CADOGAN ENERGY SOLUTIONS PLC

Annual Results for the year ended 31 December 2023

The Board of Cadogan Petroleum plc, ("Cadogan" or "the Company"), is pleased to announce the Company's annual results for the year ended 31 December 2023.

Key Financial Highlights of 2023:

Profit for the year: $1.3 million (2022: loss of $1.6 million) Average realised price[1]: $59.32/boe (2022: $73.4/boe) Gross revenues[2]: $7.6 million (2022: $8.5 million) G&A[3]: $3.6 million (2022: $3.4 million) Profit per share: 0.5 cents (2022: loss of 0.6 cents) Cash at year end: $14.2 million (2022: $13.9 million)

Key Operational Highlights of 2023:

Production: 119,057 bbl (2022: 117,793 bbl), a 1% increase year-on-year; No LTI/TRI[4]; ISO 14001 and 45001 certifications were re-validated by respective authority for one year; Extension of Blazhiv-3 and Blazhiv-Monastyrets-3 wells' lease contracts for a 5-year period; Qualification of Exploenergy as gas operator in Italy by the Ministry of Environment and Energy Transition; and Launch of the gas-to-power investment in Ukraine with the aim of being an electricity producer in 2025.

Group overview

In 2023, the Group continued to maintain exploration and production assets, and to operate an oil services business in Ukraine. Cadogan's assets are concentrated in the West of the country. The oil services business focuses on workover operations, civil works services and other services to satisfy Cadogan intra-group operational needs.

Our business model

We aim to increase value through:

Maintaining a robust balance sheet, monetising the remaining value of our Ukrainian assets and supplementing E&P cash flow with revenues from gas trading and oil services Developing new activities along the energy value chain with a lower impact on environment Diversifying Cadogan's portfolio, both geographically and operationally

Ukraine

2023 remained a highly challenging year for Cadogan due to the ongoing invasion of Ukraine by Russia and its consequences on the operational activities of the Group.

West Ukraine

The Group continued to produce oil from its production Blazhiv license located in the West of Ukraine. The Group could not avoid temporary shutdowns of its production during in the Q1 2023 due to the severe constraints arisen in the country.  Notwithstanding this, production grew up by 1% above the production of 2022. Net oil production was 119,057 bbl corresponding to an average of 326 bpd.

Cadogan has signed with PJSC Ukrnafta the extension of the wells Blazhiv-3 and Blazhiv-Monastyrets-3 lease contracts for a 5-year period (previous contracts were for a 3-year period) ahead the expiry period which allowed to avoid production stoppage and secure cash flows.

In 2023, the Company continued focusing on the subsoil study of Blazhiv field. Cadogan conducted and completed full hydrodynamic surveys of Blazhiv-1, Blazhiv-3, Blazhiv-Monastyrets-3 and Blazhiv-10 wells. The hydrodynamic model as well as the production forecast were updated. In the second half 2023, the Company launched a new assessment of hydrocarbon reserves, by an independent expert, according to PRMS standards. The assessment was completed at the end of February 2024.

Cadogan is expanding into the electricity generation business by using the gas emissions related to oil production. This will allow to significantly reduce atmospheric emissions and ensure additional cash-flow. The Company launched the project to capture non-commercial associated gas during oil production at the Blazhiv field, which will then be used to generate electricity for sale on the grid. This project is anticipated to result in a substantial decrease in Cadogan's annual gas emissions, with the intensity ratio estimated to drop from 126 to approximately 33 tons of CO2 e/Kboe. The project is scheduled to be operational in Q1 2025.

The Company completed the acquisition of the 5% of the share interest in Usenco Nadra LLC and now holds 100% of Usenco Nadra LLC.

 

Subsidiary businesses

Due to high market volatility caused by military escalation in Ukraine, Cadogan has kept its trading activity low. Despite this, the Company managed to execute few deals, and kept in storage 0.7 million m3 of gas to secure resources.

Astroservice LLC, the oil services subsidiary, continued to support Blazhiv license wells' operations.

 

Italy

The Group owns a 90% interest in Exploenergy s.r.l., an Italian company, which controls two exploration areas (Reno Centese and Corzano), located in the Po Valley region (Northern Italy).

In February 2022, the Plan for the Sustainable Energy Transition of Suitable Areas ("PITESAI") was approved by the Ministry for Environment and Energy Transition. It delivers a new framework for the possible resumption of exploration and production activities on land and at sea. Exploenergy was notified in 2022 that its projects were located in compatible areas identified by the PITESAI.  In November 2023, Exploenergy was notified by the Ministry for Environment and Energy Transition, that the procedure for verification of the technical, organizational and economic capacity of Exploenergy as a qualified gas operator resulted in a successful decision. In February 2024, the Regional Administrative Court rejected the PITESAI. Exploenergy is awaiting the decision of the Ministry for Environment and Energy Transition to indicate the way forward. The Italian national interest in the development of gas fields remains confirmed.

