President Energy PLC - Audited Results for year ended 31 December 2019

22 June 2020

PRESIDENT ENERGY PLC

("President", "the Company", or "the Group")

Audited Results for the year ended 31 December 2019

2020 update and outlook

AGM date and Investor meeting

President (AIM: PPC), the upstream oil and gas company with a diverse portfolio of production and exploration assets focused primarily in Argentina, is pleased to announce its audited results for the year ended 31 December 2019 and a 2020 update and outlook.

In the face of unforeseen challenges in 2019, the Company still delivered solid progress and operational profitability, with adjusted EBITDA* of almost US$12 million on turnover in excess of US$40 million. The continued strength of the Group can be seen demonstrated in the previously announced unaudited results for Q1 2020, and in the Company's resilience in navigating through the perfect storm of Covid-19 which has enveloped the whole of the world.

Following the recently announced share subscription, loan conversion and placing, President is in a robust position going forward with, despite the obvious challenges, another year of positive operational profits and EBITDA in prospect.

Highlights

Financial

·   Group turnover US$40.8 million (2018: US$47.2 million) in spite of Group wide operational shutdowns and issues as well as the 19% reduction in average realised sales prices in Argentina to US$49.9 per boe (2018: US$61.5 per boe)

·   Net cash generated by operating activities US$21.5 million (2018: US$14.7 million) enhanced by US$10.0 million advance under offtake agreement with Trafigura S.A., all of which has subsequently been converted into equity and therefore effectively repaid

·   Adjusted EBITDA* of US$11.6 million (2018: US$16.7 million) with no material contribution from gas sales which only began to show in Q1 2020 as gas started to flow through the newly built pipeline from Estancia Vieja field in Argentina

·   Free cash generation from core operations* (excluding workovers) US$15.1 million (2018: US$ 21.7 million)

·   Borrowings at year end reduced year on year by 25% to US$22.6 million (2018 borrowings: US$30.1 million), intended to be further materially reduced by 35% to US$14.6 million as a result of the resolutions passed at the General Meeting on 22 June 2020. Of this US$14.56 million only US$3.7 million is third party financial debt with the balance being a shareholder related loan to IYA

·   Reflecting a careful and thoughtful approach in changing market circumstances, non-cash impairments have been taken in relation to the non-core producing Puesto Guardian Concession, Argentina and the Paraguay exploration blocks totalling US$88 million which will, inter alia, materially mitigate the level of any future possible non-cash impairments of those assets as well as their depreciation

·   No benefit taken in the accounts in relation to the acquisition of the profitable producing Angostura Block (see below)

·   Reflecting these impairments, a retained loss of US$88.3 million (2018 profit of US$0.1 million) arose in the year to December 2019

Corporate

·   Angostura, a producing exploration block in Rio Negro, Argentina was acquired in late in 2019 for no payable consideration to the seller. Whilst the purchase due to timing had no significant impact in the year, the Block is already contributing profitably to the current year and has proven and probable independently assessed reserves with an interesting prospective resource upside

Operations

·   An increase of 6% in Group net average production to 2,415 boepd (2018: 2.279 boepd) notwithstanding all the production challenges encountered during the year

·   All operating fields in Argentina and Louisiana generated positive operating profits notwithstanding operational challenges of field shut-down in Louisiana for 5 months, power issues and intermittent shut-downs in Argentina as well as key producing wells requiring lengthy remedial workovers in both Rio Negro and Louisiana

·   Further improvement in Argentina core operating performance with well operating costs per boe*in 2019, excluding royalties and workovers, reduced by 7% to US$21.1 per barrel (2018: US$22.7). These have now been reduced further in the core Rio Negro assets to US$13.8 per barrel in May

·   Group-wide administrative costs per barrel *reduced by 25% over previous year to US$4.8 per boe (2018: US$6.4 per boe).

