TIDMUEN
RNS Number : 1387I
Urals Energy Public Company Limited
22 November 2018
Dissemination of a Regulatory Announcement that contains inside
information according to REGULATION (EU) No 596/2014 (MAR).
22 November 2018
Urals Energy Public Company Limited
("Urals Energy", the "Company" or the "Group")
Initial findings from accountants' review and other updates
Further to the Company's recent announcements, the board of
Urals Energy (the "Board"), the independent exploration and
production company with operations in Russia, provides the
following updates.
Initial findings from the accountants' review
The initial stage of the independent review of transactions by
Urals Energy's 98.56% owned subsidiary, JSC Petrosakh
("Petrosakh"), that are outside of the ordinary course of business,
has been completed. The independent review has been conducted by
Crowe Russaudit LLC ("Crowe").
Crowe's report (the "Report") has been prepared as part of
services that did not constitute an audit or a review (though Crowe
did review primary bank account statements). Crowe has relied
entirely on the information provided to it by the Company and
accordingly Crowe does not offer any assurances about the accuracy
of the information provided to it by the Company and which served
as the basis of its Report.
The Report principally covers loans and transactions by
Petrosakh outside the ordinary course of business and which were
not approved by the Board in accordance with the Group's
established procedures. Among those codified and previously adhered
to procedures is the practice whereby the Company's Chief Executive
Officer (Leonid Dyachenko) is to have double key authorisation
together with the Chief Executive or Director General of each
subsidiary to approve and make expenditures. Moreover, the Board
has the sole authority to approve or decline investments made
outside the ordinary course of Group's oil and gas business. The
Report also shows the effects of these loans and transactions on
the Company's cash flows during the period from 1 July 2018 to the
end of October 2018.
The Company's previous announcements have indicated that loans
and transactions by Petrosakh, authorised by its President Mr
Sergey Kononov but not by the Board, were, to the best of the
knowledge the Board at that time, in the order of approximately
US$3 million, although in the Company's announcement of 1 November
2018, the Board indicated that it could not exclude the possibility
that further transactions that had not been authorised by the Board
would emerge once Crowe's review had been undertaken. The Report
indicates that the total loans by the Group that have not been
authorised by the Board are in the order of approximately US$5.1
million, further details of which can be found below.
Loans outside the ordinary course of business involving the
Kholmsk commercial seaport (the "Port")
Crowe has identified a number of loans and transactions
concerning the Port, which as previously announced, were made on
the authority of Mr Sergey Kononov, the President of Petrosakh, but
without reference to the Board.
These loans and transactions include loans to Mr Y L Freidis,
which are now understood to represent a total balance of
approximately Russian Roubles 96 million (equivalent to
approximately US$1.45 million) (the "Freidis Loans"). Mr Freidis
became an employee of Petrosakh before the original investment by
Petrosakh of a 23% voting interest in the Port.
The Freidis Loans are unsecured and carry an interest rate of
7.5%, which is below the cost of Petrosakh's own borrowings. The
Freidis Loans are now understood to be repayable in June 2019. The
Board believes that Mr Freidis would not have been considered as
suitable for such a loan in any circumstances, and certainly not in
the context of the Port and on the basis authorised by Mr Kononov.
Crowe has raised the question as to whether the Freidis Loan should
be impaired, which the Board is considering.
Crowe has identified the disposal of part of the Group's
shareholding in the Port, for Russian Roubles 22 million
(equivalent to approximately US$0.17 million) to JSC Lipetsk
Distillery Company (the "Distillery"), of which Russian Roubles 11
million are on deferred payment terms. The Report notes the reason
for investment in the Port by the Distillery, given to Crowe by Mr
Kononov, was that the Distillery required facilities at the Port.
However on investigation, the Distillery is not operating as such,
and its business is a warehouse.
The Report notes that the price at which shares in the Port were
re-sold to the Distillery was at a substantial discount to the
highest price paid by Petrosakh for the shares that it purchased in
the Port (including both the original investment of a 23% voting
interest in the Port that was authorised by the Board, and the
subsequent purchase of further shares in the Port under the
instructions of Mr Kononov alone). The discount is of the order of
Russian Roubles 35 million (equivalent to approximately
US$530,000). The owner of the Distillery is an individual with whom
Mr Kononov has been involved in other business transactions.
