Principal Developments:
Developments in 2008:
— Raised GBP145 million net proceeds from initial public offering in June 2008 and GBP26.4 million of private funds from January to May 2008
— Net cash and cash equivalents at year end of GBP72 million (2007: GBP14 million)
— Total capital expenditure of GBP74.6 million during 2008 (2007: GBP40.5 million)
— Carried out intensive development programme focused on the group’s major fields and reached target depth on two wells in the east and now testing and evaluating data
— Total proved, plus probable reserves base of 83 mmboe (2007: 80.4 mmboe)
— Continued vigorous defence of Pirkovskoe and Zagoryanska license s and signed significant cooperation agreement with the Ministry for Environmental Protection of Ukraine
Post year end events:
— Appointed Ian Baron as interim chief executive officer and launched full strategic and operational review
— Currently testing and evaluating data across all fields with revised programme and recommendations expected by the end of the second quarter or early in the third quarter of 2009
— Maintained cost controls to sustain liquidity position
— Extended Zagoryanska license area to 2014 and will continue to seek satisfactory resolution to license issues
Operations summary:
The group’s asset portfolio consists of acquired interests in 11 license areas covering 14 fields in Ukraine.
Testing of the wells in the Poltava region in eastern Ukraine has provided a significant volume of data and operations on several wells are now at a stage where they can be temporarily suspended to allow evaluation of this information. Contingent on results from this analysis, a decision will be taken as to both the commercial viability of the oil and gas zones tested and the possible development alternatives. While this evaluation is underway, drilling operations will continue only on Borynya #3 in western Ukraine, where the company recently saw encouraging test results in a secondary target above the main objective. Drilling of Borynya #3 will require the use of only one rig and will significantly reduce the group’s capital commitments.
Political and license issues
During 2008 the group was faced with indirect challenges to the Zagoryanska and Pirkovskoe license s. The group immediately embarked on an extensive programme of court hearings and political lobbying to protect its interests. Despite a number of successful court hearings, in February 2009 the High Administrative Court of Ukraine ruled in favor of the original challenge to the Pirkovskoe license. The group has lodged a further appeal in the supreme court of Ukraine, the highest judicial body in the Country.
In support of Cadogan Petroleum’s position, on 30 March 2009, the General Prosecutor’s Office of Ukraine submitted a case to the Supreme Court of Ukraine arguing that the High Administrative Court had been mistaken in reaching its decision and that the ruling should be declared invalid. The Directors believe that, notwithstanding the uncertainties described above, the validity of the group’s license s is expected to be reconfirmed.
On October 7, 2008 Cadogan Petroleum entered into a cooperation agreement with the ministry for environmental protection of Ukraine, under which the Ministry agreed to support Cadogan Petroleum in the conversion of exploration license s to production license s and to protect Cadogan Petroleum’s rights to its existing licenses.
On January 15, 2009 the group successfully extended its license for the Zagoryanska area. The exploration and development license was extended by five years to April 2014.
Overview of financial position:
At the date of this report, the group has current cash and cash equivalents of about GBP53.9 million, of which GBP7.6 million is committed to the construction of two gas treatment plants. As part of its strategic review, the Board is exploring the possibility to augment its funds by selling surplus assets including one or both of the gas treatment plants as well as other inventory that has been acquired.
Income statement:
The group, being in an exploration and development stage, in 2008 continued to operate at a loss, recognizing a loss before tax of GBP22.8 million (2007: GBP15 million). To the extent that revenue arises from test production during an evaluation programme, an amount is charged from evaluation costs to cost of sales, to reflect a zero margin. This has resulted in a gross loss from the group’s hydrocarbon sales of GBP0.2 million (2007: profit GBP0.1 million).
Administrative expenses of GBP25.4 million (2007: GBP13.4 million) consist of staff costs, professional fees, directors’ remuneration, depreciation charges for the group’s property, plant and equipment and its other intangible assets, any currency effects from operating transactions or from the currency related restatement of the value of monetary assets or liabilities and the impact of any adjustments to the carrying value of VAT assets on the group’s consolidated balance sheet. In addition to recurring administrative expenses, GBP6.4 million of consultancy fees were incurred to defend the legal challenges indirectly associated with the Pirkovskoe and Zagoryanska license s and also to extend the Zagoryanska license , GBP4.4 million of professional costs were recognized in relation to the IPO, GBP0.8 million relates to the provision of VAT recoverable relating to Ukraine operations and GBP0.2 million (2007: GBP4.2 million) relating to equitysettled share based payment transactions.
Investment revenue increased during the year to GBP2.9 million (2007: GBP0.3 million) due mainly to interest income earned on funds held.
Cash flow statement
Following the completion of Cadogan Petroleum’s IPO in June 2008, the group raised total net proceeds of approximately GBP145 million. In addition, total net proceeds of GBP26.4 million (2007: GBP55.1 million) were raised through private equity fundraising. Expenditure of GBP39.3 million (2007: GBP17.5 million) on intangible exploration and evaluation assets and GBP32.7 million (2007: GBP4.6 million) on property, plant and equipment represents the group’s continued focus on the development and exploration of its oil and gas assets in Ukraine. During 2008, the group completed the acquisition of LLC Mercor, an operating company that holds an interest in JAA #17 on the Zagoryanska license, and in which the group already held an interest in via its previous acquisition of Radley Investments Limited. The total cash consideration for the acquisition was GBP2.3 million.
Balance sheet:
As at December 31, 2008, the group had a net cash and cash equivalents of GBP72 million (2007: GBP14 million) and no external borrowings. Intangible exploration and evaluation assets of GBP52.1 million (2007: GBP28.7 million) represent the carrying value of the group’s investment of exploration and appraisal assets throughout Ukraine. The property, plant and equipment balance of GBP39.5 million at December 31, 2008 (2007: GBP22.7 million), relates primarily to the cost of developing fields with commercial reserves and bringing them into production. Net assets have increased by GBP140.1 million to GBP208.3 million at December 31, 2008 from GBP68.2 million at December 31, 2007 which is principally due to the proceeds raised from the company’s IPO and private equity financing in the first six months of 2008.
