million of
interest on receivables). In addition, staff costs (G&A) were
reduced, and trading receivables recovered together with
interest.
Administrative expenses (“G&A”) continued to be strictly
controlled. Ukrainian G&A remained flat and the overall G&A
was further reduced from $5.0 million
in 2017 to $4.8 million in 2018.
The reversal of impairment of other assets of $1.8 million (2017: reversal of impairment of
$1.5 million) primarily included: i)
VAT of $1.7 million (2017:
$1.4 million), which was previously
impaired, as a result of the Group receiving a VAT refund in cash
of $1.0 million (2017: $1.4 million) and also offsets of VAT recoverable
against trading margin earned; and ii) inventories of $0.1 million (2017: $0.1
million) due to the successful sale of obsolete production
stock that had previously been impaired.
Impairments of other assets totalled $0.7
million (2017: $0.05 million)
reflecting $0.3 million on
infrastructure for the Pirkovska licence; and ii) $0.4 million on gas plant which has been sold in
2019 for $0.15 million, which had a
previous book value of $0.55 million
and would otherwise have needed to be abandoned as the right for
the associated licence application had expired[9].
In 2018, the Group finalised the deal on exit from the
Westgasinvest LLC and received consideration of $1.715 million as a termination fee of the
project. The investment in the Westgasinvest LLC joint venture was
fully impaired in 2017, given Eni’s communication of their
intention to exit the project.
Net finance income of $0.6 million
(2017: net finance income of $0.7
million) reflects interest expense to BNP Paribas
(“BNPP”) on a credit line used for gas trading of
$0.1 million (2017: $0.3 million), net of i) interest income on cash
deposits used for trading of $0.3
million (2017: $0.1 million);
ii) investment revenue of $0.4
million (2017: $0.2 million);
iii) interest income on receivables nil (2017: $0.5 million).
Balance sheet
Intangible Exploration and Evaluation (“E&E”) assets of
$2.4 million (2017: $1.7 million) represent the carrying value of the
Bitlyanska licence. The Property Plant & Equipment (PP&E)
balance was $3.3 million at
31 December 2018 (2017: $2.1 million), increased primarily due to the
start of drilling of Blazh-10 well at Monastyretska licence.
Additionally, $1.3 million of
prepayments for non-current assets (2017: $nil) have been incurred
associated with the forthcoming drilling activity.
Trade and other receivables of $2.5
million (2017: $4.5 million),
include $0.1 million (2017:
$1.3 million) of trading receivables,
$0.2 million of prepayments for
natural gas (2017: $1.8 million),
$1.9 million of VAT recoverable
(2017: $0.9 million), which is
expected to be recovered through production, trading and services
activities, and $0.3 million (2017:
$0.5 million) of other receivables.
.
The $1.2 million of trade and
other payables as of 31 December 2018
(2017: $1.4 million) represent
$0.1 million (2017: $0.5 million) of trading payables, $0.6 million (2017: $0.5
million) of accrued expenses and $0.5
million (2017: $0.4 million)
of other creditors.
At 31 December 2018 the Group
recognised assets held for sale of $0.2
million (2017: $nil) and liabilities held for sale of
$0.1 million (2017: $nil) related to
the exit from gas operations.
Provisions include $0.3 million
(2017: $0.4 million) of short-term
provision for decommissioning cost which are expected to be
incurred in 2019 with regards to Pirkovska licence assets and
$0.04 million (2017: $0.4 million) of long-term provision for
decommissioning costs, which represents the present value of costs
that are expected to be incurred in 2039 for producing assets, when
the licences will expire following their anticipated conversion to
production licences in 2019. The reduction in long term provisions
primarily reflects changes in estimates associated with the timing
of the decommissioning works and associated discounting.
The cash position of $35.2 million
at 31 December 2018, including
$7 million used as a pledge for the
credit line, has decreased from $37.6
million at 31 December 2017.
This was mostly due to prepayments made at the end of 2018 for
services related to the drilling of the Blazh-10 well as well as to
an increased stock of gas at the end of the year.
Cash flow statement
The Consolidated Cash Flow Statement on page 72 shows operating
cash outflow before movements in working capital of $1.9 million (2017: outflow of $2.3 million), which represents mostly cash used
by the E&P and Trading business segment net of corporate
expenses. Working capital has been further improved, which resulted
in a $1.4 million cash inflow (2017:
$0.4 million) with the impact of
increased inventory offset by recovery of receivables.
The Group, during 2018, started its drilling campaign by
drilling a shallow well at Bitlyanska licence at a cost of
$0.8 million and by preparing to
drill the Blazh-10 well at Monastyretska licence, for which a
number of prepayments were made close to the end of the year; this
resulted in an aggregate investment in PP&E of $3.9 million.
As a result of the agreement signed by ENI, Nadra and Cadogan on
the terms of Eni’s exist from WGI, the Group received a termination
fee of $1.7 million.
In 2018, the Group financed its trading operations with
short-term borrowings (Note 23) with proceeds of $4.0 million and repayments of $3.9 million (2017: proceeds of $3.3million and repayments of $7.0 million).
Related party transactions
Related party transactions are set out in note 29 to the
Consolidated Financial Statements.
Treasury
The Group continually monitors its exposure to currency risk. It
maintains a portfolio of cash and cash equivalent balances mainly
in US dollars (“USD”) held primarily in the UK. Production revenues
from the sale of hydrocarbons are received in the local currency in
Ukraine, however, the hydrocarbon
prices are linked to the USD denominated gas and oil prices. To
date, funds from such revenues have been used in Ukraine in operations rather than being
remitted to the UK.
Risks and uncertainties
There are a number of potential risks and uncertainties that
could have a material impact on the Group’s long-term performance
and could cause the results to differ materially from expected and
historical results. Executive management review the potential risks
and then classify them as having a high impact, above $5 million, medium impact, above $1 million but below $5
million, and low impact, below $1
million. They also assess the likelihood of these risks
occurring. Risk mitigation factors are reviewed and documented
based on the level and likelihood of occurrence. The Audit
Committee reviews the risk register and monitors the implementation
of risk mitigation procedures via Executive management, who are
carrying out a robust assessment of the principal risks facing the
Group, including those potentially threatening its business model,
future performance, solvency and liquidity.
The Group has analysed the following categories as key
risks:
Risk |
Mitigation |
Operational risks |
|
Health, Safety and Environment
(“HSE”) |
|
The oil and gas industry by its
nature conducts activities, which can cause health, safety and
environmental incidents. Serious incidents can have not only a
financial impact but can also damage the Group’s reputation and the
opportunity to undertake further projects. |
The Group maintains a
HSE management system in place and demands that management, staff
and contractors adhere to it. The system ensures that the Group
meets Ukrainian legislative standards in full and achieves
international standards to the maximum extent possible.
Management systems and processes have been certified as ISO 14001
and 45001 compliant. |
Climate
change |
|
Countries may impose
moratorium on E&P activities or enact tight limits to emissions
level, which may curtail production. Shareholders may also request
that the Company adopt stringent targets in terms of emissions
reduction. |
A
moratorium on domestic production is deemed highly unlikely in
Ukraine given the country’s need for affordable energy. Such risks
exist in Italy, but the Company’s exposure there is limited.
Management strives to reduce the emission in everything the Company
does and has started implementing alternatives to offset emissions.
Lastly, the Company has created an opportunity to diversify into
the renewable segment with the convertible loan to Proger. |
Drilling and
Work-Over operations |
|
The technical difficulty of drilling
or re-entering wells in the Group’s locations and equipment
limitations can result in the unsuccessful completion of the
well. |
The incorporation of detailed
sub-surface analysis into a robustly engineered well design and
work programme, with appropriate procurement procedures and
competent on-site management, aims to minimise risk. Only certified
personnel are hired to operate on the rig floor. |
Production and
maintenance |
|
There is a risk that production or
transportation facilities could fail due to non-adequate
maintenance, control or poor performance of the Group’s
suppliers. |
All plants are operated
and maintained at standards above the Ukrainian minimum legal
requirements. Operative staff are experienced and receive
supplemental training to ensure that facilities are properly
operated and maintained. When not in use the facilities are
properly kept under conservation and routinely monitored.
Service providers are rigorously reviewed at the tender stage and
are monitored during the contract period.
|
Sub-surface
risks |
|
The success of the business relies
on accurate and detailed analysis of the sub-surface. This can be
impacted by poor quality data, either historic or recently
gathered, and limited coverage. Certain information provided by
external sources may not be accurate. |
All externally provided and historic
data is rigorously examined and discarded when appropriate. New
data acquisition is considered and appropriate programmes
implemented, but historic data can be reviewed and reprocessed to
improve the overall knowledge base. Agreements with qualified local
and international contractors have been entered into to supplement
and broaden the pool of expertise available to the Company. |
Data can be misinterpreted leading
to the construction of inaccurate models and subsequent plans. |
All analytical outcomes are
challenged internally and peer reviewed. Analysis is
performed using modern geological software. |
The area available for
drilling operations is limited due to logistics, infrastructures
and moratorium. This increases the risk for setting optimum well
coordinates. |
Bottom hole locations are always
checked for their operational feasibility, well trajectory, rig
type, and verified on updated sub-surface models. They are rejected
if deemed to be too risky. |
The Group may not be successful in
proving commercial production from its Bitlyanska licence and
consequently the carrying values of the Group’s oil and gas assets
may have to be impaired. |
The Group performs a
review of its oil and gas assets for impairment on an annual basis
and considers whether to commission a review from a third or a
Competent Person’s Report (“CPR”) from an independent qualified
contractor depending on the circumstances. |
Financial risks |
|
The Group is at risk from changes in
the economic environment both in Ukraine and globally, which can
cause foreign exchange movements, changes in the rate of inflation
and interest rates and lead to credit risk in relation to the
Group’s key counterparties. |
Revenues in Ukraine are
received in UAH and expenditure is made in UAH, however the prices
for hydrocarbons are implicitly linked to USD prices.
The Group continues to hold most of its cash reserves in the UK
mostly in USD. Cash reserves are placed with leading financial
institutions, which are approved by the Audit Committee. The Group
is predominantly a USD denominated business. Foreign exchange risk
is considered a normal and acceptable business exposure and the
Group does not hedge against this risk for its E&P
operations.
For trading operations, the Group matches the revenues and the
source of financing.
Refer to note 27 to the Consolidated Financial Statements for
detail on financial risks. |
The Group is at risk that
counterparties will default on their contractual obligations
resulting in a financial loss to the Group. |
Procedures are in place to
scrutinise new counterparties via a Know Your Customer (“KYC”)
process, which covers their solvency. In addition, when trading
gas, the Group seek to reduce the risk of customer non-performance
by limiting the title transfer to product until the payment is
received, prepaying only to known credible suppliers. |
The Group is at risk that
fluctuations in gas prices will have a negative result for the
trading operations resulting in a financial loss to the Group. |
The Group mostly enters into
back-to-back transactions where the price is known at the time of
committing to purchase and sell the product. Sometimes the Group
takes exposure to open inventory positions when justified by the
market conditions in Ukraine, which is supported by analysis of the
specific transactions, market trends and models of the gas prices
and foreign exchange rate trends. |
Country risks |
|
Legislative changes may
bring unexpected risk and create delays in securing licences or
ultimately prevent licences and licence renewals / conversions
being secured. |
Compliance procedures, monitoring
and appropriate dialogue with the relevant authorities are
maintained to minimise the risk. In all cases, deployment of
capital in Ukraine is limited and investments are kept at the level
required to fulfil licence obligations. |
Ukraine has not
progressed as far as expected towards integration with Europe, the
economic challenges in the country are not yet over and the
confrontation with Russia has remained open. This can impact the
political agenda, negatively impacts the creation of a transparent
market and introduces an element of unpredictability in the
development of the legislative framework. |
The Group minimises
this risk by maintaining funds in international banks outside
Ukraine, by limiting the deployment or capital in country and by
continuously maintaining a working dialogue with the regulatory
authorities.
Commitments are fulfilled and routinely verified the relevant
Authorities, supported by competent and qualified legal
contractors.
The assets of the Group are located far from the area of
confrontation with Russia. |
Other risks |
|
The Group's success depends upon
skilled management as well as technical and administrative staff.
The loss of service of critical members from the Group's team could
have an adverse effect on the business. |
The Group periodically reviews the
compensation and contract terms of its staff in order to remain a
competitive employer in the markets where it operates. |
The Group is at risk of
underestimating the risk and complexity associated with the entry
into new countries. |
The Group applies rigorous screening
criteria in order to evaluate potential investment opportunities.
It also seeks input from independent and qualified experts when
deemed necessary. Additionally, the required rate of return is
adjusted to the perceived level of risk. |
Local communities and
stakeholders may cause delays to the project execution and postpone
activities. |
The Group maintains a
transparent and open dialogue with authorities and stakeholders (i)
to identify their needs and propose solutions which address them as
well as (ii) to illustrate the activities which it intends to
conduct and the measures to mitigate their impact. Local needs and
protection of the environment are always taken into consideration
when designing mitigation measures, which may go beyond the
legislative minimum requirement.
The Group devotes the highest level of attention and engage
qualified consultants to prepare the Environmental Impact
assessment studies and to attend public hearings, both of them
introduced in Ukraine in the course of 2018. |
Statement of Reserves and
Resources
During the year 2018 the company successfully re-entered the
Blazh 3 and Blazh-Mon 3 existing wells and conducted a number of
rig-less activities in Blazh 1 and in the two gas fields to
maintain a sustainable production.
Summary of
Reserves1
at 31 December 2018
|
|
|
Mmboe |
Proved, Probable and Possible
Reserves at 1 January 2018 |
|
|
7.82 |
Production |
|
|
(0.09) |
Revisions (sale of Debeslavetska and
Cheremkhivsko-Strupkhivska licences) |
|
|
(0.14) |
Proved, Probable
and Possible Reserves at 31 December 2018 |
|
|
7.59 |
1 The study was conducted in 2016 by third-party
Brend Vik and since then Cadogan has
entered into a Technical Service Agreement with them.
Reserves are assigned to the Bitlyanska and Monastyretska
fields.
In addition to the tabled reserves, Cadogan has 15.4 million boe
of contingent resources associated with the Bitlyanska and
Monastyretska licences.
Corporate Responsibility
Under Section 414C of the Companies Act 2006 (the “Act”), the
Board is required to disclose information about environmental
matters, employees, human rights and community issues, including
information about any policies it has in relation to these matters
and the effectiveness of these policies.
Being sustainable in our activities means conducting our
business with respect for the environment and for the communities
hosting us, with the aim of increasing the benefit and value to our
stakeholders. We recognize that this is a key element to be
competitive and to maintain our licence to operate.
The Board recognises that the protection of the health and
safety of its employees, communities and the environment in which
it operates is not just an obligation but is part of the personal
ethics and beliefs of management and staff. These are the key
drivers for the sustainable development of the Company’s activity.
Cadogan Petroleum, its management and employees are committed to
continuously improve Health, Safety and Environment (HSE)
performance; follow our Code of Ethics and apply internationally
recognised best practices and standards, in conducting our
operations.
Our activities are carried out in accordance with a policy
manual, endorsed by the Board, which has been disseminated to all
staff. The manual includes a Working with Integrity policy and
policies on business conduct and ethics, anti-bribery, the
acceptance of gifts and hospitality and whistleblowing.
In August 2018, Cadogan Ukraine
LLC obtained ISO 14001 and ISO 45001 certification for the
following scope: “Supervision, coordination, management support,
control in the field of oil and gas on-shore exploration and
production.” This provides formal recognition of the process
embedded in the Company and demonstrates the commitment and efforts
delivered by our employees and management. It is considered a
baseline to continue with the efforts to improve the way we conduct
the business.
The Board believes that health and safety procedures and
training across the Group should be in line with best practice in
the oil and gas sector. Accordingly, it has set up a Committee to
review and agree on the health and safety initiatives for the
Company and to report back to the Board on the progress of these
initiatives. Management regularly reports to the Board on HSE and
key safety and environmental issues, which are discussed at the
Executive Management level. The report of the Health, Safety and
Environment Committee can be found on page 35 to 36.
The former Chief Operating Officer is the Chairman of the HSE
Committee and is supported in his role by Cadogan Ukraine’s HSE
Manager. In accordance with the ISO 14001 and 45001, his role is to
ensure that the Group continuously develops suitable procedures,
that operational management and their teams incorporate them into
daily operations and that the HSE management has the necessary
level of autonomy and authority to discharge their duties
effectively and efficiently.
Health, safety and environment
The Group has implemented an integrated HSE management system in
accordance with the ISO requirements. The system aims to ensure
that a safe and environmentally friendly/protection culture is
embedded in the organisation with a particular focus on the local
community involvement. The HSE management system ensures that both
Ukrainian and international standards are met, with the Ukrainian
HSE legislation requirements taken as an absolute minimum. All the
Group’s local operating companies actively participate in the
process.
A proactive approach based on a detailed induction process and
near-miss reporting has been in place throughout 2018 to prevent
incidents. Staff training on HSE matters and discussions on near
miss reporting are recognised as the key factors to continuously
improve. In-house training is provided to help staff meet
international standards and follow best practice. The process
enacted by the certification, enhances attention to training on
risk assessments, emergency response, incident prevention,
reporting and investigation, as well as emergency drills regularly
run on operations’ sites and offices. This process is essential to
ensure that international best practices and standards are
maintained to comply with, or exceed, those required by Ukrainian
legislation, and to promote continuous improvement.
The Board monitors the main Key Performance Indicators (lost
time incidents, mileage driven, training received, CO2 emissions)
as business parameters. The Board has benchmarked safety
performance against the HSE performance index measured and
published annually by the International Association of Oil and Gas
Producers. In 2018, the Group recorded over 270,000 man-hours
worked with no incidents and close to 820,000 hours have been
worked since the last injury in February
2016.
During 2018 the Group continued to monitor its greenhouse gas
emissions and collect statistical data relating to the consumption
of electricity, industrial water and fuel consumption by cars,
plants and other work sites, recording a continuous improvement in
the efficient use of resources.
Employees
Wellness and professional development are part of the Company’s
sustainable development policy and wherever possible, local staff
are recruited. The Group’s activity in Ukraine is entirely managed by local staff.
Qualified local contractors are engaged to supplement the required
expertise when and to the extent it is necessary.
Procedures are in place to ensure that all recruitment is
undertaken on an open, transparent and fair basis with no
discrimination against applicants. Each operating company has its
own Human Resources function to ensure that the Group’s employment
policies are properly implemented and followed. The Group’s Human
Resources policy covers key areas such as equal opportunities,
wages, overtime and non-discrimination. As required by Ukrainian
legislation, Collective Agreements are in place with the Group’s
Ukrainian subsidiary companies, which outline agreed level of staff
benefits and other safeguards for employees.
All staff are aware of the Group’s grievance procedures. All
employees have access to health insurance provided by the Group to
ensure that all employees have access to adequate medical
facilities.
Each employee’s training needs are assessed on an individual
basis to ensure that their skills are adequate to support the
Group’s operations, and to help them to develop.
Diversity
The Board recognises the benefits and importance of diversity
(gender, ethnic, age, sex, disability, educational and professional
backgrounds, etc.) and strives to apply diversity values across the
business. We endeavour to employ a skilled workforce that
reflects the demographic of the jurisdictions in which we
operate. The board will review the existing policies and
intends to develop a diversity.
Gender diversity
The Board of Directors of the Company comprised six Directors
throughout the year to 31 December
2018. The appointment of any new Director is made on the
basis of merit. See pages 21 and 22 for more information on the
composition of the Board.
As at 31 December 2018, the
Company comprised a total of 82 persons, as follows:
|
Male |
Female |
Non-executive directors |
5 |
- |
Executive directors |
1 |
- |
Management, other than Executive
directors |
7 |
2 |
Other employees |
48 |
19 |
Total |
61 |
21 |
Human rights
Cadogan’s commitment to the fundamental principles of human
rights is embedded in our HSE polices and throughout our business
processes. We promote the core principles of human rights
pronounced in the UN Universal Declaration of Human Rights and our
support for these principles is embedded throughout our Code of
Conduct, our employment practices and our relationships with
suppliers and partners wherever we do business.
Community
The Group’s activities are carried out in rural areas of
Ukraine and the Board is aware of
its responsibilities to the local communities in which it operates
and from which some of the employees are recruited. In our
operational sites, management works with the local councils to
ensure that the impact of operations is as low as practicable by
putting in place measures to mitigate their effect. Projects
undertaken include improvement of the road infrastructure in the
area, which provides easier access to the operational sites while
at the same time minimising inconvenience for the local population
and allowing improved road communications in the local communities,
especially during winter season or harsh weather conditions.
Specific community activities are undertaken for the direct benefit
of local communities. All activities are followed and supervised by
managers who are given specific responsibility for such tasks.
The Group’s companies in the Ukraine see themselves as part of the
community and are involved and offer practical help and support.
All these activities are run in accordance with our Working with
Integrity policy and procedures. The recruitment of local staff
generates additional income for areas that otherwise are
predominantly dependent on the agricultural sector.
The enactment in 2018 of new legislation which introduces
Environmental Impact Assessment studies and public hearings as part
of the licence’s award/renewal processes was anticipated
effectively by the Group. The Group is complying with these
requirements, building on the recognized competence of its people
and advisors as well as on the good communication and relations
established with local communities.
Approval
The Strategic Report was approved by the Board of Directors on
23 April 2019 and signed by order of
the Board by:
Ben Harber
Company Secretary
23 April 2019
Board of Directors
Zev
Furst, 71, American
Non-Executive Chairman
Appointed to the Board on 2 August
2011, Mr Furst is a leading global business and
communications strategist who has advised political leaders,
foreign principals and corporate executives of Fortune 100
companies. He is the Chairman and CEO of First International
Resources, an international corporate and political consulting firm
he founded in 1992. Mr Furst specialises in providing strategic
counsel on crisis management, market entry, corporate positioning
and personal reputational issues. In recent years, he has also
advised and consulted with candidates running for national office
in Israel, Japan, Mexico
and Ukraine.
In 1986, Mr Furst was a founding partner of Meridian Resources
and Development Ltd, an international commodities trading company
specialising in chemicals and petroleum products.
Mr Furst formerly served as Chairman of the Peres Center for
Peace and is currently a member of its International Board in
addition to being a member of the Advisory Board of the Kennan
Institute in Washington, DC. He
has written and lectured extensively on international affairs,
business and political strategy and the role of media in politics
and diplomacy.
Mr Furst is Chairman of the Company’s Nomination Committee and a
member of the Remuneration Committee.
Guido
Michelotti, 65, Swiss
Chief Executive Officer
Mr Michelotti was appointed to the Board of Directors as Chief
Executive Officer on 25 June 2015. An
Oil & Gas executive with over 30 years of international
experience across the entire E&P cycle, he spent more than 10
years in senior executive roles with eni, leading E&P companies
as well as managing major capital projects. Prior to joining
Cadogan he was CEO of a Luxembourg
based Private Equity fund investing in E&P.
Mr Michelotti is a non-executive Director of Proger s.p.a.,
Exploenergy s.r.l. and Heritage Oil Ltd, and a Director of the
Swiss section of the Society of Petroleum Engineers (SPE). He has
been a former Senior Advisor to the Energy Practice of the Boston
Consulting Group and a former member of SPE’s Industry Advisory
Council.
Adelmo
Schenato, 67, Italian
Non-Executive Director
Mr Schenato was appointed to the Board as Chief Operating
Officer on 25 January 2012. He joined
the Company after a 35 years career at eni, the Italian integrated
energy business, where he served in senior global and regional
positions. His global roles at eni included Well Operations
Research and Development and Technical Management, and Vice
President HSE & Sustainability. His regional roles include
General Manager of Tunisia,
Gabon and Angola as well as CEO of eni’s Italian gas
storage company.
In January 2017, Mr Schenato
stepped down as Chief Operating Officer to take up the role of
Advisor to the CEO and Chairman and CEO of Exploenergy s.r.l., the
Italian company which is 90% owned by the Group.
Mr Schenato is the Chairman of the Health, Safety and
Environment Committee.
Gilbert
Lehmann, 73, French
Senior Independent Non-Executive Director
Mr Lehmann was appointed to the Board on 18 November 2011. He was an adviser to the
Executive Board of Areva, the French nuclear energy business,
having previously been its Deputy Chief Executive Officer
responsible for finance. He is also a former Chief Financial
Officer and deputy CEO of Framatone, the predecessor to Areva, and
was CFO of Sogee, part of the Rothschild Group. Mr Lehmann is also
Deputy Chairman and Chairman of the Audit Committee of Eramet, the
French minerals and alloy business. He is Deputy Chairman and Audit
Committee Chairman of Assystem SA, the French engineering and
innovation consultancy. He was Chairman of ST
Microelectronics NV, one of the world’s largest semiconductor
companies, from 2007 to 2009, and stepped down as Vice Chairman in
2011.
Mr Lehmann is currently Chairman of the Company’s Audit
Committee and a member of the Remuneration and Nomination
Committees.
Michel Meeùs, 66, Belgian
Non-Executive Director
Mr Meeùs was appointed as a Non-executive Director on
23 June 2014. Since 2007, he has been
a director within the Alcogroup SA Company (which gathers the
ethanol production units of the homonymous group), as well as
within some of its subsidiaries. Before joining Alcogroup, Mr Meeùs
spent most of his career in the financial sector, at Chase
Manhattan Bank in Brussels and
London, then at Security Pacific
Bank in London, then finally at
Electra Kingsway Private Equity in London.
Enrico
Testa, 67, Italian
Independent Non-Executive Director
Appointed to the Board on 1 October
2011, Mr Testa has a long and varied background in the
energy market. He was Chairman of the Board of ACEA (the
Rome electricity and water utility
company) from 1996 to 2002. He was Chairman of the Board of Enel
S.p.A, the major Italian electricity supplier, during its
privatisation. From 2005 to 2009 he was Chairman of Roma
Metropolitane, the Rome
council-owned company constructing new underground lines. He was
also Chairman of the Organising Committee for the 20th World Energy
Congress held in Rome in
November 2007, Senior Partner at the
Franco Bernabè Group which owns several investments in the IT
sector from 2002 to 2005 he was member of the Advisory Board of
Carlyle Europe and has been Chairman of the Italian Nuclear Forum
since 2010. In addition, between 2004 and August 2012 Mr Testa was Managing Director of
Rothschild S.p.A.