 

In February 2019, the Group entered in a 2-year loan agreement with Proger Management & Partners Srl ("PMP") with an option which Cadogan could exercise, with no obligation, to get a 33% equity interest in Proger Ingegneria Srl which in turn held at 31 December 2020 a 75.95% equity interest in Proger Spa. Proger is an Italian engineering company providing services in Italy and in different international areas. 

Cadogan did not exercise the Call Option. In February 2021, Cadogan notified PMP that according to the Loan Agreement, the Maturity Date occurred on 25 February 2021, and as the Call Option was not exercised, PMP must fulfill the payment of EUR 14,857,350, being the reimbursement of the Loan in terms of principal and the accumulated interest at this Maturity Date. PMP is in default since 25 February 2021. End of March 2021, PMP requested an arbitration to have the Loan Agreement recognized as an equity investment contract, which is rejected by Cadogan as the terms of the Loan Agreement are clear and include the right to repayment at maturity if the Call Option is not exercised.  

The Arbitration proceeding ended in July 2022. 

The Arbitral Committee:

-          Rejected Proger's principal claim, and declared that the Loan Agreement is valid and effective,

-          Deemed to qualify the Call Option as a preliminary contract under condition, but

-          Rejected Proger's claim ex art. 2932 Italian Civil Code, stating that it is impossible to give an award producing the same effects of a final contract ex art. 2932 Italian Civil Code,

-          This is because of the duties established by the rules of the London Regulatory Authority and because of the need, possibly by both parties, to comply with the due proceedings before the formalization of the entry of Cadogan into the capital of Proger Ingegneria,

-          Subordinated the stipulation of the final contract to the precedent completion of the proceeding and bureaucratic process as per the British rules, stating that, otherwise,

-          There is the obligation on Proger Ingegneria to return the money received under the Loan Agreement.

Cadogan introduced an appeal, still pending with a next hearing on September 2025, on the qualification of the Call Option as a preliminary contract. Meanwhile, having taken note of the content of the Award of July 2022, Cadogan repeatedly invited Proger to implement the provisions of the Award. When the invitation remained unsuccessful, Cadogan with a formal notice contested Proger's refusal, arguing that it was in direct contrast with the clear and unequivocal provision of the Award, which expressly subordinates the possible transfer of shareholdings to the prior fulfilment of the formalities required by English law and procedures related to Cadogan as a listed company on the London Stock Exchange; and also opposing Proger for having behaved and continuing to behave in a manner that has made it definitely impossible to the occurrence of the condition precedent referred to in the above-mentioned Award.

According to the provisions of the aforementioned Award, the right to reimbursement of the amount covered by the Loan Agreement has arisen in favour of Cadogan, plus interest accrued, and of which Cadogan then demanded immediate payment.

Last November 2023, Cadogan had to initiate a second arbitration to assert its right to restitution and obtain Proger's condemnation of the consequent payment.

Strategic Report

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

Section 172 Statement

The Company's section 172 statement is presented on page 36 and 37 and forms part of this strategic report.

Principal activity and status of the Company

The Company is registered as a public limited company (registration number 05718406) in England and Wales. Its principal activity is oil and gas exploration, development and production; the Company also conducts gas trading and provides services. In November 2022, the shareholders approved the change of name and the strategy to expand its activities along the energy value chain to new forms of energy with a reduced impact on the environment. In December 2023, the Company stepped in the electricity generation sector by launching the investment in the gas-to-power project on the Blazhiv field in Ukraine.

The Company's shares have a standard listing on the Official List of the UK Listing Authority and are traded on the Main Market of the London Stock Exchange.

Key performance indicators

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

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

-          to decrease administrative expenses;

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

-          to maintain no lost time incidents; and

-          to grow geographically and operationally diversify the portfolio.

The Group's performance in 2023 against these KPI's is set out in the table below, together with the prior year performance data.

 

Unit

2023

2022

2023 vs 2022

Average production (working interest basis) 1

boepd

326

323

+1%

Overhead (G&A)

$ million

(3.6)

(3.4)

+6%

Basic profit/(loss) per share 2

cents

0.5

(0.6)

+183%

Lost time incidents 3

incidents

-

-

-

Geographic diversification

new assets

  -

-

-

Average production is calculated as the average daily production during the year Basic profit/(loss) per ordinary share is calculated by dividing the net profit/(loss) for the year attributable to equity holders of the parent company by the weighted average number of ordinary shares during the year Lost time incidents relate to the number of injuries where an employee/contractor is injured and has time off work (IOGP classification)

Chairman's Statement

2023 was another year of unprecedented challenges for Ukraine, as the invasion of Ukraine by Russia continued to cause damages in the country and impact the European stability. The continuous escalation of hostilities and the geopolitical uncertainties still presented significant obstacles for our operations and were threats to the assets of the Group in Ukraine.

