RNS Number : 6298E
Urals Energy Public Company Limited
30 September 2008
Urals Energy Public Company Limited
('Urals Energy' or the 'Company')
30th September, 2008
Interim Results
Urals Energy, a leading independent exploration and production company with operations in Russia, today announces its interim results for
the six months ended 30 June 2008.
Highlights
Operations
� Average daily production for the period was 7,800 bopd (including production to April 22, 2008 from the divested KOMI assets.)
� Commencement of successful drilling campaign in Dulisma with 2 drilling rigs
o Tested appraisal well 105 at rate of 1,280 bopd
o Two additional horizontal production wells spudded and scheduled for completion in Q4 *08
o Contract for another two drilling rigs awarded to begin drilling in Q1 2009
� Substantial progress in development of Dulisma field infrastructure
o 24 kilometres of export pipeline constructed
o Major equipment installed at Central Processing Facility (CPF)
o Subsequent to period end awarded tender for Central Transfer Facility (CTF) construction
� Continued development of Taas Yuriakh
o Drilled additional horizontal side track wells for production (a total of 12 will be completed by end September)
o Acquisition and processing of 250 km� of 2D (Kurungsky license) and 200 km� of 3D (Central block) seismic
o Tenders issued for drilling and services (a contract was placed with a drilling contractor for a BU 3000 rig which was mobilised after the
reporting period, with a second rig under negotiation)
o Procurement of the license for the overlying gas reserves and usage thereof for fuel requirements, thus avoiding the need for diesel or
crude oil for this purpose, while correspondingly reducing lifting cost
Reserves
� 107% increase in 2P reserves to 1,202 MMBOE ( H1 07: 579 MMBOE)
o Taas Yuriakh acquisition contributing 253 MMBBLS
o Upward revision of Dulisma reserves resulting in 81% increase to 842 MMBBOE
� 117% increase in C1 and C2 oil reserves (Russian classification) for Taas Yuriakh to 900 MMBBLS (317 MMBBLS net to Urals)
� Confirmed licence rights to overlying gas in Taas Yuriakh
o Reserves estimated at 6.3tcf C1 + C2 (2.2 TCF net to Urals) by the Russian State Reserve Committee.
o Auditors DeGolyer and MacNaughton yet to assess gas reserves on Taas Yuriakh
Financial
� 94.6% increase in gross revenues to US$110.7 million due to higher crude oil prices and increased sales volumes
� Operating loss decreased to US$3.1 million from US$22.2 million due to higher crude oil prices and resumed production and sales of
crude oil from Dulisma, combined with a decrease in Selling, General and Administrative (SG&A) expenses
� Financing of capital program of US$59.5 million with the majority spent on the development of Dulisma
� Ongoing negotiations with Sberbank regarding the $140 million Dulisma development loan, and the extension of the initial 1-year
maturity of the $500 million Taas Acquisition loan and the $130 million Dulisma development loan by 2 and 5 years respectively. The company
is targeting a mutually satisfactory result before November 2008.
Corporate
� Gross proceeds from sale of Komi properties of US$93.5 million
� Continuing to proceed with divestiture of all remaining non-core assets with a view to finalizing these transactions by end Q1, 2009
Outlook
� Near term priority to reach mutually satisfactory conclusion in negotiations with Sberbank regarding loan facilites
� On track to meet revised production targets of 56,000 bopd in 2012 and 67,000 bopd in 2015
� Operational programme in Dulisma contemplates ESPO connection in September 2009
Leonid Y. Dyachenko, Chief Executive, commented:
*During the first half of 2008 the Company continued to make good progress with the development of its key strategic operations in East
Siberia.
*With an ongoing active programme set to continue for the remainder of the year and beyond, the Company remains firmly on track and focused
on realising its operational targets and full potential.*
Enquiries:
Pelham PR
Mark AntelmeEvgeniy Chuikov +44(0)20 3178 6242 / +44(0)752 5951 011+44(0)20
3008 5506 / +44(0)7894 608 606
Chief Executive*s Statement
During the first half of 2008 the Company continued to make good progress with the development of its key strategic assets in East Siberia.
Following the Taas Yuriakh acquisition in 2007 and further reserve upgrades at Dulisma, compared to the equivalent period last year the
Company*s 2P reserves rose by 107% to 1,202 MMBOE (H1 07: 579 MMBOE). This is also reflected in a 137% increase in the PV10 of the Company*s
2P reserves to $3.2 billion.
Average daily production for the period was 7,800 bopd, (including production until April 22 from the now divested KOMI assets).
A successful drilling campaign commenced at Dulisma with two drilling rigs. Appraisal well 105 is now producing, having tested at 1,280 bopd
and two additional production wells spudded and scheduled for completion by the year end.
The development of the Dulisma field infrastructure has progressed substantially. Key developments include the construction of 24km of
export pipeline and the installation of equipment at the Central Processing Facility. Since the period end, the Company has awarded the
tender for the construction of the Central Transfer Facility, which will tie in with the new ESPO trunk system. The target remains to
produce 27,000 bopd in 2011.
Further development progress has also been made at the Taas field, including the drilling of additional horizontal side-track production
wells and the acquisition and processing of 2D and 3D seismic at the Kurungsky license and Central block respectively. This data will allow
for further depletion planning. Tenders have now been issued for drilling and services and the license for the use of the overlying gas
reserves as a fuel supply has been procured.
At Petrosakh*s Okruzhnoye Field, Sakhalin Island, an excellent flowing oil well (�52) was drilled and completed. Well � 52 further
demonstrated the value of Ural*s wider asset base and the Company*s commitment to maximising existing value.
In keeping with our stated strategy of disposing of non strategic assets, the Company successfully sold its KOMI project for a consideration
of $93.5 million. Urals will continue to actively pursue further disposal opportunities for non-core assets.
The Company continues to negotiate with Sberbank regarding the $140 million Dulisma development loan, and the extension of the initial
1-year maturity of the $500 million Taas Acquisition loan and the $130 million Dulisma development loan by 2 and 5 years respectively.
Dulisma Operational Update
The Dulisma field development is comprised of multi-well drilling pads with flow lines to the CPF where oil will flow into the 73km export
pipeline to the CTF, providing oil metering at the Transneft ESPO trunk system.
The Russian Company, OAO SibKompletkMontageNaladka, was selected for constructing the CTF which is the last facility required for start up
to ESPO.
In addition, the Company awarded a drilling rig contract to ZAO L- Burenie for two-315 ton drilling rigs to begin drilling by March 2009.
The Company*s Dulisma subsidiary owns three drilling rigs, two of which are currently drilling and the third is being mobilised to the field
to begin operations in December 2008. This will bring to five the number of rigs to be used for drilling operations in Dulisma.
Meanwhile, the Company is gathering reservoir data by conducting production flow rate and shut-in pressure tests in various wells for
reservoir management planning. The Company is working with the international consulting firm, DeGolyer and MacNaughton on geological and
reservoir modeling and simulations to refine the reservoir management plan.
During the testing phase, the production rate from the Dulisma field is 1,500 to 1,800 bopd and is currently sold through a temporary
pipeline operated by a neighboring production company. Before connection to ESPO, production will be in the range of 4,000 to 7,000 bopd
transported through the temporary pipeline and trucking.
Upon connection to ESPO, the Company plans to produce 8000 bopd increasing production to 12,000 bopd in the end of 2009 and to 27,000 bopd
in 2011. Additionally, the Company is assessing the value of limited gas off-take and gas processing to extract natural gas liquids while
producing the main oil rim.
Financial Results
The six months ended 30 June 2008 were characterised by high crude oil market prices, resulting in an increase in gross revenues to $110.7
million, compared to $56.9 million for the same period in 2007. Revenues were also positively impacted by higher crude oil sales volumes,
which increased to 187.4 thousand tons from 157.7 during the six months ended 30 June 2008 and 2007, respectively.
Included within gross revenues during the first six months of 2008 were crude oil, purchases totalling 48.4 thousand tonnes made from Dinyu,
NizhneomrinskayaNeft and Michayuneft, and which were further resold to the third parties after these subsidiaries were divested in April
2008. There were no deliveries of crude oil exported from Arcticneft during the reporting period, resulting in 25.7 thousand tons of crude
oil that remained in stock until July 2008, when it was shipped. Arcticneft is highly dependent on weather conditions as it can only ship
crude oil during the summer and fall period from July to December.
Gross profit
In thousand US dollars Period ended30 June
2007 2008
Gross revenues (excluding crude oil for resale) 56,922 81,518
Less Export duties and excise tax 12,515 20,107
Less cost of sales (excluding cost of purchased crude oil) 36,694 41,552
Gross profit 7,713 19,859
Gross profit margin 17% 32%
Gross profit (net revenues less cost of sales) from operating activity increased from $7.7 million to $19.9 million as a result of increased
volumes of production due to both the resumption of production and sales at Dulisma, where the Company doesn*t pay Mineral Extraction Tax,
and the increase in crude oil prices. Elsewhere the increase in prices was off-set by higher Mineral Extraction Tax, which rose in line with
crude oil market prices.
Resale of purchased oil
Resale of crude oil (in thousand US dollars) Period ended 30 June
2007 2008
Crude oil
Export sales 0 18,174
Domestic sales (Russian Federation) 0 11,057
Total revenues from resale of purchased oil 0 29,231
Cost of purchasedoil 0 28,649
Net margin 582
2.0%
Following the divestiture of subsidiaries in the Komi Republic, the Group continued to re-sell crude oil produced by these subsidiaries on
the export and domestic markets. The total cost of this purchased crude amounted to $28.7 million during the six months ended 30 June 2008.
