RNS Number : 7359B
Gulf Keystone Petroleum Ltd.
06 April 2017
 

 

 

6 April 2017                                                               

 

Gulf Keystone Petroleum Ltd. (LSE: GKP)

("Gulf Keystone", "GKP" or "the Company")

 

2016 Full Year Results Announcement

Strong operational performance, cash-flow positive, and ready to increase investment in Shaikan.

Gulf Keystone Petroleum, a leading independent operator and producer in the Kurdistan Region of Iraq, today announces its results for the year ended 31 December 2016.

Highlights to 31 December 2016 and post reporting period

Operational

·       Gulf Keystone's operations in the Kurdistan Region remained safe and secure throughout 2016. Plant uptime (at PF-1 and PF-2) of over 98%, once adjusted for export constraints, and strong HSSE performance with no lost-time incidents.

·       2016 gross production of 12.7 million barrels of oil ("MMstb"), an increase of 14% on 2015, equivalent to an average of 34,794 barrels of oil per day ("bopd"), at the upper-end of our 31,000-35,000 bopd guidance, with no formation water.

·       Shaikan-8 ("Sh-8") was brought back on-stream on 11 March 2017 and, while it is still being tested, is producing dry oil at a rate of c.1,800 bopd.

·       Shaikan production for Q1 2017 averaged 36,293 bopd.

·       Current daily production is at c.38,000 bopd.

·       In April 2017, the Company received confirmation from ERC Equipoise ("ERCE") verifying remaining 2P reserves of 615 MMstb, as at 31 December 2016. 

·       In addition to our 2P reserves there are significant contingent resources of 239 MMstb (2C) as identified in the 2016 Competent Person's Report ("CPR") also provided by ERCE, as at 30 June 2016.

·       Gross production guidance for 2017 is set at 32,000-38,000 bopd; without further investment in the field - beyond maintenance capital - we would expect production levels at the lower-end of our guidance range.

Financial - as at 31 December 2016

·      Cash receipts from the MNR amounted to $114.0 million net to GKP (2015: $56.8 million net to GKP).

·      Revenues up 126% at $194.4 million (FY15: $86.2 million) including $72.6 million in relation to the offset of payables due to the MNR (2015: nil).

·      Profit/loss from operations before exceptional items of $26.0 million (FY15:$81.7 million).

·      Loss after tax of $17.4 million (FY15: $214.0 million).

·      Operating costs per barrel on a gross field basis reduced to $3.5/bbl from $5/bbl in 2015.

·      As at 31 December 2016, the Group estimates an unrecognised receivable of $25 million (2015: $44 million) net to GKP on a diluted basis with regards to the unpaid export sales and $71 million (2015: $75 million) net to GKP for the past costs associated with the Shaikan Government Participation Option.

·      Strong liquidity at year end 2016 with unrestricted cash balance of $92.9 million.

·      Cash balance at 5 April 2017 of $112.7 million against $100 million of debt.

·      In Q1 2017, the Group received three further payments for 2016 from the MNR of $15 million gross each ($12 million net to GKP).

·      The Group completed its Balance Sheet Restructuring on 14 October 2016 reducing total debt from over $600 million to $100 million and raised additional cash through a successful $25 million Open Offer.

·      The Group has decided to pay its upcoming Reinstated Notes coupon of $5 million at 10% interest rate on 18 April 2017.

Corporate developments

·      Keith Lough was appointed Non-Executive Chairman in July 2016.

·      The Board was strengthened by the appointments of David H Thomas and Garrett Soden, Non-Executive Directors in October 2016.

·      The Management team was reinforced with the appointment of Stuart Catterall as Chief Operating Officer in January 2017.

·      The Ber Bahr Block is in the process of relinquishment.


Outlook

 

·      The Company is progressing in its ongoing discussions with the MNR regarding commercial and contractual conditions, in particular those around regular payments conforming to the Production Sharing Contract ("PSC"), and crude marketing arrangements. Subject to a satisfactory resolution to these points, which we anticipate securing around mid-year 2017, and partner approvals, we look forward to making further investments to maintain plateau production at the nameplate capacity of 40,000 bopd with a view to increasing to 55,000 bopd as soon as possible.
 

·      The Company is funded for the estimated capital expenditure of $58-68 million for the 40,000 bopd stabilisation case and a further $25-45 million for the increase to 55,000 bopd (cost estimates include 25% contingency), and work continues on optimisation of these programmes.

 

Jón Ferrier, Gulf Keystone's Chief Executive Officer, said:

 

"We are strongly encouraged by the stable performance of Shaikan in-line with expectations and I am pleased to report achieving average gross production for 2016 at 34,794 barrels of oil per day at the upper-end of our 31,000-35,000 bopd guidance, while over the first quarter of 2017 we averaged 36,293 bopd. We are cash flow positive with a healthy current cash balance of $112.7 million as at 5 April 2017, so we are primed for future development.  Since September 2015, we have received 16 payments from the MNR for Shaikan exports.

To reiterate the Group's position; we have a field which continues to perform predictably, a revitalised team, and a healthy balance sheet, with which we stand ready to further invest in the Shaikan Field and grow shareholder value."

 

The Company will hold a live audio webcast and conference call for analysts at 10:00 (UK) today, 6 April 2017.

 

The webcast will be available on the Company's website: www.gulfkeystone.com

 

 

Enquiries:

 

Gulf Keystone Petroleum:

+44 (0) 20 7514 1400

Jón Ferrier, CEO

 

Sami Zouari, CFO

 

Kate Leslie, Corporate Communications Manager

 

 

 

Celicourt Communications:

+44(0) 20 7520 9266

Mark Antelme

Jimmy Lea

 

 

 

or visit: www.gulfkeystone.com

 

The information communicated in this announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

 

 

Notes to Editors:

 

·           Gulf Keystone Petroleum Ltd. (LSE: GKP) is a leading independent operator and producer in the Kurdistan Region of Iraq and the operator of the Shaikan field with current production capacity of 40,000 barrels of oil per day

 

·           Further information on Gulf Keystone is available on its website www.gulfkeystone.com

 

 

Disclaimer

 

This announcement contains certain forward-looking statements that are subject to the risks and uncertainties associated with the oil & gas exploration and production business. These statements are made by the Company and its Directors in good faith based on the information available to them up to the time of their approval of this announcement but such statements should be treated with caution due to inherent risks and uncertainties, including both economic and business factors and/or factors beyond the Company's control or within the Company's control where, for example, the Company decides on a change of plan or strategy.  This announcement has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. This announcement should not be relied on by any other party or for any other purpose.

 

 

Chairman's Statement 

 

2016 threw a wide array of very serious challenges at your Company.  The majority of which were symptomatic of both the regional geo-politics and the continued slump in the international oil & gas market.  These factors all combined to form an incredibly taxing operating environment and saw Gulf Keystone Petroleum Ltd ("Gulf Keystone" or "GKP") facing potential insolvency.

 

However, now in 2017 it is my strongly held view that Gulf Keystone is not only in a stable condition but is also in the best position the Company has been in for a number of years. I must also acknowledge that in getting to this position, significant costs have been borne by shareholders and bondholders alike and, on behalf of the Board, I thank you for your support through difficult times and for enabling the recovery of your Company.

 

The reporting period began with a weak and unpredictable crude oil price, 70% below the highs that the industry had enjoyed previously, and Daesh was continuing to threaten the integrity of the Kurdistan Region of Iraq.  The region's response, which remains both brave and resolute, was a huge drain on its limited resources.  The support of the Peshmerga security forces, who were defending Kurdistan's border, was the absolute priority for the Kurdistan Regional Government ("KRG").  The security situation put further pressure on the region's financial position and, in turn, affected its ability to pay Gulf Keystone and all of the other international producing and exporting oil companies operating in the region. 

 

We entered 2016 with a disproportionate amount of debt, but GKP was not alone in being an independent Exploration & Production company with a high level of gearing.  Our debt instruments were added to the balance sheet at a different time when the market was buoyant and oil prices were at record highs. As we relayed to the market multiple times throughout the period, the Company needed to address its own liquidity crisis or face almost certain failure, therefore, the single most important event in 2016 was undoubtedly the successful completion of the Balance Sheet Restructuring in October. 

 

The balance sheet restructuring ("the Restructuring") was essential in safeguarding the future of the Company.  It was not a process that was entered into lightly, but the dearth of global merger and acquisition activity and general market uncertainty left us with no better option than to proceed with a full capital restructuring.  Overall, whilst recognising that any restructuring of this nature is painful for shareholders and bondholders due to value-dilution and uncertain recoveries, the alternative was insolvency and as such we were pleased that the restructuring was supported.  Aligning all of the varying interests was a significant challenge and I would like to thank the team for their hard work and tenacity in ultimately securing a successful result.  I would also like to sincerely thank all of our investors for their support through the restructuring.  

 

What we achieved was the opportunity to reset the Gulf Keystone story.  As I said at the outset, Gulf Keystone is now in a positive, and stable, position.  We finished 2016 with $93 million of cash and gross debt reduced to approximately $100 million.  Importantly, as we have received regular payments from the KRG's Ministry of Natural Resources ("MNR"), we became cash flow positive in 2016 and our cash balance as at 5 April 2017 stands at $113 million.  This was of course achievable due to the fact that the Gulf Keystone story is underpinned by the Shaikan field, which has continued to perform well during the period, as you will read throughout this report.  Whilst we entered 2016 with concerns regarding consistent payments for Shaikan crude, it was reassuring that we were paid regularly throughout the reporting period, and that this trend has continued into 2017.

 

2016 saw a number of changes to the Board and I thank again Andrew Simon, and Cuth McDowell who retired from the Board as Non-Executive Chairman and Non-Executive Director, respectively.  We also welcomed David Thomas and Garrett Soden onto the Board as Non-Executive Directors in October.  Both have already made a positive contribution and I am pleased to report that the Board is functioning well.

 

In keeping with our desire to ensure good corporate governance, during the reporting period we developed a more sophisticated suite of Key Performance Indicators ("KPIs") for the Company for 2017.  I'm pleased to say that the new set of KPI's will ensure GKP is in line with its peers in the sector and is further proof of our desire to align the Board's interests with shareholders.

 

Finally, I would like to reiterate my thanks not only to our shareholders and staff, but to all of our stakeholders, including in particular our partners within the KRG's MNR.  We remain firmly aligned with the interests of the KRG and look forward to a continuing positive outlook for Gulf Keystone. 

 

Keith Lough

Chairman 

 

Chief Executive Officer's Statement

 

Following a challenging 2016, we have entered 2017 with a revitalised company and a confident future outlook.

 

Shareholder support of the full capital restructuring completed in October 2016 was not only an endorsement of the Group, but also of the confidence in Kurdistan as an investible region. Its completion means we have been able to bring the focus back to the core of our business, the Shaikan field, having rebuilt the foundations of a strong future equity story to develop the field and unlock its potential as one of the most significant assets in Kurdistan.

 

We are strongly encouraged by the stable performance of Shaikan in-line with expectations and I am pleased to report achieving average gross production for 2016 at 34,794 barrels of oil per day ("bopd")  at the upper-end of our 31,000-35,000 bopd guidance, while over the first quarter of 2017 we averaged 36,293 bopd. While our guidance is not affected, I am happy to report that we re-opened the Shaikan-8 ("Sh-8") well on 11 March 2017 which has been adding 1,800 bopd of production with no formation fluid.  In April 2017, ERC Equipoise ("ERCE") verified gross Shaikan 2P reserves of 615 million barrels of oil ("MMstb") (as at 31 December 2016), as expected, following our latest Competent Person's Report ("CPR") (as at 30 June 2016).  The CPR was highly positive in reiterating our assumptions of the previous CPR about the quality of the Shaikan field, reporting substantial gross 2C resources of 239 MMstb and reinforcing its prominent position in the Kurdistan region. Production data from Shaikan continues to support these interpretations today and as we continue to produce we build on our understanding of the field's characteristics. We have now produced over 35 MMstb but believe we have only scratched the surface, having produced just over 5% of total Shaikan reserves and considerable development upside remaining.

 

At the end of February this year, the MNR began exporting all Shaikan crude production via trucks to Turkey, an arrangement that still stands, meaning that no Shaikan crude is currently being injected into the Kirkuk-Ceyhan export pipeline at Fishkhabour. We expect this to be a temporary arrangement and the long-term future of Shaikan production will be based on pipeline export.  While this temporary route is in place the MNR has confirmed that the economic benefit to the Group will be the same as that of the previous framework and that we will continue to receive a fixed payment of $15 million gross per month for sales of our crude, while they also intend to take full responsibility for any additional transportation costs. The economic neutrality of this arrangement is of course welcome, however, making progress on the planning of longer-term pipeline export arrangements, the main benefit of which would be reduced costs, and health, safety, security and environment ("HSSE") exposure, is a priority for 2017.

 

My focus on HSSE performance never wavers. How we protect the welfare of our employees, contractors, partners and communities neighbouring our operations remains at the forefront of how GKP is run. I am pleased to report that it has been another strong year in this regard and that all sites have remained safe and secure.

 

Stakeholder engagement remains a high priority for the GKP executive team and our aim is to facilitate effective communication through a regular dialogue in order to promote transparency, and we intend to ensure this culture is maintained throughout the business. A vital aspect of this engagement is how we maintain relationships of mutual benefit and respect with our hosts and partners in the Kurdistan Region of Iraq. We understand the challenges, geo-political and otherwise, that the Kurdistan region has faced in recent times, including changes in political and commercial arrangements as the region navigates budgetary independence, which have put financial pressure on the KRG and the MNR, only worsened by a low oil price environment. Likewise our needs as a public company and significant contributor to the region's oil production are understood, as demonstrated by the track record of payments we have received since September 2015, which made the balance sheet transaction possible. Good relations through constant communication to ensure alignment are helping us to continually grow and strengthen our long-standing social and economic relationship with the region.

 

The Group is progressing in its ongoing discussions with the MNR regarding commercial and contractual conditions, in particular those around regular payments conforming to the Production Sharing Contract ("PSC"), and line of sight to our own crude marketing arrangements. Subject to satisfactory clarity on these points, which we anticipate securing around mid-year 2017, and partner approvals, we look forward to making further investments to achieve another 2017 priority of bringing our production levels back to full nameplate capacity of 40,000 bopd as soon as possible. Shaikan's mid-term production potential is 110,000 bopd based on our published CPRs, and work continues to optimise the full field development plan ("FDP"), but 55,000 bopd, established with additional electric submersible pumps ("ESP") and a new drill well remains the near-term target. Accordingly, gross production guidance for 2017 is set at 32,000 to 38,000 bopd, with this broad range reflecting the uncertainty of finalising commercial terms on the PSC in 2017. Without additional investment in the field beyond maintenance capital, we would expect to achieve the lower-end of our guidance range. 

 

With that said we are cash flow positive with a healthy current cash balance of $113 million as at 5 April 2017, so we are primed for future development. Since September 2015 we have received 16 payments from the MNR for Shaikan exports and revenues have increased 126% year on year.

 

I am confident that the leadership team we have in place is the right one. During 2016, we undertook a comprehensive review of the organisation supported by Ernst & Young LLP, with the aim of enhancing performance and cost efficiency in order to optimise future value for our shareholders. We appointed new Senior Managers and a Commercial Director, while the addition of Chief Operating Officer, Stuart Catterall, strengthens the operational structure and signals a commitment to our future investments and dedication to realising the full potential of our asset. Moreover we appointed a new Chairman, and two new Non-Executive Directors, and I would like to take this opportunity to thank them along with the rest of the Board for their valued contributions and for adding a wealth of expertise and experience.

