Enwell Energy : 2020 Audited Results

RNS Number : 0378U

Enwell Energy PLC

31 March 2021

31 March 2021

ENWELL ENERGY PLC

2020 AUDITED RESULTS

Enwell Energy plc (the "Company", and with its subsidiaries, the "Group"), the AIM-quoted (ENW) oil and gas exploration and production group, today announces its audited results for the year ended 31 December 2020.

2020 Highlights

Ukraine Operations

• Aggregate average daily production of 4,541 boepd (2019: 4,263 boepd), an increase of approximately 6.5%
• SV-54development well successfully completed and brought on production in May 2020
• Drilling of SV-25 appraisal well successfully completed and hooked-up for production in Q1 2021
• MEX-GOLand SV production licences each extended to 2040 enabling full economic development of remaining reserves
• No operational disruption to the Group's operations linked to the COVID-19 pandemic

Financials

• Revenue of $47.3 million (2019: $55.9 million), down 15% as a function of weakened gas prices in the year
• Gross profit of $15.7 million (2019: $23.5 million), down 33%
• Cash generated from operations of $23.8 million (2019: $24.7 million), remained steady, predominantly due to record production increasing non-cash DD&A
• Net profit of $3.2 million (2019: $12.2 million)
• Cash and cash equivalents were steady at $61.0 million at 31 December 2020 (2019: $62.5 million)
• Average realised gas, condensate and LPG prices in Ukraine were lower, particularly gas prices, at $136/Mm3 (UAH3,618/Mm3), $46/bbl and $46/bbl respectively (2019: $219/Mm3 (UAH5,729/Mm3) gas, $58/bbl condensate and $55/bbl LPG)

Outlook

• Development work planned for 2021 at the MEX-GOL and SV fields includes: completing drilling operations of the SV-29 well; planning for a further new well or sidetracking of an existing well in the SV field; and upgrading of the gas processing facilities
• Development work planned for 2021 at the VAS field includes: planning for a new well to explore the VED prospect within the VAS licence area; and upgrading of the gas processing facilities
• Development work planned for 2021 at the SC field includes: planning for the drilling of the SVIST- 4 well; and acquisition of 150 km2 of 3D seismic
• 2021 development programme expected to be funded from existing cash resources and operational cash flow

Sergii Glazunov, CEO, commented: "2020 was another strong operational year forEnwell Energy. Two further successful wells in the SV field led to record production levels from our fields, which helped offset the impact of lower gas prices experienced in the year. The recent resolution of the legal issues relating to LLC Arkona Gas-Energy has enabled us to commence development planning for the SC licence, with our first well planned within the next twelve months.

We are looking forward to the results of the SV-29 development well and to further progressing our development programme in the new financial year, whilst continuing to improve production rates and revenue streams in the future. Although we have not suffered any material impact from the COVID-19 pandemic, we have taken, and will continue to take, all possible actions to ensure the safety of our employees and local communities."

The Annual Report and Financial Statements for 2020, together with the Notice of Annual General Meeting, will be posted to shareholders and published on the Company's website during May/June 2021.

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014, which forms part ofUnited Kingdom domestic law by virtue of the European (Withdrawal) Act 2018.

For further information, please contact:

Dmitry Sazonenko, MSc Geology, MSc Petroleum Engineering, Member of AAPG, SPE and EAGE, Director of the Company, has reviewed and approved the technical information contained within this press release in his capacity as a qualified person, as required under the AIM Rules.

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• Euro

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Chairman's Statement

I am delighted to present the 2020 Annual Report and Financial Statements. Whilst 2020 was an unprecedented year globally as a result of the COVID-19 pandemic, I am pleased to report that the Group has not been significantly affected on an operational level, and has achieved a robust performance despite the backdrop. The Group has continued to make good progress in the development of the MEX-GOL, SV and VAS gas and condensate fields in north-easternUkraine, and has delivered a solid financial performance during the year. Drilling of the SV-54 development well was successfully completed and brought on production in May 2020, whilst the SV-25 appraisal well was spudded in July 2020 and completed and brought on production in Q1 2021.

