Interim results for the first six months of 2018

Exillon Energy plc

Interim results for the first six months of 2018

28 September 2018 - Exillon Energy plc ("Exillon", the "Company" or the "Group") (EXI.LN), a London Premium listed independent oil producer with assets in two oil-rich regions of Russia, Timan-Pechora ("Exillon TP" or "ETP") and West Siberia ("Exillon WS" or "EWS"), today issues its interim results for the first six months to 30 June 2018.

Highlights

• Net profit decreased by 3% to US$18.9 million (US$19.6 million in 1H 2017) 

• EBITDA increased by 29% to US$44.5 million (US$34.6 million in 1H 2017)

• EBITDA per barrel increased by 53% to US$26.7 per barrel (US$17.4 per barrel in 1H 2017)

• Production decreased by 16%, with the average production for 1H 2018 equivalent to 9,285 bpd

Production

Our oil production decreased by 16% from 2.01 million in 1H 2017 to 1.68 million barrels in 1H 2018 equivalent to a decrease from 11,118 bpd to 9,285 bpd, respectively. Our oil production decreased by 10% from 1.86 million in 2H 2017 to 1.68 million barrels in 1H 2018 equivalent to a decrease from 10,120 bpd to 9,285 bpd.

The decrease in our production is reflecting natural production decline curve due to the natural field depletion; this did not result in any impairment of oil and gas properties.

We publish monthly production data, and, therefore, have already announced details of our production for the period. For reference, we summarise below the monthly data published during the period.

Dear Shareholders,

The first six months of 2018 were reasonably successful for Exillon. Despite the decline in our production, we delivered robust financial performance with significant recurring EBITDA and net profit.

Financial Position and Performance

Our EBITDA increased by 29% from US$34.6 million to US$44.5 million, with a net profit of US$18.9 million (compared to a net profit of US$19.6 million in 1H 2017). Our revenue increased from US$64.4 million to US$76.8 million, while our netback (which we define as revenue less mineral extraction tax, export duty and Transneft charges) increased by 19% from US$50.0 million to US$59.4 million. The growth in our revenue was primarily a consequence of higher average oil prices during 1H 2018 as compared to 1H 2017, reflecting the movements in global oil prices. This was offset by a decrease in our sales volumes, resulting from the decline in our production. Rising average oil prices led to a simultaneous significant increase in mineral extraction tax, despite the ongoing application of certain tax exemptions by Exillon TP and Exillon WS.

Our EBITDA after allocation of central costs was equivalent to US$26.7 per barrel compared to US$17.4 per barrel in 1H 2017 and US$24.3 per barrel in 2H 2017. This improvement was driven by increase in average oil prices, but was partially offset by depreciation of the Russian Rouble, which decreased the US dollar equivalent of our netback and EBITDA.

75% of our oil production was from Exillon WS and 25% from Exillon TP (1H 2017: 76% and 24%, respectively). Both units were profitable in 1H 2018 although Exillon WS is still larger and enjoys greater economies of scale than Exillon TP. EBITDA per barrel on an operating level (before central costs) was US$32.3 per barrel in Exillon WS (1H 2017: US$21.2 per barrel) and US$11.4 per barrel in Exillon TP (1H 2017: US$5.7 per barrel). The spread in EBITDA per barrel is growing wider between operating segments due to mineral extraction tax exemptions applied by Exillon WS.

We ended the reporting period with US$0.1 million of cash and cash equivalents (31 December 2017: US$5.6 million). In April 2017, we entered into new facility agreements with Gazprombank JSC for an aggregate principal amount of up to US$206 million. As at 30 June 2018, the outstanding debt under these facilities amounted to US$124.9 million. On 27 September 2018, we received approval from Gazprombank JSC for the refinancing of our debt and extending the repayment terms for the existing loan through to January 2023 (Note 24). As at 30 June 2018, our net debt position was US$124.8 million (31 December 2017: outstanding debt of US$124.7 million and net debt position of US$119.2 million).

As of 28 September 2018, our cash and cash equivalents amounted to US$3.4 million resulting in a net debt position of US$121.6 million.

In 1H 2018, cash capital expenditure was US$0.8 million (1H 2017: US$7.9 million), 96% of which was incurred in Exillon WS and 4% in Exillon TP (1H 2017: 96% in Exillon WS and 4% in Exillon TP). Of this total, US$0.5 million was attributable to development of oil wells and US$0.3 million to purchase of equipment and transport (1H 2017: US$2.7 million was attributable to drilling and US$5.2 million to infrastructure). In 1H 2017, advance payments for property, plant and equipment in the amount of US$224.7 million were made in relation to drilling of wells and construction of infield infrastructure under the Group's investment program for the years 2017-2021, which was approved by the Board of Directors and Extraordinary General Meeting of shareholders. These advance payments formed part of additions to property, plant and equipment and investing cash flows. The advances were made in order to secure the cost of drilling and construction works and services which provides greater confidence over the returns we are targeting from the investment program.

Drilling Update

During the period we drilled six production oil wells. The drilling was carried out only at Exillon WS and the drilling results were successful for all wells.

