15th Mar 2006 07:03
JKX Oil & Gas PLC15 March 2006 JKX OIL & GAS 6 Cavendish Square, London W1G 0PD, England, UK Tel: +44 (0)20 7323 4464 Fax: +44 (0)20 7323 5258 Web site: http://www.jkx.co.uk FOR IMMEDIATE RELEASE 15 MARCH 2006 JKX Oil & Gas plc PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 Financial Highlights ____________________ 2005 2004 % Increase Turnover $82.9m $46.6m 78% Profit before tax $51.3m $23.4m 119% Earnings per share (basic) 25.15 cents 13.73 cents 83% Net Cash $56.9m $21.5m 165% Net Cash from operating activities $56.9m $25.8m 121% Strategic Highlights ____________________ - JKX enters the FTSE 250 Index- Strong operating and financial performance with record levels of achievement in production, realisation, revenue, cash flow, profitability and cash resources- Production from all four Ukrainian production licences- Award of Chervonoyarske East exploration licence in Ukraine- Two new country entries with farm-in to two exploration interests in Turkey and one in Bulgaria- 100 per cent increase in recommended full year dividend Dr Paul Davies, Chief Executive of JKX, said: "The strong results for the yearreflect the continued development of our operations coupled with a strong oilprice. JKX will continue to build on its success in Ukraine and will continue toexamine opportunities elsewhere. We are delighted with our inclusion into theFTSE 250 and remain confident that we can continue to grow value forshareholders." ENDS For further information please contact: Sofia Rehman / Anthony Cardew Cardew Group 020 7930 0777 CHAIRMAN'S STATEMENT____________________ I am pleased to report that your Company has achieved significant growth in 2005with a sustained rise in production and a substantial increase in both revenuesand profitability. The market capitalisation of the Company has also grown inthe period and the continuation of this trend in 2006 has led to its inclusionthis month in the FTSE 250. Oil and gas revenues rose by 78% in the period to $82.9million ($46.6million).Revenues have benefited from a strengthening of international oil prices and,importantly, a continued rise in domestic Ukrainian gas prices. However, themost significant contribution has come from the increase in oil production fromPoltava in the second half of the year, which has raised average production forthe year to 9,309 boepd (8,004 boepd). Profit before tax more than doubled to$51.3million ($23.4million), with a corresponding rise in operating cash flow to$56.9million ($25.8million). Profit after tax rose to $37.2million($19.3million). Capital expenditure increased to $32.3million ($27.8million),with more than 85% invested in the development of our Ukrainian assets. Cashresources at year end totalled $56.9million ($39.1million). The Company's main production base and focus of operations remains in Ukraine,an emerging market economy which has recently experienced significant growth anda change in government during the reporting period. To date, the performance ofour wholly owned Ukrainian subsidiary has been unaffected by any fiscal oradministrative changes introduced by the new government. Continuing marketreforms, promotion of foreign investment and transparent privatisation of oiland gas licences will reinforce your Board's commitment to increasing theCompany's level of investment in the country. The Company made further progress with its development drilling programme atPoltava, Ukraine in 2005. Two new oil wells were drilled and brought on toproduction from the Molchanovskoye Field in the second half of the year with asignificant upwards impact on overall production levels. The new Well N70 wasdrilled on the Novo-Nikolaevskoye Field and continues to produce hydrocarbonsfrom one of the tested horizons; a further horizon is scheduled for testing thisyear. Our major development programme on the deep and challenging RudenkovskoyeField was initiated in the first quarter with a successful re-entry and sidetrack of Well R12 (a well drilled by the State in the 1970's), and thiscontinues to produce and provide important well data for further fielddevelopment. This was followed in the fourth quarter by the first new Well R101in the north of the field. This well was suspended in January 2006 havingencountered gas at significantly higher pressure than predicted. We arereturning in the current period to complete and test a 200m gas bearing intervalafter installation of a section of high pressure casing. Following the award of the Elizavetovskoye exploration license at the end of2004, a detailed evaluation has been completed of the available seismic andproduction data purchased. The development options are dependent on the ongoingnegotiations with the local state production organisation, which continues toproduce from existing wells on our license. Most recently, we were successful insecuring the Chervonoyarske East exploration license in a Ukrainian governmentauction in December 2005. We continue to seek to broaden our oil and gasportfolio in Ukraine and are currently evaluating a number of potentialexploration and development projects. In Georgia, Anadarko Petroleum has completed the processing of the 1,100 sq.km,3D seismic survey over the southernmost block of the 8,900 sq.km explorationarea of the Georgia Black Sea (JKX: 4% net profit interest); interpretation isunderway and will be completed by mid year. We understand that a decision on thelocation of the first exploration well will be made shortly thereafter withtiming dependent on competing priorities in an increasingly tight offshore rigmarket. In Italy, we have continued to develop our onshore portfolio. The Company hascompleted its assessment of development options for the Civita discovery (JKX:100%), and is making an application for a production concession; depending onthe schedule for Italian regulatory approval, first gas is scheduled for mid2007. ENI retains its 70% interest and remains operator in the remainder of theCivita exploration permit. We remain hopeful that the scope and schedule for thenext phase of work will be agreed by the middle of this year. The Company iscontinuing to work with its partners on the pre-drilling phases of explorationon the Fiume Arrone permit (JKX: 10%) and