2017 Financial Statements

Rusneftegaz has elected to publish its full consolidated financial statements for 2017. These results were prepared in accordance with International Financial Reporting Standards, otherwise known as IFRS, and have been audited by Deloitte. Foremost, the directors can report a positive financial performance for the year. A synopsis of which is as follows:

• An increase in revenue reported of 13.9%, rising from $441.0m in 2016 to $502.3m in 2017, with operating profit also escalating by 22.4%, from $205.4m to $251.4m.
• Total electricity production rose from 10.0 TWh to 10.5 TWh, and total oil production also increased from 6.03m barrels to 6.16m barrels.
• The total value of reported assets and liabilities has risen by 16.5%, from $1 085.2m to $1 265.7m, with a notable 16.5% increase in property, plant and equipment from $987.7m in 2016 to $1.15bn in 2017.
• During the year the Group made investments of $179.4m in new assets, cumulatively, $541.1m has been endowed on property, plant and equipment since the beginning of 2015. 
• As of 31 December 2017, all major loans and borrowings have been settled, with the only outstanding payments being current payables.

 
At the end of the 2017 financial year, Rusneftegaz can report a significant 25.4% increase in pre-tax profit from $178.2m to $223.4m. Such accruals are largely attributable to a substantial 13.9% rise in revenues recorded, from $441.0m in 2016 to $502.3m in 2017. Material growth is recorded in all operations, with revenues rising in the petroleum division by 27.9% and in the electricity division by 5.9%. Such results are due to an upsurge in levels of production and rises in commodity prices during the period, offsetting the increased costs of business during the year, which rose 6.1% from $263.4m to $279.5m. One of the main factors leading to the production increase is the investments made in infrastructure upgrades during the past three years, with the Group financing an additional $179.4m of assets during 2017.
 
Foremost, of Rusneftegaz's reported revenues during the period, $206.0m was accredited to petroleum operations, an increase of $44.9m year-on-year, with the remaining $296.4m associated with the electricity division of the organisation, an increase of $16.5m from $279.9m from 2016. Moreover, $89.8m of the operating profit made during 2017 was a result of petroleum sales with the remaining $143.3m accredited to electricity contracts. Likewise, a total of 54.8% of the total costs recorded, or $153.1m, were accountable to electricity generation and 41.6%, or $116.2m, ascribed to petroleum production. The remaining 3.7%, or $10.2m, is derived from head office and other unallocated expenses. Accordingly, the Group's investments in property, plant and equipment are also split between $19.4m of new oil and gas equipment, $159.8m of electricity infrastructure, and a further $203 thousand of assets being purchased in unallocated sectors. 
 
During the period, Rusneftegaz reported an increase in costs of goods sold of 6.5% from $235.6m in 2016 to $251.0m in 2017. The causation of the rise is attributed to escalating mineral extraction tax payments, the total of which rose 99.5% during the period from $21.8m to $43.6m, or from 857 Rubles per barrel with certain exemptions to 919 Rubles per barrel. Moreover, it can also be referenced to the 16.4% increase in depreciation, depletion and amortisation recorded during the period, which escalated from $45.7m to $53.1m. However, both of these rises are considered an indirect consequence of the Group's operations and investments, with petroleum tax rises being constituent with operating in the industry, whilst depreciation, depletion and amortisation have risen proportionately to investments made in assets during previous years.
 
Such investments can be attributed to improved production rates, with the total annual electricity output increasing by 5.0% from 10.0 TWh to 10.5 TWh. Higher rates of depletion, which increased by 1.8% from $16.7m to $17m, can also be accounted for due to increased oil production for the year, which totalled 6.16m barrels. This is a rise of 4.8% from 6.03m barrels in the prior year, with the average daily production also ascending from 17 747 in 2016 to 17 789 in 2017. In the last financial year, all the electricity and petroleum produced was generated, extracted and sold to customers in the Russian Federation, whereas in 2016 whilst all electricity and petroleum was generated and or extracted domestically, $10.9m of all revenue was earned from foreign sales. As a result, no export duties were paid during 2017, compared to $2.3m in 2016. 
 