 

I extend my thanks to all Gulf Keystone employees and contractors for their commitment and hard work throughout the year and to all stakeholders and shareholders for your continued support of the Company. Finally, my thanks go out to the KRG, the MNR, and the Kurdistan region, as our hosts, and our partners MOL Hungarian Oil & Gas Plc ("MOL"), as we look forward to maintaining our enduring partnership as we work together to attain joint values of sustainability and prosperity. 

 

To close I would like to reiterate the Group's position as it stands; we have a field which continues to perform in line with expectations, a revitalised team, and a healthy balance sheet, with which we stand ready to further invest in the Shaikan Field and grow shareholder value.

 

Jón Ferrier

Chief Executive Officer

 

 

Operational Review

Operating performance in 2016 from the Shaikan field was strong, with improved safety performance and increased production volumes achieved despite reduced export in February and March due to pipeline export problems.  The field continues to perform in line with expectations and there has been no gas or water break-through to date at our producing wells.  ERCE updated their reserves number  for the field in April 2017, following the CPR in June 2016 and maintained the forecast reserves largely unchanged compared to the previous report in 2015.

Our investment programme for 2017 is designed to ensure that we maintain capacity at 40,000 bopd and we are also working on plans to increase capacity to 55,000 bopd in the near term subject to satisfactory contractual clarity.  Anticipated production for 2017 is 32,000 to 38,000 bopd, with the major uncertainties being the timing of our investment programme and the level of export availability. We have been pleased however with production in the first 3 months of 2017 where we have produced an average of 36,293 bopd.  This has been helped in part with Sh-8 being brought back on-stream at a rate of about 1,800 bopd on 11 March 2017. The well had previously been shut in due to "the influx" of drilling fluids lost into the reservoir and being produced back from the well.  So far production of Sh-8 has only shown traces of these fluids since its return to production.

HSSE

 

HSSE performance was once again strong with no Lost-time-incidents ("LTI") in 2016 and as of 31 December 2016, 535 LTI free days at Production Facility -1 ("PF-1") and 662 at Production Facility - 2 ("PF-2").

 

We achieved continuous improvements across all measurements of actual HSSE incidents in 2016. Total recordable incidents reduced from 7 in 2015 to 2 in 2016, LTI reduced from 2 to 0, and motor vehicle accidents reduced from 8 to 1.  In early 2017 however there has been an increase in reports of High Potential near-miss Incidents (HiPos), demonstrating the requirement to maintain diligence in this area.

 

In terms of leading indicators of safety performance, we completed 99% of our planned HSSE work programme for 2016, which included initiatives such as process safety, training and emergency response.

 

Our commitment to maintaining a high local proportion of the Group's workforce was continued with 81% of positions being local.  Furthermore, as training and experience has been gained we were able to promote local personnel into more senior positions via our Competency Based Framework ("CBF"). In 2016 a total of 15 promotions took place, including 2 expat positions that were localised.

 

Production

 

Due to the interruption of export pipeline operations from 16 February 2016 to 11 March 2016 our guidance for 2016 was set at 31,000 to 35,000 bopd.  Subsequently, we were pleased to have achieved an average for the year close to the top of this range at 34,794 bopd, compared with 30,500 bopd in 2015.

 

Unplanned production deferral during the year was 12% (2015:15%), of which, 11% was due to external factors (mainly offtake and export pipeline infrastructure availability) and only 1% related to operational issues.  Plant uptime at PF-1 and PF-2 was over 98%, once adjusted for export constraints.

 

Our total production for 2016 increased by 14% compared with 2015 (12.7 MMstb from 11.1 MMstb in 2015). The number of Shaikan truck deliveries for the 12 month period totalled 65,942. The maximum average sustained production over a month was 40,012 bopd achieved in May, but 2016 maximum daily production did not reach the highs of the previous year with a peak of 43,194 bopd compared with 45,063 bopd in 2015.

 

Observed natural pressure decline is in line with predicted field performance and consistent with the CPR reserves. This decline does not affect the 2P reserve estimate but will require further investment in wells and facilities to maintain a production capacity of 40,000 bopd. Our production average for Q1 2017 was 36,293 bopd as there were only minor export disruptions. However, our gross production guidance for 2017 is being set at 32,000 to 38,000 bopd which, based on previous years, estimates 15% deferment. Without further investment we would expect to achieve the lower-end of our guidance range.

 

The Group is progressing in its on-going discussions with the MNR regarding commercial and contractual conditions, in particular those around regular payments conforming to the PSC, and crude marketing arrangements. Subject to further clarity on these points and partner approvals, plans are in place for an interim project to stabilise Shaikan production at 40,000 bopd and increase up to 55,000 bopd, which we consider a bridge to the FDP target of 110,000 bopd. The stabilisation case to 40,000 bopd can be executed within nine to 12 months of committing to a capex programme of $58 million to $68  million  which we envisage consisting of up to 4 Electric Submersible Pumps ("ESPs") on the existing wells plus 1 new Jurassic well with an ESP, along with maintenance and further debottlenecking.  We estimate the increase to 55,000 bopd will require additional facilities and an optional trunk line tie-in, requiring a further capital expenditure programme of $25 million to $45 million (cost estimates include a 25% contingency).  For the stabilisation plus expansion to 55,000 bopd, we estimate a total execution time of 18 months.  However work continues on optimising these programmes. If these investments are deferred it could  result in reduced production from a combination of natural decline and the potential to lose one or two wells later in 2017 from either gas breakthrough or the inability to produce wells without artificial lift.

 

At the end of February 2017 a new export route for Shaikan crude was established. MNR began exporting all Shaikan crude by trucks to Turkey and since then, no Shaikan crude has been injected into the Kirkuk-Ceyhan export pipeline at Fishkhabour. The Group was informed that the new arrangement is required by the MNR for its overall crude oil export quality management and it is expected to be temporary. The transition caused no disruption to Shaikan production and it remains the export route for Shaikan crude today.

 

Reserves

 

Shaikan is performing in-line with expectations, in April 2017, the Company received confirmation from ERCE verifying remaining 2P reserves of 615 MMstb, as at 31 December 2016.  In addition to our 2P reserves there are significant contingent resources of 239 MMstb (2C) as identified in the 2016 CPR, an independent third-party audit of the Group's reserves, also provided by ERCE, as at 30 June 2016.  The CPR published on 31 August 2016, revised and updated the previous CPR dated September 2015 as the second report within a twelve month window.  In that time, we produced 12.4 MMstb, and the latest CPR reported no unexpected changes in reservoir behaviour observed, demonstrating the stable and predictable performance of the field.  Measured pressure decline and the absence of water or gas breakthrough support the geological interpretations of the field and provide the Group with increasing confidence of its understanding.  This means reduced risk and allows for a proposed full field development plan that will optimise the recovery and required well numbers.  An updated draft of the Shaikan FDP based on our findings, which includes the next FDP production target of 110,000 bopd, was submitted to the MNR in December 2015.  We are working with our partner MOL to finalise this development plan as soon as possible, once the timing of the short-term investment plan is confirmed. Cumulative production to date is over 35 MMstb or just over 5% of the 2P reserves.

 

Portfolio

 

Due to commercial considerations and capital constraints in early 2016, the decision was taken to rationalise our portfolio and the Sheikh Adi block was relinquished while Ber Bahr is currently in the process of relinquishment.

 

Stuart Catterall
Chief Operating Officer

 

 

 

Financial Review

 

As both the CEO and Chairman have outlined in their statements, 2016 has been a challenging year for the industry as a whole and for Gulf Keystone in particular. A debt burden of over $600 million repayable in 2017 with large interest payments due in 2016, combined with the low oil price environment, meant that the Group had a number of hurdles to overcome.

 

My outlook and goals for 2016 were clearly set and I am pleased to say that, despite all the difficulties, 2016 proved to be a year of significant progress and developments for the Group. We successfully completed a complex Balance Sheet Restructuring and successfully raised funds through a fully subscribed open offer ("Open Offer"), demonstrating continuous support from our shareholders for the Company and its management team, in spite of the difficult environment. As a result, the Group's debt was reduced from over $600 million to $100 million.

 

Despite geopolitical difficulties and low oil prices, the MNR was committed to supporting the producers who operate in the Kurdistan Region. The Group has seen a marked improvement in cash receipts with gross payments of $142.5 million ($114.0 million net to the Group) received in 2016 (2015: $74.2 million net to the Group, including domestic revenues).

 

Our progress on the implementation of the revised Shaikan PSC terms has not been as swift as we had expected. However, the Group is progressing in its discussions with the MNR and its partner MOL on resolving the remaining commercial and contractual uncertainties. This will allow the Group to invest with confidence in the next stage of the Shaikan development and unlock the potential of this remarkable field, which continues to deliver strong production in line with our expectations

 

Operating Results

 

Revenue production

 

Gross liftings for the year were 12.7 million barrels ("bbl") of oil (2015: 11.1 million bbl of oil) all of which was trucked to Fishkhabour for injection into the export pipeline (2015: 8.6 million barrels for export market and 2.5 million barrels for domestic off take).

 

The Group received regular payments from the MNR for oil sales during the period. The payments amounted to $12 million net a month with the exception of February when the receipt was $6.0 million net, due to pipeline export problems.  As at 31 December 2016, the Group recognised three months of revenue receipts outstanding of $36 million net (2015: $12 million net), all of which were received in Q1 2017.

 

Due to continued uncertainty relating to the payment mechanism for sales to the export market, the Group recognises its revenues when the cash receipt is assured (see note 2). Based on this, revenue recognised for 2016 amounted to $194.4 million (2015: $86.2 million), including $121.8 million for assured receipts in relation to the Group's revenue entitlements and $72.6 million recognised by offsetting payables to the MNR against amounts due from previously unrecognised revenue.

 

The Group's production is sold under its oil export arrangements with the KRG at a field-specific quality discount to the price of Brent crude oil and after transportation costs. The Group continues to assume Shaikan quality discount at $14.7/bbl, subject to future audit with the MNR. Transportation costs amounted to $5.7/bbl from January to October 2016 and $5.2/bbl from October 2016 onwards. Based on these discussions, the realised price for 2016 export sales is estimated at $24/bbl (2015: export sales $22/bbl; domestic sales $18/bbl). This remains subject to audit and reconciliation, and the establishment of a retroactive quality bank for Kurdistan crude oil.

 

Unrecognised revenue arrears at 31 December 2016 are estimated at $25.0 million (2015: $44.0 million) on a diluted basis (based on the implementation of the Second Shaikan Amendment in the manner envisaged by the MNR Agreement).

 

Production cost

 

Cost of sales for the year was $142.8 million (2015:$136.9 million). This includes production costs and depreciation, depletion and amortisation. The Group saw a decrease of 27% in production costs, excluding production bonus and capacity payments due to the KRG, from $48.1 million in 2015 to $35.2 million in 2016. On a gross field basis, production costs per gross barrel excluding production bonus and capacity payments due to the KRG were $3.5/bbl (2015: $5/bbl). The Group continued to improve efficiency and reduce costs throughout the year achieving operating costs per barrel well under the stated target of $4.5/bbl.

 

The Group generated a gross profit for the year of $51.6 million (2015: $50.7 million loss) driven primarily by the recognition of the revenue arrears and improved revenue receipts in the year.

 

Change in accounting policy

 

During the year, the Group changed its accounting policy for its oil and gas assets from modified full cost to successful efforts.  As a result of the change, the Group restated its prior year financial statements by writing off the remaining balance of the Ber Bahr block of $79.0 million as of 31 December 2015. Furthermore, all expenditures relating to the Sheikh Adi and Ber Bahr blocks were written off and included in the Impairment expense and General and administrative expense, respectively, in the Consolidated Income Statement in 2016. The effects of the change in the Consolidated Financial Statements are discussed in detail in Note 25.

 

Non-Operating Results

 

Following the change in its accounting policy and the relinquishment of the Sheikh Adi block in March 2016, the Group recognised an impairment expense of $215.7 million (2015: a restated expense of $82.6 million) (see notes 10 and 25). The restatement of the 2015 balance was a result of the change in the Group's accounting policy, meaning that the Group's decision to relinquish the Ber Bahr block at the end of 2015 resulted in impairment.

 

A gain on debt extinguishment of $222.5 million resulted from the successful Balance Sheet Restructuring ("the Restructuring") in October 2016 when the Group extinguished its convertible bonds and guaranteed notes in consideration for 4,585,192,303 and 15,031,035,578 common shares, respectively and the issue of $100 million of Reinstated Notes (see note 16).

 

Other gains amounted to $9.9 million (2015: $3.1 million). The Group was successful in securing the release of $3.2 million unpaid costs in the Excalibur litigation. The Group relinquished Akri Bijeel in December 2015 and executed the Akri Bijeel Joint Operating Agreement Termination Agreement in June 2016 with no further liabilities payable by the Group. This resulted in a release of a decommissioning provision of $3.7 million and extinguishment of a contingent liability estimated at $39.9 million. The remaining balance relates to foreign exchange gains (see note 6).

 

General and administrative expenses for 2016 were 18% down at $25.5 million (2015: $31.0 million). The decrease has been generated through a cost review and efforts to increase efficiencies and reduce costs, partially offset by an increase in the advisory and other costs associated with the Restructuring. 

 

The Group generated an after tax loss of $17.4 million (2015: $214.0 million restated loss). The improved bottom line is a result of both higher revenues and lower costs.

 

Cash Flow

 

The Group generated cash in 2016 without any significant external funding inflows. The net overall increase in cash and cash equivalents during the year was $49.2 million (2015: $44.2 million decrease) with cash and cash equivalents totalling $92.9 million at 31 December 2016 (2015: $43.6 million).

 

The Group generated a positive cash flow of $49.6 million (2015: inflow $20.7 million) from operations due to the improved revenue payment cycle and prudent cost management.  The successful completion of the Restructuring meant that the interest due on the Notes and Convertible Bonds in 2016 was converted into common shares alongside the debt principals and the Group made no interest payments (2015: $52.9 million).

 

The Group spent $9.7 million on investing activities (2015: $52.1 million) which is a result of asset portfolio rationalisation and limited investment in the Shaikan field reflecting the Group's strategic decision to limit its spend on capital activities until a regular and predictable payment cycle is established and outstanding entitlements from the KRG are addressed.

 

The Group also raised $9.7 million through financing activities (2015: $39.4 million). The majority of these funds were raised through the successful completion of the Open Offer on 14 October 2016.

 

Corporate Activities

 

Balance sheet restructuring

 

The Group successfully completed the Balance Sheet Restructuring on 14 October 2016 to address the Group's guaranteed notes and convertibles bonds maturing in April 2017 and October 2017, respectively.  As a result, the Group's debt was reduced from over $600 million of Convertible Bonds and Guaranteed Notes to $100 million of Reinstated Notes through full conversion of the Convertible Bonds and partial conversion of the Guaranteed Notes to Common Shares. The Reinstated Notes give the Group an option to defer the payment of the first two years of interest until the maturity in 2021 (see note 16 for further details). The Group also has the flexibility to seek and raise additional debt of up to $45 million through the use of the Super Senior Debt basket and the General Debt Basket. The Reinstated Notes do not contain covenants or debt service reserve account requirement, freeing $32.5 million of cash for general use. In conjunction with the Restructuring, the Group completed a successful $25.0 million Open Offer on 14 October 2016 (see note 16 for further details), leading to a strong cash balance at 31 December 2016.