the Moltalbano permit (JKX: 40%), andhas made applications for further permits at Corropoli in the eastern part ofcentral Italy and at Brienza in southern Italy. In March 2005, the Company farmed in to two onshore exploration permits, BGolitza and B1 Golitza (JKX: 25%), covering an area of 4,800 sq.km in easternBulgaria. A 200km 2D survey was shot in the third quarter of the year andprocessing and interpretation work has now been completed. The Company intendsto exercise its option to increase its interest to 50% by spudding the firstexploration well in the fourth quarter of 2006. During the period, the Company farmed in to the three onshore explorationKarakilise licences (JKX: 30%) in south eastern Turkey and two onshoreexploration licences (JKX: 25%) in Thrace in the west of Turkey. On Karakilise,a well was drilled in the second quarter but failed to flow oil in commercialquantities; further work is planned this year on the initial producing well onthe license. In Thrace, additional seismic will be shot this year with a view tospudding the first exploration well in 2007. The Company paid an interim dividend of 0.5p per share on 4 November 2005, adoubling of the interim dividend paid in 2004. I am pleased to report that theBoard is recommending a final dividend of 0.6p which will be paid on 22 May toshareholders who are on the Company's Register of Members at the close ofbusiness on 3 April. This payment will bring the total dividend in respect of2005 to 1.1p per share (0.55p per share), a 100% increase over 2004. Outlook The full development of the four production licences at Poltava remains ouroperational focus in the near term. A second drilling rig was mobilised fromPoland in December and is currently being utilised for both drilling of newwells and workovers. New wells are scheduled this year on the Ignatovskoye,Molchanovskoye and Rudenkovskoye Fields with the twin objectives of increasingproduction and firming up reserves. The completion and testing of our suspended deep Well R101 on the RudenkovskoyeField is a priority for the second quarter of the year, as is the securing of athird rig with a 15,000psi BOP system capable of drilling the underlyingDevonian sands at depths of 5,000m plus. I am hopeful that we will be able togive a much firmer interpretation of this exciting and technically challenginglicense by the year end. The first exploration well on the Zaplavskoye license in Ukraine is scheduledfor the third quarter of the year. Evaluation work will also progress on theElizavetovskoye and Chernovayarske exploration licences with a 2D seismic shootover the latter scheduled for the third quarter of the year. The addition ofadditional Ukrainian licences to our portfolio remains the priority. Exploration drilling is scheduled on our Bulgarian and Turkish licences thisyear as we seek to broaden the scope and breadth of our exploration portfolio.We continue to search for suitable development projects in and around our corearea of the states of the former Soviet Union which could employ the technicaland operational strengths of the Company. Russia remains an area of particularinterest although we have yet to identify a suitable onshore oil or gas project. I would like to thank all members of staff for their contribution to thecontinuing success of the Company and extend my appreciation to all shareholdersof the Company for their continued interest and support. I am confident that ourgrowth strategy will bear fruit. CHIEF EXECUTIVE'S STATEMENT___________________________ The Company achieved its two key objectives in 2005, namely increase inproduction and acquisition of additional licences in and around its core area.These objectives remain central to our strategy for 2006, coupled with anincreasing emphasis on adding to our reserve base from both existing licencesand new acquisitions. Ukraine_______ The Company's wholly owned subsidiary, Poltava Petroleum Company ("PPC"),remains the largest non-state producer of oil and gas in Ukraine, and suppliedapproximately 5% of the total indigenous oil and gas production during theperiod. Average daily production increased to 9,304 boepd (8,000 boepd) withproduction coming on-stream during the year from new Wells M151, M152 and N70and the re-entered Well R12. Rising oil and condensate production accounts foralmost all the overall increase, with gas production remaining essentiallyconstant. Average realisations for oil in the period rose by 45% to $46.43 per barrel($31.99 per barrel) despite the effective curtailment of oil exports fromUkraine as a result of the introduction of a quota system in April 2005. Thequota system was removed at the end of the year, but it has not been possible todate to obtain the necessary documentation from the relevant ministries to allowthe Company to resume exports. We remain of the view that this inconsistency istemporary and will be resolved by mid 2006. Average realisations for gas in the period rose by 14% to $1.82 per Mcf ($1.59per Mcf), with all gas being sold into the domestic market. The price of gas inthe Ukrainian market has increased by more than 50% in the first quarter of thisyear, as a result of the recent negotiations between Russia and Ukraine on theprice of all Gasprom and central Asian gas being supplied to Ukraine from/viaRussia. We anticipate a continuing upward pressure on gas prices through theyear. The ongoing development drilling programme continued throughout the reportingperiod. The two new wells (M151, M152) drilled on the Molchanovskoye Field werebrought on-stream at rates of 3,000 bopd plus 2.0 MMcfd, and 2,950 bopd plus 2.4MMcfd respectively. The first new Well N70 on the Novo-Nikolaevskoye Field wasdrilled and is producing from one thin horizon only; it is intended to test onefurther horizon this year. On the Rudenkovskoye Field, a re-entry and side trackwas completed on Well R12, a well drilled by the state in the 1970's in thesouth of the field; testing began in April and has continued through the period.The first new Well R101 was spudded on the northern part of the field inOctober, and was suspended at a depth of 4,579m in January of this year afterencountering gas at pressures in excess of 12,000psi. Completion and testing