Annual Report & Accounts 2013

 

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2013

21. Related party transactions – Group and Company
22. Capital commitments and lease commitments – Group
23. Financial instruments
24. Subsidiary undertakings
25. Update on legal proceedings

21. Related party transactions – Group and Company

Identity of related parties

The Company has a related party relationship with its subsidiaries and key management which the Group defines to include Directors and senior management. There were no related party transactions in the Group or Company during the year other than as stated below.

Contract of significance

Under the terms of a Net Profit Interest Agreement relating to the Galata gas field in Bulgaria and originally entered into in 1998 an amount of $0.6m (2012: $nil) is payable in respect of 2013 to Orbis Holding Limited, a company in which David Archer (Managing Director, Black Sea) has a 50% beneficial interest.

Information regarding the Directors’ remuneration, shareholdings and share options is contained in the audited part of the Directors’ remuneration report. In addition to their salaries and other elements of their remuneration, the Executive Directors participate in the Group’s share option schemes.

In the year ended 31 December 2013, the aggregate total remuneration (including healthcare benefits, pension and bonus but excluding share and share option incentive arrangements) paid by the Group to the senior managers (excluding Directors) was $3,752,025. In addition, $1,070,763 of the Group’s non-cash charge in respect of share based payment arrangements referred to in note 20 relates to senior management.

22. Capital commitments and lease commitments – Group

(a) Exploration and production expenditure:
The Group had capital commitments of $120m at 31 December 2013 (2012: $143m). The relevant cash outflows will occur over the period to December 2014.

(b) Total commitments payable under non-cancellable operating leases are as follows:

Property

Group

2013

2012

Operating leases which expire:

$’000

$’000

 

 

 

Within one year

1,614

1,376

Between two and five years

3,779

3,066

Over five years

58

-

 

5,451

4,442

 

 

 

The Group has operating lease commitments in respect of office premises located in the Group’s areas of operation.

During the year ended 31 December 2013, $1.4m (2012:$0.6m) was recognised as an expense in the consolidated income statement in respect of operating leases.

23. Financial instruments

Group and Company


(a) Overview of risk exposures and risk management strategy

The Group and Company are exposed to various financial risks in the ordinary course of business that include credit, liquidity, currency and interest rate risk. The Group’s financial exposures are predominantly related to changes in commodity price, foreign exchange rates and interest rates as well as the creditworthiness of counterparties which impact on financial assets and liabilities. The Group has a risk management programme in place which seeks to limit the impact of these risks on the financial performance of the Group and Company and it is Group policy to manage these risks in a non-speculative manner. The Group has an established treasury risk policy in place.

This note presents information about the Group and Company’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing the risk, and the management of liquid resources. Further quantitative disclosures are included throughout the notes to the accounts.

The Board of Directors has the overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board has reviewed the process for identifying and evaluating the significant risks affecting the business and the policies and procedures by which these risks will be managed effectively. The Board has embedded these structures and procedures throughout the Group and considers there to be a robust and efficient mechanism for creating a culture of risk awareness at every level of management.

The Group’s overall risk management programme seeks to minimise potential adverse effects on the Group’s financial performance from fluctuations in financial markets.

(b) Financial assets and liabilities – fair values


(i) Measurement of financial assets and liabilities

The Group and Company financial assets and liabilities comprise:

Financial assets and liabilities

Note

Recognised at

 

 

 

Trade and other receivables

13

Historic cost

Cash and cash equivalents

14

Historic cost

Derivative assets/(liabilities)

23

Fair value

Loans and borrowings

16

Amortised cost

Trade and other payables

15

Historic cost

The fair values of the Group and Company loans and borrowings at 31 December 2013 was $300m. For all other financial assets and liabilities, the carrying amount is considered equal to fair value.

The method in which the fair value of the Group and Company loans and derivative instruments have been determined using the following hierarchy:

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.

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

There were no transfers between Levels 1, 2 or 3 categories in the reporting period.