Also the Company charged a commission on these operations, which was included in gross revenues in these financial statements. The profit
margin on these operations is substantially lower than for the self-produced oil, as the price of purchased crude oil also includes a
seller*s mark-up. There were no such operations with the Komi subsidiaries in 2007.
Selling, General and Administrative expenses decreased during the six months ended 30 June 2008 by $6.4 million. This was primarily due to
an absence of non-recurring expenses related to separation expenses paid to certain top managers of the Group, who left the Group during the
six months ended 30 June 2007.
In the current period the Company reported an operating loss of $3.1 million as compared to the loss of $22.2 million reported at 30 June
2007.
Gain from the change in fair value of financial derivatives increased from $1.1 million to $18.0 million during 2008. The increase is
primarily due to the change in fair value of the put option liability, which decreased from $118.7 at 31 December 2007 to $96.2 million at
30 June 2008, resulting in a gain which was partly off-set by the impairment of the call option, which was reduced to nil. The fair values
of the call and put options as at the valuation date of 31 December 2007 were estimated at $5.1 million and $118.7 million, respectively,
based on the equity value derived from the long-term discounted cash flows model by applying cost of capital and some other parameters
attributable to analogous to Taas Yuriakh traded companies, since the shares of Taas are not traded on the market. For the purposes of these
financial statements the Group has reviewed the long-term model of discounted cash flows to asses the change in Taas Yuriakh equity value,
and re-value the financial instruments as required by IFRS. As a result of changes in macroeconomic parameters, primarily the long-term oil price forecast, the equity value of Taas Yuriakh has
increased. This change resulted in a decrease of the put option value, classified as a financial instrument in this interim condensed
consolidated financial from $118.7 million to $96.2 million as of 31 December 2007 and 30 June 2008, respectively. With respect to the call
option, management has not assigned any value to this financial derivative, as the Group is not planning to exercise this option but rather
plans to use funds available to the Group for value creation through the ongoing development of the Dulisma oil field. Furthermore, given
current market conditions, the Group*s ability to sell this option to a third party prior to its expiration in January 2009 is uncertain.
Therefore, for the purposes of this interim condensed consolidated financial report, management have discounted the value of the call option
to nil, from $5.1 million as of 31 December 2007, and recognised a loss on the revaluation of the financial derivative in the Statement of Income. The write down does not result in any loss of
cash-flow for the Group.
Interest expenses increased primarily because of total interest accrued for the $500 million and $130 million Sberbank loans in the amount
of $43.7 million, and the accretion of the issuance costs under the Sberbank loans in the amount of $10.6 million. Interest income increased
during the six months of 2008 as compared to six months of 2007 primarily due to the interest income received from the loans issued to Taas
Yuriakh, and also interest on the promissory notes deposited with Sberbank, which were used to secure interest payments under the $500
million loan agreement.
Operating cash flows before changes in working capital increased because of an increase in net revenues and a decrease in selling, and
general and administrative expenses. However, the total cash generated from operations decreased as compared to the first six months in
2007. This was primarily due to the increase in volumes of crude oil held in stock as of 30 June 2008 compared to 30 June 2007.
For the first six months of 2008 the Group generated $41.4 million from investing activity. This was driven by the receipt of proceeds from
the divestiture of certain subsidiaries located in the Komi Republic of Russian Federation. The total proceeds net of transaction costs
amounted to $93.1 million. Also the Group recognised income of $3.6 million with respect to the sale of the Komi subsidiaries.
Cash used for the purchases of property, plant and equipment increased by $25.7 million. This increase primarily relates to the development
of the Dulisma field and was used for the construction of the pipe-line from the field to the tie-in to ESPO, construction of Central
Processing Facility, as well as drilling and construction of other infrastructure in the field.
Loans issued during the six month period amount to $26.6 million. The majority of this amount represents loans issued to the equity investee
Taas Yuriakh, which was acquired at the end of 2007. The loans were given for the development of the Srednebotuobinskoye field, repayment of
old outstanding loans to third parties and to finance the acquisition of promissory notes to secure interest payments to Sberbank in
accordance with the $600 million loan agreement for the development of Taas Yuriakh.
During the six months ended 30 June 2008 the Group classified certain subsidiaries as assets held for sale. Such classification is governed
by the IFRS if the Company is expecting to realise the benefits from the assets not through ongoing operations, but through the sale of
those assets. At 30 June 2008 following the decision of Group to sell Chepetskoye NGDU during 2008 and an announced sale of CNPSEI, which is
connected to the transaction with the other Komi subsidiaries, these subsidiaries were classified as assets held for sale and recorded as
current assets and current liabilities in the attached financial statements.
Sberbank and liquidity
All of the Company*s bank debt at 30 June and at 30 September 2008 was comprised of two Sberbank loans:
1. $500 million Taas acquisition loan bearing interest of 14% per annum with initial 1-year maturity expiring in November 2008 with the
possibility of a 2-year extension if certain conditions precedent are met. Annual interest payments should be prepaid in the form of the
purchase of Sberbank promissory notes for the amount of $70 million in November 2007, 2008 and 2009. The purchase of promissory notes in
November 2008 to prepay interest under this loan for 2009 is one of the two outstanding conditions for the extension of the maturity of the
loan. The second condition is signing of a loan agreement for a $140 million loan for continued development of Dulisma. The Company
believes it has met all Conditions Precedent to availability of such $140 million loan.
The borrower of this loan is Urals Energy LLC, Russia, and UEPCL*s 35.329% of interest in Tass is pledged under this loan. In addition to
that certain founding shareholders of Urals Energy have pledged to Sberbank 6 535 966 shares of UEPCL, worth $ 22 million at the time of the
pledge. Also, Ashmore*s 10.497% interest in Taas is pledged under this loan.
2. $130 million Dulisma field development loan bearing interest of 14% per annum with initial 1-year maturity expiring in November 2008
with the possibility of a 5-year extension if certain conditions precedent are met. The conditions precedent are the same as for the
maturity extension of the $500 million Taas acquisition loan. The borrower of this loan is ZAO Dulisma, and UEPCL*s 100% of interest in
Dulisma is pledged under this loan. In addition to that, certain founding shareholders of Urals Energy have pledged to Sberbank 8 897 402
shares of UEPCL, worth $28 million at the time of the pledge.
The Company believes it is capable of maintaining its liquidity at an adequate level and meeting its financial obligations if it receives
the incremental $140 million loan and obtains the extension for the other Sberbank loans maturing in November 2008. The Company is targeting
mutually satisfactory result of the negotiations with Sberbank before November 2008. Investors should refer to Note 4 in the notes to the
interim results for further information on the liquidity position of the Company.
Ongoing seasonal deliveries of oil to the export markets from Kolguev (Arcticneft) and Sakhalin (Petrosakh) islands contribute to the
Company*s liquidity. Next shipment of 27,500 tonnes from Petrosakh is scheduled for the first week of October.
Management and Personnel
Effective from 1 May 2008 Bob Maguire resigned as a non-executive director in order to devote more time to his other business interests
which have increased since he joined Urals* Board.
Outlook
Urals Energy is well placed to further build upon its unique position in East Siberia, with its attractive fiscal regime and easy access to
the fast growing Asia-Pacific markets.
Finalising financing arrangements with Sberbank is the near term priority and should ensure that Company liquidity is sound and sources of
financing for the Company*s projects are available.
The Company is continuing with its aggressive development programme at its core assets and is on track for combined Taas and Dulisma revised
production targets of 56,000 bopd in 2012 and 67,000 bopd in 2015.