Reserves

In June 2018, the updated reserves report for Exillon Energy plc was completed by Miller and Lents Ltd, independent engineering consultants, according to international SPE-PRMS standards with an effective date of 01 January 2018. This recorded a 5% decrease in proved reserves ("1P") to 176 million barrels as compared to the previous reserves report as at 30 June 2016. Total proved plus probable reserves ("2P") decreased by 7% to 465 million barrels and total proved plus probable plus possible reserves ("3P") decreased by 10% to 793 million barrels. The decrease in our reserves is primarily due to oil production.

Viacheslav Nekrasov

Chief Executive Officer

FINANCIAL REVIEW

The interim condensed consolidated financial information of Exillon Energy plc for the six month period ended 30 June 2018 has been prepared in accordance with IAS 34 "Interim Financial Statements". The condensed consolidated financial information and the relevant notes should be read in conjunction with this review which has been included to assist in the understanding of the Group's financial position at 30 June 2018 and financial performance for the six months then ended.

Revenue

Our revenue for the six months ended 30 June 2018 increased by 19% compared to the same period in 2017, reaching US$76.8 million (1H 2017: US$64.4 million). During both periods 100% of revenue came from domestic sales of crude oil. This change in revenue is attributable to:

· a decrease in production leading to a 16% decrease in sales volumes from 1,987,146 bbl in 1H 2017 to 1,669,253 bbl in 1H 2018;

· an increase in average commodity prices: we achieved an average oil price of US$46.0 / bbl for domestic sales (1H 2017: US$32.4 / bbl); and

· Russian Rouble depreciation, which decreased the US dollar equivalent of our revenue. The effective average exchange rate was 57.9862 Russian Roubles to one US dollar (Rouble/US$) in 1H 2017 and 59.3536 Rouble/US$ in 1H 2018.

Operating Results

Cost of sales excluding depreciation and depletion expenses increased to US$25.1 million (1H 2017: US$23.0 million), despite the decrease in production by 16% to 1,680,663 bbl (1H 2017: 2,012,360 bbl). The difference between the production volumes and sales volumes is due to the change in the oil inventory balance during the period. The major increase occurred in mineral extraction tax from US$13.6 million in 1H 2017 to US$17.4 million in 1H 2018. It was a combined result of:

· both operating segments: substantial increase in average crude oil prices used in the calculation of the tax;

· Exillon TP: during both periods Exillon TP applied decreasing factors to the base mineral extraction tax rate, which reflect the specific characteristics of oil production from the ETP V and ETP VI oil fields (Note 7). This tax exemption had a similar effect for both periods, while the decrease in Exillon TP production partially offset increasing oil prices mentioned above; and

· Exillon WS: during both periods Exillon WS applied a 0% mineral extraction tax rate to the oil produced from a certain oil reservoir, which includes oil production from the majority of oil wells located at EWS I and EWS II oil fields. The tax exemption for this oil reservoir was introduced by Russian legislation in the second half of 2015 with an effective date from 1 January 2015 (Note 7). In 1H 2018, Exillon WS produced 1,265,489 bbl of crude oil and applied a 0% tax rate to 76% or 967,281 bbl (1H 2017: total production of 1,534,306 bbl; with a 0% tax rate applied to 74% or 1,140,512 bbl). As a result, Exillon WS accrued the tax for 298,208 bbl of crude oil in 1H 2018 as compared to 393,794 bbl 1H 2017. Consequently, lower taxable production volumes in Exillon WS partially offset increasing oil prices indicated above.

Depreciation and depletion costs ("DD&A") primarily relate to the depreciation of proved and probable reserves and other production and non-production assets. These costs amounted to US$8.1 million in 1H 2018 compared to US$8.7 million in 1H 2017. The decrease in DD&A costs was driven by Russian Rouble depreciation, since most of DD&A costs are nominated in Russian Roubles, and decrease in the depletion charge for oil and gas properties as a result of lower production volumes. This was partially offset by DD&A charge on the additions in 1H 2018 to property, plant and equipment.

Selling expenses in 1H 2018 amounted to US$1.6 million (1H 2017: US$3.1 million) and comprised of transportation services of US$1.1 million and services of Transneft crude oil metering system of US$0.5 million (1H 2017: transportation services of US$2.5 million and services of Transneft crude oil metering system of US$0.6 million). Transportation services included services provided by Transneft and trucking services from the infield oil filling stations to oil terminals at Transneft. During 1H 2017, transportation services provided by Transneft of US$0.7 million related to domestic sales of crude oil in Exillon TP for the period from January to April 2017. During 1H 2018 and the period from May to June 2017 domestic customers of both operating segments have been paying directly to Transneft for its transportation services. Exillon TP used Transneft crude oil metering system services at a cost of US$0.5 million in 1H 2018 as compared to US$0.6 million in 1H 2017. The decrease is a result of reduced production volumes. The decrease in Russian Rouble denominated trucking services to Transneft from US$1.8 million in 1H 2017 to US$1.1 million in 1H 2018 is a result of lower production volumes and depreciation of the Russian Rouble against US dollar.

Administrative expenses in 1H 2018 (excluding depreciation and amortisation) amounted to US$4.8 million in comparison to US$3.9 million in 1H 2017, with the main increase attributable to salary and related taxes and consulting services.

In 1H 2018, interest income decreased to US$0.1 million (1H 2017: US$4.3 million) along with the decrease in cash and cash equivalents.

