40Capital expenditure ($m)Financial review continuedCapital expenditure 2011 was a capital intensive year, with the Group spending $162.0m, 9% less than the 2010 programme of $178.5m. The Group's main focus was to complete its Russian gas processing facility and well redevelopment activities for the Koshekhablskoye gas field in the southern autonomous Republic of Adygea. The Group spent $103.4m during the year to bring this project to fruition. At the end of 2011, the carrying value of our oil and gas assets in Russia totalled $246.2m. The remaining portion of capital expenditure spent during 2011 was $41.4m (2010: $56.1m) in Ukraine on the LPG facility and further drilling, $12.4m (2010: $9.8m) on drilling and exploration activity in Hungary and $4.8m (2010: $4.8m) on our other exploration interests in Slovakia and Bulgaria. The carrying value of our Ukrainian oil and gas assets at year end was $226.7m (2010: $214.3m).Specifically, in Ukraine, our investment in the LPG facility, where sales commenced in July, has proven to yield far more attractive economic returns than expected. For the second half of 2011, it contributed $10.9m to the Group's revenue. Additionally, we continued with our development drilling programme in order to exploit the Group's reserves as further described in the Operational Review.In Hungary, we embarked on an exploration programme at the end of 2010 in our Turkeve acreage, drilling six wells in the year. Only one of those wells was considered a commercial success and we have accordingly written off $6.7m in the year relating to the drilling and related costs. Additionally, disappointing results in Bulgaria have necessitated the write off of the remaining book value of the assets of $6.2m. The total of these comprises the $12.9m for impairment of oil and gas assets/write off of exploration costs in the consolidated income statement. The review of asset carrying values in the statement of financial position concluded that no other impairments were required.Operating cash flowThe Group continued to reap the rewards of past investments with cash generated from operations of $124.2m (2010: $146.3m). This was 15% lower than in 2010 due to $61.7m (2010: nil) of payments made in respect of Ukrainian rental fees. Absent this production tax increase, cash generated from operations would have been $185.9m, a 27% increase over the same figure of $146.3m in 2010.On 12 January 2012, the Ukrainian government reduced the tax applicable to oil production decreasing it by 30% on a gross per barrel basis. This brought a welcome improvement to the Group's forecast cash flow, albeit minor in light of the level of our oil production in Ukraine. The overall production tax burden for the Group will remain significantly higher than in prior years thereby rebasing Group profit and cash flow.Financing cash flowIn the first half of the year the Group raised funds through entering into a prepaid swap arrangement with Credit Suisse and drew cash of $49.5m after expenses in June 2011. A portion of the proceeds ($9.5m) was deposited in a debt service reserve over which Credit Suisse has security and which is restricted exclusively to pay amounts due under the facility. The remaining proceeds were applied towards the completion of the redevelopment of the Koshekhablskoye field in south west Russia. Including principal repayments due, swap payments and financing costs, the net cash generated from financing activities (excluding dividend payments) was $29.8m (2010: $58.4m). Financial instrumentsThe Group employs a number of financial instruments to manage the liquidity associated with the Group's operations. These include cash and cash equivalents, together with receivables and payables that are typical and arise directly from our operations. Separate and apart from these, the main financial instrument of the Group is the Credit Suisse facility mentioned above. Ukraine $41.4mRussia $103.4mHungary $12.4mOther $4.8m$162.0mNet cash generated from operating activities ($m)070809101199.0117.7126.5126.5119.918%>
