CADOGAN ENERGY SOLUTIONS PLC

Half Yearly Report for the Six Months ended 30 June 2023

(Unaudited and unreviewed)

 

Highlights

 

Cadogan Energy Solutions plc ("Cadogan" or the "Company"), an independent oil & gas company, listed on the main market of the London Stock Exchange, aiming to be a diversified energy company, is pleased to announce its unaudited results for the six months ended 30 June 2023.

 

H1 2023 was another semester with severe challenges caused by the invasion of Ukraine by Russia since 24 February 2022. Cadogan could not avoid the temporary shutdowns of its production during this period due to the severe constraints arisen in the Country. H1 2023 has been another semester without LTI and TRI. All employees and assets have been secured.   In H1 2023, the average production was 298 bpd in (336 bpd in H1 2022), a 11% decrease versus H1 2022. 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. Cadogan completed the acquisition of the 5% of the share interest in Usenco Nadra LLC that was not yet owned by the Company and holds now 100% of Usenco Nadra LLC. In H1 2023, the services segment was dedicated totally to supporting the production activities in Ukraine. Production entities activities together with services entity activities are presented as Exploration and Production segment results.  The production revenues decreased by 48% versus the same period in 2022, mainly due to a 36% decrease in the average realized oil price and a 11% decrease of the production volumes.  In August 2022, Cadogan was informed of the arbitral proceeding award which:

-          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 payment received under the Loan Agreement,

-          compensated all the expenses of the proceeding.

Proger refused to apply the requirements of the award and thus, Proger must reimburse the amount covered by the Loan Agreement plus interest accrued in the meantime.

The cash position at the period end was $14.2 million (30 June 2022: $14.5 million). This level of cash is sufficient to sustain on-going operations.

Overall, Cadogan continued operating in an environment with tremendous challenges caused by the ongoing war in Ukraine. The Company is currently developing new initiatives to continue to improve its performance.

Key performance indicators

During H1 2023, the Group has monitored its performance in conducting its business with reference to a number of key performance indicators (`KPIs'):

to increase oil production measured on the barrels of oil produced per day (`bpd'); to decrease administrative expenses; to increase the Group's basic earnings per share; to maintain no lost time incident; to grow and geographically diversify the portfolio; and to secure its staff and operations.

The Group's performance during the first six months of 2023, measured against these targets, is set out in the table below, together with the prior year performance data. No changes have been made to the sources of data or calculations used in the period/year. The positive trend in the HSE performances continues with zero incidents. 

 

Unit

30 June 2023

30 June 2022

31 December 2022

 

 

 

 

 

Average production (working interest basis) (a)

Boepd

298

336

323

Administrative expenses

$million

1.6

1.6

3.4

Basic loss per share (b)

Cent

(0.1)

(0.7)

(0.6)

Lost time incident (c)

Incidents

-

-

-

Geographical diversification

New assets

-

-

-

 

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

 

Enquiries:

 

Cadogan Energy Solutions Plc

 

Fady Khallouf

Chief Executive Officer

f.khallouf@cadogan-es.com

Ben Harber

Company Secretary

+44 (0) 207 264 4366

Introduction

Operations Review

First semester 2023 was another dramatic period for Ukraine. Urban and industrial infrastructure were destroyed, in particular, oil refineries as well as energy infrastructure have been severely damaged.

This situation has affected Cadogan's activities in Ukraine and impacted the Blazhiv wells production with temporary shutdowns, and consequent changes of crude oil buyers portfolio due to the volatility in their ability to refine available volumes.

All legislative measures related to martial law introduced after the beginning of the war in 2022 remain in force. However, 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.

In H1 2023, Cadogan employees in Ukraine continued operating in the combined (remote/ office) work mode.  To date, all our employees are safe. In this context, the Group has continued to focus on safely and efficiently operating the existing wells, on controlling its costs and on cash preservation while continuing to look at opportunities to grow and diversify its portfolio.

Operations

E&P activity remained focused on maintaining and securing its activities for the new term and safely and efficiently producing from the existing wells within the Blazhiv oil field. During H1 2023, the average gross production rated at 298 bpd, which is 11% lower than in H1 2022 (336 bpd). There have been several production stoppages of the wells during the winter period due to lower volumes of crude oil purchases by oil refineries.  

Cadogan has signed with PJSC Ukrnafta the extension of Blazhiv-3 and Blazhiv-Monastyrets-3 wells lease contracts for a 5-year period. This was possible thanks to the solid professional cooperation between the parties during the past term and the mutual proactive and constructive approach.