In 1H 2018, a foreign exchange loss of US$10.8 million (1H 2017: US$3.3 million) has been included in our net profit arising from the revaluation of foreign currency monetary items (cash and cash equivalents, accounts receivable and payable, borrowings, other monetary assets) using the closing rate at the reporting date. In 1H 2017, the exchange rate decreased from 60.6569 Rouble/US$ as of 31 December 2016 to 59.0855 Rouble/US$ as of 30 June 2017. The foreign exchange loss arising on US dollar nominated cash and cash equivalents held by Russian subsidiaries was partially offset by foreign exchange gain arising on US dollar nominated loan, received by Russian subsidiary in April 2017 (Note 18). The foreign exchange loss in 1H 2018 was mostly attributable to US dollar nominated loan held by Russian subsidiary and was a consequence of the exchange rate increase from 57.6002 Rouble/US$ as of 31 December 2017 to 62.7565 Rouble/US$ as of 30 June 2018. In 1H 2018, the exchange rate experienced increasing volatility: while in 1H 2017 it fluctuated between the highest rate of 60.6569 Rouble/US$ achieved on 01 January 2017 and the lowest rate of 55.8453 Rouble/US$ achieved on 26 April 2017; in 1H 2018 the highest rate of 64.0683 Rouble/US$ was achieved on 20 June 2018 and the lowest rate of 55.6717 Rouble/US$ was achieved on 28 February 2018. A foreign exchange loss of US$38.5 million (1H 2017: gain of US$10.6 million) has been recognised in other comprehensive income as part of the translation reserve.

As a result of the above, net profit for the first six months of 2018, which includes depreciation costs and foreign exchange translation effects, amounted to US$18.9 million compared to net profit of US$19.6 million for the six months ended 30 June 2017.

Financial position

We ended the period with US$0.1 million of cash and cash equivalents and outstanding borrowings of US$124.9 million (31 December 2017: US$5.6 million and US$124.7 million, respectively). In April 2017, we entered into new facility agreements with Gazprombank JSC and received US$125.0 million (Note 18). The difference of US$0.1 million between proceeds from borrowings and the outstanding borrowings relates to unamortized amounts of borrowing costs. As at 30 June 2018, the entire borrowings of US$125.0 million were due for repayment by 28 September 2018. On 27 September 2018, we received approval from Gazprombank JSC for the refinancing of our debt and extending the repayment terms for the existing loan through to January 2023 (Note 24).

As of 30 June 2018, our trade receivables amounted to US$49.8 million (31 December 2017: US$2.6 million). The increase in trade receivables was a consequence of a post-payment scheme introduced for a new domestic customer (Note 13). As of 30 June 2018, trade receivables amounting to US$47.9 million were due from the new customer and were receivable by 31 December 2018. As of the date of approval of these condensed consolidated financial statements, US$26.9 million out of this amount due from this customer has been settled, comprising novation of $16.8 million against the Group's liabilities to suppliers and cash receipts of US$10.1 million. The remaining amount is expected to be recovered in full by 31 December 2018. The increase in trade receivables led to a strong negative effect in working capital movements in the cash flow statement for the six months ended 30 June 2018, which was the main reason for the negative net operating cash flows for the period.

The additions to the property, plant and equipment of US$29.1 million included US$4.4 million of capitalised interest, US$0.3 million of additions to provision for decommissioning, US$6.7 million of completed and accepted construction works for development of infrastructure in Exillon WS and US$17.7 million of delivered equipment and construction materials for development of oil wells and infield infrastructure in Exillon WS and Exillon TP. This was offset by depreciation and depletion of US$8.1 million and the negative translation difference of US$54.2 million, due to the depreciation of the Russian Rouble against the US dollar at the reporting date. There is no tax relief related to the capitalised borrowing costs (Note 11).

At the date of the approval of these financial statements, there are pending litigation matters in connection with the four claims brought against Kayumneft JSC and one claim brought against Nem Oil CJSC in the court by the Temporary Administrators of Bank Ugra in November and December 2017, as well as in May and July 2018 (Note 21). The plaintiff demands to set aside a number of alleged transactions as the part of the bankruptcy case of Bank Ugra. The Group disputes the existence of the alleged transactions. Having carefully considered the nature of the risks arising from pending litigation against the Company's subsidiaries, and having received advice from external legal counsel, the Board noted that, while it is difficult to predict the ultimate outcome of pending litigation, it estimates that the risk of a material financial outflow arising from pending litigation against the Company's subsidiaries is less than probable.

Principal risks and uncertainties

The principal risks and uncertainties affecting the business activities of the Group are set out on pages 20 to 23 of the Directors' Report section of the Annual Report for the year ended 31 December 2017, a copy of which is available on the Company's website at www.exillonenergy.com. The Board continually assesses and monitors the key risks of the business. The principal risks and uncertainties that could have a material impact on the Group's performance over the remainder of the financial year have not changed from those that were set out in the Group's 2017 Annual Report, except for liquidity risk in relation to the existing borrowings. This risk was removed from the list of principal risks and uncertainties following successful refinancing of the existing loan in September 2018 (Note 24).