 

Exploration blocks relinquishment

 

In March 2016, as part of the Group's strategy to focus on its core assets, the Group relinquished the Sheikh Adi block and terminated the Sheikh Adi PSC. Under the terms of the Sheikh Adi Relinquishment, the Group relinquished to the KRG its right to drill, explore, and export oil and gas from the Sheikh Adi block.  Both the KRG and the Group relieved each other from any claims and obligations they may have against the other under the PSC, with the exception of $10.0 million relating to reduced PSC bonuses due on the declaration of commerciality.  This will be offset against the past costs associated with the Shaikan Government Participation Option.

The Group announced its intention to relinquish the Ber Bahr block as part of its 2015 results. The relinquishment is currently in the process of finalisation.  Additional costs incurred on Ber Bahr during the year relate to remediation and on-going general and administrative cost associated with the termination of the licence.

 

Completion of Share consolidation

 

Following the completion of the restructuring plan, the number of existing common shares significantly increased.  The Group considered that the issued share capital was considerably higher than similar sized companies listed on the London Stock Exchange and adversely impacted investors' perception of the company.  Hence, on 16 November 2016, the Group proposed to undertake a consolidation of its shares (the "Consolidation") pursuant to which the 22,942,956,605 existing common shares would be divided in 229,429,566 new common shares of $1 each. The Consolidation was completed on 9 December 2016. The new common shares have the same rights and are subject to the same restrictions as common shares prior to consolidation.  All existing options and warrants have been consolidated on the same 100:1 basis.  Fractional entitlements arising from the consolidation were aggregated and sold in the market with the net proceeds donated to a charity designated by the Board of Directors of the Company. The Group believes that the Consolidation of the existing common shares may improve the liquidity and marketability of the common shares to a wider range of investors, including institutional investors and will make them a more attractive investment proposition.

 

Second Shaikan PSC Amendment

 

The Group continues to work towards the execution of the Second Shaikan PSC Amendment implementing the terms of the agreement signed by the MNR and Gulf Keystone Petroleum International Limited ("GKPI") on 16 March 2016 (the "Bilateral Agreement"). For the avoidance of doubt, MOL was not a party to the Bilateral Agreement.  The Bilateral Agreement, inter alia, records the MNR's approval to reduce the Group's capacity building charge from 40% to 30% of profit petroleum, and the MNR's approval of the proposed assignment and transfer to GKPI of the 5% participating interest in the Shaikan PSC currently held by Texas Keystone International Limited. It also documents the MNR and GKPI's intention to implement the Third Party Interest so that a 7.5% participating interest in the Shaikan PSC in aggregate shall be allocated in favour of GKPI and MOL pro rata to their respective participating interests and a 7.5% carried interest in the Shaikan PSC shall be allocated to the MNR. In addition, the MNR and GKPI stated their intention to recognise the allocation to the MNR of the Option of Government Participation in the Shaikan PSC with effect from 1 August 2012 (subject to the satisfaction of certain conditions, including the payment by the MNR of associated past costs attributable to the Option of Government Participation).

 

Staff Retention Plan and Value Creation Plan

 

In order to retain and motivate employees, the Company introduced a new Staff Retention Plan in 2016 (the "SRP").  This SRP was approved by shareholders at the Annual General Meeting on 8 December 2016 and its implementation was approved by the Company's Remuneration Committee on 12 December 2016.  Employees who are not participating in the Value Creation Plan ("VCP") are eligible for the SRP. The SRP is based on an allocation of nil-cost options over Gulf Keystone Petroleum (GKP) shares which will vest on completion of a 3-year retention period or on a change of control.  Should a change of control occur during the first 12 months of the SRP, then only 50% of the shares will vest.  In years 2 and 3, 100% of the shares will vest.  A total of 1% of the company's issued share capital was reserved for the SRP.

 

Additionally, the Company implemented the VCP for Executive Directors.  Participants in the VCP, who are selected at the discretion of the Remuneration Committee, are awarded units representing their share in a 'Performance Pot' equivalent to 8% of the increase in value of the Company in excess of a minimum annual rate of return to shareholders.  Subject to the Company generating a rate of return to shareholders of not less than 8% per annum compound (the "hurdle") participants will be granted nil-cost options each year for five years, starting one year after the initial award of units.  The value of shares subject to each option corresponds to the individual's share of the Performance Pot.  If, by the end of the 5th plan year the Company has failed to generate the hurdle rate of returns to shareholders, all unvested nil-cost options will lapse.   The aggregate value of all nil- cost options granted at previous measurement dates shall not exceed $20 million.  If there is a change of control prior to 31st December 2017, the participants will receive 2% of the value of the sale consideration less the value provided to employees under the SRP.

 

Financial Strategy and Outlook for 2017

 

Improved liquidity and capacity

 

In 2017, we are in a strong position with markedly improved liquidity and financial flexibility. As at 5 April 2017 the Group's cash and cash equivalents were $112.7 million.

 

Several challenges still face our Group, as outlined below, but we believe we have the right partners and team to tackle them:

 

-       We will continue to work on achieving further contractual and commercial clarity and will work towards the

        execution of the Second Shaikan PSC Amendment;

-       We will maintain our active dialogue with the MNR and aim to shift to revenue receipts in accordance with the   

        PSC entitlements;

-       We will continue to seek clarifications on the marketing terms and market routes for our crude; and

-       Prudent resource management and robust operational and financial controls remain at the forefront of our

        operation and we are striving to deliver improvements wherever possible.

 

The Group continues its efforts to manage costs prudently whilst maintaining safe and secure operations. We have successfully reduced operating costs in 2016 to $3.5/bbl from $5/bbl in 2015. Our operating costs guidance for 2017 is $4 per bbl as we have identified a number of facilities and infrastructure maintenance projects that will help us to ensure smooth and safe operations. 

 

Considering the current healthy cash balance and regularity of payments from the MNR, the Group has decided to pay its upcoming Reinstated Notes coupon of $5 million at 10% interest rate on 18 April 2017, even though it has the option to postpone it to maturity (at 13% interest rate).

 

In addition to our strong cash balance, we have a positive outlook on our forward liquidity, which will support our investments with a view to maintaining our gross production at 40,000 bopd and potentially increasing it to 55,000 bopd, subject to approval by the MNR and our partners MOL.  

 

With the successful restructuring and improved revenue flow, we now have the financial strength to focus on realising the potential of our asset.

 

 

 

Sami Zouari 

 

Chief Financial Officer

 

 

 

Consolidated Income Statement

For the year ended 31 December 2016

 

 

 

Notes

2016

2015

 

 

$'000

$'000

 

 

 

As restated

 

 

 

(note 25)

Continuing operations

 

 

 

Revenue

2

194,409

86,165

Cost of sales

3

(142,827)

(136,872)

Gross profit/ (loss)

 

51,582

(50,707)

 

 

 

 

General and administrative expenses

 

(25,536)

(30,990)

Profit/ (loss) from operations before exceptional items

4

26,046

(81,697)

 

 

 

 

Interest revenue

2

100

42

Finance costs

7

(60,182)

(52,075)

Impairment expense

10

(215,658)

(82,596)

Gain on debt extinguishment

16

222,455

-

Other gains

6

9,931

3,051

Loss before tax

 

(17,308)

(213,275)

 

 

 

 

Tax charge

8

(127)

(689)

Loss after tax for the year

 

(17,435)

(213,964)

 

Loss per share (cents)

 

 

 

Basic

9

(30.82)

(2,283.66)

Diluted

9

(30.82)

 (2,283.66)

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2016

 

 

 

2016

2015

 

 

$'000

$'000

 

 

 

As restated

 

 

 

 

Loss for the year

 

(17,435)

(213,964)

 

Items that may subsequently be reclassified to profit or loss:

 

 

 

 

 

 

 

Exchange differences on translation of foreign operations

 

(2,901)

(1,139)

 

 

 

 

Total comprehensive loss for the year

 

(20,336)

(215,103)

 

The comparatives have been restated following the change in accounting policy from modified full cost to successful efforts (see note 25 for further details) and for the effect of Share Consolidation (see note 19 for further details).
 

Consolidated Balance Sheet

As at 31 December 2016

 

 

Notes

2016

2015

 

 

$'000

$'000

 

 

 

As restated

(note 25)

Non-current assets

 

 

 

Intangible assets

10

99

235,709

Property, plant and equipment

11

489,379

562,178

Deferred tax asset

18

310

483

 

 

489,788

798,370

 

 

 

 

Current assets

 

 

 

Inventories

13

15,971

18,544

Trade and other receivables

14

41,565

16,527

Cash and cash equivalents

 

92,870

43,641

 

 

150,406

78,712

Total assets

 

640,194

877,082

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

Trade and other payables

15

(56,284)

(127,399)

Provisions

17

(7,461)

(11,151)

 

 

(63,745)

(138,550)

 

 

 

 

Non-current liabilities

 

 

 

Convertible bonds

Other borrowings

Provisions

16

16

17

-

(310,444)

(98,886)

(234,094)

(23,794)

(27,333)

 

 

(122,680)

(571,871)

Total liabilities

 

(186,425)

(710,421)

Net assets

 

453,769

166,661

 

 

 

 

Equity

 

 

 

Share capital

19

229,430

9,781

Share premium account

19

920,728

834,619

Convertible bonds reserve

 

-

10,179

Exchange translation reserve

 

(4,299)

(1,398)

Accumulated losses

 

(692,090)

(686,520)

Total equity

 

453,769

166,661

 

A presentational change to combine Share Option Reserve and Accumulated Losses was made in 2016.

 

The financial statements were approved by the Board of Directors and authorised for issue on 5 April 2017 and signed on its behalf by:

 

 

 

 

Jón Ferrier

Chief Executive Officer

 

 

 

Sami Zouari

Chief Financial Officer

 

 

Consolidated Statement of Changes in Equity

For the year ended 31 December 2016

 

 

 

 

 

 

 

Attributable to equity holders of the Company

 

Notes

 

Share

capital

Share

premium account

Exchange translation reserve

Accumulated losses

Convertible bonds reserve

Total

equity

 

$'000

$'000

$'000

$'000

$'000

$'000

 

 

 

 

 

 

 

 

 

 

 

Balance at 1 January 2015

 

8,922

796,099

(259)

  (480,991)

 

 

 

 

15,834

As restated

(note 25)

 

 339,605

 

 

 

 

 

 

 

 

Net loss for the year

 

-

-

-

(213,964)

-

(213,964)

Other comprehensive loss for the year

 

-

-

(1,139)

-

-

(1,139)

Total comprehensive loss for the year

 

-

-

(1,139)

(213,964)

-

(215,103)

Share-based payment expense

22

-

-

-

2,723

-

2,723

Deferred tax on share-based payment transactions

18

-

-

-

57

-

57

Share issue

19

859

38,520

-

-

-

39,379

Convertible bond equity amortisation

16

-

-

-

5,655

(5,655)

-

Balance at 31 December 2015

 

9,781

834,619

(1,398)

(686,520)

10,179

166,661

 

 

 

 

 

 

 

 

Net loss for the year

 

-

-

-

(17,435)

-

(17,435)

Other comprehensive loss for the year

 

-

-

(2,901)

-

-

(2,901)

Total comprehensive loss for the year

 

-

-

(2,901)

(17,435)

-

(20,336)

Share-based payment expense

22

-

-

-

1,686

-

1,686

Share conversion and issue, net of issue cost

19

219,649

86,109

-

-

-

305,758

Transfer of convertible bond reserve

16

-

-

-

10,179

(10,179)

-

Balance at 31 December 2016

 

229,430

920,728

(4,299)

(692,090)

-

453,769

                 

 

 

 

A presentational change to combine Share Option Reserve and Accumulated Losses was made in 2016.

 

Consolidated Cash Flow Statement

For the year ended 31 December 2016

 

 

Notes

2016

2015

 

 

$'000

$'000

 

 

 

As restated

(note 25)

Operating activities

 

 

 

Cash generated in operations

20

49,619

20,663

Interest received

 

100

42

Guaranteed note and  convertible bond coupon payments

 

-

(52,903)

Net cash generated from /(used in) operating activities

 

49,719

(32,198)

 

 

 

 

Investing activities

 

 

 

Purchase of intangible assets

 

(123)

(5,607)

Purchase of property, plant and equipment

 

(9,557)

(46,542)

Net cash used in investing activities

 

(9,680)

(52,149)

 

 

 

 

Financing activities

 

 

 

Proceeds on issue of share capital and conversion

19

23,535

39,379

Cost incurred on the Restructuring

 

(13,884)

-

Net cash from financing activities

 

9,651

39,379

 

 

 

 

Net increase/ (decrease) in cash and cash equivalents

 

49,690

(44,968)

Cash and cash equivalents at beginning of year

 

43,641

87,835

Effect of foreign exchange rate changes

 

(461)

774

 

 

 

 

Cash and cash equivalents at end of the year being bank balances and cash on hand(1)

 

92,870

43,641

 

 

(1) In 2016, there was no Debt Service Reserve Account requirement for the Reinstated Notes (2015 - $32.5 million held as restricted cash as stipulated by the 2014 Notes).  For further details, please see Note 16.

 

Summary of Significant Accounting Policies

 

General information

 

The Company is incorporated in Bermuda (registered address: Cumberland House, 9th Floor, 1 Victoria Street, Hamilton, Bermuda). On 25 March 2014, the Company's common shares were admitted, with a standard listing, to the Official List of the United Kingdom Listing Authority ("UKLA") and to trading on the London Stock Exchange's Main Market for listed securities. Previously the Company was quoted on AIM, a market operated by the London Stock Exchange. In 2008, the Company established a Level 1 American Depositary Receipt programme in conjunction with the Bank of New York Mellon which has been appointed as the depositary bank. The Company serves as the holding company for the Group, which is engaged in oil and gas exploration and production, operating in the Kurdistan Region of Iraq and the Republic of Algeria.

 

Adoption of new and revised accounting standards

 

Amendments to IFRSs that are mandatorily effective for the current year

 

In the current year, the Group has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January 2016. Their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements.

 

Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception

The Group has adopted the amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception for the first time in the current year. The amendments clarify that the exemption from preparing consolidated financial statements is available to a parent entity that is a subsidiary of an investment entity, even if the investment entity measures all its subsidiaries at fair value in accordance with IFRS 10. The amendments also clarify that the requirement for an investment entity to consolidate a subsidiary providing services related to the former's investment activities applies only to subsidiaries that are not investment entities themselves.

As the Company is not an investment entity and does not have any holding company, subsidiary, associate or joint venture that qualifies as an investment entity, the adoption of the amendments has had no impact on the Group's consolidated financial statements.

Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations

The Group has adopted the amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations for the first time in the current year. The amendments provide guidance on how to account for the acquisition of a joint operation that constitutes a business as defined in IFRS 3 Business Combinations. Specifically, the amendments state that the relevant principles on accounting for business combinations in IFRS 3 and other standards should be applied. The same requirements should be applied to the formation of a joint operation if and only if an existing business is contributed to the joint operation by one of the parties that participate in the joint operation.

A joint operator is also required to disclose the relevant information required by IFRS 3 and other standards for business combinations.