All activities were executed without LTI or TRI[1], with a total of 1,650,000 manhours since the last incident, which occurred to a sub-contractor in February 2016. CO2 emissions level in H1 2023 remained at nearly the same level with 125,08 tons of CO2,e/boe produced compared to 124,99 tons of CO2,e/boe for the same reporting period of the last year. The Company is actively working on a different technological scenario that will allow to substantially reduce emissions to the atmosphere.

In Italy, Exploenergy was notified that its projects (Reno Centese and Corsano) were located in compatible areas identified by the PITESAI, the Plan for the Sustainable Energy Transition of Suitable Areas. This plan delivers a new framework for the possible resumption of exploration and production activities on land and at sea. Exploenergy is currently in the qualification process as gas operator.

Trading

The Company had no operations for the first half of 2023. Cadogan continues to monitor the gas markets in Europe and Ukraine.

Proger

In February 2021, Cadogan notified Proger Managers & Partners Srl ("PMP") that according to the Loan Agreement, the Maturity Date occurred on 25 February 2021. As the Call Option was not exercised, PMP must fulfill the payment of EUR 16,430,992, being the reimbursement of the Loan in terms of principal and the accumulated interest. PMP is in default since 25 February 2021. End of March 2021, PMP requested an arbitration to have the Loan Agreement recognised as an equity investment contract, which is rejected by Cadogan as the terms of the Agreement are clear and include the right to repayment at maturity if the Call Option is not exercised.

As at 30 June 2022, Proger Ingegneria holds 96.49 % of Proger Spa after the exit of SIMEST and the purchase by Proger Ingegneria of its stake in Proger Spa. In August 2022, Cadogan was informed of the award in the arbitration proceeding which:

-                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 payment received under the Loan Agreement,

-                compensated all the expenses of the proceeding.

Proger refused to apply the requirements of the award and thus, Proger must reimburse the amount covered by the Loan Agreement plus interest accrued in the meantime. Cadogan is taking the necessary legal actions to recover these amounts.

Financial position

Cash at 30 June 2023 was $14.2 million ($14.5 million at 30 June 2022). The Group continually monitors its exposure to currency risk. It maintains a portfolio of cash mainly in US Dollars ("USD") and EURO held primarily in the UK.

The Directors believe that the capital available at the date of this report is sufficient for the Group to continue its operations for the foreseeable future.

In H1 2023, the Group held working interests in an oil production licence in the West of Ukraine. It is operated by the Group and is located in the prolific Carpathian basin, close to the Ukrainian oil & gas distribution infrastructure.  

The Group's primary focus during the period continued to be on cost optimisation and enhancement of current production, through the existing well stock and new drilling.

 

Summary of the Group's licences (as of 30 June 2023)

Working

interest (%)

Licence

Expiry

Licence type

100

Blazhiv

November 2039

Production

 

Below we provide an update to the full Operations Review contained in 2022 Annual Report published on 28 April 2023.

 

Blazhiv licence

Through the reporting period the Company has been working to safely and efficiently producing from the existing wells located in the Blazhiv licence area. At the end of the reporting period, the average gross production rated at 298 bpd vs 336 bpd in H1 2022. There have been several production stoppages of the wells during the winter period due to the reduction of crude oil consumption by oil refineries caused by Russian air strikes or by power outage due to similar strikes on electricity infrastructure.

Cadogan has signed the extension of Blazhiv-3 and Blazhiv-Monastyrets-3 wells lease contracts for a 5-year period with PJSC Ukrnafta ahead the expiry period which allowed to avoid production shutdown. This was possible thanks to the solid professional cooperation between the parties during the past term and the proactive and constructive approach of both.

Service Company activities 

In H1 2023, Astro Service LLC, focused its activities on serving intra-group operational needs in wells' work-over/ re-entry operations, wells' survey as well as field on-site activities. Production and service activities will be presented solely as Exploration and Production segment result.

 

Financial Review

 

Overview

Income statement

In H1 2023, revenues decreased to $2.4 million (H1 2022: $4.6 million) due to the decrease of the realised price by 36% and the decrease in the produced volumes of oil by 12%.

Trading business had no activities during the first half of 2023.

The cost of sales of the production segment consists of $1 million of production royalties ($1.9 million), $0.7 million of operating costs ($0.7 million), $0.3 million of depreciation and depletion of producing wells ($0.4 million), and $0.07 million of direct staff costs for production ($0.15 million).

Half year gross profit from production activities decreased to $0.32 million (30 June 2022: increased to $1.5 million), driven by decrease in production and lower oil prices.