Reserves

·   Net 2P (proven and probable ) reserves in Argentina at year end, as confirmed by an independent reserves audit, increased to 25.9 mmboe (2018: 24.9 mmboe) with the higher value core Rio Negro assets increasing by over 20% to 13.8 mmboe (2018: 11.4 mmboe)

·   Louisiana 1P proven producing reserves estimated at 540 mboe

Post year end update

·   The unaudited results for Q1 2020 announced on 3 June 2020, demonstrated the solidity of the Company notwithstanding the more than 50% decline in oil prices in March as a result of the global spread of Covid-19. These results included a net cash profit in Argentina for Q1 of US$3.45 million after all G&A, foreign exchange, and finance charges are taken into account but before depreciation

·   Despite the historic fall in oil prices in the second quarter, the unaudited results for Argentina for that period are estimated to show a net cash profit after all G&A, foreign exchange and finance charges but before depreciation of approximately US$1 million. Louisiana likewise is estimated to show a net cash profit on that basis.

·   Accordingly the estimated unaudited figures for H2 in terms of net cash profit as aforesaid demonstrate a commendable cash generative performance during the periods most impacted by the Covid-19 pandemic, with realisable prices in July for oil produced from Rio Negro expected to be substantially higher than in May

·   In the first six months of the current year, the international commodity trading and logistics group Trafigura agreed to subscribe for new ordinary shares in the Company for a total sum of US$10 million at an average share price of 2.34 pence per share (based on an FX rate of 1.27), thereby becoming a 16.7 per cent shareholder in President.

·   During the same period, IYA, a Peter Levine group company, converted US$7.2 million of debt owed to it from the Company into new ordinary shares at the same average price. In aggregate this will result in Peter Levine holding through his investment fund PLLG Investments 29.95% of the Company

·   The net effect of the above has reduced liabilities as at today's date by US$17.1 million, a significant positive change to the Company's balance sheet 

·   On 4 June 2020, the Company announced that it had raised £4.73 million before expenses by way of placing ordinary shares at a price of 1.85 pence per share

·   In H1 2020 the gas pipeline in Rio Negro was built and commissioned and new compression added to the gas infrastructure thereby enabling the start of material gas sales to market to the benefit of both the Estancia Vieja and the recently acquired Angostura field.

·   On 3 June 2020, Company inter alia provided the market with a Trading Update and the reader is referred to the contents of that announcement

 Outlook

·   Since February, the Covid-19 pandemic has seized the world in a manner few could have anticipated. The effect on demand for oil and gas industry combined with the already present pressure on prices due to the Saudi Arabia and Russian standoff has been unprecedented with potentially uncertainty to continue in the coming few months until the demand and supply side become more balanced

·   Notwithstanding this, President has not had to shut-in producing wells in any of its locations and its business model concentrating on maximising margins and generating positive cash flow is helping us to weather the current market challenges

·   The changes in share capital, inter alia seeing Trafigura extend its holding in the Company to 16.7%, combined with the material reduction in balance sheet debt, as well as the President's strategic focus on low cost conventional hydrocarbons, stand us in good stead

·   Unlike many of the Company's peers, President is planning to return to drilling in late Q3 or early Q4 with at least 2 wells being planned in the Rio Negro province: one development and one exploration  

·   With demand slowly picking up, there is optimism that the steps taken so far this year have placed President in a robust position to grow in the medium term if not before and to be able to take advantage of opportunities that arise.

Annual General Meeting and Investor Q&A

The Annual General Meeting will be held on Wednesday 22 July, after which the Company will host an interactive presentation through the digital platform Investor Meet Company.

The Company is committed to ensuring that there are appropriate communication structures for all elements of its shareholder base so that its strategy, business model and performance are clearly understood. Further details of the presentation on the Investor Meet Company platform will be provided closer to the date.

Investors can sign up to Investor Meet Company for free and add to meet President Energy PLC via: 

https://investormeetcompany.com/president-energy-plc/register-investor

Peter Levine, Chairman, commented in the Chairman's Statement:

"It is hard not to describe the results for 2019 as a footnote in the context of the post Coronavirus world. Suffice to say, the Company has delivered a solid performance in the face of a series of one-off unexpected challenges.

