Cadogan Petroleum Plc - Annual Financial Report

§ Gross profit: $2.1 million (2016: $1.1 million)

§ G&A²:  $5.0 million (2016:  $5.6 million)

§ Loss for the year: $1.6 million (2016: $5.9 million)

§ Loss per share: 0.7 cents (2016: 2.6 cents)

§ Net cash³ at year end: $37.6 million (2016: $39.7 million)

Key Operational Highlights of 2017:

§ Production: 56,516 boe (2016: 42,495 boe), a 33% increase year-on-year

§ 78% increase in production from the key Monastyretska licence, located in Western Ukraine

§ Completed first step of the diversification strategy by acquiring a 90% interest in Exploenergy s.r.l., in Italy

§ A good year for trading, which generated a healthy profit of $1.3 million⁴ (2016: loss of $2.0 million)

§ Oil Service operations reduced Group costs by retaining margin within the Group

§ No LTIs’⁵ and a further reduction of emissions⁶: 24.11 of CO₂e/boe produced (2016: 29.89 CO₂e/boe)

Cadogan has successfully delivered on the first pillar of its strategy, which is to make Ukraine its platform for growth by monetising the value of its legacy assets, both core and non-core.

The Group has continued to maintain exploration and production assets in Ukraine, to conduct gas trading operations and to operate an oil service business in Ukraine. Cadogan’s assets are concentrated in the West of the country, far away from the zone of military confrontation with Russia. Gas trading includes the importing of gas from Slovakia and Poland and local purchasing and sales with physical delivery of natural gas. The oil services business focuses on work-over operations, civil works services and other services provided to Exploration and Production (“E&P”) companies.

Our business model

We aim to increase value through:

§ Maintaining a robust balance sheet, monetising the remaining value of our Ukrainian assets; E&P cash flow to be supplemented with revenues from gas trading and oil services

§ Pursuing farm-outs to progress investments in Ukrainian licences

§ Sourcing additional E&P assets to diversify Cadogan’s portfolio, both geographically and operationally; target assets are either in mature exploration or appraisal stage and are located in Europe, Africa, Middle East or Central Asia

The Group has continued to actively pursue its strategy of portfolio re-loading and geographical diversification. At the beginning of 2017, it implemented the first step of this strategy through the acquisition

of a 90% participating interest in Exploenergy s.r.l., an Italian company.

Both gas trading and the service business optimise the use of existing available resources, such as cash as working capital for trading and equipment and competences for the service business, and continue to contribute to the Group’s goal of being cash neutral, while actively searching for value accretive opportunities in the E&P domain.

Ukraine

West Ukraine

The Group was able to increase oil production by 78% from the Monastyretska licence, via the successful re-entry of two old, suspended wells rented from Ukrnafta⁷ under a profit sharing agreement. Both wells are currently producing with sucker road pumps. The licence is located in the Carpathian fold belt (Skuba unit), in Western Ukraine. 

The Group also continued to produce gas from the Debeslavetske and Cheremkhivske gas fields and has maintained both the Bitlyanska licence and its 15% interest in Westgasinvest LLC (“WGI”), which holds the Cheremkhivsko-Strupkivska, Debeslavetska Production, Filimonivska, Kurinna, Sandugeyivska and Yakovlivska licences for shale gas exploitation. Eni is the operator of these shale gas licences and Cadogan is carried through the exploration phase. Eni has recently notified Cadogan of its intention to exit the shale gas project and discussions are on-going to agree acceptable exit terms and more generally on the future of WGI.  Following Eni’s decision to exit the joint venture and given the uncertainty over the future of WGI the investment has been impaired.

East Ukraine

Cadogan’s application to convert the Pirkovska licence from exploration into production has not yet been awarded. The application has been impacted by a dispute between central and local authorities on the distribution of gas royalties, which has brought the award process in the region to a halt. These assets remain impaired.

Subsidiary businesses

Gas trading operations continued, with sales in Ukraine of both imported and locally produced gas. Despite lower volumes, margins increased substantially as the new team delivered on expectations. Finally, the Group continued providing oil services through its wholly-owned subsidiary Astroservice LLC. These primarily related to well abandonment, site restoration and well workover operations. Unlike previous years, these services were rendered to Group companies during the year as their activity in Ukraine picked-up.

