RNS Number:7024E
Urals Energy Public Company Limited
28 September 2007
Urals Energy Public Company Limited
('Urals Energy' or the 'Company')
Interim Results
Urals Energy, a leading independent exploration and production company with
operations in Russia, today announces its interim results for the six months to
30 June 2007.
Highlights
Strategy
* Acquisitions a key cornerstone of the Urals strategy.
* Continuing to assess complementary and value enhancing acquisitions as
well as delivering on operational development plans
* Eastern Siberia now specifically being targeted as key growth area for
Urals Energy with the aim of achieving critical mass in the region
* Assets actively being identified that will provide synergies with
existing Dulisma field and capitalise on access to the Transneft ESPO
and significant tax breaks.
* Confident of funding support when required
Operations
* Remain on track to reach 12,000 BOPD by end 2007 and 15,000 BOPD by
mid year 2008.
* Production average for the period 8,859 BOPD. Currently 9,000 BOPD.
* Production stable with increases expected at Dulisma, Sakahlin and
Komi.
* Subsequent to period end Russian Ministry of Natural Resources has
confirmed Russian Registered Reserves higher than Urals SPE reserve
figures.
* New senior management team in place combining both Russian and Western
experts, with proven capability of operational delivery and financial
experience.
Financial
* Revenues decreased to US$44.4 million following poor H1 07 weather,
resulting in delay of shipment of cargoes. However, revenues expected
to increase significantly in second half.
* Operating loss of US$13.2 million before non recurring items. Overall
US$22.2 million loss primarily driven by non-recurring items and poor
weather conditions delaying of shipment of cargoes by sea.
* Enhanced balance sheet via two debt financings including Dulisma
development being funded through US$130 million Goldman Sachs project
finance loan. Cash position at period end of US$55.9 million.
* Paid down US$63.1 million debt facility and secured pre-payment
facility on attractive terms.
Outlook
* Production set to increase through new development wells, fraccing and
recommencement of Dulisma production.
* 7 wells to be drilled in H2 07 including two exploration and
completion of Urals Nord exploration well currently drilling with
results expected shortly.
* At Dulisma major development and preparatory work including clearing
of land, purchasing of rigs and installation of generators and
powerlines is underway ahead of tie-in to Transneft ESPO pipeline.
* Growth through 2008 with ramping up of Dulisma production and
execution of acquisition strategy.
Leonid Y. Dyachenko, Chief Executive, commented:
"Urals Energy continues to grow into a leading Russian independent E&P company
with a unique exposure to Eastern Siberia - a region identified as being a key
Russian oil and gas growth area.
The operational performance of the company has been sound throughout the first
half and we have successfully rectified a number of operational issues which
will ensure we finish the year in a stronger position.
The bolstering of our Board and senior management team reflects both the growth
of Urals and the recognition of our intention to become a significant Russian
independent oil and gas company.
Our focus is now on operational deliverability and execution of our plans
specifically at Dulisma which, together with potential future acquisitions, will
transform Urals Energy over the next 12 to 18 months."
28 September 2007
Enquiries:
Pelham Pr
Gavin Davis +44(0)20 7743 6677 / +44(0)7910 104 660
Evgeniy Chuikov +44(0)20 3008 5506 / +44(0)7894 608 606
Morgan Stanley
John Bathard-Smith +44(0)20 7425 8700
Chief Executive's Statement
The first half of 2007 was characterized by positive progress through ongoing
development work, combined with corrective work to reverse certain unexpected
reservoir pressure maintenance problems. This was set against the backdrop of
robust domestic and export prices. The company is now in a position to finish
the year on a strong upward trajectory with production expected to grow
significantly in 2008/09.
Operationally, the Company successfully increased average daily production at
its brownfield sites from 8,982 barrels of oil per day (BOPD) at the beginning
of 2007 to an average of 9,170 BOPD in June. A total of nine development wells,
including side-track wells were completed, adding a net figure of 1,600 BOPD of
additional average oil production.
This increase was offset by production declines during the first quarter of 2007
in some fields. The company began a program to augment pressure support systems
to reverse the decline trend. A reassessment of our reservoir maintenance
program was completed at two of the fields in particular where a total of six
new injection wells in Dinyu and Petrosakh were added for pressure support which
is anticipated to increase production in H2 07
Urals continues to develop infrastructure in its greenfield, Eastern Siberian
subsidiary, Dulisma, with a focus on early infrastructure work, equipment
procurement, development plan licensing, rig mobilization and initial drilling
work while final detailed designs are being completed. The important Transneft
oil pipeline, the Eastern Siberia to Pacific Ocean (ESPO), is also progressing
as planned which will allow full scale production from Dulisma in H1 2009
targeting production of 30,000 by 2011. A temporary oil transport line to Ust
Kut is once again operational and oil will flow through this shortly.
Eastern Siberia has some of the best reserves in Russia and, when combined with
10 year tax breaks in the region and a direct export route through Transneft's
ESPO pipeline, there is a clear rational for our focus there.
Our acquisition strategy is to target assets in the region which are value
enhancing and which will provide a step change opportunity through their reserve
base and monetisation potential.
Financially the company was impacted by shipping delays and non recurring items.
These were short term difficulties and the financial outlook for the second half
is strong.