As well as export duties, the majority of Rusneftegaz's reported costs also fell during the period. The increase in the effectualness of assets, due to investments made in the previous three years, has resulted in a 52.8% year-on-year fall in maintenance costs and a 22.6% decline in impairment compared to 2016. In the electricity division, the $274.5m investment made last year has resulted in a reduction in fuel and water used thus saving the division $3.5m and $286 thousand respectively, despite commodity price rises. Management has also been able to conserve on rents, with a 29.0% fall year-on-year, and on labour costs, which declined 1.3% from 2016. Overall, the Group amassed a cumulative $14.1m of efficiency savings to offset the rises in other expenses. 
 
Moreover, during the period operating expenses fell by 6.6% from $10.3m to $9.6m, despite a 20.3% rise in transportation costs and an increase of 21.4% in transmission costs. Total administrative expenses also declined by 3.5% from $9.3m to $9.0m, largely due to a 22.6% fall in professional fees, and declines in insurance and head office maintenance costs. Rusneftegaz did, however, report an uplift in salaries paid, rising by 4.5% from $5.4m to $5.6m, which can be attributed to annual pay rises for long-term personnel in January 2017. As well as expenses, the Group also reported income from accrued interest, which increased net of interest expense by 7.6% year-on-year to $540 thousand, and also from derivatives, which rose by 81.2% year-on-year to $129 000 respectively. Financial instruments pertaining from derivative contracts, such as foreign currency forward contracts and commodity price swaps, are now valued at $916 000 in the 2017 statement of financial position, an increase from $787 000 in 2016.
 
As well as financial instruments, the value of all Rusneftegaz's non-current assets increased during 2017, including intangibles which rose in value by 2.1% from $141 thousand to $144 thousand. This growth was due to currency conversion differences rather than any investments made during the period, whereas rises in the value of property, plant and equipment from $987.7m to $1.15bn can be mostly attributed to expenditure on assets, with currency conversion differences and revaluation being secondary factors. Aggregated, this has led to a 16.5% inflation in the value of property, plant and equipment, with $32.3m of currency conversion differences being reported in the consolidated financial statements, a change from $179.4m in 2016, including a foreign exchange expense of $10.0m, up 22.5% from $8.2m in the prior period.
 
Rusneftegaz also maintains control over current assets worth $113.4m, rising 17.5% from $96.4m in 2016, including $24.5m of inventories, $20.5m of receivables and $5.5m of assets-held-for-sale. This is comparable to the $15.5m of inventories and $10.2m of receivables reported in 2016, with $5.5m of assets-held-for-sale remaining unchanged. To continue, the Group also reported a total of $62.8m of cash and cash equivalents, a fall of 3.7% from $65.3m, on the reporting date. During the financial year, the Group also reported a total cash flow from operating activities of $214.4m, a fall of 5.9% to $227.9m.
 
For earnings attained during the 2017, Rusneftegaz accumulated an income tax bill of $48.1m, compared to $38.6m in the previous year. The income tax rate charged remained unchanged at 20.0% and is not expected to be adjusted in 2018, although this comparatively corresponds with 9.6% of all revenue earned during the period, up from 8.7% in 2016. This incongruity is attributable to differences in reporting between IFRS and tax laws, and thus deferred tax assets of $183 thousand and deferred tax liabilities of $20.7m are recognised in lieu of the disparities between depreciation reported in the consolidated financial statements and in the Group's tax returns. Correspondingly, the Group also reported $172 thousand of deferred tax assets and deferred tax liabilities of $18.9m in 2016. Furthermore, the organisation also paid other taxes of $4.9m, which are classified as taxes that are not income tax, mineral extraction tax or export duty, a rise from $4.2m in 2016, albeit other taxes are recognised as a component of cost of goods sold rather than as a constituent of income tax.
 
Presently, Rusneftegaz foresees the majority of its future growth deriving from electricity production, and forecasts strong revenues in the electricity generation division. This is largely as a result of the investments made during previous years; therefore the Group intends to concentrate invested funds on increasing electricity revenue. Likewise, the current policy of maximising the investment of earnings into useful assets is to be continued into 2018, as such policies have and will continue to result in greater profits in the future, although adequate levels of liquid cash will still be maintained. However, due to the continuing volatility in commodity prices and the political actions against both the Russian Federation and the oil and gas industry, there is a degree of uncertainty in petroleum revenue forecasts. Earnings from the oil and gas division are also expected to increase exponentially with a potential stabilisation in the price of oil and new efficiency measures deployed by the Group.