Clearly 2020 represents an entirely different and a once in a century scenario for everyone and the Company is no exception. Things are radically changing in our industry. The shale boom is over for the moment and President, with its concentration only on conventional resources, is in my view on the right side of the fence.

The continued driving down of operating and administration costs, significant reduction of debt, improved liquidity and Trafigura becoming a major shareholder holding now over 16% provides President with a firm foundation to develop and succeed in the post coronavirus world where we still see a challenging demand side and surplus of supply build up over the last few months, the result of which provides continued pressure on pricing. In light of the prevailing circumstances and in common with many in our industry we have given careful thought to, and applied non-cash impairments to certain of our non-core producing and exploration assets.

We expect 2020 to be a year of positive cash flow, EBITDA and operational profitability with our balance sheet much healthier reflecting borrowings as at 30 June 2020 projected to be US$14.6 million (almost halved since year end 2018), of which only US$3.7 million is a third party financial debt with the US$10.9 million balance from IYA Global Ltd ("IYA"), an associated entity of mine.

With the World starting to unlock, we have cautious optimism that the worst, as far as President is concerned, is behind us and we look forward to rising to the challenges ahead and taking the opportunities that this year may bring."

* calculation of all quoted metrics not directly corresponding to GAAP measures are detailed in the Alternative Performance Measure glossary and cross referenced to the Notes where applicable

Contact:

Detailed financial review

In 2019, the Group recognized a gross profit of US$3.5 million (2018: profit US$14.7 million) under challenging conditions in both Argentina and the USA. A turbulent economic environment in Argentina saw the re-imposition of price controls for a period while a production outage caused by flooding led to an unplanned workover in Louisiana. Despite these challenges, further progress has been made in establishing Rio Negro in Argentina as a core regional asset with the development of our gas assets and infrastructure to better balance our revenue exposure in the uncertain times ahead. While in the USA, production has now fully recovered and our cost base rationalised. While we face unprecedented challenges in the current market, the experience gained through 2019 allows us to remain focused on financial discipline throughout the business.

After administrative expenses of US$4.4 million (2018: US$6.1 million) are taken into account, this led to an operating loss before impairment and non-operating gains / (losses) of US$0.9 million (2018: profit US$8.7 million). The loss for the year before tax of US$93.6 million (2018: profit US$6.1 million) was after an impairment of US$88.2 million (2018: US$2.6 million credit) related principally to intangible exploration assets in Paraguay (US$48.5 million) and the Puesto Guardian production concession in Argentina (US$39.9 million). After considering the accounting provision for future taxes and minor current tax charges, a loss of US$88.3 million was recognized in the year (2018: US$0.1 million profit).

Revenue fell by 14% to US$40.8 million (2018: US$47.2 million), despite higher overall sales volume, lower realised prices in both Argentina and the USA depressed sales revenues. Overall Group production rose by 6% reaching 2,415 boepd (2018: 2,279 boepd). Lower average product prices for the year of US$49.6/boe (2018: US$59.6/boe) resulted in the lower reported sales. Cost of sales of US$37.3 million (2018: US$32.5 million) increased due to higher depreciation charges while total operating costs on a per boe basis fell reflecting the higher production volumes achieved.

Argentine operating performance

Production in Argentina increased by 14% to 824,272 boe (2018: 721,764 boe) or 2,258 boepd (2018: 1,977 boepd). Oil production rose by 8% while a fourfold increase in gas production generated additional sales revenue and was used for power generation. Average realised sales prices in Argentina fell 19% to US$49.9 per boe (2018: US$61.5 per boe) as regulated oil price controls imposed from August to November 2019 reduced prices below export parity levels and as gas sales become a small but growing source of income.

Well operating costs in Argentina before non-recurring items* fell by 7% to US$21.1/boe (2018: US$22.7/boe) as the focus remained on cost control. Depreciation rose during the year to US$12.3/boe (2018: US$9.6/boe)* due to increased estimates for future development costs and the depreciation of Right of Use assets following the adoption of IFRS16 on leasing.