Operational Update
Timan-Pechora Basin
In Urals' subsidiaries in Komi and Nenets, in the Russian oil region known as
the Timan-Pechora Basin, production for the H1 2007 increased from 4,971 BOPD at
the beginning of the year to an average of 5,573 BOPD in June. The Company
drilled and completed 5 wells, including two sidetracked from existing
wellbores. The Company added 4 new water injection wells at its largest
producing field in Komi, Dinyu-Savinoborskaya, to augment the reservoir pressure
maintenance program and reverse a trend of declining production that was
observed early in 2007. In H2 07 the Company plans to frac 16 additional wells
which are anticipated to significantly lift production at year end.
The Company will drill 3 sidetrack wells this year. Two of the three are already
producing crude oil of approximately 70 BOPD and the third will be drilled to a
deeper horizon that had oil tested in a nearby wellbore.
At another of the Company's exploration plays in Timan-Pechora, the Urals Nord
subsidiary spudded its first exploration well in the Nadezhdinskiy block in
April and, as at the time of this release, had drilled to a depth of 3,650
metres in a 3,750 metre TD program. This well is targeting the Devonian
limestone which found oil bearing pay in the analogous fields in the same basin.
Udmurtia
At CNGDU production dropped, beginning the six-month period at 1,046 BOPD, and
ending the period at 888 BOPD. The reason for the decrease is primarily due to
reservoir pressure decline on the Potapovskoye field. The Company is now
evaluating an enhanced oil recovery project with water injection for the
reservoir and believe this will rectify the problem.
Sakhalin
At the Company's subsidiary, Petrosakh, operations were focused on intensive
processing and interpretation of 3D seismic data as well as drilling one
producing well and three injection wells to increase oil recovery from this
geologically complex reservoir. This has resulted in the successful
stabilization of production at 2,712 BOPD from 2,981 BOPD
The use of recently reprocessed 3D seismic is helping to pinpoint prospective
areas in the onshore block and exploration plays in the offshore block.
We now expect to increase production as a result of positive trends noted thus
far and additional wells to be drilled during the second half of 2007 and in
2008.
East Siberia
Production will resume shortly at Dulisma following repairs to the temporary oil
evacuation route by the downstream operator.
Despite this, Dulisma remains on track to produce and ship oil to the Transneft
ESPO in H1 2009 and preparatory work has continued as planned. A major
regulatory milestone was reached in the first half of the year with Russia's
Central Committee approving Dulisma's Field Development Plan.
Field work highlights include the successful mobilization and rig-up of the
Company's new 160-tonne mobile drilling rig on the first completed drilling pad,
where up to 9 wells can be drilled. The Company has also ordered a second 225
tonne mobile drilling rig for delivery during the 1st quarter of 2008. Besides
drilling activities, the Company also constructed a new 100 man field camp and
two -2.5 MW electric generators, cleared land for the Central Processing
Facility (oil processing for shipment to Transneft) and cleared the area for the
field camp.
Tendering for key advance procurement items has been made and the Company
continues to add staff as we grow in the region.
Financial Results
Revenues for the first half were impacted as a result of late winter ice
break-up and severe June weather resulting in the Company only being able to
ship a limited amount of stored crude for export at its two large island
producers. This represents only a timing delay in our mid-year accounting, as
these inventories were subsequently cleared after the 30 June closing period.
The prevailing high export price levels will be fully reflected in our 2007
full-year results. Partly as a result of these delays net revenues decreased by
US$14.0 million as compared to the six months ended 20 June 2006.
Selling, General and Administrative expenses increased during the six months
ended 30 June 2007 by US$16.1 million. This was primarily due to settlement of
unvested stock for the former CEO who resigned during the first half. In
addition, SG&A expenses increased as a result of full six months consolidation
of Dulisma in the current financial statements. As a result of this and the
aforementioned factors the Company reported a loss of US$22.2 million driven by
non-recurring items and the poor weather conditions delaying shipment of cargoes
by sea. Without these non-recuring items the loss is reduced to US$13 million.
The Company has successfully enhanced its balance sheet via two debt financings
in the first half. In March, the Company received the final tranche of its
US$130 million project financing for Dulisma, underwritten by Goldman Sachs,
through a total return swap structure using Standard Bank as the lender of
record. In addition, in June the Company restructured its senior borrowing base
by repaying in full US$51.1 million outstanding under the five-year
reserve-based loan facility and related US$12 million mezzanine note, and
replaced it with a five-year, revolving pre-payment facility provided by the
Company's export off-taker Petraco S.A. This has resulted in substantial
savings to the Company, due to the non-amortizing nature of the revolver, and
that it is at a cost lower than the debt that was retired.
Interest expenses increased primarily because of interest accrued for the
Goldman Sachs loan of US$16.1 million and the accelerated accretion of the
issuance costs under BNP Paribas RBL facility due to early prepayment as well as
acceleration of the accretion and discount associated with the warrants under
the BNP Paribas Subordinated Loan. Interest income increased during the six
months of 2007 as compared to six months of 2006 primarily due to the large
amount of cash on deposit at Dulisma from the project finance facility closed in
the first quarter of the year.
Cash generated from operations decreased because of the decrease in net revenues
and the increase in SG&A expense. Operating cash outflows before changes in
working capital were improved by the cash received from Petraco under the 5 year
revolving prepayment agreement and an increase in other taxes payable, which
were fully paid in July 2007. The increase in outflows from investment activity
primarily represents an increase in development activity in Dulisma of
approximately US$14.4 million and exploration drilling of a first well on
Nadezhdenskoye oil field of approximately US$3.0 million.