He is currently Chairman of the AIM listed telecommunications
company Telit Communications Plc, Chairman of Sorgenia S.p.A
(Rome Electricity and Gas company) and Chairman of E.VA – Energie
Valsabbia S.p.A. – a company developing hydropower and solar
generating plants.
Mr Testa is Chairman of the Company’s Remuneration Committee and
a member of the Audit and Nomination Committees.
Report of the Directors
Directors
The Directors in office during the year and at the date of this
report are as shown below:
Non-Executive Directors
Executive Director
Zev Furst
(Chairman)
Guido Michelotti
Gilbert
Lehmann
Michel
Meeùs
Enrico Testa
Adelmo Schenato
Directors’ re-election
The Board has decided previously that all Directors are subject
to annual election by shareholders, in accordance with industry
best practice and as such, all of the Directors will be seeking
re-election at the Annual General Meeting to be held on
19 June 2019.
The biographies of the Directors in office at the date of this
report are shown on pages 21 and 22.
Appointment and replacement of
Directors
The Company’s Articles of Association allow the Board to appoint
any individual willing to act as a Director either to fill a
vacancy or act as an additional Director. The appointee may hold
office only until the next annual general meeting of the Company
whereupon his or her election will be proposed to the
shareholders.
The Company’s Articles of Association prescribe that there shall
be no fewer than three Directors and no more than fifteen.
Directors’ interests in shares
The beneficial interests of the Directors in office as at
31 December 2018 and their connected
persons in the Ordinary shares of the Company at 31 December 2018 are set out below.
Director |
|
|
Number of
Shares |
Z Furst |
|
|
- |
G Michelotti |
|
|
4,637,588 |
G Lehmann |
|
|
- |
M Meeùs |
|
|
26,000,000 |
A Schenato |
|
|
- |
E Testa |
|
|
- |
Conflicts of Interest
The Company has procedures in place for managing conflicts of
interest. Should a director become aware that they, or any of their
connected parties, have an interest in an existing or proposed
transaction with the Company, its subsidiaries or any matters to be
discussed at meetings, they are required to formally notify the
Board in writing or at the next Board meeting. In accordance with
the Companies Act 2006 and the Company’s Articles of Association,
the Board may authorise any potential or actual conflict of
interest that may otherwise involve any of the directors breaching
his or her duty to avoid conflicts of interest. All potential and
actual conflicts approved by the Board are recorded in register of
conflicts, which is reviewed by the Board at each Board
meeting.
Directors’ indemnities and
insurance
The Company’s Articles of Association provide that, subject to
the provisions of the Companies Act 2006, all Directors of the
Company are indemnified by the Company in respect of any liability
incurred in connection with their duties, powers or office. Save
for such indemnity provisions, there are no qualifying third-party
indemnity provisions. In addition, the Company continues to
maintain Directors’ and Officers’ Liability Insurance for all
Directors who served during the year.
Powers of Directors
The Directors are responsible for the management of the business
and may exercise all powers of the Company subject to UK
legislation and the Company’s Articles of Association, which
includes powers to issue or buy back the Company’s shares given by
special resolution. The authorities to issue and buy back shares,
granted at the 2018 Annual General Meeting, remains unused.
Dividends
The Directors do not recommend payment of a dividend for the
year ended 31 December 2018 (2017:
nil).
Principal activity and status
The Company is registered as a public limited company
(registration number 05718406) in England and Wales. The principal activity and business of
the Company is oil and gas exploration, development and
production.
Structure of share capital
The authorised share capital of the Company is currently
£30,000,000 divided into 1,000,000,000 Ordinary shares of
3 pence each. The number of shares in
issue as at 31 December 2018 was
235,729,322 Ordinary shares (each with one vote) with a nominal
value of £7,071,880. The total number of voting rights in the
Company is 235,729,256. The Companies (Acquisition of Own Shares)
(Treasury Shares) Regulations 2003 allow companies to hold shares
in treasury rather than cancel them. Following the consolidation of
the issued capital of the Company on 10 June
2008, there were 66 residual Ordinary shares, which were
transferred to treasury. No dividends may be paid on shares whilst
held in treasury and no voting rights attach to shares held in
treasury.
Rights and obligations of Ordinary
shares
In accordance with applicable laws and the Company’s Articles of
Association, holders of Ordinary shares are entitled to:
- receive shareholder documentation including the notice of any
general meeting;
- attend, speak and exercise voting rights at general meetings,
either in person or by proxy; and
- a dividend where declared and paid out of profits available for
such purposes. On a return of capital on a winding up, holders of
Ordinary shares are entitled to participate in such a return.
Exercise of rights of shares in
employee share schemes
None of the share awards under the Company’s incentive
arrangements are held in trust on behalf of the beneficiaries.
Agreements between shareholders
The Board is unaware of any agreements between shareholders,
which may restrict the transfer of securities or voting rights.
Restrictions on voting deadlines
The notice of any general meeting of the Company shall specify
the deadline for exercising voting rights and appointing a proxy or
proxies to vote at a general meeting. In order to accurately
reflect the views of shareholders, it is the Company’s policy at
present to take all resolutions at any general meeting on a
poll.
Following the meeting, the results of the poll released to the
market via a regulatory news service and be published on the
Company’s website.
Substantial shareholdings
As at 31 December 2018 and
17 April 2019, being the last
practicable date, the Company had been notified of the following
interests in voting rights attached to the Company’s shares:
|
31
December 2018 |
17 April 2019 |
Major shareholder |
Number of shares
held |
% of total voting
rights |
Number of shares
held |
% of total voting
rights |
SPQR Capital Holdings SA |
67,298,498 |
28.55 |
67,298,498 |
28.55 |
Mr Michel Meeùs |
26,000,000 |
11.03 |
26,000,000 |
11.03 |
Ms Veronique Salik |
17,959,000 |
7.62 |
17,959,000 |
7.62 |
Ms Brigitte Salik |
17,409,000 |
7.39 |
17,409,000 |
7.39 |
Kellet Overseas Inc. |
14,002,696 |
5.94 |
14,002,696 |
5.94 |
Julius Baer |
9,940,410 |
4.22 |
9,940,410 |
4.22 |
Credit Agricole Luxembourg |
9,176,336 |
3.89 |
9,176,336 |
3.89 |
Mr Pierre Salik |
7,950,000 |
3.37 |
7,950,000 |
3.37 |
Cynderella Trust |
7,657,886 |
3.25 |
7,657,886 |
3.25 |
Amendment of the Company’s Articles of
Association
The Company’s Articles of Association may only be amended by way
of a special resolution of shareholders.
Disclosure of information to
auditor
As required by section 418 of the Companies Act 2006, each of
the Directors as at 23 April 2019
confirms that:
(a) so far as the Director is aware, there is no relevant audit
information of which the Company’s auditor is unaware; and
(b) the Director has taken all the steps that he ought to have
taken as a Director in order to make himself aware of any relevant
audit information and to establish that the Company’s auditor is
aware of that information.
Going concern
The Group’s business activities, together with the factors
likely to affect its future development, performance and position,
are set out on pages 14 to 16.
Having considered the Company’s financial position and its
principal risks and uncertainties, the Directors have a reasonable
expectation that the Company and the Group have adequate resources
to continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in
preparing the Consolidated and Company Financial Statements. For
further detail please refer to the detailed discussion of the
assumptions outlined in note 3 (b) to the Consolidated Financial
Statements.
Reporting year
The reporting year coincides with the Company's fiscal year,
which is 1 January 2018 to
31 December 2018.
Financial risk management objectives
and policies
The Company’s financial risk management objectives and policies
including its policy for managing its exposure of the Company to
price risk, credit risk, liquidity risk and cash flow risk are
described on page 97 to 99 in note 27 to the Consolidated Financial
Statements.
Outlook
Future developments in the business of the Company are presented
on page 6 to 8.
Change of control – significant
agreements
The Company has no significant agreements containing provisions,
which allow a counterparty to alter and amend the terms of the
agreement following a change of control of the Company.
Should a change in control occur then certain Executive
directors are entitled to a payment of salary and benefits for a
period of six months.
Global greenhouse gas emissions
This section contains information on greenhouse gas (“GHG”)
emissions required by the Companies Act 2006 (Strategic Report and
Directors' Report) Regulations 2013 (the “Regulations”).
Methodology
The principal methodology used to calculate the emissions is
drawn from the ‘Environmental Reporting Guidelines: including
mandatory greenhouse gas emissions reporting guidance (June 2013)’,
issued by the Department for Environment, Food and Rural Affairs
(“DEFRA”) and DEFRA GHG conversion factors for company reporting
were utilised to calculate the CO2 equivalent of emissions from
various sources (2018 update).
The Company has reported on all of the emission sources required
under the Regulations.
The Company does not have responsibility for any emission
sources that are not included in its consolidated statement.
In assessing the method used to calculate and report emissions,
a mistake has been discovered in
Cadogan’s previously reported emissions data. The mistake
was discovered in April 2019 while
assessing alternatives to contain emissions in a scenario of higher
production levels as a result of a tie-back of a positive well
(Blazh-10) and of further development activity. This data, which
had been calculated using a process audited in Ukraine by an independent third party, has now
been calculated using a different process for the year 2018 and
restated in respect of the year 2017. Going forwards,
Cadogan intends to install a second gas metering system, in
order to reduce the degree of intra wells extrapolations of data,
and to assess the level of gas fugitive emissions. The
Company also intends to have its entire data calculation
process re-validated by a different independent third party
upon completion of the above activities. Reported emissions data
may change as a result of the implementation of the above actions.
Management will also thoroughly evaluate
potential solutions for reducing the Company’s
emissions in future periods.
Consolidation approach and
organisation boundary
An operational control approach was used to define the Company's
organisational boundary and responsibility for GHG emissions. All
material emission sources within this boundary have been reported
upon, in line with the requirements of the Regulations.
Scope of reported emissions
Emissions data from the sources within Scope 1 and Scope 2 of
the Company's operational boundaries is detailed below. This
includes direct emissions from assets that fall within the
Company’s organisational boundaries (Scope 1 emissions), as well as
indirect emissions from energy consumption, such as purchased
electricity and heating (Scope 2 emissions).
Scope 1 emissions in 2018 increased compared to the previous
year (4,810 tons in 2018 vs 2,026 tons in 2017) driven by the
resumption of drilling and workover activity in Bitlyanska
commitment and the substantial increase of production in
Monastyretska licences.
Conversely, Scope 2 emissions decreased in 2018 (504 tons in
2018 vs 592 tons in 2017), as a result of the processes started in
2016 to improve the efficiency of the structure, logistic and
facilities. This reduction contributed to mitigate the increase in
the Scope 1 and, consequently, total emissions in 2018 were 5,314 t
ons versus the 2,618 tons of 2017.
Intensity ratio
In order to express the GHG emissions in relation to a
quantifiable factor associated with the Company's activities,
wellhead production of crude oil, condensates and natural gas has
been chosen as the normalisation factor for calculating the
intensity ratio. This will allow comparison of the Company’s
performance over time, as well as with other companies in the
Company’s peer group.
The intensity ratio for E&P operations (same reporting
perimeter) increased by 26%, from 46.3 tons CO2e/Kboe in
2017 to 58.3 tons CO2e/Kboe in 2018.
Total greenhouse gas emissions data for the year from 1 January
to 31 December
Greenhouse gas emissions source |
E&P |
|
|
2018 |
2017 |
|
|
|
|
Scope 1 |
|
|
|
|
|
|
Direct emissions, including
combustion of fuel and operation of facilities (tonnes of
CO2 equivalent) |
4,809 |
2,026 |
|
|
|
|
Scope 2 |
|
|
|
|
|
|
Indirect emissions from energy
consumption, such as electricity and heating purchased for own use
(tonnes of CO2 equivalent) |
504 |
592 |
|
|
|
|
Total (Scope 1 &
2) |
5,314 |
2,618 |
|
|
|
|
Normalisation factor |
|
|
|
|
|
|
|
|
|
|
|
|
|
Barrels of oil equivalent, net |
91,080 |
56,516 |
|
|
|
|
Intensity ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
Emissions reported above normalised
to tonnes of CO2e per total wellhead production of crude
oil, condensates and natural gas, in thousands of Barrel of Oil
Equivalent, net |
58.3 |
46.3 |
|
|
|
|
2019 Annual General Meeting
The 2019 Annual General Meeting (“AGM”) of the Company provides
an opportunity to communicate with shareholders and the Board
welcomes their participation. Board members constantly strive to
engage with shareholders on strategy, governance and a number of
other issues.
The Board looks forward to welcoming shareholders to the AGM.
The AGM notice will be issued to shareholders well in advance
of the meeting with notes to provide an explanation of all
resolutions to be put to the AGM. In addition, shareholder
information will be enclosed as usual with the AGM notice to
facilitate voting and feedback in the usual way.
The Chairman of the Board and the members of its committees will
be available to answer shareholder questions at the AGM. All
relevant shareholder information including the annual report for
2018 and any other announcements will be published on our website –
www.cadoganpetroleum.com
This Report of Directors comprising pages 23 to 28 has been
approved by the Board and signed by the order of the Board by:
Ben Harber
Company Secretary
23 April 2019
Corporate Governance Statement
The Board of the Company is committed to the highest standards
of corporate governance.
Board
The Board provides leadership and oversight. The Board comprises
a Non-Executive Chairman, Chief Executive Officer, two Independent
Non-Executive Directors and two Non-Executive Directors who are not
deemed independent. The Board has appointed Mr Lehmann as the
Senior Independent Director.
The biographical details for each of the Directors and their
membership of Committees are incorporated into this report by
reference and appear on page 21 and 22.
As at the date of this report, the Chairman had no significant
commitments that would affect his ability to allocate sufficient
time to the Company to discharge his responsibilities
effectively.
Under the Company’s Articles of Association, all Directors must
seek re-election by members at least once every three years.
However, the Board has agreed that all Directors will be subject to
annual election by shareholders in line with Corporate Governance
best practice. Accordingly, all members of the Board will be
standing for re-election at the 2019 Annual General Meeting due to
be held on 19 June 2019.
The Board has a formal schedule of matters specifically reserved
for its decision, including approval of acquisitions and disposals,
major capital projects, financial results, Board appointments,
dividend recommendations, material contracts and Group strategy.
Other responsibilities are delegated to its Committees.
The Chairman, in conjunction with the Company Secretary, plans
the programme for the Board during the year. The agenda for Board
and Committee meetings is considered by the relevant Chairman and
issued with supporting papers during the week preceding the
meeting. For each Board meeting, the Directors receive a Board pack
including management accounts, briefing papers on commercial and
operational matters and major capital projects including
acquisitions. The Board also receives briefings from key management
on specific issues. Seven Board meetings took place during 2018.
The attendance of those Directors in place at the year end at Board
and Committee meetings during the year was as follows:
|
Board |
Audit
Committee |
Nomination
Committee |
Remuneration
Committee |
No. Held |
7 |
3 |
1 |
2 |
No. Attended: |
|
|
|
|
Z Furst |
6 |
N/A |
- |
2 |
G Michelotti |
7 |
N/A |
N/A |
N/A |
G Lehmann |
7 |
3 |
1 |
2 |
M Meeùs |
7 |
N/A |
N/A |
N/A |
A Schenato |
7 |
N/A |
N/A |
N/A |
E Testa |
5 |
3 |
1 |
2 |
A procedure exists for the Directors, in the furtherance of
their duties, to take independent professional advice if necessary,
under the guidance of the Company Secretary and at the Company’s
expense. All Directors have access to the advice and services of
the Company Secretary, who is responsible to the Chairman for
ensuring that Board procedures are complied with and that
applicable rules and regulations are followed.
Board independence
The roles and responsibilities of the Chairman and Chief
Executive Officer are separate with a clear and formal division of
each individual’s responsibilities, which has been agreed and
documented by the Board.
The Non-Executive Directors bring an independent view to the
Board’s discussions and the development of its strategy. Their
range of experience ensures that management’s performance in
achieving the business goals is challenged appropriately. Two
Non-Executive Directors, Messrs Lehmann and Testa are considered by
the Board to be independent. Michel Meeùs, who is a significant
shareholder, is not considered to be independent. Adelmo Schenato, who is CEO of Exploenergy
s.r.l. and an Advisor to the CEO of the Group and until
31 December 2016 was Chief Operating
Officer of the Group is not considered to be independent[10]. The
Board is of the view that all Directors continue to be effective
and have sufficient time available to perform their duties. The
letters of appointment for the Non-Executive Directors are
available for review at the Registered Office and prior to the
Annual General Meeting.
Responsibilities and membership of
Board Committees
The Board has agreed written terms of reference for the
Nomination Committee, Remuneration Committee, Audit Committee and
HSE committee. The terms of reference for the Board Committees are
published on the Company’s website, www.cadoganpetroleum.com, and
are also available from the Company Secretary at the Registered
Office. A review of the Committees including their membership and
activities of all Board Committees is provided on pages 32 to
39.
Internal control
The Directors are responsible for the Group’s system of internal
control and for maintaining and reviewing its effectiveness. The
Group’s systems and controls are designed to safeguard the Group’s
assets and to ensure the reliability of information used both
within the business and for publication. The Board has delegated
responsibility for the monitoring and review of the Group’s
internal controls to the Audit Committee.
Systems are designed to manage, rather than eliminate the risk
of failure to achieve business objectives and can provide only
reasonable, and not absolute assurance against material
misstatement or loss.
The key features of the Group’s internal control and risk
management systems that ensure the accuracy and reliability of
financial reporting include clearly defined lines of accountability
and delegation of authority, policies and procedures that cover
financial planning and reporting, preparing consolidated financial
statements, capital expenditure, project governance and information
security.
The key features of the internal control systems, which operated
during 2018 and up to the date of signing the Financial Statements
are documented in the Group’s Corporate Governance Policy Manual
and Finance Manual. These manuals and policies have been circulated
and adopted throughout the Group throughout the period, except the
joint venture Westgasinvest LLC (“WGI”), where Eni’s policies are
adopted.
Day-to-day responsibility for the management and operations of
the business has been delegated to the Chief Executive Officer and
senior management. Certain specific administrative functions are
controlled centrally. Taxation and treasury functions report to the
Group Director of Finance who reports directly to the Chief
Executive Officer.
The legal function for Ukraine’s related assets and activities
is managed by the General Counsel, who reports to the General
Director of Cadogan Ukraine. The Health, Safety and Environment
functions report to the Chairman of the HSE Committee. The Group
does not have an internal audit function. Due to the small scale of
the Group’s operations at present, the Board does not feel that it
is appropriate or economically viable to have an internal audit
function in place, however this will be kept under review by the
Audit Committee on an annual basis. Management though has appointed
a Compliance Officer for its Ukrainian subsidiaries.
The Board has reviewed internal controls and risk management
processes, in place from the start of the year to the date of
approval of this report. During the course of its review the Board
did not identify nor were advised of any failings or weaknesses
which it has deemed to be significant.
Relations with shareholders
The Chairman and Executive Directors of the Company have a
regular dialogue with analysts and substantial shareholders. The
outcome of these discussions is reported to the Board at quarterly
meetings and discussed in detail. Mr Lehmann, as the Senior
Independent Director, is available to meet with shareholders who
have questions that they feel would be inappropriate to raise via
the Chairman or Executive Directors.
The Annual General Meeting is used as an opportunity to
communicate with all shareholders. In addition, financial results
are posted on the Company’s website, www.cadoganpetroleum.com, as
soon as they are announced. The Notice of the Annual General
Meeting is also contained on the Company’s website,
www.cadoganpetroleum.com. It is intended that the Chairmen of the
Nomination, Audit and Remuneration Committees will be present at
the Annual General Meeting. The results of all resolutions will be
published on the Company’s website, www.cadoganpetroleum.com.
Board Committee Reports
Audit Committee Report
The Audit Committee is appointed by the Board, on the
recommendation of the Nomination Committee, from the Non-Executive
Directors of the Group. The Audit Committee’s terms of reference
are reviewed annually by the Audit Committee and any changes are
then referred to the Board for approval. The terms of reference of
the Committee are published on the Company’s website,
www.cadoganpetroleum.com, and are also available from the Company
Secretary at the Registered Office. Two members constitute a
quorum.
Responsibilities
- To monitor the integrity of the annual and interim financial
statements, the accompanying reports to shareholders, and
announcements regarding the Group’s results;
- To review and monitor the effectiveness and integrity of the
Group’s financial reporting and internal financial controls;
- To review the effectiveness of the process for identifying,
assessing and reporting all significant business risks and the
management of those risks by the Group;
- To oversee the Group’s relations with the external auditor and
to make recommendations to the Board, for approval by shareholders,
on the appointment and removal of the external auditor;
- To consider whether an internal audit function is appropriate
to enable the Audit Committee to meet its objectives; and
- To review the Group’s arrangements by which staff of the Group
may, in confidence, raise concerns about possible improprieties in
matters of financial reporting or other matters.
Governance
Mr Testa and Mr Lehmann, who are both independent Non-Executive
Directors are the members of the Audit Committee. The Audit
Committee is chaired by Mr Lehmann who has recent and relevant
financial experience as a former finance director of a major
European company as well as holding several non-executive roles in
major international entities.
At the invitation of the Audit Committee, the Group Director of
Finance and external auditor regularly attend meetings. The Company
Secretary attends all meetings of the Audit Committee.
The Audit Committee also meets the external auditor without
management being present.
Activities of the Audit Committee
During the year, the Audit Committee discharged its
responsibilities as follows:
Assessment of the effectiveness of the
external auditor
The Committee has assessed the effectiveness of the external
audit process. They did this by:
- Reviewing the 2018 external audit plan;
- Discussing the results of the audit including the auditor’s
views on material accounting issues and key judgements and
estimates, and their audit report;
- Considering the robustness of the audit process;
- Reviewing the quality of the service and people provided to
undertake the audit; and
- Considering their independence and objectivity.
Financial statements
The Audit Committee examined the Group’s consolidated and
Company’s financial statements and, prior to recommending them to
the Board, considered:
- the appropriateness of the accounting policies adopted;
- reviewed critical judgements, estimates and underlying
assumptions; and
- assessed whether the financial statements are fair, balanced
and understandable.
Going concern
After making enquiries and considering the uncertainties
described on pages 14 to 16, the Committee has a reasonable
expectation that the Company and the Group has adequate resources
to continue in operational existence for the foreseeable future and
consider the going concern basis of accounting to be appropriate.
For further detail, please refer to the detailed discussion of the
assumptions outlined in note 3 (b) to the Consolidated Financial
Statements.
Internal controls and risk
management
The Audit Committee reviews and monitors financial and control
issues throughout the Group including the Group’s key risks and the
approach for dealing with them. Further information on the risks
and uncertainties facing the Group are detailed on pages 97 to 99
and in Note 27 to the financial statements.
External auditor
The Audit Committee is responsible for recommending to the
Board, for approval by the shareholders, the appointment of the
external auditor.
The Audit Committee considers the scope and materiality for the
audit work, approves the audit fee, and reviews the results of the
external auditor’s work. Following the conclusion of each year’s
audit, it considers the effectiveness of the external auditor
during the process. An assessment of the effectiveness of the audit
process was made, giving consideration to reports from the auditor
on its internal quality procedures. The Committee reviewed and
approved the terms and scope of the audit engagement, the audit
plan and the results of the audit with the external auditor,
including the scope of services associated with audit-related
regulatory reporting services. Additionally, auditor independence
and objectivity were assessed, giving consideration to the
auditor’s confirmation that its independence is not impaired, the
overall extent of non-audit services provided by the external
auditor and the past service of the auditor.
There is an agreed policy on the engagement of the external
auditor for non-audit services to ensure that its independence and
objectivity are safeguarded. Audit related services can be awarded
to the external auditor by the executive Directors provided the
work does not exceed £50,000 in fees per item. Work exceeding
£50,000 requires approval by the Audit Committee. All other
non-audit work either requires Audit Committee approval or forms
part of a list of prohibited services, where it is felt the
external auditor’s independence or objectivity may be
compromised.
A breakdown of the non-audit fees is disclosed in Note 10 to the
Consolidated Financial Statements. The Audit Committee has reviewed
the nature, level and timing of these services in the course of the
year and is confident that the objectivity and independence of the
auditor are not impaired by the reason of such non-audit work.
Internal audit
The Audit Committee considers annually the need for an internal
audit function and believes that, due to the size of the Group and
its current stage of development, an internal audit function will
be of little benefit to the Group.
Whistleblowing
The Group’s whistleblowing policy encourages employees to report
suspected wrongdoing and sets out the procedures employees must
follow when raising concerns. The policy, which was implemented
during 2008, was updated in 2013 and recirculated to staff as part
of a manual that includes the Group’s policies on anti-bribery, the
acceptance of gifts and hospitality, and business conduct and
ethics.
Overview
As a result of its work during the year, the Audit Committee has
concluded that it has acted in accordance with its terms of
reference and has ensured the independence and objectivity of the
external auditor. A formal review of the Audit Committee’s
performance was undertaken after the year end and concluded that
the Committee is effective in its scrutiny of the accounts and
financial reporting process, its oversight of risk management
systems and its monitoring of internal control testing.
The Chairman of the Audit Committee will be available at the
Annual General Meeting to answer any questions about the work of
the Audit Committee.
Gilbert Lehmann
Chairman of the Audit Committee
23 April 2019
Health, Safety and Environment Committee Report
The Health, Safety and Environment Committee (the ”HSE
Committee”) is appointed by the Board, on the recommendation of the
Nomination Committee. The HSE Committee’s terms of reference are
reviewed annually by the Committee and any changes are then
referred to the Board for approval. The terms of reference of the
Committee are published on the Company’s website,
www.cadoganpetroleum.com, and are also available from the Company
Secretary at the Registered Office. Two members constitute a
quorum, one of whom must be a Director.
Governance
The Committee is chaired by Mr Adelmo Schenato and its
other members are Ms Snizhana Buryak (HSE Manager) and Mr
Andriy Bilyi (Cadogan Ukraine
General Director). The CEO attends meetings of the HSE Committee as
required. During 2018, the HSE Committee held five meetings to
monitor the HSE risks and activities across the business, following
which actions were identified for the continuous improvement of the
various processes and the mitigation of risk.