The Group recorded a $0.7 million interest on Proger Loan. Due to expected delay in the loan reimbursement, the Company recognized additional provision of $350 thousand. Please refer to note 11 for details.

Other administrative expenses were kept under control at $1.6 million (30 June 2022: $1.6 million). They comprise other staff costs, professional fees and expenses, Directors' remuneration and depreciation charges on non-producing property.

Balance sheet

At 30 June 2023, the cash position of $14.2 million (30 June 2022: $14.5 million) increased compared to the $13.9 million as at 31 December 2022.

The Property, Plant and Equipment ("PP&E") balance of $6.4 million at 30 June 2023 (30 June 2022: $8.6 million, 31 December 2022: $6.6 million) includes the development and production assets on the Blazhyvska licence and other PP&E of the Group.

Trade and other receivables of $0.2 million (30 June 2022: $0.4 million, 31 December 2022: $0.3 million) includes recoverable VAT of $0.1 million (30 June 2022: $0.1 million, 31 December 2022: $0.07 million), $0.1 million of other receivables and prepayments (30 June 2022: $0.3 million, 31 December 2022: $0.2 million).

The $1.9 million of trade and other payables as of 30 June 2023 (30 June 2022: $1.3 million, 31 December 2022: $1.4 million) represent $1.5 million (30 June 2022: $0.9 million, 31 December 2022: $0.8 million) of other creditors and $0.4 million of accruals (30 June 2022: $0.4 million, 31 December 2022: $0.6 million).

Cash flow statement

The Consolidated Cash Flow Statement shows positive cash-flow from operating activities of $0.1 thousand (30 June 2022: neutral, 31 December 2022: negative $0.9 thousand). Cashflow, before movements in working capital, shows an outflow of $0.9 thousand (30 June 2022: inflow $0.3 thousand, 31 December 2022: inflow $0.2 million).

Group capital expenditure was $0.1 million: investment into subsidiaries (purchase of the non-controlled stake in Usenco-Nadra) and investment in Property, Plant and Equipment which related to the Blazhyvska licence.

Commitments

There has been no material change in the commitments and contingencies reported as at 31 December 2022 (refer to page 80 of the Annual Report).

Treasury

The Group continually monitors its exposure to currency risk. It maintains a portfolio of cash mainly in US dollars ("USD") and Euro held primarily in the UK. Production revenues from the sale of hydrocarbons are received in the local currency in Ukraine, however, the hydrocarbon prices are linked to the USD denominated gas and oil prices. The martial law in Ukraine forbids the transfer of cash outside of Ukraine.

The cash held in the Country must be held in the local currency (Hryvnia).

Going concern

The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Interim Financial Statements. For further details, refer to the detailed presentation of the assumptions outlined in note 2(a) of the Interim Financial Statements.

 

Cautionary Statement

The business review and certain other sections of this Half Yearly Report contain forward looking statements that have been made by the Directors in good faith based on the information available to them up to the time of their approval of this report. However they should be treated with caution due to inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information and no statement should be construed as a profit forecast.

 

Risk and Uncertainties

 

There are a number of potential risks and uncertainties inherent in the oil and gas sector which could have a material impact on the long-term performance of the Group and which could cause the actual results to differ materially from expected and historical results. The Company has taken reasonable steps to mitigate these where possible. Full details are disclosed on pages 10 to 13 of the 2022 Annual Financial Report. There have been no changes to the risk profile during the first half of the year. The risks and uncertainties are summarised below.

War risk

Operational risks

Health, safety, and environment COVID-19 Climate change Drilling and work-over operations Production and maintenance

Subsurface risks

Financial risks

Changes in economic environment Counterparty Default on the Proger loan repayment Commodity price

Country risk

Regulatory and licence issues Emerging market

Other risks

Risk of losing key staff members Risk of entry into new countries Risk of delays in projects related to dialogue with local communities

 

Director's Responsibility Statement

 

We confirm that to the best of our knowledge:

(a) the Interim Financial Statements have been prepared in accordance with the UK-adopted IAS 34 `Interim Financial Reporting';

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year);

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R  (disclosure of related parties' transactions and changes therein); and

(d) the condensed set of financial statements, which has been prepared in accordance with the applicable set of accounting standards, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer, or the undertakings included in the consolidation as a whole as required by DTR 4.2.4R.             

This Half Yearly Report consisting of pages 1 to 21 has been approved by the Board and signed on its behalf by:

Fady Khallouf

Chief Executive Officer