For reference we summarise below the principal risks and uncertainties:

· substantial and/or extended decline in the prices for crude oil;

· fluctuations in currency exchange rates materially and adversely affecting our financial results and condition;

· continued high levels of inflation in Russia;

· potential significant capital expenditures that may be required to increase production levels and overall efficiency, and any inability to finance these and other expenditures. These include successful execution of the Group's investment program for the years 2017-2021, which was approved by the Board of Directors and Extraordinary General Meeting of shareholders, and securing the targeted level of returns from this program;

· suspension, restriction, termination or lack of extension to our exploration and production licences issued by the Russian authorities;

· potential claims and liabilities under environmental, health, safety and other laws and regulations. These include certain claims brought against the subsidiaries of the Group in the court by the Temporary Administrators of Bank Ugra (Note 21);

· potential tax audits by the Russian tax authorities, resulting in additional tax liabilities;

· drilling, exploration and production risks and hazards which may prevent us from realising profits resulting in substantial losses;

· third party provision of some services, including transportation services;

· transportation of produced crude oil via a single pipeline system operated by an external provider - Transneft;

· variable weather conditions at our oil fields which may limit the production during certain times of the year;

· forced liquidation of some companies in the Group as a result of negative net assets;

· dependence on senior management personnel and on maintaining a highly qualified skilled workforce;

· failure to manage the Company's growth or to execute or integrate acquisitions;

· changes in the foreign policy of the Russian government and changes in its key global relationships leading to an adverse effect on the Russian political and economic environment in general;

· potential difficulties in enforcing court decisions and the discretion of governmental authorities to file and join claims and enforce court decisions preventing the Group or investors from obtaining effective redress in court proceedings.

Directors

A full list of Directors is maintained on the Group's website: www.exillonenergy.com.

Related parties

Related party transactions are disclosed in Note 22.

Statement of directors' responsibilities

The Directors of the Company hereby confirm that to the best of their knowledge:

(a) the condensed consolidated interim financial statements have been prepared in accordance with IAS 34; and

(b) the interim management report includes a fair review of the information required by DTR 4.2.7 (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year) and DTR 4.2.8 (being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period).

The list of Directors is as stated in the Annual Report for the year ended 31 December 2017, except that Viacheslav Nekrasov was appointed as a new Director and CEO of the Company on 23 May 2018, following the resignation of Dmitry Margelov.

On behalf of the Board of Directors of Exillon Energy plc.

Viacheslav Nekrasov

Chief Executive Officer

Disclaimer

This document may contain forward-looking statements concerning the financial condition and results of operations of the Group. Forward-looking statements are statements of future expectations that are based on the management's current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. No assurances can be given as to future results, levels of activity and achievements and actual results, levels of activity and achievements may differ materially from those expressed or implied by any forward-looking statements contained in this report. The Company does not undertake any obligation to update publicly or revise any forward-looking statement as a result of new information, future events or other information.

INDEPENDENT REVIEW REPORT TO Exillon Energy PLC

Introduction

We have been engaged by Exillon Energy PLC (the "Company") to review the condensed consolidated set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 which comprises the interim consolidated statement of comprehensive income, interim consolidated statement of financial position, interim consolidated statement of changes in equity interim consolidated statement of cash flows and the related explanatory notes 1 to 24. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual consolidated financial statements of the Company are prepared in accordance with IFRSs. The condensed consolidated set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting".

Our Responsibility

Our responsibility is to express to the Company a conclusion on the interim condensed consolidated set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

London

28 September 2018

INTERIM consolidated statement of comprehensive income

 INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION

INTERIM consolidated statement of changes in equity

 INTERIM consolidated statement of cash flows

Total interest paid during the six months ended 30 June 2018 comprised $4,379 thousand (the six months ended 30 June 2017: $685 thousand).

notes to INTERIM condensed consolidated financial statements (UNAUDITED)

1. Background

The principal activity of Exillon Energy plc (the "Company" or the "Parent") and its subsidiaries (together "the Group") is exploration, development and production of oil. The Group's production facilities are based in the Republic of Komi and the Khanty-Mansiysk Region of the Russian Federation. A list of the Company's subsidiaries is provided in Note 23.

Exillon Energy plc is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the Isle of Man. The company was formed on 27 March 2008. Its registered address is First Names House, Victoria Road, Douglas, Isle of Man, IM2 4DF.

As at 30 June 2018, the largest shareholder has an interest of 29.99% (2017: 29.99%) in the Company's outstanding issued share capital.

The Group's operations are conducted primarily through its operating segments, Exillon TP and Exillon WS.

2. basis of preparation

This condensed consolidated interim financial information for the six months ended 30 June 2018 has been prepared in accordance with International Accounting Standard ("IAS") 34, "Interim financial reporting". The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2017, which have been prepared in accordance with International Financial Reporting Standards ("IFRSs"). The operations carried out by the Group are not subject to seasonality or cyclical factors.