Proceeds from borrowings, net of borrowing costs, were composed of the US$130
million proceeds from the Goldman Sachs and Standard Bank loan, a US$14 million
draw down under the BNP Paribas RBL facility, and US$2 million drawn from an
overdraft facility organised by ZAO BNP Paribas Bank Moscow. This additional
US$14 million draw down was used to repay a US$12 million subordinated BNP
Paribas loan in June 2007. The remaining funds were used to settle the ZAO BNP
Paribas overdraft in July 2007.
Management and Personnel
Key management changes have been made throughout the first half of the year
reflecting the growth of the company and its focus on becoming a key Russian
business. Two new members were admitted to the Board, Alexei Ogarev, the
Company's VP for Government Relations, as an executive member, and a
non-executive member, Robert Maguire, the former Global Head of Energy for
Morgan Stanley and now Partner for International Oil and Gas investment at
Carlysle -Riverstone. Chuck Pitman remains as Chairman of the Board.
As the Company matures, progressing from its start-up phase of asset
consolidation and its IPO, to a company focused on developing its array of
upstream assets and meeting further strategic acquisitions, strengthening of the
Russian composition of the senior management has been emphasised. The company
also employs first-class, experienced senior Western managers who have both
Russian and international experience in delivering major oil projects. We now
have a team capable of executing our aggressive development plans.
Following the resignations of William Thomas as CEO in April, and of Stephen
Buscher as CFO in August, Leonid Dyachenko was appointed as the new CEO and
Vladimir Sidorovich as CFO. Mr. Dyachenko is an original founder of the first
Urals Energy and the current public company, and has acted as the General
Director for all operations, with each unit head reporting to him on a daily
basis. His appointment is, therefore, a logical step in the evolution of Urals
Energy as a significant Russian operator. Mr. Sidorovich has long expertise in
the Russian market, having acted as Finance Director for such companies as RAO
UES, and most recently Tambeyneftegas. Given the rapid growth of the Russian
capital markets, and in particular, the shift in dynamics of liquidity between
Western and Russian debt markets, his appointment reflects a natural change in
focus by the Company toward tapping the increasingly robust Russian market.
Operationally, two critical appointments have been made. In August, Kerry
Kendrick was named as COO. Mr. Kendrick has over 26 years of upstream oil and
gas operations experience in the Middle East, South America, the US domestic
and, most recently, in Western Siberia where he was Director General of a TNK-BP
- Occidental Oil and Gas Corp joint venture. In February, Stephen Kirton was
hired as Vice President for Subsurface Technical Services. Mr. Kirton has 26
years of total upstream oil and gas experience with 16 years in Russia and CIS
countries.
Finally, in August Vyacheslav Rovneiko, also an original founder of Urals
Energy, was appointed as Senior VP for Acquisition Strategy. Mr Rovneiko has
been involved in the company's business development and identification of
acquisition opportunities since the Company's inception.
Outlook
With a rebalancing of management and enhancement of our operational expertise in
critical areas, the Company is well-positioned to execute its acquisition,
development and exploration strategy. In the second half of 2007, the Company
plans to drill seven wells, conduct a major fracture stimulation campaign in the
Komi region, and complete the exploration well at Urals Nord.
Overall the company is in a strong position for growth with Dulisma set to
significantly increase production once it ties in to the ESPO.
Importantly, we have received endorsement of our SPE reserve figures from the
Russian Ministry of Natural Resources and can now focus on capitalising on our
significant reserve base.
Further value enhancing acquisition opportunities continue to be explored in
addition to a particular focus on ensuring operational effectiveness and
execution of the development plan across all Urals assets.
Urals Energy Public Company Limited
Interim Condensed Consolidated Balance Sheets (unaudited)
(presented in US$ thousands)
30 June 2007 31 December 2006
Note
Assets
Current assets
Cash and cash equivalents 4 55,930 33,082
Financial derivatives 9 19,130 -
Accounts receivable and prepayments 28,196 24,717
Current income tax prepayments 3,614 4,401
Inventories 42,763 26,679
Total current assets 149,633 88,879
Non-current assets
Property, plant and equipment 630,963 595,800
Other non-current assets 11,325 16,073
Total non-current assets 642,288 611,873
Total assets 791,921 700,752
Liabilities and equity
Current liabilities
Accounts payable and accrued expenses 16,950 10,033
Income tax payable 3,054 3,281
Other taxes payable 11,826 9,620
Short-term borrowings and current 9 144,132 22,965
portion of long-term borrowings
Advances from customers 46,519 30,913
Current liabilities before warrants classified as 222,481 76,812
liabilities
Warrants classified as liabilities 3,185 3,516
Total current liabilities 225,666 80,328
Long-term liabilities
Long-term borrowings 9 - 40,844
Long term finance lease obligations 1,384 1,192
Dismantlement provision 3,614 3,327
Deferred tax liability 112,417 111,787
Other long term liabilities 347 298
Total long-term liabilities 117,762 157,448
Total liabilities 343,428 237,776
Equity
Share capital 641 633
Share premium 408,135 401,448