At the MEX-GOL and SV fields, production was stable during 2020, with higher production volumes compared with 2019. At the VAS field production was also steady, but lower than during 2019 after a decline in production from the VAS-10 well in late 2019.

Aggregate average daily production from the MEX-GOL, SV and VAS fields during 2020 was 4,541 boepd, which compares favourably with an aggregate daily production rate of 4,263 boepd during 2019, an increase of approximately 6.5%.

The Group delivered a solid financial performance for the year, despite the higher production levels being offset by a lower average gas price during the year, as a result of weakened European gas prices. During 2020, the Group achieved a net profit of $3.2 million (2019: $12.2 million) despite the weak gas prices, while cash generated from operations during the year was steady at $23.8 million (2019: $24.7 million), predominantly due to the higher production rates increasing non-cash depreciation, depletion and amortisation (DD&A).

The fiscal and economic environment inUkraine remains stable, despite the effects of the COVID-19 pandemic resulting in a contraction in GDP and an increase in the rate of inflation, and recently Ukrainian Hryvnia exchange rates have been steady. Nevertheless, future fiscal and economic uncertainties remain in the Ukrainian market and we continue to be vigilant.

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 more recently, reductions in the subsoil tax rates relating to oil and gas production and a 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 the market gas prices in Ukraine now broadly correlate with the imported gas prices. During 2020, gas prices trended lower, reflecting a similar trend in European gas prices, and were lower than in 2019. Similarly, condensate and LPG prices were also lower by comparison with last year. However, prices have improved in 2021 to date.

Arkona Acquisition

As announced on 24 March 2020, the Group acquired the entire issued share capital of LLC Arkona Gas-Energy ("Arkona") for a total consideration of up to $8.63 million, subject to satisfaction of certain conditions. Arkona holds a 100% interest in the Svystunivsko- Chervonolutskyi ("SC") exploration licence in north-eastern Ukraine, some 15 km east of the SV field. The SC licence was granted in May 2017, with a duration of 20 years, and is prospective for gas and condensate. As with the productive reservoirs in the SV field, the prospective reservoirs in this licence are Visean, at depths between 4,600 - 6,000 metres.

However, NJSC Ukrnafta, the majority State-owned oil and gas producer,issued legal proceedings against Arkona, in which NJSC Ukrnafta made claims of irregularities in the procedures involved in the grant of the SC licence to Arkona in May 2017. In early July 2020, the First Instance Court in Ukraine made a ruling in favour of NJSC Ukrnafta, which found that the grant of the SC licence was irregular, but this ruling was overturned by the Appellate Administrative Court in September 2020, and a final appeal to the Supreme Court of Ukraine was determined in favour of Arkona in February 2021. Further information can be found in the Company's announcements dated 3 July 2020, 31 July 2020, 30 September 2020, 23 November 2020 and 11 February 2021.

With these legal issues now resolved, the Group has re-commenced planning for the development of this licence, and a new well is planned for later this year.

COVID-19 Pandemic

We continue to closely monitor the volatility in global financial markets, and the implications on the operational, economic and social environment caused by the COVID-19 pandemic, coupled with the weakened hydrocarbon prices. As of the date hereof, there has been no operational disruption linked to the COVID-19 pandemic, and no material impact is currently envisaged on the Group's prospects. However, the Board and management remain acutely aware of the risks, and are taking action to mitigate them where possible, not only to protect our staff and other stakeholders, but also to minimise any potential disruption to our business. We have taken steps to continually monitor the health of our operational staff, including temperature checks for such staff at the commencement of each shift, as well as investing in technology to enable many staff to work from remote locations. We continue to reassess our medium-term forecasts based on current pricing and are highly confident we have the resources to deliver on our plans. Of course, we cannot be certain of the duration of the pandemic's impact but will remain focussed on monitoring and protecting our business through the period of uncertainty. In protecting our stakeholders interests, we are conscious of our wider obligations to the communities, and country, in which we operate. Accordingly, as previously announced, in 2020 we acted, alongside other corporate entities in Ukraine, to directly acquire critical equipment and supplies from Chinese suppliers to donate to the Ukrainian State to assist its efforts to manage the pandemic in Ukraine. Our monetary contribution of $2 million to this initiative is reflected in the results for the year.

