30 September 2024

ENWELL ENERGY PLC

2024 INTERIM RESULTS

Enwell Energy plc ("Enwell Energy" or the "Company", and together with its subsidiaries, the "Group"), the AIM-quoted (AIM: ENW) oil and gas exploration and production group, is pleased to announce its unaudited results for the six month period ended 30 June 2024.

Highlights

Operational

Financial

Outlook

Oleksiy Zayets, Interim CEO, commented: "To date, 2024 has been a solid operational year for Enwell Energy, however our achievements are significantly overshadowed by the ongoing war, which continues to have a huge impact on all aspects of life and business in Ukraine. The lifting of the suspensions of the VAS and SC licences in June 2024 was very welcome news, and we are pleased to be able to resume operations at those licences. In addition, we have continued production and some development activities at our MEX-GOL and SV fields, which is testament to the diligence and fortitude of our operational team."

This announcement contains inside information for the purposes of Article 7 of EU Regulation No. 596/2014, which forms part of United Kingdom domestic law by virtue of the European Union (Withdrawal) Act 2018, as amended by virtue of the Market Abuse (Amendment) (EU Exit) regulations 2019.

For further information, please contact:

Dr Gehrig Schultz, BSc Geophysical Engineering, PhD Geophysics, Member of the European Association of Geophysical Engineers, Member of the Executive Coordinating Committee of the Continental European Energy Council, and a Non-Executive Director of the Company, has reviewed and approved the technical information contained within this announcement in his capacity as a qualified person, as required under the AIM Rules for Companies.

Chairman's Statement

I am pleased to present the Group's results for the first half of 2024 but very much wish that the circumstances were different. The invasion of Ukraine by Russia in February 2022 and the ongoing conflict has created a very challenging and worrying outlook for both the current and future situation in Ukraine, and I am greatly saddened by the terrible events occurring there.

The ongoing war has had a significant impact on all aspects of life in Ukraine, including the Group's business and operations. The overall scale and duration of future disruption to the Group's business continues to be difficult to predict, and there remains significant uncertainty about the outcome of the war.

Notwithstanding the disruption caused by the war, during the first half of 2024, the Group continued with some development activities at the MEX-GOL and SV fields. However, the suspensions of the VAS production licence and SC exploration licence in May 2023 meant that no activities on these licences took place in the period. At the MEX-GOL field, following the completion of the GOL-107 development well in Q4 2023, the well underwent longer-term testing to establish its optimal operating parameters. Following testing, the producing horizon in the well was re-perforated, which improved production rates, and hydraulic fracturing of the well is being evaluated to assess whether this may further improve production rates. Additionally, at the MEX-GOL field, a workover of the MEX-102 well to access a shallower horizon is underway, and planning has continued for the drilling of the MEX-114 appraisal well, deepening of the MEX-109 well to explore a deeper horizon and investigating the possible sidetracking of the MEX-119 well to access additional reserves. At the SV field, hydraulic fracturing of the SV-29 development well is being considered.

Aggregate average daily production (calculated on the days when the fields were actually in production) from the MEX-GOL and SV fields during the first half of 2024 was 2,077 boepd, which is lower than the aggregate daily production rate of 2,730 boepd achieved on the days of actual production during the corresponding period in 2023 due to the disruption caused by the war, natural field decline and the suspension of operations at the VAS field in May 2023. The aggregate production volumes for the period were 377,968 boe, which is lower than the aggregate production volumes of 475,305 boe for the corresponding period in 2023 for the same reasons.   

There was also a significant decline in gas prices during the period further contributing to the decline in revenues to $23.7 million (1H 2023: $33.1 million). The Group's operating profit was lower at $16.9 million (1H 2023: $17.2 million), but net profit was slightly higher at $12.6 million (1H 2023: $12.5 million), and cash generated from operations was higher at $21.3 million (1H 2023: $12.4 million) as a result of the disproportionate reduction in operating costs. 

Whilst the Group's operational activities continued broadly in line with 2023, development activity was significantly impacted by the increase in risks faced by the Group in Ukraine.