Urals Energy Public Company Limited
Interim Condensed Consolidated Balance Sheets (unaudited)
(presented in US$ thousands)
30 June 2008 31 December 2007
Note
Assets
Current assets
Cash and cash equivalents 22,504 28,400
Accounts receivable and prepayments 38,879 38,771
Promissory notes receivable 14 30,238 64,581
Current income tax prepayments 824 905
Inventories 40,839 21,464
Non-current assets held-for-sale 6 35,137 133,363
Total current assets 168,421 287,484
Non-current assets
Property, plant and equipment 584,772 540,745
Financial derivatives 11 - 5,103
Intangible assets 1,405 1,816
Other non-current assets 35,219 19,649
Investment in joint venture 907,900 911,433
Loan receivable from joint venture 12, 15 29,869 2,264
Deferred tax assets 2,875 1,925
Total non-current assets 1,562,040 1,482,935
Total assets 1,730,461 1,770,419
Liabilities and equity
Current liabilities
Accounts payable and accrued expenses 29,429 23,397
Income tax payable 3,615 2,079
Other taxes payable 2,300 2,900
Other taxes provision 553 529
Financial instruments 11 96,200 118,657
Short-term borrowings and current 14 624,440 614,031
portion of long-term borrowings
Advances from customers 13 54,381 55,179
Liabilities associated with non-current 6 5,952 27,477
assets held-for-sale
Current liabilities before warrants 816,870 844,249
classified as liabilities
Warrants classified as liabilities 11 644 1,326
Total current liabilities 817,514 845,575
Long-term liabilities
Long-term borrowings - 29
Long term finance lease obligations 1,067 1,164
Dismantlement provision 1,265 1,448
Deferred tax liability 97,200 93,835
Total long-term liabilities 99,532 96,476
Total liabilities 917,046 942,051
Equity
Share capital 7 1,122 990
Share premium 7 635,406 625,111
Difference from conversion of share 7 (113) -
capital into USD
Translation difference 55,601 49,919
Retained earnings 119,632 150,744
Equity attributable to shareholders 811,648 826,764
of Urals Energy Public Company Limited
Minority interest 1,767 1,604
Total equity 813,415 828,368
Total liabilities and equity 1,730,461 1,770,419
Approved on behalf of the Board of Directors on 29 September 2008
______________________________ _____________________
___________________L.Y. _____________________
DyachenkoChief Executive V.G. SidorovichChief
Officer Financial Officer
Urals Energy Public Company Limited
Interim Condensed Consolidated Statement of Income (unaudited)
(presented in US$ thousands)
Six months ended 30 June:
Note 2008
2007
Gross revenues 8 110,749 56,922
Less: excise taxes (195) (539)
Less: export duties (19,912) (11,976)
Revenues 90,642 44,407
Operating costs
Cost of production 9 (70,201) (36,694)
Selling, general and 10 (23,505) (29,910)
administrative expenses
Total operating costs (93,706) (66,604)
Operating (loss) profit (3,064) (22,197)
Finance income (expense)
Interest income 14 3,169 1,450
Interest expense 14 (55,414) (12,531)
Foreign currency gains 9,571 2,846
Gain from disposal of assets 6 3,629 -
held for sale
Loss from joint venture (3,535) -
operations
Change in fair value of 11 18,036 1,112
financial derivatives
Total finance expense (24,544) (7,123)
Loss before tax (27,608) (29,320)
Income tax benefit (charge) (3,418) 265
Loss for the period (31,026) (29,055)
(Loss) profit for the period 86 (12)
attributable to: - Minority
interest
- Shareholders of Urals Energy (31,112) (29,043)
Public Company Limited
Loss per share of profit
attributable to
shareholders of Urals Energy
Public Company Limited:
- Basic loss per share (in US 7 (0.1750) (0.2450)
dollar per share)
- Diluted loss per share (in 7 (0.1750) (0.2450)
US dollar per share)
Weighted average shares
outstanding attributable to:
- Basic shares 177,824,274 118,546,479
- Diluted shares 177,824,274 118,546,479
Urals Energy Public Company Limited
Interim Condensed Consolidated Statements of Cash Flows (unaudited)
(presented in US$ thousands)
Six months ended 30 June:
2008 2007
Cash flows from operating activities
Loss before income tax (27,608) (29,320)
Adjustments for:
Depreciation and depletion 11,144 10,601
Share-based payments 4,297 6,695
Interest income (3,169) (1,450)
Interest expense 55,414 12,531
Foreign currency gains (9,571) (2,846)
Gain from disposal of assets held for sale (3,629) -
Loss from joint venture operations 3,535 -
Change in fair value of financial derivatives (18,036) (1,112)
Other 64 (124)
Operating cash flows before changes in working 12,441 (5,025)
capital
(Increase) in inventories (25,197) (13,823)
(Increase)/decrease in accounts receivables and 25 (1,944)
prepayments
Increase in accounts payable and accrued expenses 17,669 7,079
Increase/(decrease) in advances from customers (854) 15,606
Increase/(decrease) in other taxes payable (1,098) 2,465
Cash generated from operations 2,986 4,358
Interest received 879 579
Interest paid (44,566) (3,208)
Income tax paid (1,995) (876)
Net cash (used in)/generated from operating (42,696) 853
activities
Cash flows from investing activities
Proceeds from sale of subsidiaries 93,125 -
Purchase of property, plant and equipment (59,487) (33,780)
Repayment of promissory notes 35,002 -
Loans issued (26,617) -
Acquisition of joint venture (578) -
Purchase of intangible assets (43) (822)
Net cash (used in)/generated from investing 41,402 (34,602)
activities
Cash flows from financing activities
Proceeds from borrowings, net of borrowing costs 18,000 142,289
Repayment of borrowings (18,000) (65,054)
Repayment of loan organization fees (10,000) -
Cash proceeds from issuance of ordinary shares, 5,892 -
net of associated costs
Purchase of financial derivative - (20,457)
Finance lease principal payments (222) (211)
Cash proceeds from exercise of options 125 -
Net cash (used in)/generated from financing (4,205) 56,567
activities
Effect of exchange rate changes on cash and cash 22 30
equivalents
Net increase/(decrease) in cash and cash (5,477) 22,848
equivalents
Cash and cash equivalents at the beginning of the 28,779 33,082
period
*ash and cash equivalents at the end of the 23,302 55,930
period
Cash and cash equivalents at the end of the 22,504 -
period of the Group, excluding those classified
as held for sale
Cash and cash equivalents at the end of the 798 -
period of the assets classified as held for sale
Urals Energy Public Company Limited
Interim Condensed Consolidated Statements of Changes in Shareholders* Equity (unaudited) (presented in US$ thousands)
Share capital Share premium Difference from Cumulative Retained earnings Equity
attributable Minority interest Total equity
conversion of share Translation to
Shareholders of
capital into USD Adjustment Urals Energy
Public
Company
Limited
Balance at 1 January 2007 633 401,448 - 22,445 37,022
461,548 1,428 462,976
Effect of currency translation - - - 7,849 -
7,849 28 7,877
Loss for the period (29,043)
(29,043) (12) (29,055)
Total recognized income (loss) - - - 7,849 (29,043)
(21,194) 16 (21,178)
Issuance of restricted stock 8 (8) - - -
- - -
Exercise of options - 20 - - -
20 - 20
Share-based payment - 6,675 - - -
6,675 - 6,675
Balance at 30 June 2007 641 408,135 - 30,294 7,979
447,049 1,444 448,493
Balance at 1 January 2008 990 625,111 - 49,919 150,744
826,764 1,604 828,368
Effect of currency translation - - - 19,162 -
19,162 77 19,239
Accumulative translation - - - (13,480) 13,480
- - -
adjustment relating to
disposed subsidiaries
Loss for the period - - - - (44,592)
(44,592) 86 (44,506)
Total recognized income (loss) - - - 5,682 (31,112)
(25,430) 163 (25,267)
Issuance of shares 19 5,998 - - -
6,017 - 6,017
Share-based payment - 4,297 - - -
4,297 - 4,297
Conversion of share capital 113 - (113) - -
- - -
into USD
Balance at 30 June 2008 1,122 635,406 (113) 55,601 119,632
811,648 1,767 813,415
Note 1: Activities
Urals Energy Public Company Limited (*Urals Energy* or the *Company* or *UEPCL*) was incorporated as a limited liability company in Cyprus
on 10 November 2003. Urals Energy and its subsidiaries (the *Group*) are primarily engaged in oil and gas exploration and production in the
Russian Federation and processing of crude oil for distribution on both the Russian and international markets.
The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34, CY-1066, Nicosia, Cyprus. UEPCL*s shares are traded on the AIM
(Alternative Investment Market) Market operated by the London Stock Exchange.
The Group comprises UEPCL and the following main subsidiaries and joint venture:
30 June 2008 31 December 2007
Exploration and production
ZAO Petrosakh (*Petrosakh*) Sakhalin 97.2% 97.2%
ZAO Arcticneft (*Arcticneft*) Nenetsky 100.0% 100.0%
OOO CNPSEI (*CNPSEI*) Komi 100.0% 100.0%
ZAO Chepetskoye NGDU Udmurtia 100.0% 100.0%
(*Chepetskoye*)
OOO Dinyu (*Dinyu*) Komi - 100.0%
OOO Oil Company Dulisma Irkutsk 100.0% 100.0%
(*Dulisma*)
OOO Nizhneomrinskaya Neft Komi - 100.0%
OOO Taas-Yuryakh Neftegazdobycha Sakha-Yakutia 35.3% 35.3%
(*Taas*)
Management company
OOO Urals Energy Moscow 100.0% 100.0%
Note 2: Seasonality
The Group*s producing subsidiaries, ZAO Petrosakh and ZAO Arcticneft, operate on Sakhalin and Kolguev Islands, respectively, and are not
connected to the State owned pipeline monopoly, Transneft. Accordingly, the majority of their production is exported by tanker. Due to
severe weather conditions, shipping tankers can generally only load during the period of June through late December. Outside this period,
oil is either stored or processed and sold on the local market. During the six months ended 30 June 2008, Petrosakh and Arcticneft produced
49.8 and 19.5 thousand tons of crude oil, respectively, and sold 46.4 and 0.3 thousand tons of crude oil and oil products, respectively.
During the six months ended 30 June 2007, Petrosakh and Arcticneft produced 66.9 and 20.4 thousand tons of crude oil, respectively, and sold
51.9 and 0.6 thousand tons of crude oil and oil products, respectively. During 2008 crude oil export sales from ZAO Petrosakh commenced in
June 2008 and crude oil export sales from ZAO Arcticneft commenced in July 2008. Crude oil and oil products in stock at 30 June 2008 were 14.6 thousand tons and 25.7 thousand tons in Petrosakh and
Arcticneft, respectively, and 12.7 thousand tons and 8.8 thousand tons, respectively, at 31 December 2007.
Note 3: Basis of Presentation
The consolidated interim condensed financial information has been prepared in accordance with International Accounting Standard No. 34,
Interim Financial Reporting (*IAS 34*). This consolidated interim condensed financial information should be read in conjunction with the
Company consolidated financial statements as of and for the year ended 31 December 2007 prepared in accordance with International Financial
Reporting Standards (*IFRS*). The 31 December 2007 consolidated balance sheet data has been derived from the audited financial statements.