The adoption of these amendments has had no impact on the Group's consolidated financial statements.

Amendments to IAS 1 Disclosure Initiative

The Group has adopted the amendments to IAS 1 Disclosure Initiative for the first time in the current year. The amendments clarify that an entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material, and give guidance on the bases of aggregating and disaggregating information for disclosure purposes. However, the amendments reiterate that an entity should consider providing additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, events and conditions on the entity's financial position and financial performance.

In addition, the amendments clarify that an entity's share of the other comprehensive income of associates and joint ventures accounted for using the equity method should be presented separately from those arising from the Group, and should be separated into the share of items that, in accordance with other IFRSs: (i) will not be reclassified subsequently to profit or loss; and (ii) will be reclassified subsequently to profit or loss when specific conditions are met.

The amendments also address the structure of the financial statements by providing examples of systematic ordering or grouping of the notes.

The adoption of these amendments has not resulted in any impact on the financial performance or financial position of the Group.

Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation

The Group has adopted the amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation for the first time in the current year. The amendments to IAS 16 prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment. The amendments to IAS 38 introduce a rebuttable presumption that revenue is not an appropriate basis for amortisation of an intangible asset. This presumption can only be rebutted in the following two limited circumstances:

a)     when the intangible asset is expressed as a measure of revenue; or

b)     when it can be demonstrated that revenue and consumption of the economic benefits of the intangible asset are highly correlated.

As the Group already uses the straight-line method for depreciation and amortisation for its property, plant and equipment and intangible assets, respectively, the adoption of these amendments has had no impact on the Group's consolidated financial statements.

Annual Improvements to IFRSs 2012-2014 Cycle

The Group has adopted the amendments to IFRSs included in the Annual Improvements to IFRSs 2012-2014 Cycle for the first time in the current year.

The amendments to IFRS 5 introduce specific guidance in IFRS 5 for when an entity reclassifies an asset (or disposal group) from held for sale to held for distribution to owners (or vice versa). The amendments clarify that such a change should be considered as a continuation of the original plan of disposal and hence requirements set out in IFRS 5 regarding the change of sale plan do not apply. The amendments also clarify the guidance for when held-for-distribution accounting is discontinued. 

The amendments to IFRS 7 provide additional guidance to clarify whether a servicing contract is continuing involvement in a transferred asset for the purpose of the disclosures required in relation to transferred assets.

The amendments to IAS 19 clarify that the rate used to discount post-employment benefit obligations should be determined by reference to market yields at the end of the reporting period on high quality corporate bonds. The assessment of the depth of a market for high qualify corporate bonds should be at the currency level (i.e. the same currency as the benefits are to be paid). For currencies for which there is no deep market in such high quality corporate bonds, the market yields at the end of the reporting period on government bonds denominated in that currency should be used instead.

The adoption of these amendments has had no effect on the Group's consolidated financial statements.

 

New and revised IFRSs in issue but not yet effective

 

In the current year, no new or revised Standards and Interpretations have been adopted. 

 

At the date of the authorisation of these financial statements, the Group has not applied the following new and revised IFRSs that have been issued but are not yet effective:

 

IFRS 9

Financial Instruments

IFRS 15

Revenue from Contracts with Customers

IFRS 16

Leases

IFRS 2 (amendments)

Classification and Measurement of Share-based Payment Transactions

IAS 7 (amendments)

Disclosure Initiative

IAS 12 (amendments)

Recognition of Deferred Tax Assets for Unrealised Losses

IFRS 10 and IAS 28 (amendments)

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

 

 

With the exception of IFRS 2 (amendments), IFRS 9, IFRS 15 and IFRS 16, the Directors do not currently anticipate that the adoption of the Standards and Interpretations listed above will have a material impact on the financial statements of the Group in future periods. A detailed assessment of the effect of IFRS 2 (amendments), IFRS 9, IFRS 15 and IFRS 16 has not yet been completed.

 

Statement of compliance

 

The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union.

 

Basis of accounting

 

The financial statements have been prepared under the historical cost basis, except for the valuation of hydrocarbon inventory and the valuation of certain financial instruments, which have been measured at fair value, and on the going concern basis. Equity-settled share-based payments were initially recognised at fair value, but have not been subsequently revalued. The principal accounting policies adopted are set out below.

 

Going Concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement, the Chief Executive Officer's Statement and the Operational Review. The financial position of the Group at the year end and its cash flows and liquidity position are included in the Financial Review. 

 

The Group successfully completed a Balance Sheet Restructuring Transaction (the "Restructuring") on 14 October 2016 which addressed the difficulties of raising funds to pay for the Guaranteed Notes and Convertible Bonds maturing in April and October 2017, respectively. As a result of the Restructuring, the Group's debt was reduced from over $600 million to $100 million of the Reinstated Notes through the partial conversion of the guaranteed notes and full conversion of the convertible bonds to the Company's Common Shares. The Reinstated Notes give the Group an option to defer the payment of interest arising in the first two years until the maturity of the Reinstated Notes (see note 16 for further details). The Group also has the flexibility to raise additional debt of up to $45 million through the use of the Super Senior Debt basket and the General Debt Basket. The Reinstated Notes do not contain a Debt Service Reserve Account requirement freeing up $32.5 million of cash for general use. In conjunction with the Restructuring, the Group raised additional funds through successful $25 million Open offer 14 October 2016. 

 

The Group has seen a significant improvement in the pattern of cash receipts from the MNR for the oil sent for export with the total receipts of $102 million net to the Group in 2016 and further receipts of $36 million in the first quarter of 2017 in relation to 2016 sales.  

 

Following the relinquishment of the Sheikh Adi block in March 2016 and the ongoing formal relinquishment of the Ber Bahr block, the Group has focused on its core asset, the Shaikan block.  The Group's improved liquidity arising from the successful restructuring, among other factors, is expected to allow the implementation of the Group's near term investment plan to maintain production at 40,000 bopd with the potential to increase production to 55,000 bopd.  This is subject to the MNR and MOL approvals, the continuation of the regular payment cycle from the MNR and a commercially acceptable investment environment. 

 

The significant reduction of the debt burden, the option to delay the Reinstated Notes interest payments and the improvements in oil revenues receipts alongside prudent cost management give the Group the financial flexibility and capability to meet its working capital requirements.

 

The Group continues to closely monitor and manage its liquidity risk. Cash forecasts are regularly produced and sensitivities run for different scenarios including, but not limited to, changes in commodity prices, different production rates from the Shaikan block, costs contingencies, disruptions to revenue receipts, etc. The Group has taken appropriate action to reduce its cost base and has $112.7 million of free cash at 5 April 2017. The Group's forecasts, taking into account the risks applicable to the Group, show that the Group will be able to have sufficient financial headroom for the 12 months from the date of approval of the 2016 Annual Report and Accounts.

 

Based on the analysis performed, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual Financial Statements.

 

Basis of consolidation

 

The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

 

Joint arrangements

 

The Group is engaged in oil and gas exploration, development and production through unincorporated joint arrangements; these are classified as joint operations in accordance with IFRS 11. The Group accounts for its share of the results and net assets of these joint operations. In addition, where the Group acts as Operator to the joint operation, the gross liabilities and receivables (including amounts due to or from non-operating partners) of the joint operation are included in the Group's balance sheet.

 

Sales and interest revenue

 

The recognition of revenue, particularly the recognition of revenue from export sales, is considered to be a key accounting judgement. For all sales, the goods are considered to be delivered and the title passed at the point of loading at the Shaikan field. For sales into the local market, it is clear that, at this point of delivery, economic benefit will flow to the Group and that revenue and costs can be measured reliably and therefore revenue is recognised. As the payment mechanism for sales to the export market is developing within the Kurdistan Region of Iraq, the Group currently considers that revenue can best be reliably measured when the cash receipt is assured. The assessment of whether cash receipt is reasonably assured is based on management's evaluation of the reliability of the MNR's payments to the international oil companies operating in the Kurdistan Region of Iraq in line with the KRG's announcement in February 2016 of its intention to apply the PSC terms.

 

Management makes the following assumptions in arriving at the value of sales revenue:

 

·      point of sale is the Shaikan facility;

·      cash is received and revenue is recognised for all sales, net of royalty, as the royalty is taken "in-kind" by the    KRG;

·      cash receipts from the MNR represent the non-governmental contractors' share of revenue; and,

·      where appropriate, payables to the MNR are offset against amounts due for previously unrecognised revenue in line with the terms of the Shaikan PSC.

 

To the extent that revenue arises from test production during an evaluation programme, an amount is charged from evaluation costs to cost of sales so as to reflect a zero net margin.

 

Under IAS 12 'Income Taxes', where income tax arising from the Group's activities under production sharing contracts is settled by a third party on behalf of the Group, and where the Group would otherwise be liable for such income tax, the associated sales are required to be shown gross including the notional tax, and a corresponding income tax charge shown in the statement of comprehensive income. However, due to the uncertainty over the payment mechanism for oil sales in Kurdistan and the fact that there is no sufficiently well-established tax regime in place in the Kurdistan region of Iraq, it has not been possible to measure reliably the taxation due that has been paid on behalf of the Group by the KRG. Therefore the notional tax amounts have not been included in revenue or in the tax charge. This is an accounting presentational issue and there is no taxation to be paid.

 

Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective rate of interest applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition.

 

 

Property, plant and equipment other than oil and gas interests

 

Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.  Depreciation is provided at rates calculated to write each asset down to its estimated residual value over its expected useful life as follows:

 

Fixtures and equipment

 

-

 

20% straight-line

 

Intangible assets other than oil and gas interests

 

Intangible assets, other than oil and gas assets, have finite useful lives and are measured at cost and amortised over their expected useful economic lives as follows:

 

Computer software

-

33% straight-line

 

Oil and gas assets

 

The Group has changed its accounting policy for oil and gas assets from modified full cost to successful efforts. This change resulted in the write off of the costs associated with the Sheikh Adi and Ber Bahr blocks which have been relinquished and in the process of relinquishment, respectively, by the Group. The benefit of this voluntary change in the accounting policy is ensuring that the balance sheet reflects only the assets that will bring future economic benefits to the Group. In addition, the successful efforts method is more widely adopted by listed oil companies and therefore, the change in the policy will make the Group's financial statements more comparable to those of its peers (note 25).

 

Pre-licence costs

 

Costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred.

 

Exploration and evaluation costs

 

The Group follows the successful efforts method of accounting for exploration and evaluations ("E&E") costs.  Expenditures directly associated with evaluation or appraisal activities are initially capitalised as intangible asset in cost pools by well, field or exploration area, as appropriate. Such costs include licence acquisition, technical services and studies, seismic acquisition, exploration and appraisal well drilling, payments to contractors, interest payable and directly attributable administration and overhead costs.    

 

These costs are then written off as exploration costs in the income statement unless the existence of economically recoverable reserves has been established and there are no indicators of impairment.

 

E&E costs are transferred to development and production assets within property, plant and equipment upon the approval of a development programme by the relevant authorities and the determination of commercial reserves existence.  

 

Development and production assets

 

Development and production assets are accumulated on a field-by-field basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above.

 

The cost of development and production assets includes the cost of acquisition and purchases of such assets, directly attributable overheads, and costs for future restoration and decommissioning. These costs are capitalised as part of the property, plant and equipment and depreciated based on the Group's depreciation of oil and gas assets policy.

 

Depreciation of oil and gas assets

 

The net book values of producing assets are depreciated generally on a field-by-field basis using the unit of production ("UOP") basis which uses the ratio of oil and gas production in the period to the remaining commercial reserves plus the production in the period. Production associated with unrecognised export sales revenue is included in the DD&A calculation. Costs used in the calculation comprise the net book value of the field, and any further anticipated costs to develop such reserves.

 

Commercial reserves are proven and probable ("2P") reserves together with, where considered appropriate, a risked portion of 2C contingent resources, which are estimated using standard recognised evaluation techniques. The estimate is regularly reviewed by independent consultants.

 

Impairment of tangible and intangible non-current assets

 

At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss.  If any such indication exists, the recoverable amount of the asset, or group of assets, is estimated in order to determine the extent of the impairment loss (if any). 

 

For other assets where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

Recoverable amount is the higher of fair value less costs to sell and value in use.  In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

 

Any impairment identified is immediately recognised as an expense.

 

Borrowing costs

 

Borrowing costs directly relating to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised and added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

 

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

 

All other borrowing costs are recognised in the income statement in the period in which they are incurred.

 

Taxation

 

The tax expense represents the sum of the tax currently payable and deferred tax.

 

The tax currently payable is based on taxable profit for the year. Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted by the balance sheet date.

 

As described in the Revenue accounting policy section above, it is not possible to calculate the amount of notional tax to be shown in relation to any tax liabilities settled on behalf of the Group by the KRG.

 

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method.  Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.  Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

 

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part assets to be recovered.

 

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted or substantively enacted by the balance sheet date.  Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also recognised in equity.

 

Foreign currencies

 

The individual financial statements of each company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and the financial position of the Group are expressed in US dollar, which is the functional currency of the Group, and the presentation currency for the consolidated financial statements.

 

In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date.  Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined.  Gains and losses arising on retranslation are included in the income statement for the year.

 

On consolidation, the assets and liabilities of the Group's foreign operations which use functional currencies other than US dollars are translated at exchange rates prevailing on the balance sheet date.  Income and expense items are translated at the average exchange rates for the period.  Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity in the Group's translation reserve.  On the disposal of a foreign operation, such translation differences are reclassified to profit or loss.

 

Inventories

 

Inventories, except for hydrocarbon inventories, are valued at the lower of cost and net realisable value. Hydrocarbon inventories are recorded at net realisable value with changes in hydrocarbon inventories being adjusted through cost of sales.

 

Financial instruments

 

Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group has become a party to the contractual provisions of the instrument. 

 

Trade receivables

 

Trade receivables are measured at amortised cost using the effective interest method less any impairment.

 

Cash and cash equivalents

 

Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

 

Liquid investments

 

Liquid investments comprise short-term liquid investments with maturities of three to twelve months maturity.

 

Financial assets at fair value through profit and loss

 

Financial assets are held at fair value through profit and loss ("FVTPL") when the financial asset is either held for trading or it is designated at FVTPL.  Financial assets at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss.  The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the other gains and losses line in the income statement.

 

Derivative financial instruments

 

The Group may enter into derivative financial instruments including foreign exchange forward contracts to manage its exposure to foreign exchange rate risk.

 

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each balance sheet date.  The resulting gain or loss is recognised in the profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

 

A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a liability.  A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than twelve months and it is not expected to be realised or settled within twelve months.  Other derivatives are presented as current assets or current liabilities.

 

Impairment of financial assets

 

Financial assets, other than those valued at FVTPL, are assessed for indicators of impairment at each balance sheet date.  Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

 

For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis.  Objective evidence of impairment for a portfolio of receivables could include the Group's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, as well as observable changes in local or national economic conditions that correlate with default on receivables.

 

Financial liabilities and equity

 

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.  An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

 

Equity instruments

 

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs, which are charged to share premium.

 

Convertible bonds

 

The net proceeds received from the issue of convertible bonds are split between a liability element and an equity component at the date of issue. The fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of issue of the convertible bonds and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in equity, as a convertible bond reserve and is not re-measured. The equity portion is amortised over the life of the bond to accumulated losses reserve within equity.  The liability component is carried at amortised cost using the effective interest method until extinguished upon conversion or at the instrument's maturity date. 