There is significant disruption to the fiscal and economic environment in Ukraine due to the ongoing conflict, and while the economy grew during the first half of 2024, the inflation rate increased and the Ukrainian Hryvnia weakened further against other currencies. It is likely that fiscal and economic uncertainties will continue in the future until hostilities cease.

The Ukrainian Government has implemented a number of reforms in the oil and gas sector in recent years, which include the deregulation of the gas supply market in late 2015, and subsequently, the simplification of the regulatory procedures applicable to oil and gas exploration and production activities in Ukraine. 

The deregulation of the gas supply market, supported by electronic gas trading platforms and improved pricing transparency, has meant that Ukrainian market prices for gas are broadly correlated with the price of imported gas. During 2024 to date, gas prices weakened, reflecting a similar trend in European gas prices, as disruption to worldwide oil and gas supplies eased. However, condensate and LPG prices were higher by comparison to the corresponding period in 2023.

Restructuring of Smart Holding Group

In January 2023, the Company was notified that there had been a restructuring of the ownership of the PJSC Smart-Holding Group, a member of which held a major shareholding in the Company, and which was ultimately controlled by Mr Vadym Novynskyi ("Mr Novynskyi"). Under this restructuring, which occurred with effect from 1 December 2022, Mr Novynskyi disposed of his major indirect shareholding interest in the Company to two trusts registered in Cyprus named the SMART Trust and the STEP Trust. Further information is contained in the Company's announcement dated 17 January 2023, and the TR-1 Forms published on 26 January 2023, 31 July 2023 and 20 March 2024.

Regulatory Actions by Ukrainian Authorities affecting the VAS and SC Licences

In early December 2022, the Ukrainian Government imposed sanctions on Mr Novynskyi, as set out in the Company's announcement dated 9 December 2022.

As announced on 4 January 2023, new legislation, Law No. 2805-IX, relating to the natural resources sector was enacted in Ukraine, which came into force on 28 March 2023. This legislation is a substantial package of new procedures and reforms designed to improve the regulatory process relating to the exploration and development of natural resources in Ukraine. However, the legislation includes provisions that if the ultimate beneficial owner of a mineral or hydrocarbon licence becomes the subject of sanctions in Ukraine, then the State Geologic and Subsoil Survey of Ukraine (the "SGSS") may suspend or revoke that licence.

Following Law No. 2805-IX coming into force on 28 March 2023, the Ukrainian authorities have taken a number of regulatory actions against certain of the Group's subsidiary companies in Ukraine.

As announced on 12 April 2023, such regulatory actions included conducting a search at the Group's Yakhnyky office, from where the MEX-GOL and SV fields are operated, and placing certain physical assets of the Ukrainian branch (representative) office of Regal Petroleum Corporation Limited ("RPC") and LLC Arkona Gas-Energy ("Arkona") (which respectively hold the MEX-GOL and SV fields and the SC exploration licence) under seizure, thereby restricting any actions that would change registration of the property rights relating to such assets, although the use of such assets was not restricted and therefore the Company has been able to continue to operate and produce gas and condensate from the MEX-GOL and SV fields. In addition, the Ministry of Justice of Ukraine (the "MoJ") made an Order cancelling the registration entry made on behalf of a subsidiary of the Company named LLC Regal Petroleum Corporation (Ukraine) Limited in the Unified State Register of Legal Entities, Individuals-entrepreneurs and Civil Institutions of Ukraine (the "State Register") relating to the ultimate beneficial owners of such company, which were stated as being the trustees of the SMART Trust and STEP Trust as previously notified to the Company, thereby restoring the previous entry in the State Register, Mr Novynskyi. Furthermore, the SGSS issued an Order to RPC requiring that additional information be provided and/or violations be eliminated in the disclosures relating to the ultimate beneficial owners of the MEX-GOL and SV licences respectively.

On 2 May 2023, the MoJ made further Orders cancelling the registration entry made on behalf of three further Ukrainian subsidiaries of the Company named LLC Prom-Enerho Produkt ("PEP"), Arkona and LLC Well Investum ("Well Investum") respectively in the State Register relating to the ultimate beneficial owners of such companies, which again were stated as being the trustees of the SMART Trust and STEP Trust, thereby restoring the previous entry, Mr Novynskyi. PEP holds the VAS production licence, Arkona holds the SC exploration licence and Well Investum is a dormant company.