3. going concern

These condensed consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern which assumes that the Group will realise its assets and discharge its liabilities in the normal course of business. As of 30 June 2018, the Group's current liabilities exceeded its current assets by US$99.6 million, primarily due to a US$125.0 million loan from Gazprombank which was due to be repaid in full on 28 September 2018 (Note 18). Over the past few months the directors have taken steps to secure the refinancing of the Gazprombank loan and on 27 September 2018, the Group received approval from Gazprombank JSC for refinancing the debt. The repayment terms for the existing loan of US$125.0 million were extended through to January 2023; with monthly repayments of principal that increase over the term of the loan. The interest rate remained unchanged and continues to be charged at LIBOR plus 5.3%.

With the refinancing having been approved, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence and meet its liabilities as they fall due for the foreseeable future, being at least 12 months from the date of approval of the condensed consolidated interim financial statements. For this reason the directors continue to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements.

4. ACCOUNTING POLICIES

Changes in accounting policies:

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those applied and disclosed in the Group's annual consolidated financial statements for 2017 prepared in accordance with IFRS, except for the adoption of new standards effective from 1 January 2018.

The following standards were applied for the first time in 2018:

● IFRS 9 Financial Instruments. The final version of the standard issued in 2014 replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 brings together new requirements for classification, measurement and impairment of financial instruments, as well as hedge accounting. The Group adopted IFRS 9 using the modified retrospective method of adoption and did not restate comparative information.

With respect to impairment, IFRS 9 replaces the incurred losses model that was applied under IAS 39 with the expected credit loss model, designed to ensure the timely and complete recognition of losses on financial assets. According to the new standard, the loss allowance estimation should be made taking into account credit risks of counterparties. The adjustment to the opening balance of retained earnings as at 1 January 2018 for the change in financial asset impairment accounting was recognised in the statement of changes in equity for the six months ended 30 June 2018 and amounted to $654 thousand.

The new classification and measurement of the Group's debt financial assets are, as follows:

• Debt instruments at amortised cost for financial assets that are held within a business model with the objective to hold the financial assets in order to collect contractual cash flows representing "solely payments of principal and interest". This category includes the Group's Trade and other receivables.

• Debt instruments at fair value through other comprehensive income (FVOCI), with gains or losses recycled to profit or loss on derecognition. Financial assets in this category are the Group's debt instruments, which contractual cash flows represent "solely payments of principal and interest" and which are held within a business model both to collect cash flows and to sell. Under IAS 39, the Group's debt instruments were classified as available-for-sale (AFS) financial assets.

● IFRS 15 Revenue under Contracts with Customers. IFRS 15 is a unified guidance on revenue recognition, and it also contains all requirements for disclosure of relevant information in the financial statements. The new standard replaces IAS 18 Revenue, IAS 11 Construction Contracts and a number of interpretations of IFRS provisions regarding revenue. Based on the results of the analysis conducted by the Group, it was concluded that the changes introduced by the standard did not have any significant impact on revenue recognition in the interim condensed consolidated financial statements. The Group adopted IFRS 15 using the modified retrospective method of adoption with initial date of application of 1 January 2018. The Group elected to apply that method to only those contracts that were not completed at the date of initial application.

Critical accounting judgements and key sources of estimation uncertainty:

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2017.

1. Details of the Group's critical accounting estimates are set out below:

Decommissioning costs

Provision for decommissioning represents the present value of decommissioning costs relating to the Russian Federation oil and gas interests, which are expected to be incurred in a time period between 2025 and 2038. These provisions have been created based on the Group's internal estimates. Assumptions, based on the current economic environment, have been made which management believe are a reasonable basis upon which to estimate the future liability. Those estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon future market prices for the necessary decommissioning works required which will reflect market conditions at the relevant time. Furthermore, the timing of decommissioning is likely to depend on when the fields cease to produce at economically viable rates. This in turn will depend upon future oil and gas prices, which are inherently uncertain.

Major assumptions used in estimation of decommissioning costs are set out below:

Exillon TP:

· as at 30 June 2018, undiscounted value of estimated future cash outflows is estimated at $5,698 thousand (31 December 2017: $6,192 thousand);

· expected timing of future cash outflows - the majority of the expenditure is expected to take place in a range between 2026 and 2038 (2017: between 2026 and 2038);

· discount rate (based on long-term maturity Russian government bonds) - 7.8% per annum (2017: 8.4%);

· inflation rate (based on the external analysts' forecasts) - 3-4% per annum (2017: 3-4%).

If the discount rate had increased by 1% to 8.8% at 30 June 2018, the decommissioning liability would have been $429 thousand lower (31 December 2017: $426 thousand lower).

Exillon WS:

· as at 30 June 2018, undiscounted value of estimated future cash outflows is estimated at $11,734 thousand (31 December 2017: $12,207 thousand);

· expected timing of future cash outflows - the majority of the expenditure is expected to take place in 2025 (2017: 2025);

· discount rate (based on long-term maturity Russian government bonds) - 7.8% per annum (2017: 8.4%);

· inflation rate (based on the external analysts' forecasts) - 3-4% per annum (2017: 3-4%).

If the discount rate had increased by 1% to 8.8% at 30 June 2018, the decommissioning liability would have been $571 thousand lower (31 December 2017: $617 thousand lower).

Estimation of oil and gas reserves

Oil and gas reserves are key elements in the Group's investment decision-making process. They are also an important element in assessing and testing for impairment. Changes in oil and gas reserves, particularly proved and probable reserves, will affect unit-of-production depreciation charges in the consolidated statement of comprehensive income.