 

Issue costs are apportioned between the liability and equity components of the convertible bonds based on their relative carrying amounts at the date of issue. The portion relating to the equity component is charged directly against equity.

 

The interest expense on the liability component is calculated by applying the prevailing market interest rate for similar non-convertible debt to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying amount of the convertible bonds.

 

Borrowings

 

Interest-bearing loans and overdrafts are recorded at the fair value of proceeds received, net of transaction costs.  Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the year in which they arise. The liability is carried at amortised cost using the effective interest rate method until maturity.

 

Trade payables

 

Trade payables are stated at amortised cost.  The average maturity for trade and other payables is one to three months.

 

Provisions

 

Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reliably estimated.

 

Decommissioning provision

 

Provision for decommissioning is recognised in full when damage is done to the site and an obligation to restore the site to its original condition exists. The amount recognised is the present value of the estimated future expenditure for restoring the sites of drilled wells and related facilities to their original status.  A corresponding amount equivalent to the provision is also recognised as part of the cost of the related oil and gas property.  The amount recognised is reassessed each year in accordance with local conditions and requirements.  Any change in the present value of the estimated expenditure is dealt with prospectively. The unwinding of the discount is included as a finance cost.

 

Share-based payments

 

Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the entity instruments at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in Note 22. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight- line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserve.

 

For cash-settled share-based payments, a liability is recognised for the goods or services acquired, measured initially at the fair value of the liability. At each balance sheet date until the liability is settled, and at the date of settlement, the fair value of the liability is re-measured, with any changes in fair value recognised in profit or loss for the period. Details regarding the determination of the fair value of cash-settled share-based transactions are set out in Note 22.

 

Leasing

 

Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.

 

Critical accounting estimates and judgements

 

In the application of the Group's accounting policies, which are described above, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods.

 

Accounting estimates

 

Carrying value of producing assets

 

Oil and gas assets within property, plant and equipment are held at historical cost value, less accumulated depreciation and impairments.

 

Producing assets are tested for impairment whenever indicators of impairment exist. Management assesses whether such indicators exist, with reference to the criteria specified in IAS 36, at least annually. 

An annual valuation of the Shaikan field was performed providing further support in relation to the conclusion that no indicators of impairment existed for the year ended 31 December 2016.

 

The assumptions and estimates in the valuation model include:

 

-       Commodity prices that are based on latest internal forecasts, benchmarked with external sources of information, to ensure they are within the range of available analyst forecasts and the long-term corporate economic assumptions thereafter.

 

-       Discount rates that are adjusted to reflect risks specific to individual assets and the region

 

-       Commercial reserves and the related production and payment profiles.

 

-       Timing of revenue receipts

 

Operating costs and capital expenditure are based on financial budgets and internal management forecasts. Cost assumptions incorporate management experience and expectations, as well as the nature and location of the operation and the risks associated therewith. Underlying input cost assumptions are consistent with related output price assumptions.

 

In line with the Group's accounting policy on impairment, management performs an impairment review of the Group's oil and gas assets annually with reference to indicators as set out in IAS 36- Impairment of Assets.  The Group assesses its group of assets called cash generating units (CGU) for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Where indicators are present, management calculates the recoverable amount using key assumptions such as future oil and gas prices, estimated production volume, pre-tax discount rates that reflect the current market assessment of the time value of money and risks specific to the asset, commercial reserves, inflation and transportation fees. The key assumptions are subject to change based on the current market trends and economic conditions.  The CGU's recoverable amount is the higher of the fair value less cost of disposal and value in use. Where the CGU's recoverable amount is lower than the carrying amount, the CGU is considered impaired and is written down to its recoverable amount.  The Group's sole CGU at 31 December 2016 was Shaikan with a carrying value of $488.6 million.  No impairment indicator was identified as at 31 December 2016.

 

Reserves estimates

 

Commercial reserves are determined using estimates of oil-in-place, recovery factors and future oil prices.  Future development costs are estimated using assumptions as to numbers of wells required to produce the commercial reserves, the cost of such wells and associated production facilities, and other capital and operating costs.  Reserves estimates principally affect the depreciation, depletion and amortisation charges, as well as impairment assessments.

 

Significant accounting judgement

 

Revenue

 

The recognition of revenue, particularly the recognition of revenue from exports, is considered to be a key accounting judgement.  The Group began commercial production from the Shaikan field in July 2013 and historically made sales to both the domestic and export market.  For all sales, the goods are considered to be delivered and the title passed at the point of loading at the Shaikan field.  For sales into the local market, it is clear that, at this point of delivery, economic benefit will flow to the Group and that revenue and costs can be measured reliably and therefore revenue is recognised.  However, as the payment mechanism for sales to the export market is currently developing within the Kurdistan Region of Iraq, the Group considers that revenue can be only reliably measured when the cash receipt is assured. The assessment of whether cash receipt is reasonably assured is based on management's evaluation of the reliability of the MNR's payments to the international oil companies operating in the Kurdistan Region of Iraq in line with the KRG's announcement in February 2016 of its intention to apply the PSC terms.  The Group also recognised payables to the MNR against amounts due for previously unrecognised revenue in line with the terms of the Shaikan PSC, where applicable.

 

Accounting for restructuring

 

The Group completed the Balance Sheet Restructuring in October 2016 (see note 16 for further details).  In line with the Group's accounting policy on borrowing costs, management recorded the interest bearing loans and overdrafts at fair value of proceeds received, net of transaction costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the year in which they arise. The liability is carried at amortised cost using the effective interest rate method until maturity.

 

Under IAS 39, if the present value of the revised cash flows of the new or modified debt plus any costs/fees paid differs by 10% or more from the present value of the remaining cash flows of the existing debt (using the original EIR) the new or modified debt is classed as being substantially different from the old debt.  As this test is satisfied, a new financial liability has been recognised and a gain or loss from extinguishment of the original financial liability has been recognised in the income statement.

 

Change in accounting policy

 

The prior year Consolidated Income Statement has been restated by $79.0 million as a result of the change in the accounting policy on the Group's oil and gas asset from modified full cost to successful efforts. The $79.0 million represents the 2016 opening balance of the intangible assets relating to Ber Bahr block which the Group decided to relinquish at 31 December 2015. The adjustment decreased the Group's intangible assets and equity (see note 25 for further details). No adjustments to the period prior to 2015 are required as there were no unsuccessful exploration expenditures prior to 2015.

 

Notes to the Consolidated Financial Statements

 

1.   Segment information

 

For the purposes of resource allocation and assessment of segment performance, the Group is organised into three regional business units - Algeria, Kurdistan and the United Kingdom. These geographical segments are the basis on which the Group reports its segmental information.  The chief operating decision maker is the Chief Executive Officer. He is assisted by the Chief Financial Officer and senior management team. 

 

The accounting policies of the reportable segments are consistent with the Group's accounting policies. 

 

Each segment is described in more detail below:

 

-       Kurdistan Region of Iraq: the Kurdistan segment consists of the Shaikan and the Erbil office which provides support to the operations in Kurdistan, as well as segmental information relating to the previously held Akri-Bijeel, Sheikh Adi and Ber Bahr blocks;;

 

-       United Kingdom: the UK segment provides geological, geophysical and engineering services to the Gulf Keystone Group; and

 

-       Algeria:  the Algerian segment consists of the Algiers office and the Group's operations in Algeria.

 

 

Corporate manages activities that serve more than one segment.  It represents all overhead and administration costs incurred that cannot be directly linked to one of the above segments.

 

 

31 December 2016

Algeria

Kurdistan

United Kingdom

Corporate

Elimination

Total

 

$'000

$'000

$'000

$'000

$'000

$'000

Revenue

 

 

 

 

 

 

Oil sales

-

194,409

-

-

-

194,409

Inter-segment sales

-

-

5,542

-

(5,542)

-

Total revenue

 

194,409

5,542

-

(5,542)

194,409

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

Production costs

-

(61,191)

-

-

-

(61,191)

Oil and gas properties depreciation expense

-

(81,636)

-

-

-

(81,636)

Gross profit/(loss)

-

51,582

5,542

-

(5,542)

51,582

 

 

 

 

 

 

 

General and administrative expenses

 

 

 

 

 

 

Allocated general and administrative expenses

(843)

(9,222)

(6,439)

(13,447)

4,993

(24,958)

Depreciation and amortisation expense

-

(295)

(283)

-

-

(578)

 

 

 

 

 

 

 

Profit /(loss) from operations

(843)

42,065

(1,180)

(13,447)

(549)

26,046

 

 

 

 

 

 

 

Interest revenue

-

-

16

84

-

100

Finance income/ (costs)

-

(700)

-

(59,915)

433

(60,182)

Impairment charge

-

(215,658)

-

-

-

(215,658)

Gain on debt extinguishments

-

-

-

222,455

-

222,455

Other gains

181

3,963

-

5,787

-

9,931

 

Profit/ (loss) before tax

(662)

(170,330)

(1,164)

154,964

(116)

(17,308)

 

 

 

 

 

 

 

Tax expense

-

-

(127)

-

-

(127)

 

 

 

 

 

 

 

(Loss)/profit after tax

(662)

(170,330)

(1,291)

154,964

(116)

(17,435)

 

 

 

 

 

 

 

Capital expenditure

-

9,454

138

-

-

9,592

Total assets

38

546,163

12,864

75,675

5,454

640,194

 

 

 

31 December 2015

Algeria

Kurdistan

United Kingdom

Corporate

Elimination

Total

 

$'000

$'000

$'000

$'000

$'000

$'000

 

 

 

 

 

 

As restated

 

 

 

 

 

 

(note 25)

Revenue

 

 

 

 

 

 

Oil sales

-

86,165

-

-

-

86,165

Inter-segment sales

-

-

8,478

-

(8,478)

-

Total revenue

-

86,165

8,478

 

(8,478)

86,165

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

Production costs

-

(63,227)

-

-

406

(62,821)

Royalty Costs

-

(1)

-

-

-

(1)

Oil and gas properties depreciation expense

-

(74,050)

-

-

-

(74,050)

Gross profit/(loss)

-

(51,113)

8,478

-

(8,072)

(50,707)

 

 

 

 

 

 

 

General and administrative expenses

 

 

 

 

 

 

Allocated general and administrative expenses

(460)

(11,093)

(8,586)

(17,297)

7,136

(30,300)

Depreciation and amortisation expense

-

(437)

(253)

-

-

(690)

 

 

 

 

 

 

 

Loss from operations

(460)

(62,643)

(361)

(17,297)

(936)

(81,697)

 

 

 

 

 

 

 

Impairment charge

-

(82,600)

-

-

4

(82,596)

Interest revenue

-

-

7

35

-

42

Finance income/ (costs)

-

(803)

-

(70,055)

18,783

(52,075)

Other gains/(losses)

238

(124)

-

2,937

-

3,051

(Loss)/profit before tax

(222)

(146,170)

(354)

(84,380)

17,851

(213,275)

 

 

 

 

 

 

 

Tax expense

-

-

(689)

-

-

(689)

 

 

 

 

 

 

 

(Loss)/profit after tax

(222)

(146,170)

(1,043)

(84,380)

17,851

(213,964)

 

 

 

 

 

 

 

Capital expenditure

-

76,580

613

-

-

82,019

Total assets

53

852,040

16,047

1,242,554

(1,233,611)

877,082

 

Geographical information

 

The Group's information about its segment assets (non-current assets excluding deferred tax assets and other financial assets) by geographical location is detailed below:

 

 

2016

$'000

2015

$'000

 

 

As restated

Algeria

-

-

Kurdistan

488,893

797,074

Bermuda

-

-

United Kingdom

585

813

 

489,478

797,887

 

Information about major customers

 

Included in revenues arising from the Kurdistan segment are revenues of approximately $194.4 million which arose from sales to the Group's largest customer (2015: $68.8 million from largest customer).

 

2. Revenue

 

 

2016

$'000

2015

$'000

 

 

 

Oil sales

194,409

86,165

Interest revenue

100

42

 

194,509

86,207

 

During 2016, the Group sold Shaikan oil to the export market generating revenue of $121.8 million (2015: $68.8 million).  No revenue was derived from domestic sales for the year (2015: $17.4 million).  The Group also recognised $72.6 million (2015: $nil) by offsetting payables to the MNR against amounts due for previously unrecognised revenue. Revenue for commercial sales is recognised in line with the terms of the Shaikan PSC, the applicable sales contracts and the Group's accounting policy.

 

 

Management has used the following assumptions in arriving at the value of sales revenue during the year:

 

·      point of sale is the Shaikan facility;

·      cash is received and revenue is recognised for all sales, net of royalty, as the royalty is taken "in-kind" by the KRG;

·      deductions for  transportation costs as well as the discount to Brent, for the quality of the crude, have been estimated at c.$20/bbl based on the discussions with the MNR and are subject to audit and reconciliation, and the establishment of a retroactive quality bank for Kurdistan crude exports delivered through the international pipeline to Turkey;

·      cash receipts by GKPI as the operator represent the non-governmental contractors' share of revenue; and

·      the Group's current working interest in the Shaikan block is 80%.

 

3.             Cost of Sales

 

 

2016

$'000

2015

$'000

 

 

 

61,191

62,822

81,636

74,050

142,827

136,872

 

Production costs represent the Group's share of gross production expenditure for the Shaikan field for the year and include the Shaikan PSC production bonus of $8.0 million (2015: $4.0 million) and capacity building charges of $18.0 million (2015: $10.7 million).  All costs are included with no deferral of costs associated with unrecognised sales in accordance with the Group's revenue policy.  Production and depreciation, depletion and amortisation ("DD&A") costs related to revenue arrears recognised in 2016 have been charged to the income statement in prior periods when the oil was lifted.

 

A unit-of-production method, based on full entitlement production, commercial reserves and costs for Shaikan full field development, has been used to calculate the DD&A charge for the year.  Commercial reserves are proven and probable ("2P") reserves, estimated using standard recognised evaluation techniques. Production and reserves entitlement associated with unrecognised sales in accordance with the Group's revenue policy have been included in the full year DD&A calculation. 

 

4.             Profit/ (loss) from operations

 

2016
$'000

2015

$'000

 

 

 

Profit/ (loss) from operations has been arrived at after charging/ (crediting):

 

 

Depreciation of property, plant and equipment (note 11)

82,176

74,707

Amortisation of intangible assets (note 10)

38

35

Credit in relation to Excalibur litigation (note 6)

(3,188)

-

Staff costs (see note 5)

24,228

26,772

Auditor's remuneration for audit services (see below)

173

206

Operating lease rentals (note 21)

3,936

3,765

 

 

 

 

 

 

 

 

 

2016

$'000

2015

$'000

 

 

 

Fees payable to the Company's auditor for the audit of the Company's annual accounts

154

175

 

Fees payable to the Company's auditor for other services to the Group

 

 

  - audit of the Company's subsidiaries pursuant to legislation

19

31

  Total audit fees

173

206

 

  Other assurance services (half year review)

73

69

  Corporate finance services

454

122

  Tax services (advisory)

9

10

Total fees

709

407

 

 

5. Staff costs

 

The average monthly number of employees (including Executive Directors) for the year was as follows:

 

 

2016

Number

2015

Number

 

 

 

80

89

229

222

309

311

 

 

 

 

2016

$'000

2015

$'000

 

 

20,929

23,114

2,044

1,119

1,255

2,539

24,228

26,772

 

 6. Other gains

 

 

2016

$'000

2015

$'000

 

 

6,876

-

3,055

3,051

9,931

3,051

 

Other gains consist of the release of the decommissioning liability relating to the Akri Bijeel block of $3.7 million (for further detail, see note 17) and the receipt of an additional repayment of costs incurred in relation to Excalibur litigation of $3.2 million.