(ii) Derivatives

As set out in note 20, the commitment to issue a variable number of warrants to Macquarie is a derivative liability for accounting purposes. The liability was initially measured based on an estimate of the number of warrants potentially issuable under the Warrant Deed, taking into account the expected funds which would be drawn under the facility applied to the fair value per warrant at the measurement date. The fair value of an individual warrant was derived using an option pricing model, the inputs to which are more fully described in note 20 to the financial statements. The number of warrants potentially issuable became fixed on the settlement of the Macquarie facility in February 2012 and fair value changes arise primarily in respect of movements in the share price of Petroceltic and foreign currency rates which has been updated at the reporting date. The resulting movement in the fair value of the derivative liability recorded in the consolidated income statement and the derivative liability at year end were $48k (2012: $0.3m) and $0.6m (2012: $0.6m)respectively.

(iii) Interest bearing loans and borrowings

For interest bearing loans and borrowings, the fair value of the amount drawn at the reporting date has been calculated based on the present value of the expected future principal and interest cash flows discounted at estimated market interest rates effective at the balance sheet date and adjusted for movements in credit spreads. The Directors believe that the existing loan facilities are on par with current credit spreads and therefore the fair value is not materially different from the carrying value.

(iv) Trade receivables and trade payables

All receivables and payables have a remaining maturity of less than 12 months or are on-demand balances, and therefore the carrying value is deemed to reflect fair value. Egyptian trade receivables which become overdue are interest bearing.

(c) Credit risk

Credit risk arises from the exposure on receivables from various counterparties together with cash held by various financial institutions. Wherever possible, the Group seeks to transact with counterparties of proven credit quality and on defined payment terms. The Group’s maximum exposure to credit risk at the reporting date arising from financial assets is the carrying value of cash and cash equivalents and trade and other receivables.

Receivables

The Group’s most material receivable balance relates to its Egyptian business. During 2013, the overall amounts outstanding from this counterparty reduced by 25% with receipts in line with an agreed payment schedule.

The Group undertakes continued and active monitoring of all its credit risk exposures to ensure all amounts due are received in accordance with the terms and that cash balances are held with counterparties who satisfy credit rating and other criteria.

Cash and cash equivalents

The Group and Company enters into transactions with financial institutions for the purposes of placing deposits. From a credit risk management perspective, it is the Group’s policy to enter into such transactions only with well capitalised financial institutions and, accordingly, the Group does not expect any counterparty to fail to meet its obligations.

Details of these deposits, which are all for terms of three months or less, are as follows:

Group

Company

 

Balance invested

Weighted average interest rate

Balance invested

Weighted average interest rate

 

$’000

%

$’000

%

At 31 December 2013

 

 

 

 

US Dollar

34,465

0.0%

2,667

0.0%

Euro

1,163

0.0%

-

0.0%

Sterling

1,335

0.0%

-

0.0%

Bulgarian Leva

31

0.3%

-

0.0%

Egyptian Pounds

16,650

5.0%

-

0.0%

Other

227

0.0%

43

0.0%

 

53,871

0.0%

2,710

0.0%

 

 

 

 

 

At 31 December 2012

 

 

 

 

US Dollar

57,903

1.5%

503

1.4%

Euro

1,254

1.4%

-

0.0%

Sterling

2,051

1.1%

-

0.0%

Bulgarian Leva

4,178

0.6%

-

0.0%

Egyptian Pounds

1,622

5.0%

-

0.0%

Other

190

0.0%

154

0.0%

 

67,198

1.4%

657

1.0%

(d) Liquidity risk

The Group and Company have adequate cash resources and an available loan facility, which combined with the anticipated completion of the farm-out of an 18.375% interest in the Ain Tsila asset to Sonatrach provide sufficient liquidity to fulfil current operational expenses and capital plans and therefore limited liquidity risk exists at present. In addition, on 16 May 2014 the Group will announce a proposed Equity Placing to raise $100m, subject (in part) to shareholder approval. These funds will provide significant ongoing liquidity support to the Group’s business.

At 31 December 2013, the Group had interest bearing liabilities of $300m relating to a loan facility funded by a syndicate of banks led by HSBC. Full details are set out in note 16.

All cash and cash equivalent amounts are on demand, and all trade and other receivables and trade and other payables are due within three months of the reporting date with the exception of a certain portion of the Egyptian trade receivables due from EGPC.

The Board monitors the availability of and requirements for funds in the Group. Surplus cash within the Group is used to reduce the loans drawn or put on deposit in accordance with limits and counterparties agreed by the Board, the objective being to maximise return on funds whilst ensuring that the short-term cashflow requirements of the Group are met.