Italy

In January 2017, Cadogan, through its fully owned Dutch subsidiary, finalised the purchase of a 90% interest in Exploenergy s.r.l. (“Exploenergy”) for a deferred cash consideration of up to €50,000 per licence, contingent upon licences being awarded. Exploenergy is an Italian company, which has filed applications for two exploration licences (Reno Centese and Corzano), located in the Po Valley region, in close proximity to fields discovered by the former operator. Two leads have been identified on these licences, with combined unrisked prospective resources estimated to be in excess of 60 bcf of gas. Both applications are in an advanced stage of their approval process, which will resume after the national and local election held in early March 2018.

___________________________

¹ Gross revenues of $15.1 million (2016: $19.7 million) included $12.7 million (2016: $15.6 million) from trading of natural gas, $2.4 million (2016: $1.6 million) from exploration and production

2 Administrative expenses (“G&A”)

3 Net cash includes cash and cash equivalents less short term borrowings

⁴ $0.9 million net of interest income received on receivables

5LTI: Lost Time Incidents; TRI: Total Recordable Incidents

⁶ E&P operations emissions. For details please see the Annual Report

⁷ PJSC “Ukrnafta”

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

For further information, please contact

Cadogan Petroleum plc                                                                                     

Strategic Report

The Strategic Report has been prepared in accordance with Section 414A of the Companies Act 2006 (the “Act”) and presented hereunder. Its purpose is to inform stakeholders and help them assess how the Directors have performed their legal duty under Section 172 of the Act to promote the success of the Company.

Principal activity and status of the Company

The Company is registered as a public limited company (registration number 05718406) in England and Wales. Its principal activity is oil and gas exploration, development and production; the company also conducts gas trading and provides services to other operators.

The Company’s shares have a standard listing on the Official List of the UK Listing Authority and are traded on the main market of the London Stock Exchange.

Key performance indicators

The Group monitors its performance through five key performance indicators (“KPIs”):

-       to increase oil, gas and condensate production measured on number of barrels of oil equivalent produced per day (“boepd”);

-       to decrease administrative expenses;

-       to increase the Group’s basic earnings per share;

-       to maintain no lost time incident; and

-       to grow and geographically diversify the portfolio.

The Group’s performance in 2017 against these KPI’s is set out in the table below, together with the prior year performance data.

(1)    Average production is calculated as the average daily production during the year

(2)    Basic loss per ordinary share is calculated by dividing the net loss for the year attributable to equity holders of the parent company by the weighted average number of ordinary shares during the year

(3)    Lost time incidents relates to the number of injuries where an employee/contractor is injured and has time off work (IOGP classification)

Chairman’s Statement

2017 has been a good year for Cadogan, which has made significant progress towards profitability notwithstanding the challenging context in the countries where it has assets.

The process of integrating Ukraine within Europe did not progress as expected and a number of warnings came from the European Community, the EBRD and the leading international financial institutions, asking for an acceleration of the process, particularly in terms of fight against corruption and transparency. The economic crisis is not yet over and the confrontation with Russia has remained an open wound and this has exerted some influence of the political agenda. The ban has remained in place on the direct import of Russian gas resulting in the volumes needed to match internal demand being imported from Europe using reverse flow.

The slow pace of reform in the energy sector and the perception of limited transparency have penalised Ukraine which has not witnessed a recovery of foreign direct investment nor new players entering the local exploration and production sector notwithstanding the healthier oil prices. The country's goal of becoming energy independent in the near future has resulted in given a wake-up call to the state-owned companies and also to some of the local privately held companies and this has generated an increase in the drilling activity with some international contractors winning sizable contracts. This is an encouraging development for Astro-Service LLC as it creates opportunities to monetise its value.

The challenging situation facing the E&P industry is represented by the difficulties that the Company faced to convert Zagoryanska and Pirkovska from exploration into production licences. A dispute between local and central authorities on the distribution of royalties which went on for most of 2017 brought the award process in the Poltava council to a complete halt: several applications to award or convert licences were rejected and the Zagoryanska licence was a casualty as the last rejection came at the end of the three year time-frame allowed for conversion. After investing tens of millions of dollars and proving the existence of commercial quantities of gas, 30 million m³ were produced, the company was not awarded its production licence, an award which in most of the countries is a recognised right.

In Italy the pace of progress towards the award of the licences has been hampered by concerns at local level on the long-term sustainability of E&P activities in general and by the local and national elections scheduled for the first quarter of 2018. The company has used this time to introduce itself to regional and national authorities and will now re-focus its communication towards local stakeholders.