                                                                                                                    

In December 2010, Excalibur commenced legal action against Gulf Keystone and two of its subsidiaries (together "the Companies") and Texas Keystone Inc. asserting certain contractual and non-contractual claims against the Companies and Texas Keystone Inc. and claiming that Excalibur is entitled to an interest of up to 30% in the Companies' blocks in the Kurdistan Region of Iraq.

 

On 13 December 2013, the Court handed down its full judgement dismissing all of the claims asserted by Excalibur and deciding all issues in favour of the Companies and Texas Keystone Inc.  Excalibur was ordered to pay the costs of the Companies and Texas Keystone on the enhanced costs basis, known as the indemnity basis ("Excalibur Costs Order").

 

Excalibur had no funds save for that provided by its litigation funders. The Companies and Texas Keystone sought a non-party costs order against the litigation funders to make up for the shortfall that arose between the Excalibur Costs Order and the interim payment that the Companies and Texas Keystone received ("Shortfall").

 

Once the litigation funders were joined to the proceedings, the Judge ordered them to pay the Companies' and Texas Keystone's costs on the indemnity basis to cover the Shortfall ("Funders Costs Order"). 

The litigation funders appealed the Funders Costs Order on several grounds, and their appeals were heard at a 2-day hearing at which the Companies and Texas Keystone vigorously opposed the appeals.  On 18 November 2016, the Court ordered that the appeals be dismissed and the sum of $3.2 million (£2.6 million) was received by the Group in January 2017. As at 31 December 2016, this was included in the Other receivables in Note 14.

 

 

7. Finance costs

 

 

2016

$'000

2015

$'000

 

 

22,203

27,479

35,232

42,577

2,481

-

699

803

(433)

(18,784)

60,182

52,075

 

 

8. Tax

 

 

2016

$'000

2015

$'000

Corporation tax

 

 

   Current year charge

-

-

   Adjustment in respect of prior years

1

(433)

  Deferred UK corporation tax expense (see note 18)

(128)

(256)

   Tax expense attributable to the Company and its subsidiaries

(127)

(689)

 

Under current Bermudian laws, the Group is not required to pay taxes in Bermuda on either income or capital gains. The Group has received an undertaking from the Minister of Finance in Bermuda exempting it from any such taxes at least until the year 2035.

 

Any corporate tax liability in Algeria is settled out of Sonatrach's share of oil under the terms of the Algerian PSCs and is therefore not reflected in the tax charge for the year.

 

In the Kurdistan Region, the Group is subject to corporate income tax on its income from petroleum operations under the Kurdistan PSCs. The rate of corporate income tax is currently 15% on total income. Under the PSC, any corporate income tax arising from petroleum operations will be paid from the KRG's share of petroleum profits. Due to the uncertainty over the payment mechanism for oil sales in Kurdistan, it has not been possible to measure reliably the taxation due that has been paid on behalf of the Group by the KRG and therefore the notional tax amounts have not been included in revenue or in the tax charge. This is an accounting presentational issue and there is no taxation to be paid.

 

The tax currently payable is based on taxable profit for the year earned in the United Kingdom by the Group's UK subsidiary. UK corporation tax is calculated at 20% (2015: 20.25%) of the estimated assessable profit for the year of the UK subsidiary. 

Deferred tax is provided for due to the temporary differences which give rise to such a balance in jurisdictions subject to income tax.  During the current period no taxable profits were made in respect of the Group's Kurdistan PSCs, nor were there any temporary differences on which deferred tax is required to be provided. As a result, no corporate income tax or deferred tax has been provided for Kurdistan in the period.

All deferred tax arises in the UK.

The expense for the year can be reconciled to the loss per the income statement as follows:

 

2016

$'000

2015

$'000

 

 

As restated

 

 

 

Loss before tax

(17,308)

(213,275)

 

 

 

Tax at the Bermudian tax rate of 0% (2015: 0%)

-

-

Effect of different tax rates of subsidiaries operating in other jurisdictions

(127)

(689)

Tax charge for the year

  (127)

(689)

 

9. Loss per share

 

The calculation of the basic and diluted profit/(loss) per share is based on the following data:

 

2016

$'000

2015

$'000

 

 

As restated

Loss

 

 

Loss after tax for the purposes of basic and diluted loss per share

(17,435)

(213,964)

 

 

 

 

  

2016

Number

(000s)

2015

Number

(000s)

Number of shares

 

 

Basic weighted average number of shares

56,565

9,369

 

Following the Balance Sheet restructuring, all common shares have been consolidated on a 100:1 basis (see note 19).  As a result, prior year weighted average number of shares has been restated.

 

The Group followed the steps specified by IAS 33 in determining whether potential common shares are dilutive or anti-dilutive. It was determined that all of the potential common shares including  share options, convertible bonds, warrants and common shares held by the Employee Benefit Trustee ("EBT") and the Exit Event Trustee have an anti-dilutive effect on loss per share. As a result, there is no difference between basic and diluted earnings per share.

 

 

Reconciliation of anti-dilutive shares:

 
 

2016

Number

(million)

2015

Number

(million)

Number of shares

 

 

 

 

 

Share Options

1.8

0.4

Common Shares held by the EBT

0.1

0.1

Common Shares held by the Exit Event Trustee

0.1

0.1

Warrants outstanding

0.4

0.4

Common Shares to be issued on conversion of convertible bonds

-

0.7

Total potentially anti-dilutive shares

2.4

1.7

 

 

10. Intangible assets

 

 

Exploration and

evaluation costs

$'000

Computer

software

$'000

Total

$'000

Year ended 31 December 2015

 

 

 

Opening net book value

276,243

47

276,290

Additions

38,439

2

38,441

Amortisation charge

-

(35)

(35)

Closing net book value

314,682

14

314,696

Effect of change in accounting policy (Note 25 )

(78,987)

-

(78,987)

Closing net book value as restated

235,695

14

235,709

 

 

 

 

At 31 December 2015

 

 

 

Cost

235,695

930

236,625

Accumulated amortisation

-

(916)

(916)

Net book value

235,695

14

235,709

 

Year ended 31 December 2016

 

 

 

Opening net book value as restated

235,695

14

235,709

Other movements related to the relinquishment of Sheikh Adi

(20,037)

-

(20,037)

Additions

-

138

138

Write offs

(215,658)

-

(215,658)

Amortisation charge

-

(38)

(38)

Foreign currency translation differences

-

(15)

(15)

Closing net book value

-

99

99

 

 

 

 

At 31 December 2016

 

 

 

Cost

-

1,053

1,053

Accumulated amortisation

-

(954)

(954)

Net book value

-

99

99

 

 

In March 2016, the Group relinquished the Sheikh Adi block.  As part of the agreement for relinquishment of the Sheikh Adi block, the MNR released the Group from its obligations to pay past PSC payments due with the exception of $10.0 million relating to reduced PSC bonuses due on the declaration of commerciality.  This will be offset against the past costs associated with the Shaikan Government Participation Option. This is included in the Other creditors in Note 15.

 

During the year, the Group retrospectively changed its accounting policy from modified full cost to successful efforts. As a result, previously capitalised expenditure relating to the Ber Bahr block of $79.0 million was written off following the decision to relinquish the Block in December 2015 (see note 25 for further details). Further, the expenditure amounting to $215.7 million relating to the Sheikh Adi block was written off in 2016 upon relinquishment and included in the Impairment expense in the Consolidated Income Statement.  The oil and gas exploration costs of $0.8 million incurred during the year in relation to the Sheikh Adi and Ber Bahr blocks were expensed directly to the Consolidated Income Statement.

 

The net book value at 31 December 2016 includes intangible assets relating to computer software.  The amortisation charge of $38,000 (2015: $35,000) for computer software has been included in general and administrative expenses.

 

In December 2015, an impairment of $3.6 million has been recognised associated with the write off of the assets held for sale relating to Akri Bijeel.

 

11. Property, plant and equipment

 

 

Oil and Gas

Properties

$'000

Fixtures and

Equipment

$'000

 

Total

$'000

Year ended 31 December 2015

 

 

 

Opening net book value

591,932

1,672

593,604

Additions

42,953

625

43,578

Disposals

-

(364)

(364)

Depreciation charge

(74,050)

(657)

(74,707)

Accumulated depreciation eliminated on disposals

-

87

87

Foreign currency translation differences

-

(20)

(20)

Closing net book value

560,835

1,343

562,178

 

 

 

 

At 31 December 2015

 

 

 

Cost

675,652

5,801

681,453

Accumulated depreciation

(114,817)

(4,458)

(119,275)

Net book value

560,835

1,343

562,178

 

 

 

 

 

Year ended 31 December 2016

 

 

 

Opening net book value

560,835

1,343

562,178

Additions

9,435

19

9,454

Depreciation charge

(81,636)

(540)

(82,176)

Foreign currency translation differences

-

(77)

(77)

Closing net book value

488,634

745

489,379

 

 

 

 

At 31 December 2016

 

 

 

Cost

685,087

5,743

690,830

Accumulated depreciation

(196,453)

(4,998)

(201,451)

Net book value

488,634

745

489,379

 

The net book value of Oil and Gas properties at 31 December 2016 is comprised of property, plant and equipment relating to the Shaikan block and has a carrying value of $488.6 million (2015: $560.8 million).

 

The additions to the Shaikan asset during the year include costs for various studies and production facilities improvement projects.

 

The DD&A charge of $81.6 million on oil and gas properties (2015: $74.1 million) has been included within cost of sales (note 3). The depreciation charge of $0.5 million on fixtures and equipment (2015: $0.7 million) has been included in general and administrative expenses.

 

For details of the key assumptions and judgements underlying the impairment assessment and the depreciation, depletion and amortisation charge, refer to the "Critical accounting estimates and judgments" section of the Summary of Significant Accounting Policies.

 

12. Group Companies

Details of the Company's subsidiaries and joint operations at 31 December 2016, and 31 December 2015, are as follows:

 

Name of subsidiary

 

Place of incorporation

 

Proportion of ownership interest

Proportion of voting power held

Principal

activity

 

Gulf Keystone Petroleum (UK) Limited

6th floor

New Fetter Place

8-10 New Fetter Lane

London EC4A 1AZ

United Kingdom

 

100%

 

100%

 

Geological, geophysical and engineering services

Gulf Keystone Petroleum International Limited

Cumberland House

9th floor, 1 Victoria Street

PO Box 1561

Hamilton HMFX

Bermuda

Bermuda

 

100%

 

100%

 

Exploration and evaluation activities in Kurdistan

Gulf Keystone Petroleum Numidia Limited

Cumberland House

9th floor, 1 Victoria Street

PO Box 1561

Hamilton HMFX

Bermuda

Bermuda

 

100%

 

100%

 

Exploration and evaluation activities

 

Gulf Keystone Petroleum HBH Limited

Cumberland House

9th floor, 1 Victoria Street

PO Box 1561

Hamilton HMFX

Bermuda

Bermuda

100%

 

100%

 

Exploration and evaluation activities

Shaikan Petroleum Limited

Cumberland House

9th floor, 1 Victoria Street

PO Box 1561

Hamilton HMFX

Bermuda

Bermuda

100%

 

100%

 

Exploration and evaluation activities

 

 

Name of joint operation

 

Place of incorporation

 

Proportion of ownership interest

Proportion of voting power held(2)

Principal

activity

 

Shaikan

 

Kurdistan

 

80%(1)

 

33.3%

 

Production and development activities

Sheikh-Adi (3)

 

Kurdistan

 

 

100%

 

50%

 

Exploration and evaluation activities

Ber Bahr (4)

 

Kurdistan

 

40%

 

33.3%

 

Exploration and evaluation activities

 

 

(1) 75% is held directly by Gulf Keystone Petroleum International Limited, with 5% held in trust for Texas Keystone, Inc. ("TKI") until formal transfer of the share is completed.

(2) Proportion of voting power is as defined in the individual Production Sharing Contracts (PSC).  The above are joint operations based on the voting rights as set out in each PSC.

(3) Relinquished effective 16 March 2016

(4) In process of being relinquished

 

13.          Inventories

 

2016

$'000

2015

$'000

 

 

 

Warehouse stocks and materials

14,814

17,697

Crude oil

1,157

847

 

15,971

18,544

 

Inventories at 31 December 2016 include write downs to net realisable value of $2.9 million (2015: nil).

 

 

14. Trade and other receivables

 

 

2016

$'000

2015

$'000

 

 

 

Trade receivables

36,000

12,000

Other receivables

4,976

3,034

Corporation tax receivable

-

189

Prepayments and accrued income

589

1,304

 

41,565

16,527

 

Trade receivables relate to amounts due from oil sales with $36.0 million outstanding as at 31 December 2016 (2015: $12.0 million) which have been received subsequent to the year end. This included past due trade receivables of $24.0 million.

 

Included within other receivables for 2016 is an amount of $0.4 million (2015: $0.5 million) being the deposits for leased assets which are receivable after more than one year. There are no receivables from related parties as at 31 December 2016 (2015: $nil) (see note 23). No impairments of receivables have been recognised during the year (2015: $nil).

 

The Directors consider that the carrying amount of trade and other receivables approximates to their fair value and no amounts are provided against them. 

 

15. Trade and other payables

 

Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs.  

 

The Directors consider that the carrying amount of trade payables approximates their fair value.

 

 

2016

$'000

2015

$'000

Trade payables

2,922

10,786

Other creditors

26,917

232

Accrued expenses

26,445

116,381

 

56,284

127,399

 

There is no interest payable included in the accrued expenses in 2016 (2015: $4.2 million in respect of convertible bonds and $6.6 million in respect of 2014 Notes) (see note 16).

 

In accordance with the Bilateral MNR Agreement signed between GKPI and the MNR on 16 March 2016, the Group has received payments on account for back-costs of approximately $16.2 million in recognition of the Group's and MNR's intention, subject to the satisfaction of certain conditions, to recognise the allocation to MNR of the Shaikan Government Option with effect from 1 August 2012. The treatment of the Shaikan Government Option is subject to the execution of a revised Shaikan PSC and the amounts received have been included in Other creditors until this has been finalised. The balance of outstanding back-costs as at 31 December 2016 is estimated at $71.0 million.  The amount of $10.0 million relating to reduced Sheikh Adi PSC bonus due on commerciality was also included in Other creditors (for further detail, see note 10).

 

16. Long term borrowings and warrants

 

On 14 October 2016, the Company successfully completed the Balance Sheet Restructuring which reduced the Company's debt from over $600 million to $100 million through the partial conversion of the Guaranteed Notes and full conversion of the Convertible Bonds to Common Shares in the Company.

 

The impact of the Balance Sheet Restructuring on the long term borrowing is as follows:

 

a)      The Company's convertible debt securities issued in 2012 and 2013 consisting of $325 million convertible bonds due on October 2017 carrying a coupon of 6.25% payable on a bi-annual basis (the "Convertible Bonds") and the related accrued interest payable of $20.2 million were extinguished as a result of the Balance Sheet Restructuring in consideration for 4,585,192,303 shares with a fair value of £0.012 ($0.0144) per share on 14 October 2016.