isnow planned for the second quarter of this year of the upper 200m of gas bearingTournasian sandstones encountered in a number of intervals from approximately4,100m, where downhole pressures were recorded between 9,000psi and 11,000psi. A second drilling rig (Kremco 900) was contracted from Poland in December toincrease the pace of the development programme in 2006. Upgrade and expansion of the production facilities at Poltava continuedthroughout the period, including expansion of our rail loading terminal,installation of two new 8,000 barrel oil storage tanks (bringing oil storagecapacity up to 60,000 barrels), installation of a new 800hp compressor andinstallation of more than 30 km of new intra-field flowlines. Further oilstorage, new flowlines and a new 2,300hp compressor are scheduled for thecurrent year. Additional gas export capacity from our Poltava licences is essential for PPC todeliver a significantly higher level of gas production to market. All technicalapprovals have been received for the proposed tie-in of our field facilities tothe 56inch Soyuz pipeline, one of the main gas trunkline systems delivering gasfrom Russia to western Europe. However, we are still awaiting final sign-offfrom Naftogas of Ukraine, the state oil and gas company. We have thereforeundertaken and completed the engineering of an alternative 42km line and tie-into the 36inch Efremovka-Dikanka-Kiev trunkline, and this project has recentlybeen submitted to the relevant regulatory authorities for approval. In parallel,we have proceeded with, and are close to finalising, acquisition of the right ofway in order to minimise any delay in implementing an alternative export routefor our gas. The Company was awarded the Chervonoyarske East exploration licence in Decemberin the first open auction in Ukraine. Reprocessing of existing seismic data isunderway, and it is planned to shoot additional 2D seismic in the second half ofthis year. Georgia_______ During the period, BP, TPOC and Unocal farmed in to the Georgia license and alsodrilled an exploration well on their adjacent license in the Turkish Black Sea,close to the Georgian border. As operator of the Turkish block, BP has keptinformation relating to this well very tight. Notwithstanding this lack ofadditional information, I remain optimistic with regard to the explorationprogramme on our large offshore block. Anadarko, as operator of the consortium,has indicated that the location of the first exploration well will be decided inthe third quarter of this year following completion of its 3D seismicinterpretation, with timing being dictated by deep water rig availability. Ibelieve that 2007 is the earliest we can expect spudding of our first well. Italy_____ Following the increase of our participation in the Civita 1 discovery to 100%,we have submitted an application in cooperation with ENI to the Italianauthorities for a production concession. The development plan comprises minimalproduction facilities with a 1.1km flowline tie-in to nearby infrastructurewhere it is envisaged that the gas will be treated and compressed totransmission pipeline pressure for a tariff. First gas delivery is scheduled formid 2007. We remain optimistic that joint exploration activities with ENI on theremainder of the block will be reinitiated in the second quarter of this year. Agreement has now been reached to farm out the Fiume Arrone permit to fund thedrilling and testing of an exploration well; this is scheduled for the lastquarter of this year. The Company will retain a 10% working interest oncompletion of the farm-in. The exploration permit was awarded in October for the Montalbano block (JKX:40%). Initial efforts are concentrated on evaluating a small existing discoveryon the permit and the area around it, and purchasing, reprocessing andinterpretation of existing seismic data. The Company applied in 2004 for the 176 sq.km Corropoli permit, which is locatedin the Abruzzo region of central Italy. The Company is undertaking anenvironmental survey over the block. Permit award is not expected before 2007. In July, the Company applied for the 76 sq.km Brienza permit, adjacent to theVal D'Agri area of southern Italy. We await a response from the authorities toour submission. Bulgaria________ The Company farmed into two onshore exploration permits, B Golitza and B1Golitza, in the first quarter of the period. The permits cover a total of 4,800sq.km and contain two well defined prospects and a number of leads. A largeprospect has been identified in the B Golitza permit with the potential tocontain several hundred Bcf of gas; the smaller prospect in B1 Golitza couldcontain approximately 50 Bcf. The Company shot 200km of 2D seismic in the thirdquarter of 2005 to earn its 25% interest in the permit. The survey covered themain prospect identified in each permit. Processing of the data is now completeand a well location will be agreed in the current quarter. The Company intendsto exercise its option to increase its interest to 50% and spud the first wellin the fourth quarter of this year. Turkey______ The Company farmed into three Karakilise onshore exploration licences, coveringa total of 1,230 sq.km in south-eastern Turkey, in the second quarter of theperiod (JKX: 30%). The licences contain a commercial oil discovery well,Karakilise 1, and a number of leads. In the third quarter, an appraisal wellKarakilise 2 was drilled to 2,500m and found hydrocarbons, but not in commercialquantities. It is planned to deepen Karakilise 1 by approximately 600m laterthis year to evaluate the lower horizons. The Company farmed into two onshore exploration licences, covering an area of897 sq.km in the Thrace region, in the fourth quarter of the period (JKX: 25%).The licences contain two strong leads and additional seismic is planned for thesecond half of this year to firm up a drillable prospect for 2007. USA___ The performance of the three wells drilled to date on the Center Deep project ineast Texas (JKX: 34.4%) has been disappointing, with two wells unable tomaintain continuous production. There remain a number of areas on the 11,290acre Unit where it is believed that commercial producers could be drilled to theJames Lime (the primary target in the Unit). It