Following the issuance of the abovementioned Orders by the MoJ, Mr Novynskyi is registered in the State Register as the ultimate beneficial owner of each of PEP and Arkona, and is consequently recognised by the SGSS as the ultimate beneficial owner of each of the VAS production licence and SC exploration licence. As a result, on 4 May 2023, the SGSS issued orders suspending the VAS production licence and SC exploration licence for a period of 5 years effective from that date. Accordingly, the Company ceased all field and production operations on the VAS and SC licence areas at that time.

However, on 26 June 2024, the SGSS issued orders to renew the validity of each of the VAS production licence and SC exploration licence, thereby cancelling the suspensions of those licences, and enabling the resumption of operational activities at those licences. Further information is contained in the Company's announcement dated 27 June 2024.

In September 2024, new legislation has come into force which requires that branches (or representative offices) of foreign companies operating in Ukraine register their ultimate beneficial owners in Ukrainian Registries. RPC, which holds the MEX-GOL and SV licences, operates such a branch and is therefore required to register its ultimate beneficial owners in such Registries, which raises a potential risk that such registration will not be accepted by the Ukrainian authorities, and possibly result in regulatory action against RPC and/or its licences and assets, including suspension of the MEX-GOL and SV licences.

Board and Management Changes

In March 2024, Chris Hopkinson stepped down as Non-Executive Chairman of the Board, and Sergii Glazunov stepped down as Chief Executive Officer and a Director, and I joined the Board as Non-Executive Chairman alongside Igor Basai as a Non-Executive Director. In addition, Oleksiy Zayets was appointed as Interim Chief Executive Officer.

Outlook

The ongoing war in Ukraine creates a devastating humanitarian situation, as well as extreme challenges to the country's fiscal, economic and business environment. In such, circumstances, it is extremely difficult to plan future investment and operational activities at the Group's fields. However, subject to it being safe to do so, the Group is planning to undertake further limited development activities during the remainder of 2024 and beyond in order to continue the development of its fields. In doing so, the Group is taking and will continue to take all measures available to protect and safeguard its personnel and business, with the safety and wellbeing of its personnel and contractors being paramount. The Group retains a significant proportion of its cash reserves outside Ukraine, and this provides a material buffer to any further disruptions to the Group's operations. This has enabled the Board to reach the opinion that the Group has sufficient resources to navigate the current risk environment for the foreseeable future.

In conclusion, on behalf of the Board, I would like to thank all of our staff for the continued dedication and support during 2024 to date, especially their remarkable fortitude during the ongoing conflict in Ukraine.

Chuck Valceschini

Chairman

Chief Executive's Statement

Introduction

The war in Ukraine has materially disrupted the Group's development activity at its Ukrainian fields during the first half of 2024. At the MEX-GOL and SV fields, production operations and some development activities continued, with the GOL-107 development well being completed in Q4 2023 and undergoing longer-term testing to establish its optimal operating parameters. Following testing, the producing horizon in the well was re-perforated, which improved production rates, and hydraulic fracturing of the well is being evaluated to assess whether this may further improve flow rates. 

At the VAS field, production operations remained suspended following the suspension of the VAS production licence in May 2023, but, in June 2024, this suspension was lifted, and production operations have now resumed. In addition, planning for the further development of the field, as well as for a proposed new well to explore the VED prospect within the VAS licence area have also resumed.

The SC exploration licence was also suspended in May 2023, but similarly, the suspension of the SC exploration licence was lifted in June 2024, and planning has resumed for the development of the licence area.

Overall production in the first half of 2024 was lower than in the corresponding period in 2023 due to the disruption to production operations caused by the war in Ukraine, natural field decline and the suspension of the VAS production licence.

Production

The average daily production of gas, condensate and LPG from the MEX-GOL and SV fields during the six month period ended 30 June 2024 is shown below. There was no production from the VAS field due to the suspension of the VAS production licence.