Use of estimates. The preparation of consolidated interim condensed financial information in conformity with IFRS requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities as of the reporting date and during the reporting period. Estimates have principally been made in respect
to fair values of financial assets and financial liabilities, impairment provisions, asset retirement obligation and deferred income taxes.
Actual results may differ from such estimates.
Functional and presentation currency. The United States dollar (*US dollar or US$ or $*) is the presentation currency for the Group*s
operations as management have used the US dollar accounts to manage the Group*s financial risks and exposures, and to measure its
performance. Financial statements of the Russian subsidiaries are measured in Russian Roubles, their functional currency.
Translation to functional currency. Monetary balance sheet items denominated in foreign currencies have been remeasured using the exchange
rate at the respective balance sheet date. Exchange gains and losses resulting from foreign currency translation are included in the
determination of profit or loss. The US dollar to Russian Rouble exchange rates were 23.46 and 24.55 as of 30 June 2008 and 31 December
2007, respectively.
Translation to presentation currency. The Group*s financial statements are presented in US dollars in accordance with IAS 21 (revised 2003),
The Effects of Changes in Foreign Exchange Rates. The results and financial position of each group entity having a functional currency
different from the presentation currency (the functional currency of none of which is a currency of a hyperinflationary economy) are
translated into the presentation currency as follows:
(i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet. Goodwill
and fair value adjustments arising on the acquisitions are treated as assets and liabilities of the acquired entity.
(ii) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at
the dates of the transactions).
(iii) All resulting exchange differences are recognised as a separate component of equity.
When a subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity, the
exchange differences deferred in equity are reclassified to statement of income.
Reclassifications. Certain reclassifications have been reflected in the six months ended 30 June 2007 amounts to conform to this interim
condensed consolidated financial information. The table below discloses the amounts before and after reclassification. Management believes
that the current presentation is preferable to that presented in prior years.
As originally reported Following reclassification or adjustment
Cost of purchased crude oil 34 767
Unified production tax 14,203 17,268
Depreciation and depletion 7,900 10,601
Wages and salaries including 6,614 10,962
payroll taxes
Materials 3,165 3,697
Other taxes 1,075 1,350
Energy services 486 610
Other 3,217 4,923
Changein finished goods - (13,484)
Total cost of production 36,694 36,694
At 31 December 2007, $22,422 thousand of materials and suppliers intended for construction of fixed assets were reclassified from
inventories to property, plant and equipment. The reclassifications were made to conform to current year presentation.
As originally Following reclassification or adjustment
reported
Inventories 43,886 21,464
Property, plant and equipment 518,323 540,745
Note 4: Going concern
A substantial portion of the Group's consolidated net assets of $813.4 million comprise undeveloped mineral deposits requiring significant
additional investment. The Group is dependent upon external debt to fully develop the deposits and realize the value attributed to such
assets.
During 2007, the Group attracted $630 million in financing from Sberbank in the form of current borrowings (Note 14). As a result, at 30
June 2008 the Group*s current liabilities exceeded current assets by $649.1 million.According to the Group's borrowing agreements with
Sberbank, after the Group meets several technical condition precedents, Sberbank is obliged to extend the maturity of borrowings of $500.0
million by two years from the original maturity and the remaining $130 million loan by 5 years from the original maturity. At the date of
this interim condensed consolidated financial information there are two conditions precedent that remain outstanding; the most significant
is the need for the Group to sign a loan agreement for an additional $140 million loan from Sberbank for the development of Dulisma.
Management is currently negotiating the terms of this agreement with Sberbank. As of the date of preparation of this interim condensed
consolidated financial information, Sberbank has not committed to providing this loan.
In addition to obtaining the additional $140 million loan and extending the maturity of the Sberbank borrowings, management intends to meet
its investing cash flow needs through cash generated from its producing properties and from proceeds from divestiture of certain non-core
assets.
As at the balance sheet date and the date of signing this interim condensed consolidated financial information, there is uncertainty as
to whether the $140 million loan will be granted and thus whether the terms of the $130 million and $500 million loans will be extended.
Further, due to the deterioration in conditions in the credit markets (see note 16) access to immediate alternative sources of long term
funding is problematic. Consequently, there exists a material uncertainty whether the Group can continue as a going concern. Management is
currently discussing the receipt and extension of the aforementioned loans. Based on discussions to date, management considers that the
application of the going concern assumption is appropriate.
Note 5: New accounting pronouncements and interpretations
Except as discussed below, the principal accounting policies followed by the Group are consistent with those disclosed in the financial
statements for the year ended 31 December 2007.
Certain new standards and interpretations have been published that are mandatory for the Group*s accounting periods beginning on or after 1
January 2008 or later periods and which the Group has not early adopted.
Beginning 1 January 2008, the Group has adopted the following interpretations:
� IFRIC 11, IFRS 2 * Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007). IFRIC 11
addresses accounting for certain transactions an entity may enter into to satisfy rights to equity instruments previously granted to
employees. Additionally it provides guidance on accounting for rights to equity instruments of a parent company granted for employees of a
subsidiary in the subsidiary*s separate financial statements;
� IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008). IFRIC 12 gives guidance
on the accounting by operators for public-to-private service concession arrangements;
� IFRIC 14, IAS 19 * The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods
beginning on or after 1 January 2008). IFRIC 14 addresses the measurement of defined benefit plan assets and accounting for an obligation
under a minimum funding requirement.
The adoption of these interpretations, if applicable, had an insignificant effect on the Group*s consolidated interim condensed financial
information.
Recently, the International Accounting Standards Board published the following new standards and interpretations which have not been early
adopted by the Group:
� IAS 1, Presentation of Financial Statements (revised September 2007; effective for annual periods beginning on or after 1 January 2009).
The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all
non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to
present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement
to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity
restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group expects the revised IAS
1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions
and balances;
� IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). IFRS 8 requires an entity to report
financial and descriptive information about its operating segments and specifies how an entity shouldreport such information. The Group is
currently assessing what impact the new standard will have on its consolidated financial statements;
� IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to
measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree*s identifiable net assets) or at
fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations.
The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a
portion of goodwill has been removed. Instead, goodwill will be measured as the difference at acquisition date between the fair value of any
investment in the business held before the acquisition, the consideration transferred and the net assets acquired. Acquisition-related costs
will be accounted for separately from the business combination and therefore recognized as expenses rather than included in goodwill. An acquirer will have to recognize at the acquisition
date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be
recognized in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its
scope business combinations involving only mutual entities and business combinations achieved by contract alone. The Group is currently
assessing what impact the new standard will have on its consolidated financial statements;
� Amendment to IAS 32 and IAS 1, Puttable financial instruments and obligations arising on liquidation (effective from 1 January 2009).
The amendment requires classification as equity of some financial instruments that meet the definition of a financial liability. The Group
is currently assessing what impact the new standard will have on its consolidated financial statements;
� IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July
2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the
non-controlling interests (previously *minority interests*) even if this results in the non-controlling interests having a deficit balance
(the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies
that changes in a parent*s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity
transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date
when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Group is currently
assessing what impact the new standard will have on its consolidated financial statements;
� Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2009). The
amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment
are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the
same accounting treatment. The Group is currently assessing what impact the new standard will have on its consolidated financial
statements;
� IAS 23 (Revised), Recognition of Borrowing Costs. The revision removed the option of immediately recognizing as an expense borrowing
costs that relate to assets that take a substantial period of time to get ready for use or sale. The revised standard applies to borrowing
costs relating to qualifying assets for which the commencement date for capitalization is on or after 1 January 2009. The Group is currently
assessing what impact the new standard will have on its consolidated financial statements;
� Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board
decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments
issued in May 2008 consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The
substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a
subsidiary; possibility of presentation of financial instruments held for trading as noncurrent under IAS 1; accounting for sale of IAS 16
assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating
activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in
accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in
the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS
36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss
category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in
accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further
amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes
have no or minimal effect on accounting. The Group is currently assessing what impact the new standard will have on its consolidated
financial statements;
� Amendment to IFRS 1 and IAS 27, Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (revised May 2008;
effective for annual periods beginning on or after 1 January 2009). The amendment allows first-time adopters of IFRS to measure investments
in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate
financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognized in profit or
loss rather than as a recovery of the investment. The Group is currently assessing what impact the new standard will have on its
consolidated financial statements;
� Amendment to IAS 39, Financial Instruments: Recognition and Measurement. Entities are required to apply the amendment retrospectively for
annual periods beginning on or after 1 July 2009, with earlier application permitted. The amendment clarifies how the principles that
determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The Group
is currently assessing what impact the new standard will have on its consolidated financial statements;
� IFRIC 13, Customer loyalty programmers, effective for annual periods beginning on or after 1 July 2008. The Group is currently assessing
what impact the new interpretation will have on its consolidated financial statements;
� IFRIC 15, Agreements for the construction of real estate, effective for annual periods beginning on or after 1 January 2009. The Group is
currently assessing what impact the new interpretation will have on its consolidated financial statements;
� IFRIC 16, Hedges of a net investment in a foreign operation, effective for annual periods beginning on or after 1 October 2008. The Group
is currently assessing what impact the new interpretation will have on its consolidated financial statements.