is now anticipated the next wellwill evaluate two deeper formations, which are productive in the surroundingarea, with a 9,500 ft vertical well planned for the third quarter of 2006.Whilst the Company wishes to participate in any further appraisal work, it isexamining its options for this remaining interest in North America. Outlook_______ The focus of our 2006 work programme is the accelerated development of ourexisting Ukrainian licences. We are currently drilling another horizontal oilWell M154 on the Molchanovskoye Field with the Skytop N75 rig, and a verticaloil Well I124 on the Ignatovskoye Field with the Kremco 900 rig. Further wellsare planned on both fields later in the year. The N75 rig will return to theRudenkovskoye Field in April to run well logs and complete the upper section ofWell R101 with testing to be undertaken of the 200m of gas bearing Tournasiansandstones. In parallel, we will tender in the second quarter for a heavy dutyrig with a 15,000psi BOP system which will be capable of drilling to 5,000m plusto test the very high pressure gas in the underlying Devonian formations on theRudenkovskoye Field. The work programme to develop this deep and technicallychallenging field is the medium term development goal at Poltava. We are intensifying our exploration programme in Ukraine with a vertical well onour Zaplavskoye license and a 2D seismic survey over the Chervonoyarske Eastlicense in the third quarter of the year. We are actively evaluating otherexisting licences in the area and will welcome the opportunity to participate inany further Ukrainian government auctions. We are enthusiastic about our initial investments in Bulgaria and Turkey, but todate have not identified a suitable onshore prospect in Russia. We areincreasing our efforts to identify suitable prospects around our coreoperational area and are well placed to move swiftly to secure them. Increasing our asset and reserve base, whether through the drill bit oracquisitions, is our objective going forward. I am confident that the Companyand its staff will continue to deliver and build upon its achievements to date. Financial Review Production summary Total Second First Total half half 2005 2005 2005 2004_____________________________________________________________________________________ ProductionOil (Mbbl) 1,300 939 361 729Gas (Bcf) 12.6 6.6 6.0 13.2_____________________________________________________________________________________ Oil equivalent (Mboe) 3,398 2,037 1,361 2,929_____________________________________________________________________________________ Daily productionOil (bopd) 3,561 5,104 1,993 1,993Gas (MMcfd) 35 36 33 36_____________________________________________________________________________________ Oil equivalent (boepd) 9,309 11,067 7,521 8,004_____________________________________________________________________________________ Total Second First Total half halfOperating results 2005 2005 2005 2004 $m $m $m $m_____________________________________________________________________________________ RevenueOil 59.8 46.5 13.3 23.1Gas 22.4 12.2 10.2 20.7Other 0.7 0.4 0.3 2.8_____________________________________________________________________________________ 82.9 59.1 23.8 46.6_____________________________________________________________________________________ Cost of salesOperating costs (14.7) (10.5) (4.2) (10.2)Depreciation, depletion and amortisation (9.7) (7.0) (2.7) (5.1)Production based taxes (1.3) (0.9) (0.4) (3.2)_____________________________________________________________________________________ (25.7) (18.4) (7.3) (18.5)_____________________________________________________________________________________ 57.2 40.7 16.5 28.1_____________________________________________________________________________________ Operating expensesGeneral and administrative expenses (3.9) (1.6) (2.3) (4.5)Share-based payment costs (3.3) (3.2) (0.1) (0.2)_____________________________________________________________________________________ Operating profit 50.0 35.9 14.1 23.4_____________________________________________________________________________________ Earnings Total Second First Total half half 2005 2005 2005 2004_____________________________________________________________________________________ Net profit ($m) 37.3 26.4 10.9 19.2Basic weighted average number of shares in issue (m) 148 152 145 140Earnings per share (basic) (cents) 25.15 17.63 7.52 13.73Earnings before interest, tax, depreciation and amortisation ($m) 60.4 43.3 17.1 29.1_____________________________________________________________________________________ Realisations Total Second First Total half half 2005 2005 2005 2004_____________________________________________________________________________________ Oil (per bbl) $46.43* $47.88* $41.97* $31.99*Gas (per Mcf) $1.82* $1.89* $1.75 $1.59_____________________________________________________________________________________ *Oil and gas prices are net of all transportation, shrinkage and brokeragecharges. Cost of production ($/boe) Total Second First Total half half 2005 2005 2005 2004 _____________________________________________________________________________________ Production costs $3.51* $4.09* $2.64* $2.56*Depreciation, depletion and amortisation $2.84 $3.43 $1.96 $1.71Production based taxes $0.38 $0.41 $0.32 $1.09_____________________________________________________________________________________ *Production costs relate to the operating costs attributable to oil and gasturnover. Cash flow Total Second First Total half half 2005 2005 2005 2004_____________________________________________________________________________________ Cash generated from operations ($m) 69.3 49.1 20.2 28.7Operating cash flow per share (cents) 46.7 32.4 13.9 20.5_____________________________________________________________________________________ Balance sheet Total Second First Total half half 2005 2005 2005 2004_____________________________________________________________________________________ Net cash ($m) 56.9 56.9 36.6 21.5Net cash to equity (%) 38.4 38.4 29.0 21.4Return on average capital employed (%) 30.6 39.0 20.0 22.7Capital expenditure ($m) 32.3 16.1 16.2 27.8_____________________________________________________________________________________ Unaudited Group Income StatementFor the year ended 31 December Note 2005 2004 $000 $000_____________________________________________________________________________________ Revenue 4 82,883 46,594Cost of sales (25,686) (18,541)_____________________________________________________________________________________ Gross profit 57,197 28,053General and administrative expenses (3,896) (4,518)_____________________________________________________________________________________ Share based payment costs (3,270) (154)_____________________________________________________________________________________ Operating profit 50,031 23,381_____________________________________________________________________________________ Finance revenue 2,036 564Finance cost (772) (546)_____________________________________________________________________________________ Profit before tax 51,295 23,399Taxation 6 (14,066) (4,120)_____________________________________________________________________________________ Profit for the year 37,229 19,279_____________________________________________________________________________________ Attributed to:JKX shareholders 37,301 19,226Minority interest (72) 53_____________________________________________________________________________________ 37,229 19,279_____________________________________________________________________________________ Dividends (2,162) (1,303)Dividend (per share) 0.8 pence 0.5pence_____________________________________________________________________________________ Earnings per share - basic earnings per 10p ordinary share (in cents) 7 25.15 13.73- diluted earnings per 10p ordinary share (in cents) 7 24.07 13.07_____________________________________________________________________________________ Unaudited Statement of Recognised Income and Expense For the year ended 31 December 2005 2004 $000 $000_____________________________________________________________________________________ Equity - foreign currency translation (1,774) 200_____________________________________________________________________________________ Net income/(expense) recognised directly in equity (1,774) 200Profit for the period 37,229 19,279Total recognised income and expense for the year 35,455 19,479_____________________________________________________________________________________ Attributable to:Minority interest (72) 53JKX shareholders 35,527 19,426_____________________________________________________________________________________ 35,455 19,479_____________________________________________________________________________________ Effects of changes in accounting policy:Recognition of split accounting of Convertible Loan Notes following adoption of IAS 32 (358) -Minority interest - -_____________________________________________________________________________________ Unaudited Group Balance Sheet As at 31 December Note 2005 2004 $000 $000_____________________________________________________________________________________ AssetsNon-current assetsIntangible assets 19,869 14,927Property, plant and equipment 81,481 65,353Other receivables 1,554 3,090_____________________________________________________________________________________ 102,904 83,370_____________________________________________________________________________________ Current assetsInventories - finished goods 762 194Trade and other receivables 6,278 11,923Cash at bank and in hand 9 56,923 39,134_____________________________________________________________________________________ 63,963 51,251_____________________________________________________________________________________ LiabilitiesCurrent liabilitiesConvertible loan notes - (17,662)Current tax liabilities (1,392) (1,696)Trade and other payables (13,795) (12,944)_____________________________________________________________________________________ (15,187) (32,302)_____________________________________________________________________________________ Net current assets/(liabilities) 48,776 18,949_____________________________________________________________________________________ Non-current liabilitiesProvisions (590) (475)Deferred tax (2,784) (1,518)_____________________________________________________________________________________ (3,374) (1,993)_____________________________________________________________________________________ Net assets 148,306 100,326_____________________________________________________________________________________ EquityShare capital 23,292 21,582Share premium 37,524 22,127Merger reserve 30,680 30,680Other reserves Capital redemption reserve 587 587 Equity - share options 400 171 Equity - foreign currency translation (1,275) 499Retained earnings 57,098 24,587_____________________________________________________________________________________ JKX shareholders' equity 148,306 100,233_____________________________________________________________________________________ Minority interests - equity - 93_____________________________________________________________________________________ Total equity 148,306 100,326_____________________________________________________________________________________ These financial statements were approved by the Board of Directors on 15 March2006 and signed on its behalf by: Lord Fraser B J BurrowsDirector Director Unaudited Group Cash Flow Statement For the year ended 31 December Note 2005 2004 $000 $000_____________________________________________________________________________________ Cash flows from operating activities 8Cash generated from operations 69,335 28,727Interest Received 1,588 571Interest Paid (865) (498)Income tax paid (13,180) (3,040)_____________________________________________________________________________________ Net cash from operating activities 56,878 25,760_____________________________________________________________________________________ Cash flows from investing activitiesProceeds from sale of property, plant and equipment 46 17Proceeds from sale of US assets 1,329 233Purchase of property, plant and equipment and intangible assets (34,208) (25,044)_____________________________________________________________________________________ Net cash used in investing activities (32,833) (24,794)_____________________________________________________________________________________ Cash flows from financing activitiesProceeds from issue of ordinary share capital - 8,049Treasury shares purchased (2,695) -Convertible loan note - 17,662Share issue costs (25) -Short term borrowings - 2,482Repayment of borrowings - (9,476)Dividends paid to shareholders (2,162) (1,303)_____________________________________________________________________________________ Net cash (used in)/from financing activities (4,882) 17,414_____________________________________________________________________________________ Increase in cash and cash equivalents in the year 19,163 18,380Effect of exchange rates on cash and cash equivalents (1,374) 1,083Cash and cash equivalents at 1 January 39,134 19,671_____________________________________________________________________________________ Cash and cash equivalents at 31 December 56,923 39,134_____________________________________________________________________________________ Accounting policies 1. Adoption of new and revised International Financial Reporting Standards The consolidated financial information for the year ended 31 December 2005 andfor the comparative year ended 31 December 2004 have been prepared in accordancewith IFRS. Where the Group's UK GAAP financial information was based on estimates, the sameestimates have been applied in preparing the IFRS financial information. WhereIFRS requires estimates that were not previously required under UK GAAP, theyhave been based only on those factors existing on the relevant balance sheetdate. This is consistent with treating information received after the balancesheet date as non adjusting events under IAS 10 - Events after the Balance SheetDate. Estimates not previously required under UK GAAP primarily relate tofinancial instruments, split accounting and share-based payments. IFRS 1 allows exemptions from the application of certain IFRS's to assistcompanies with the transition process. Accordingly the Group has made thefollowing first time accounting policy choices: • IFRS 2 - Share-based Payments is applied to all equity-settled share based awards made after 7 November 2002 that did not vest before 1 January 2005 • IFRS 3 - Business combinations prior to 1 January 2004 have not been restated • IAS 32 - Financial Instruments: Disclosure and Presentation, and IAS 39 - Financial Instruments: Recognition and Measurement, was adopted on 1 January 2005. The Group, as a first time adopter, has adopted early (with effect from 1January 2004) the following Standard that is not mandatory as at 31 December2005, the reporting date of the Group's first IFRS financial statements. • IFRS 6 - Exploration for and Evaluation of Mineral Resources. The Standard provides for the continuance of the Group's existing policy of successful efforts for exploration and evaluation expenditure and accordingly the Group has elected to adopt IFRS 6. At the date of approval of these financial statements the Group has not appliedthe following IFRS, IAS and International Financial Reporting InterpretationsCommittee (IFRIC) interpretations which are in issue but not yet effective: • IFRS 7 - Financial Instruments: Disclosures; and the related amendment t IAS 1 on capital disclosures • IAS 21 - Amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates Net Investment in a Foreign Operation • IAS 39 - Amendment to IAS 39 Financial Instruments Recognition and Measurement The Fair Value • IFRIC 5 - Right to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds • IFRIC 8 - Scope of IFRS 2 The adoption of these IFRS and IFRICs in future periods is not expected to havea material impact on the Groups financial statements. 2. Ukrainian business environment Ukraine continues to display emerging market characteristics, and itslegislation and business practices regarding banking operations, foreigncurrency transactions and taxation is constantly evolving as the new governmentattempts to manage the economy. Risks inherent in conducting business in anemerging market economy include, but are not limited to, volatility in thefinancial markets and the general economy. Uncertainties over the development ofthe tax and legal environment, as well as difficulties associated with theconsistent application of current laws and regulations, have continued. As at 31December 2005, oil and gas assets based in Ukraine represent approximately 83%of the Group's oil and gas assets. 3. Significant accounting policies Basis of preparation This is the first year in which the group has prepared its financial statementsunder IFRSs and the comparatives as restated from UK Generally AcceptedAccounting Practice (UK GAAP) to comply with IFRSs. At the interim resultsrelease the group issued it's preliminary IFRS financial statements for 2004 andthe reconciliations to IFRSs from the previously published UK GAAP financialstatements. The group financial statements are presented in US Dollars and thesignificant accounting policies are included in the IFRS re-statements. The unaudited financial information for the years ended 31 December 2005 and 31December 2004 contained in this document does not constitute statutory accountsas defined in section 240 of the Companies Act 1985. The financial informationfor the year ended 31 December 2005 and 31 December 2004 have been extractedfrom the unaudited financial statements of JKX Oil & Gas plc which will bedelivered to the Registrar of Companies in due course. The auditors have issuedan unqualified opinion on the Group's statutory financial statements under UKGAAP for the year ended 31 December 2004, which have been filed with theRegistrar of Companies. 4. Revenue Revenue represents amounts invoiced net of value added and similar taxes for theGroup's share of oil and gas sales and related management services. The split of revenue received is listed in note 5 in the segmental analysis,which includes oil and gas sales, management services (other) and financerevenue. 