As a result of the continued operational disruptions caused by the war and deferment of development work, the Group's average daily production rate for the first half of 2024 has been materially adversely affected. In addition, as a result of the regulatory actions by the Ukrainian authorities, the VAS production licence and the SC exploration licence were suspended between 4 May 2023 and 26 June 2024.

Aggregate production volumes for 1H 2024 were 377,968 boe, which is lower than the aggregate production volumes of 475,305 boe in the corresponding period in 2023 for the reasons set out above. 

Production is currently continuing at the MEX-GOL and SV fields at a rate of approximately 1,900 boepd, and following the lifting of the licence suspension at the VAS field, production operations resumed, and, after a period of cleaning up, the production rate is recovering back towards the production rate prior to the suspension of the licence.  

Operations

The war in Ukraine has significantly affected fiscal and economic stability in the country, and the oil and gas sector in Ukraine has been particularly affected by interruptions to power supplies, the unavailability of oil field equipment and services and disruptions to the markets for the sale of gas, condensate and LPG. In addition, the decrease in gas prices in Europe fed through to the Group's realised prices in Ukraine, impacting the Group's revenues and operating profitability during the period.

During the first half of 2024, the Group continued to refine its geological subsurface models of the MEX-GOL, SV and VAS fields, as well as the SC licence area, in order to enhance its strategy for the further development of such fields and licence area, including the timing and level of future capital investment required to exploit the hydrocarbon resources. 

At the MEX-GOL field, the GOL-107 development well, targeting production from the V-20 and V-23 Visean formations, was completed in late October 2023, with the well having been drilled to a final depth of 5,190 metres. One interval, at a drilled depth of 5,140 - 5,143 metres, within the V-23 formation, was perforated and demonstrated gas flows, but at lower than anticipated rates. The well was hooked up to the gas processing facilities to undergo longer-term testing to establish its optimal operating parameters. Following this testing, the producing horizon in the well was re-perforated, which improved production rates, and hydraulic fracturing of the well is being evaluated to assess whether this may further improve flow rates.   

The Group continued to operate each of the SV-2 and SV-12 wells under joint venture agreements with PJSC Ukrnafta, the majority State-owned oil and gas producer. Under the agreements, the gas and condensate produced from the respective wells is sold under an equal net profit sharing arrangement between the Group and PJSC Ukrnafta, with the Group accounting for the hydrocarbons produced and sold from the wells as revenue, and the net profit share due to PJSC Ukrnafta being treated as a lease expense in cost of sales. However, following the SV-2 well experiencing water ingress, a workover of this well was undertaken to replace the production string and remove obstructions in the well, but this work was unsuccessful and further remedial work is not being considered at the present time.

At the VAS field, there were no operational activities during the period due to the continued suspension of the VAS production licence since May 2023, but with the lifting of the suspension of such licence on 26 June 2024, operational activities resumed, including production operations, and, after a period of cleaning up, the production rate is recovering back towards the production rate prior to the suspension of the licence. Planning for the further development of the field, as well as for a proposed new well to explore the VED prospect within the VAS licence area, has also resumed.

Similarly, at the SC exploration licence area, there were no operational activities due to the continued suspension of the SC exploration licence since May 2023, but such suspension was lifted on 26 June 2024, and since then, planning for the further development of the licence area has resumed.

Outlook 

The ongoing war in Ukraine has caused significant disruption to the country as a whole and to the Group's business activities, and until there is a satisfactory resolution to the conflict, the disruption and uncertainty are likely to continue. However, subject to it being safe to do so, during the remainder of 2024 and 2025, the Group plans to continue the development of its fields to the extent it is possible to do so.

At the MEX-GOL and SV fields, the development programme includes completing a workover of the MEX-102 well to access a shallower horizon, drilling the MEX-114 appraisal well, deepening of the MEX-109 well to explore a deeper horizon in the Visean formation, investigating the possible hydraulic fracturing of the SV-29 well, evaluating the potential for sidetracking of the MEX-119 well to access additional reserves, installing additional compression equipment and upgrading and maintaining the flow-line network and pipelines and other field infrastructure, as well as planning for the further development of the fields.

At the VAS field, production operations will continue, together with planning for the further development of the field, as well as for a proposed new well to explore the VED prospect within the VAS licence area.