Outlook

Whilst there are still challenges in the business environment inUkraine, the situation is relatively stable despite the COVID-19 outbreak. Following the steady operational performance during 2020, and the increased production output during the year, we are looking forward to the results of the SV-29 development well, which are expected in the fourth quarter of 2021. We are also looking forward to achieving further successes in the development activities planned for 2021 and delivering a steadily increasing production and revenue stream in the future.

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In conclusion, on behalf of the Board, I would like to thank all of our staff for the continued dedication and support they have shown during the year and especially in the midst of the COVID-19 pandemic.

Chris Hopkinson

Chairman

Chief Executive's Statement

Introduction

The Group continued to make good progress at its Ukrainian fields during 2020, with development activity at the MEX-GOL and SV fields including successes with the drilling of the SV-54 development well, which came on production in May 2020 and the SV-25 appraisal well, which came on production in February 2021. In addition, work continued on the planning of an upgrade to the gas processing facilities, as well as work on upgrades to the flow-line network and remedial activity on existing wells.

At the VAS field, planning for a proposed new well to explore the VED prospect within the VAS licence area has continued, and upgrades to the gas processing facilities, flow-line network and other infrastructure are underway.

Overall production continued its upward trend during the year, achieving record levels for the Group and being approximately 6.5% higher than in 2019, with a substantial boost in May 2020, once the SV-54 well came on production.

Quality, Health, Safety and Environment ("QHSE")

The Group is committed to maintaining the highest QHSE standards and the effective management of these areas is an intrinsic element of the overall business ethos. The Group's QHSE policies and performance are overseen by the Health, Safety and Environment Committee. Through strict enforcement of the Group's QHSE policies, together with regular management meetings, training and the appointment of dedicated safety professionals, the Group strives to ensure that the impact of its business activities on its staff, contractors and the environment is as low as is reasonably practicable. The Group reports safety and environmental performance in accordance with industry practice and guidelines.

I am pleased to report that during 2020, a total of 461,321 man-hours of staff and contractor time were recorded without a Lost Time Incident occurring. The total number of safe man-hours now stands at over 3,451,816 man-hours without a Lost Time Incident. No environmental incidents were recorded during the year.

Production

The average daily production of gas, condensate and LPG from the MEX-GOL, SV and VAS fields for the year ended 31 December 2020 was as follows:-

Production rates were higher in 2020 when compared with 2019, predominantly due to the contributions of the MEX-119 well, which commenced production in October 2019, and the SV-54 well, which commenced production in May 2020.

The Group's average daily production for the period from 1 January 2021 to 26 March 2021 from the MEX-GOL and SV field was 18.1 MMscf/d of gas, 634 bbl/d of condensate and 239 bbl/d of LPG (4,072 boepd in aggregate) and from the VAS field was 2.5 MMscf/d of gas and 28 bbls/d of condensate (499 boepd in aggregate).

Operations

Notwithstanding the impact of the COVID-19 pandemic during 2020, over recent periods, there have been relatively stable fiscal and economic conditions in Ukraine, as well asreductions in the subsoil tax rates and improvements in the regulatory procedures in the oil and gas sector in Ukraine, and this has given the Board confidence to continue the Group's development programme at its Ukrainian fields during 2020. However, lower realised gas prices impacted revenues, following a general decline in gas prices in Europe.

The Group continued to refine its geological subsurface models of the MEX-GOL, SV and VAS fields, in order to enhance its strategy for the further development of the fields, including the timing and level of future capital investment required to exploit the hydrocarbon resources.

At the MEX-GOL and SV fields, the drilling of the SV-54 development well was completed to a final depth of 5,322 metres. One interval, at a drilled depth of 5,303 - 5,308 metres in the B-23 Visean formation, was perforated, and after successful testing, the well was hooked-up to the gas processing facilities in May 2020. In January 2021, additional intervals, at drilled depths of 5,143 - 5,146, 5,125 - 5,155 and 5,180 - 5,186 within the B-22 Visean formation were perforated. The well is currently producing at approximately 1.1 MMscf/d of gas and 25 bbl/d of condensate (212 boepd in aggregate).