Note 6: Non-current assets held for sale
As of 31 December 2007, the assets and liabilities related to Dinyu, Michayuneft, Nizhneomrinskaya Neft and CNPSEI have been presented as
held for sale following the approval of the Group*s Board of Directors in December 2007 to sell these subsidiaries. In April 2008, the Group
completed the sale of Dinyu, Michayuneft and Nizhneomrinskaya Neft for $93.1 million subject to a possible working capital adjustment that
management believes will be insignificant. As a result of the sale of Dinyu, Michayuneft and Nizhneomrinsakya Neft the Group recognized a
gain of $3.6 million. As part of the sale and purchase agreement, CNPSEI was also included in the list of assets to be disposed; however,
this transaction is not complete at the date of this interim condensed consolidated financial information as it is subject to an unfulfilled
condition precedent. Management believes that this transaction will be completed during 2008 and therefore, CNPSEI is classified with assets
held for sale as of 30 June 2008.
In January 2008 the Group implemented a plan to divest ZAO Chepetskoye NGDU, which is expected to be sold during 2008. Therefore, the Group
has also classified Chepetskoye as non-current assets held for sale in this interim condensed consolidated financial information.
Below is a breakdown of assets and liabilities of non-current assets classified as held for sale.
30 June2008 31 December 2007
Cash and cash equivalents 798 379
Accounts receivable and prepayments 932 2,166
Current income tax prepayments 73 288
Inventories 1,313 3,313
Property, plant and equipment 31,643 126,052
Intangible assets 248 262
Deferred tax assets - 726
Other non-current assets 130 177
Total non-current assets held for sale 35,137 133,363
Accounts payable and accrued expenses 739 2,515
Income tax payable - 1
Other taxes payable 1,790 3,099
Advances from customers - 57
Long-term borrowings - 41
Dismantlement provision 494 2,638
Deferred tax liability 2,929 19,126
Total liabilities directly associated with 5,952 27,477
non-current assets classified as held for sale
Note 7: Equity
Redenomination of shares. Following the adoption of the Euro on 1 January 2008 as the official currency of the Republic of Cyprus, replacing
the Cyprus Pound, the Company was obliged to convert its authorised and issued share capital first to Euro and subsequently was permitted to
change to any other approved currency. On 22 January 2008 following the Extraordinary General Meeting, the Company converted its shares
first into Euro and subsequently into US dollars. As a result of this at 22 January 2008 the authorised share capital was changed to $1,890
thousand divided into 300 million shares of $0.0063 each and the issued share capital was changed to $1,103 thousand divided into 175.1
million shares of $0.0063 each. The effect of this redenomination was to increase share capital by $113 thousand.
At 30 June 2008 authorised share capital was $1,890 thousand divided into 300 million shares of $0.0063 each and issued share capital was
$1,122 thousand divided into 178.1 million shares of $0.0063 each.
Shares issued for cash. In January 2008, Morgan Stanley, the Group*s nominated adviser of a private placement in December 2007, executed an
option for 5% of overallotment of UEPCL shares in the amount of 1,643,000 shares. Proceeds from the overallotment issuance totalled $5.9
million net of transaction costs of $0.3 million.
Date of Grant Number of shares Share capital Share premium Difference from
(thousand of shares) conversion of share
capital into USD
Balance at 1 January 2007 175,120 990 625,111 -
Shares issued for cash 1,643 10 5,882 -
Shares issued under restricted 754 5 (5) -
stock plans
Early vested shares issued 460 3 (3) -
under restricted stock plans
Shares issued under option 167 1 124 -
agreement
Share-based payment under - - 4,297 -
restricted stock plans
Conversion of share capital - 113 - (113)
into USD
Balance at 30 June 2008 178,144 1,122 635,406 (113)
Restricted Stock Plan. In February 2006, the Group*s Board of Directors approved a Restricted Stock Plan (the *Plan*) authorizing the
Compensation Committee of the Board of Directors to issue restricted stock of up to five percent of the outstanding shares of the Group.
Restricted stock grants entitle the holder to shares of stock for no consideration upon vesting. There are no performance conditions beyond
continued employment with the Group. Upon adoption, the Group granted restricted stock awards in the amount of 1,332,355 shares of which
during 2007 145,952 shares were forfeitured. Also, of the initially granted in 2007 restricted stock of 3,075,393 shares, 75,275 granted
shares were cancelled as a result of retirement of certain employees of the Company.
In March 2008, the Group substantially granted an additional 2,281,677 shares of restricted stock.
The total costs associated with the restricted stock granted during the six months ended 30 June 2008, during the years ended 31 December
2007 and 2006, were $7.9 million, $20.1 million and $5.9 million, respectively, based upon the market value of the Group*s shares on the
date of grant. Such amounts are being recognized over the vesting period of the respective awards. During the six months ended 30 June 2008
and 2007, $4.3 million and $6.7 million, respectively, of expense related to share-based payments were recognized in the consolidated
statements of income. Such expense for the six months ended 30 June 2007 includes $3.0 million of expense related to restricted stock
granted to the Group*s former chief executive officer, who resigned in April 2007. As part of the former chief executive officer*s severance
package, all unvested restricted stock grants were immediately vested.
As of 30 June 2008, the number of unvested restricted stock grants and their respective vesting dates are presented in the table below.
Date of Grant January 2008 January 2009 January 2010 January 2011 Total
Total Restricted Stock 753,588 798,931 715,530 45,344 2,313,393
Granted as of 31 December 2007
Restricted Stock Granted in - 760,559 760,559 760,559 2,281,677
2008
Issuance in 2008 (753,588) - - - (753,588)
Total Restricted Stock - 1,559,490 1,476,089 805,903 3,841,482
Granted as of 30 June 2008
Share options granted. In September 2005, the Group granted options to purchase 20,000 shares at an exercise price of GBP 2.40 per share to
one of its non-executive directors. These options were granted for zero consideration. All of these options remain unexercised. The fair
value of this option was evaluated at $7 thousand. The options vest on 30 September 2006, 2007 and 2008 in equal parts and expire on 30
September 2009. No option had been exercised at the date of this interim condensed consolidated financial information.
During 2005, the Group granted a share-based award to one of its officers who is no longer with the Group. Under the award, the officer had
the option to purchase a certain number of the Group*s shares at a share price equal to $131.0 million divided by the number of the Group*s
shares that are issued and outstanding at both 1 August 2006 and 1 August 2007. The option is in two parts comprised of the number of shares
that can be purchased for a payment of $125 thousand on 1 August 2006 and of $125 thousand on 1 August 2007, which are the respective
vesting dates of the two parts of the award. The Group estimated the total fair value of the award to be $120 thousand.
During the six months ended 30 June 2008, 167 thousand shares were issued as a result of execution of the award. The option was executed in
full in February 2008, when the Group issued 167,000 shares to the former officer. Overall the Group issued 280 thousand shares in
accordance with that plan.
Earnings per share. For the six months period ended 30 June 2008 and 30 June 2007, basic and diluted earnings per share and the
corresponding weighted average shares outstanding used in each calculation are identical as all potentially dilutive instruments are
antidilutive for the periods presented.
Note 8: Revenues
Six months ended 30 June:
2008 2007
Crude oil
Export sales 64,267 29,769
Domestic sales (Russian Federation) 37,913 18,495
Petroleum (refined) products * domestic sales 7,639 8,313
Trading commission 190 -
Other sales 740 345
Total gross revenues 110,749 56,922
Note 9: Cost of Production
Six months ended 30 June:
2008 2007
Cost of purchased crude oil 28,650 767
Unified production tax 25,298 17,268
Depreciation and depletion 11,144 10,601
Wages and salaries including payroll taxes 12,737 10,962
Materials 3,226 3,697
Other taxes 1,632 1,350
Energy services 734 610
Other 6,526 4,923
Changein finished goods (19,746) (13,484)
Total cost of production 70,201 36,694
Note 10: Selling, General and Administrative Expenses
Six months ended 30 June:
2008 2007
Wages and salaries 7,707 13,362
Share-based payments 4,297 6,695
Audit and professional consultancy fees 3,229 3,114
Transport, loading and storage services 2,673 3,057
Office rent and other expenses 1,243 1,566
Trip expenses and communication services 849 364
Other 3,507 1,752
Total selling, general and administrative 23,505 29,910
expenses
Included within wages and salaries and share-based payments for the six months ended 30 June 2007 are $5.3 million and $2.5 million,
respectively, related to severance costs for a key executive (Note 15). There were no such expenses incurred during the six months ended 30
June 2008.
Note 11: Financial derivatives and financial instruments
30 June 2008 31 December 2007
Non-current assets
Financial derivatives - 5,103
Current liabilities
Financial instruments 96,200 118,657
Warrants classified as liabilities 644 1,326
As part of acquisition of Taas, which was completed in December 2007 the Company also acquired a call option from the Taas sellers and wrote
a put option to an affiliate of the Ashmore Investment Management Limited (*Ashmore*) a Taas shareholder, for additional interests in Taas
of 4.182% and 10.479%, respectively. The call option to acquire the additional 4.182% of Taas is exercisable by the Company in January 2009,
with a strike price of $70.0 million, plus 11.95% per annum from the Taas closing date to the date of payment of the call option price,
payable in cash. The put option is exercisable by the Ashmore affiliate over the period from December 2008 to December 2012. It provides the
Ashmore affiliate with a right to sell a 10.479% stake in Taas to the Company either: 1) for cash consideration of $175.0 million plus
interest accrued at 14% until the exercise date, or, 2) at the holder*s discretion, the number of shares of Urals Energy equal to $83.5
million plus 14% interest for the 15 day trading period immediately following the Taas deal announcement in November 2007 (the *Valuation Period*), such shares to be valued at an average of the
closing mid-market prices for the Valuation Period; plus a cash amount that is equal to the exercise date value of the number of Urals
Energy shares that are determined as having been equal to $91.5 million plus 14% interest for the Valuation Period, again valued at an
average of the closing mid-market prices for the Valuation Period.