Proved oil and gas reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date the estimate is made. Probable reserves are those additional Reserves which analysis of geoscience and engineering data indicate to have 50% of the likely recovery, while Possible reserves have a 10% chance of full extraction. Estimates of oil and gas reserves are inherently imprecise, require the application of judgement and are subject to future revision. Accordingly, financial and accounting measures (such as depletion charges) that are based on Proved and Probable reserves are also subject to change.

Proved reserves are estimated by reference to available reservoir and well information. All proved reserves estimates are subject to revision, either upward or downward, based on new information, such as from development drilling and production activities or from changes in economic factors, including product prices, contract terms or development plans. In general, changes in the technical maturity of hydrocarbon reserves resulting from new information becoming available from development and production activities have tended to be the most significant cause of revisions.

In general, estimates of reserves for undeveloped or partially developed fields are subject to greater uncertainty over their future life than estimates of reserves for fields that are substantially developed and being depleted. As a field goes into production, the amount of proved reserves will be subject to future revision once additional information becomes available through, for example, the drilling of additional wells or the observation of long-term reservoir performance under producing conditions. As those fields are further developed, new information may lead to revisions.

Changes to the Group's estimates of Proved and Probable reserves also affect the amount of depletion recorded in the Group's consolidated financial statements for property, plant and equipment related to oil and gas production activities. A reduction in Proved and Probable reserves will increase depletion charges (assuming constant production) and reduce profit.

Proved and Probable reserve estimates used in calculating monthly depletion charges use the estimates of such reserves at the beginning of the month, based on the reports prepared by Miller and Lents as of 1 January 2018, adjusted for subsequent production. Management considered the existence of any factors that may indicate material changes to the reserves and concluded that it is appropriate to use the valuation report effective on 01 January 2018 for the purpose of depletion charge calculation for the six months ended 30 June 2018.

As at 30 June 2018, the net carrying amount of oil and gas producing properties and related cost of production licences was $303,212 thousand (31 December 2017: $317,448 thousand).

2. Details of the Group's significant accounting judgments are set out below:

Taxation

The Group is subject to income tax and other taxes. Significant judgement is required in determining the provision for income tax and other taxes due to the complexity of the tax legislation incorporated in the Russian Federation. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit matters based on estimates on whether additional tax will be due. Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the amount of tax and tax provisions in the period in which such determination is made.

Litigation

The Group management exercises considerable judgment in measuring and recognising provisions and exposure to contingent liabilities related to pending litigation or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities (Note 21).

Judgment is necessary in assessing the likelihood that a pending claim against the Group will succeed, or a material liability will arise, and to quantify the possible amount of the final settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the original estimations. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists, where such exist, or with the support of external consultants, such as legal counsel. Revisions to the estimates may significantly affect future operating results of the Group.

Impairment

The carrying value of the Group's assets can be significantly affected by change in oil prices. Taking into account rising average oil prices and its decreasing volatility in 2017 and during the six months ended 30 June 2018, together with the absence of other adverse indicators, there were no indicators of potential impairment of oil and gas properties as of 31 December 2017 and 30 June 2018. Consequently, there was no need to perform impairment tests as of 31 December 2017 and 30 June 2018 for the Group's oil and gas assets.

5. OPERATING SEGMENTS

Management has determined the operating segments based on the reports reviewed by Directors that make the strategic decisions for the Company, who are deemed to be the chief operating decision maker (CODM).

Exillon Energy plc manages its business through two operating segments, Exillon TP and Exillon WS.

· Exillon TP: upstream business based in the Timan-Pechora basin in the Komi Republic in the Russian Federation. The revenue is derived from extraction and sale of crude oil.

· Exillon WS: upstream business based in Western Siberia in the Russian Federation. The revenue is derived from extraction and sale of crude oil.

No operating segments have been aggregated to form the above reportable operating segments.

Segmental information for the Group for the six months ended 30 June 2018 is presented below:

During the six months ended 30 June 2018, the refund of advance payments for property, plant and equipment of $5,210 thousand was received due to the amendments in construction contract (Note 13).

Set out below is the disaggregation of the Group's revenue from contracts with customers:

Segmental information for the Group for the six months ended 30 June 2017 is presented below:

During the six months ended 30 June 2017, cash capital expenditure included $7,842 thousand of completed and accepted drilling services of oil wells and the development of infield infrastructure and $224,741 thousand of advances issued for the capital construction. During both periods, capital expenditures do not include amount of capitalised interest.

The selling prices between operating segments are on an arm's length basis in a manner similar to transactions with third parties. There were no intersegment revenues during the six months ended 30 June 2017 and 2018.

Unallocated category represents costs of corporate companies that are managed at the Group level.

Management assesses performance of the operating segments based on EBITDA which is calculated as follows: operating result plus depletion and depreciation, plus/minus foreign exchange gains/(losses) and plus/minus other significant one-off income/(expenses).

Net back is defined as revenue less direct and indirect government taxation. The indicator is calculated as revenue less mineral extraction tax, export duty and Transneft transportation services.