In February 2021, the SV-25 appraisal well was completed, having been drilled to a final depth of 5,320 metres. One interval, at a drilled depth of 5,184 - 5,190 metres, within the B-22 Visean formation was perforated, and after successful testing, the well was hooked-up to the gas processing facilities. The well is currently producing at approximately 1.9 MMscf/d of gas and 80 bbl/d of condensate (423 boepd in aggregate).

The Group continues to operate each of the SV-2 and SV-12 wells under joint venture agreements with NJSC 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 NJSC Ukrnafta, with the Group accounting for the hydrocarbons produced and sold from the wells as revenue, and the net profit share due to NJSC Ukrnafta being treated as a lease expense in cost of sales. Both of these wells have proven to be strong producers since being brought back on production.

At the VAS field, planning has continued for a new well to explore the VED prospect within the VAS licence area. However, a decline in production rates from the VAS-10 well impacted overall production at the VAS field during the fourth quarter of 2019, and as a result, compression equipment was installed to increase production from this well, with a longer-term plan to undertake a workover of the well to access an alternative reservoir horizon.

In March 2019 (as set out in the announcement made on 12 March 2019), a regulatory issue arose when theState Service of Geology and Subsoil of Ukraine issued an order for suspension (the "Order") ofthe production licence for the VAS field. Under the applicable legislation, the Order would lead to a shut-down of production operations at the VAS field, but the Group has issued legal proceedings to challenge the Order, and has obtained a ruling suspending operation of the Order pending a hearing of the substantive issues. The Group does not believe that there are any grounds for the Order, and intends to pursue its challenge to the Order through the Ukrainian Courts.

Arkona Acquisition

As announced on 24 March 2020, the Group acquired the entire issued share capital of LLC Arkona Gas-Energy ("Arkona") for a total consideration of up to $8.63 million, of which $4.32 million was subject to the satisfaction of certain conditions. Following satisfaction of the initial conditions, a second payment of $2.1 million (net of an indemnity liability) has been paid, and the balance of the consideration is subject to the remaining conditions. Arkona holds a 100% interest in the Svystunivsko-Chervonolutskyi ("SC") exploration licence, which is located in

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the Poltava region in north-eastern Ukraine. The SC licence covers an area of 97 km2, and is approximately 15 km east of the SV field. The licence was granted in May 2017 with a duration of 20 years. The licence is prospective for gas and condensate, and has been the subject of exploration since the 1980s, with 5 wells having been drilled on the licence since then, although none of these wells are currently on production. As with the productive reservoirs in the SV field, the prospective reservoirs in the licence are Visean, at depths between 4,600 - 6,000 metres.

According to the recorded information on the Ukrainian State Balance of Natural Resources as at 1 January 2020, the licence has hydrocarbon

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reserves, in the category of C1 and C2 under the Ukrainian classification, DKZ, of approximately 38.0 MMboe (4.9 Bm of gas and 0.86 Mtonnes

of condensate). It should be noted, however, that whilst the Group's review of existing technical data for the licence is considered supportive of such assessment of hydrocarbon resources, such hydrocarbon resources have not been verified by an independent reserves assessor and do not correspond to the SPE/WPC/AAPG/SPEE Petroleum Resources Management System ("PRMS") standard for classification and reporting.

However, NJSC Ukrnafta, as claimant, issued legal proceedings against Arkona, as defendant, in which NJSC Ukrnafta claimed that irregular procedures were adopted in the grant of the SC licence to Arkona in May 2017. NJSC Ukrnafta was the holder of a previous licence over this area which expired prior to the grant of the SC licence. In early July 2020, the First Instance Court in Ukraine announced a ruling in favour of NJSC Ukrnafta, which found that the grant of the SC licence was irregular, which would mean the licence is invalid. Arkona filed an appeal in the Appellate Administrative Court in Kyiv, which was determined in favour of Arkona in September 2020, as was a final appeal to theSupreme Court of Ukraine issued in February 2021. Further information can be found in the announcements dated 3 July 2020, 31 July 2020, 30 September 2020, 23 November 2020 and 11 February 2021.