5. Segmental analysis Segmental Information The primary segmental reporting format is determined to be the geographicalsegment according to the location of the asset. Secondary information byproducts and services could have been used for reporting secondary businesssegment information; however the Group believe that no meaningful informationwould have been reported. With this in mind the Group decided not to report asecondary segment reporting format. There are five reporting segments. The Ukraine and the USA are involved withproduction and exploration; Georgia and the 'Rest of the World' are involved inexploration and the UK is the home of the head office. The 'Rest of the World'segment comprises operations in Italy, Bulgaria and Turkey. Transfer prices between segments are set on an arms length basis in a mannersimilar to transactions with third parties. Segment revenue, segment expense andsegment result include transfers between segments. Those transfers areeliminated on consolidation. Rest of Sub Total 2005 UK Ukraine Georgia USA world Total Eliminations 2005 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000____________________________________________________________________________________________External revenue Turnover by location of assetOil 10,022 49,806 - - - 59,828 - 59,828Gas - 22,335 - 79 - 22,414 - 22,414Management services 300 278 - - - 578 - 578Natural gas liquids - 63 - - - 63 - 63____________________________________________________________________________________________ 10,322 72,482 - 79 - 82,883 - 82,883____________________________________________________________________________________________Inter segment salesOil - 14,572 - - - 14,572 (14,572) -Gas - - - - - - - -Management services 8,827 1,089 - - - 9,916 (9,916) -Equipment 18,385 - - - - 18,385 (18,385) -____________________________________________________________________________________________ 27,212 15,661 - - - 42,873 (42,873) -____________________________________________________________________________________________Total revenueOil 10,022 64,378 - - - 74,400 (14,572) 59,828Gas - 22,335 - 79 - 22,414 - 22,414Management services 9,127 1,367 - - - 10,494 (9,916) 578Natural gas liquids - 63 - - - 63 - 63Equipment 18,385 - - - - 18,385 (18,385) -____________________________________________________________________________________________ 37,534 88,143 - 79 - 125,756 (42,873) 82,883____________________________________________________________________________________________Operating profit/ (loss) (7,847) 56,798 (94) (315) (409) 48,133 1,898 50,031Finance revenue 2,036 - 2,036Finance cost (772) - (772)____________________________________________________________________________________________Profit before tax 49,397 1,898 51,295____________________________________________________________________________________________ Segment assets 13,707 140,126 5,771 5,235 3,763 168,602 - 168,602 Unallocated assets - - - - - - - (1,735)____________________________________________________________________________________________Total assets - - - - - - - 166,867____________________________________________________________________________________________Segment liabilities (47,376) (9,338) (6,785) (6,494) (6,158) (76,151) - (76,151) Unallocated liabilities - - - - - - - 57,590____________________________________________________________________________________________Total liabilities - - - - - - - (18,561)____________________________________________________________________________________________ Non cash expenses other thandepreciation 273 - - - 37 310 - 310Capital expenditure 2,747 28,603 229 201 539 32,319 - 32,319Depreciation, depletion &amortisation 102 10,226 2 - - 10,330 - 10,330____________________________________________________________________________________________ Rest of Sub Total 2004 UK Ukraine Georgia USA world Total Eliminations 2004 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000____________________________________________________________________________________________External revenueTurnover by location of assetOil 21,818 1,303 - - - 23,121 - 23,121Gas - 20,635 - 43 - 20,678 - 20,678Management services 2,760 - - - - 2,760 - 2,760Natural gas liquids - 33 - 2 - 35 - 35____________________________________________________________________________________________ 24,578 21,971 - 45 - 46,594 - 46,594____________________________________________________________________________________________Inter segment salesOil - 18,355 - - - 18,355 (18,355) -Management Services 14,251 547 - - - 14,798 (14,798) -Equipment 13,514 - - - - 13,514 (13,514) -____________________________________________________________________________________________ 27,765 18,902 - - - 46,667 (46,667) -____________________________________________________________________________________________Total revenueOil 21,818 19,658 - - - 41,476 (18,355) 23,121Gas - 20,635 - 43 - 20,678 - 20,678Management services 17,011 547 - - - 17,558 (14,798) 2,760Natural gas liquids - 33 - 2 - 35 - 35Equipment 13,514 - - - - 13,514 (13,514) -____________________________________________________________________________________________ 52,343 40,873 - 45 - 93,261 (46,667) 46,594____________________________________________________________________________________________ Operating profit/ (loss) 5,145 18,284 116 (52) (112) 23,381 - 23,381Finance revenue 564 - 564Finance cost (546) - (546)____________________________________________________________________________________________Profit before tax 23,399 - 23,399____________________________________________________________________________________________ Segment assets 10,632 98,249 5,545 5,032 3,670 123,128 - 123,128Unallocated assets - - - - - - - 11,493____________________________________________________________________________________________Total assets - - - - - - - 134,621____________________________________________________________________________________________ Segment liabilities (22,209) (2,795) (6,468) (6,275) (7,750) (45,497) - (45,497)Unallocated liabilities - - - - - - - 11,202____________________________________________________________________________________________Total liabilities - - - - - - - (34,295)____________________________________________________________________________________________ Non cash expenditures otherthan depreciation 346 55 - - - 401 - 401Capital expenditure 2,882 21,542 372 1,581 1,715 28,092 - 28,092Depreciation, depletion &amortisation 56 5,630 10 - - 5,696 - 