Overall, independently assessed proved and probable reserves in Argentina rose by 7% due to additional reserves attributed to Puesto Flores Concession and through the acquisition of the Angostura Concession at the end of the year. Reserves in the Salta Province were reduced by 9% as the Group focused on the higher value added Rio Negro fields. This together with the prevailing market environment triggered an impairment review and the careful and thoughtful decision to impair US$39.9 million of the net book value in 2019.

USA operating performance

Production from the Group's working interest in US operations fell by 48% to 156 boepd (2018: 301 boepd). Extensive flooding in Louisiana which resulted in the shutdown of the wells and facilities was followed by a workover of the Triche well leading to a four month outage before production rates had fully recovered.

Average realised prices in the US fell 4% on the prior year to US$45.6/boe (2018: US$47.7/boe). Well operating costs excluding royalty related expenses and non-recurring workovers* rose by over 26% to US$9.8 /boe (2018: US$7.8 /boe). Despite mitigation measures, fixed costs of operations were incurred during the extended outage leading to a higher annual cost per barrel. Depreciation rose during the year to US$4.9/boe (2018: US$3.1/boe)* due to depreciation of Right of Use assets following the adoption of IFRS16 on leasing. The USA continued to make a contribution to the business despite the challenges in the year.

Corporate

Group administrative expense fell by over 25% to US$4.4 million (2018: US$6.1 million) largely due to 2018 including non-recurring legal expenses. While operations in Argentina progressed and the growth in the reserves base provided encouragement the price environment and outages in the USA proved challenging generating an operating loss of US$0.9m (2018 profit US$8.7 million).

In recognition of the challenging environment, although the Pirity license in Paraguay has now been extended until the first quarter of 2022 and the Group remains committed to future drilling, a careful and thoughtful approach has been taken with respect to the book value carried forward for the licence. A partial impairment of US$48.5 million has been made on the licence reflecting indications arising during the farm out process.

When considering the valuation of the Paraguay asset, the Directors have taken into account both the output of discussions from the farm down process over the past 12 months and internal assessments. The activity supporting any opportunity for a farm down is currently on hold given the Covid-19 pandemic and the associated impact on oil pricing. Management will continue to review opportunities for encouraging other parties to take a share in the ongoing costs of the licence when the macroeconomic conditions become more stable. The planned drilling in Paraguay scheduled for 2020 has been deferred into 2021.

Following a reduction in reserves and changes to the timing of future development plans, an impairment review was triggered on the Puesto Guardian field in Argentina. The strategic decision has been made to focus on developing the higher margin Rio Negro concessions as the Puesto Guardian concession extends through to August 2050. An impairment of US$39.9 million was made to leave the remaining recoverable value of US$5.2 million. While the conditions that have given rise to these impairments will be reviewed in the future, there is a risk of future impairments if oil prices continue to fall.

The Group's primary investment focus during 2019 was on growth in core areas, increasing production in Argentina whist continuing to evaluate farm out opportunities in Paraguay and Argentina. To this end, the Group successfully raised net proceeds of US$4.1 million through an equity raise in order to accelerate the expansion programme in Rio Negro through the fast track development of its gas assets. An offtake agreement with Trafigura SA was signed in July advancing oil sales allowing the financial flexibility to reduce existing debt and develop a strategic relationship. Concurrent with the acquisition of the Angostura concession in Argentina in November 2019 at minimal cost, Compañia General De Combustibles S.A agreed to subscribe for US$1.8 million in shares over the next two years, further developing a long term relationship. The acquisition continues the strategy of leveraging on our critical mass in Rio Negro and in particular, our strategic gas pipeline.

Investment in Property, Plant and Equipment in the year included US$10.3 million (2018: US$ 16.4 million) to develop the gas infrastructure, reactivate the Estancia Vieja wells and prepare for future drilling together with US$0.1 million on acquisition of the Angostura licence in Rio Negro. While the adoption of IFRS16 on lease accounting saw the recognition of US$2.0 million of leased assets primarily on drilling equipment in Argentina. Intangible Fixed Asset additions amounted to US$0.3 million (2018: US$0.7 million) comprising expenditure on evaluation of the concessions in Paraguay, Matorras/Ocultar and Puesto Flores licences in Argentina and Jefferson Island in the USA.