Translation difference 30,294 22,445
Retained earnings 7,979 37,022
Equity attributable to shareholders 447,049 461,548
of Urals Energy Public Company Limited
Minority interest 1,444 1,428
Total equity 448,493 462,976
Total liabilities and equity 791,921 700,752
MEMORANDUM NOTE:
Total equity 448,493 462,976
Warrants classified as liabilities 3,185 3,516
451,678 466,492
Approved on behalf of the Board of Directors on 27 September 2007
____________________________ ___________________________
L.Y. Dyachenko V.G. Sidorovich
Chief Executive Officer Chief Financial Officer
The accompanying notes on pages 8 to 20 are an integral part of these interim
condensed consolidated financial information
Urals Energy Public Company Limited
Interim Condensed Consolidated Statement of Income (unaudited)
(presented in US$ thousands)
Six months ended 30 June:
Note 2007 2006
Gross revenues 56,922 78,444
Less: excise taxes (539) (430)
Less: export duties (11,976) (19,576)
44,407 58,438
Revenues
Operating costs
Cost of production 7 (36,694) (39,876)
Selling, general and administrative expenses 8 (29,910) (13,785)
(66,604) (53,661)
Total operating costs
Operating (loss) profit (22,197) 4,777
Finance income (expense)
Interest income 9 1,450 765
Interest expense 9 (12,531) (4,250)
Foreign currency gains 2,846 4,319
Change in fair value of financial derivatives 9 1,112 (3,314)
(7,123) (2,480)
Total finance expense
(29,320) 2,297
(Loss) profit before tax
Income tax benefit (charge) 265 (1,821)
(29,055) 476
(Loss) profit for the period
(Loss) profit for the period attributable to: (12) 90
- Minority interest
- Shareholders of Urals Energy Public Company Limited (29,043) 386
(Loss) profit per share of profit attributable to
shareholders of Urals Energy Public Company Limited:
- Basic (loss) profit per share (in US dollar per share) (0.2450) 0.0042
- Diluted (loss) profit per share (in US dollar per share) (0.2450) 0.0041
Weighted average shares outstanding attributable to:
- Basic shares 118,546,479 91,891,653
- Diluted shares 118,546,479 93,390,285
The accompanying notes on pages 8 to 20 are an integral part of these interim
condensed consolidated financial information
Urals Energy Public Company Limited
Interim Condensed Consolidated Statements of Cash Flows (unaudited)
(presented in US$ thousands)
Six months ended 30 June:
2007 2006
Cash flows from operating activities
(Loss) profit before income tax (29,320) 2,297
Adjustments for:
Depreciation and depletion 7,900 7,784
Change in fair value of financial derivatives 9 (1,112) 3,314
Share-based payments 6,695 2,285
Interest income 9 (1,450) (765)
Interest expense 9 12,531 4,250
Foreign currency gains (2,846) (4,319)
Other (124) 373
Operating cash flows before changes in working capital (7,726) 15,219
(11,122) (3,680)
(Increase) in inventories
(Increase)/decrease in accounts receivables and prepayments (1,944) 1,427
Increase/(decrease) in accounts payable and accrued expenses 7,079 (1,608)
Increase in advances from customers 15,606 146
Increase in other taxes payable 2,465 268
Cash generated from operations 4,358 11,772
Interest received 579 685
Interest paid (3,208) (4,949)
Income tax paid (876) (1,151)
853 6,357
Net cash generated from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment (33,780) (18,958)
Purchase of intangible assets (822) -
Acquisitions of subsidiaries, net of cash acquired - (127,735)
(34,602) (146,693)
Net cash used in investing activities
Cash flows from financing activities
Proceeds from borrowings, net of borrowing costs 142,289 12,000
Repayment of borrowings (65,054) (18,165)
Repayment of promissory notes - (15,088)
Purchase of financial derivative 9 (20,457) -
Finance lease principal payments (211) (207)
Cash proceeds from issuance of ordinary shares, net of - 197,988
associated costs
Net cash generated from financing activities 56,567 176,528
Effect of exchange rate changes on cash and cash equivalents 30 221
Net increase in cash and cash equivalents 22,848 36,413
Cash and cash equivalents at the beginning of the period 33,082 32,334
Cash and cash equivalents at the end of the period 55,930 68,747
The accompanying notes on pages 8 to 20 are an integral part of these interim
condensed consolidated financial information
Urals Energy Public Company Limited
Interim Condensed Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
(presented in US$ thousands)
Share Share Retained Equity Minority Total equity
capital premium earnings attributable to interest
Shareholders of
Urals Energy
Cumulative Public Company
Translation Limited
Adjustment
Balance at 1 January 460 201,355 (2,296) 2,714 202,233 1,199 203,432
2006
Effect of currency - - 13,991 - 13,991 77 14,068
translation
Profit for the period - - - 386 386 90 476
Total recognized income - - 13,991 386 14,377 167 14,544
(loss)
Issuance of shares 173 194,961 - - 195,134 - 195,134
Share-based payment - 2,285 - - 2,285 - 2,285
Balance at 30 June 2006 633 398,601 11,695 3,100 414,029 1,366 415,395
Balance at 1 January 633 401,448 22,445 37,022 461,548 1,428 462,976
2007
Effect of currency - - 7,849 - 7,849 28 7,877
translation
Loss for the period (29,043) (29,043) (12) (29,055)
Total recognized income - - 7,849 (29,043) (21,194) 16 (21,178)
(loss)
Issuance of restricted 8 (8) - - 0 - 0
stock
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
The accompanying notes on pages 8 to 20 are an integral part of these interim
condensed consolidated financial information
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
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 Market operated
by the London Stock Exchange.