JKX Oil & Gas plc Annual Report 201141At a glance01-17Board statements18-23Operational review24-36Financial review37-47CSR review48-61Directors' reports62-83Financial statements84-136The repayment is structured over an 18 month period and commenced in October 2011 with full repayment due to occur in December 2012. Repayments are straight line at $3.3m per month. At year end, gross borrowings* stood at $40.5m (2010: nil). There was a zero coupon rate on the outstanding balance due; however, the overall finance charge to JKX is the cost of the related oil price hedge on 36,000 bbl/month at $94/bbl up to a Urals Med price of $130/bbl. Urals Med prices in excess of $130/bbl are excluded from the calculation of the monthly payment due to Credit Suisse and any benefit of such prices is solely attributable to the Company's account. In addition we are still required to settle the Ukrainian production taxes on the oil production for the hedged barrels without realising any benefit of the current market price of hedged oil above $94/bbl.As the oil price increases from $94/bbl our effective finance charge and payment to Credit Suisse increases; for every $1 increase in the average Urals Med oil price above 1236794/bbl,1215112145monthly finance charge increases by $36,000. LIFE average Urals Med oil price FRANKMORROWCOMPANY800.556.7688 term .of the 401.941.3900finance to www.date has been $110/bbl.frankmorrow.comfax:401.941.3810Med creative price ideas in at metals $since 90/1929bbl, $110/bbl and $120/bbl through to the end of the loan period the effective interest rate on the Credit Suisse loan over the 18 month period will be 5.7%, 23.8% and 34.3% respectively; clearly this is likely to place a strain on our cash resources in the near term.Total cashTotal cash (cash and cash equivalents plus restricted cash) closed at $28.9m comprising $19.1m (2010: $62.0m) unrestricted cash and $9.8 million of restricted cash, the majority of which is represented by the $9.5m debt service reserve for the prepaid swap facility with Credit Suisse. We also have in place a net $10.0m * Gross Borrowings is Borrowings gross of unamortised effective interest and arrangement fees.Cynthia DubinFinance Directorworking capital facility from Credit Agricole which comprises a gross facility of $15.0m but requires a cash deposit to match any facility used over $10.0m. The $33.1m decrease in total cash balances (cash plus restricted cash) is mainly attributable to the significant payments made for our property, plant, equipment and intangible exploration assets of $162.7m (2010: $172.8m), of which $105.4m related to our Russian redevelopment project. The continued increase in the cash requirements of our Russian project due to the schedule delays and the short-term repayment profile of the Credit Suisse finance used to meet the unplanned costs has been the largest contributing factor to the reduction in our cash balances during the year.Our total net cash used in investing activities of $164.2m (2010: $175.1m) was only partially funded by net cash generated from operating activities of $99.0m (net of corporation tax and interest payments of $25.2m) (2010: $117.7m) and net cash from financing activities of $32.4m excluding the movement in restricted cash (2010: $45.2m). We also incurred a foreign exchange loss on our cash of $0.3m (2010: $0.2m).Dividends paidDividends of $7.2 million (2010: $13.2 million) paid relate to the final 2010 dividend approved by shareholders at the AGM in June 2011. The reduction from the 2010 level is due to the passing on an interim dividend payment in relation to 2011. LiquidityOur immediate priority with our cash resources is to support realisation and operational risks in Ukraine and the nascent Russian operations.With the on-going cash require-ments of the Credit Suisse finance repayments through to the end of the year and delays experienced with our Russian production and related cash flow, in addition to restrictions over $9.8m of our cash balances, Group liquidity will be carefully managed. Despite the imminent start-up of our Russian plant, we do not expect our Russian operations to become net cash positive until 2013 and therefore we may have to delay some of the Group's planned capital expenditure in 2012, subject to additional financial resources; this includes the proposed multi-frac of well R103 in the Rudenkovskoye field. The Group intends to fund its future operating and capital expenditures through existing working capital, cash flow from operations and borrowings under its Credit Facility with Crédit Agricole. With our current low level of gearing we have a wide variety of options available to maximise our financial flexibility to support our operating and growth objectives. OutlookIn Ukraine and Hungary we expect the increased realisations from our oil and gas production achieved in 2011 to ease slightly through 2012 but to remain strong.In Russia, gas sales from the Koshekhablskoye field will commence imminently and the cash-intensive investment programme on this first phase is now complete. We expect to pay down our short-term borrowings during 2012 and see a strengthening of the Group's liquidity toward the end of the year and into 2013.