Overall, Trade and Other Payables increased to US$26.5 million (2018: US$23.7 million) largely due to inclusion of US$10.2 million of deferred income under the offtake arrangement and US$1.5 million of lease liabilities offset by lower operating accruals and trade creditors due to settlements during the year. Trade and Other Receivables decreased to US$6.5 million (2018: US$10.7 million) in connection with the settlements made. While the Group's net current liability of US$19.8 million (2018: US$14.8 million) has increased during the year, this is entirely due to the advance under the offtake arrangement with Trafigura S.A. Settlement was linked to future oil deliveries until events in 2020 have seen this converted in to an equity investment. Furthermore, stripping out the liabilities on drilling and acquisition investment activity, which are periodic in nature shows that the underlying net current liability from ongoing operations is significantly lower at US$3.2 million (2018: US$2.3 million).Year-end cash balances were US$0.9 million (2018: US$2.0 million).

Key Performance Indicators

Key Performance Indicators are used to measure the extent to which Directors and management are reaching key objectives. The principal methods by which the Directors monitor the Group's performance are volumes of net production, well operating costs and the extent of exploration success. The Directors also carry out a regular review of cash available for exploration and development and review actual capital expenditure and operating expenses against forecasts and budgets.

In order to have more visibility on the controllable element of operating costs royalty and production related taxes have been excluded from our key performance measures. Underlying operating costs excluding non-recurring items have been calculated and detailed in the Alternative Performance Measure section of this report.

Production in Argentina increased by 14% to 824,272 boe (2018: 721,764 boe) or 2,258 boepd (2018: 1,977 boepd). Oil production rose by 8% while a fourfold increase in gas production generated additional sales revenue and was used for power generation. Well operating costs in Argentina before non-recurring items fell by 7% to US$21.1/boe (2018: US$22.7/boe) as the focus remained on cost control.

Production from the Group's working interest in US operations fell by 48% to 156 boepd (2018: 301 boepd). Extensive flooding in Louisiana which resulted in the shutdown of the wells and facilities was followed by a workover of the Triche well leading to a four month outage before production rates had fully recovered. Well operating costs excluding royalty related expenses rose by over 26% to US$9.8 /boe (2018: US$7.8 /boe). Despite mitigation measures, fixed costs of operations were incurred during the extended outage leading to a higher annual cost per barrel.

* calculation of all quoted metrics not directly corresponding to GAAP measures are detailed in the Alternative Performance Measure glossary and cross referenced to the Notes where applicable

Consolidated Statement of Comprehensive Income

Year ended 31 December 2019

Consolidated Statement of Financial Position

31 December 2019

Consolidated Statement of Changes in Equity

Year ended 31 December 2019

Consolidated Statement of Cash Flows

Year ended 31 December 2019

Notes

1.    Accounting policies and preparation

The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 December 2019 or 2018 but is derived from the 2019 accounts.

A copy of the statutory accounts for the year to 31 December 2018 has been delivered to the Registrar of Companies and is also available on the Company's website. Statutory accounts for 2019 will be delivered in due course. The auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006 in respect of the accounts for 2018 nor 2019.

Whilst the financial statements from which this preliminary announcement is derived have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted for use in the EU, this announcement does not itself contain sufficient information to comply with IFRS. The Annual Report, containing full financial statements that comply with IFRS, will be sent out to shareholders later in June 2020.

The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Therefore, in the preparation of the 2019 financial statements they continue to adopt the going concern basis.

Well operating costs include US$1,163,000 (2018: US$1,531,000) in Argentine non-recurring workover costs expensed in the period. During 2019, an exceptional bonus of US$305,000 was included in well operating costs.