Responsibilities
- To develop a framework of the policies and guidelines for the
management of health, safety and environment issues within the
Group;
- Evaluate the effectiveness of the Group’s policies and systems
for identifying and managing health, safety and environmental risks
within the Group’s operation;
- Assess the policies and systems within the Group for ensuring
compliance with health, safety and environmental regulatory
requirements;
- Assess the performance of the Group with regard to the impact
of health, safety, environmental and community relations decisions
and actions upon employees, communities and other third parties and
also assess the impact of such decisions and actions on the
reputation of the Group and make recommendations to the Board on
areas for improvement;
- On behalf of the Board, receive reports from management
concerning any fatalities and serious accidents within the Group
and actions taken by management as a result of such fatalities or
serious accidents;
- Evaluate and oversee, on behalf of the Board, the quality and
integrity of any reporting to external stakeholders concerning
health, safety, environmental and community relations issues;
and
- Where it deems it appropriate to do so, appoint an independent
auditor to review performance with regard to health, safety,
environmental and community relations matters and review any
strategies and action plans developed by management in response to
issues raised and, where appropriate, make recommendations to the
Board concerning the same.
Activities of the Health, Safety and
Environment Committee
The HSE Committee in discharging its duties reviewed and
considered the following:
- Existing HSE policies and procedures in place in relation to
the current activities were assessed to evaluate the need for
updates or integrations;
- Monthly statistics and reports on the activity were regularly
distributed to the CEO, Management and to the members of the
committee;
- Ensured that the implementation of new legislation and
requirements were punctually followed-up and promptly updated;
- Compliance with HSE regulatory requirements was ensured through
discussion of the results of inspections, both internal inspections
and those carried out by the Authorities. The results of the
inspections and drills were analysed and commented to assess the
need for corrective actions and/or training initiatives;
- The new process for obtaining licences in the Ukraine licences and their impact on the
Bitlyanska and Monastyretska were reviewed;
- A standing item was included on the agenda at every meeting to
monitor monthly HSE performance, key indicators and statistics
allowing the HSE Committee to assess the Company’s performance by
analysing any lost-time incidents, near misses, HSE training and
other indicators;
- Interaction with contractors, Authorities, local communities
and other stakeholders were discussed among other HSE
activities;
- The ISO 14001 and 45001 certifications were obtained, a new HSE
Integrated Management System was developed and successfully
deployed; and
- Ensuring all the Observation and Actions requested by the
Certification Body have been implemented
Overview
The Company’s HSE Management System and the Guidelines and
Procedures have been modified to fit with the ISO requirements and
are adequate for the proper execution of the Company’s
operations.
As a result of its work during the year, the HSE Committee has
concluded that it has acted in accordance with its terms of
reference.
Adelmo Schenato
HSE Committee Chairman
23 April 2019
Nomination Committee Report
The Board delegates some of its duties to the Nomination
Committee and appoints the members of the Nomination Committee
which are non-executive Directors of the Group. The membership of
the Committee is reviewed annually and any changes to its
composition are referred to the Board for approval. The terms of
reference of the Nomination Committee are published on the
Company’s website, www.cadoganpetroleum.com, and are available from
the Company Secretary at the Registered Office. Two members
constitute a quorum.
Governance
Mr Zev Furst (Board and
Nomination Committee Chairman) and Messrs Gilbert Lehmann and
Enrico Testa (Independent
Non-Executive Directors) are the members of the Nomination
Committee. The Company Secretary attends all meetings of the
Nomination Committee.
Responsibilities
- To regularly review the structure, size and composition
(including the skills, knowledge and experience) required of the
Board compared to its current position and make recommendations to
the Board with regard to any changes;
- Be responsible for identifying and nominating candidates to
fill Board vacancies as and when they arise, for the Board’s
approval;
- Before appointments are made by the Board, evaluate the balance
of skills, knowledge, experience and diversity (gender, ethnic,
age, sex, disability, educational and professional backgrounds,
etc.) on the Board and, in the light of this evaluation, prepare a
description of the role and capabilities required for a particular
appointment; and
- In identifying suitable candidates, the Nomination Committee
shall use open advertising or the services of external advisers to
facilitate the search and consider candidates from a wide range of
backgrounds on merit, ensuring that appointees have enough time
available to devote to the position.
The Nomination Committee shall also make recommendations to the
Board concerning:
- Formulating plans for succession for both executive and
non-executive Directors and in particular for the key roles of
Chairman and Chief Executive Officer;
- Membership of the Audit and Remuneration Committees, in
consultation with the Chairmen of those committees;
- The reappointment of any non-executive Director at the
conclusion of their specified term of office, having given due
regard to their performance and ability to continue to contribute
to the Board in the light of the knowledge, skills and experience
required; and
- The re-election by shareholders of any Director having due
regard to their performance and ability to continue to contribute
to the Board in the light of the knowledge, skills and experience
required.
Any matters relating to the continuation in office of any
Director at any time including the suspension or termination of
service of an executive Director as an employee of the Company
subject to the provisions of the law and their service
contract.
Activities of the Nomination
Committee
During the financial year under review, the Committee reviewed
and considered the following:
- The size, structure and composition of the Board in the light
of the current business environment, the Company's anticipated
future activities and particularly the independence of the
Non-Executive Directors;
- Its internal governance documents and the Policy;
- The letters of appointment of the Board.
The Committee recommends the re-election of the six incumbent
Directors at the AGM.
Overview
As a result of its work during the year, the Committee has
concluded that it has acted in accordance with its terms of
reference. The Chairman of the Nomination Committee will be
available at the Annual General Meeting to answer any questions
about the work of the Committee.
Zev Furst
Nomination Committee Chairman
23 April 2019
Remuneration Committee
Statement from the Chairman
I am pleased to present the Annual Report on Remuneration for
the year ended 31 December 2018.
As I anticipated in last year’s Annual Report, the Company has
reviewed and amended its Remuneration Policy, which was presented
to our shareholders for their approval at last year Annual General
Meeting. The key elements of the new Remuneration Policy are:
- A better long-term alignment of the executives’ remuneration
with the interests of shareholders;
- A material reduction in the maximum remuneration level for the
Executive Directors, both in terms of annual bonus and of long-term
incentive (performance share plan);
- The payment of at least 50% of the Annual Bonus in shares with
the remaining 50% to be paid in cash or shares at the discretion of
the Remuneration Committee. Shares will be priced for this award
based on their market value at closing on the Business Day prior to
the Subscription Date;
- The introduction of claw-back and malus
provisions on both bonuses and share awards; and
- The expectation that the Executive Directors build a
substantial shareholding position in the company through their
mandate.
The new Remuneration Policy was approved as proposed by the
shareholders at the Annual General Meeting of June 19, 2018 and is attached at the end of the
Annual Report on Remuneration. During 2018 there were no
further changes made to the composition of directors' remuneration,
and there was no increase to executive and non-executive directors'
salary and fees in base currency.
In 2018 the Remuneration Committee enrolled again the CEO in a
performance-related, bonus scheme built around a scorecard with a
set of challenging KPI’s aligned with the company strategy of
preserving cash and operating safely and efficiently while actively
pursuing opportunities to re-load and geographically diversify the
portfolio. Based on the results achieved, the
Remuneration Committee has determined to award the CEO a bonus
of €176,000 ($201,872), or 32%
of the maximum allowable bonus under the current Remuneration
Policy, and to split the post-tax amount in 50 % cash and 50%
shares.
The performance related bonus scheme, which had been rolled down
to two key managers of Cadogan Ukraine in 2017, was extended in
2018 to a larger group of managers in Ukraine.
Enrico Testa
Chairman of the Remuneration Committee
23 April 2019
ANNUAL REPORT ON REMUNERATION 2018
Remuneration Committee Report
The Remuneration Committee is committed to principles of
accountability and transparency to ensure that remuneration
arrangements demonstrate a clear link between reward and
performance.
Governance
The Remuneration Committee is appointed by the Board from the
non-executive Directors of the Company. The Remuneration
Committee’s terms of reference are reviewed annually by the
Remuneration Committee and any changes are then referred to the
Board for approval. The terms of reference of the Remuneration
Committee are published on the Company’s website,
www.cadoganpetroleum.com, and are also available from the Company
Secretary at the Registered Office.
The Remuneration Committee consists of Mr Enrico Testa, Mr Zev
Furst and Mr Gilbert Lehmann.
At the discretion of the Remuneration Committee, the Chief
Executive Officer is invited to attend meetings when appropriate,
but is not present when his own remuneration is being discussed.
None of the directors are involved in deciding their own
remuneration. The Company Secretary attends the meetings of the
Remuneration Committee.
Responsibilities
In summary, the Remuneration Committee’s responsibilities, as
set out in its terms of reference, are as follows:
- To determine and agree with the Board the policy for the
remuneration of the executive Directors, the Company Secretary and
other members of executive management as appropriate;
- To consider the design, award levels, performance measures and
targets for any annual or long-term incentives and approve any
payments made and awards vesting under such schemes;
- Within the terms of the agreed remuneration policy, to
determine the total individual remuneration package of each
executive Director and other senior executives including bonuses,
incentive payments and share options or other share awards;
and
- To ensure that contractual terms on termination, and any
payments made, are fair to the individual and the Company, that
failure is not rewarded and that the duty to mitigate loss is fully
recognised.
Overview
The Chairman and Executive Directors of the Company have a
regular dialogue with analysts and substantial shareholders, which
includes the subject of Directors’ Remuneration. The outcome of
these discussions is reported to the Board and discussed in detail
both there and during meetings of the Remuneration Committee.
As a result of its work during the year, the Remuneration
Committee has concluded that it has acted in accordance with its
terms of reference. The chairman of the Remuneration Committee will
be available at the Annual General Meeting to answer any questions
about the work of the Committee. Alternatively, Mr Lehmann, as the
Senior Independent Director, is available to shareholders who have
concerns that they feel would be inappropriate to raise via the
Chairman or Executive Directors.
Remuneration consultants
The Remuneration Committee did not take any advice from external
remuneration consultants, except engaging Baker & McKenzie LLP
to assist in the drafting and implementation of the new
Remuneration Policy and in the review of the Remuneration
Report.
Single total figure of remuneration
for executive and non-executive directors (audited)
|
Salary
and fees |
Taxable benefit[11] |
Annual
bonus |
Total |
|
|
$ |
$ |
$ |
$ |
|
Executive Director |
|
|
|
|
|
|
|
|
2018 |
2017 |
2018 |
2017 |
2018 |
2017 |
2018 |
2017 |
G Michelotti |
521,664 |
497,288 |
39,838 |
27,273 |
201,872 |
126,992[12] |
763,374 |
651,553 |
Non-executive Directors |
|
|
|
|
|
|
Z Furst |
114,028 |
109,565 |
- |
- |
- |
- |
114,028 |
109,565 |
G Lehmann |
60,368 |
58,005 |
- |
- |
- |
- |
60,368 |
58,005 |
E Testa |
46,953 |
45,115 |
- |
- |
- |
- |
46,953 |
45,115 |
M Meeùs |
46,953 |
45,115 |
- |
- |
- |
- |
46,953 |
45,115 |
A Schenato[13] |
147,428 |
140,749 |
- |
- |
- |
- |
147,428 |
140,749 |
|
|
|
|
|
|
|
|
|
|
|
Notes to the table
Long-term incentives were not paid in 2017 and 2018.
In 2018, there were no increases in executive and non-executive
directors' salary in base currency. Any difference in salary and
fees for the directors reflects a change in the exchange rate
between the base currency and the USD, which is the reporting
currency.
Mr Guido
Michelotti
Mr Guido Michelotti was Chief
Executive Officer through 2018. Mr Michelotti’s salary is €440,000
($521,664) per annum.
Following shareholders’ approval of the new Remuneration Policy,
Mr Guido Michelotti received in 2018
the Performance Bonus awarded to him based on the achievement vis a
vis his 2017 scorecard and without a discretionary element. The
Remuneration Committee decided to award in shares 72.5% of the
awarded bonus less taxes and social contribution and therefore the
€106,000 bonus was split in €64,000 cash (inclusive of income tax
and social contributions to be paid by Mr Michelotti on the entire
awarded amount) and €42,000 in shares priced at their market value
at closing on the Business Day prior to the Subscription Date.
While the cash element was paid in October
2018, the shares have not yet been awarded as the company
has been in closed periods since the decision was made. Based on
the new Remuneration Policy the shares, when awarded, will be
subject to a holding period and to malus and claw
back provisions. The amount that may be clawed back from Mr
Guido Michelotti is limited to the
value of an equivalent number of shares that Mr Guido Michelotti subscribed for using the
proceeds of his bonuses, taking the value of the shares at the time
of the clawback, less any income tax that Mr Guido Michelotti paid on his bonuses.
The Remuneration Committee has determined that it would be
appropriate to award Mr Guido
Michelotti in relation to the year 2018 a bonus of €176,000
($201,872), based on the achievement
vis a vis his scorecard and without any additional discretionary
element. In assessing the performance related element, the
Remuneration Committee determined that the Company’s stretch
targets for production, net profit/(loss) and change in net cash
had been met or exceeded, and that the minimum target for the
loading of the portfolio had been achieved. The Remuneration
Committee also decided that the leadership target had also been
achieved. Under the performance scorecard considered by the
Remuneration Committee, the production and profit/(loss) targets
each represent 20% of the weightings of the bonus (for target level
performance) with change in net cash contributing 30% and
reloading of portfolio 20% (see following table). Based on the
above, the Remuneration Committee determined that some 32% of the
maximum performance related bonus should become payable.
KPI |
Weighting
% |
Target1 |
Achievement |
% of KPI related bonus
achieved2 |
Average production, boepd |
20 |
Approved budget (stretch target
+20%) |
Budget target exceeded |
20 |
Net profit/(loss), $ million |
20 |
Approved budget (stretch target
+20%) |
Stretch target achieved |
26 |
Change in net cash, $ million |
30 |
Approved budget (stretch target
+20%) |
Stretch target achieved |
39 |
Reloading of portfolio, n. of assets
outside UA |
20 |
Min -
max
1/2 |
Minimum target
achieved3 |
14 |
Leadership4 |
10 |
|
|
13 |
|
100 |
|
|
112 |
1 The company does not disclose its budget
2 Scores for achieving respectively minimum
target, target and stretch target are set at 70, 100
and 130
3 The loan agreement with Proger was considered as achieved in the
year, though formally finalized in 2018
4 Evaluated by the Remuneration Committee on (i)
management on change and (ii) communication with shareholders
Based on the above the Remuneration Committee decided to:
- Award Mr. Michelotti a performance related bonus of €176,000
($201,872 ) for 2018;
- Award 50% of the bonus, less taxes and social contribution, in
shares and the remaining in cash.
Shares awarded will be subject to malus and
claw-back. Mr Michelotti undertook to respect 3 years
holding period.
Benefits
Benefits may be provided to the executive directors, in the form
of private medical insurance and life assurance.
The Chairman and Non-Executive
Directors
Fees for non-Executive Directors have remained at the level of
the previous year, namely: the Chairman’s fee at £85,000
($114,028) and the fee for acting as
a non-executive Director at £35,000 ($46,953) with an additional £10,000 ($13,415) for acting as Chairman of the Audit
Committee. Also, Adelmo Schenato
received the same fees as in 2017, namely £20,600 ($27,635) as a non-executive Director and
€101,040 ($119,793) per annum under a
consultancy agreement as Advisor to the CEO of the Company and
Chairman and CEO of Exploenergy.
Scheme interests awarded during the
financial year (audited)
There were no scheme interests awarded during the year.
Payments to past directors
(audited)
In 2018 there were no payments to past directors.
Payments for loss of office
(audited)
In 2018 there were no payments to past directors. No notice
period was either worked or paid.
Directors’ interests in shares
(audited)
The beneficial interests of the Directors in office as at
31 December 2018 and their connected
persons in the Ordinary shares of the Company at 31 December 2018 are set out below.
Shares as at 31 December |
|
2018 |
2017 |
Z Furst
G Michelotti |
|
-
4,637,588 |
-
4,637,588 |
G Lehmann |
|
- |
- |
M Meeùs |
|
26,000,000 |
26,000,000 |
A Schenato |
|
- |
- |
E Testa |
|
- |
- |
There were no changes in the Directors shareholding as at
31 December 2018 compared to
23 April 2019.
The Company does not currently operate formal shareholding
guidelines. Whilst there is no specified level, the Company expects
that under the new Remuneration Policy, the Executive Directors
will build up a significant shareholding position in the Company
during their mandate.
The Company’s performance
The graph below highlights the Company’s total shareholder
return (“TSR”) performance for the last eight years compared to the
FTSE All Share Oil & Gas Producers index. This index has been
selected on the basis that it represents a sector specific group,
which is an appropriate group for the Company to compare itself
against, and has been retained ever since, primarily for continuity
purposes TSR is the return from a share or index based on share
price movements and notional reinvestment of declared
dividends.
Historic Remuneration of Chief Executive
|
Salary |
Taxable
benefits |
Annual
bonus |
Long-term
incentives |
Pension |
Loss of
office |
Total |
|
$ |
$ |
$ |
$ |
$ |
$ |
$ |
2009 |
422,533 |
- |
284,552 |
- |
- |
- |
707,085 |
2010 |
547,067 |
- |
- |
- |
- |
- |
547,067 |
2011 |
669,185 |
- |
- |
- |
- |
- |
669,185 |
2012 |
511,459 |
- |
- |
- |
31,966 |
126,808 |
670,233 |
2013 |
384,941 |
- |
- |
- |
- |
- |
384,941 |
2014 |
405,433 |
20,734 |
- |
- |
- |
- |
426,167 |
2015 |
432,409[14] |
15,987 |
243,132 |
- |
- |
- |
691,528 |
2016 |
487,080 |
15,353 |
210,504[15] |
- |
- |
- |
712,937 |
2017 |
497,288 |
27,273 |
126,992 |
- |
- |
- |
651,553 |
2018 |
521,664 |
39,838 |
201,872 |
- |
- |
- |
763,374 |
In 2018 the annual bonus awarded to the CEO was 32% (2017: 12%)
of the maximum bonus as per the approved Remuneration
Policy[16].
The annual bonus received by the CEO as a percentage of the
maximum opportunity is presented in the following table.
Year |
CEO |
CEO single figure of total
remuneration $ |
Annual bonus pay-out against
maximum opportunity % |
2018 |
Mr. Michelotti |
763,374 |
32 |
2017 |
Mr. Michelotti |
651,553 |
12 |
2016 |
Mr. Michelotti |
712,937 |
22[17] |
2015 |
Mr. Michelotti |
502,021 |
27,
[18] |
Mr. des Pallieres |
189,507 |
- |
2014 |
Mr. des Pallieres |
426,167 |
- |
2013 |
Mr. des Pallieres |
384,941 |
- |
2012 |
Mr. des Pallieres |
389,935 |
- |
Mr. Barron |
280,298[19] |
- |
2011 |
Mr. des Pallieres[20] |
273,201 |
- |
Mr. Barron |
395,984 |
- |
2010 |
Mr. Barron |
547,067 |
- |
2009 |
Mr. Barron[21] |
707,085 |
67 |
Percentage change in the remuneration
of the Chief Executive
The following table shows the percentage change in the
remuneration of the Chief Executive in 2018 and 2017 compared to
that of all employees within the Group.
|
|
|
|
|
2018 |
2017 |
Average |
|
|
|
|
|
$’000 |
$’000 |
change, % |
Base
salary |
CEO[22] |
|
522 |
497 |
5% |
|
|
|
All
employees[23] |
2,004 |
2,406 |
(17)% |
|
|
|
|
|
|
|
|
Taxable
benefits |
CEO |
|
40 |
27 |
148% |
|
|
|
All
employees |
60 |
34 |
176% |
|
|
|
|
|
|
|
|
Annual
Bonus |
CEO |
|
202 |
127 |
59% |
|
|
|
All
employees |
381 |
179 |
213% |
|
|
|
|
|
|
|
|
Total |
|
|
CEO |
764 |
639 |
20% |
|
|
|
All
employees |
2,445 |
2,619 |
(7)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2018 none of the directors participated in long-term
incentives.
In 2018 there was no increase in executive and non-executive
directors' salary in base currency. The difference in pay
represents the change in exchange rate between the base currency
and USD as a reporting currency.
Relative importance of spend on
pay
The table below compares shareholder distributions (i.e.
dividends and share buybacks) and total employee pay expenditure of
the Group for the financial years ended 31
December 2017 and 31 December
2018.
|
2018
$’000 |
2017
$’000 |
Year-on-year change,
% |
All-employee remuneration |
2,445 |
2,619 |
(7)% |
Distributions to shareholders |
- |
- |
N/A |
Shareholder voting at the Annual General Meeting
The Directors’ Remuneration Policy was approved by shareholders
at the Annual General Meeting held on 20
June 2018. The Remuneration Policy can be found on the
Group’s website and at pages 41 to 60 of this Annual Report on
Remuneration. The votes cast by proxy were as follows:
Directors’ Remuneration
Policy |
Number of
votes |
|
% of
votes cast |
For |
62,011,302 |
|
99.74 |
Against |
164,370 |
|
0.26 |
Total votes cast |
62,175,672 |
|
100.00 |
Number of votes withheld |
17,071 |
|
|
The Directors’ Annual Report on Remuneration for the year ended
31 December 2017 was approved by
shareholders at the Annual General Meeting held on 20 June 2018. The votes cast by proxy were as
follows:
Director’s Annual Report
on Remuneration |
Number of
votes |
|
% of
votes cast |
For |
62, 192,743 |
|
100.00 |
Against |
0 |
|
0.00 |
Total votes cast |
62,192,743 |
|
100.00 |
Number of votes withheld |
0 |
|
|
The Directors Remuneration Policy was approved at the 2018 AGM
and did not change since then. It can be found on the Group’s
website and at pages 47 to 60 of this Annual Report on
Remuneration.
Implementation of Remuneration Policy
in 2019
The June 2018 Annual General
Meeting approved the new Remuneration Policy which aligns Cadogan
to the recent developments in terms of remuneration and reduces the
maximum remuneration level for executives, thus making general a
principle originally accepted by Mr Michelotti on a personal
basis.
As was the case in 2018, the performance related elements of Mr
Guido Michelotti’s 2019 bonus will
be built around a scorecard with a set of KPI’s aligned with the
Group strategy, i.e. profit/loss, change in cash and portfolio
management. His scorecard is as described at page 42 of the
Remuneration Policy with production and geographic diversification
as operational KPIs, with a 20% each weigh factor, and net
profit/loss and change in free cash as financial KPIs, each with a
25 % weigh factor. The HSE KPI has been declined as a target
related to a reduction in the level of emissions to the atmosphere.
His scorecard has been rolled down to key managers of the Ukrainian
subsidiary.
Approval
The Directors’ Annual Report on Remuneration was approved by the
Board on 23 April 2019 and signed on
its behalf by:
Zev Furst
Chairman
23 April 2019
Directors’ Remuneration Policy
· Introduction
This Directors’ Remuneration Policy (the “Policy”) contains the
information required to be set out as the directors’ remuneration
policy for the purposes of The Large and Medium-sized Companies and
Groups (Accounts and Reports) (Amendment) Regulations 2013.
The Policy was approved by shareholders at the 2018 AGM of the
Company. The effective date of this Policy is the date on which the
Policy is approved by shareholders.
The Policy applies in respect of all executive officers
appointed to the Board of Directors (“executive directors”) and
non-executive directors. Other senior executives may be subject to
the Policy, including in relation to annual bonus and shares
incentive arrangements in particular, if and to the extent that the
Remuneration Committee determines it is appropriate.
The Remuneration Committee will keep the Policy under review to
ensure that it continues to promote the long-term success of the
Company by giving the Company its best opportunity of delivering on
the business strategy. It is the Remuneration Committee’s intention
that the Policy be put to shareholders for approval every three
years, unless there is a need for the Policy to be approved at an
earlier date.
The Company aims to provide sufficient flexibility in the Policy
for unanticipated changes in compensation practices and business
conditions to ensure the Remuneration Committee has appropriate
discretion to retain its top executives who perform. The
Remuneration Committee reserves the right to approve any payments
that may be outside the terms of this Policy, where the terms of
that payment were agreed before the Policy came into effect, or
before the individual became a director of the Company.
Maximum caps are provided to comply with the required
legislation and should not be taken to indicate an intent to make
payments at that level. The maximum caps are valid at the time that
the relevant employment agreement or appointment letter is entered
into and the caps may be adjusted to take into account fluctuations
in exchange rates.
· Remuneration policy table:
executive directors
Component |
Purpose and link to strategy |
Maximum opportunity |
Operation and performance measures |
Salary and Fees |
To provide fixed remuneration at an
appropriate level, to attract and retain directors as part of the
overall compensation package. |
The maximum annual base
combined salary and fees for executive directors is
€450,000[24].
The Remuneration Committee will consider the factors set out under
the "Operation" column when determining the appropriate level of
base salary within the formal Policy maximum. |
Salary is paid on a
monthly basis.
The Remuneration Committee takes into account a number of factors
when setting salaries including:
·scope and difficulty of the role;
· skills and experience of the individual;
· salary levels for similar roles within the
international industry; and
· pay and conditions elsewhere in the
Group.
Salaries are reviewed on an annual basis, but are not necessarily
increased at each review.
No performance measures. |
Annual Bonus |
To incentivise and reward the
achievement of individual and business objectives which are key to
the delivery of the Company's business strategy. |
The maximum award is 125% of
combined base salary and fees. |
The payment of any
bonus is at the discretion of the Board with reference to the
performance year.
· The Remuneration Committee sets, in advance, a scorecard with a
set of Key Performance Indicators ("KPIs") aligned with the
Company's strategy. The measures and the relative weightings are
substantiated by the Remuneration Committee and aim to be
stretching and to support the Company's business strategy.
Measures are related to Company financial performance, operational
performance and the Company’s health and safety record. In general
relative weightings of each KPI are expected not to exceed 50% and
not to be less than 10%.
· The Remuneration Committee retains the flexibility to determine
and, if it considers appropriate, change the KPIs and weightings of
the KPIs based on the outcome of its annual review. The
Remuneration Committee may also adjust KPIs during the year to take
account of material events, such as (without limitation) material
corporate events, changes in responsibilities of an individual and/
or currency exchange rates. Any such changes will be within the
overall target and maximum payouts approved in the policy.
· The KPI targets and specific weightings in the scorecard are
defined annually early in the year, once the budget has been
approved. A summary of the KPI targets, weightings for the KPIs and
how far the KPIs are met will be included retrospectively each year
in the Implementation Report for the year.
· All bonuses that may become payable are subject to malus and
clawback provisions in the event of material financial misstatement
of the Company or fraud or material misconduct on the part of the
executive, as explained further below.