Reconciliation of profit/(loss) before income tax to EBITDA for the six months ended 30 June 2018 is presented below:

Reconciliation of profit/(loss) before income tax to EBITDA for the six months ended 30 June 2017 is presented below:

During the six months ended 30 June 2018 the Group earned revenues each exceeding 10% of the Group's revenues from two major customers: $18,402 thousand (attributable to domestic sales reported by Exillon TP) and $58,065 thousand (attributable to domestic sales reported by Exillon WS).

During the six months ended 30 June 2017 the Group earned revenues each exceeding 10% of the Group's revenues from four major customers: $14,879 thousand (attributable to domestic sales reported by Exillon TP), $8,477 thousand, $8,540 thousand and $9,437 thousand (attributable to domestic sales reported by Exillon WS).

6. revenue

7. cost of sales

During the six months ended 30 June 2017 and 2018, Exillon WS applied 0% mineral extraction tax rate to the oil produced from a certain oil reservoir, which includes oil production from the majority of oil wells located at the EWS I and EWS II oil fields. The tax exemption for this oil reservoir was introduced in the second part of 2015 (with effective date from 1 January 2015). The tax exemption amounted to $24,999 thousand for the first six months of 2018 and $19,533 thousand for the first six months of 2017. During both periods, Exillon WS also applied a reducing factor to the mineral extraction tax rate, which reflects the specific characteristics of the remaining oil production from the EWS II oil field. This tax exemption amounted to $113 thousand for the first six months of 2018 and $75 thousand for the first six months of 2017.

During the six months ended 30 June 2017 and 2018, Exillon TP applied reducing factors to the mineral extraction tax rate, which reflect the specific characteristics of oil production from the ETP V and ETP VI oil fields. This tax exemption amounted to $811 thousand for the first six months of 2018 and $689 thousand for the first six months of 2017.

8. selling expenses

9. administrative expenses

10. earnings per share

Basic earnings per share ("EPS") is calculated by dividing net profit for the period attributable to ordinary equity shareholders of the Company by the weighted average number of ordinary shares outstanding during the period.

The following reflects the income and adjusted share data used in the EPS computations:

11. Property, plant and equipment

Decommissioning costs of $7,219 thousand and $7,183 thousand were included within oil and gas properties as of 30 June 2018 and 31 December 2017, respectively. Change in estimates relates to the change in the assumptions used in estimation of decommissioning costs (Note 4).

Cumulative capitalized borrowing costs of $28,428 thousand and $24,049 thousand were included within oil and gas properties as of 30 June 2018 and 31 December 2017, respectively. Total borrowing costs incurred during the six months ended 30 June 2018 amounted to $4,379 thousand and were capitalised in full (31 December 2017: total borrowing costs amounted to $4,792 thousand of which $4,241 thousand was capitalised). There is no tax relief related to the capitalised borrowing costs.

Exploration and evaluation assets as of 30 June 2018 and 31 December 2017 comprise the ETP VII licence acquired in December 2011. Construction in progress relates to the construction of infield infrastructure and drilling of oil wells commenced in 2017 and 2018 under the Group's investment program for the years 2017-2021, which was approved by the Board of Directors and Extraordinary General Meeting of shareholders.

In 2015, the Group purchased an aircraft for $10,600 thousand, which was subsequently leased to an unrelated third party for a period of ten years at a monthly lease payment of $130 thousand; with the retained right to use the aircraft for the Company's needs on commercial payment terms.

Minimum lease payments were as follows:

12. Inventories

Inventories included no obsolete or slow-moving items as of 30 June 2018 (31 December 2017: nil).

13. trade and other receivables

Trade receivables are non-interest bearing. The increase in trade receivables was a consequence of post-payment scheme introduced for a new domestic customer. As of 30 June 2018, trade receivables amounting to $47,922 thousand were due from the new customer and were receivable by 31 December 2018. As of the date of approval of these condensed consolidated financial statements, $26,872 thousand out of this amount has been settled, comprising novation of $16,801 thousand against the Group's liabilities to suppliers and cash receipts of $10,071 thousand. The remaining amount is expected to be recovered in full by 31 December 2018.

The Group applied the simplified approach and recorded lifetime expected losses on all trade receivables. The Group applied the general approach for the rest of the financial assets. The loss allowance for other receivables was recognised in profit or loss for 12-month expected credit losses. Accordingly, the management of the Group believes that there is no further credit provision required in excess of the allowance for expected credit losses. 

As at 31 December 2017, other receivables included $5,296 thousand of advance payment for property, plant and equipment, which was made during the year ended 31 December 2017 and refunded in 2018, due to the amendments in construction contract. The refund of $5,210 thousand was received after 31 December 2017 and was shown as a reduction to investing cash flows for the six months ended 30 June 2018. The difference between other receivables and refund relates to foreign exchange translation effects.

14. other current assets

15. OTHER CURRENT FINANCIAL ASSETS

Debt instruments at fair value through other comprehensive income (FVOCI) relate to investment portfolio of unquoted debt securities with returns up to 5%. The financial instruments are denominated in EURO. The difference between the consideration paid of $5,000 thousand and the carrying value is due to foreign exchange translation effects.

16. provision for decommissioning

In accordance with the licence agreements the Group is liable for site restoration, clean up and abandonment of the wells upon completion of their production cycle. The provision for future site restoration relates to obligations to restore the oilfields after use. All of these costs are expected to be incurred at the end of the life of wells between 2025 and 2038 (Note 4). They depend on the estimated lives of the wells, the scale of any possible contamination and the timing and extent of corrective actions.