At the SC exploration licence area, planning for the development of the licence area will continue, including planning for the installation of new gas processing facilities and other surface infrastructure and/or the feasibility of connection to existing gas processing facilities.  

Finally, I would like to add my thanks to all of our staff for their continued hard work and dedication over the course of 2024, and to especially recognise their ongoing efforts and professionalism in the face of the extremely challenging current situation in Ukraine.

Oleksiy Zayets

Interim Chief Executive Officer

Finance Review

Despite the continued significant disruption caused by the war in Ukraine, the Group was still able to generate a net profit for the period of $12.6 million, marginally higher than the first half of 2023 (1H 2023: $12.5 million), notwithstanding lower production rates and lower gas prices.

Revenue for the period, derived from the sale of the Group's Ukrainian gas, condensate and LPG production, was 28% lower at $23.7 million (1H 2023: $33.1 million), primarily as a result of the combined effects of lower production rates and a decrease in gas prices in the period, slightly mitigated by an improvement in condensate and LPG prices. 

Aggregate daily production for the first half of 2024 was down approximately 24% at 2,077 boepd (1H 2023: 2,730 boepd), in each case calculated on the days when the Group's fields were actually in production, due to the disruption to operations and ongoing reduced levels of field development as a result of the war in Ukraine, natural field decline and the suspension of the VAS production licence in May 2023. Aggregate production volumes for the period were 377,968 boe, which is lower than the aggregate production volumes of 475,305 boe in the corresponding period in 2023 for the same reasons. 

During 2024, global, and particularly European, gas prices declined as the disruption to supplies caused by the Russian invasion of Ukraine abated, and this decrease also occurred in Ukraine, causing a 27% decline in average gas price realisations in the period at $306/Mm³ (UAH11,919/Mm³). However, condensate and LPG average sales prices improved by 61% and 62% at $74/bbl and $149/bbl respectively (1H 2023: $419/Mm³ (UAH15,315/Mm³), $46/bbl and $92/bbl respectively).  

During the period from 1 July 2024 to 31 August 2024, the average realised gas, condensate and LPG prices were $308/Mm³ (UAH12,639/Mm³), $114/bbl and $106/bbl respectively.

Gross profit for the period was 21% lower at $15.5 million (1H 2023: $19.6 million), the dampened effect of the steeper fall in revenues being offset to an extent by a 40% fall in cost of sales for the period at $8.2 million (1H 2023: $13.6 million). The decline in production resulted in a decline in depreciation, and the decreased gas prices also disproportionately reduced the revenue-related costs of taxes and well rental, down a combined 57% at $3.1 million (1H 2023: $7.2 million).

The subsoil tax rates applicable to gas production were stable during the first six months of 2024 and were as follows:

The tax rates applicable to condensate production were 31% for condensate produced from deposits shallower than 5,000 metres and 16% for condensate produced from deposits deeper than 5,000 metres, for both old and new wells.

As a direct result of the war in Ukraine, including the significant decline in domestic consumption disrupting the previous supply, demand and pricing dynamics, there has been a divergence between domestic and European gas pricing, and accordingly, the methodology (linked to European prices) used to determine the reference gas price for the subsoil tax rates has had a significantly detrimental effect for domestic gas producers. In order to address this issue, legislation was implemented in August 2022 which modified such methodology to ensure that it operates as originally intended (with such reference price being aligned with domestic prices). 

Administrative expenses for the period were lower at $2.4 million (1H 2023: $3.7 million) as a result of the reduced level of activity.

The tax charge for the six months ended 30 June 2024 was lower at $4.2 million (1H 2023: $5.0 million), and comprised a current tax charge of $3.1 million (1H 2023: $3.1 million) and a deferred tax charge of $1.1 million (1H 2023: $1.9 million).      

A deferred tax asset relating to the Group's provision for decommissioning as at 30 June 2024 of $0.6 million (31 December 2023: $0.6 million) was recognised on the tax effect of the temporary differences of the Group's provision for decommissioning at the MEX-GOL and SV fields, and its tax base. A deferred tax liability relating to the Group's development and production assets at the MEX-GOL and SV fields as at 30 June 2024 of $7.0 million (31 December 2023: $5.5 million) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the MEX-GOL and SV fields, and its tax base.