The Group comprises UEPCL and the following subsidiaries:
Effective ownership at:
30 June 2007 31 December 30 June 2006 31 December
2006 2005
Exploration and production
ZAO Petrosakh ("Petrosakh") Sakhalin 97.2% 97.2% 97.2% 97.2%
ZAO Arcticneft ("Arcticneft") Nenetsky 100.0% 100.0% 100.0% 100.0%
OOO CNPSEI ("CNPSEI") Komi 100.0% 100.0% 100.0% 100.0%
ZAO Chepetskoye Udmurtia 100.0% 100.0% 100.0% 100.0%
NGDU ("Chepetskoye")
OOO Dinyu ("Dinyu") Komi 100.0% 100.0% 100.0% 100.0%
OOO Michayuneft ("Michayuneft") Komi 100.0% 100.0% 100.0% 100.0%
OOO Oil Company Irkutsk 100.0% 100.0% 100.0% -
Dulisma ("Dulisma")
OOO Lenskaya Irkutsk 100.0% 100.0% 100.0% -
Transportnaya Kompaniya ("LTK")
OOO Nizhneomrinskaya Neft Komi 100.0% 100.0% - -
Management company
OOO Urals Energy Moscow 100.0% 100.0% 100.0% 100.0%
Urals Energy (UK) Limited United Kingdom 100.0% 100.0% 100.0% 100.0%
Exploration
OOO Urals-Nord ("Urals-Nord") Nenetsky 100.0% 100.0% 100.0% 100.0%
Trading
UENEXCO Limited ("UENEXCO") Cyprus 100.0% 100.0% 100.0% 100.0%
UENEXCO Limited only operated during the first quarter of 2006 after which all
trading operations were transferred to UEPCL.
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 2: Seasonality
The Group's largest 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 early
December. Outside this period, oil is either stored or processed and sold on
the local market. 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 the six months ended 30 June 2006, Petrosakh and Arcticneft produced 74.5
and 23.8 thousand tons of crude oil, respectively, and sold 66.0 and 22.0
thousand tons of crude oil and oil products, respectively. During 2007 crude
oil export sales from ZAO Petrosakh in June 2007 and from ZAO Arcticneft began
in July 2007. Crude oil and oil products in stock at 30 June 2007 were 21.6
thousand tons and 32.5 thousand tons in Petrosakh and Arcticneft, respectively,
and 8.6 thousand tons and 11.2 thousand tons, respectively, at 31 December 2006.
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 2006 prepared in accordance with
International Financial Reporting Standards ("IFRS"). Except as discussed
below, the 31 December 2006 consolidated balance sheet data has been derived
from audited financial statements.
At 31 December 2006, the consolidated balance sheet included a current liability
of $2.367 million for other taxes. In this interim condensed consolidated
financial information, this amount has been included within other taxes payable
as management believes that such classification more appropriately represents
the nature of this balance.
For the six months ended 30 June 2006, the Group reclassified $0.258 million of
payroll expense into selling, general and administrative expenses that were
formerly incorrectly classified as cost of production.
Use of estimates. The preparation of consolidated interim condensed financial
information in conformity with IFRS requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities as of the
reporting date and during the reporting period. Estimates have principally been
made in respect to fair values of assets and liabilities, impairment provisions,
asset retirement obligation and deferred income taxes. Actual results may
differ from such estimates.
Exchange rates. The official rate of exchange of the Russian rouble to the US
dollar ("USD") at 30 June 2007 and 31 December 2006 was 25.82 and 26.33 Russian
roubles to USD 1.00, respectively. Any translation of Russian rouble amounts to
US dollars or any other hard currency should not be construed as a
representation that such Russian rouble amounts have been, could be, or will in
the future be converted into hard currency at the exchange rate shown or at any
other exchange rate.
Through early 2006, the Russian rouble was not a convertible currency in most
countries outside of the former Soviet Union and, further, the Group was
required to convert 10 percent of its hard currency proceeds into Russian
roubles. During the first half of 2006, substantially all restrictions for hard
currency transactions were lifted and the rights of the government of the
Russian Federation and those of the Central Bank of the Russian Federation to
impose such restrictions were waived.
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 4: Liquidity
Restrictions on cash and cash equivalents. As discussed in Note 9, at 30 June
2007, $48.2 million of the Group's cash and cash equivalents is restricted for
use by its subsidiary, Dulisma, and is therefore unavailable for use for other
general corporate purposes. Dulisma may use such cash and cash equivalents for
both operating and investing purposes.
Liquidity. In the first quarter of 2007, production at certain of the Group's
subsidiaries fell below the assumptions embedded in the BNP Paribas Reserve
Based Facility (Note 9). As a result of the drop in production, principal
repayments under the BNP Paribas Reserve Based Facility were accelerated. In
June 2007, the Group committed to repay the BNP Paribas Reserve Based Facility
and to repurchase the warrants issued in connection with the subordinated loan
from Paribas.
As a result of the issues outlined above and others, during and subsequent to
the six months ended 30 June 2007, the Group experienced liquidity issues that
impacted its ability to make settlements with its vendors and to execute its
development plan. The Group recognized an operating loss of $22.2 million for
the six months ended 30 June 2007 and net cash from operations of $0.9 million
for the same period. Net cash from operations included $15.6 million of
advances from customers. Additionally, at 30 June 2007, the Group's current
liabilities exceeded its current assets by $76.0 million. As a result, the
Group was not in compliance with a financial covenant under its loan agreement
with Standard Bank plc. Although the Group received an extension of the period
allowed to correct the noncompliance in September 2007, such borrowings were
classified as current at 30 June 2007. Finally, as discussed above, of the
Group's cash and cash equivalents balance of $55.9 million at 30 June 2007,
$48.2 million is not available for general corporate purposes.