With the resolution of these legal issues, the Group has re-commenced planning for the development of this licence, which includes the acquisition of 150 km2 of 3D seismic and drilling of a new well, SVYST-4, both of which are planned to start later this year.

Outlook

During 2021, the Group will continue to develop the MEX-GOL, SV and VAS fields, as well as progressing the development planning for theSC licence. At the MEX-GOL and SV fields, the development programme includes continuing the drilling operations on the SV-29 development well, planning for a further well or sidetracking of an existing well in the SV field, investigating workover opportunities for other existing wells, installation of further compression equipment, further upgrading of the gas processing facilities and flow-line network, and remedial and upgrade work on existing wells, pipelines and other infrastructure.

At the VAS field, a workover of the VAS-10 well has recently been completed to access an alternative production horizon, planning for the proposed new well to explore the VED prospect within the VAS licence area is continuing, and upgrades to the gas processing facilities, pipeline network and other infrastructure are planned.

Ongoing legislative reforms and the general stability in the business climate inUkraine, are encouraging and supportive of the independent oil and gas producers in Ukraine.

Finally, I would like to add my thanks to all of our staff for the continued hard work and dedication they have shown over the course of the year, and to especially recognise their continuing efforts and professionalism during the COVID-19 pandemic.

Sergii Glazunov

Chief Executive Officer

Overview of Assets

We operate four fields in the Dnieper-Donets basin in north-easternUkraine. Our fields have high potential for growth and longevity for future production - a strong foundation for success.

MEX-GOL and SV fields

The MEX-GOL and SV fields are held under two adjacent production licences, but are operated as one integrated asset, and have significant gas and condensate reserves and potential resources of unconventional gas.

Production Licences

We hold a 100% working interest in, and are the operator of, the MEX-GOL and SV fields. The production licences for the fields were granted to the Group in July 2004 with an initial duration of 20 years, and the duration of these licences have recently been extended to 2040 in order to fully develop the remaining reserves. The economic life of these fields extend to 2038 and 2042 respectively pursuant to the most recent reserves and resources assessment by DeGolyer and MacNaughton ("D&M") as at 31 December 2017.

The two licences, located inUkraine's Poltava region, are adjacent and extend over a combined area of 253 km², approximately 200 km east of Kyiv.

Geology

Geologically, the fields are located towards the middle of the Dnieper-Donets sedimentary basin which extends across the major part of northeastern Ukraine. The vast majority of Ukrainian gas and condensate production comes from this basin. The reservoirs comprise a series of gently dipping Carboniferous sandstones of Visean age inter-bedded with shales at around 4,700 metres below the surface, with a gross thickness between 800 and 1,000 metres.

Analysis suggests that the origin of these deposits ranges from fluvial to deltaic, and much of the trapping at these fields is stratigraphic. Below these reservoirs is a thick sequence of shale above deeper, similar, sandstones at a depth of around 5,800 metres. These sands are of Tournasian age and offer additional gas potential. Deeper sandstones of Devonian age have also been penetrated in the fields.

Reserves

The development of the fields began in 1995 by the Ukrainian State company Chernihivnaftogasgeologiya ("CNGG"), and shortly after this time, the Group entered a joint venture with CNGG in respect of the exploration and development of these fields.

The fields have been mapped with 3D seismic, and a geological subsurface model has been developed and refined using data derived from high-level reprocessing of such 3D seismic and new wells drilled on the fields.

The assessment undertaken by D&M as at 31 December 2017 estimatedproved plus probable (2P) reserves attributable to the fields of 50.0 MMboe, with 3C contingent resources of 25.3 MMboe.

VAS field

The VAS field is a smaller field with interesting potential. The field has assessed proved plus probable reserves in excess of 3 MMboe and substantial contingent and prospective resources, as well as potential resources of unconventional gas.