A deferred tax asset relating to the Group's provision for decommissioning as at 30 June 2024 of $0.3 million (31 December 2023: $0.3 million) was recognised on the tax effect of the temporary differences on the Group's provision on decommissioning at the VAS field, and its tax base. A deferred tax asset relating to the Group's development and production assets at the VAS field as at 30 June 2024 of $0.7 million (31 December 2023: deferred tax liability of $0.1) was recognised on the tax effect of the temporary differences between the carrying value of the Group's development and production asset at the VAS field, and its tax base.

Capital investment of just $0.5 million reflects the greatly reduced investment in the Group's oil and gas development and production assets during the period (1H 2023: $3.0 million). The low level of capital investment in the period is a function of the deferral of certain aspects of the Group's development plans necessitated by the ongoing war in Ukraine and the suspension of the Group's VAS and SC licences, but has been increased since the end of the period after the lifting of the suspensions of the Group's VAS and SC licences in late June 2024.

A review of any indicators of impairment of the carrying value of the Group's assets was undertaken at the period end and this review concluded that the war in Ukraine and the suspension of the VAS production licence had resulted in such an indicator. Impairment reviews were therefore conducted on the carrying value of the Group's assets but did not result in the recognition of any impairment loss.

Cash and cash equivalents held as at 30 June 2024 were significantly higher at $93.7 million (1H 2023: $33.8 million), primarily due to the payment of the £48.1 million interim dividend in June 2023. The Group's cash and cash equivalents balance as at 23 September 2024 was $97.1 million, held as to $79.9 million equivalent in Ukrainian Hryvnia and the balance of $17.2 million equivalent predominantly in US Dollars, Euros and Pounds Sterling.

During the first six months of 2024, the Ukrainian Hryvnia weakened slightly against the US Dollar, at UAH38.0/$1.00 on 31 December 2023 and UAH40.5/$1.00 on 30 June 2024. The impact of this was $8.9 million of foreign exchange loss (1H 2023: $0.7 million of foreign exchange gain). Increases and decreases in the value of the Ukrainian Hryvnia against the US Dollar affect the carrying value of the Group's assets. The official exchange rate of the Ukrainian Hryvnia to the US Dollar on 23 September 2024 was UAH41.4/$1.00.  

Cash from operations has funded the capital investment during the first six months of 2024, and the Group's current cash position and positive operating cash flow are the sources from which the Group plans to fund the development programmes for its assets over the remainder of 2024 and beyond. This is coupled with the fact that the Group is currently debt-free, and therefore has no debt covenants that may otherwise impede its ability to implement contingency plans if domestic and/or global circumstances dictate. This flexibility and ability to monitor and manage development plans and liquidity is a cornerstone of our planning, and underpins our assessments of the future. With monetary resources at the end of the period of $93.7 million equivalent, and annual running costs of less than $8 million, the Group remains in a very strong position, notwithstanding the impact of the current conflict in Ukraine, as well as any local or global shocks that may occur to the industry and/or the Group.

Bruce Burrows

Finance Director

Principal Risks and How We Manage Them

The Group has a risk evaluation methodology in place to assist in the review of the risks across all material aspects of its business. This methodology highlights external, operational and technical, financial and corporate risks and assesses the level of risk and potential consequences. It is periodically presented to the Audit Committee and the Board for review, to bring to their attention potential risks and, where possible, propose mitigating actions. Key risks recognised and mitigation factors are detailed below:-

Directors' Responsibility Statement

The Directors confirm that, to the best of their knowledge:

A list of current Directors is maintained on the Group's website, www.enwell-energy.com.

Condensed Interim Consolidated Income Statement

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.

Condensed Interim Consolidated Statement of Comprehensive Income

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.

Condensed Interim Consolidated Balance Sheet

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.

Condensed Interim Consolidated Statement of Changes in Equity

 * Predominantly as a result of exchange differences on retranslation, where the subsidiaries' functional currency is not US Dollars

The Notes set out below are an integral part of these unaudited condensed interim consolidated financial statements.