EXALO Drilling SA was established in 2012 (as PGNiG Poszukiwania SA at that time) following consolidation of five companies– PNiG Kraków SA, PNiG NAFTA SA, PNiG JASŁO SA, PN “Diament” Sp. o.o. oraz ZRG Krosno Sp. z o.o. – providing onshore drilling and workover services as part of PGNiG Capital Group. During the NIK audit, EXALO Drilling SA had three daughter companies, including two outside Poland (n Ukraine and in United Arab Emirates) and seven foreign branches: in Kazakhstan, Pakistan, Libya, Uganda, Chad, Czech Republic and Slovakia. EXALO Drilling SA was the parent company of EXALO Drilling (GK EXALO).
Companies being part of EXALO Drilling SA struggled with problems related to the scale and effectiveness of foreign operations, the manner of managing foreign entities, performance of unprofitable contracts as well as formal and legal errors in the branches’ operations. An example is a subsidiary based in the United Arab Emirates which operated for many years and its organisational structure and mode of operations posed legal and fiscal risks. Although subsequent boards of directors of EXALO Drilling SA implemented changes to the company’s organisation, accounting and controlling to handle the said issues, supervision of the company’s operations in foreign markets was not fully effective or efficient. Part of identified problems remained unsolved until the end of NIK’s audit.
Due to a difficult economic situation and constantly aggravating market environment, EXALO Drilling SA was forced to take restructuring efforts under subsequent recovery programmes. Although they helped achieve most of the assumptions, the company’s financial results were improved only temporarily.
In 2016-2017 and from 1 January 2020 to 30 September 2020, the Capital Group EXALO Drilling suffered a net loss of over PLN 132.5 million in total. The Group’s activity in those periods was unprofitable (profitability ratios for those periods were negative). In 2016–2019, the share of foreign markets in the revenue of the capital group was falling systematically: in 2016 it was 35%, in 2017 it was 26%, in 2018 it was 21% and in 2019 it was only 17%.
The company’s condition was affected by failures in the foreign expansion. In 2018, three foreign branches of EXALO Drilling SA: in Georgia, Lithuania and Ethiopia concluded their operations. They did not conduct any drilling, reconstruction or workover since 2013 and 2014.
Those branches were liquidated since there were no prospects for continued operations. During the audit, works were pending to deregister and liquidate branches: in Egypt, Uganda, Slovakia and Libya.
In 2015-2018, they key foreign markets where GK EXALO operated were: Pakistan and Kazakhstan, where the company had its branches and Ukraine, where activities were conducted by the subsidiary Exalo Drilling Ukraine LLC. In 2019, the key markets were Pakistan and Chad, where a new long-term contract for drilling works was signed, and also Ukraine. Also in 2019, EXALO Drilling SA did not perform any contract in the Kazakhstani market, which was related to the market situation in that area (it was among others influenced by: a significant drop in the number of tenders for new drill holes, increased competition related to the expansion of Chinese companies as well as relatively low oil prices).
In 2015–2020 (until the third quarter), most foreign branches incurred losses. Exalo Drilling Ukraine LLC generated net profit only in 2019, and the Pakistani branch in 2018. The net profit of the Kazakhstani branch was dropping successively from 2016, whereas in 2017 and 2019 and in three quarters of 2020 it brought about losses. In 2020, activities taken in foreign branches aimed mainly at minimising operating costs. In case there were no contracts, the branch closure procedure was planned to be started in 2021.
NIK identified significant irregularities in the operations of the Kazakhstani branch EXALO Drilling SA. They were also found in other markets of EXALO Capital Group. According to NIK, financial consequences of irregularities identified by NIK in foreign operations of EXALO Drilling SA exceeded PLN 21.5 million.
NIK also identified other significant problems in the operations of the Capital Group EXALO Drilling SA. The mode of operations of its subsidiary based in the United Arab Emirates, as well as supervision exercised by its owner posed tax risks to all entities related to that company. According to NIK, those risks resulted from non-transparent operations of that entity, not fully clear cash flows and the company management mode.
EXALO Drilling SA did not properly supervise personnel issues of the Kazakhstani branch. As a result, in two different periods there were two and three persons respectively hired as the branch directors. A similar situation occurred in the position equivalent to CEO in the company in the United Arab Emirates.
PGNiG SA properly executed its rights attached to shares of EXALO Drilling SA. It did not help the company develop and adopt its long-term strategy or permanently improve its financial standing. Actions taken with regard to that company were mostly of ad hoc nature which was inadequate, considering its structural problems.
Supervision exercised by PGNiG SA over EXALO Drilling SA was compliant with applicable law. However, considering problems of the company and its subsidiaries outside Poland, it was not fully effective. For instance, it failed to eliminate faulty mechanisms of project management used in EXALO Drilling SA, which resulted in non-profitable contracts as well as formal and legal errors in the operation of EXALO Drilling SA and its foreign branches. As a consequence, the company had to pay high fines.
Investor’s supervision exercised by PGNiG SA over EXALO Drilling SA was not fully effective. Efforts of PGNIG SA did not help define a coherent vision of PGNIG Capital Group’s activity in foreign markets or establish the degree and ways of that involvement.
Besides, PGNiG SA did not take any specific measures towards EXALO Drilling SA due to a contract with a Kazakhstani law company, which caused a significant loss. PGNiG SA was aware of the circumstances in which the contract was signed and performed. Also, the company knew about the loss incurred by Exalo Drilling SA. Nevertheless, it did not take any measures related to corporate and/ or compensation responsibility on part of the board of directors of EXALO Drilling SA.
In view of the audit findings, NIK started a detailed analysis to evaluate the purpose of notifying other competent authorities about the said irregularities.
Recommendations
to EXALO Drilling SA to:
- take legal actions against persons responsible for losses incurred by EXALO Drilling SA because of signing improper contracts;
- intensify measures started in 2020 to lead to final liquidation of Oil Tech International F.Z.E. as soon as possible;
- consider the necessity to keep the register of powers of attorney to sign contracts;
- take measures to ensure the employees handling issues of foreign branches of EXALO Drilling SA, comply with tax and ecological regulations applicable in countries where the branches operate;
- ensure effective management control over foreign branches to avoid breaches of law applicable in those countries;
- the board of directors of EXALO Drilling SA should monitor recovery proceedings towards the Kazakhstani company.
to PGNiG SA to:
- work out internal solutions to evaluate the causes of damages in PGNiG SA subsidiaries in view of using mechanisms aimed at pursuing claims to repair them;
- use all instruments as part of investor’s supervision specified in corporate documents of PGNiG SA towards EXALO Drilling SA to prevent wrong decisions of the company board of directors exposing the company to financial losses.