To address these matters, management has reviewed its investment program for
2007 and decreased its investment activity in exploration and infrastructure
improvements. Simultaneously, management is actively negotiating with
commercial lending institutions and other investors to secure additional general
purpose financing. In September 2007, the Group restructured short-term
advances from customers of $46.5 million at 30 June 2007 into a long-term
borrowing arrangement (Note 9). Additionally, in September 2007, the Group
obtained a non-binding commitment to extend $40 million (RR 1.02 billion) in
credit from a customer (Note 9). Management believes that the steps taken as
outlined above are sufficient to ensure that the Group has sufficient resources
to continue as a going concern for at least twelve months from 30 June 2007.
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 5: Accounting Policies
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 2006.
Certain new standards and interpretations have been published that are mandatory
for the Group's accounting periods beginning on or after 1 January 2007 or later
periods and which the Group has not early adopted.
Adoption of IFRS 7. Effective 1 January 2007, the Group adopted IFRS 7,
Financial Instruments: Disclosures ("IFRS 7"). IFRS 7 introduces new
requirements and guidelines regarding the disclosures of financial instruments.
The Group will disclose in its annual consolidated financial statements the
complete information required by IFRS 7. The adoption of IFRS 7 does not have
any impact on the classification and valuation of the Group's financial
instruments.
Adoption of IFRIC 8. Effective 1 January 2007, the Group adopted IFRIC 8, Scope
of IFRS 2 ("IFRIC 8"). IFRIC 8 introduces guidance for accounting for
transactions in which the entity cannot identify specifically some or all of the
goods or services received in exchange for equity instruments. The adoption of
IFRIC 8 did not have any impact on the Group's disclosures, financial position
or results of operations.
Adoption of IFRIC 10. Effective 1 January 2007, the Group adopted IFRIC 10,
Interim Financial Reporting and Impairment ("IFRIC 10"). IFRIC 10 prohibits
reversal of an impairment loss recognised in a previous interim period in
respect of goodwill or an investment in either an equity instrument or a
financial asset carried at cost. The adoption of IFRIC 10 did not have any
impact on the Group's disclosures, financial position or results of operations.
Other new standards and interpretations that did not significantly affect the
Group's financial position and results of operations when adopted on 1 January
2007 are: IFRIC 7, Applying the Restatement Approach under IAS 29 (effective for
annual periods beginning on or after 1 March 2006); and IFRIC 9 Reassessment of
Embedded Derivatives (effective for annual periods beginning on or after 1 June
2006).
Certain new standards and interpretations have been published that are mandatory
for the Group's accounting periods beginning after 1 January 2007 or later
periods and which the Group has not early adopted. These new standards and
interpretations are not expected to significantly affect the Company's financial
statements when adopted:
IAS 23, Borrowing Costs (revised March 2007; effective for annual periods
beginning on or after 1 January 2009); IFRS 8, Operating Segments (effective for
annual periods beginning on or after 1 January 2009); IFRIC 11, IFRS 2-Group and
Treasury Share Transactions (effective for annual periods beginning on or after
1 March 2007); IFRIC 13, Customer Loyalty Programs (effective for annual periods
beginning on or after 1 July 2008); and 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 12, Service Concession Arrangements ("IFRIC 12"), is effective for annual
periods beginning on or after 1 January 2008). IFRIC 12 is not expected to
significantly affect the Group's financial statements.
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 6: Equity
Share-based payments. 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 awards of 1,332,360 shares of restricted stock.
In January 2007, the Group granted an additional 2,074,944 shares of restricted
stock.
The total costs associated with the restricted stock granted during the six
months ended 30 June 2007 and 2006 were $14.48 million and $6.58 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 2007 and 2006, $6.70
million and $2.29 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 $3.0 million of expense related
to restricted stock granted to the Group's former chief executive officer, who
resigned in April 2007 (Note 10). As part of the former chief executive
officer's severance package, all unvested restricted stock grants were
immediately vested.
As of 30 June 2007, unvested restricted stock grants and their respective
vesting dates are presented in the table below.
Date of Grant January 2008 January 2009 January 2010 Total
February 2006 260,625 260,625 - 521,250
January 2007 548,268 548,267 548,265 1,644,800
Total 808,893 808,892 548,265 2,166,050
At 30 June 2007, restricted stock grants for 811,105 shares were fully vested
and issued. At 31 December 2006, no restricted stock grants were vested.
Earnings per share. For the six months period ended 30 June 2007, basic and
diluted earnings per share and the corresponding weighted average shares
outstanding used in each calculation are identical as all potentially dilutive
instruments are antidilutive for the periods presented.
For the six months period ended 30 June 2006, the diluted number of share is
calculated by adjusting the weighted average number of ordinary shares
outstanding to assume conversion of all dilutive potential ordinary shares. The
Company has three categories of dilutive potential ordinary shares: restricted
stock, warrants and share options.
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 7: Cost of Production
Six months ended 30 June:
2007 2006
Unified production tax 14,203 16,744
Depreciation and depletion 7,900 7,784
Wages and salaries including payroll taxes 6,614 6,788
Materials 3,165 2,702
Cost of purchased crude oil 34 2,324
Other taxes 1,075 968
Other 3,703 2,566
Total cost of production 36,694 39,876
Note 8: Selling, General and Administrative Expenses
Six months ended 30 June:
2007 2006
Wages and salaries 13,362 4,506
Share-based payments 6,695 2,285
Audit and professional consultancy fees 3,114 2,024
Transport, loading and storage services 3,057 2,517
Office rent and other expenses 1,566 596
Other 2,116 1,857
Total selling, general and administrative expenses 29,910 13,785
Included within wages and salaries and share-based payments for the six months
ended 30June 2007 are $5.3 million and $2.5 million, respectively, related to
severance costs for a key executive (Note 10).