The table below sets out the contractual maturities of the financial liabilities, including estimated contracted interest payments based on the contractual terms of all agreements and excluding the impact of netting agreements.

Carrying value

Contractual cashflow

Within 6 months

Due 6 – 12 months

Due 1-2 years

Due 2-5 years

Group

$’000

$’000

$’000

$’000

$000

$000

At 31 December 2013

 

 

 

 

 

 

Loans and borrowings

300,000

340,613

51,874

5,455

9,015

274,269

Trade and other payables

48,049

48,049

48,049

-

-

-

 

348,049

388,662

99,923

5,455

9,015

274,269

Company

 

 

 

 

 

 

At 31 December 2013

 

 

 

 

 

 

Loans and borrowings

300,000

340,613

51,874

5,455

9,015

274,269

Trade and other payables

2,782

2,782

2,782

-

-

-

 

302,782

343,395

54,656

5,455

9,015

274,269

 

 

 

 

 

 

 

(e) Interest rate risk

Cash and loan amounts are denominated primarily in dollars. Exposure to interest rate risk on cash and loan balances are actively monitored and managed. If interest rates rose by 0.5% based on balances at the reporting date, the Group’s loss for the year would increase and equity at year end would decrease by approximately $1.2m based on financial assets and liabilities held at that date. If interest rates fell by 0.5% it would have an equal but opposite effect.

Group

Company

 

Loan balance

Weighted average floating interest rate

Loan balance

Weighted average floating interest rate

 

$’000

%

$’000

%

At 31 December 2013

 

 

 

 

Secured bank loans

300,000

4.0%

300,000

4.0%

 

 

 

 

 

At 31 December 2012

 

 

 

 

Secured bank loans

280,000

3.1%

-

N/A

(f) Commodity price risk

In Egypt, liquids realise market prices based on Western Desert pricing, and during 2013 equated to approximately 99% of Brent (2012: 98%). Gas production from development leases within the El Mansoura and South East El Mansoura Concessions in Egypt is sold under long-term contracts in which the gas price is linked to the oil price when the oil price lies in the range of between $10 per barrel to $22 per barrel. With the oil price at its current level, significantly above $22 per barrel, the gas price is at the top of the contractual range and is, therefore, effectively fixed. In Bulgaria, gas is sold to two suppliers, Bulgargaz EAD, the state owned gas company and Agropolychim, an independent chemicals company. Sales nominations are agreed in advance of the start of the calendar year. The Bulgargaz EAD pricing is agreed for each quarter throughout the year whereas the independent company gas price is at a discount to the local quarterly consumer natural gas price, as published by Bulgargaz EAD.

For the year ended 31 December 2013, it is estimated that a general weakening of one percentage point in commodity prices (with the exception of Egyptian gas prices which are effectively fixed when the price of oil is greater than $22 per barrel) would decrease the Group’s loss before tax by approximately $0.1m (2012: $0.4m).

(g) Currency risk

The US dollar is the primary currency in which the Group and Company conduct business. The dollar is used for planning and budgetary purposes and as the presentation currency for financial reporting. The Group and Company also have some costs, assets and liabilities, denominated in Algerian Dinars, Bulgarian Lev, Egyptian Pounds, Romania Lei, Euro and Sterling. The Group manages the exposure by matching receipts and payments in the same currency to the extent possible and monitoring the residual net position.

In order to minimise currency risk, it is Group policy that borrowings incurred in relation to development projects should be denominated in the currency in which future cash flows from the development projects are denominated, currently dollars. Similarly, it is Group policy that corporate borrowings should be denominated in dollars.

The Group may, from time to time, with the approval of the Board, use derivative financial instruments to manage its exposure to fluctuations in foreign currency exchange rates. No such instruments were in use during the current or prior year. The Group does not undertake any trading activity in financial instruments.

If the dollar increased by 5% in value, the Group’s loss for the year would decrease by approximately $0.7m. A 5% weakening would have an equal but opposite effect.