· 50% of the bonuses that may become payable must be applied to
subscribe for or acquire shares in the Company (after the deduction
of any income tax and/ or employee social security contributions
payable). The Company is proposing to adopt and operate a Deferred
Bonus Plan as a framework plan for the delivery of shares to
executives, which may be satisfied by the issue of new shares or
transfer of existing or treasury shares.
· The Remuneration Committee will determine whether the remainder
of the bonus shall be paid in cash or must be applied to subscribe
for or acquire shares (after the deduction of any income tax and/
or employee social security contributions payable). In making
its determination as to how the remainder of the bonus shall be
paid, the Remuneration Committee may take into account:
profitability of the Company; the executive's shareholding as
measured against any Company shareholding guidelines; potential
liabilities of the recipients to income tax and social security
contributions, among other things. Additional shares representing
the value of dividends payable on the deferred shares may be
paid.
· The Remuneration Committee may impose holding periods of up to
three years on any of the shares delivered pursuant to the annual
bonus plan.
· There are no prescribed minimum levels of performance in the
annual bonus structure and so it is possible that no bonus award
would be made.
· |
Share Incentive Arrangements |
To incentivise, retain and reward
eligible employees and align their interests with those of the
shareholders of the Company. |
Awards can be made under the PSP
with a value of up to a maximum of 200% of base salary and fees or
300% in exceptional circumstances. |
The Company is
proposing to adopt and operate the 2018 Performance Share Plan
("PSP") to replace the 2008 Performance Share Plan. The PSP offers
the opportunity to earn shares in the Company subject to the
achievement of stretching but realistic performance conditions.
Performance conditions will be a main feature of the PSP.
The PSP will be administered by the Remuneration Committee.
· Awards can be made under the PSP at the direction of the
Remuneration Committee within the policy maximum in the form of
contingent share awards.
· PSP awards will have a minimum vesting period of 3 years and, for
directors, the PSP awards have a further holding period of 2 years
following the end of the vesting period (subject to any number of
shares that may need to be sold to meet any income tax and employee
social security contributions due on vesting).
· The Remuneration Committee will develop clear KPIs that aim to
align directors with Company strategy over time periods in excess
of one financial year. Any performance measures and targets used
for share incentive awards during 2018 will be relevant and
stretching in line with the overall strategy of the Company.
· The Remuneration Committee may adjust or change the PSP measures,
targets and weightings for new awards under the PSP to ensure
continued alignment with Company strategy.
· PSP awards are subject to malus and clawback in the event of
material financial misstatement of the Company or fraud or material
misconduct on the part of the executive.
· Upon vesting of an award, the award holder must pay the nominal
value in respect of each share that vests.
· PSP Awards will normally lapse where the award holder ceases
employment with the Company before vesting. PSP Awards will
not lapse and will vest immediately if the award holder is
considered to be a Good Leaver (leaves due to death or disability)
subject to the Remuneration Committee being satisfied that
performance conditions have been satisfied or are likely to be
satisfied as at the end of the relevant performance period. In
other circumstances, the Remuneration Committee may determine that
awards will not lapse and will continue to vest at their normal
vesting date, subject to pro-ration to reflect the period of
service during the performance period and performance conditions.
The Remuneration Committee has residuary discretions to disapply
pro ration and bring forward the date of vesting.
· In the event of a change of control of the Company, if the
acquiring company agrees, awards will be exchanged for equivalent
awards over shares in the acquiring company and continue to vest
according to the original vesting schedule. If the acquiring
company does not agree to exchange the awards, the awards will vest
at the Committee's absolute discretion. Awards that vest will be
subject to time pro-ration and performance conditions.
· Benefits under the PSP will not be pensionable.
· The PSP Plan Limits are set out at Note 2.4 below.
|
Pension |
To provide a retirement benefit that
will foster loyalty and retain experienced executive
directors. |
Any pension benefits will be set at
an appropriate level in line with market practice, and in no event
will the contributions paid by the Company exceed 15% of combined
base salary and fees. |
No pension benefits are
currently provided to executives. However, the Remuneration
Committee may in the future decide to provide pension benefits
commensurate with the market.
No performance measures. |
Benefits |
To provide a market competitive
level of benefits to executive directors. |
Any benefits will be set at an
appropriate level in line with market practice, and in no event
will the value of the benefits exceed 15% of combined base salary
and fees. |
· The executive
directors are entitled to private medical insurance and life
assurance cover (of four times the combined salary and fee) and
directors' and officers' liability insurance.
· The Remuneration Committee may decide to provide other benefits
commensurate with the market. Such benefits may include (for
instance) company car or allowance, physical examinations and
medical support, professional advice, assistance with filling out
tax returns and occasional minor benefits. A tax equalisation
payment may be paid to an executive director if any part of the
remuneration of the executive director becomes subject to double
taxation. Tax gross ups may be paid, where appropriate. The Company
does not, at present, provide other taxable benefits to the
executive directors.
· Executive directors are reimbursed for reasonable business
expenses incurred in the course of carrying out their duties.
· No performance measures. |
Notes to the executive directors'
remuneration policy table
The Remuneration Committee's philosophy is that remuneration
arrangements should be appropriately positioned to support the
Group's business strategy over the longer term and the creation of
value for shareholders. In this context the following key
principles are considered to be important:
- remuneration
arrangements should align executive and employee interests with
those of shareholders;
- remuneration
arrangements should help retain key executives and employees;
and
- remuneration
arrangements should incentivise executives to achieve short, medium
and long-term business targets which represent value creation for
shareholders. Targets should relate to the Group's performance in
terms of overall revenue and profit and the executive's own
performance. Exceptional rewards should only be delivered if there
are exceptional returns.
The Remuneration Committee reserves the right to make any
remuneration payments (including satisfying awards of variable
remuneration) and payments for loss of office notwithstanding that
they are not in line with the Policy set out above, where the terms
of that payment were agreed before the Policy came into effect, or
before the individual became a director of the Company (provided
the payment was not in consideration for the individual becoming a
director).
· Performance measures and targets
(a) Annual
Bonus
The performance measures for executive directors comprise of
financial measures and business goals linked to the Company's
strategy, which could include financial and non-financial measures.
The business goals are tailored to reflect each executive
director's role and responsibilities during the year. The
performance measures are chosen to enable the Remuneration
Committee to review the Company's and the individual's performance
against the Company's business strategy and appropriately
incentivise and reward the executive directors.
Annual bonus targets are set by the Remuneration Committee each
year. They are stretching but realistic targets which reflect the
most important areas of strategic focus for the Company. The
factors taken into consideration when setting targets include the
Company's Key Performance Indicators (which are determined annually
by the Remuneration Committee), and the extent to which they are
under the control or influence of the executive whose remuneration
is being determined.
Performance is measured over the financial year against the
measures and targets set according to the scorecard. The
Remuneration Committee retains the right to exercise its judgement
to adjust the bonus outcome for an individual to ensure the outcome
reflects any other aspects of the Company's performance that become
relevant during the financial year.
The Remuneration Committee intends to use Company operational
and financial performances and safety as performance measures for
the 2019 scorecard. For years following 2019, the structure of the
annual bonus scorecard will be reviewed by the Remuneration
Committee.
2019 Annual bonus scorecard measures for
executive directors
40% weighting |
50% weighting |
Operational performance, such as production, sales, geographical
diversification, and starting new projects. |
Company
financial performance, including cash targets and profit
targets. |
10% weighting |
Indicators of health
and safety to promote the effective risk management of the
Company. |
(b) Share
Plans
The Remuneration Committee will make the vesting of a Plan award
conditional upon the satisfaction of stretching but realistic
performance conditions. These conditions are meant to achieve a
long-term alignment of the executives’ remuneration with the
interest of the shareholders.
EBITDA growth increase of P1 reserves (in millions boe), and
changes to the free cash-flow are the key KPIs to be used by the
Remuneration Committee and will be measured over time periods of
three financial years. The performance measures are chosen to align
the performance of participants with the attainment of financial
performance targets over the vesting period of the award. The
targets are set by the Remuneration Committee by reference to the
Company's strategy and business plan and the results achieved at
the time of the vest are determined by the Remuneration
Committee.
Under the PSP plan rules, the Board may vary a performance
target where it considers that any performance target to which an
award is subject is no longer a true or fair measure of the
participant's performance, provided that the Board must act fairly
and reasonably and that the new performance target is materially no
more difficult and no less difficult to satisfy than the original
performance target.
· Malus and clawback (applicable to bonuses and share
awards)
The Remuneration Committee has the discretion to reduce the
bonus before payment or require the executive director to pay back
shares or a cash amount in the event of material financial
misstatement of the Company or fraud or material misconduct on the
part of the executive. The amount that may be clawed back on any
such event is limited to the value of the bonus, taking into
account the cash paid and the shares delivered to the executive,
taking the value of the shares at the time of the clawback, less
any income tax or employee social security contributions paid on
the bonuses.
· Share ownership guidelines for executives
The Remuneration Committee is planning to implement share
ownership guidelines for executive directors to further align the
interests of the executive directors with those of shareholders.
The share ownership guidelines will include an expectation that
executive directors build up their shareholding to 200% of base
salary over a period of five years from the later of: the date of
adoption of this policy and the date of appointment. Once the
shareholding guideline is reached, executive directors would be
expected to maintain it. The intention would be for the
shareholding guideline to be reached through the retention of
vested shares from share plans (e.g. the deferred share element of
the annual bonus and shares vested under the PSP). As such, the
Remuneration Committee's discretion may be used to increase the
proportion of an annual bonus to be delivered in shares to assist
the executive director in meeting this guideline. The deferred
share mechanism in the annual bonus and the design of the PSP will
assist executive directors in reaching the guidelines. Executive
directors will not be expected to top up their shareholding with
personal acquisitions of Company shares outside the usual share
plans described in the Policy. The Remuneration Committee will
monitor the executive directors' shareholdings and may adjust the
guideline in special individual and Company circumstances, for
example in the case of a share price fall.
· PSP Plan Limits
The PSP may operate over new issue shares, treasury shares or
shares purchased in the market. In any ten calendar year period,
the Company may not issue (or grant rights to issue) more than:
(a) 10% of
the issued ordinary share capital of the Company under the Plan and
any other employee share plan adopted by the Company; and
(b) 5% of
the issued ordinary share capital of the Company under the Plan and
any other executive share plan adopted by the Company.
Treasury shares will count as new issue shares for the purposes
of these limits unless institutional investors decide that they
need not count. These limits do not include rights to shares which
have been renounced, released, lapsed or otherwise become incapable
of vesting, awards that the Remuneration Committee determines after
grant to be satisfied by the transfer of existing shares and shares
allocated to satisfy bonuses (including pursuant to the Deferred
Bonus Plan).
· Remuneration throughout the Group
Differences in the Company's pay policy for executive directors
from that applying to employees within the Group generally reflect
the appropriate market rate for the individual executive roles.
· Remuneration policy table:
non-executive directors
Component |
Purpose and link to strategy |
Maximum opportunity |
Operation and performance measures |
Fees |
To provide an
appropriate reward to attract and retain high-calibre individuals
with the relevant
skills, knowledge and experience to progress the Company
strategy. |
· The maximum annual fees paid to
non-executive directors is £50,000 for a non-executive director
role, and £100,000 for the role of Chairman. An additional £10,000
will be paid to the individual acting as Chairman of the Audit
Committee. |
Non-executive directors
receive a standard annual fee, which is paid on a quarterly basis
in arrears.
Additional fees may also be paid to recognise the additional work
performed by members of any committees set up by the Board, and for
the role of chair of a committee.
Fees are reviewed on an annual basis, but are not necessarily
increased at each review. Fees are set at a rate that takes into
account:
· market practice for comparative roles;
· the financial results of the Company;
· the time commitment and duties involved; and
· the requirement to attract and retain the quality of individuals
required by the Company.
The remuneration of the non-executive directors is a matter for the
Board to consider and decide upon.
There are no performance measures related to non-executive
directors' fees. |
Notes to the Policy Table
The payment policy for non-executive directors is to pay a rate
which will secure persons of a suitable calibre. The remuneration
of the non-executive directors is determined by the Board. External
benchmarking data and specialist advisers are used when setting
fees, which will be reviewed at appropriate intervals. The maximum
caps are valid at the time that the relevant appointment letter is
entered into and the caps may be adjusted to take into account
fluctuations in exchange rates.
Expenses reasonably and wholly incurred in the performance of
the role of non-executive director of the Company may be reimbursed
or paid for directly by the Company, as appropriate, and may
include any tax due on the expense.
The non-executive directors' fees are non-pensionable. The
non-executive directors have not to date been eligible to
participate in any incentive plans (such as bonuses or share
plans); however, the Board considers that it may be appropriate in
the future to enable such participation, subject to suitably
stretching performance thresholds.
Non-executive directors may receive professional advice in
respect of their duties with the Company which will be paid for by
the Company. They will also may be covered by the Company's
insurance policy for directors.
· Recruitment
The Company's policy on the recruitment of directors is to pay a
fair remuneration package for the role being undertaken and the
experience of the individual being recruited. The Remuneration
Committee will consider all relevant factors, which include the
abilities of the individual, their existing remuneration package,
market practice, and the existing arrangements for the Company's
current directors.
The Remuneration Committee will determine that any arrangements
offered are in the best interests of the Company and shareholders
and will endeavour to pay no more than is necessary.
The Remuneration Committee intends that the components of
remuneration set out in the policy tables, and the approach to the
components as set out in the policy tables, will be equally
applicable to new recruits, i.e. salary, annual bonus, share plan
awards, pension and benefits for executive directors, and fees for
non-executive directors. However, the Company acknowledges that
additional flexibility may be required to ensure the Company is in
the best position to recruit the best candidate for any vacant
roles and, as such, a buy-out arrangement may be required.
· Flexibility
The salary and compensation package designed for a new recruit
may be higher or lower than that applying for existing directors.
The Remuneration Committee may decide to appoint a new executive
director to the Board at a lower than typical salary, such that
larger and more frequent salary increases may then be awarded over
a period of time to reflect the individual's growth in experience
within the role.
Remuneration will normally not exceed those set out in the
policy table above. However, to ensure that the Company can
sufficiently compete with its competitors, the Remuneration
Committee considers it important that the recruitment policy has
sufficient flexibility in order to attract and appropriately
remunerate the high-performing individuals that the Company
requires to achieve its strategy. As such, the Remuneration
Committee reserves discretion to provide a buy-out arrangement and
benefits (such as a sign-on bonus and additional share awards) in
addition to those set out in the policy table (or mentioned in this
section) where the Remuneration Committee considers it reasonable
and necessary to do so in order to secure an external appointment
(see below for more detail in relation to buy-out
arrangements).
· Buy-out arrangements
The Remuneration Committee retains the discretion to enter into
buy-out arrangements to compensate new hires for incentive awards
forfeited in joining the Company. The Remuneration Committee will
use its discretion in awarding and setting any such compensation,
which will be decided on a case-by-case basis and likely on an
estimated like-for-like basis. In deciding the appropriate type and
quantum of compensation to replace existing awards, the
Remuneration Committee will take into account all relevant factors,
including the type of award being forfeited, the likelihood of any
performance measures attached to the forfeited award being met, and
the proportion of the vesting period remaining. The Remuneration
Committee will appropriately discount the compensation payable to
take account of any uncertainties over the likely vesting of the
forfeited award to ensure that the Company does not, in the view of
the Remuneration Committee, pay in excess of what is reasonable or
necessary.
Compensation for awards forfeited may take the form of a bonus
payment or a share award. For the avoidance of doubt, the maximum
amounts of compensation contained in the policy table will not
apply to such buy-out arrangements. The Company has not placed a
maximum value on the compensation that can be paid under this
section, as it does not believe it would be in shareholders'
interests to set any expectations for prospective candidates
regarding such awards.
· Payments for loss of
office
Any compensation payable in the event that the employment of an
executive director is terminated will be determined in accordance
the terms of the employment contract between the Company and the
executive, as well as the relevant rules of any share plan and this
Policy, and in accordance with the prevailing best practice.
The Remuneration Committee will consider a variety of factors
when considering leaving arrangements for an executive director and
exercising any discretions it has in this regard, including (but
not limited to) individual and business performance during office,
the reason for leaving, and any other relevant circumstances (for
example, ill health).
In addition to any payment that the Remuneration Committee may
decide to make, the Remuneration Committee reserves discretion as
it considers appropriate to:
(a) pay an
annual bonus for the year of departure;
(b) continue
providing any benefits for a period of time; and
(c)
provide outplacement services.
Non-executive directors are subject to one month notice periods
prior to termination of service and are not entitled to any
compensation on termination save for accrued fees as at the date of
termination and reimbursement of any expenses properly incurred
prior to that date.
· Share plan awards
The treatment of any share award on termination will be governed
by the PSP rules.
Under the PSP, outstanding share awards held by an individual
who ceases to be a director or employee of the Company will lapse,
unless the cessation is due to death, illness, injury or
disability, redundancy, retirement, the Company ceasing to be a
member of the Group or the transfer of an undertaking or part of an
undertaking to a person who is not a member of the Group, or the
Board exercises its discretion otherwise.
Under the PSP, the Board has discretion to decide the period of
time for which the award will continue, and whether any unvested
award shall be treated as vesting on the date of cessation of
employment or in accordance with the original vesting schedule, in
both cases have regard to the extent to which the performance
targets have been satisfied prior to the date of cessation.
For executive directors, the vesting period will be set by the
Remuneration Committee with a minimum three-year period. The
Remuneration Committee will (unless the vesting period is set as a
period equal to or longer than five years) impose a holding period
on shares (or awards) so that the executive is not able to sell the
shares that the executive director acquires through the PSP until
the fifth anniversary of the date of the award. The
holding period will not apply to the number of shares equivalent in
value to the amount required by the Company or the executive
director to fund any income tax and employee social security
contributions due on the vesting of the awards or otherwise in
connection with the awards.
· Executive director employment
agreements
This section contains the key employment terms and conditions of
the executive directors that could impact on their remuneration or
loss of office payments.
The Company's policy on employment agreements is that executive
directors' agreements should be terminable by either the Company or
the director on not more than six months' notice. The employment
agreements contain provision for early termination, among other
things, in the event of a breach by the executive but make no
provision for any termination benefits except in the event of a
change of control of the Company, where the executive becomes
entitled to a lump sum equal to 24 months' base salary plus
benefits plus (if any), bonus received. on termination by the
Company. The employment agreements contain restrictive covenants
for a period of 12 months following termination of the agreement.
Details of employment agreements in place as at the date of this
report are set out below:
Director |
Current agreement start date |
Notice period |
G Michelotti |
1 July 2015 |
Six months |
Directors' employment agreements are available for inspection at
the Company's registered office and at Zhylyanska street 48/50,
01033 Kyiv, Ukraine.
· Non-executive directors'
letters of appointment
This section contains the key terms of the appointments of
non-executive directors that could impact on their
remuneration.
Typically, the non-executive directors are appointed by letter
of appointment for an initial term of three years which may be
extended. All non-executive directors are subject to annual
re-election by the Company's shareholders and their appointments
may be terminated earlier with one month's prior written notice (or
with immediate effect, in the case of specific serious
circumstances such as fraud or dishonesty). On termination of
appointment, non-executive directors are usually only entitled to
accrued fees as at the date of termination together with
reimbursement of any expenses properly incurred prior to that date
and the company has no obligation to pay further compensation when
the appointment terminates[25]. Non-executive directors' letters of
appointment are available for inspection at the Company's
registered office and at Zhylyanska street 48/50, 01033
Kyiv, Ukraine.
No pension entitlements were provided in 2018. However, the
Remuneration Committee may in the future decide to provide pension
benefits commensurate with the market.
· Consideration of shareholder
views
The Chairman and executive directors of the Company have a
regular dialogue with analysts and substantial shareholders, which
includes the subject of directors' remuneration. The outcome of
these discussions is reported to the Board and discussed in detail
both there and during meetings of the Remuneration Committee.
The Remuneration Committee will take into account the results of
the shareholder vote on remuneration matters when making future
remuneration decisions. The Remuneration Committee remains mindful
of shareholder views when evaluating and setting ongoing
remuneration strategy.
· Consideration of employment
conditions within the Group
When determining remuneration levels for its executive
directors, the Board considers the pay and employment conditions of
employees across the Group. The Remuneration Committee will be
mindful of average salary increases awarded across the Group when
reviewing the remuneration packages of the executive directors.
· Minor changes
The Remuneration Committee may make, without the need for
shareholder approval, minor amendments to the Policy for
regulatory, exchange control, tax or administrative purposes or to
take account of changes in legislation.
Statement of Directors’
Responsibilities in respect of the Annual Report and the Financial
Statements
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations. Company law requires the Directors to prepare
financial statements for each financial year. The Directors are
required by law to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(“IFRSs”) as adopted by the European Union and Article 4 of the
International Accounting Standards (“IAS”) regulation and have also
elected to prepare the Parent Company financial statements under
IFRSs as adopted by the European Union. Under Company law, the
Directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of
affairs of the Company and Group and of the profit or loss for that
period. In preparing the Company and Group’s financial statements,
IAS Regulation requires that Directors:
- properly select and apply accounting policies;
- make judgements and accounting estimates that are reasonable
and prudent;
- present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
- state whether they have been prepared in accordance with IFRSs
as adopted by the European Union, subject to any material
departures disclosed and explained in the financial
statements;
- provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the Company’s and Group’s financial position and
financial performance; and
- make an assessment of the Company’s and Group’s ability to
continue as a going concern, prepare the financial statements on
the going concern basis unless it is inappropriate to presume that
the Company and Group will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company and
Group’s transactions and disclose with reasonable accuracy at any
time the financial position of the Company and Group and enable
them to ensure that the financial statements comply with the
Companies Act 2006, as regards the Group financial statements,
Article 4 of the IAS Regulation. They are also responsible for
safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities. Under applicable law and regulations, the
Directors are also responsible for preparing a Strategic Report,
Directors’ Report, Annual Report on Remuneration, Directors’
Remuneration Policy and Corporate Governance Statement that comply
with that law and those regulations. The Directors are responsible
for the maintenance and integrity of the corporate and financial
information and statements included on the Company’s website,
www.cadoganpetroleum.com. Legislation in the United Kingdom governing the preparation and
dissemination of the financial statements may differ from
legislation in other jurisdictions. The directors' responsibility
also extends to the ongoing integrity of the financial statements
contained therein.
Responsibility Statement of the
Directors in respect of the Annual Report
We confirm to the best of our knowledge:
(1) the financial statements, prepared in accordance with
International Financial Reporting Standards as adopted by the
European Union and Article 4 of the IAS Regulation, give a true and
fair view of the assets, liabilities, financial position and profit
or loss of the Company and the undertakings included in the
consolidation as a whole; and
(2) the Annual Report, includes a fair review of the development
and performance of the business and the position of the Company and
the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and
uncertainties that they face; and
(3) the annual report and the financial statements, taken as a
whole, are fair, balanced and understandable and provides the
information necessary for the shareholders to assess the Group’s
position, performance, business model and strategy.
On behalf of the Board
Zev Furst
Chairman
23 April 2019
Independent auditor’s report to the
members of Cadogan Petroleum Plc
Opinion
We have audited the financial statements of Cadogan Petroleum
Plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for
the year ended 31 December 2018 which
comprise the consolidated income statement, the consolidated
statement of comprehensive income, the consolidated balance sheet,
the consolidated cash flow statement, the consolidated statement of
changes in equity, the parent company balance sheet, the parent
company cash flow statement, the parent company statement of
changes in equity and notes to the financial statements, including
a summary of significant accounting policies. The financial
reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union and, as regards the Parent
Company financial statements, as applied in accordance with the
provisions of the Companies Act 2006.
In our opinion the financial statements:
- give a true and fair view of the state of the Group’s and of
the Parent Company’s affairs as at 31
December 2018 and of the Group’s profit for the year then
ended;
- the Group financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union;
- the Parent Company financial statements have been properly
prepared in accordance with IFRSs as adopted by the European Union
and as applied in accordance with the provisions of the Companies
Act 2006; and
- the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006; and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
Auditor’s responsibilities for the audit of the financial
statements section of our report. We are independent of the Group
and the Parent Company in accordance with the ethical requirements
that are relevant to our audit of the financial statements in the
UK, including the FRC’s Ethical Standard as applied to listed
public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe
that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Conclusions relating to going
concern
We have nothing to report in respect of the following matters in
relation to which the ISAs (UK) require us to report to you
where:
- the Directors’ use of the going concern basis of accounting in
the preparation of the financial statements is not appropriate;
or
- the Directors have not disclosed in the financial statements
any identified material uncertainties that may cast significant
doubt about the Group’s or the Parent Company’s ability to continue
to adopt the going concern basis of accounting for a period of at
least twelve months from the date when the financial statements are
authorised for issue.
Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified, including those which had the greatest
effect on: the overall audit strategy, the allocation of resources
in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
Key Audit Matter |
How the matter was addressed in
our audit |
Carrying value of oil and gas exploration and production assets
as detailed in note 3 and 4
At 31 December 2018 the group held exploration and evaluation
assets of $2.4m and $2.8m of development and production assets as
detailed in note 15 and 16.
Management is required to assess these assets for indicators of
impairment at each reporting date. Management has performed an
impairment review which included assessment of the Bitlyanska and
Monastyretska licences’ value in use based on the underlying
discounted cash flow forecasts and concluded that no impairment is
necessary.
The impairment reviews require judgment and estimate in determining
whether indicators of impairment exist and, in respect of the
discounted cash flow models significant estimates in selecting
inputs, together with significant judgment regarding the likelihood
of licences being renewed / converted to production licences prior
to their expiry in November and December 2019.
As a result of these factors this represented a key focus area for
our audit and a key audit matter. |
We
reviewed the licence agreements and confirmed that group holds
valid licences and gained an understanding of the licence
conditions and remaining term.
We evaluated management’s impairment indicator review paper,
together with the underlying discounted cash flow forecasts which
formed part of their impairment review. We critically
challenged the key judgments and assumptions made by management,
including forecast oil and gas prices, production levels, royalties
and costs. This included assessment compared to empirical data, the
independent Competent Person’s Report on the oil and gas reserves
and external evidence where available. We benchmarked the discount
rates against peer companies in the Ukraine.
We performed sensitivity analysis on the impairment models to
establish the impact of reasonably possible changes in key
variables such as pricing, production, expenditure and the discount
rates.
We reviewed budgets, forecasts and strategic plans to consider the
extent to which management’s judgment regarding future planned
exploration activity is supported by those plans.