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 9: Borrowings
Long-term borrowings. Long-term borrowings were as follows at 30 June 2007 and
31 December 2006:
30 June 2007 31 December
2006
Standard Bank plc 127,944 -
BNP Paribas Reserve Based Loan Facility 14,000 51,054
BNP Paribas Subordinated Loan - 10,570
Other 188 185
Subtotal 142,132 61,809
Less: current portion of long-term borrowings (142,132) (20,965)
Total long-term borrowings - 40,844
Standard Bank plc.. In January 2007, the Group entered into a new loan agreement
to fund the development of the Dulisminskoye field in Irkutsk Region, Eastern
Siberia. Goldman Sachs, as Arranger, and Standard Bank plc, as the funding bank,
have committed to provide a total of US$130 million in financing. The debt
facility is secured by 100 percent of the Group's ownership of Dulisma. This
debt financing is dedicated to fund in Urals Energy's commitment to develop the
oil reserves at its Dulisminskoye field. The Company incurred additional loan
organisation fees, which are recorded net in the financial statements and which
are amortised over the life of the loan.
The terms of the loan include an interest rate of 725 basis points over the
three month LIBOR rate of which LIBOR plus 300 basis points are payable
quarterly, with the remainder accruing and being capitalized to loan principal
until the loan matures in 2011 or when all principal and accrued interest is due
in a single payment. The loan may be prepaid at any time with certain penalties
if it is repaid before January 2009.
Concurrent with entering into the loan agreement, the Group entered into an
agreement with Goldman Sachs under which Goldman Sachs agreed to make payments
to the Group equal to the cash portion of the interest under the loan agreement
from 9 February 2007 to 9 February 2009. The Group paid Goldman Sachs $20.4
million for agreeing to make these payments to the Group as the interest comes
due. Goldman Sach's assumption of this liability was recognized as a financial
derivative asset in the Group's consolidated balance sheet, valued at inception
at its cost of $20.4 million.
The Group recognizes interest expense on the principal balance of the loan
agreement at the coupon rate of LIBOR plus 7.25 percent per annum. Amortization
of loan organisation fees is also recorded within interest expense.
Additionally, at each balance sheet date, the carrying value of the financial
derivative is adjusted to its fair value by reference to current market rates
for similar instruments. Any change in the fair value of the financial
derivative, other than those caused by cash payments received, is recorded
within the consolidated income statement.
Included within the Group's cash balance of $55.9 million at 30 June 2007 is
$48.2 million received under the agreement with Standard Bank plc. This amount
is designated exclusively for expenditures at the Group's subsidiary Dulisma.
Accordingly, such amount is not available for general corporate expenditures.
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 9: Borrowings (Continued)
At 30 June 2007, the Group was not in compliance with a financial covenant
requiring the maintenance of a minimum current ratio under its loan agreement
with Standard Bank plc. Although the Group received a waiver for this covenant
violation in September 2007 (Note 4), IFRS requires that such borrowings be
classified as current at 30 June 2007 as the waiver had not yet been obtained on
that date.
BNP Paribas Reserve Based Loan Facility. In November 2005, the Group entered
into a five year, revolving Reserve Based Loan Facility with BNP Paribas,
underwritten to a maximum commitment of $100.0 million. The facility is divided
into a senior tranche of $59.0 million that bears interest at LIBOR plus 5.0 %
and a junior tranche of $10.0 million priced at LIBOR plus 6.25 %. The weighted
average interest rate of the facility at 30 June 2007 and 31 December 2006 was
11.20% and 10.82%, respectively. Both tranches are payable on quarterly basis
and mature in December 2010. The facility is collateralized by liens on
property, plant and equipment of subsidiaries and includes certain financial and
other covenants under the facility, including the maintenance of a minimum
current ratio and a maximum ratio of total borrowings to EBITDA. At 30 June
2007, the Group was in compliance with all its covenants under the facility.
In August 2007, the Group fully repaid the Reserve Based Loan. As part of the
agreement reached with BNP Paribas to settle the loan in full, the Group also
committed to repurchase the warrants issued in connection with the Subordinated
Loan at a price equal to 1.02046 times the U.S. dollar to British Pound exchange
rate times the higher of either one British Pound or the difference between GBP
3.03 and the average market price of the Group's shares during the period from
19 June 2007 to the date of repurchase. No warrants were repurchased at the
date of these financial statements.
BNP Paribas Subordinated Loan. In January 2006, the Group obtained a $12.0
million subordinated loan from BNP Paribas (the "Subordinated Loan"). The
Subordinated Loan bears interest at LIBOR plus 5.0% (10.34% percent and 10.37%
percent at 30 June 2007 and 31 December 2006, respectively) and is repayable on
10 November 2010. Attached to the Subordinated Loan were warrants to purchase
up to two million of the Group's common stock for #3.03. The warrants are
exercisable at any time and expire in November 2010. The Group used the
proceeds from the Subordinated Loan to repay a loan from Bank Zenit of $12.0
million. In June 2007 the Group repaid the Subordinated Loan in full.
Management estimated the value of the warrants to be $1.75 million at issuance.
As the exercise price of the warrants is denominated in a currency other than
the Group's functional currency, the warrants are classified as a liability and
adjusted to fair value at each reporting date, with the change in fair value
recorded within the consolidated income statement. As the warrants are
exercisable at any time, this amount was recorded within current liabilities in
the Group's consolidated balance sheet. During the six months periods ended 30
June 2007 and 2006, respectively, the change in the fair value of outstanding
warrants resulted in a gain of $0.33 million and an expense of $3.31 million,
respectively.