Despite these challenges, Cadogan remained steadfast in its commitment to operational excellence, safety, and sustainability. We continued implementing rigorous risk management to safeguard our operations and ensure the well-being of our workforce. The safety of our people is our highest priority. The Group is taking all possible actions to preserve the safety of its employees and meet their needs.

As for existing operations in Ukraine, Cadogan has demonstrated robust performance in oil production maintaining steady output levels exceeding 2022 results. Moreover, the Group has launched an investment in the power generation, showcasing its resilience and commitment to growth and diversification despite stormy weathers adversity in the country.

In 2023, despite the volatility in the oil and gas markets, Cadogan has adapted its strategies to manage these uncertainties. By implementing agile measures, the Group has effectively mitigated the impact of market volatilities, ensuring continuity of its oil production and sales which allowed to minimize the temporary shutdowns of its production activities.

Looking ahead, we recognise that the geopolitical uncertainties and security risks will continue to be high challenges. However, we remain committed to advance through these challenges with resilience, integrity, and determination. This is possible thanks to the commitment of all with a competent and strong management. The Board remains focused on maximizing value from our assets and on our strategy based on the future diversification of our activities towards sectors providing lower impacts on environment along the energy value chain.

Michel Meeùs

Non-Independent Non-Executive Chairman

07 May 2024

Chief Executive's Review

With the ongoing war resulting from the Russian invasion of Ukraine in 2022, the Group was compelled to adapt to a drastically altered operating and economic environment. We swiftly implemented measures to mitigate risks, ensuring the safety of personnel and assets while facing the operational, economic, and financial challenges posed. Following these events, in 2023, Cadogan had to operate in a highly complex environment characterised by air shelling of oil & gas and energy infrastructures, oil & gas prices volatilities, martial law restrictions on the financial transactions as well as other associated risks.

The ongoing war and the unpredictable air strikes continue to impact the sector of oil and gas in Ukraine, with uncertainties surrounding production, distribution, and market dynamics. The bombing naturally affected the oil and gas production in the country. Oil refineries as well as energy infrastructure suffer constant air attacks and remain severely damaged.

Cadogan employees in Ukraine have been operating in a combined remote and office work mode, prioritising both safety and productivity. We are pleased to report that all our employees remain safe and uninjured since the beginning of the invasion in February 2022.

The imposition of legislative restrictions on oil and gas exports due to war time has significantly impacted the operations of the industry. This restriction has created challenges for companies operating in the country, limiting their ability to access international markets.

The government pursued the efforts for the modernization of its oil and gas regulatory framework, in particular, by enforcing law #4187 which deregulates the subsoil sector, introduces a free market of licenses and simplifies access to the land.

Against this challenging background, Cadogan's operational activities performed as following:

a 1% increase in production, from 117,793 bbl in 2022 to 119,057 bbl in 2023; a robust balance sheet, with $14.2 million of net cash; a significant diversification in electricity generation business by developing a new project in Ukraine; the extension of Blazhiv-3 and Blazhiv-Monastyrets-3 wells' lease contracts for a 5-year period; and another year without LTIs'.

 

Core operations

Cadogan has continued to safely produce from its Blazhiv field in the West of Ukraine. Oil production has increased by 1% compared to the previous year despite the temporary production shutdowns caused by severe constraints in the country. This was largely due to our focus on operational efficiency and effective planning and timely implementation of production support measures.

In 2023 Cadogan extended lease contracts with PJSC Ukrnafta for the Blazhiv-3 and Blazhiv-Monastyrets-3 wells, prolonging the agreement from 3 to 5 years ahead of the expiry period. This important move ensured uninterrupted production and allowed securing cash flows. By proactively extending these contracts, the company demonstrates its commitment to stability and long-term sustainability in operations.

In 2023, the company maintained its focus on studying the subsoil of the Blazhiv field. Full hydrodynamic surveys of Blazhiv-1, Blazhiv-3, Blazhiv-Monastyrets-3, and Blazhiv-10 wells were conducted and completed, leading to updates of the hydrodynamic model and production indicators. Additionally, in the latter half of 2023, the company initiated a new reserves assessment conducted by an independent expert, in accordance with PRMS standards. This assessment was successfully completed in February 2024, enhancing the Company's understanding of hydrocarbon reserves and informing strategic decision-making.