We met with operational management and considered the
appropriateness of management’s judgment that the Bitlyanska and
Monastyretska licences would be extended or converted to production
licences upon expiry in December and November 2019 respectively. In
doing so we obtained documents demonstrating the advanced status of
submissions for the licence conversions, confirmations from the
relevant authorities that the group is in compliance with licence
obligations and considered factors such as the exploration results
to date. We specifically considered the extent to which the
delays and failure to secure equivalent licence conversions in the
East of Ukraine may occur on these licences located in the Western
region. In assessing management’s judgment that the licences
applications are reasonably expected to be approved, we assessed
public data on the pattern of extension and conversion of such
licences in the West of Ukraine. |
Key observations
We found management’s conclusion that no indication of impairment
exists on the exploration and production assets at Bitlyanska and
Monastyretska to be appropriate. The disclosures in the notes
are sufficient and in line with accounting standards. |
Key Audit Matter |
How the matter was addressed in
our audit |
Accounting treatment of the exit from the WGI JV
As detailed in note 18 the group exited the WGI joint venture
during 2018 and received $1.715m from Eni as part of the agreement
which included the transfer of the group’s interests in the
historically impaired WGI JV and the group’s shale gas projects to
PJSC Nadra Ukrayny for nominal consideration. Given the
material nature of this transaction to the group’s results the
accounting treatment of the transaction was a focus for our
audit. |
We
assessed the accounting treatment for the amounts received from Eni
as part of the exit from the WGI JV and shale gas projects, against
the requirements of the relevant accounting standards. We
made inquiries of management and the Audit Committee regarding the
structure of the transaction, reviewed the accounting entries and
relevant agreements and verified the receipt to
bank. |
Key observations
We found the accounting treatment and presentation of the amounts
received from Eni in the WGI JV and shale gas projects to be
appropriate based on relevant accounting standards. |
Key Audit Matter |
How the matter was addressed in
our audit |
Appropriateness of
revenue recognition policies and the appropriateness of cut off for
gas trading revenue
The group generated revenues of $14.7m comprising $9.9m from gas
trading activity, $4.7m from oil and gas production and $0.1m from
services.
We considered it appropriate, noting that this was the first year
of application of IFRS 15 as detailed in note 2, to assess the
appropriateness of the group’s revenue recognition policies and
their application for compliance with IFRS.
In addition, there is inherent risk of material misstatement
associated with the recognition of revenue around the year end,
which is focused on gas trading contracts due to the volume of
activity and increased potential for revenue being recorded in the
incorrect period.
|
We reviewed the terms
of significant sales agreements and assessed the impact of such
terms of revenue recognition.
We assessed the group’s revenue recognition policies for compliance
with IFRS 15 and consistency with the contractual arrangements with
its customers.
We reviewed the terms of the contracts to satisfy ourselves that
the group appropriately accounts for gas trading revenues as the
principal rather than as an agent.
In respect of oil production, we recalculated expected revenues
using verified production data and externally sourced average price
and compared this information to actual revenue. We verified a
sample of oil production revenues to supporting evidence.
We verified a sample of gas trading revenues by customer to third
party confirmations. We obtained confirmation from the body
responsible for regulating gas delivery in the Ukraine to confirm
the existence, accuracy and completeness of gas inventory.
We performed cut off procedures on revenue around the year end for
gas trading revenues which included verification of source
documents such as acceptance notices.
In respect of service revenues we obtained the contract, assessed
the terms and recalculated the revenue for the period. |
Key observations
We found the revenue recognition policies to be compliant with IFRS
and the presentation in the financial statements to be acceptable.
Based on our work we did not identify any issues with the recording
of revenue in the appropriate period. |
Our application of materiality
We apply the concept of materiality both in planning and
performing our audit, and in evaluating the effect of
misstatements. We consider materiality to be the magnitude by which
misstatements, including omissions, could influence the economic
decisions of reasonable users that are taken on the basis of the
financial statements. Importantly, misstatements below these
levels will not necessarily be evaluated as immaterial as we also
take account of the nature of identified misstatements, and the
particular circumstances of their occurrence, when evaluating their
effect on the financial statements as a whole.
|
Group |
Parent company |
Materiality |
$730,000 |
$550,000 |
Basis for determining
materiality |
1.5% of total assets |
1.5% of total assets, capped at 75%
of group materiality |
We determined that an asset based measure is appropriate as the
Group holds significant cash balances and its principal activity is
the exploration & development of oil and gas assets, such that
the asset base is considered to be a key financial metric for users
of the financial statements.
Whilst materiality for the financial statements as a whole was
$730,000 (FY 2017: $750,000), each significant component of the
Group was audited to a lower performance materiality ranging from
$97,500 to $412,500 (FY 2017: $90,000 to $420,000).
Performance materiality for the Parent Company was set at
$412,500 (FY 2017: $420,000).
Performance materiality is used to determine the financial
statement areas that are included within the scope of our audit and
the extent of sample sizes during the audit. Performance
materiality is applied at the individual account or balance level
set at an amount to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality for the financial statements as a
whole.
We agreed with the Audit Committee that we would report to them
all individual audit differences identified during the course
of our audit in excess of $36,000 (FY 2017: $40,000). We also agreed to report differences
below that threshold that, in our view, warranted reporting on
qualitative grounds.
An overview of the scope of our
audit
Our group audit was scoped by obtaining an understanding of the
group and its environment and assessing the risks of material
misstatement in the financial statements at the group level.
Whilst Cadogan Petroleum Plc is a company listed on the Standard
Segment of the London Stock Exchange, the Group’s operations
principally comprise an exploration & development of oil and
gas assets located in Ukraine,
together with gas trading and oil services activities. We assessed
there to be seven significant components within the Ukrainian
sub-group, comprising components holding exploration &
development assets, gas trading activities which were subject to a
full scope audit. Together with the parent company, Cadogan
Petroleum Holdings Ltd and the group consolidation, which was also
subject to a full scope audit, these represent the significant
components of the group.
These locations represent the principal business units and
account for 100% of the group’s revenue and 99% of the group’s
total assets.
The audits of each of the Ukrainian components were principally
performed in the Ukraine. The audits of the parent company,
Cadogan Petroleum Holdings Ltd and the group consolidation were
performed in the United Kingdom by
BDO LLP.
A BDO member firm performed a full scope audit of the components
in Ukraine, under our direction
and supervision as group auditors.
In setting the audit strategy we considered our approach in
respect of the ability of the audit to detect irregularities,
including fraud. We designed audit procedures to respond to the
risk, recognising that the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting
one resulting from error, as a fraud may involve deliberate
concealment by, for example, forgery or intentional
misrepresentations or through collusion.
We considered the laws and regulations of the Ukraine and the UK to be of significance in
the context of the Group audit. As part of our Group audit strategy
direction was provided to the auditor of the significant components
to ensure an assessment was performed on the extent of the
components compliance with the relevant local and regulatory
framework. As part of our Group audit work we reviewed this work
and held meetings with relevant internal Management to form our own
opinion on the extent of Group wide compliance. In addition our
tests included, but were not limited to agreement of the Financial
Statement disclosures to underlying supporting documentation,
performing substantive testing on accounts balances which were
considered to be at a greater risk of susceptibility to fraud and
reviewed correspondence with regulators in so far as the
correspondence related to the Financial Statements.
As part of our audit strategy, as group auditors:
- Detailed group reporting instructions were sent to the
component auditor, which included the significant areas to be
covered by the audit (including areas that were considered to be
key audit matters as detailed above), and set out the information
required to be reported to the group audit team.
- The group audit partner and senior members of the group audit
team visited the Ukraine to meet
with component management during the audit.
- We performed a review of the component audit files in the
Ukraine and held calls and
meetings with the component audit team during the planning and
completion phases of their audit.
- The group audit team was actively involved in the direction of
the audits performed by the component auditors for group reporting
purposes, along with the consideration of findings and
determination of conclusions drawn. We performed our own additional
procedures in respect of certain of the significant risk areas that
represented Key Audit Matters in addition to the procedures
performed by the component auditor.
The remaining components of the group were considered
non-significant and these components were principally subject to
analytical review procedures.
Other information
The directors are responsible for the other information. The
other information comprises the information included in the annual
financial report, other than the financial statements and our
auditor’s report thereon. Our opinion on the financial statements
does not cover the other information and, except to the extent
otherwise explicitly stated in our report, we do not express any
form of assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a
material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of the other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed
by the Companies Act 2006
In our opinion, the part of the directors’ remuneration report
to be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of
the audit:
- the information given in the strategic report and the
directors’ report for the financial year for which the financial
statements are prepared is consistent with the financial
statements; and
- the strategic report and the directors’ report have been
prepared in accordance with applicable legal requirements.
Matters on which we are required to
report by exception
In the light of the knowledge and understanding of the Group and
Parent Company and its environment obtained in the course of the
audit, we have not identified material misstatements in the
strategic report or the directors’ report.
We have nothing to report in respect of the following matters in
relation to which the
Companies Act 2006 requires us to report to you if, in our
opinion:
- adequate accounting records have not been kept by the Parent
Company, or returns adequate for our audit have not been received
from branches not visited by us; or
- the Parent Company financial statements and the part of the
directors’ remuneration report to be audited are not in agreement
with the accounting records and returns; or
- certain disclosures of directors’ remuneration specified by law
are not made; or
- we have not received all the information and explanations we
require for our audit.
Responsibilities of directors
As explained more fully in the Statement of directors’
responsibilities set out on page 61, the directors are responsible
for the preparation of the financial statements and for being
satisfied that they give a true and fair view, and for such
internal control as the directors determine is necessary to enable
the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group’s and the Parent Company’s
ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
Group or the Parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor’s responsibilities for the
audit of the financial statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the Financial Reporting
Council’s website at:
www.frc.org.uk/auditorsresponsibilities. This description
forms part of our auditor’s report.
Other matters which we are required to
address
Following the recommendation of the audit committee, we were
appointed by the Board of directors on 27
April 2017 to audit the financial statements for the year
ending 31 December 2017 and
subsequent years. This is the second year of our engagement as
auditor.
The non-audit services prohibited by the FRC’s Ethical Standard
were not provided to the company and we remain independent of the
company and the group in conducting our audit.
Our audit opinion is consistent with the additional report to
the audit committee.
Use of our report
This report is made solely to the Parent Company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might
state to the Parent Company’s members those matters we are required
to state to them in an auditor’s report and for no other
purpose. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the Parent
Company and the Parent Company’s members as a body, for our audit
work, for this report, or for the opinions we have formed.
Ryan Ferguson (Senior Statutory
Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London,
United Kingdom
23 April 2019
BDO LLP is a limited liability partnership registered in
England and Wales (with registered number OC305127).
Consolidated Income
Statement for the year ended 31 December 2018 |
Notes |
2018
$’000 |
2017
$’000 |
CONTINUING OPERATIONS |
|
|
|
Revenue |
6 |
14,730 |
15,145 |
Cost of sales |
|
(12,849) |
(13,093) |
Gross profit |
|
1,881 |
2,052 |
|
|
|
|
|
|
|
|
Administrative expenses |
7 |
(4,762) |
(4,981) |
Reversal of impairment/(impairment)
of oil and gas assets |
|
(56) |
(162) |
Reversal of impairment of other
assets |
8 |
1,730 |
1,513 |
Impairment of other assets |
8 |
(751) |
(51) |
Share of losses in joint
venture |
18 |
- |
(2,323) |
Net foreign exchange losses |
|
(58) |
(116) |
Other operating income, net |
9 |
2,419 |
480 |
Operating profit/(loss) |
|
403 |
(3,588) |
|
|
|
|
Finance income, net |
12 |
636 |
672 |
Profit/(Loss) before tax |
|
1,039 |
(2,916) |
|
|
|
|
Tax benefit |
13 |
178 |
1,332 |
Profit/(Loss) for the
year |
|
1,217 |
(1,584) |
|
|
|
|
Attributable to: |
|
|
|
Owners of the Company |
|
1,220 |
(1,585) |
Non-controlling interest |
|
(3) |
1 |
|
|
1,217 |
(1,584) |
|
|
|
|
Profit/(Loss) per Ordinary
share |
|
Cents |
cents |
Basic |
14 |
0.5 |
(0.7) |
Consolidated Statement of
Comprehensive Income for the year ended 31
December 2018
|
|
|
|
|
|
|
2018
$’000 |
2017
$’000 |
|
|
|
|
|
Profit/(loss) for the
year |
|
|
1,217 |
(1,584) |
Other comprehensive
profit/(loss) |
|
|
|
|
Items that may be reclassified subsequently to profit or loss: |
|
|
Unrealised currency translation
differences |
|
|
354 |
(671) |
Other comprehensive
profit/(loss) |
|
|
354 |
(671) |
|
|
|
|
|
Total comprehensive profit/(loss)
for the year |
|
|
1,571 |
(2,255) |
|
|
|
|
|
Attributable to: |
|
|
|
|
Owners of the Company |
|
|
1,574 |
(2,256) |
Non-controlling interest |
|
|
(3) |
1 |
|
|
|
1,571 |
(2,255) |
|
|
|
|
Consolidated Balance Sheet as at 31st December
2018
|
Notes |
2018
$’000 |
2017
$’000 |
ASSETS |
|
|
|
Non-current
assets |
|
|
|
Intangible exploration
and evaluation assets |
15 |
2,386 |
1,715 |
Property, plant and
equipment |
16 |
3,297 |
2,095 |
Prepayments for
non-current assets |
|
1,318 |
- |
Deferred tax
asset |
22 |
501 |
323 |
|
|
7,502 |
4,133 |
Current
assets |
|
|
|
Inventories |
19 |
4,487 |
2,292 |
Trade and other
receivables |
20 |
2,472 |
4,497 |
Assets held for
sale |
|
165 |
- |
Cash and cash
equivalents |
21 |
35,136 |
37,640 |
|
|
42,260 |
44,429 |
Total
assets |
|
49,762 |
48,562 |
|
|
|
|
LIABILITIES |
|
|
|
Non-current
liabilities |
|
|
|
Provisions |
25 |
(39) |
(412) |
|
|
(39) |
(412) |
Current
liabilities |
|
|
|
Trade and other
payables |
24 |
(1,271) |
(1,406) |
Liabilities held for
sale |
|
(140) |
- |
Provisions |
25 |
(276) |
(358) |
|
|
(1,687) |
(1,764) |
Total
liabilities |
|
(1,726) |
(2,176) |
|
|
|
|
NET ASSETS |
|
48,036 |
46,386 |
|
|
|
|
EQUITY |
|
|
|
Share capital |
26 |
13,525 |
13,525 |
Share premium |
|
329 |
329 |
Retained earnings |
|
194,062 |
192,842 |
Cumulative translation
reserves |
|
(161,816) |
(162,170) |
Other reserves |
|
1,668 |
1,589 |
Equity attributable
to owners of the Company |
|
47,768 |
46,115 |
|
|
|
|
Non-controlling
interest |
|
268 |
271 |
TOTAL
EQUITY |
|
48,036 |
46,386 |
|
|
|
|
The consolidated financial statements of Cadogan Petroleum plc,
registered in England and
Wales no. 05718406, were approved
by the Board of Directors and authorised for issue on 23 April 2019. They were signed on its behalf
by:
Guido Michelotti
Chief Executive Officer
23 April 2019
The notes on pages 74 to 102 form an integral part of these
financial statements.
Consolidated Cash Flow Statement for the year 31st
December 2018 |
|
|
|
|
Note |
2018
$’000 |
2017
$’000 |
Operating profit / (loss) |
|
403 |
(3,588) |
Adjustments for: |
|
|
|
Depreciation of property, plant and equipment |
16 |
425 |
211 |
Impairment
of oil and gas assets |
|
56 |
162 |
Impairment
of property, plant and equipment |
8 |
751 |
- |
Termination fee on exit from WGI |
18 |
(1,700) |
- |
Share of
losses in joint ventures |
18 |
- |
2,323 |
Impairment
of receivables |
8 |
- |
51 |
Reversal
of impairment of inventories |
8 |
(107) |
(77) |
Reversal
of impairment of VAT recoverable |
8 |
(1,730) |
(1,436) |
Gain on
disposal of property, plant and equipment |
|
(45) |
(9) |
Effect of
foreign exchange rate changes |
|
58 |
116 |
Operating cash flows before movements in working
capital |
|
(1,889) |
(2,247) |
Increase
in inventories |
|
(2,100) |
(564) |
Decrease
in receivables |
|
3,651 |
469 |
Increase
in payables and provisions |
|
84 |
367 |
Cash
used in operations |
|
(254) |
(1,975) |
Interest
paid |
|
(130) |
(298) |
Interest
on receivables received |
|
- |
500 |
Interest
received |
|
230 |
61 |
Income
taxes paid |
|
- |
(107) |
Net
cash outflow from operating activities |
|
|
(154) |
(1,819) |
Investing activities |
|
|
|
|
Proceeds
from termination fee on exit from WGI |
|
|
1,700 |
- |
Purchases
of property, plant and equipment |
|
|
(3,944) |
(68) |
Purchases
of intangible exploration and evaluation assets |
|
|
(857) |
(568) |
Proceeds
from sale of property, plant and equipment |
|
|
58 |
198 |
Interest
received |
|
|
553 |
205 |
Net
cash used in investing activities |
|
|
(2,490) |
(233) |
|
|
|
|
|
Financing activities |
|
|
|
|
Proceeds
from short-term borrowings |
|
|
3,965 |
3,365 |
Repayments
of short-term borrowings |
|
|
(3,887) |
(7,075) |
Net
cash from/(used in) financing activities |
|
|
78 |
(3,710) |
|
|
|
|
|
Net
decrease in cash and cash equivalents |
|
|
(2,566) |
(5,762) |
Effect of
foreign exchange rate changes |
|
|
102 |
102 |
Cash and
cash equivalents held for sale at end of year |
|
|
(40) |
- |
Cash and
cash equivalents at beginning of year |
|
|
37,640 |
43,300 |
Cash and cash
equivalents at end of year |
|
|
35,136 |
37,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Changes in Equity for the year
ended 31 December 2018 |
|
|
Share
capital
$’000 |
|
Retained earnings
$’000 |
Cumulative
translation
reserves
$’000 |
|
|
Non-controlling
interest
$’000 |
Total
$’000 |
|
Share
premium account
$’000 |
Other
reserves
$’000 |
Equity attributable to owners of the Company |
|
As at 1 January
2017 |
13,337 |
- |
194,427 |
(161,499) |
1,589 |
47,854 |
270 |
48,124 |
|
Net loss for the
year |
- |
- |
(1,585) |
- |
- |
(1,585) |
1 |
(1,584) |
|
Other comprehensive
loss |
- |
- |
- |
(671) |
- |
(671) |
- |
(671) |
|
Total comprehensive
loss for the year |
- |
- |
(1,585) |
(671) |
- |
(2,256) |
1 |
(2,255) |
|
Issue of ordinary
shares |
188 |
329 |
- |
- |
- |
517 |
- |
517 |
|
As at 1 January
2018 |
13,525 |
329 |
192,842 |
(162,170) |
1,589 |
46,115 |
271 |
46,386 |
|
Net profit for the
year |
- |
- |
1,220 |
- |
- |
1,220 |
(3) |
1,217 |
|
Other comprehensive
profit |
- |
- |
- |
354 |
- |
354 |
- |
354 |
|
Total comprehensive
profit for the year |
- |
- |
1,220 |
354 |
- |
1,575 |
(3) |
1,572 |
|
Issue of ordinary
shares |
- |
- |
- |
- |
79 |
79 |
- |
79 |
|
As at 31 December
2018 |
13,525 |
329 |
194,062 |
(161,816) |
1,668 |
47,768 |
268 |
48,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to the Consolidated Financial
Statements for the year ended 31st December 2018
1.
General information
Cadogan Petroleum plc (the “Company”, together with its
subsidiaries the “Group”), is registered in England and Wales under the Companies Act 2006. The
address of the registered office is 6th Floor, 60 Gracechurch
Street, London EC3V 0HR. The
nature of the Group’s operations and its principal activities are
set out in the Operations Review on pages 9 to 10 and the Financial
Review on pages 11 to 13.
2.
Adoption of new and revised Standards
New IFRS accounting standards,
amendments and interpretations not yet adopted
Impact of initial application of IFRS
9 Financial Instruments
In the current year, the Group has applied IFRS 9 Financial
Instruments (as revised in July 2014)
and the related consequential amendments to other IFRS Standards
that are effective for an annual period that begins on or after
1 January 2018. The transition
provisions of IFRS 9 allow an entity not to restate
comparatives.
IFRS 9 introduced new requirements for:
1) The classification and measurement of financial assets and
financial liabilities,
2) Impairment of financial assets, and
3) General hedge accounting.
Details of these new requirements as well as their impact on the
Group’s consolidated financial statements are described below. The
Group has applied IFRS 9 in accordance with the transition
provisions set out in IFRS 9.
(a) Classification and measurement of
financial assets
The date of initial application (i.e. the date on which the
Group has assessed its existing financial assets and financial
liabilities in terms of the requirements of IFRS 9) is 1 January 2018. Accordingly, the Group has
applied the requirements of IFRS 9 to instruments that continue to
be recognised as at 1 January 2018
and has not applied the requirements to instruments that have
already been derecognised as at 1 January
2018. All recognised financial assets that are within the
scope of IFRS 9 are required to be measured subsequently at
amortised cost or fair value on the basis of the entity’s business
model for managing the financial assets and the contractual cash
flow characteristics of the financial assets.
The Group reviewed and assessed the Group’s existing financial
assets as at 1 January 2018 based on
the facts and circumstances that existed at that date and concluded
that the initial application of IFRS 9 has not had significant
impact on the Group’s financial assets as regards their
classification and measurement and have not had any impact on the
Group’s financial position, profit or loss, other comprehensive
income or total comprehensive income in either year. The Group’s
financial assets are held at amortised cost.
(b) Impairment of financial
assets
In relation to the impairment of financial assets, IFRS 9
requires an expected credit loss model as opposed to an incurred
credit loss model under IAS 39. The expected credit loss model
requires the Group to account for expected credit losses and
changes in those expected credit losses at each reporting date to
reflect changes in credit risk since initial recognition of the
financial assets. In other words, it is no longer necessary for a
credit event to have occurred before credit losses are recognised.
Specifically, IFRS 9 requires the Group and the Company to
recognise a loss allowance for expected credit losses on trade
receivables and receivables from subsidiaries to which the
impairment requirements of IFRS 9 apply.
In particular, IFRS 9 requires the Group to measure the loss
allowance for a financial instrument at an amount equal to the
lifetime expected credit losses (ECL) if the credit risk on that
financial instrument has increased significantly since initial
recognition, or if the financial instrument is a purchased or
originated credit-impaired financial asset. However, if the credit
risk on a financial instrument has not increased significantly
since initial recognition (except for a purchased or originated
credit-impaired financial asset), the Group is required to measure
the loss allowance for that financial instrument at an amount equal
to 12-months ECL. IFRS 9 also requires a simplified approach for
measuring the loss allowance at an amount equal to lifetime ECL for
trade receivables, contract assets and lease receivables in certain
circumstances. The impact of ECL provisions on the Group was
insignificant.
(c) Classification and measurement of
financial liabilities
A significant change introduced by IFRS 9 in the classification
and measurement of financial liabilities relates to the accounting
for changes in the fair value of a financial liability designated
as at FVTPL attributable to changes in the credit risk of the
issuer. Specifically, IFRS 9 requires that the changes in the fair
value of the financial liability that is attributable to changes in
the credit risk of that liability be presented in other
comprehensive income, unless the recognition of the effects of
changes in the liability’s credit risk in other comprehensive
income would create or enlarge an accounting mismatch in profit or
loss. Changes in fair value attributable to a financial liability’s
credit risk are not subsequently reclassified to profit or loss,
but are instead transferred to retained earnings when the financial
liability is derecognised.
Previously, under IAS 39, the entire amount of the change in the
fair value of the financial liability designated as at FVTPL was
presented in profit or loss.
The change to classification and measurement of financial
liabilities had no impact on the Group.
(e) Disclosures in relation to
the initial application of IFRS 9
There were no financial assets or financial liabilities which
the Group had previously designated as at FVTPL under IAS 39 that
were subject to reclassification or which the Group has elected to
reclassify upon the application of IFRS 9. There were no financial
assets or financial liabilities which the Group has elected to
designate as at FVTPL at the date of initial application of IFRS
9.
The application of IFRS 9 has had no impact on the consolidated
financial position, financial result and cash flows of the Group
but led to changes to disclosures and accounting
policies
Impact of application of IFRS 15
Revenue from Contracts with Customers
In the current year, the Group has applied IFRS 15 Revenue from
Contracts with Customers (as amended in April 2016) which is effective for an annual
period that begins on or after 1 January
2018. IFRS 15 introduced a 5-step approach to revenue
recognition. IFRS 15 introduced a single framework for revenue
recognition and clarified principles of revenue recognition. This
standard modifies the determination of when to recognise revenue
and how much revenue to recognise. The core principle is that
an entity recognises revenue to depict the transfer of promised
goods and services to the customer of an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. The adoption of IFRS 15
did not result in any material change to the Group’s revenue
recognition following analysis of its contracts.
IFRS 15 uses the terms ‘contract asset’ and ‘contract liability’
to describe what might more commonly be known as ‘accrued revenue’
and ‘deferred revenue’, however the Standard does not prohibit an
entity from using alternative descriptions in the statement of
financial position. The Group has adopted the terminology used in
IFRS 15 to describe such balances.
The Group’s accounting policies for its revenue are disclosed in
detail in note 3 below. Apart from providing more extensive
disclosures for the Group’s revenue transactions, the application
of IFRS 15 has not had a significant impact on the financial
position and/or financial performance of the Group.
In the current year, the Group has applied a number of
amendments to IFRS Standards and Interpretations issued by the
International Accounting Standards Board (IASB) that are effective
for an annual period that begins on or after 1 January 2018. Their adoption has not had any
material impact on the disclosures or on the amounts reported in
these financial statements.