In a context that has remained challenging, Cadogan has delivered on its strategy of building in Ukraine its platform for growth. Costs have remained under strict control, with a streamlining of the Executive directorships and a right sizing of the gas operations in West Ukraine contributing to savings. E&P operations from the assets operated by the Company have been taken to profitability, driven by an increase in oil production from Monastyretska licence where management sees an upside for further growth, working capital have been optimised and gas trading has delivered healthy margins. 

Management has continued to actively pursue opportunities to renew and geographically diversify the portfolio. Many opportunities have been reviewed using stringent investment criteria that are aimed at delivering long-term value for the shareholders and one was finalised. As a Board, we are confident that these efforts will produce results and are not prepared to relax the selection criteria.

Zev Furst

Non-Executive Chairman

25 April 2018

Chief Executive’s Review

2017 was a good year for Cadogan, with reduced losses of $1.6 million, the best result over the last six years. Net of losses in joint venture (“JV”), where the Group is carried and not an operator, the Group would have delivered a $0.7 million profit (2016: $5.8 million loss). This achievement is the result of multiple efforts, including:

§ a strict discipline in controlling costs;

§ E&P operations brought firmly into profitability, due to increased oil production and despite the impact of a punitive tax on gas production;

§ a good year for gas trading, with a healthy margin; and

§ effective efforts to recover past receivables, some of which had been previously impaired as deemed of no value, and the fending-off potential past tax liability.

2017 was also the year that saw the Company’s efforts to geographically diversify its portfolio come to fruition, with the first acquisition outside of Ukraine of an Italian E&P company, which has filed the application for two licences in the prolific Po Valley.

While 2017 witnessed signs of recovery for the oil & gas industry, it has been another difficult year for Ukraine, which remained embroiled in its confrontation with Russia and continued to be economically challenged. The country has made slow progress towards modernisation of its oil & gas legislative framework but the few steps made have fallen short of creating an environment conducive to investment, which the country needs to maximise its domestic production. In this uncertain context, Cadogan has remained one of the few, if not the only, truly foreign investor operating in Ukraine’s E&P sector.

Cadogan’s application to convert the Pirkovska exploration licence into a production licence is a reflection of the uncertainties that still impact the E&P industry in Ukraine. The application was filed two years ago and has been rejected 4 times, together with nearly 70 other applications, by the Poltava local Council, due to its dispute with the Central Government over the split of royalties. An agreement has been reached, effective from 1 January 2018, bringing into law the distribution of royalties and consequently we are cautiously optimistic that the application will be accepted, as Cadogan has fulfilled all the obligations and submitted the documents in due time.

Eni has informed its partners, Nadra¹ and Cadogan, of its intention to exit WGI, the shale gas project, and discussions are on-going on whether and under which terms to accept Eni’s exit and, in general, on the future of the project.  As a precaution, Cadogan’s management has decided to impair the residual value of its 15% participating interest in the project. Eni’s decision, which comes on top of similar decisions for the Pokrovska and Zagoryanska licences, has a marginal impact on Cadogan’s business. This is a testimony of Cadogan’s proven ability to generate value from a legacy of fragile foundations and marginal assets.

Against this challenging background, Cadogan has done well in 2017.  In particular:

§ the average production rate through the year increased up to 155 boepd, the highest level in the last five years, and this increase was achieved with minimal capital deployment; and

§ the result of E&P business segment in 2017 was $0.3 million higher than in the year before, out-performing the 21% increase in the average realised price over the same period of time.

Other highlights of 2017 are:

§ A 33% increase in production, from 42,495 boe in 2016 to 56,516 boe this year;

§ A 11% reduction of overhead (G&A), from $5.6 million in 2016 to $5.0 million this year; this is in addition to the 15% reduction achieved in 2016 and of the 13% reduction in 2015;

§ A good year for trading which generated a healthy margin by leveraging a limited amount of Cadogan’s financial resources;

§ The first step in the process of geographic diversification of the portfolio with the acquisition of Exploenergy in Italy;

§ A robust balance sheet, with $37.6 million of net cash, kept mostly in UK banks; and

§ A year without LTIs’ and with a further reduction of emissions into atmosphere.

In summary, Cadogan has successfully delivered on the first pillar of its strategy, which is to make Ukraine its platform for growth by monetising the value of its legacy assets, both core and non-core.

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