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 9: Borrowings (Continued)
Scheduled maturities of long-term borrowings outstanding were as follows:
Scheduled maturities at
30 June 2007 31 December
2006
One year 142,132 20,965
Two to five years - 40,844
Thereafter - -
Total long-term borrowings 142,132 61,809
Short-term borrowings. Short-term borrowings were as follows at 30 June 2007
and 31 December 2006:
30 June 31 December
2006
2007
BNP Paribas Revolving Facility 2,000 2,000
Current portion of long-term borrowings 142,132 20,965
Total short-term borrowings and
current portion of long-term 144,132 22,965
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 9: Borrowings (Continued)
BNP Paribas Revolving Facility. In November 2006, the Group entered into a
revolving loan agreement with BNP Paribas for a maximum of $2 million with a
maximum maturity of 3 months and bearing interest of LIBOR plus 4.0% (9.37%
percent). This facility was repaid in full in July 2007.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 the lower of 70% of the estimated value of the aggregate estimated
deliveries under the off-take contract for the next succeeding eight month
period or $50 million. Each individual prepayment advance must be reimbursed
via the specified 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 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 1.00% on prepayments
for which the related volumes have been delivered, in order to mirror normal
commercial payment terms. The maximum amount of the facility may not exceed the
lower of 70% of the estimated value of the aggregate estimated deliveries under
the off-take contract for the next succeeding eight month period or $50 million.
ImpexOil. In September 2007, the Group entered into a revolving credit line for
up to RR 1.02 billion with Impex Oil, a customer of the Group on the Russian
domestic market. Borrowings under the credit line accrue interest at 12.0
percent per annum, payable monthly, are due in full in February 2009, and are
secured by a pledge of the Group's production from its subsidiaries Chepetskoye,
Dinyu, Michayuneft, CNPSEI, and OOO Nizhneomrinskaya Neft.
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 9: Borrowings (Continued)
Interest expense and income. Interest expense and income for the six months
ended 30 June 2007 and 2006 comprised the following:
Six months ended 30 June:
2007 2006
Short-term borrowings
Bank Zenit - 127
BNP Paribas Moscow 56 -
Total interest expense associated with short-term borrowings 56 127
Long-term borrowings
BNP Paribas Subordinated Loan
- interest at coupon rate 628 492
- commitment fees 26 -
- accretion of issuance costs and discount associated with warrants 1,694 174
BNP Paribas Reserve Based Loan Facility
- interest at coupon rate 2,176 3,330
- commitment fees 348 -
- accretion of issuance costs 2,127 374
Goldman Sachs
- interest at coupon rate 5,567 -
- accretion of issuance costs 457 -
Total interest expense associated with long-term borrowings 13,023 4,370
Finance leases 136 80
Less: capitalised borrowing costs (1,267) (793)
Other interest 583 466
Total interest expense 12,531 4,250
Total interest income (1,450) (765)
Total finance costs, net 11,081 3,485
Capitalized borrowing costs. The rate used for capitalization of borrowing
costs for the six months periods ended 30 June 2007 and 2006 were 12.11 percent
and 10.31 percent, respectively.
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 10: Balances and Transactions with Related Parties
For the purposes of these financial statements, 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 months ended 30 June:
2007 2006
Interest expense (income), net (64) (64)
Rental fees paid - 259
As of:
30 June 2007 31 December
2006
Accounts and notes receivable 712 708
Loans and advances receivable 1,148 1,983
Interest receivable 269 206
Accounts payable to contractors 291 863
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 advances receivable. Loans receivable comprise balances denominated
in U.S. dollars and are receivable from companies owned by directors or
management. Loans receivable bear interest at 10 percent per annum. Advances
receivable comprises a $0.8 million advance to an executive of the Group.
Compensation to senior management. The Group's senior management team comprises
10 people whose compensation totalled $16.049 million and $6.778 million for the
six months periods ended 30 June 2007 and 2006, respectively, including salary
and bonuses of $9.374 million and $4.493 million respectively, and stock
compensation of $6.675 million and $2.285 million, respectively, and no other
compensation was paid for both periods. Additionally, included in loans and
advances receivable at 30 June 2007 and 31 December 2006 were loans receivable
of $0.06 million and $0.955 million, from the Group's senior management team.
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 $5.3 million.
The expenses associated with accelerated vesting and the other miscellaneous
cash benefits were recorded within share-based payments and wages and salaries
in selling, general and administrative expenses in the interim condensed
consolidated financial information (Note 8).
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 11: 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 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 was no production from the area in
2006.
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
Dinyu-Savinoborskoe Dinyu 2018
Dulisminskoye Dulisma 2019
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.
Urals Energy Public Company Limited
Selected Notes to the Interim Condensed Consolidated Financial Information
(unaudited)
(in US dollars, tabular amounts in US$ thousands, except as indicated)
Note 11: Contingencies, Commitments and Operating Risks (continued)
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 these financial
statements.
Insurance policies. In August 2006, the Group insured all of its major assets,
including oil in stock, against a variety of risks and purchased insurance in
respect of certain personnel, including casualty, medical and travel insurance
for losses of up to $90 million. Also, a liability insurance policy covering
hazardous objects was put in place, including environmental liability, with a
total limit of $7.8 million. The associated expenses are included within
selling, general and administrative expenses in the consolidated income
statement.
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 these consolidated financial statements.
Other capital commitments. At 30 June 2007, the Company had no significant
contractual commitments for capital expenditures.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR UWONRBKRKURR
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