- IFRS 2 (amendments) Classification and Measurement of
Share-based Payment Transactions
- Annual Improvements to IFRS Standards 2014 – 2016 Cycle
- Amendments to IAS 28 Investments in Associates and Joint
Ventures
- IFRIC 22 Foreign Currency Transactions and Advance
Consideration
New and revised IFRS Standards 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 IFRS Standards
that have been issued but are not yet effective:
- IFRS 16 Leases
- Annual Improvements to IFRS Standards 2015–2017 Cycle
- Amendments to IFRS 3 Business Combinations, IFRS 11 Joint
Arrangements,
- IAS 12 Income Taxes and IAS 23 Borrowing Costs
- IFRS 10 Consolidated Financial Statements and IAS 28
(amendments)Sale or Contribution of Assets between an Investor and
its Associate or Joint Venture
- IFRIC 23 Uncertainty over Income Tax Treatments
IFRS 16 specifies how to recognize, measure, present and
disclose leases. The standard provides a single lessee accounting
model, requiring lessees to recognize right-of-use assets and lease
liabilities for all material leases. It will result in almost all
leases being recognised on the balance sheet by lessees, as the
distinction between operating and finance leases is removed. Under
the new standard, an asset (the right to use the leased item) and a
financial liability to pay rentals are recognised. The only
exceptions are short-term and low-value leases. The Group’s well
service and rental arrangements in Ukraine for oil and gas extraction activities
are outside of the scope of IFRS 16.
As for other IFRS Standards 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.
3.
Significant accounting policies
(a) Basis of
accounting
The financial statements have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) as issued by
the International Accounting Standards Board (“IASB”) and as
adopted by the European Union (“EU”), and therefore the Group
financial statements comply with Article 4 of the EU IAS
Regulation.
The financial statements have been prepared on the historical
cost convention basis.
The principal accounting policies adopted are set out below:
(b) Going concern
The Group's business activities, together with the factors
likely to affect future development, performance and position are
set out in the Strategic Report on pages 4 to 13. The financial
position of the Group, its cash flow and liquidity position are
described in the Financial Review on pages 11 to 13.
The Group’s cash balance at 31 December
2018 was $35.2 million (2017:
$37.6 million) prior to the loan to
Proger detailed in Note 30 of €13.4 million ($15.2 million). It includes pledged cash of
$7.0 million (2017: $7.0 million) (Note 20). The Directors believe
that the funds available at the date of the issue of these
financial statements are sufficient for the Group to manage its
business risks and planned investments successfully.
The directors’ confirmation that they have carried out a robust
assessment of the principal risks facing the Group, including those
that could potentially threaten its business model, future
performance, solvency or liquidity is on page 14.
The Group’s forecasts and projections, taking into account
reasonably possible changes in trading activities, operational
performance, start dates and flow rates for commercial production
and the price of hydrocarbons sold to Ukrainian customers, show
that there are reasonable expectations that the Group will be able
to operate on funds currently held and those generated internally,
for the foreseeable future.
The Group continues to pursue its farm-out campaign, which, if
successful, will enable it to farm-out a portion of its interests
in its oil and gas licences to spread the risks associated with
further exploration and development.
After making enquiries and considering the uncertainties
described above, the Directors have a reasonable expectation that
the Company and the Group have adequate resources to continue in
operational existence for the foreseeable future and consider the
going concern basis of accounting to be appropriate and, thus, they
continue to adopt the going concern basis of accounting in
preparing the annual financial statements.
(c) Basis of
consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company
(its subsidiaries) made up to 31 December each year. IFRS 10
defines control to be investor control over an investee when it is
exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to control those returns
through its power over the investee.
The results of subsidiaries acquired or disposed of during the
year are included in the consolidated income statement from the
effective date of acquisition or up to the effective date of
disposal, as appropriate. Where necessary, adjustments are made to
the financial statements of subsidiaries to bring accounting
policies used into line with those used by the Group. All
intra-group transactions, balances, income and expenses are
eliminated on consolidation.
Non-controlling interests in subsidiaries are identified
separately from the Group’s equity therein. Those interests of
non-controlling shareholders that are present ownership interests
entitling their holders to a proportionate share of net assets upon
liquidation may be initially measured at fair value or at the
non-controlling interests’ proportionate share of the fair value of
the acquiree’s identifiable net assets. The choice of measurement
is made on an acquisition-by-acquisition basis. Other
non-controlling interests are initially measured at fair value.
Subsequent to acquisition, the carrying amount of
non-controlling interests is the amount of those interests at
initial recognition plus the non-controlling interests’ share of
subsequent changes in equity. Total comprehensive income is
attributed to non-controlling interests even if this results in the
non-controlling interests having a deficit balance.
Changes in the Group’s interests in subsidiaries that do not
result in a loss of control are accounted for as equity
transactions. The carrying amount of the Group’s interests and the
non-controlling interests are adjusted to reflect the changes in
their relative interests in the subsidiaries. Any difference
between the amount by which the non-controlling interests are
adjusted and the fair value of the consideration paid or received
is recognised directly in equity and attributed to the owners of
the Company.
(d) Business
combinations
The acquisition of subsidiaries is accounted for using the
acquisition method. The cost of the acquisition is measured at the
aggregate of the fair values, at the date of exchange, of assets
given, liabilities incurred or assumed, and equity instruments
issued in exchange for control of the acquiree. Acquisition-related
costs are recognised in profit or loss as incurred. The acquiree’s
identifiable assets, liabilities and contingent liabilities that
meet the conditions for recognition under IFRS 3 Business
Combinations are recognised at their fair value at the acquisition
date, except for non-current assets (or disposal groups) that are
classified as held for resale in accordance with IFRS 5 Non-Current
Assets held for sale and Discontinued Operations. These are
recognised and measured at fair value less costs to sell.
(e) Investments in joint
ventures
A joint venture is a joint arrangement whereby the parties that
have joint control of the arrangement have rights to the net assets
of the arrangement. A joint venture firm recognises its interest in
a joint venture as an investment and shall account for that
investment using the equity method in accordance with IAS 28
Investments in Associates and Joint Ventures.
Under the equity method, the investment is carried on the
balance sheet at cost plus changes in the Group’s share of net
assets of the entity, less distributions received and less any
impairment in value of the investment. The Group Consolidated
Income Statement reflects the Group’s share of the results after
tax of the equity-accounted entity, adjusted to account for
depreciation, amortisation and any impairment of the equity
accounted entity’s assets. The Group Statement of Comprehensive
Income includes the Group’s share of the equity-accounted entity’s
other comprehensive income.
Financial statements of equity-accounted entities are prepared
for the same reporting year as the Group. The Group assesses
investments in equity-accounted entities for impairment whenever
events or changes in circumstances indicate that the carrying value
may not be recoverable. In doing so, the Group applies the criteria
of IFRS 6 ‘Exploration for and evaluation of mineral resources’ as
the joint venture holds exploration phase assets. If any such
indication of impairment exists, the carrying amount of the
investment is compared with its recoverable amount, being the
higher of its fair value less costs of disposal and value in use.
If the carrying amount exceeds the recoverable amount, the
investment is written down to its recoverable amount.
The Group ceases to use the equity method of accounting from the
date on which it no longer has joint control over the joint venture
or significant influence over the associate, or when the interest
becomes classified as an asset held for sale.
(f) Revenue
recognition
Revenue from contracts with customers is recognized when or as
the Group satisfies a performance obligation by transferring a
promised good or service to a customer. A good or service is
transferred when the customer obtains control of that good or
service. Revenue is measured at the fair value of the consideration
received or receivable and represents amounts receivable for
hydrocarbon products and services provided in the normal course of
business, net of value added tax (‘VAT’) and other sales-related
taxes, excluding royalties on production. Royalties on
production are recorded within cost of sales.
E&P and Trading business
segments
The transfer of control of hydrocarbons usually coincides with
title passing to the customer and the customer taking physical
possession as the product passes a physical point such as a
designated point in the pipeline for the sale of gas or loading
point in the case of oil. The Group principally satisfies its
performance obligations at a point in time.
To the extent that revenue arises from test production during an
evaluation programme, an amount is credited to evaluation costs and
charged to cost of sales, so as to reflect a zero net margin.
Service business segment
Revenue from services is recognised in the accounting period in
which services are rendered. The main types of services provided by
the Group are drilling and civil works services. Revenue is
recorded as the service is provided over time such as through day
rates for supply of drill rigs, civil works and manpower.
Interest income is accrued on a time basis, by reference to the
principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts estimated
future cash receipts through the expected life of the financial
asset to that asset’s net carrying amount on initial
recognition.
(g) Foreign
currencies
The functional currency of the Group’s Ukrainian operations is
Ukrainian Hryvnia. The functional currency of the Group’s UK
subsidiaries and the parent company is US Dollar.
In preparing the financial statements of the individual
companies, transactions in currencies other than the functional
currency of each Group company (‘foreign currencies’) are recorded
in the functional currency 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 into the functional currency 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. Non-monetary items that are measured
in terms of historical cost in a foreign currency are not
retranslated. Foreign exchange differences on cash and cash
equivalents are recognised in operating profit or loss in the
period in which they arise.
Exchange differences are recognised in the profit or loss in the
period in which they arise except for exchange differences on
monetary items receivable from or payable to a foreign operation
for which settlement is neither planned nor likely to occur. This
forms part of the net investment in a foreign operation, which is
recognised in the foreign currency translation reserve and in
profit or loss on disposal of the net investment.
For the purpose of presenting consolidated financial statements,
the results and financial position of each entity of the Group,
where the functional currency is not the US dollar, are translated
into US dollars as follows:
i.
assets and liabilities of the Group’s foreign operations are
translated at the closing rate on the balance sheet date;
ii.
income and expenses are translated at the average exchange rates
for the period, where it approximates to actual rates. In other
cases, if exchange rates fluctuate significantly during that
period, the exchange rates at the date of the transactions are
used; and
iii.
all resulting exchange differences arising, if any, are recognised
in other comprehensive income and accumulated equity (attributed to
non-controlling interests as appropriate), transferred to the
Group’s translation reserve. Such translation differences are
recognised as income or as expenses in the period in which the
operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition
of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate.
The
relevant exchange rates used were as follows: |
|
Year ended
31 December 2018 |
Year ended
31 December 2017 |
|
|
GBP/USD |
USD/UAH |
GBP/USD |
USD/UAH |
|
Closing rate |
1.2768 |
27.7477 |
1.3494 |
28.3865 |
|
Average rate |
1.3415 |
27.2324 |
1.2890 |
26.8034 |
|
|
|
|
|
|
|
(h) 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. Taxable profit differs from net profit as reported in the
consolidated income statement because it excludes items of income
or expense that are taxable or deductible in other years and it
further excludes items that are never taxable or deductible. The
Group’s liability for current tax is calculated using tax rates
that have been enacted or substantively enacted by the balance
sheet date.
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. This 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 (other than in a business combination) of other assets
and liabilities in a transaction that affects neither the taxable
profit nor the accounting profit. Deferred tax liabilities are
recognised for taxable temporary differences arising on investments
in subsidiaries and associates, and interests in joint ventures,
except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
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 of the asset 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.
Deferred tax is charged or credited in the income statement, except
when it relates to items charged or credited in other comprehensive
income, in which case the deferred tax is also dealt with in other
comprehensive income.
Deferred tax assets and liabilities are offset when there is a
legally enforceable right to set off current tax assets against
current tax liabilities and when they relate to income taxes levied
by the same taxation authority and the Group intends to settle its
current tax assets and liabilities on a net basis.
In case of the uncertainty of the tax treatment, the Group
assess, whether it is probable or not, that the tax treatment will
be accepted, and to determine the value, the Group use the most
likely amount or the expected value in determining taxable profit
(tax loss), tax bases, unused tax losses, unused tax credits and
tax rates.
(i) Other
property, plant and equipment
Property, plant and equipment (‘PP&E’) are carried at cost
less accumulated depreciation and any recognised impairment loss.
Depreciation and amortisation is charged so as to write-off the
cost or valuation of assets, other than land, over their estimated
useful lives, using the straight-line method, on the following
bases:
Other
PP&E
10% to 30%
The gain or loss arising on the disposal or retirement of an
asset is determined as the difference between the sales proceeds
and the carrying amount of the asset and is recognised in
income.
(j) Intangible
exploration and evaluation assets
The Group applies the modified full cost method of accounting
for intangible exploration and evaluation (‘E&E’) expenditure,
which complies with requirements set out in IFRS 6 Exploration
for and Evaluation of Mineral Resources. Under the modified
full cost method of accounting, expenditure made on exploring for
and evaluating oil and gas properties is accumulated and initially
capitalised as an intangible asset, by reference to appropriate
cost centres being the appropriate oil or gas property. E&E
assets are then assessed for impairment on a geographical cost pool
basis, which are assessed at the level of individual licences.
E&E assets comprise costs of (i) E&E activities which
are in progress at the balance sheet date, but where the existence
of commercial reserves has yet to be determined (ii) E&E
expenditure which, whilst representing part of the E&E
activities associated with adding to the commercial reserves of an
established cost pool, did not result in the discovery of
commercial reserves.
Costs incurred prior to having obtained the legal rights to
explore an area are expensed directly to the income statement as
incurred.
Exploration and Evaluation costs
E&E expenditure is initially capitalised as an E&E
asset. Payments to acquire the legal right to explore, costs of
technical services and studies, seismic acquisition, exploratory
drilling and testing are also capitalised as intangible E&E
assets.
Tangible assets used in E&E activities (such as the Group’s
vehicles, drilling rigs, seismic equipment and other property,
plant and equipment) are normally classified as PP&E. However,
to the extent that such assets are consumed in developing an
intangible E&E asset, the amount reflecting that consumption is
recorded as part of the cost of the intangible asset. Such
intangible costs include directly attributable overheads, including
the depreciation of PP&E items utilised in E&E activities,
together with the cost of other materials consumed during the
exploration and evaluation phases.
E&E assets are not amortised prior to the conclusion of
appraisal activities.
Treatment of E&E assets at
conclusion of appraisal activities
Intangible E&E assets related to each exploration property
are carried forward, until the existence (or otherwise) of
commercial reserves has been determined. If commercial reserves
have been discovered, the related E&E assets are assessed for
impairment on individual assets basis as set out below and any
impairment loss is recognised in the income statement. Upon
approval of a development programme, the carrying value, after any
impairment loss, of the relevant E&E assets is reclassified to
the development and production assets within PP&E.
Intangible E&E assets that relate to E&E activities that
are determined not to have resulted in the discovery of commercial
reserves remain capitalised as intangible E&E assets at cost
less accumulated amortisation, subject to meeting a pool-wide
impairment test in accordance with the accounting policy for
impairment of E&E assets set out below.
Impairment of E&E assets
E&E assets are assessed for impairment when facts and
circumstances suggest that the carrying amount may exceed its
recoverable amount. Such indicators include, but are not limited to
those situations outlined in paragraph 20 of IFRS 6 Exploration
for and Evaluation of Mineral Resources such as, a) licence
expiry during year or in the near future and will not likely to be
renewed; b) expenditure on E&E activity neither budgeted nor
planned; c) commercial quantities of mineral resources have been
discovered; and d) sufficient data exist to indicate that carrying
amount of E&E asset is unlikely to be recovered in full from
successful development or sale.
Where there are indications of impairment, the E&E assets
concerned are tested for impairment. Where the E&E assets
concerned fall within the scope of an established full cost pool,
which are not larger than an operating segment, they are tested for
impairment together with all development and production assets
associated with that cost pool, as a single cash generating
unit.
The aggregate carrying value of the relevant assets is compared
against the expected recoverable amount of the pool, generally by
reference to the present value of the future net cash flows
expected to be derived from production of commercial reserves from
that pool. Where the assets fall into an area that does not have an
established pool or if there are no producing assets to cover the
unsuccessful exploration and evaluation costs, those assets would
fail the impairment test and be written off to the income statement
in full.
Impairment losses are recognised in the income statement as
additional depreciation and amortisation and are separately
disclosed.
(k) 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 E&E expenditures incurred in finding commercial
Reserves transferred from intangible E&E assets.
The cost of development and production assets comprises the cost
of acquisitions and purchases of such assets, directly attributable
overheads, finance costs capitalised, and the cost of recognising
provisions for future restoration and decommissioning.
Depreciation of producing assets
Depreciation is calculated on the net book values of producing
assets on a field-by-field basis using the unit of production
method. The unit of production method refers to the ratio of
production in the reporting year as a proportion of the Proved and
Probable Reserves of the relevant field, taking into account future
development expenditures necessary to bring those Reserves into
production.
Producing assets are generally grouped with other assets that
are dedicated to serving the same Reserves for depreciation
purposes, but are depreciated separately from producing assets that
serve other Reserves.
(l) Impairment of development and
production assets and other property, plant and equipment
At each balance sheet date, the Group reviews the carrying
amounts of its PP&E 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 is
estimated in order to determine the extent of the impairment loss
(if any). 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. The
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.
If the recoverable amount of an asset (or cash-generating unit)
is estimated to be less than its carrying amount, the carrying
amount of the asset (cash-generating unit) is reduced to its
recoverable amount. An impairment loss is recognised as an expense
immediately.
Where an impairment loss subsequently reverses, the carrying
amount of the asset (cash-generating unit) is increased to the
revised estimate of its recoverable amount, but so that the
increased carrying amount does not exceed the carrying amount that
would have been determined had no impairment loss been recognised
for the asset (cash-generating unit) in prior years. A reversal of
an impairment loss is recognised as income immediately.
(m) Inventories
Oil and gas stock and spare parts are stated at the lower of
cost and net realisable value. Costs comprise direct materials and,
where applicable, direct labour costs and those overheads that have
been incurred in bringing the inventories to their present location
and condition. Cost is allocated using the weighted average method.
Net realisable value represents the estimated selling price less
all estimated costs of completion and costs to be incurred in
marketing, selling and distribution.
(n) Financial
instruments
Financial assets and financial liabilities are recognised in the
consolidated statement of financial position when the Group becomes
party to the contractual provisions of the instrument.
Trade and other payables
Payables are initially measured at fair value, net of
transaction costs and are subsequently measured at amortised cost
using the effective interest method.
Trade and other receivables
Trade and other receivables are recognised initially at their
transaction price in accordance with IFRS 9 and are subsequently
measured at amortised cost. The Group applies the simplified
approach to providing for expected credit losses (ECL) prescribed
by IFRS 9, which permits the use of the lifetime expected loss
provision for all trade receivables. Expected credit losses are
assessed on a forward looking basis. The loss allowance is measured
at initial recognition and throughout its life at an amount equal
to lifetime ECL. Any impairment is recognised in the income
statement.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, on-demand
deposits, and other short-term highly liquid investments that are
readily convertible to a known amount of cash with three months or
less remaining to maturity and are subject to an insignificant risk
of changes in value.
(o) Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that the Group will be required to settle that
obligation and a reliable estimate can be made of the amount of the
obligation. The amount recognised as a provision is the best
estimate of the consideration required to settle the present
obligation at the balance sheet date, taking into account the risks
and uncertainties surrounding the obligation. When a provision is
measured using the cash flows estimated to settle the present
obligation, its carrying amount is the present value of those cash
flows.
(p) Decommissioning
A provision for decommissioning is recognised in full when the
related facilities are installed. The decommissioning provision is
calculated as the net present value of the Group’s share of the
expenditure expected to be incurred at the end of the producing
life of each field in the removal and decommissioning of the
production, storage and transportation facilities currently in
place. The cost of recognising the decommissioning provision is
included as part of the cost of the relevant asset and is thus
charged to the income statement on a unit of production basis in
accordance with the Group’s policy for depletion and depreciation
of tangible non-current assets. Period charges for changes in the
net present value of the decommissioning provision arising from
discounting are included within finance costs.
4.
Critical accounting judgements and key sources of estimation
uncertainty
In the application of the Group’s accounting policies, which are
described in note 3, the Directors are required to make judgements,
estimates and assumptions about the carrying amounts of the 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 the revision and future
periods if the revision affects both the current and future
periods.
The following are the critical judgements and estimates that the
Directors have made in the process of applying the Group’s
accounting policies and that have the most significant effect on
the amounts recognised in the financial statements.
Critical judgements and estimates
(a) Impairment indicator assessment
for E&E assets
The outcome of ongoing exploration, and therefore the
recoverability of the carrying value of intangible exploration and
evaluation assets, is inherently uncertain. Management assesses its
E&E assets for impairment indicators and if indicators of
impairment are identified performs an impairment test. In
assessing potential indicators of impairment judgment was required
and management considered factors such as the remaining term of the
licence and plans for renewal and conversion to a production
licence, reserves reports and the net present value of economic
models, the results of drilling and exploration in the year and the
future plans including farm out proposals. In respect of the
renewal and conversion of the licence management considered the
status of licence commitments, the status of submissions necessary
for the renewal and trends in the relevant region of the
Ukraine with respect to licence
application approval (Note 15).
(b) Impairment of
PP&E
Management assess its development and production assets for
impairment indicators and if indicators of impairment are
identified performs an impairment test. In assessing
potential indicators of impairment judgment was required and
management considered factors such as the remaining term of the
licence and plans for renewal and conversion to a production
licence, reserves reports and the net present value of economic
models and planned drilling. In respect of the renewal and
conversion of the licence management considered the status of
licence commitments, the status of submissions necessary for the
renewal and trends in the relevant region of the Ukraine with respect to licence application
approval (Note 16). No impairment was determined to be
appropriate.
In respect of other assets an impairment of $0.7 million was considered appropriate at
31 December 2018 in respect of gas
plant and infrastructure assets associated with the Pirkovska
licence which earlier expired, reflecting the sale value achieved
subsequent to year end on the gas plant and the risk that ancillary
infrastructure may be abandoned. The licence costs were
impaired historically (Note 17).
(c) Recoverability and
measurement of VAT
Judgment and estimation are required in assessing the
recoverability of VAT assets and the extent to which historical
impairment provisions remain appropriate, particularly noting the
recent recoveries against historically impaired VAT. In
forming this assessment, the Group considers the nature and age of
the VAT, future vatable supplies, the pattern of recoveries and
risks and uncertainties associated with the operating
environment.
5. Segment information
Segment information is presented on the basis of management’s
perspective and relates to the parts of the Group that are defined
as operating segments. Operating segments are identified on the
basis of internal reports provided to the Group’s chief operating
decision maker (“CODM”). The Group has identified its senior
management team as its CODM and the internal reports used by the
senior management team to oversee operations and make decisions on
allocating resources serve as the basis of information presented.
These internal reports are prepared on the same basis as these
consolidated financial statements.
Segment information is analysed on the basis of the type of
activity, products sold, or services provided. The majority of the
Group’s operations and all Group’s revenues are located within
Ukraine. Segment information is
analysed on the basis of the types of goods supplied by the Group’s
operating divisions. The Group’s reportable segments under IFRS 8
are therefore as follows:
Exploration and Production
- E&P activities on the exploration and production licences
for natural gas, oil and condensate.
Service
- Drilling services to exploration and production companies;
and
- Civil works services to exploration and production
companies.
Trading
- Import of natural gas from European countries; and
- Local purchase and sales of natural gas operations with
physical delivery of natural gas.
The accounting policies of the reportable segments are the same
as the Group’s accounting policies described in Note 3. Sales
between segments are carried out at rates considered to approximate
market prices. The segment result represents operating profit under
IFRS before unallocated corporate expenses. Unallocated corporate
expenses include management remuneration, representative expenses
and expenses incurred in respect of the maintenance of office
premises. This is the measure reported to the CODM for the purposes
of resource allocation and assessment of segment performance. The
Group does not present information on segment assets and
liabilities as the CODM does not review such information for
decision-making purposes.
As of 31 December 2018 and for the
year then ended the Group’s segmental information was as
follows:
|
Exploration and
Production |
Service(2) |
Trading |
Consolidated |
|
$’000 |
$’000 |
$’000 |
$’000 |
Sales of hydrocarbons |
4,570 |
- |
10,037 |
14,607 |
Other revenue |
- |
123 |
- |
123 |
Sales between segments |
129 |
- |
(129) |
- |
Total revenue |
4,699 |
123 |
9,908 |
14,730 |
Cost of sales |
(3,739) |
(24) |
(9,086) |
(12,849) |
Administrative expenses |
(535) |
(36) |
(74) |
(645) |
Finance income, net (Note 11)
(1) |
- |
- |
(57) |
(57) |
Segment results |
425 |
63 |
691 |
1,179 |
Unallocated administrative
expenses |
|
|
|
(4,117) |
Other income, net |
|
|
|
4,091 |
Reversal of impairment of oil and
gas assets |
|
|
|
(56) |
Net foreign exchange loss |
|
|
|
(58) |
Profit before tax |
|
|
|
1,039 |
- Net finance income includes $135
thousand of interest on short-term borrowings and
$78 thousand of interest on cash
deposits used for trading.
The services business segment in 2018 primarily provided well
work-overs and other works to other Group companies as tenders
secured with third parties had been deferred by customers.
As of 31 December 2017 and for the
year then ended the Group’s segmental information was as
follows:
|
Exploration and
Production |
Service(1) |
Trading |
Consolidated |
|
$’000 |
$’000 |
$’000 |
$’000 |
Sales of hydrocarbons |
1,779 |
- |
13,366 |
15,145 |
Sales between segments |
630 |
- |
(630) |
- |
Total revenue |
2,409 |
- |
12,736 |
15,145 |
Cost of sales |
(1,687) |
- |
(11,406) |
(13,093) |
Administrative expenses |
(454) |
(26) |
(265) |
(745) |
Finance income, net (Note 11)
(2) |
- |
- |
305 |
305 |
Segment results |
268 |
(26) |
1,370 |
1,612 |
Unallocated administrative
expenses |
|
|
|
(4,236) |
Other income, net |
|
|
|
2,309 |
Impairment of oil and gas
assets |
|
|
|
(162) |
Share of loss in joint ventures |
|
|
|
(2,323) |
Net foreign exchange loss |
|
|
|
(116) |
(Loss) before tax |
|
|
|
(2,916) |
(1) The services business segment in 2017 primarily
provided well work-overs and other works to other Group companies
as tenders secured with third parties had been deferred by
customers.
(2) Net
finance income includes $0.26 million
of interest on short-term borrowings, $0.49
million of interest income on receivables and $67 thousand of interest on cash deposits used
for
rading.
(3) Trading result excluding interest received on
receivables was $0.9 million.
6. Revenue
|
2018
$’000 |
2017
$’000 |
Sale of hydrocarbons (trading) –
point in time |
9,908 |
12,736 |
Sale of hydrocarbons (exploration
and production) – point in time |
4,699 |
2,409 |
Service revenues – over time |
123 |
- |
|
14,730 |
15,145 |
Revenue is generated in the Ukraine. Refer to note 3(f) for details of the
performance obligations. Service revenue and associated
contract assets and liabilities are immaterial.
Information about major customers
Included in revenues arising from the Trading segment for the
year ended 31 December 2018 are
revenues of $6.9 million (2017:
$7.4 million), which arose from sales
to the Group’s three largest customers. No other single customers
contributed 10 per cent or more to the Group’s revenue in either
2018 or 2017.