Cadogan is expanding its operations into electricity generation activities. The Company has initiated a project focused on capturing non-commercial associated gas during oil production at the Blazhiv field and converting it into electricity for sale on the grid. Expected to be operational in Q1 2025, this project is anticipated to significantly decrease Cadogan's annual gas emissions, with the intensity ratio projected to drop from 126 to approximately 33 tons of CO2 e/Kboe. This project holds significant importance for Ukraine, particularly due to country's shortage of balancing electricity generating facilities caused by the destruction of infrastructure during the war. Cadogan's initiative to convert non-commercial associated gas into electricity will make its contribution to mitigate the gap in generating capacity.

High operational standards of the Group have been confirmed again by zero LTI or TRI, with a total over 1,720,000 manhours since the last incident, and re-validation off ISO 14001 & 45001 certifications by respective authority for the one year.

Exploenergy srl was notified, in November 2023, by the Ministry for Environment and Energy Transition, that the procedure for verification of the technical, organisational, and economic capacity of Exploenergy as a qualified gas operator resulted in a successful decision. This is a significant move for Cadogan. It will allow a geographical diversification of its assets and a significant value creation. In February 2024, the Regional Administrative Court rejected the PITESAI. Exploenergy is awaiting the decision of the Ministry for Environment and Energy Transition to indicate the way forward. The Italian national interest in the development of gas fields remains confirmed.

Non E&P operations

Due to the high market volatility resulting from military escalation in Ukraine, Cadogan has maintained its trading activity at a low level. The Company has cautiously executed few deals in the market while strategically positioning itself for future trading seasons. In preparation for the upcoming 2024 trading season, Cadogan purchased 0.7 million m3 of gas at the end of 2023, The oil services activities were used primarily to serve the Group's wells' operations.

Proger

In February 2019, Cadogan used part of its cash (Euros 13.385 million) to enter into a 2-year Loan Agreement with Proger Managers & Partners, together with a Call Option Agreement which could be exercised by Cadogan, with no obligation, between September 2019 and February 2021, and subject to shareholders' approval, into a 33 % equity interest in Proger Ingegneria which in turn held, a 75.95% equity interest in Proger as at 31 December 2020, and a 96.48% equity interest in Proger as of 31 December 2021.

As at 25 February 2021, being the Maturity Date, the Call Option was not exercised by Cadogan and accordingly to its previous notification Cadogan demanded repayment of the Loan together with the accumulated interest which in total amounted Euro 14,857,350. After five business days, PMP was in default and asked for an additional term that ended on 19 March 2021. The terms of the Loan Agreement provide for an additional default interest of 2%. End of March 2021, PMP contested the default situation and the obligation to reimburse and asked for an Arbitration according to the said Loan Agreement to get the Loan Agreement recognised as an equity investment contract. Cadogan consider PMP's arguments as groundless and consider that they are intended to delay PMP reimbursement obligations. The Arbitration proceeding ended in July 2022.  

The Arbitral Committee:

-          Rejected Proger's principal claim, and declared that the Loan Agreement is valid and effective,

-          Deemed to qualify the Call Option as a preliminary contract under condition, but

-          Rejected Proger's claim ex art. 2932 Italian Civil Code, stating that it is impossible to give an award producing the same effects of a final contract ex art. 2932 Italian Civil Code,

-          This because of the duties established by the rules of the London Regulatory Authority and because of the need, possibly by both parties, to comply with the due proceedings before the formalization of the entry of Cadogan into the capital of Proger Ingegneria,

-          Subordinated the stipulation of the final contract to the precedent completion of the proceeding and bureaucratic process as per the British rules, stating that, otherwise,

-          There is the obligation on Proger Ingegneria to return the money received under the Loan Agreement.

Cadogan introduced an appeal, still pending with a next hearing on September 2025, on the qualification of the Call Option as a preliminary contract.

Meanwhile, having taken note of the content of the Award of July 2022, Cadogan repeatedly invited Proger to implement the provisions of the Award. When the invitation remained unsuccessful, Cadogan with a formal notice contested Proger's refusal. This refusal was in direct contrast with the clear and unequivocal provision of the Award, which expressly subordinates the possible transfer of shareholdings to the prior fulfilment of the formalities required by English law and procedures related to Cadogan as a listed company on the London Stock Exchange. Furthermore, Proger behaved and continue to behave in a manner that has made it definitely impossible to the occurrence of the condition precedent referred to in the above-mentioned Award.

According to the provisions of the aforementioned Award, the right to reimbursement of the amount covered by the Loan Agreement has arisen in favour of Cadogan, plus interest accrued, and of which Cadogan then demanded immediate payment.

Last November 2023, Cadogan had to initiate a second arbitration, with a first audience fixed for the 3rd May 2024, to assert its right to restitution and obtain Proger's condemnation of the consequent payment.