The fair values of the call and put options as at the valuation date of 31 December 2007 were estimated at $5.1 million and $118.7 million,
respectively, based on the equity value derived from the long-term discounted cash flows model by applying certain parameters attributable
to analogous to Taas since the shares of Taas are not traded on the market.
For the purposes of this interim condensed consolidated financial information the Group has reviewed the long-term model of discounted cash
flows to asses the change in Taas equity value and revalue the financial instruments as required by IFRS. As a result of changes in
macroeconomic parameters, primarily long-term oil price forecast, the equity value of Taas has increased.
This change resulted in a decrease of the put option value classified as financial instrument in this interim condensed consolidated
financial information from $118.7 million to $96.2 million as of 31 December 2007 and 30 June 2008, respectively. With respect to the call
option, management has not assigned any value to this financial derivative, as the Group is not planning to exercise this option but rather
plans to use funds available to the Group for value creation through the ongoing development of the Dulisma oil field. Furthermore, given
current market conditions, the Group*s ability to sell this option to a third party prior to its expiration in January 2009 is uncertain.
Therefore, for the purposes of this interim condensed consolidated financial information, management have discounted the value of the call
option to nil, from $5.1 million as of 31 December 2007, and recognised a loss on the revaluation of the financial derivative in the
statement of income. The write down does not result in any loss of cash-flow for the Group.
The net change in these financial instruments value, as well as change in the value of the Warrants classified as liabilities, amounted to
$18.0 million, which is recorded as a gain from changes in the fair value of financial derivatives in the statement of income.
Note 12: Loans receivable from joint venture
Pursuant to the Sberbank acquisition loan (Note 14), the Group provided long-term financing in the amount of $28.6 million to Taas (Note
15). The loans are unsecured, bear interest of 12% and mature in February 2015. These loans were part of the shareholders agreement and were
provided by all shareholders in the proportion to holdings at the date of the transaction. These funds were used for the purchase of
promissory notes, payment for loan organization fees, repayment of other pre-existing loans and financing of development activity. As of 30
June 2008 all loans granted are fully performing. The fair value of the loans approximates the carrying amount of the loans at the balance
sheet dates.
Note 13: Advances from customers
30 June 2008 31 December2007
Petraco 46,804 32,011
Galaform 7,480 22,407
Other 97 761
Total advances from customers 54,381 55,179
Petraco Revolving Prepayment Agreement. In July 2007, the Group entered into a five year revolving prepayment agreement with Petraco. Under
the terms of the agreement, prepayments shall be made in one or more advances against specified future deliveries of agreed volumes of crude
oil to be sold to Petraco. The total aggregate amount of all prepayments outstanding at any given time shall not exceed 70% of the
estimated value of the aggregate estimated deliveries under the off-take contract for the next succeeding eight month period or a maximum
$50.0 million. Each individual prepayment advance must be reimbursed by the specified future deliveries which must occur within eight
months from the date of the relevant advance. All prepayment amounts outstanding as of 1 January 2009 shall be reimbursed in full before
any additional prepayments may be requested or made, provided that following the full reimbursement of such outstanding prepayments,
additional prepayments may be requested and made thereafter through to the expiration of the agreement in July 2012. The agreement does not have any financial covenants but does contain cross-default
provisions in the event the Group is in default of any of its other borrowing agreements. Interest on the prepayments accrues at LIBOR plus
4.75% on prepayments for which the related volumes have not been delivered, and LIBOR plus 1% on prepayments for which the related volumes
have been delivered, in order to mirror normal commercial payment terms. Subsequent to the year-end the maximum borrowing base was
increased to $60.0 million, the period of the deliveries was reduced to six months and the interest rate was increased by 25 basis points
and amounted to LIBOR plus 5%.
An additional drawdown of $10.0 million from Petraco was received in April 2008.
Galaform domestic crude oil prepayment agreement. In November 2007, the Group received an interest free prepayment from a domestic
off-taker, Galaform, for the amount of RR 550.0 million ($22.4 million). The prepayment was secured with the domestic crude oil deliveries
from the resources of Dinyu, CNPSEI, Michayuneft, Nizhneomrinskaya Neft and Chepetskoye NGDU and remains secured with domestic crude oil
deliveries from CNPSEI and Chepetskoye NGDU. The prepayment is due to be settled starting from November 2008 and should be fully repaid in
April 2009.
Following the sale of three of the five properties, the Group repaid to Galaform RR 374.6 million ($14.9 million) of prepayments for crude
oil deliveries outstanding at 31 December 2007 thus reducing the balance down to RR 175.4 million ($7.5 million).
Note 14: Borrowings
Short-term borrowings. Short-term borrowings were as follows at 30 June 2008 and 31 December 2007:
30 June 2008 31 December 2007
Sberbank acquisition loan 500,000 500,000
- loan organization fees (5,183) (14,678)
Sberbank field development loan 130,000 130,000
- loan organization fees (504) (1,415)
Other 127 124
Total short-term borrowings 624,440 614,031
Sberbank acquisition loan. In December 2007, the Group entered into a loan agreement with the Savings Bank of the Russian Federation
(*Sberbank*) in the amount of $500.0 million to finance the acquisition of its participation interest in Taas. The loan bears interest of
14% per annum payable monthly. The interest payments are secured with interest bearing promissory notes acquired from Sberbank that will be
redeemed as payment for interest. According to the loan agreement, the loan matures in November 2008. However, if the Group meets certain
technical conditions, the loan can be extended until November 2010, repayable in full in one installment. The Group incurred loan
organisation fees of $6.250 million (or 1.25% of the loan amount), which are recorded net against the loan balance in the consolidated
balance sheet and which are being amortised over the life of the loan using the effective interest method. The Group will be subject to a
3.9% penalty for any early repayments of the loan.
Additionally, the Group contracted to pay $10.0 million in fees to Ashmore in exchange for a pledge of 10.5% of Ashmore*s share in Taas to
Sberbank in support of the Group*s acquisition loan. The payment was rendered in 2008. The Group also pledged its stakes in Petrosakh and
Arcticneft to Ashmore to secure the obligations of the Group under the put option described in Note 11, to protect against a default under
the Sberbank $500 million acquisition loan due to Ashmore*s pledge of its stake in Taas to secure such acquisition loan and to protect
against other material adverse events affecting the Group. The Group may secure the release of the pledge over Articneft and Petrosakh in
favour of Ashmore by either securing the release of Ashmore*s pledge of its shares in Taas that secure the acquisition loan or by paying
Ashmore the amount called for under the put option agreement..
The Group guaranteed its obligations under the Sberbank loan by pledging its interest in Taas. Additionally, other shareholders of Taas and
of the Group have pledged a portion of their shares in Taas and in UEPCL as collateral for the Group*s obligations under the loan.
Also, according to the loan agreement the Group has to secure interest payment for the next year by Sberbank promissory notes, which should
be acquired by the Group and pledged in the deposit with Sberbank. In November 2007 the Group acquired $70.0 million of promissory of which
$5.8 million were released in December 2007 and $35.0 million through the period from January to June 2008 to make a repayment of interest
on due dates. The outstanding promissory notes receivable was $30.2 million as at 30 June 2008 which included $29.2 million of principal
amount of promissory notes and $1.0 million of interest receivable. The promissory notes are considered to be fully performing as of the
date of this interim condensed consolidated financial information.
Sberbank Dulisma field development loan. In November 2007, the Group entered into a loan agreement with Sberbank in the amount of $130.0
million bearing interest of 14% per annum payable quarterly and maturing in November 2008. The Group incurred loan organization fees of
$1.625 million (1.25% of the facility amount) which are recorded net against the loan balance in the consolidated balance sheet and which
are being amortised over the life of the loan using the effective interest method. If the Group meets certain technical conditions, the loan
can be extended for six years with 15 equal quarterly principal installments payable starting May 2010.
The Group pledged 100% of its shares in Dulisma as collateral for its obligations under the loan. Additionally, major shareholders of the
Group agreed to pledge UEPCL shares to Sberbank as additional collateral.
On 16 September 2008 the Group received a notification from Sberbank that the market value of UEPCL shares pledged as collateral for the
Dulisma field development loan and the Taas acquisition loan had fallen below the threshold established in the loan agreement. Sberbank has
requested additional UEPCL shares be pledged to make up for the shortfall. Management are currently negotiating the matter with Sberbank and
are confident a resolution can be reached with no adverse impact to the Group.
Management believes that the Group was in compliance with all covenants in the existing loan agreements as of the date of this interim
condensed consolidated financial information.
Evrofinance Mosnarbank. In February 2008 the Group borrowed $18.0 million from the Evrofinance Mosnarbank to fulfil its obligation to make a
loan to Taas in the amount of $18.0 million in accordance with the Joint-venture agreement connected to the acquisition. The loan bore 12%
interest and was to mature in August 2008. In May 2008, the loan was repaid in full.