7. Administrative
expenses
|
|
|
2018
$’000 |
2017
$’000 |
Staff |
|
|
2,570 |
2,531 |
Professional fees |
|
|
1,247 |
1,206 |
Office rent |
|
|
181 |
161 |
Travel |
|
|
176 |
238 |
IT and communication |
|
|
133 |
142 |
Insurance |
|
|
88 |
177 |
Bank charges |
|
|
63 |
58 |
Other |
|
|
304 |
468 |
|
|
4,762 |
4,981 |
8. Reversal of
impairment/(impairment) of other assets
|
|
|
2018
$’000 |
2017
$’000 |
VAT recoverable |
|
|
1,730 |
1,436 |
Inventories |
|
|
- |
77 |
Reversal of impairment of other
assets |
|
|
1,730 |
1,513 |
$1.7 million (2017: $1.4 million) of provision against VAT has been
released following receipts in cash and offsets against output VAT
of VAT refund balances that has been impaired in previous years due
to collectability issues. $5.0
million of VAT refunds still remains impaired. Refer to Note
3.
At 31 December 2018, $107 thousand (2017: $77
thousand) of impairment has been released following the sale
of previously impaired inventory.
|
|
|
2018
$’000 |
2017
$’000 |
Receivables |
|
|
- |
(51) |
Other Property, Plant and
Equipment |
|
|
(751) |
- |
Impairment of other assets |
|
(751) |
(51) |
Impairment of other PPE includes $0.43
million of impairment reflecting the recoverable value of
the gas plant on the Pirkivska licence to reduce the asset value
down to the sale consideration received in February 2019 on its disposal; and $0.32 million of impairment of other ancillary
infrastructure assets at Pirkivska which are likely to require
abandonment.
9. Other operating income,
net
|
|
|
2018
$’000 |
2017
$’000 |
Termination fee on exit from
WGI |
|
|
1,715 |
- |
Other |
|
|
704 |
480 |
|
|
2,419 |
480 |
For the details on Termination fee on exit from WGI please refer
to Note 18.
10. Auditor’s
remuneration
The analysis of auditor’s remuneration is as follows:
|
2018
$’000 |
2017
$’000 |
Audit fees |
|
|
Fees payable to the Company’s
auditor and their associates for the audit of the Company’s annual
accounts |
114 |
229 |
Fees payable to the Company’s
auditor and their associates for other services to the Group: |
|
|
- The audit of the Company’s
subsidiaries |
- |
13 |
Total audit fees |
114 |
242 |
|
|
|
Non-audit fees |
|
|
- Audit-related assurance
services |
43 |
5 |
- Taxation compliance services |
- |
33 |
Non-audit fees |
43 |
38 |
Audit fees for 2018 refer to BDO LLP of $114 thousand for the audit of group accounts as
of and for the year ended 31 December
2018. Audit fees for 2017 refer to BDO LLP of $121 thousand for the audit of group accounts as
of and for the year ended 31 December
2017 and to Deloitte LLP, the Group’s previous auditor, of
$108 thousand, for the audit as of
and for the year ended 31 December
2016.
11. Staff costs
The average monthly number of employees (including Executive
Directors) was:
|
2018
Number |
2017
Number |
Executive Director |
1 |
1 |
Other employees |
64 |
68 |
|
65 |
69 |
|
|
|
Total number of employees at 31
December |
82 |
69 |
|
|
|
|
$’000 |
$’000 |
Their aggregate remuneration
comprised: |
|
|
Wages and salaries |
2,038 |
2,150 |
Annual bonus |
380 |
179 |
Social security costs |
399 |
290 |
|
2,817 |
2,619 |
Within wages and salaries $0.8
million (2017: $0.8 million)
relates to amounts accrued and paid to the Executive Director for
services rendered.
12. Finance income/(costs),
net
|
2018
$’000 |
2017
$’000 |
Interest expense on short-term
borrowings |
(135) |
(256) |
Total interest expense on
financial liabilities |
(135) |
(256) |
|
|
|
Interest benefit on tax
provision |
- |
189 |
Interest income on receivables |
- |
494 |
Interest income on cash deposits in
Ukraine |
230 |
67 |
Investment revenue |
553 |
205 |
Total interest income on
financial assets |
783 |
955 |
|
|
|
Unwinding of discount on
decommissioning provision (note 25) |
(12) |
(27) |
|
636 |
672 |
13. Tax
|
2018
$’000 |
2017
$’000 |
Current tax |
- |
- |
Adjustment in relation to the
current tax of prior years |
- |
(1,009) |
Deferred tax |
- |
- |
Recognition of previously
unrecognised deferred tax assets |
(178) |
(323) |
|
(178) |
(1,332) |
The Group’s operations are conducted primarily outside the UK,
namely in Ukraine. The most
appropriate tax rate for the Group is therefore considered to be
18% (2017: 18%), the rate of profit tax in Ukraine, which is the primary source of
revenue for the Group. Taxation for other jurisdictions is
calculated at the rates prevailing in the respective
jurisdictions.
The taxation charge for the year can be reconciled to the
profit/(loss) per the income statement as follows:
|
2018
$’000 |
2018
% |
2017
$’000 |
2017
% |
Profit/(loss) before tax |
1,039 |
100 |
(2,916) |
100 |
Tax credit at Ukraine corporation
tax rate of 18% (2017: 18%) |
187 |
18 |
(525) |
18 |
Permanent
differences |
(1,652) |
(159) |
(923) |
32 |
Unrecognised tax losses generated in
the year |
972 |
94 |
1,174 |
(40) |
Recognition of
previously unrecognised deferred tax assets |
(178) |
(17) |
(323) |
11 |
Tax credit related to
the Joint venture losses |
- |
- |
418 |
(14) |
Effect of different tax rates |
493 |
47 |
(144) |
5 |
|
(178) |
(17) |
(323) |
12 |
Adjustments recognised in the
current year in relation
to the current tax of prior years |
- |
- |
(1,009) |
- |
Income tax (benefit)/expense
recognised in profit or loss |
(178) |
- |
(1,332) |
- |
Permanent differences mostly represent differences on
profit/(loss) items, including provisions, accruals, impairments,
related to taxation in Ukraine,
where it is probable that such differences will not reverse in the
foreseeable future.
14. Profit/(Loss) per Ordinary
share
Basic profit/(loss) per Ordinary share is calculated by dividing
the net profit/(loss) for the year attributable to owners of the
Company by the weighted average number of Ordinary shares
outstanding during the year. The calculation of the basic
profit/(loss) per share is based on the following data:
Profit/(Loss) attributable to
owners of the Company |
2018
$’000 |
2017
$’000 |
Profit/(Loss) for the
purposes of basic profit/(loss) per share being net profit/(loss)
attributable to owners of the Company |
1,220 |
(1,585) |
Number of shares |
Number
‘000 |
Number
‘000 |
Weighted average number
of Ordinary shares for the purposes of
basic profit/(loss) per share |
235,729 |
232,251 |
|
Cent |
cent |
Profit/(Loss) per Ordinary
share |
|
|
Basic |
0.5 |
(0.7) |
The Group has no potentially dilutive
instruments in issue. Therefore, no diluted profit/(loss) per share
is presented above.
15. Intangible exploration and
evaluation assets
Cost |
|
$’000 |
At 1 January 2017 |
|
22,348 |
Additions |
|
461 |
Disposals |
|
(78) |
Change in estimate of
decommissioning assets (note 24) |
|
27 |
Transfer to property, plant and
equipment |
|
(937) |
Exchange differences |
|
(753) |
At 1 January 2018 |
|
21,068 |
Additions |
|
857 |
Disposals |
|
- |
Change in estimate of
decommissioning assets (note 24) |
|
(274) |
Exchange differences |
|
533 |
At 31 December 2018 |
|
22,184 |
|
|
|
Impairment |
|
|
At 1 January
2017 |
|
19,994 |
Exchange
differences |
|
(641) |
At 1 January
2018 |
|
19,353 |
Exchange
differences |
|
445 |
At 31 December
2018 |
|
19,798 |
|
|
|
Carrying
amount |
|
|
At 31 December
2018 |
|
2,386 |
At 31 December
2017 |
|
1,715 |
The carrying amount of E&E assets as at 31 December 2018 of $2.4
million (2017: $1.7 million)
relates to Bitlyanska licence. Management has performed an
impairment indicator review. Refer to note 4 (a). As part of
the information considered management assessed the Bitlyanska
licence’s value in use based on the underlying discounted cash flow
forecasts which demonstrated significant headroom over carrying
value. The impairment review supported the conclusion that no
impairment was applicable.
16. Property, plant and
equipment
Cost |
Development
and
production assets
$’000 |
Other
$’000 |
Total
$’000 |
At 1 January
2017 |
5,473 |
2,803 |
8,276 |
Additions |
133 |
148 |
281 |
Change in estimate of
decommissioning assets (note 25) |
73 |
- |
73 |
Transfer from
E&E |
937 |
- |
937 |
Disposals |
(51) |
(324) |
(375) |
Exchange
differences |
(193) |
(90) |
(283) |
At 1 January
2018 |
6,372 |
2,537 |
8,909 |
Additions |
2,150 |
447 |
2,597 |
Change in estimate of
decommissioning assets (note 25) |
(94) |
- |
(94) |
Disposals |
(25) |
(192) |
(217) |
Transferred to Assets
held for sale |
- |
(125) |
(125) |
Exchange
differences |
129 |
54 |
183 |
At 31 December
2018 |
8,532 |
2,721 |
11,253 |
|
|
|
|
Accumulated
depreciation and impairment |
|
|
|
At 1 January
2017 |
5,473 |
1,491 |
6,964 |
Impairment |
162 |
- |
162 |
Charge for the
year |
44 |
167 |
211 |
Disposals |
(107) |
(199) |
(306) |
Exchange
differences |
(171) |
(46) |
(217) |
At 1 January
2018 |
5,401 |
1,413 |
6,814 |
Impairment |
56 |
751 |
807 |
Charge for the
year |
236 |
189 |
425 |
Disposals |
(4) |
(200) |
(204) |
Exchange
differences |
83 |
32 |
115 |
At 31 December
2018 |
5,772 |
2,185 |
7,956 |
|
|
|
|
Carrying
amount |
|
|
|
At 31 December
2018 |
2,760 |
536 |
3,297 |
At 31 December
2017 |
971 |
1,124 |
2,095 |
Other property, plant and equipment include fixtures and
fittings for the development and production activities.
The carrying amount of development and production assets as at
31 December 2018 of $1.9 million relates to the Monastyretska
licence. Depreciation includes $0.2
million for the Monastyretska licence.
Management has performed an impairment indicator review of
Development and production assets. As part of the information
considered management carried out the assessment of the
Monastyretska licence’s value in use based on the underlying
discounted cash flow forecasts. The impairment review
supported the conclusion that no impairment indicator existed and
impairment was not applicable. Key assumptions used in the
impairment assessment were: future oil prices which were assumed at
a constant $370, real per tonne; 1P
reserves and a pre-tax discount rate of 20%, real.
Refer to note 4 for details of the impairment of other
assets.
17. Subsidiaries
The Company had investments in the following subsidiary
undertakings as at 31 December
2018:
Name |
Country of
incorporation
and operation |
Proportion
of voting
interest % |
Activity |
Registered office |
Directly held |
|
|
|
|
Cadogan Petroleum Holdings Ltd |
UK |
100 |
Holding company |
6th Floor 60 Gracechurch Street,
London, United Kingdom, EC3V 0HR |
Ramet Holdings Ltd |
Cyprus |
100 |
Holding company |
48 Inomenon Ethnon, Guricon House,
Floor 2 & 3, 6042, Larnaca, Cyprus |
Indirectly held |
|
|
|
|
Cadogan Petroleum Holdings BV |
Netherlands |
100 |
Holding company |
Hoogoorddreef 15, 1101 BA
Amsterdam |
Cadogan Bitlyanske BV |
Netherlands |
100 |
Holding company |
Hoogoorddreef 15, 1101 BA
Amsterdam |
Cadogan Delta BV |
Netherlands |
100 |
Holding company |
Hoogoorddreef 15, 1101 BA
Amsterdam |
Cadogan Astro Energy BV |
Netherlands |
100 |
Holding company |
Hoogoorddreef 15, 1101 BA
Amsterdam |
Cadogan Pirkovskoe BV |
Netherlands |
100 |
Holding company |
Hoogoorddreef 15, 1101 BA
Amsterdam |
Cadogan Zagoryanske Production
BV |
Netherlands |
100 |
Holding company |
Hoogoorddreef 15, 1101 BA
Amsterdam |
Zagoryanska Petroleum BV |
Netherlands |
100 |
Holding company |
Hoogoorddreef 15, 1101 BA
Amsterdam |
Pokrovskoe Petroleum BV |
Netherlands |
100 |
Holding company |
Hoogoorddreef 15, 1101 BA
Amsterdam |
Cadogan Ukraine Holdings
Limited |
Cyprus |
100 |
Holding company |
48 Inomenon Ethnon, Guricon House,
Floor 2 & 3, 6042, Larnaca, Cyprus |
Momentum Enterprise (Europe)
Ltd |
Cyprus |
100 |
Holding company |
48 Inomenon Ethnon, Guricon House,
Floor 2 & 3, 6042, Larnaca, Cyprus |
Rentoul Ltd |
Isle of Man |
100 |
Dormant |
Commerce House, 1 Bowring Road,
Ramsey, Isle of Man IM8 2LQ |
LLC AstroInvest-Ukraine |
Ukraine |
100 |
Exploration |
5a, Pogrebnyak Street, ap. 2,
Zinkiv, Poltava region, Ukraine, 38100 |
LLC Astro Gas |
Ukraine |
100 |
Exploration |
5a, Pogrebnyak Street, ap. 2,
Zinkiv, Poltava region, Ukraine, 38100 |
LLC Astroinvest-Energy |
Ukraine |
100 |
Exploration |
5a, Pogrebnyak Street, ap. 2,
Zinkiv, Poltava region, Ukraine, 38100 |
LLC Industrial Company
Gazvydobuvannya |
Ukraine |
100 |
Exploration |
3, Myru str., Poltava, Ukraine,
36022 |
DP USENCO Ukraine |
Ukraine |
100 |
Production |
8, Mitskevycha sq.,Lviv,
Ukraine,79000 |
LLC USENCO Nadra |
Ukraine |
95 |
Production |
9a, Karpenka-Karoho str., Sambir,
Lviv region, Ukraine |
JV Delta |
Ukraine |
100 |
Exploration |
3 Petro Kozlaniuk str,
Kolomyia, Ukraine |
LLC Cadogan Ukraine |
Ukraine |
100 |
Corporate services |
48/50A Zhylyanska Street, BC
“Prime”, 8th fl. 01033 Kyiv, Ukraine |
LLC Astro-Service |
Ukraine |
100 |
Service Company |
3 Petro Kozlaniuk str, Kolomyia,
Ukraine |
OJSC AgroNaftoGasTechService |
Ukraine |
79.9 |
Construction services |
Ivan Franko str, Hvizdets, Kolomyia
district, Ivano-Frankivsk Region, Ukraine |
Exploenergy s.r.l. |
Italy |
90 |
Exploration |
Via Triulziana 16c, San Donato
Milanese Milano, CAP 20097, Italy |
18. Joint venture
In 2017, Eni informed its partners, NJSC “Nadra Ukrayny” and
Cadogan Ukraine, of its intention to exit the parties WGI joint
venture. In 2017, as a result of the uncertainty as to the future
exploration of the licences following the proposed exit by Eni
which provided a carried interest to the Group, management impaired
its 15% participating interest in the project as at 31 December 2017. The share of joint venture loss
for the 2017 year of $2.3 million
comprised the Group’s 15% share in WGI’s loss for the period of
$0.7 million and $1.6 million related to impairment of the
investment in joint venture.
During 2018 discussions were on-going on the terms of Eni’s exit
and, generally, on the future of the project. As a result, Eni and
Cadogan exited from WestGasInvest LLC. Under the terms of the
agreements for which Cadogan received from Eni at the end of the
year project termination fee of $1.7
million from Eni. Cadogan agreed to (i) to transfer its own
shares in WGI to Nadra Ukrayny for a nominal consideration which
took place in late 2018 and (ii) to transfer its shares in the
company operating the Debeslavetska and Cheremkhivsko-Strupkivska
gas licences to WGI. The gas producing assets, were subject to
punitive tax regime of 70% and to Cadogan were sub-economic and
carried no value. The transfer of gas producing assets have
occurred in January 2019.
The termination fee has been treated as other operating income
rather than as a gain on disposal as the fee was received from Eni
which is not the recipient of the transfer of equity in the gas
assets, being NJSC Nadra Ukrayny.
19. Inventories
|
|
2018
$’000 |
2017
$’000 |
Natural gas |
|
3,584 |
1,312 |
Other inventories |
|
1,080 |
1,143 |
Impairment provision
for obsolete inventory |
|
(177) |
(163) |
Carrying
amount |
|
4,487 |
2,292 |
The impairment provision as at 31
December 2018 and 2017 is made so as to reduce the carrying
value of the obsolete inventories to net realisable value.
20. Trade and other
receivables
|
|
2018
$’000 |
2017
$’000 |
VAT recoverable |
|
1,874 |
896 |
Trading
prepayments |
|
258 |
1,797 |
Trading
receivables |
|
39 |
1,338 |
Receivable from joint
venture |
|
62 |
56 |
Other receivables |
|
239 |
410 |
|
|
2,472 |
4,497 |
Trading prepayments represent actual payments made by the Group
to suppliers for the January 2019 gas
supply.
Trading receivables represent current receivables from customers
and were repaid within four month after the year end. The Group
considers that the carrying amount of receivables approximates
their fair value.
VAT recoverable is presented net of the cumulative provision of
$5.0 million (2017: $6.4 million) against Ukrainian VAT receivable
that has been recognised as at 31 December
2018. VAT recoverable relates to the oil production and gas
trading operations and has been recovered since year end or is
expected to be recovered through the gas and oil sales VAT.
21. Notes supporting statement
of cash flows
Cash and cash equivalents as at 31
December 2018 of $35.2 million
(2017: $37.6 million) comprise cash
held by the Group. The Directors consider that the carrying amount
of these assets approximates to their fair value. As of
31 December 2018 total amount of
pledged cash is $7 million (2017:
$7 million), which related to
security of borrowings and held at UK bank (note 23).
Non-cash transactions from financing activities are shown in the
reconciliation of liabilities from financing transactions:
|
Short term
borrowings
$’000 |
At 1 January 2017 |
3,574 |
Cash flows |
(3,710) |
Effects of foreign exchange |
136 |
At 1 January 2018 |
- |
Cash flows |
78 |
Effects of foreign exchange |
(78) |
At 31 December 2018 |
- |
22. Deferred tax
The following are the major deferred tax liabilities and assets
recognised by the Group and movements thereon during the current
and prior reporting period:
|
Temporary
differences
$’000 |
Liability as at 1 January
2017 |
- |
Deferred
tax benefit |
323 |
Exchange
differences |
- |
Asset as at 1 January
2018 |
323 |
Deferred tax
benefit |
178 |
Exchange differences |
- |
Asset as at 31 December
2018 |
501 |
At 31 December 2018, the Group had
the following unused tax losses available for offset against future
taxable profits:
|
|
|
2018
$’000 |
2017
$’000 |
UK |
|
|
12,634 |
15,028 |
Ukraine |
|
|
180,982 |
182,469 |
|
|
|
193,615 |
197,497 |
Deferred tax assets have been recognised in respect of those tax
losses where there is sufficient certainty that profit will be
available in future periods against which they can be utilised. The
Group’s unused tax losses of $12.4
million (2017: $15.0 million)
relating to losses incurred in the UK are available to shelter
future non-trading profits arising within the Company. These losses
are not subject to a time restriction on expiry. No deferred tax
asset is recorded.
Unused tax losses incurred by Ukraine subsidiaries amount to $181.0 million (2017: $182.5 million). Under general tax law
provisions, these losses may be carried forward indefinitely to be
offset against any type of taxable income arising from the same
company. Tax losses may not be surrendered from one Ukraine subsidiary to another. The deferred
tax asset recorded is expected to be utilised based on forecasts
and relates to oil production subsidiaries which are generating
taxable profits.
23. Short-term borrowings
In October 2014 the Group started
to use short-term borrowings as a financing facility for its
trading activities. Borrowings are represented by credit line drawn
in short-term tranches in UAH at a Ukrainian bank which is a 100%
subsidiary of a UK bank. The credit line is secured by $7 million of cash placed at the European bank in
the UK.
The outstanding amount as at 31 December
2018 and 2017 was $nil. Interest is paid monthly and as at
31 December 2018 and 2017 accrued
interest amounted to $nil.
24. Trade and other
payables
|
2018
$’000 |
2017
$’000 |
Accruals |
660 |
480 |
Trade creditors |
437 |
264 |
Trading payables |
51 |
477 |
VAT payable |
- |
17 |
Other payables |
123 |
168 |
|
1,271 |
1,406 |
Trade creditors and accruals principally comprise amounts
outstanding for ongoing costs. The average credit period taken for
trade purchases is 28 days (2017: 35 days). The Group has financial
risk management policies to ensure that all payables are paid
within the credit timeframe.
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value. No interest is
generally charged on outstanding balances.
25. Provisions
The provisions at 31 December 2018
comprise of $0.3 million (2017:
$0.8 million) of decommissioning
provision.
Decommissioning
|
$’000 |
At 1 January 2017 |
678 |
Change in estimate (note 15 and
16) |
100 |
Unwinding of discount on
decommissioning provision (note 12) |
27 |
Exchange differences |
(35) |
At 1 January 2018 |
770 |
Change in estimate (note 15 and
16) |
(368) |
Utilisation of provision on impaired
oil and gas assets |
(131) |
Transferred to liability held for
sale |
(16) |
Unwinding of discount on
decommissioning provision (note 12) |
12 |
Exchange differences |
48 |
At 31 December 2018 |
315 |
|
$’000 |
At 1 January 2017 |
678 |
Non-current |
412 |
Current |
358 |
At 1 January 2018 |
770 |
Non-current |
39 |
Current |
276 |
At 31 December 2018 |
315 |
In accordance with the Group’s environmental policy and
applicable legal requirements, the Group intends to restore the
sites it is working on after completing exploration or development
activities.
A short-term provision of $0.3
million (2017: $0.3 million)
has been made for decommissioning costs, which are expected to be
incurred within the next year as a result of the demobilisation of
drilling equipment and respective site restoration.
26. Share capital
Authorised and issued equity share
capital
|
2018 |
2017 |
|
Number |
$’000 |
Number |
$’000 |
Authorised
Ordinary shares of £0.03 each |
1,000,000 |
57,713 |
1,000,000 |
57,713 |
Issued
Ordinary shares of £0.03 each |
235,729 |
13,525 |
235,729 |
13,525 |
Authorised but unissued share capital of £30 million has been
translated into US dollars at the historic exchange rate of the
issued share capital. The Company has one class of Ordinary shares,
which carry no right to fixed income.
Issued equity share capital
|
|
Ordinary shares
of £0.03 |
At 31 December
2016 |
|
|
231,091,734 |
Issued during
year |
|
|
4,637,588 |
At 31 December
2017 |
|
|
235,729,322 |
Issued during
year |
|
|
- |
At 31 December
2018 |
|
|
235,729,322 |
On 22 September 2017 the Company
issued 4,637,588 ordinary shares of £0.03 each in the capital of
the Company for cash on the basis of £0.0825 per share to the CEO,
Mr Guido Michelotti.
27. Financial instruments
Capital risk management
The Group manages its capital to ensure that entities in the
Group will be able to continue as a going concern, while maximising
the return to shareholders.
The capital resources of the Group consist of cash and cash
equivalents arising from equity attributable to owners of the
Company, comprising issued capital, reserves and retained earnings
as disclosed in the Consolidated Statement of Changes in
Equity.
Externally imposed capital
requirement
The Group is not subject to externally imposed capital
requirements.
Categories of financial
instruments
|
2018
$’000 |
2017
$’000 |
Financial assets – loans and receivables (includes cash and cash
equivalents) |
|
|
Cash and cash
equivalents |
|
35,136 |
37,640 |
|
Trading
receivable |
|
39 |
1,338 |
|
Other receivables |
|
239 |
410 |
|
Receivable from joint
venture |
|
62 |
56 |
|
|
35,476 |
39,444 |
Financial liabilities – measured at amortised cost |
|
|
Accruals |
660 |
480 |
Trade
creditors |
437 |
264 |
Trading
payables |
51 |
477 |
Other
payables |
123 |
168 |
|
1,271 |
1,389 |
|
|
|
|
|
|
|
The Group considers that the carrying amount of financial
instruments approximates their fair value.
Financial risk management
objectives
Management co-ordinates access to domestic and international
financial markets and monitors and manages the financial risks
relating to the operations of the Group in Ukraine through internal risks reports, which
analyse exposures by degree and magnitude of risks. These risks
include commodity price risks, foreign currency risk, credit risk,
liquidity risk and cash flow interest rate risk. The Group does not
enter into or trade financial instruments, including derivative
financial instruments, for speculative purposes.
The Audit Committee of the Board reviews and monitors risks
faced by the Group at meetings held throughout the year.
Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect the value of the financial instruments.
The Group is not exposed to interest rate risk because entities of
the Group borrow funds at fixed interest rates.
Commodity price risk
The commodity price risk related to Ukrainian gas and condensate
prices and prices for crude oil are the Group’s most significant
market risk exposures. World prices for gas and crude oil are
characterised by significant fluctuations that are determined by
the global balance of supply and demand and worldwide political
developments, including actions taken by the Organisation of
Petroleum Exporting Countries.
These fluctuations may have a significant effect on the Group’s
revenues and operating profits going forward. In 2018 the price for
Ukrainian gas was mainly based on the current price of the European
gas imports. Management continues to expect that the Group’s
principal market for gas will be the Ukrainian domestic market.
The Group does not hedge market risk resulting from fluctuations
in gas, condensate and oil prices, and holds no financial
instruments, which are sensitive to commodity price risk.
Foreign exchange risk and foreign
currency risk management
The Group undertakes certain transactions denominated in foreign
currencies. Hence, exposures to exchange rate fluctuations arise,
the Group considers exposure to be minimal. The Group to date has
elected not to hedge its exposure to the risk of changes in foreign
currency exchange rates.