At year end, the Group’s foreign currency balances were as follows:

 

Denominated in Algerian Dinars

Denominated in Euro

Denominated in Sterling

Denominated in Bulgarian Leva

Denominated in Egyptian Pounds

Other

 

$’000

$’000

$’000

$’000

$’000

$’000

At 31 December 2013

 

 

 

 

 

 

Trade and other receivables

-

964

840

7,269

2,128

1

Trade and other payables

(115)

(2,309)

(3,836)

(3,899)

(3,458)

(9)

Current tax liability

-

1,657

-

(1,006)

(141)

-

Cash and cash equivalents

43

1,163

1,335

31

16,650

185

 

(72)

1,475

(1,661)

2,395

15,179

177

 

 

 

 

 

 

 

At 31 December 2012

 

 

 

 

 

 

Trade and other receivables

-

1,527

1,481

10,174

6,959

118

Trade and other payables

(505)

(285)

(2,524)

(7,892)

(2,718)

(49)

Current tax liability

-

(7,562)

-

(4,594)

(469)

-

Cash and cash equivalents

154

1,254

2,051

4,178

1,622

36

 

(351)

(5,066)

1,008

1,866

5,394

105

The Company balance is the same as that presented in the Group for Algerian Dinars.

The exchange rates used in the preparation of the financial statements were as follows:

2013

2013

2012

2012

 

$ per foreign currency

$ per foreign currency

 

Average

Year end

Average

Year end

 

 

 

 

 

Euro

1.32

1.38

1.29

1.32

Sterling

1.56

1.65

1.58

1.62

Algerian Dinars

0.01

0.01

0.01

0.01

Bulgarian Leva

0.68

0.70

0.66

0.68

Egyptian Pounds

0.14

0.14

0.16

0.17

Romania Lei

0.33

0.32

0.29

0.30

(h) Capital management

The Board’s policy is to maintain a strong capital base in order to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitor the allocation of operating cash flow against projects to maximise the return on asset value within the Group.

The Group seeks to maintain a balance between the levels of debt borrowings undertaken and the advantages and security afforded by a sound capital position.

24. Subsidiary undertakings

The Company’s principal subsidiary undertakings at 31 December 2013, all of which are wholly owned, are as follows:

Name

Place of incorporation

Place of operation

Indirect Holding

Petroceltic Investments Limited

Ireland

Ireland

 

Petroceltic Resources plc

England

Scotland

 

Petroceltic Kurdistan Limited

BVI

Kurdistan

 

Petroceltic Italia S.R.L.

Italy

Italy

 

Petroceltic El Mansoura Company

Cayman Islands

Egypt

*

Petroceltic Qantara Company

Cayman Islands

Egypt

*

Petroceltic South East El Mansoura Company

Cayman Islands

Egypt

*

Petroceltic Odyssey El Mansoura Limited

Bermuda

Egypt

*

Petroceltic Odyssey Qantara Limited

Bermuda

Egypt

*

Petroceltic International Petroleum Limited

Bermuda

Egypt

*

Petroceltic S.a r.l.

Luxembourg

Bulgaria

 

Petroceltic Bulgaria EOOD

Bulgaria

Bulgaria

*

Petroceltic Romania B.V.

Netherlands

Romania

 

All shareholdings are of ordinary shares.

A full list of subsidiary companies is filed with the Registrar of Companies, in the appropriate jurisdiction.

25. Update on legal proceedings

In July 2013, the Group issued legal proceedings in the Irish High Court against two former consultants to the Group, Mr Seghir Maza and Mr Samir Abdelly (“the Consultants”), and against a Tunisian company owned and controlled by Mr Abdelly (“AAIC”), seeking to set aside a number of consultancy agreements entered into in 2004 and 2005 with respect to the Group’s North African business activities. The proceedings also seek the return of payments that were made to the Consultants under those agreements during 2005 and 2006.

Petroceltic’s action followed the receipt of correspondence during 2013 threatening legal proceedings against the Group on behalf of one of the parties seeking payment of sums totalling $3.4m pursuant to these agreements. The agreements contain provisions under which the parties could make claims for further material payments from the Group. In November 2013, the High Court of Ireland granted the Company judgment, in default of appearance, against Mr Maza and granted all reliefs sought by the Company in the proceedings, including judgment in the amount of $4.7m, being amounts previously paid under one of the consultancy agreements, plus interest from the date of judgment. The proceedings against Mr Abdelly and AAIC are on-going and the ultimate outcome of these proceedings, by their nature, remain subject to inherent uncertainty.

The financial statements do not contain any provisions relating to these contracts or proceedings other than amounts relating to normal legal and associated advisory costs.