To allow for meaningful comparison, staff costs, share based payments and depreciation expenses are reflected gross before the effect of allocations to operating costs or balance sheet assets. Other expenses are shown net of the effect of allocations US$1.6 million (2018: US$1.7 million). During 2019, an exceptional bonus of US$609,000 was included in director and staff costs. This was partly offset by a one off credit of US$428,000 arising on change in bank transaction taxes in Argentina.

Administrative expenses in 2018 included US$0.7 million in legal expenses arising on the settlement of the DP1002 dispute in Argentina that are non-recurring.

Following a reduction in reserves, oil price forecasts and changes to the timing of future development plans an impairment review was triggered on the Puesto Guardian field in Argentina. The strategic decision has been made to focus on developing the higher margin Rio Negro concessions as the Puesto Guardian concession extends through to August 2050. An impairment of US$39.9 million was made to leave the remaining recoverable value of US$5.2 million.

In recognition of the challenging environment, although the Pirity license in Paraguay has now been extended until the first quarter of 2022 and the Group remains committed to future drilling, a careful and thoughtful approach has been taken with respect to the book value carried forward for the licence. A partial impairment of US$48.5 million has been made on the licence reflecting indications arising during the farm out process.

Settlement was reached in 2018 in the dispute with contractors on the DP1002 well which was impaired in 2016. Consequently, outstanding cost accruals included in the US$10.9 million impairment have been reversed in 2018 resulting in a gain in the period.

At 31 December 2019, 42,126,694 (2018: 64,962,628) weighted potential ordinary shares in the Company which underlie the Company's share option and share warrant awards and may dilute earnings per share in the future, have been included in the calculation of diluted earnings per share. No dilution per share was calculated for 2019 as with the reported loss they are anti-dilutive.

8   Segment reporting

Alternative Performance Measures

The Group uses certain measures of performance that are not specifically defined under IFRS or other generally accepted accounting principles. These non-IFRS measures include net debt and well operating and underlying well operating costs per boe and free cash flow. Where used in the context of segmental disclosure the metrics are calculated in the same manner.

Total operating cost and underlying well operating cost per boe

Total operating cost per boe is a useful straight forward indicator of the Group's costs incurred to produce oil and gas including all relevant expenses. However, since royalty, production taxes and similar expenses are not controllable these have been disaggregated to allow well operating costs to be measured.

Where one-off or cyclical costs, such as workovers, are material these have been disclosed and the underlying well cost per boe referred to show the core performance. These have been defined and calculated as follows:

A 7% reduction in core operating performance arose in Argentina and was calculated as follows:

Administrative cost per barrel

Underlying administrative expense excluding non-recurring items is calculated as follows:

Adjusted EBITDA

The calculation is detailed on the Income Statement with further details on the non-recurring items below.

Non-recurring items

Where referred to in the calculation of Adjusted EBITDA and in alternative performance measures these comprise the following:

Free cash generation from core operations

A measure of cash generation from operations excluding changes in working capital, administrative expense and non-recurring workovers. Used by management as an indication of cash generation at asset level.

Reconciliation to cash flow from operations

The reported cash flow generated from operating activities can be reconciled to free cashflows from core operations as follows:

Deprecation per boe

Depreciation per barrel of oil equivalent can change between accounting periods due to costs incurred, changes in reserves or changes in future costs and hence is a useful metric for reporting purposes. Where calculated on at a group or segment level the calculation is as follows:

·    Reported depreciation charge as reported in Cost of Sales per Note 4 in accordance with IFRS GAAP reporting

·    Divided by the barrel of oil equivalent of production reported in the Chairman's Statement in accordance with industry standards and state reports

Glossary

Boe - barrels of oil equivalent

Bopd - barrels of oil per day

Boepd - barrels of oil equivalent per day

MMscf/d - million of standard cubic feet of gas production per day

1P - proven hydrocarbon reserves

2P - proven and probable hydrocarbon reserves

Contingent Resources   Quantities of hydrocarbons estimated to be potentially recoverable from known accumulations

Prospective Resources  Quantities of hydrocarbons estimated to be potentially recoverable from undiscovered accumulations

NPV10 - net present value over the life of the concessions/licences discounted by 10%