5,696____________________________________________________________________________________________ Eastern Total2005 UK Ukraine Georgia USA Europe 2005 $'000 $'000 $'000 $'000 $'000 $'000______________________________________________________________________________________External revenueTurnover by location of customerOil - 49,806 - - 10,022 59,828Gas - 22,335 - 79 - 22,414Management services - 278 300 - - 578Natural gas liquids - 63 - - - 63______________________________________________________________________________________ - 72,482 300 79 10,022 82,883______________________________________________________________________________________ Eastern Total2004 UK Ukraine Georgia USA Europe 2004 $'000 $'000 $'000 $'000 $'000 $'000______________________________________________________________________________________External revenueTurnover by location of customerOil - 1,303 - - 21,818 23,121Gas - 8,095 - 43 12,540 20,678Management services 80 - 213 - 2,467 2,760Natural gas liquids - 33 - 2 - 35______________________________________________________________________________________ 80 9,431 213 45 36,825 46,594______________________________________________________________________________________ 6. Taxation Taxes charged on production of hydrocarbons are included in the cost of sales. Analysis of tax on profit on ordinary activities. 2005 2004 $000 $000Current tax - Overseas 13,117 3,771Deferred tax - Overseas 949 349_____________________________________________________________________________________ 14,066 4,120_____________________________________________________________________________________ Factors that affect the total tax charge The total tax charge for the year of $14.1m (2004: $4.1m) is lower than thestandard rate of UK corporation tax of 30% (2004: 30%). The differences areexplained below: Total tax reconciliation 2005 2005 2004 2004 $000 % $000 %_________________________________________________________________________________Profit on ordinary activities before tax 51,294 23,399_________________________________________________________________________________Current tax calculated at 30% (2004: 30%) 15,388 30.0% 7,020 30.0%Fixed asset differences 31 0.1% - 0.0%Utilisation of tax losses (871) -1.7% (2,464) -10.5%Losses to carry forward into future periods 2,838 5.5% 88 0.4%Taxable temporary differences not recognised (2,839) -5.5% (287) -1.2%Permanent foreign exchange differences 17 0.0% 16 0.0%Effect of tax rates in foreign jurisdictions (2,699) -5.3% (749) -3.2%Other non-deductible expenses 2,201 4.3% 496 2.1%_________________________________________________________________________________Total tax charge 14,066 27.4% 4,120 17.5%_________________________________________________________________________________ Factors that may affect future tax charges A significant proportion of the group's income will be generated overseas.Profits made overseas will not be able to be offset by costs elsewhere in thegroup. This could lead to a higher than expected tax rate for the group. 7. Earnings per share The calculation of the basic and diluted earnings per share attributable to theordinary equity holders is based on the following data: Earnings 2005 2004 $000 $000________________________________________________________________________________Earnings for the purposes of basic earnings per share 37,301 19,226(profit for the year attributable to equityholders)Effect of dilutive potential ordinary shares:Interest on convertible loan notes (net of tax) 506 348________________________________________________________________________________Earnings for the purposes of diluted earnings per share 37,807 19,574________________________________________________________________________________________________________________________________________________________________Number of shares 2005 2004________________________________________________________________________________Basic weighted average number of shares 148,340,576 140,054,580Dilutive potential ordinary shares:Convertible loan notes 3,314,693 4,086,134Share options 5,423,236 5,635,441________________________________________________________________________________Weighted average number of shares for diluted earnings per share 157,078,505 149,776,155________________________________________________________________________________ There were 6,246,531 (2004: 8,131,531) outstanding share options at 31 December2005, of which 5,423,236 (2004: 5,635,441) have a dilutive effect. During theperiod there were no antidilutive instruments (2004: 1,531 share options). 8. Reconciliation of operating profit to net cash inflow from operations 2005 2004 $000 $000________________________________________________________________________________Operating profit 50,031 23,381Depreciation, depletion and amortisation 10,330 5,696Unwinding of discount on decommissioning 48 49Disposal of property, plant and equipment/intangible assets 424 (57)Share-based payments 229 154Exchange differences (696) (1,283)Decrease/(Increase) in operating debtors 7,652 (4,165)Increase in operating creditors 1,885 5,101Increase in inventory (568) (149)________________________________________________________________________________Cash generated from operations 69,335 28,727________________________________________________________________________________ 9. Cash and cash equivalents 2005 2004 $000 $000________________________________________________________________________________Cash 2,772 1,278 Short term deposits 54,151 37,856 Cash and cash equivalents 56,923 39,134 Glossary Mcf Thousand cubic feetMcfd Thousand cubic feet per dayBcf Billion cubic feetcfpd Cubic feet per dayMMcf Million cubic feetMMcfd Million cubic feet per dayMbbl Thousand barrelsMMbbl Million barrelsbbl Barrelbopd Barrel of oil per dayboe Barrel of oil equivalentMboe Thousand barrels of oil equivalentMMboe Million barrels of oil equivalentboepd Barrel of oil equivalent per daysq.km Square Kilometre$ United States DollarsLIBOR London InterBank Offered RateUS United StatesHryvna The lawful currency of Ukraine Conversion factors6,000 standard cubic feet of gas = 1 boe We welcome visits to our websitewww.jkx.co.uk This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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