Production Licence

We hold a 100% working interest in, and are the operator of, the VAS field. The production licence for the field was granted in August 2012 with a duration of 20 years. The economic life of the field extends to 2032 pursuant to the most recent reserves and resources assessment by D&M as at 31 December 2018.

The licence extends over an area of 33.2 km² and is located 17 km south-east of Kharkiv, in the Kharkiv region ofUkraine. The field was discovered in 1981, and the first well on the licence area was drilled in 2004.

The Group acquired this project in July 2016.

Geology

Geologically, the field is located towards the middle of the Dnieper-Donets sedimentary basin in north-eastUkraine. The field is trapped in an anticlinal structure broken into several faulted blocks, which are gently dipping to the north, stretching from the north-east to south-west along a main bounding fault. The gas is located in Carboniferous sandstones of Bashkirian, Serpukhovian and Visean age.

The productive reservoirs are at depths between 3,370 and 3,700 metres.

Reserves

The fields have been mapped with 3D seismic, and a geological subsurface model has been developed and refined using data derived from such 3D seismic and new wells drilled on the field.

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The assessment undertaken by D&M as at 31 December 2018 estimated proved plus probable (2P) reserves of 3.1 MMboe, with contingent resources of 0.6 MMboe, and prospective resources of 7.7 MMboe in the VED area of the field. The next well planned on the field is designed to explore the VED area of the field.

SC field

The SC field is located near to and has similar characteristics to the SV field, and is prospective for gas and condensate.

Production Licence

We hold a 100% working interest in, and are the operator of, the SC field. The production licence for the field was granted in May 2017 with a duration of 20 years.

The licence extends over an area of 97 km2, and is located in the Poltava region in north-easternUkraine, approximately 15 km east of the SV field.

Geology

Geologically, the field is located towards the middle of the Dnieper-Donets sedimentary basin which extends across the major part of northeastern Ukraine. The vast majority of Ukrainian gas and condensate production comes from this basin. The reservoirs comprise a series of gently dipping Carboniferous sandstones of Visean age inter-bedded with shales at depth between 4,600 and 6,000 metres.

Resources

The licence is prospective for gas and condensate, and has been the subject of exploration since the 1980s, with five wells having been drilled on the licence since then, although none of these wells are currently on production.

According to the recorded information on the Ukrainian State Balance of Natural Resources as at 1 January 2020, the licence has hydrocarbon

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reserves, in the category of C1 and C2 under the Ukrainian classification, DKZ, of approximately 38.0 MMboe (4.9 Bm of gas and 0.86 Mtonnes

of condensate). It should be noted, however, that whilst the Group's review of existing technical data for the licence is considered supportive of such assessment of hydrocarbon resources, such hydrocarbon resources have not been verified by an independent reserves assessor and do not correspond to the SPE/WPC/AAPG/SPEE Petroleum Resources Management System ("PRMS") standard for classification and reporting.

Overview of Reserves

1. MEX-GOL and SV fields

The Group's estimates of the remaining Reserves and Resources at the MEX-GOL and SV fields are derived from an assessment undertaken by D&M, as at 31 December 2017 (the "MEX-GOL-SV Report"), which was announced on 31 July 2018. During the period from 1 January 2018 to 31 December 2020, the Group has produced 3.7 MMboe from these fields.

The MEX-GOL-SV Report estimated the remaining Reserves as at 31 December 2017 in the MEX-GOL and SV fields as follows:-

The MEX-GOL-SV Report estimated the Contingent Resources as at 31 December 2017 in the MEX-GOL and SV fields as follows:-

2. VAS field

The Group's estimates of theremaining Reserves and Resources at theVAS field and the Prospective Resources at the VED prospect are derived from an assessment undertaken byD&M as at 31 December 2018 (the "VAS Report"), which was announced on 21 August 2019. During the period from 1 January 2019 to 31 December 2020, 0.5 MMboe were produced from the field.

The VAS Report estimates the remaining Reserves asat 31 December 2018 in the VAS field as follows:-

The VAS Report estimates the Contingent Resources asat 31 December 2018 in the VAS field as follows:-

The VAS Report estimates the Prospective Resources asat 31 December 2018 in the VED prospect as follows:-

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