       

The Company's three-year senior guaranteed notes of $250 million ("Guaranteed Notes"), carrying a coupon of 13% per annum payable on a bi-annual basis and freely tradeable,  and the related accrued interest payable of $32.3 million were extinguished in consideration for 15,031,035,578 Common Shares at a fair value price of £0.012 ($0.0144) per share. In addition, Reinstated Notes of $100 million were issued by the Company (see note 16b).

 

The extinguishment of the Convertible Bonds and the Guaranteed Notes resulted in a net gain of $222.5 million as included in the Consolidated Income statement.

 

b)      On 14 October 2016, the Company issued $100 million of new guaranteed notes ("Reinstated Notes").  The unsecured Reinstated Notes are guaranteed by Gulf Keystone Petroleum International Limited, the Company's subsidiary and their terms are the same as the Guaranteed Notes subject to the following amendments:

 

·      Maturity date is 18 October 2021. At any time prior to maturity, the Reinstated Notes are redeemable in part or full at par and can therefore be refinanced without any prepayment penalty;

 

·      The Company will have the option to defer its interest payments until the maturity of the Reinstated Notes in PIK at 13% or pay in cash at 10% until 18 October 2018. From 19 October 2018, the Company is mandatorily liable to pay interest in cash at 10%;

 

 

·      The aggregate principal amount of the Reinstated Notes shall be increased by the amount of such PIK interest on the date such interest is due and interest will accrue on the increased principal amount from such date;

 

·      The Company will be permitted to raise up to $45 million of additional indebtedness at any time on market terms to fund capital and operating expenditure;

 

·      Certain other amendments, including inter alia, the removal of security, removal of the Debt Service Reserve Account requirement and the extension of the grace periods in respect of certain events of default under the Reinstated Notes;

 

·      Cost of $12.0 million incurred in relation to Restructuring has been expensed.

 

 

The liabilities associated with the Reinstated notes are presented in the following table:

 

2016

$'000

2015

$'000

 

 

 

Liability component at 1 January

555,374

538,221

Liability component of the guaranteed notes at issue

 

 

Interest charged during the year

57,435

70,056

Interest paid during the year

-

(52,903)

Extinguishment of liability and related interest during the year

(612,809)

-

Issue of Reinstated Notes at fair value

96,405

-

Reinstated notes interest capitalised during the year

2,481

-

Liability component at 31 December

98,886

555,374

 

Liability component reported in:

 

2016

$'000

2015

$'000

 

 

 

Current liabilities (see note 15)

-

10,836

Non-current liabilities

98,886

544,538

 

98,886

555,374

 

As part of the Restructuring, the interest payable relating to Convertible Bonds and Guaranteed Notes was extinguished.  The interest charged was computed until 13 October 2016 by applying the effective rates on an annual basis to the liability component for the period. The effective interest rates for the initial $275 million convertible bond issue in October 2012 and the $50 million tap issue in October 2012 is 9.26% and 7.20%, respectively. The effective interest rate for the 2014 Notes is 19.7%. The interest capitalised on the Reinstated Notes was calculated using the effective interest rate of 12.11%.

 

For the year ended 31 December 2016, the Company recognised $2.5 million interest capitalised on the Reinstated Notes. This amount was capitalised as part of Other borrowings in the Consolidated Balance Sheet and no interest was accrued on the Reinstated Notes. The interest payment method will be reassessed prior to each interest payment date. Any difference from what was capitalised or accrued for the year ended 31 December 2016 and the actual interest payment method selected will be adjusted prospectively.

 

The Reinstated Notes are traded on the Luxembourg Stock Exchange and the fair value at the prevailing market price as at the balance sheet date was:

 

 

Market price

2016

$'000

2015

$'000

 

 

 

 

Convertible Bonds

n/a

-

91,325

2014 Notes

n/a

-

134,000

Reinstated Notes

$0.972

97,229

-

 

 

97,229

225,325

 

As of 31 December 2016, the Group's remaining contractual liability comprising principal and interest based on undiscounted cash flows at the maturity date of the Reinstated Notes is as follows:

 

 

 

2016

$'000

2015

$'000

 

 

 

Within one year

-

52,813

Within two to five years

167,241

611,562

 

167,241

664,375

Following the Company's announcement on 14 October 2016 of the completion of the Restructuring, the exercise price of the 40,000,000 warrants in the Company issued pursuant to the Guaranteed Notes (the "Warrants") was adjusted from $1.70 to $0.81 per Warrant, with effect from 14 October 2016.  Furthermore, following Share Consolidation on 9 December 2016, the exercise price of the Warrants was adjusted from $0.81 to $81.30 and the total number of post-consolidation Common Shares with par value of $1.0 each in the Company to be issued upon exercise of the rights thereunder was adjusted from 40,000,000 pre-Consolidation Common Shares of $ 0.01 each to 400,000 New Common Shares of $1.0 each with effect from 9 December 2016. The Warrants remain exercisable at the place where the relevant Warrant is deposited)up until the close of business on 18 April 2017.

17. Provisions

 

 

2016

$'000

2015

$'000

 

 

 

Current provisions

7,461

11,151

Non-current provisions

23,794

27,333

 

31,255

38,484

 

 

 

Current Provisions (Algeria and Kurdistan)

Non-current Provisions (Kurdistan)

Total

Decommissioning provision

$'000

$'000

$'000

At 1 January 2016

11,151

27,333

38,484

New provisions and changes in estimates

-

103

103

Unwinding of discount

8

691

699

Release of provisions

(3,698)

(4,333)

(8,031)

At 31 December 2016

7,461

23,794

31,255

 

The provision for decommissioning is based on the net present value of the Group's share of expenditure which may be incurred in the removal and decommissioning of the wells and facilities currently in place and restoration of the sites to their original state. This expenditure is estimated to be incurred over the next twelve months on Algerian assets and on the Ber Bahr block in Kurdistan which is in the process of relinquishment. The expenditure on the Shaikan block in Kurdistan is expected to take place over the next 26 years.

 

The Group relinquished Akri Bijeel in December 2015 and executed the Akri Bijeel Termination and Settlement Agreement in respect of Akri Bijeel Joint Operating Agreement in June 2016 with no further liabilities payable by the Group.  The balance of the decommissioning liability of $3.7 million was released and recognised as a gain in the Other Gains in the Consolidated Income Statement.

 

As part of the agreement for relinquishment of the Sheikh Adi block, the MNR released the Group from its obligations to pay past liabilities resulting in the reversal of the decommissioning liability of $4.3 million against the cost of the asset (note 10).

 

18. Deferred tax asset

 

The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods.

 

 

 

Accelerated tax depreciation

 

$'000

Share-based payments

 

$'000

Tax losses carried forward

$'000

Total

 

 

$'000

At 1 January 2015

(31)

763

-

732

(Charge)/credit to income statement

(79)

(630)

453

(256)

Charge direct to equity

-

57

-

57

Exchange differences

(1)

(32)

(17)

(50)

At 31 December 2015

(111)

158

436

483

(Charge)/credit to income statement

15

(132)

(11)

(128)

Exchange differences

14

10

(69)

(45)

At 31 December 2016

(82)

36

356

310

 

 

19. Share capital

 

On 5 August 2016, the authorised share capital of the Company increased by $219.1 million from $73 million following a resolution passed at the Special General Meeting as shown in the table below:

 

 

2016

$000s

2015

$000s

Authorised

 

 

 

 

 

Common shares of $1 each (2015:$0.01 each)

231,605

12,500

Non-voting shares of $0.01 each

500

500

Preferred shares of $1,000 each

20,000

20,000

Series A Preferred shares of $1,000 each

40,000

40,000

 

292,105

73,000

 

 

On 20 July 2016, the Company's then largest shareholder, Capital Research and Management Company, as investment advisor to New World Fund, Inc. and SMALLCAP World Fund, Inc. ("Capital") subscribed for 54,294,991 common shares at the Open Offer price of $0.0109 per share.

 

The Company successfully completed its Balance Sheet Restructuring in October 2016. This reduced the Company's debt from over $600 million to $100 million through full conversion of the convertible bonds to 4,585,192,303 common shares and partial conversion of the Guaranteed Notes to 15,031,035,578 common shares (see note 16 for further details). In conjunction with the Restructuring, the Company also issued 2,294,295,672 common shares to the qualifying shareholders at a price of £0.01 per share through the Open Offer.

 

On 9 December 2016, the Company completed the share consolidation following a resolution duly passed at the Company's Annual General Meeting on 8 December 2016. The Share Consolidation was effected to bring the number of common shares in issue in line with comparable London listed companies. The 22,942,956,605 common shares of $0.01 per share were consolidated and divided into 229,429,566 new common shares of $1.0 each.  The new common shares have the same rights and are subject to the same restrictions (save as to par value) as common shares in issue prior to consolidation.  All existing options and warrants have been consolidated on the same 100:1 basis. 

 

Fractional entitlements of new common shares arising from the Share Consolidation were aggregated and sold in the market.  The net proceeds were donated to a charity designated by the Directors of the Company.

 

                                                                                                                    

 

Common shares

 

 

      Share

Share

 

No. of shares

Amount

            capital

premium

 

000

$'000

               $'000

$'000

Balance 31 December 2014

892,238

805,021

8,922

796,099

 

 

 

 

 

Share placement

85,900

40,693

859

39,834

Issue costs of share placement

-

(1,314)

-

(1,314)

 

 

 

 

 

Balance 31 December 2015

978,138

844,400

9,781

834,619

 

 

 

 

 

Share placement

21,964,819

306,116

219,649

86,467

Share consolidation

(22,713,527)

-

-

-

Issue cost of share placement

-

(358)

-

(358)

 

 

 

 

 

Balance 31 December 2016

229,430

1,150,158

229,430

920,728

             

 

 

At 31 December 2016, a total of 0.1 million common shares at $1.0 each were held by the EBT (2015: 6.4 million at $0.01 each) and 0.1 million shares at $1.0 each were held by the Exit Event Trustee (2015: 10.0 million at $0.01 each). All 0.2 million common shares were included within reserves (2015: 16.4 million).

 

Rights attached to share capital

The holders of the common shares have the following rights (subject to the other provisions of the Byelaws):

 

(i)

entitled to one vote per common share;

(ii)

entitled to receive notice of, and attend and vote at, general meetings of the Company;

(iii)

entitled to dividends or other distributions; and

(iv)

in the event of a winding-up or dissolution of the Company, whether voluntary or involuntary or for a reorganisation or otherwise or upon a distribution of capital, entitled to receive the amount of capital paid up on their common shares and to participate further in the surplus assets of the Company only after payment of the Series A Liquidation Value (as defined in the Byelaws) on the Series A Preferred Shares.

 

 

20. Reconciliation of loss from operations to net cash generated from operating activities

 

 

2016

$'000

2015

$'000

 

 

As restated

 

 

 

Profit/(loss) from operations

26,046

(81,697)

 

 

 

Adjustments for:

 

 

 

 

 

Depreciation, depletion and amortisation of property, plant and equipment

82,176

74,707

Amortisation of intangible assets

38

35

Share-based payment expense

1,255

2,539

Decrease in inventories

2,573

4,310

Increase in receivables

(22,129)

(2,554)

(Decrease)/ increase in payables

(40,522)

22,724

Net cash generated by operations

49,437

20,064

Income tax received

182

599

Net cash generated from operating activities

49,619

20,663

 

 

21. Commitments

 

Operating lease commitments - the Group as a lessee

 

2016

$'000

2015

$'000

 

 

 

Minimum lease payments under operating leases recognised as expense for the year

3,936

3,765

 

At the balance sheet date, the Group had outstanding total commitments under non-cancellable operating leases, which fall due as follows:

 

 

2016

$'000

2015

$'000

 

 

 

Within one year

1,805

2,100 

In the second to fifth years inclusive

                 1,617

2,572

 

3,422

4,672

 

Operating lease payments represent rentals payable by the Group for certain of its office and residence properties and facilities and vehicle rentals in the United Kingdom and the Kurdistan Region of Iraq. The non-cancellable operating leases within Kurdistan are for up to one year in duration.

 

Exploration and development commitments

 

Due to the nature of the Group's operations in exploring and evaluating areas of interest and development of assets, it is difficult to accurately forecast the nature or amount of future expenditure.

 

Expenditure commitments on current permits for the Group could be reduced by selective relinquishment of exploration tenure, by the sale of assets or by the renegotiation of expenditure commitments. There is no significant capital commitment expected in the year ending 31 December 2017 for the Group (2016: $6.0 million, including the minimum amounts required to retain the relevant licences).

 

 

22. Share-based payments

 

 

2016

$'000

2015

$'000

 

 

 

Share options charge

1,686

2,723

 

1,686

2,723

 

 

Value Creation Plan

 

On 12 December 2016 the Company awarded performance units under the 2016 Gulf Keystone Petroleum Value Creation Plan ("VCP") to the directors and persons discharging managerial responsibilities of the Company listed below:

 

 

Position

Number of units awarded

Jón Ferrier

CEO

386,667

Sami Zouari

CFO

306,667

Nadhim Zahawi

CSO

226,667

 

The award of performance units is based on a distribution of one third of the total awards each during the first year and, thereafter, 40% for the CEO; 30% for the CFO and 20% for the CSO for the remainder of the plan, with the remaining 10% available for future distribution subject to board decision.

 

Participants in the VCP are selected at the discretion of the Remuneration Committee.  Awards under the VCP are granted in the form of performance units of which there are a maximum of 1,000,000 available.

 

The key terms and conditions of the VCP are set out below:

 

·      Subject to the achievement of performance conditions, the VCP award may be converted into a number of nil cost options over a number of shares on five measurement dates over the 5 year life of the plan.

·      The value of the award is dependent on the extent to which the actual Total Shareholder Return exceeds the Threshold Total Shareholder Return at each measurement date.

·      The Threshold Total Shareholder Return (the 'Hurdle') will be equal to 8% per annum compound growth on each measurement date or the highest Total Shareholder Return if this is higher than the 8% compound rate.

·      The VCP limits the value on grant of nil-cost options to $20 million for the whole plan.  Once this limit has been reached no further nil-cost options may be granted on that or any subsequent measurement date.

·      Vesting of the nil-cost options occurs following the third, fourth and fifth measurement dates should the performance parameters be achieved. At the third and fourth measurement date, 50% of earned nil-cost options will vest subject to achievement of the 'hurdle'.

·      At the fifth measurement date, providing the 'hurdle' has been achieved i.e. 8% per annum increase in total shareholder return on a compound basis, 100% of the outstanding nil-cost options will vest.  If the 'hurdle' has not been achieved, then the outstanding nil-cost options will lapse.

·      Where there is a change of control of the company before 31 December 2017 the terms of the VCP will not apply but the participants will share awards based on 2% of the value of the sale consideration less the value provided to employees under the SRP (described above). 

 

A charge of $0.06 million (2015: nil) in relation to the VCP is included in the total share options charge.

 

Staff Retention Plan

 

At the 2016 Annual General Meeting, shareholders approved the adoption of the Gulf Keystone Petroleum 2016 Staff Retention Plan (SRP), which is designed to reward members of staff through the grant of share options at a zero exercise price. On 12 December 2016, the Company awarded 1,401,500 share options to employees (2015: nil).