The unwinding of the discount related to future site restoration and abandonment reserve is included within finance costs.

17. trade and other payables

Trade and other payables are non-interest bearing.

As at 30 June 2018, trade payables included $27,028 thousand of payables for property, plant and equipment.

18. borrowings

There is no material difference between the carrying amount and fair value of borrowings.

Gazprombank JSC - On 7 April 2017, Kayumneft JSC entered into facility agreements for an aggregate principal amount of up to $206,000 thousand, nominated in US dollars and repayable in full on 28 September 2018. During the six months ended 30 June 2017, Kayumneft JSC received $125,000 thousand. The facility agreements provide an interest rate at LIBOR plus 5.3%. The interest is payable monthly with the first payment made in April 2017.

As at 30 June 2018, the outstanding balance of $124,913 thousand was recognized net of the unamortized amounts of borrowing costs of $87 thousand. The amortisation of borrowing costs for the first six months of 2018 was $174 thousand. The undrawn facilities amounted to $81,000 thousand and were available until March 2018.

Under the terms of the facility agreements, the Group is subject to two financial covenants and a number of general covenants. The Group has complied with these covenants for the year ended 31 December 2017 and up to the date of approval of these condensed consolidated interim financial statements.

On 27 September 2018, the Group received approval from Gazprombank JSC for the refinancing of the existing debt and extending the repayment terms for the loan through to January 2023 (Note 24). The principal is payable monthly with repayments increasing over the term of the loan. The interest rate remained unchanged and is charged at LIBOR plus 5.3%.

Exillon Energy plc and its subsidiaries guarantee and secure the obligations of Kayumneft JSC under the facility agreements. The facility agreements are secured by a pledge of the 100% shares of certain Group's subsidiaries (Note 23): Komi Resources CJSC, Nem Oil CJSC, Aslador Oil CJSC, Kayumneft JSC, Ucatex Ugra LLC, Ucatex Oil LLC and Setera LLC.

The facility agreements are also secured by pledge of movable and immovable property of certain Group's subsidiaries (Note 23): Komi Resources CJSC, Nem Oil CJSC, Kayumneft JSC, Ucatex Ugra LLC and Ucatex Oil LLC. As at 30 June 2018, the carrying value of relevant property was $110,887 thousand.

19. Share capital

The issued share capital of the Company at the date of these consolidated financial statements is as follows:

The total number of allotted ordinary shares is 161,510,911 with a par value of $0.0000125 each. As of 30 June 2018 shares issued include 1,195,702 shares (31 December 2017: 1,195,702 shares), which are not paid and held by the Employee Benefit Trust within the Group for further allocation to employees. There were no new share awards granted to employees during the six months ended 30 June 2018.

20. Risk management

The Group's activities expose it to a variety of financial risks: market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk.

The interim condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31 December 2017.

Major categories of financial instruments - The Group has various financial assets such as trade and other accounts receivable, cash and cash equivalents, other current financial assets and interest receivable on current financial assets. The Group's principal financial liabilities comprise borrowings, trade and other accounts payable, advances received and salary payable.

The major part of cash is held in financial institutions incorporated in the Russian Federation. The financial ability of financial institutions and overall market circumstances are continuously monitored by management based on the information provided by independent rating agencies or other publicly available financial information.

As of 30 June 2018, cash and cash equivalents amounted to $105 thousand were held in one financial institution (31 December 2017: cash and cash equivalents of $5,445 thousand).

As of 30 June 2018, trade receivables amounting to $47,922 thousand were due from one customer (Note 13).

Fair value of financial instruments - Management believes that the carrying values of financial assets and liabilities recorded at amortised cost in these financial statements approximate their fair values. All fair value measurements are calculated using inputs which are based on observable market data (observable inputs) (Level 2).

21. COMMITMENTS and contingencies

Capital commitments - The Group has capital commitments outstanding against major contracts:

As at 30 June 2018, capital commitments for construction of wells and infield infrastructure relate to outstanding amounts under contracts concluded in 2017 under the Group's investment program for the years 2017-2021, which was approved by the Board of Directors and Extraordinary General Meeting of shareholders.

Leases - the Group leases three oil wells and associated land plots from government agencies in the Russian Federation. The initial terms on two leases have expired. In 2017, the third lease contract was extended till 2022. The expired lease terms allow for continued lease renewal after expiry of the initial term. In continuing to use these two wells, the Group relies on Article 621(2) of the Civil Code of the Russian Federation, which states that such leases are renewed for an indefinite term if the tenant continues to use the property after the term of the lease has expired in the absence of objections from the lessor, although either party is entitled to terminate the lease upon three months' notice. The Group believes that the Russian authorities are unlikely to exercise this termination right as the Group has the exclusive right to extract the oil resources underlying the wells and continues to make lease payments. Management expects to continue paying for the leases with expired initial terms until the expiry of relevant subsoil licence in 2025.

Taxes - Overall, management believes that the Group has paid or accrued all taxes that are applicable. For taxes where uncertainty exists, the Group has accrued tax liabilities based on management's best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities.