Financial review

Income statement

Total revenue decreased by 23% in 2016 to US$29.1 million (2015: US$37.7 million) as a result of to an approximate 20% decrease in gas prices and a 7% decline in the RMB/USD exchange rate year on year. Total sales volumes are stable year-on-year with revenue in 2015.

Sales volumes by channel in 2016 compared to 2015 were as follows:

  2016
bcf
2015
bcf
     
PNG 3 2.9
CNG - Industrial 0.1 0.1
CNG - Retail 0.4 0.5
Power 0.2 0.2

PNG sales volumes from our operated GSS area were 3% higher in 2016 than in 2015 as a result of the increase in new well connections during 2016 and the initial results from the compression upgrade. This activity is entirely aimed at increasing sales volumes from investments already made. Offsetting the increase in PNG sales from GSS, our share of sales volumes (47%) from GCZ was 16% lower than in 2015 reflecting the relative maturity of the GCZ area. The sales price per m3 achieved on GCZ is higher than that on GSS due to the higher compression ratio of sales-gas that means it can be directly injected into the main east-west gas pipeline. This modest price differential results in a decrease in total sales revenue with the effect of currency exchange.

CNG retail sales volumes in 2016 were lower than 2015 primarily due to the suspension of operations at the Zhengzhou Airport CNG station during the year. Operations at the station were suspended pending its relocation to a new site following a significant redevelopment of the airport campus.

Subsidy revenue has increased by 30% compared to 2015 as a result of the increase in rates compared to 2015. Subsidies are calculated at a flat rate based on sales volumes and hence are presented as a component of revenue.

Cost of sales has increased by 5% in 2016 to US$16.4 million (2015: US$15.5 million). Production processing and associated power cost are variable in nature, with other costs being relatively fixed in nature. The majority of the underlying items included in cost of sales are denominated in RMB. The depreciation of the RMB against the US Dollar during the year has not resulted in reduction in the reported cost of sales figure.

Selling and distribution costs were US$1.0 million (2015: US$1.6 million) and relate wholly to the retailing gas station sales segment. Selling and distribution costs comprise the costs associated with the operation of the CNG retail stations. The underlying costs are consistent year-on-year with eight stations in operation in both periods. The costs are incurred wholly in RMB with the decline in reported cost being almost entirely due to the depreciation of the RMB during the period and the suspension of service of the airport gas station.

Other administrative costs are US$3.4 million higher in 2016 at US$8.9 million (2015: US$5.5 million) due to the reduction of capitalisation of directly attributable costs as part of exploration and appraisal assets in the current year.

Liquidity and capital resources

The Group closed the year with US$7.3 million (2015: US$26.9 million) of cash on hand and US$2.0 million (2015: US$2.0 million) of restricted cash related to a performance bond given to PetroChina in relation to the Group’s exploration activities on the GGZ Block. During the year, US$8.5 million (2015: US$12.4 million) was generated from operations with US$10.5 million (2015: US$44.7 million) invested in the exploration and production acreage. The decrease in investment in exploration and production acreage is largely due to availability of the capital fund.

The cash used for debt service in 2016 is at the same level of 2015 reflects the interest paid in respect of the US$88.0 million bond entered in late 2014 and carrying a coupon of 10%, together with the convertible bond also taken out in late 2014, with principal of US$50.0 million and a coupon of 7%.

In December 2016, the group reached an agreement with the holder, GIC, to extend the maturity of the US$50 million convertible bond. Under the agreement, the Bond remains unsecured, has a revised coupon of 10% and a maturity date extended to 31 December 2020 (subject to a one-time redemption option exercisable by GIC on the current maturity). The Bond is convertible into ordinary shares at a conversion price of US$2.83 per share representing a 25% premium over the 13 December 2016 closing price. At final maturity of the Bond, GIC has the right to require the Company to purchase its conversion shares at a price based on the 90 day VWAP calculated as of 31 December 2020 and to be settled prior to 30 April 2021.

The Company is in discussions with Bond Trustee of the $88 million senior secured bonds and certain key bondholders regarding a request for certain waivers of its financial covenants. The 2015 Financial Statements did not include the Group's share of the CUCBM operated Shizhuang North Block ("GSN") transactions or operated Shizhuang South Block ("GSS") 1,388 wells' revenue, associated costs, resulting margins and EBITDA. In order to allow the Company to resolve completion of the CUCBM audit so that it will be able to give a final and conclusive statement of its results for the year to 31 December 2015, and deliver to the Bond Trustee the adjusted financial covenant ratios reflecting the audited figures, the Company has requested the Bond Trustee to convene a meeting of the bondholders to consider a waiver in respect of the Interest Coverage Ratio and the Leverage Ratio in each case for the reporting period ended on 31 December 2015 and 30 June 2016. The request is still in progress.

Asset additions

Total additions to upstream CBM assets in 2016 amounted to US$15.2 million (2015: US$45.4 million). Of the total additions, US$0.1 million (2015: US$3.3 million) related to capex additions in respect of the GCZ production block. Additions to exploration assets totalled US$10.5million (2015: US$42.3 million) primarily related to the GSS Block and GGZ. In 2016, due to the substantive nature of operations and the cash generation from GSS, a portion of this asset was transferred from exploration and appraisal assets to property plant and equipment. An amount of US$Nil million (2015: US$121.0 million) was transferred to property, plant and equipment in respect of GSS. On transfer to property plant and equipment the elimination of margin on test revenue was ceased and depreciation was recognised in respect of this area in accordance with the Group’s accounting policies.