Inflation risk management
Inflation in Ukraine and in the
international market for oil and gas may affect the Group’s cost
for equipment and supplies. The Directors will proceed with the
Group’s practices of keeping deposits in US dollar accounts until
funds are needed and selling its production in the spot market to
enable the Group to manage the risk of inflation.
Credit risk management
Credit risk refers to the risk that counterparty will default on
its contractual obligations resulting in financial loss to the
Group. The Group’s credit management process includes the
assessment, monitoring and reporting of counterparty exposure on a
regular basis. Credit risk with respect to receivables and advances
is mitigated by active and continuous monitoring the credit quality
of its counterparties through internal reviews and assessment.
Trading receivables as at 31 December
2018 have been paid within four months after year end, there
were no material past due receivables as at year end.
The Group makes allowances for expected credit losses on
receivables in accordance with its accounting policy.
The credit risk on liquid funds (cash) is considered to be
limited because the counterparties are financial institutions with
high and good credit ratings, assigned by international
credit-rating agencies in the UK and Ukraine respectively.
The carrying amount of financial assets recorded in the
financial statements represents the Group’s maximum exposure to
credit risk.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with
the Board of Directors, which has built an appropriate liquidity
risk management framework for the management of the Group’s short,
medium and long-term funding and liquidity management requirements.
The Group manages liquidity risk by maintaining adequate cash
reserves and by continuously monitoring forecast and actual cash
flows.
The following tables sets out details of the expected
contractual maturity of financial liabilities.
|
Within
3 months |
3 months to 1
year |
More than 1
year |
Total |
|
$’000 |
$’000 |
$’000 |
$’000 |
At 31 December 2017 |
|
|
|
|
Trade and other payables |
1,406 |
- |
- |
1,406 |
At 31 December 2018 |
|
|
|
|
Trade and other payables |
1,271 |
- |
- |
1,271 |
28. Commitments and
contingencies
The Group has working interests in four licences to conduct its
exploration and development activities in Ukraine. Each licence is held with the
obligation to fulfil a minimum set of exploration activities within
its term and is summarised on an annual basis, including the agreed
minimum amount forecasted expenditure to fulfil those obligations.
The activities and proposed expenditure levels are agreed with the
government licencing authority.
The required future financing of exploration and development
work on fields under the licence obligations are as follows:
|
2018
$’000 |
2017
$’000 |
Within one year |
1,583 |
931 |
Between two and five
years |
- |
829 |
|
1,583 |
1,760 |
Tax contingent liabilities
The Group assesses its liabilities and contingencies for all tax
years open for audit by UK and Ukraine tax authorities based upon the latest
information available. For those matters where it is probable that
an adjustment will be made, the Group records its best estimate of
these tax liabilities, including related interest charges. Inherent
uncertainties exist in estimates of tax contingencies due to
complexities of interpretation and changes in tax laws.
Whilst the Group believes it has adequately provided for the
outcome of these matters, certain periods are under audit by the UK
and Ukraine tax authorities, and
therefore future results may include favourable or unfavourable
adjustments to these estimated tax liabilities in the period the
assessments are made or resolved. The final outcome of tax
examinations may result in a materially different outcome than
assumed in the tax liabilities.
29. Related party
transactions
All transactions between the Company and its subsidiaries, which
are related parties, have been eliminated on consolidation and are
not disclosed in this note. The application of IFRS 11 resulted in
the joint venture LLC Westgasinvest being accounted for under the
equity method and disclosed as a related party.
During the period, Group companies entered into the following
transactions with joint ventures who are considered as related
parties of the Group:
|
|
|
2018
$’000 |
2017
$’000 |
Revenues
from services provided and sales of goods |
|
- |
84 |
Amounts
owed by related parties |
|
62 |
56 |
|
|
|
|
|
|
Directors’ remuneration
The remuneration of the Directors, who are 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. Further information about the remuneration of
individual Directors is provided in the audited part of the Annual
Report on Remuneration 2018 on pages 40 to 60.
|
Purchase of services |
Amounts owing |
|
2018
$’000 |
2017
$’000 |
2018
$’000 |
2017
$’000 |
|
|
Directors’
remuneration |
1,182 |
1,392 |
230 |
204 |
|
The total remuneration of the highest paid Director was
$0.8 million in the year (2017:
$0.7 million).
The amounts outstanding are unsecured and will be settled in
cash. No guarantees have been given or received and no provisions
have been made for doubtful debts in respect of the amounts owed by
related parties.
30. Events after the balance
sheet date
On 26 February 2019 the Group has
entered into a Euro 13,385,000 loan
agreement with Proger Managers & Partners s.r.l. (“PMP”), a
privately owned Italian company whose only interest is a 59.6%
participation in Proger Ingegneria s.r.l. (“Proger Ingegneria”), a
privately owned company which has a 67.9% participating interest in
Proger s.p.a. (“Proger”).
The loan carries an entitlement to interest at a rate of 5.5%
per year, payable at maturity (which is 24 months after the
execution date and assuming that the call option described below is
not exercised). The principal of the loan is secured by a pledge on
PMP’s current participating interest in Proger Ingegneria s.r.l.,
up to a maximum guaranteed amount of Euro
13,385,000.
Proger is a privately-owned international contractor, providing
some of the world’s largest companies with comprehensive
engineering, project management and security solutions. Its second
largest shareholder, with a 27.4% participating interest, is
SIMEST, the Italian government agency which supports local
companies to achieve export driven growth. Proger is based in
Italy, with offices in the
Middle East, Africa and Europe, and is involved in major projects
around the world, including significant oil and gas, energy and
infrastructure installations, and has more than 60 years’
experience.
The loan will be used to finance Proger business plan which
targets a material increase of EBITDA over the next 5 years, driven
by the expansion of energy projects in the Middle East as well as by the development of
its integrated services business. In exchange for providing the
loan, and besides the pledge on PMP’s current participating
interest in Proger Ingegneria, the Group has secured:
i. The right to designate two out of the
seven directors in each of Proger and Proger Ingegneria’s Boards of
Directors. One of the two directors designated by the Group will be
appointed as Proger’s Chairman of the Board, with a supervisory
role on financial affairs.
ii. The right to designate one of the three
members of Statutory Auditors in each of Proger and Proger
Ingegneria Boards.
iii. A call option to acquire, at its sole
discretion, 33% of the participating interest that PMP will be
holding in Proger Ingegneria as a result of its forthcoming
subscription; the exercise of the option would give the Group, an
indirect 22% interest in Proger. The call option is granted at no
additional cost and can be exercised at any time between the 6th
(sixth) and 24th (twenty-fourth) months following the execution
date of the loan agreement and subject to the Group’s shareholders
having approved the exercise of the call option as explained
further below. Should the Group exercise the call option, the price
for the purchase of the 33% participating interest in Proger
Ingegneria shall be paid by setting off the corresponding amount
due by PMP to the Group, by way of reimbursement of the principal,
pursuant to the loan agreement. If the call option is exercised,
then the obligation on PMP to pay interest is extinguished.
This exercise of the call option (or the enforcement of the
pledge referred to above) would be likely to constitute a reverse
takeover for the Group under the Listing Rules.
In that instance, the exercise of the call option would be
subject to and require publication of: (i) a shareholder circular
and notice to convene a general meeting seeking the Group
shareholder approval of the proposed exercise of the call option by
the Group; and (ii) a prospectus in connection with the proposed
re-admission of the Group’s shares to the Standard segment of the
Official List and to trading on the London Stock Exchange (as the
Group’s listing would be cancelled following the consummation of a
reverse takeover).
The Group is currently analysing the accounting treatment of the
loan instrument and option in the financial statements for
2019.
Company Balance Sheet as at
31 December 2018
|
Notes |
2018
$’000 |
2017
$’000 |
ASSETS |
|
|
|
Non-current
assets |
|
|
|
Investments |
33 |
- |
- |
Receivables from
subsidiaries |
34 |
28,457 |
19,576 |
|
|
28,457 |
19,576 |
Current
assets |
|
|
|
Trade and other
receivables |
34 |
- |
78 |
Cash and cash
equivalents |
34 |
17,477 |
27,406 |
|
|
17,477 |
27,484 |
Total
assets |
|
45,934 |
47,060 |
|
|
|
|
LIABILITIES |
|
|
|
Current
liabilities |
|
|
|
Trade and other
payables |
35 |
(614) |
(671) |
|
|
(614) |
(671) |
Total
liabilities |
|
(614) |
(671) |
|
|
|
|
Net assets |
|
45,320 |
46,389 |
|
|
|
|
EQUITY |
|
|
|
Share capital |
36 |
13,525 |
13,525 |
Share premium |
|
329 |
329 |
Retained
earnings1 |
|
140,106 |
141,254 |
Other reserve |
|
79 |
- |
Cumulative translation
reserves |
37 |
(108,719) |
(108,719) |
Total
equity |
|
45,320 |
46,389 |
The financial statements of Cadogan Petroleum plc, registered in
England and Wales no. 05718406, were approved by the Board
of Directors and authorised for issue on 23
April 2019.
They were signed on its behalf by:
Guido Michelotti
Chief Executive Officer
23 April 2019
The notes on pages 106 to 109 form part of these financial
statements.
1 Included in retained earnings, loss for the financial
year ended 31 December 2018 was
$1.6 million (2017: $20.9 million).
Company Cashflow Statement for the
year ended 31 December 2018
|
2018
$’000 |
2017
$’000 |
Operating activities
Loss for the year |
(1,148) |
(20,868) |
Adjustments for:
Interest received
Effect of foreign exchange rate changes
Impairment of receivables from subsidiaries |
(468)
(74)
(78) |
(185)
(74)
19,376 |
Operating cash
flows before movements in working capital |
(1,768) |
(1,751) |
(Increase)/decrease in
receivables |
78 |
(61) |
Increase in
payables |
22 |
255 |
Cash used in
operations |
(1,668) |
(1,557) |
Income taxes paid |
- |
- |
Net cash outflow
from operating activities |
(1,668) |
(1,557) |
Investing activities |
|
|
Interest received |
468 |
185 |
Loans to subsidiary
companies |
(8,803) |
325 |
Net cash from/(used
in) investing activities |
(8,335) |
510 |
|
|
|
|
|
|
Net decrease in
cash and cash equivalents |
(10,003) |
(1,047) |
Effect of foreign
exchange rate changes |
74 |
73 |
Cash and cash
equivalents at beginning of year |
27,406 |
28,380 |
Cash and cash
equivalents at end of year |
17,477 |
27,406 |
Company Statement of Changes in Equity for
the year ended 31 December
2018
|
Share
capital
$’000 |
Share
premium account
$’000 |
Retained earnings
$’000 |
Other Reserve
$’000 |
Cumulative translation reserves
$’000 |
Total
$’000 |
As at 1
January 2017 |
13,337 |
- |
162,122 |
- |
(108,719) |
66,740 |
Net loss for the
year |
- |
- |
(20,868) |
- |
- |
(20,868) |
Total comprehensive
loss for the year |
- |
- |
(20,868) |
- |
- |
(20,868) |
Issue of ordinary
shares |
188 |
329 |
- |
- |
- |
517 |
As at 1
January 2018 |
13,525 |
329 |
141,254 |
- |
(108,719) |
46,389 |
Net loss for the
year |
- |
- |
(1,148) |
- |
- |
(1,148) |
Total comprehensive
loss for the year |
- |
- |
(1,148) |
- |
- |
(1,148) |
Issue of ordinary
shares |
- |
- |
- |
79 |
- |
79 |
As at 31 December
2018 |
13,525 |
329 |
140,106 |
79 |
(108,719) |
45,320 |
|
|
|
|
|
|
|
31.
Significant accounting policies
The separate financial statements of the Company are presented
as required by the Companies Act 2006 (the “Act”). As permitted by
the Act, the separate financial statements have been prepared in
accordance with International Financial Reporting Standards, as
adopted in the EU.
The financial statements have been prepared on the historical
cost basis. The principal accounting policies adopted are the same
as those set out in note 3 to the Consolidated Financial Statements
except as noted below.
As permitted by section 408 of the Act, the Company has elected
not to present its profit and loss account for the year. Cadogan
Petroleum plc reports a loss for the financial year ended
31 December 2018 of $1.1 million (2017: $20.9
million).
Investments
Investments in subsidiaries are stated at cost less, where
appropriate, provisions for impairment.
Receivables from subsidiaries
Loans to subsidiary undertakings are subject to IFRS 9’s new
expected credit loss model. As all intercompany loans are repayable
on demand, the loan is considered to be in stage 3 of the IFRS 9
ECL model on the basis the subsidiary does not have enough liquid
assets in order to repay the loans if demanded. Lifetime ECLs are
determined using all relevant, reasonable and supportable
historical, current and forward-looking information that provides
evidence about the risk that the subsidiaries will default on the
loan and the amount of losses that would arise as a result of that
default. All recovery strategies indicated that the Company will
fully recover the full balances of the loans so no ECL has been
recognised in the current period.
Critical accounting judgements and key
sources of estimation uncertainty
The Company’s financial statements, and in particular its
investments in and receivables from subsidiaries, are affected by
certain of the critical accounting judgements and key sources of
estimation uncertainty.
The critical estimates and judgments referred to application of
the expected credit loss model to intercompany receivables (note
33). Management determined that the interest free on demand
loans were required to be assessed on the lifetime expected credit
loss approach and assessed scenarios considering risks of loss
events and the amounts which could be realised on the loans.
In doing so, consideration was given to factors such as the cash
held by subsidiaries and the underlying forecasts of the Group’s
divisions and their incorporation of prospective risks and
uncertainties.
32. Auditor’s
remuneration
The auditor’s remuneration for audit and other services is
disclosed in note 10 to the Consolidated Financial Statements.
33.
Investments
The Company’s subsidiaries are disclosed in note 17 to the
Consolidated Financial Statements. The investments in subsidiaries
are all stated at cost less any provision for impairment.
34. Financial
assets
The Company’s principal financial assets are bank balances and
cash and cash equivalents and receivables from related parties none
of which are past due. The Directors consider that the carrying
amount of receivables from related parties approximates to their
fair value.
Receivables from subsidiaries
At the balance sheet date gross amounts receivable from the
fellow Group companies were $341.0
million (2017: $331.9
million). The Company recognised no additional expected
credit loss provisions in relation to receivables from subsidiaries
in 2018 (2017: $19.4 million). The
accumulated provision on receivables as at 31 December 2018 was $312.5 million (2017: $312.5 million). The carrying value of the
receivables from the fellow Group companies as at 31 December 2018 was $28.5
million (2017: $19.6 million).
Receivables from subsidiaries are interest free and repayable on
demand. There are no past due receivables. The receivables are
classified as non-current based on the expected timing of receipt
notwithstanding their terms.
Trade and other receivables
|
|
2018
$’000 |
2017
$’000 |
Prepayments |
|
- |
- |
Other receivables |
|
- |
78 |
|
|
- |
78 |
Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Company and
short-term bank deposits with an original maturity of three months
or less. The carrying value of these assets approximates to their
fair value. As of 31 December 2018
cash and cash equivalents in the amount of $7 million, related to security of the loan
provided to the Ukrainian subsidiary and held at European bank in
the UK, was pledged (note 21).
35. Financial
liabilities
Trade and other payables
|
|
2018
$’000 |
2017
$’000 |
Accruals |
|
157 |
214 |
Trade creditors |
|
75 |
58 |
Other creditors and
payables |
|
382 |
399 |
|
|
614 |
671 |
Trade payables principally comprise amounts outstanding for
trade purchases and ongoing costs. The average credit period taken
for trade purchases is 35 days (2017: 39 days).
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value. No interest is
charged on balances outstanding.
36. Share
capital
The Company’s share capital is disclosed in note 26 to the
Consolidated Financial Statements.
37.
Cumulative translation reserve
The directors decided to change the functional currency of the
Company from sterling to US dollars with effect from 1 January 2016. The effect of a change in
functional currency is accounted for prospectively. In other words,
the Company translates all items into the US dollar using the
exchange rate at the date of the change. The resulting translated
amounts for non-monetary items are treated as their historical
cost. Exchange differences arising from the translation of an
operation previously recognised in other comprehensive income in
accordance with paragraphs 32 and 39(c) IAS 21 “Foreign
Currency” are not reclassified from equity to profit or loss
until the disposal of the operation.
38. Financial instruments
The Company manages its capital to ensure that it is able to
continue as a going concern while maximising the return to
shareholders. Refer to note 27 for the Group’s overall strategy and
financial risk management objectives.
The capital resources of the Company consist of cash and cash
equivalents arising from equity, comprising issued capital,
reserves and retained earnings.
Categories of financial
instruments
|
2018
$’000 |
2017
$’000 |
Financial assets –
loans and receivables (includes cash and cash equivalents) |
|
|
Cash and cash
equivalents |
17,477 |
27,406 |
Amounts due from
subsidiaries |
19,476 |
19,576 |
|
36,953 |
46,982 |
Financial
liabilities – measured at amortised cost |
|
|
Trade creditors |
(75) |
(58) |
|
(75) |
(58) |
Interest rate risk
All financial liabilities held by the Company are non-interest
bearing. As the Company has no committed borrowings, the Company is
not exposed to any significant risks associated with fluctuations
in interest rates.
Credit risk
Credit risk refers to the risk that counterparty will default on
its contractual obligations resulting in financial loss to the
Company. For cash and cash equivalents, the Company only transacts
with entities that are rated equivalent to investment grade and
above. Other financial assets consist of amounts receivable from
related parties.
The Company’s credit risk on liquid funds is limited because the
counterparties are banks with high credit ratings assigned by
international credit-rating agencies.
The carrying amount of financial assets recorded in the Company
financial statements, which is net of any impairment losses,
represents the Company’s maximum exposure to credit risk.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with
the Board of Directors, which has built an appropriate liquidity
risk management framework for the management of the Company’s
short, medium and long-term funding and liquidity management
requirements. The Company maintains adequate reserves, by
continuously monitoring forecast and actual cash flows.
The Company’s financial liabilities are not significant and
therefore no maturity analysis has been presented.
Foreign exchange risk and foreign
currency risk management
The Company undertakes certain transactions denominated in
foreign currencies. Hence, exposures to exchange rate fluctuations
arise, the Company considers exposure to be minimal. The Company
holds a large portion of its monetary assets and monetary
liabilities in US dollars. More information on the foreign exchange
risk and foreign currency risk management is disclosed in note 27
to the Consolidated Financial Statements.
38. Related
parties
Amounts due from subsidiaries
The Company has entered into a number of unsecured related party
transactions with its subsidiary undertakings. The most significant
transactions carried out between the Company and its subsidiary
undertakings are mainly for short and long-term financing. Amounts
owed from these entities are detailed below:
|
2018
$’000 |
2017
$’000 |
Cadogan Petroleum
Holdings Limited |
28,457 |
19,576 |
|
28,457 |
19,576 |
Refer to note 33 for details on the Company’s receivables due
from subsidiaries.
The remuneration of the Directors, who are 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. In 2018 there were no other employees in the
Company. Further information about the remuneration of individual
Directors is provided in the audited part of the Annual Report on
Remuneration 2018 on pages 40 to 60.
|
Remuneration |
Amounts owing |
|
2018
$’000 |
2017
$’000 |
2018
$’000 |
2017
$’000 |
|
|
Directors’
remuneration |
1,182 |
989 |
- |
- |
|
|
The total remuneration of the highest paid Director was
$0.8 million in the year (2017:
$0.7 million).
39. Events after the balance
sheet date
Events after the balance sheet date are disclosed in note 30 to
the Consolidated Financial Statements.
Glossary
IFRSs |
International Financial Reporting
Standards |
JAA |
Joint activity agreement |
UAH |
Ukrainian hryvnia |
GBP |
Great Britain pounds |
$ |
United States dollars |
bbl |
Barrel |
boe |
Barrel of oil equivalent |
mmboe |
Million barrels of oil
equivalent |
mboe |
Thousand barrels of oil
equivalent |
mboepd |
Thousand barrels of oil equivalent
per day |
boepd |
Barrels of oil equivalent per
day |
bcf |
Billion cubic feet |
mmcm |
Million cubic metres |
mcm |
Thousand cubic metres |
Reserves |
Those quantities of petroleum
anticipated to be commercially recoverable by application of
development projects to known accumulations from a given date
forward under defined conditions. Reserves include proved, probable
and possible reserve categories. |
Proved Reserves |
Those additional Reserves which
analysis of geoscience and engineering data can be estimated with
reasonable certainty to be commercially recoverable, from a given
date forward, from reservoirs and under defined economic
conditions, operating methods and government regulations. |
Probable Reserves |
Those additional Reserves which
analysis of geoscience and engineering data indicate are less
likely to be recovered than proved Resources but more certain to be
recovered than possible Reserves. |
Possible Reserves |
Those additional Reserves which
analysis of geoscience and engineering data indicate are less
likely to be recoverable than probable Reserves. |
Contingent Resources |
Those quantities of petroleum
estimated, as of a given date, to be potentially recoverable from
known accumulations by application of development projects, but
which are not currently considered to be commercially recoverable
due to one or more contingencies. |
Prospective Resources |
Those quantities of petroleum which
are estimated as of a given date to be potentially recoverable from
undiscovered accumulations. |
P1 |
Proved Reserves |
P2 |
Probable Reserves |
P3 |
Possible Reserves |
1P |
Proved Reserves |
2P |
Proved plus Probable Reserves |
3P |
Proved plus Probable plus Possible
Reserves |
Workover |
The process of performing major
maintenance or remedial treatment of an existing oil or gas
well |
E&E / E&P |
Exploration and Evaluation / Exploration and Production |
LTI |
Lost
time incidents |
Shareholder Information
Enquiries relating to the following administrative matters
should be addressed to the Company’s registrars: Link Asset
Services, The Registry, 34 Beckenham Road, Beckenham, Kent BR3
4TU.
Telephone number:
UK: 0871 664 0300 (calls cost 12p per minute plus network
extras).
International: +44 (0) 371 664 0300
Lines are open 9am – 5.30pm, Monday – Friday, excluding public
holidays.
- Loss of share certificates.
- Notification of change of address.
- Transfers of shares to another person.
- Amalgamation of accounts: if you receive more than one copy of
the Annual Financial Report, you may wish to amalgamate your
accounts on the share register.
You can access your shareholding details and a range of other
services at the Shareholder Portal www.signalshares.com.
Information concerning the day-to-day movement of the share
price of the Company can be found on the Group’s website
www.cadoganpetroleum.com or that of the London Stock exchange
www.prices.londonstockexchange.com.
Unsolicited mail
As the Company’s share register is, by law, open to public
inspection, shareholders may receive unsolicited mail from
organisations that use it as a mailing list. To reduce the amount
of unsolicited mail you receive, contact: The Mailing Preference
Service, FREEPOST 22, London W1E
7EZ. Telephone: 0845 703 4599. Website: www.mpsonline.org.uk.
Financial calendar 2018/2019
Annual General Meeting
19 June 2019
Half Yearly results announced
August 2018
Annual results announced
April
2019
Investor relations
Enquiries to: info@cadoganpetroleum.com
Registered office
Shakespeare Martineau LLP,
6th Floor, 60 Gracechurch Street, London EC3V 0HR
Registered in England and
Wales no. 05718406
Ukraine
48/50A Zhylyanska Street
Business center “Prime”, 8th floor
01033 Kyiv
Ukraine
Email: info@cadoganpetroleum.com
Tel: +38 044 594
58 70
Fax: +38 044 594
58 71
www.cadoganpetroleum.com
______________
[1] Gross revenues of $14.7 million
(2017: $15.1 million) included
$9.9 million (2017: $12.7 million) from trading of natural gas,
$4.7 million (2017: $2.4 million) from exploration and production and
$0.1 million from services (2017:
$nil)
[2] Administrative expenses (“G&A”)
[3] Net cash includes cash and cash equivalents less short-term
borrowings
[4] Astroservice LLC used its rig for the work-over campaign on
the Monastyretska licence
[5] LTI: Lost Time Incidents; TRI: Total Recordable
Incidents
[6] Emissions have been restated because of past mistakes in
their calculation see page
27
[7] Income net of transaction cost was $
1.70 million
[8] Segment result being the gross profit net of administrative
expenses of the segment
[9] The sale of the plant allowed an estimated saving of
$0.3 million of dismantling and site
restoration costs
[10] Adelmo Schenato, who has
become a Non-Executive Director in the first quarter January 2017 is also non-Independent as he
retains a role of Advisor to the CEO, besides being Chairman and
CEO of Exploenergy
[11] Taxable benefits include life and medical insurance
provided to the executive and leased car. There are no
contributions to pension schemes.
[12] In 2015 and 2016 the CEO undertook to use the entire amount
of the bonus to buy at market price newly issued company
shares.
[13] In January 2017, Mr Schenato
stepped down as Chief Operating Officer, became a non-executive
director of the Company and took up the roles of Advisor to the CEO
and Chairman and CEO of Exploenergy. His remuneration comprises a
fee of £20,600 ($27,635) as a
non-executive Director and €101,040 ($119,793) per annum under a consultancy
agreement.
[14] 2015 CEO’s salary is the sum of Mr. des Pallieres' salary
for the period January to June and of Mr. Michelotti's salary for
the period July to December
[15] In relation to performance in 2016 and 2015, the CEO used
the entire amount of the bonus to buy at market price newly issued
company shares on 22 September
2017
[16] The new Remuneration Policy approved in June 2018, reduces the maximum allowable bonus
from 200% to 125% of the base salary
[17] Mr Michelotti undertook to use the entire bonus to buy
company’s share at market price in order to leave the Company cash
neutral
[18] Year-end performance-based bonus was an alternative to an
up-front sign-on bonus. Mr Michelotti use the entire bonus to buy
company’s share at market price on 22
September 2017
[19] $280,298 paid as fees,
pension and loss of office
[20] From 1 August, 2011
[21] From 19 March 2009
[22] CEO’s base salary has not changed since he was hired and a
lower bonus has been paid in 2018 vs 2017. Changes reflect the
variation in the exchange rate versus the US dollar, which is the
reporting currency.
[23] All employees mean all employees of the Group, including
CEO and other Directors (note 11, page 89).
[24] Please note that the salary of the CEO for 2019 will remain
at €440,000. The CEO's salary has not changed since his appointment
on 1 July 2015.
[25] Mr A. Schenato had an
initial one-year term that expired on December 31st, 2017 under his appointment letter
because he performed different roles in the Company for the
previous years (COO and Director).
References to page numbers throughout this announcement relates
to the page numbers within the Annual Report of the Company for the
year ended 31st December 2018.