Weighted average interest rate. The Group*s weighted average interest rates on short-term borrowings were 14.0%and 12.1% for the six months
ended 30 June 2008 and 2007, respectively.
Interest expense and income. Interest expense and income for the six months ended 30 June 2008 and 2007 comprised the following:
Six months ended 30 June:
2008 2007
Short-term borrowings
Sberbank
- interest at coupon rate 43,666 -
- accretion of issuance costs 10,649 -
Other short-term borrowings - 56
Evrofinance
- interest at coupon rate 408 -
Total interest expense associated with short-term 54,723 56
borrowings
Long-term borrowings
BNP Paribas Subordinated Loan
- interest at coupon rate - 628
- commitments and break up cost - 26
- accretion of issuance costs and discount - 1,694
associated with warrants
BNP Paribas Reserve Based Loan Facility
- interest at coupon rate - 2,176
- commitments - 348
- accretion of issuance costs - 2,127
Goldman Sachs
- interest at coupon rate - 5,567
- accretion of issuance costs - 457
Total interest expense associated with long-term - 13,023
borrowings
Finance leases 128 136
Less capitalised borrowing costs (2,367) (1,267)
Change in dismantlement provision due to passage 73 218
of time
Interest on advance from Petraco Oil Company 2,803 316
Limited
Other interest 54 49
Total interest expense 55,414 12,531
Interest income
JP Morgan Liquidity Fund - (76)
Related party loans issued (Note 15) (1,642) (67)
Sberbank promissory notes (1,384) -
Bank deposit (41) (1,307)
Other (102) -
Total interest income (3,169) (1,450)
Total finance costs 52,245 11,081
Note 15: Balances and Transactions with Related Parties
For the purposes of this interim condensed consolidated financial information, parties are considered to be related if one party has the
ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial
or operational decisions as defined by IAS 24, Related Party Disclosures, which also treats key management personnel as related parties. In
considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Balances and transactions with related parties.
Six monthsended 30 June:
2008 2007
Interest incomefromTaas, net (1,294) (3)
Interest income, net (348) (64)
Rental fees paid 35 -
As of:
30 June 2008 31 December 2007
Loans issued to Taas 28,573 2,261
Interest receivable from Taas 1,296 3
Loans receivable 5,554 5,372
Interest receivable 695 347
Accounts and notes receivable 59 48
Advances from and payables to related parties (74) (113)
Accounts receivable and accounts payable. The Group purchases certain geological and other technical services from and leases office space
to companies owned by directors and management. The resulting accounts receivable and payable balances are unsecured and are expected to be
settled in cash or, in the case of accounts receivable, by the provision of services.
Loans and interest receivable. Included in loans and interest receivable at 30 June 2008 and 31 December 2007 were loans receivable of
$4,377 thousand and $3,793 thousand, respectively from the Group*s senior management team. Subsequent to 30 June 2008 of the $4,377
thousand, $305 thousand of principal and interest was repaid.
Within loans receivable the largest part relates to a short-term loan provided to one of the senior managers of the company in the amount of
$4,022 thousand, including accrued interest of $292 thousand. The loan bears 15% interest and matures on 30 September 2008. The loan is
secured against real estate owned by that employee.
Additionally, loans receivable include amounts due by OOO Komineftegeophysica in the amount of $866 thousand, where major shareholders of
the Group hold the majority of shares. The loans bear interest from 5% to 15%. These loans are not secured, however, in the ordinary course
of business and on market terms Komineftegeophysica provides geological and geophysical services to the Group companies.
Other loans and receivable balances are short-term in the nature, immaterial individually and expire during 2008.
Compensation to senior management. The Group*s senior management team comprises 14 people whose compensation totalled $7,833 thousand
and $16,049 thousand for the six months periods ended 30 June2008 and 2007, respectively, including salary and bonuses of $3,536 thousand
and $9,374 thousand respectively, and stock compensation of $4,297 thousand and $6,675 thousand, respectively, and no other compensation was
paid for both periods.
Resignation of key executive. In April 2007, one of the Group*s key executives resigned. In connection with his resignation, the executive
received termination benefits totalling approximately $7.8 million, comprising approximately $2.5 million of expense associated with
accelerating the vesting of 430,140 shares of restricted stock originally scheduled to vest between 2007 and 2010 and termination payments
and other miscellaneous cash benefits totalling approximately $5.3 million.
The expenses associated with accelerated vesting and the other miscellaneous cash benefits were recorded within share-based payments and
wages and salaries in selling, general and administrative expenses in the interim condensed consolidated financial information (Note 10).
There were no such expenses incurred during six months ended 30 June 2008.
Note 16: Contingencies, Commitments and Operating Risks
Operating environment. The Russian Federation continues to display some characteristics of an emerging market economy. These characteristics
include, but are not limited to, the existence of a currency that is not yet fully convertible in most countries outside of the Russian
Federation, and relatively high inflation. The tax and customs legislation within the Russian Federation is subject to varying
interpretations and changes that can occur frequently.
The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary
measures undertaken by the Government, together with tax, legal, regulatory, and political developments.
Sales and royalty commitments. In accordance with the sale and purchase agreement to acquire Petrosakh, the Group agreed to pay a perpetual
royalty to the previous shareholders of $0.25 per ton of crude oil produced from the currently unproved off-shore licensed area. There has
been no production from the area since acquisition date.
Oilfield licenses. The Group is subject to periodic reviews of its activities by governmental authorities with respect to the requirements
of its oil field licenses. Management of the Group correspond with governmental authorities to agree on remedial actions, if necessary, to
resolve any findings resulting from these reviews. Failure to comply with the terms of a license could result in fines, penalties or license
limitations, suspension or revocations. Management believes any issues of non-compliance will be resolved through negotiations or corrective
actions without any materially adverse effect on the financial position or the operating results of the Group.
Management believes that proved reserves should include quantities, which are expected to be produced after the expiry dates of the Group*s
production licenses. These licenses expire between 2008 and 2067, with the most significant licenses expiring between 2012 and 2067.
The principal licenses of the Group and their expiry dates are:
Field License holder License expiry date
Okruzhnoye Petrosakh 2012
Peschanozerskoye Arcticneft 2067
Dulisminskoye Dulisma 2019
Srednebotuobinskoye Taas-Yuryakh Neftegazdobycha 2016
Kurungsky Taas-Yuryakh Neftegazdobycha 2032
Management believes the licenses may be extended at the initiative of the Company and management intends to extend such licenses for
properties expected to produce subsequent to their license expiry dates.
Management currently does not believe that any of its significant exploration or production licenses are at risk of being withdrawn by the
licensing authorities. Additionally, management currently plans to complete all the required exploration or development work, as
appropriate, within the timetables established in the licenses.
Taxation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently.
Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant
regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more
assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have
not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal
periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain
circumstances reviews may cover longer periods.
Management believes that its interpretation of the relevant legislation is appropriate and the Group's tax, currency and customs positions
will be sustained. Where management believes it is probable that a position cannot be sustained, an appropriate amount has been accrued for
in this interim condensed consolidated financial information.
Insurance policies. The Group insured all of its major assets, including oil in stock, plant and equipment, transport and machinery with a
total limit of $110.1 million. Also, a liability insurance policy, covering property, plant and equipment, hazardous objects, including
environmental liability, was put in place with a total limit of $10.5 million and directors and officers liability with total limit up to
$100.0 million. Staff and personal insurance includes casualty, medical and travel insurance for losses of up to $4.3 million. The
associated expenses are included within selling, general and administrative expenses in the condensed consolidated statement of income.
Restoration, rehabilitation and environmental costs. The Group companies have operated in the upstream and refining oil industry in the
Russian Federation for many years and its activities have had an impact on the environment. The enforcement of environmental regulations in
the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group
periodically evaluates its obligation related thereto. The outcome of environmental liabilities under proposed or future legislation, or as
a result of stricter enforcement of existing legislation, cannot reasonably be estimated at present, but could be material. Under the
current levels of enforcement of existing legislation, management believes there are no significant liabilities in addition to amounts which
are already accrued and which would have a material adverse effect on the financial position of the Group.
Legal proceedings. The Group is involved in a number of court proceedings (both as a plaintiff and a defendant) arising in the ordinary
course of business. In the opinion of management, there are no current legal proceedings or other claims outstanding, which could have a
material effect on the result of operations or financial position of the Group and which have not been accrued or disclosed in this interim
condensed consolidated financial information.
Recent volatility in global financial markets. Since the second half of 2007 there has been a sharp rise in foreclosures in the US subprime
mortgage market. The effects have spread beyond the US housing market as global investors have re-evaluated their exposure to risks,
resulting in increased volatility and lower liquidity in the fixed income, equity, and derivative markets. The volume of wholesale financing
has significantly reduced since August 2007. Such circumstances may affect the ability of the Group to obtain new borrowings and refinance
its existing borrowings at terms and conditions that applied to similar transactions in recent periods. Debtors of the Group may also be
affected by the lower liquidity situation which could in turn impact their ability to repay their amounts owed. Management is unable to
reliably estimate the effects on the Group's financial position of any further possible deterioration in the liquidity of the financial
markets and their increased volatility.
Other capital commitments. At 30 June 2008, the Company had no significant contractual commitments for capital expenditures.