 

The exercise of the awarded options is not subject to any performance conditions and can be exercise at any time after the three year vesting period but within ten years after the date of grant. If options are not exercise within ten years, the options will lapse and will not be exercisable. If an employee leaves the company during the three years from the date of grant, the options will lapse on the date notice to leave is given to the company. Should an employee be regarded as a good leaver, the options may be exercised at any time within a period of six months from departure date.

 

The inputs into the stochastic (binomial) valuation model were as follows:

 

 

2016

2015

 

 

 

Weighted average opening share price on date of grant (in pence)

               120.00

-

 

 

 

 

The expected volatility was calculated as 34.2% and has been based on the Company's share price volatility averaged for the three years prior to grant date.

 

The expected weighted average term of the new options is 3 years. The risk free rate was 0.32% for the new options.

 

The weighted average fair value of the options granted in 2016 was £1.20.

 

The Company has not made a dividend payment to date and, as there is no expectation of making payments in the immediate future, the dividend yield variable has been set at zero for all grants.

 

A charge of $0.04 million (2015: nil) in relation to the SRP is included in the total share options charge.

 

Equity-settled share option plan

 

The Group's share option plan provides for an exercise price at least equal to the closing market price of the Group shares on the date prior to grant.  Awards made under the Group's share option plan have a vesting period of at least three years except for awards made under the Long Term Incentive Plan, which vest in equal tranches over a minimum of three years subsequent to the achievement of a number of operational and market-based performance conditions.  Options expire if they remain unexercised after a period of 10 years from the date of grant. The options granted in 2015 were made under the recruitment remuneration policy, vest in three equal tranches over two years, and expire if they remain unexercised after a period of 7 years from the date of grant. Options are forfeited if the employee leaves the Group before the options vest. The company has not made any awards during 2016 under this scheme.

 

 

 

2016

2015

 

 

Number of

share options

'000

Weighted average

exercise price

(in pence)

 

Number of

share options

'000

Weighted

average

exercise price

(in pence)

 

 

 

 

 

Outstanding at 1 January

35,967

101.9

35,770

102.5

Share Consolidation (note 19)

(35,607)

10,088.1

-

-

Outstanding at 1 January

360

10,190.0

35,770

102.5

Granted during the year

-

-

1,500

55.0

Forfeited during the year

-

-

(1,303)

(75.0)

Outstanding at 31 December

360

10,190.0

35,967

101.9

 

 

 

 

 

Exercisable at 31 December

309

10,599.0

24,158

114.15

 

No options were exercised, granted or cancelled in 2016 (2015: 1.5 million options granted).

 

The options outstanding at 31 December 2016 had a weighted average exercise price of £102 (adjusted for consolidation, 2015: $1.02)) and a weighted average remaining contractual life of four years.

 

Share options outstanding at the end of the year have the following expiry date and exercise prices:

 
Expiry date

 

 

Exercise price (pence)

 

Options ('000)

 

 

2016

2015

2016

2015

 

 

 

 

 

13 February 2018

3,000

30.00

11.0

1,100

9 July 18

3,000

30.00

20.0

2,000

9 July 18

7,500

75.00

16.3

1,628

24 September 2018

3,000

30.00

0.1

6

31 December 2018

3,000

30.00

13.4

1,344

15 March 2019

3,000

30.00

2.5

250

30 July 2019

3,000

30.00

10.0

1,000

23 Jun 2020

7,500

75.00

140.0

13,999

22 September 2020

14,750

147.50

2.5

250

6 February 2021

17,500

175.00

96.9

9,690

19 June 2021

14,625

146.25

5.5

550

7 July 2021

14,625

146.25

2.5

250

14 July 2021

14,625

146.25

2.5

250

21 July 2021

14,625

146.25

5.0

500

19 September 2021

15,250

152.50

2.5

250

26 October 2021

14,625

146.25

2.5

250

25 November 2021

19,450

194.50

2.5

250

23 January 2022

5,500

55.00

15.0

1,500

20 March 2022

19,450

194.50

4.0

400

8 July 2023

15,875

158.75

2.5

250

24 April 2024

9,975

99.75

2.5

250

 

 

 

359.7

35,967

           

 

Following the Balance Sheet Restructuring, all options and warrants granted prior to 9 December 2016, have been consolidated on 100:1 basis (see note 19).

 

Bonus shares

 

All shares in the Company's Executive Bonus Scheme were issued by 31 December 2014.

 

Exit Event Awards

 

On March 2012, the Remuneration Committee recommended that the Company make cash settled awards to certain Executive Directors and employees conditional on the occurrence of an Exit Event (as defined below) up to a maximum amount equivalent to the value of 0.1 million common shares (adjusted for consolidation on 100:1 basis) at the time of an Exit Event, and that a trustee (the "Exit Event Trustee") be appointed to hold and, subject to the occurrence of an Exit Event, to sell sufficient common shares to satisfy the Exit Event Awards.

 

On 21 March 2012, the Board approved the Exit Event Awards to certain Executive Directors and employees, subject to the occurrence of an Exit Event, equivalent to the value of 0.02 million common shares (adjusted for consolidation on 100:1 basis). The Exit Event Trustee will hold the remaining 0.08 million common shares (adjusted for consolidation on 100:1 basis) to satisfy any future Exit Event Awards to full-time employees of the Company and subsidiary companies, subject to the occurrence of an Exit Event, with such beneficiaries to be determined in due course. A further award of 0.01 million common shares (adjusted for consolidation on 100:1 basis) was made to staff in December 2013, with no additional Exit Event Awards made to Directors. The first tranche of Exit Event Awards expired in March 2017.

 

An Exit Event envisages a sale of either the Company or a substantial proportion (i.e. more than 50%) of its assets.

 

These share-based payments are measured at the fair value of the associated liability at the year end. As at
31 December 2016, the fair value of Exit Event Awards was $nil (2015: $nil) based on the market value of the shares and the probability of the Exit Event occurring assessed as of that date.

 

23. Related party transactions

 

The Group has a related party relationship with its subsidiaries. The Company and its subsidiaries, in the ordinary course of business, enter into various sales, purchase and service transactions with joint operations in which the Group has a material interest. These transactions are under terms that are no less favourable to the Group than those arranged with third parties.

 

Remuneration of key management personnel

The remuneration of the Directors and Officers, the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.  Those identified as key management personnel include the Directors of the Company and the following key personnel:

 

J Stafford - Vice President Operations

AR Peart - Legal and Commercial Director

U Eminkahyagil - Kurdistan Country Manager

M Messaoudi - Algeria Country Manager

N Zahawi - Chief Strategy Officer

N Kernoha - Financial Controller

G Papineau-Legris - Commercial Director

M Ross - Legal Director & Company Secretary

 

The values below are calculated in accordance with IAS 19 and IFRS 2.

 

2016

$'000

2015

$'000

 

 

 

Short-term employee benefits

5,136

6,357

Other allowances

-

746

Share-based payment - options

302

794

 

5,438

7,897

 

Further information about the remuneration of individual Directors is provided in the Directors' Emoluments section of the Remuneration Committee Report.

 

24. Financial instruments

2016

$'000

2015

$'000

 

 

 

Financial assets

 

 

Cash and cash equivalents

92,870

43,641

Loans and receivables

40,976

15,223

 

133,846

58,864

 

 

 

Financial liabilities

 

 

Trade and other payables

41,844

127,399

Reinstated Note

98,886

-

Convertible bonds (Level 1)

-

310,444

2014 Notes (Level 1)

-

234,094

 

140,730

671,937

 

All loans and payables, except for the Reinstated Notes and the prior year Convertible Bonds and 2014 Notes, are due to be settled within one year and are classified as current liabilities.

 

The maturity profile and fair values of the Reinstated Notes and the prior year Convertible Bonds and 2014 Notes are disclosed in note 16. The maturity profile of all other financial liabilities is indicated by their classification in the balance sheet as "current" or "non-current".  Further information relevant to the Group's liquidity position is disclosed in the Directors' Report under "Going Concern".

 

Fair value hierarchy

 

In line with IFRS 13 - 'Fair Value Measurement' the Group uses the following hierarchy for determining the fair value of financial instruments by valuation technique:

 

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

 

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and

 

Level 3: techniques which use inputs which have a significant effect on the recorded value that are not based on observable market data.

 

Capital Risk Management

 

The Group manages its capital to ensure that the entities within the Group will be able to continue as going concerns while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group is not subject to externally imposed capital requirements. The capital structure of the Group consists of cash, cash equivalents, Reinstated Notes and equity attributable to equity holders of the parent, comprising issued capital, reserves and accumulated losses as disclosed in Note 19, the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Changes in Equity.

 

Capital Structure

 

The Group's Board of Directors reviews the capital structure on a regular basis and makes adjustments to it in light of changes in economic conditions. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital. 

 

On 14 October 2016, the Group successfully completed the Balance Sheet Restructuring reducing the Group's debt from over $600 million to $100 million of the Reinstated Notes through the partial conversion of the guaranteed notes and full conversion of the convertible bonds to the Company's common shares.  The Reinstated Notes give the Group an option to defer the payment of the first two years of interest until the maturity of the Reinstated Notes (see note 16 for further details). The Group also has the flexibility to raise additional debt of up to $45 million through the use of the Super Senior Debt basket and the General Debt Basket. The Reinstated Notes do not contain a Debt Service Reserve Account requirement freeing up $32.5 million of cash for general use. In conjunction with the Restructuring, the Group completed a successful $25.0 million Open Offer on 14 October 2016. 

 

The Group has seen a significant improvement in the pattern of cash receipts from the MNR for the oil sent for export with the total receipts of $114 million net to the Group in 2016 and further receipts of $36 million in the first quarter of 2017 in relation to 2016 sales.  

 

Significant Accounting Policies

 

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in the Summary of Significant Accounting Policies.

 

Financial Risk Management Objectives

 

The Group's management monitors and manages the financial risks relating to the operations of the Group. These financial risks include market risk (including commodity price, currency and fair value interest rate risk), credit risk, liquidity risk and cash flow interest rate risk.

 

The Group currently has no currency risk or other hedges against financial risks as the benefit of entering into such agreements is not considered to be significant enough as to outweigh the significant cost and administrative burden associated with such hedging contracts. The Group does not use derivative financial instruments for speculative purposes.

 

The risks are closely reviewed by the Board on a regular basis and steps are taken where necessary to ensure these risks are minimised.

 

Market risk

 

The Group's activities expose it primarily to the financial risks of changes in foreign currency exchange rates, oil prices and changes in interest rates in relation to the Group's cash balances. The operating currencies of the Group are Great British pounds (GBP), US dollars (USD), Algerian dinars (DZD) and Iraqi dinars (IQD). 

 

The Group's exposure to currency risk is low as the Reinstated Notes are denominated in USD, which is the main currency for the Group's transactions, and following the utilisation of sterling funds from previous equity raises. During the year the majority of funds raised in the GBP equity issue were converted to USD at the spot rate, with a small balance being held in GBP to meet GBP denominated expenditure. Previously, currency hedges were entered into to address foreign currency risk arising when entering into funding transactions in GBP. 

 

There have been no changes to the Group's exposure to other market risks or any changes to the manner in which the Group manages and measures the risk.  The Group does not hedge against the effects of movement in oil prices. The risks are monitored by the Board on a regular basis.

 

Foreign currency risk management

 

The Group undertakes certain transactions denominated in foreign currencies, being any currency other than the functional currency of the Group subsidiary concerned. Hence, exposures to exchange rate fluctuations arise.

 

At 31 December 2016, a 10% weakening or strengthening of the US dollar against the other currencies in which the Group's monetary assets and monetary liabilities are denominated would not have a material effect on the Group's net current assets or loss before tax.

 

Interest rate risk management

 

The Group's policy on interest rate management is agreed at the Board level and is reviewed on an ongoing basis.  The current policy is to maintain a certain amount of funds in the form of cash for short-term liabilities and have the rest on relatively short-term deposits, usually one month's notice to maximise returns and accessibility. Under the terms of the Reinstated Notes, the Group has the option to pay interest in PIK at 13% or in cash at 10% until 18 October 2018. From 19 October 2018, the Group is mandatorily liable to pay interest in cash at 10%.

 

Interest rate sensitivity analysis

 

Based on the exposure to the interest rates for cash and cash equivalents at the balance sheet date, a 0.5% increase or decrease in interest rates would not have had a material impact on the Group's loss for the year or the previous year.  A rate of 0.5% is used as it represents management's assessment of the reasonably possible changes in interest rates.

 

Credit risk management

 

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. As at 31 December 2016, the maximum exposure to credit risk from a trade receivable outstanding from one customer is $36 million (2015: $12 million). 

 

The credit risk on liquid funds is limited because the counterparties for a significant portion of the cash and cash equivalents at the balance sheet date are banks with good credit ratings assigned by international credit-rating agencies.

 

Liquidity risk management

 

Ultimate responsibility for liquidity risk management rests with the Board of Directors.  It is the Group's policy to finance its business by means of internally generated funds, external share capital and debt.  In common with many exploration companies, the Group raises finance for its exploration and appraisal activities in discrete tranches to finance its activities for limited periods.  The Group seeks to raise further funding as and when required. 

 

25. Change in accounting policy

 

The Group changed its accounting for its oil and gas assets from modified full cost to successful efforts during the year.  The latter method allows the Group to capitalise only those expenditures associated with successfully locating new oil and natural gas reserves.  All costs that are related to unsuccessful efforts are expensed. Prior to this change in policy, unsuccessful exploration and evaluations costs were retained within the intangible non-current assets and depreciated on a UOP basis by reference to the commercial reserves of the wider geographic pool.

 

The Group believes that the adoption of the successful efforts method will make the Group's financial statements more comparable to those of its peers as it is a more widely used method and will better reflect the economic substance of the Group's financial performance.

 

In line with the requirements of IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors, this change in accounting policy is accounted for retrospectively.  As a result, the Group has restated its 2015 Consolidated Financial statements.  No adjustments to the period prior to 2015 are required as there were no unsuccessful exploration expenditures prior to 2015.

 

The effect of the change in accounting policy has been adjusted by restating each of the affected financial statement line items for the prior period, as follow:

 

31 December  2015

$'000

 

 

Consolidated Balance Sheet

 

Intangible assets (decrease)

(78,987)

 

 

 

 

Consolidated Income Statement

 

Impairment expense (increase)

(78,987)

Loss per share (increase)

 

 Basic (cents)

(8.43)

 Diluted (cents)

(8.43)

 

 

26. Contingent liabilities

 

The Group has a contingent liability of $27 million (net to GKP) in relation to the proceeds from the sale of test production in the period prior to the approval of the Shaikan Field Development Plan in July 2013. The PSC does not appear to address expressly any party's rights to this pre-Development Plan petroleum. This suggests strongly that there must have been some other agreement, understanding or arrangement between GKP and the KRG as to how this pre-Development Plan petroleum would be lifted and sold. The sales were made based on sales contracts with domestic offtakers which were approved by the KRG. The Group believes that the receipts from these sales of pre-Development Plan petroleum are for the account of the Contractor (GKP and MOL), rather than the KRG and accordingly recorded them as test revenue in prior years. However, the KRG has requested a repayment of these amounts and we are currently involved in discussions with them to resolve this matter.

 

27. Events after the balance sheet date

 

In March 2017, considering the current healthy cash balance and regularity of payments from the MNR, the Group has decided to pay its upcoming Reinstated Notes coupon of $5.0 million at 10% interest rate on 18 April 2017, even though it has the option to postpone it to maturity (at 13% interest rate). 


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