Petrosakh has also made loans to the Port directly. These loans,
which were not authorised by the Board and were only authorized by
Mr Kononov in his position as President of Petrosakh, total
approximately Russian Roubles 97 million as at the end date of the
reporting period (equivalent to approximately US$1.5 million).
These loans to the Port carry an interest rate of 17% and are
repayable on dates over June to September 2019. The Board would
have only approved Petrosakh making loans to the Port that were
proportionate and pro rata to Petrosakh's original a 23% voting
interest in the Port. This would be the equivalent of approximately
Russian Roubles 20 million (equivalent to approximately
US$300,000).
Crowe have noted in the Report that the Port is in financial
distress and has only avoided bankruptcy proceedings due to
Petrosakh covering its debts as the Port's creditors pursue it in
the Russian courts. The Port still has other substantial
liabilities and it is not clear whether Petrosakh will be able to
recover its loans. As a result, the Board is considering the
possible impairment of all the above loans and deferred
payments.
Petrosakh's total exposure to the Port is approximately Russian
Roubles 204 million (equivalent to approximately US$3 million) in
the worst case, if all of the Group's loans and deferments were not
to be recovered.
Other loans outside the ordinary course of business.
The Report identifies two other parties who have received a
total of approximately Russian Roubles 122 million (being
equivalent to approximately US$1.85 million) in loans from JSC
Articneft ("Arcticneft") and Petrosakh, without security, on Mr
Kononov's orders and without Board approval. Further details of
these loans are provided below. The Board believes that further
investigation is required into the reason that the Group made these
loans. The Board notes that all of the companies involved as the
borrowers are, or were, clients of Kamchatka Bank, with which Mr
Kononov is associated. The Board are considering making the
necessary impairment provisions against these loans.
Loans to Igrovoy Kontinent LLC / PRO-ARTS LLC
On 24 May 2016, Arcticneft issued a short-term loan to a company
named Igrovoy Kontinent LLC ("Igrovoy Kontinent") amounting to
US$360,000. . The interest rate according the loan agreement was
11%. The Board are of the opinion that the justification for the
loan provided to Crowe by Mr Kononov was not justified by the facts
presented, and other facts established by the Board, and is not
credible. The Board further believes that there is evidence to
indicate that Igrovoy Kontinent had previously been owned by Mr
Kononov prior to the loan being made.
On 15 March 2017, Arcticneft assigned the loan issued to Igrovoy
Kontinent to PRO-ARTS LLC ("PRO-ARTS"), in accordance with a loan
assignment agreement. As at 15 March 2017, US$360,000 was
equivalent to approximately Russian Roubles 23.1 million. As at 31
October 2018, PRO-ARTS has not repaid its debt to Arcticneft.
According Mr Kononov's explanations, Arcticneft assigned the loan
to PRO-ARTS to eliminate any connection with Igrovoy Kontinent as a
participant in the tender. Crowe received no answer as to whether
PRO-ARTS will repay the sum of Russian Roubles 23.1 million to
Arcticneft.
Neither Igrovoy Kontinent nor PRO-ARTS appear to Crowe, on the
basis of their publicly available accounts, to have the means to
repay the loan. The Board believes that one of the shareholders of
Pro-Arts is associated with Mr Kononov.
Loans to Maxitrans LLC
The second set of loans, for approximately Russian Roubles 95
million (equivalent to approximately US$1.44 million), were made by
Petrosakh to a company named Maxitrans LLC ("Maxitrans") and were
made in 2017. These loans to Maxitrans carry interest rates of
9.5%, have no security, and are repayable on dates over June to
November 2019.
The Board do not consider the reasons given to Crowe for the
loans to Maxitrans to be credible, given their investigation of the
business of Maxitrans. This company already had substantial
liabilities before the loan was made and it would appear that it is
unlikely to be able to repay its loans to the Group.