Note 17: Financial Risks
The accounting policies for financial instruments have been applied to the line items below:
At 30 June2008 At 31 December2007
Financial assets
Investments held-to-maturity: current
assets
Promissory notes 30,238 64,581
Total investments held-to-maturity 30,238 64,581
Loans and receivables: current assets
Cash and cash equivalents 22,504 28,400
Trade receivables 10,340 8,846
Total loans and receivables: current 32,844 37,246
assets
Measured at fair value * non-current
assets
Financial derivatives - 5,103
Total non-current assets measured at fair - 5,103
value
Loans and receivables: non-current assets
Loans receivable: non-current 29,869 2,264
Total loans and receivables 29,869 2,264
Financial liabilities
Measured at fair value * current
liabilities
Derivative financial instruments 96,200 118,657
Warrants classified as liabilities 644 1,326
Total current liabilities measured at 96,844 119,983
fair value
Measured at amortized cost: current
liabilities
Trade and other payables 28,552 22,362
Short-term borrowings and current portion 624,440 614,031
of long-term borrowings
Total current liabilities measured at 652,992 636,393
amortized cost
Measured at amortized cost: non-current
liabilities
Long-term borrowings - 29
Total long-term liabilities measured at - 29
amortized cost
Financial risk management objectives and policies. In the ordinary course of business, the Group is exposed to market risks from fluctuating
prices on commodities purchased and sold, credit risk, liquidity risk, currency exchange rates and interest rates. Depending on the degree
of price volatility, such fluctuations in market price may create volatility in the Group*s financial results. As an entity focused upon the
exploration and development of oil and gas properties, the Group*s overriding strategy is to maintain a strong financial position by
securing access to capital to meet its capital investment needs.
The Group*s principal risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk
limits and controls, and to monitor risks and adherence to these limits. Risk management policies and systems are reviewed regularly to
reflect changes in market conditions and the Group*s activities.
Market risk. Market risk is the risk that changes in market prices and rates, such as foreign exchange rates, interest rates, commodity
prices and equity prices, will affect the Group*s financial results or the value of its holdings of financial instruments. The primary
objective of mitigating these market risks is to manage and control market risk exposures. The Group is exposed to market price movements
relating to changes in commodity prices such as crude oil, gas condensate, petroleum products and natural gas (commodity price risk),
foreign currency exchange rates, interest rates, equity prices and other indices that could adversely affect the value of the Group*s
financial assets, liabilities or expected future cash flows.
(a) Foreign exchange risk
The Group is exposed to foreign exchange risk arising from various exposures in the normal course of business, primarily with respect to the
US dollar. Foreign exchange risk arises primarily from commercial transactions, and recognized assets and liabilities when such
transactions, assets and liabilities are denominated in a currency other than the functional currency.
The Group*s overall strategy is to have no significant net exposure in currencies other than the Russian rouble or the US dollar.
The carrying amounts of the Group*s financial instruments are denominated in the following currencies (all amounts expressed in thousands of
US dollars at the appropriate 30 June 2008 and 31 December 2007 exchange rates):
At 30 June 2008 Russian rouble USdollar GB pound Euro CY pound Total
Financial assets
Non-current
Loans receivable - 29,869 - - - 29,869
Current
Cash and cash equivalents 7,703 14,730 65 6 - 22,504
Accounts receivable 4,030 6,310 - - - 10,340
Promissory notes - 30,238 - - - 30,238
Financial liabilities
Current
Accounts payable and accrued (14,932) (13,620) - - - (28,552)
expenses
Financial derivatives - (96,200) - - - (96,200)
Short-term borrowings and (66) (624,374) - - - (624,440)
current portion of long-term
borrowings
Warrants classified as - - (644) - - (644)
liabilities
Net exposure at 30 June 2008 (3,265) (653,047) (579) 6 - (656,885)
At 31 December 2007 Russian rouble USdollar GB pound Euro CY pound Total
Financial assets
Non-current
Financial derivatives - 5,103 - - - 5,103
Loans receivable - 2,264 - - - 2,264
Current
Cash and cash equivalents 2,968 5,414 17,948 2,064 6 28,400
Accounts receivable 3,079 5,767 - - - 8,846
Promissory notes - 64,581 - - - 64,581
Financial liabilities
Non-current
Long-term borrowings - - (29) - - (29)
Current
Accounts payable and accrued (3,169) (19,193) - - - (22,362)
expenses
Derivative financial - (118,657) - - - (118,657)
instruments
Short-term borrowings and (63) (613,968) - - - (614,031)
current portion of long-term
borrowings
Warrants classified as - - (1,326) - - (1,326)
liabilities
Net exposure at 31 December 2,815 (668,689) 16,593 2,064 6 (647,211)
2007
(b) Commodity price risk
The Group*s overall commercial trading strategy in crude oil and related products is centrally managed. Changes in commodity prices could
negatively or positively affect the Group*s results of operations.
The Group sells all its crude oil and petroleum products under spot contracts. Crude oil sold internationally is based on benchmark
reference crude oil prices of Brent dated, plus or minus a discount for quality and on a transaction-by-transaction basis for volumes sold
domestically. As a result, the Group*s revenues from the sales of liquid hydrocarbons are subject to commodity price volatility based on
fluctuations or changes in the crude oil benchmark reference prices. Presently, the Group does not use commodity derivative instruments for
trading purposes to mitigate price volatility.
(c) Cash flow and fair value interest rate risk
The Group is not significantly exposed to cash flow and fair value interest rate risk on its financial liabilities as most of its financial
liabilities bear fixed rates of interest. However, changes in market interest rates impact the fair values of fixed rate financial
liabilities or future cash flows in the case of variable financial liabilities. Management does not have a formal policy on the proportion
of the Group*s exposure to interest rate risk on its financial liabilities.
At 30 June 2008 and 31 December 2007, the Group*s interest rate profiles for interest-bearing financial liabilities were:
30 June2008 At 31 December 2007
At variable rate - -
At fixed rate 624,440 614,060
Total interest bearing financial 624,440 614,060
liabilities
To the degree possible, the Group centralizes the cash requirements and surpluses of controlled subsidiaries and the majority of their
external financing requirements, and applies, on its consolidated net debt position, a funding policy to optimize its financing costs and
manage the impact of interest-rate changes on its financial results in line with market conditions.
Credit risk. Credit risk refers to the risk exposure that a potential financial loss to the Group may occur if a counterparty defaults on
its contractual obligations.
Credit risk is managed on a Group level and arises from cash and cash equivalents, including short-term deposits with banks, promissory
notes, loans issued as well as credit exposures to customers, including outstanding trade receivables and committed transactions. Cash and
cash equivalents are deposited only with banks that are considered by the Group at the time of deposit to minimal risk of default.
The Group*s domestic trade and other receivables consist of a large number of customers, spread across diverse industries and geographical
areas. All of the Group*s export crude oil sales are made to the only customer Petraco, with whom the Group was trading for the past several
years (see Note 13). A majority of domestic sales of petroleum products are made on a prepayment basis. Although the Group does not require
collateral in respect of trade and other receivables, it has developed standard credit payment terms and constantly monitors the status of
trade receivables and the creditworthiness of the customers. The maximum exposure to credit risk is represented by the carrying amount of
each financial asset exposed to credit risk.
Liquidity risk. Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group*s
approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both
normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group*s reputation. In managing its liquidity
risk, management aims to maintain adequate cash reserves and debt facilities, continuously monitoring forecast and actual cash flows and
striving to balance cash from operations with the maturity profiles of financial assets and liabilities.
The Group prepares various financial plans (monthly, quarterly and annually) to ensure that the Group has sufficient cash on demand to meet
expected operational expenses, financial obligations and investing requirements for a period of 30 days or more. The Group has a number of
short term facilities that may be converted into long term debt at the Group's discretion after the completion of certain technical
condition precedents. The conversion of these loans is in accordance with existing loan agreements - this matter is discussed further in
Note 4. Additionally, the Group may consider selling some of the non-core assets or issue additional equity to fund future development or
acquisitions.
The following tables summarize the maturity profile of the Group*s financial liabilities based on contractual undiscounted payments,
including interest payments:
At 30 June 2008: Less than 1 year Between 1 and 2 Between 2 and 5 years After 5 years Total
years
Debt at fixed rate
Principal 630,127 - - - 630,127
Interest 727 - - - 727
Warrants classified as 644 - - - 644
liability
Financial instruments 96,200 - - - 96,200
Accounts payable and accrued 27,825 - - - 27,825
expenses
Total financial liabilities 755,523 - - - 755,523
At 31 December 2007 Less than 1 year Between 1 and 2 Between 2 and 5 years After 5 years Total
years
Debt at fixed rate
Principal 630,124 29 - - 630,153
Interest 967 - - - 967
Warrants classified as 1,326 - - - 1,326
liability
Financial instruments 118,657 - - - 118,657
Accounts payable and accrued 21,395 - - - 21,395
expenses
Total financial liabilities 772,469 29 - - 772,498
Capital management. The primary objectives of the Group*s capital management policy is to ensure a strong capital base to fund and sustain
its business operations through prudent investment decisions and to maintain investor, market and creditor confidence to support its
business activities.
For the capital management, the Group manages and monitors its liquidity on a corporate-wide basis to ensure adequate funding to
sufficiently meet group operational requirements. The Group controls all external debts at the Parent level, and all financing to Group
entities for the operating and investing activity is facilitated through inter-company loan arrangements, except for the specific project
financing, which are taken on the subsidiary level.
There were no changes to the Group*s approach to capital management during the reporting period.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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