Other loans
Finally, Crowe has noted that Mr Kononov has authorised the
Group to make loans totaling Russian Roubles 12 million (equivalent
to approximately US$0.18 million) to two individuals associated
with him and who are advisers to him personally. One of these
loans, which has recently become due, was not repaid at its
maturity date and the Board are reviewing whether an impairment is
required.
Petrosakh issued two loans to Bondaruk Alla Borisovna which
amounted to Russian Roubles 5 million and Russian Roubles 2 million
with due dates of 15 November 2018 and 30 November 2018
respectively. The interest rate of both loans is 7.5%. The loan of
Russian Roubles 5 million has not been repaid yet. Petrosakh issued
a loan to Shvets Roman Viktorovich which amounted to Russian
Roubles 5 million with a due date of 25 December 2022. The interest
rate of the loan is 7.5%.
Conclusions of the Board
Having reviewed the Report and made its own investigations of Mr
Kononov's explanations, the Board believes that a total that is the
equivalent of approximately US$5.1 million of loans have been made
by the Group on the authority of Mr Kononov (without Board
approval), and some or all of this may be irrecoverable. Mr
Kononov, through his legal advisers, has stated that as the
President of Petrosakh he had authority to undertake these actions
under Russian law, notwithstanding the established governance
procedures of the Group or any potential illegality of his actions
under applicable law.
As a result, without prejudice to any other action that may be
taken by the Board, the Board has proposed that Mr Kononov must
take personal responsibility for the loans and transactions made by
the Group that were not authorised by the Board (as detailed
above), and organise their prompt repayment, failing which he must
repay Petrosakh the full amount as soon as practical and must
deliver acceptable evidence without delay that he has the means to
do so.
The Board has also asked Mr Kononov to resign from his position
as the President of Petrosakh immediately. We await his
response.
The Board has decided to delay the implementation of the review
of the short-term working capital requirements of the Group for the
forward-looking period to 30 June 2019 by the London affiliate
office of Crowe, Crowe U.K. LLP, until Mr Kononov has indicated
whether or not he will take personal responsibility for the loans
and transactions made by the Group that were not authorised by the
Board and organise their prompt repayment.
Tanker shipment update
The price per barrel for the tanker shipment announced on 9
November 2018 has been confirmed as US$65.9 per barrel. The net
proceeds from this shipment are anticipated to be approximately
US$0.7 million, after taking into account all duties and taxes,
freight and other transport costs, demurrage and similar charges
(and the repayment of all loans and interest due to Petraco Oil
Company Limited).
Group working capital
Given the factors referred to above, especially the lower oil
price achieved by the recent tanker shipment, the Board now
believes that the Group's working capital position over the coming
months will be more constrained than indicated in the Company's
announcement of 9 November 2018 and will remain subject to a number
of variables. The Board now believes that the Group will likely
face a total working capital deficit of up to approximately US$4.5
million in the coming months, unless the loans and transactions
that were not authorised by the Board (as referred to above) are
repaid in the near term.
Chairman Andrew Shrager commented:
"The results of the Report have confirmed the information that
the Board had been able to obtain concerning transactions relating
to the Port, but it is extremely annoying that the exercise has
disclosed further loans to which the Board would never have agreed.
The breakdown of the Group's governance procedures under Mr Kononov
is unforgivable and we expect Mr Kononov to resign, as well as
immediately repay the sum of approximately US$5.1 million. It
should be remembered that Mr Kononov represents the holding of some
44% of the shares of the Company, which we believe are now held to
the benefit of his daughter by a trust. This makes Mr Kononov's
actions even more difficult to understand. We will begin the search
for a new President for Petrosakh shortly."
Further announcements will be made as appropriate.
- Ends -
For further information, please contact:
Urals Energy Public Company Limited
Andrew Shrager, Chairman Tel: +7 495 795 0300
Leonid Dyachenko, Chief Executive Officer
Allenby Capital Limited
Nominated Adviser and Broker
Nick Naylor / Alex Brearley Tel: +44 (0) 20 3328
5656
www.allenbycapital.com
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END
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