Cue Energy Resources Limited A.B.N. 45 066 383 971 Level 21 114 William Street Melbourne Victoria 3000 Australia Telephone: (03) 9670 8668 Facsimile: (03) 9670 8661 Email: mail@cuenrg.com.au Website: www.cuenrg.com.au TO : Company Announcements Office 10th Floor 20 Bond Street Sydney NSW 2000 DATE : 29 September 2011 PAGES (including this page): 85 FROM : Andrew Knox RE : Annual Report for 2011 Attached please find Cue Energy Resources Limited's release with respect to the above mentioned. Yours faithfully Andrew M Knox Public Officer AnnuAl RepoRt 2010/11 CUE ENERGY RESOURCES LIMITED InSIde this report About Cue Energy Chairman’s Letter Corporate Directory Results in 2010/11 Highlights in 2010/11 Joint Venture Interests 1 2 3 4 5 6 8 Chief Executive Officer’s Review 16 Corporate Governance Statement 22 Annual Report Of Directors 33 Independence Declaration 34 Directors’ Declaration 35 Financial Information 76 Independent Audit Report 78 Shareholder Information InSIde this report HIGHlIGHtS in 2010/11 Corporate Results Revenue of $59.67 million Net profit of $19.1 million Cash increased to $52.8 million Debt reduced to AUD5.1 million Papua New Guinea LNG project development commences SE Gobe gas sale negotiations nears completion Indonesia Farmed into Mahakam Hilir PSC, onshore Kalimantan Oyong oil production continues significantly above budget Full year of Oyong gas production Wortel development commences and remains on schedule for completion in December 2011 New Zealand Manaia -1 extended reach well in production 3D and 2D Seismic completed in PEP51313 2D Seismic completed in PEP51149 Australia WA-389-P seismic completed by Woodside Farmout of WA-359-P and WA-409-P to Apache 3D Seismic in WA-359-P and WA-409-P completed by Apache Sale of 20% interest in AC/RL7 to PTTEP Cue Energy Resources Limited Annual Report 2011 1 CoRpoRAte directory Directors Solicitors R.G. Tweedie LL.B - Chairman L. Musca LL.B S. Koroknay BE(Hons) Chief Executive Officer M.J. Paton B.SC (Hons), MIChemE Chief Financial Officer/ Company Secretary A.M. Knox B.Com Registered Office AUSTRALIA Level 21, 114 William Street Melbourne, Victoria 3000 Australia Telephone: + 61 (3) 9670 8668 Facsimile: + 61 (3) 9670 8661 Email: mail@cuenrg.com.au Website: www.cuenrg.com.au ABN 45 066 383 971 Stock Exchange Listings AUSTRALIA Australian Securities Exchange Ltd 525 Collins Street Melbourne, Victoria 3000 Australia ASX Code: CUE NEW ZEALAND New Zealand Exchange Limited Level 2, NZX Centre, 11 Cable Street PO Box 2959 Wellington, New Zealand PAPUA NEW GUINEA Port Moresby Stock Exchange Cnr of Champion Parade & Hunter Street Port Moresby, Papua New Guinea UNITED STATES OF AMERCIA OTCQX OTC Markets 304 Hudson Street 3rd Floor New York, NY 10013-1015 Allens Arthur Robinson 530 Collins Street Melbourne, Victoria 3000 Australia Auditor PKF Level 14, 140 William Street Melbourne, Victoria 3000 Australia Bankers National Australia Bank Limited Level 4, 330 Collins Street Melbourne Victoria 3000 Australia ANZ Banking Group Limited 91 William Street Melbourne Victoria 3000 Australia Investec Bank (Australia) Limited Level 31, The Chifley Tower 2 Chifley Square Sydney NSW 2000 Australia ASB Bank Limited PO Box 35, Shortland Street Auckland 1140 New Zealand Share Register AUSTRALIA Computershare Investor Services Pty Ltd Yarra Falls, 452 Johnston Street Abbotsford, Victoria 3067 Australia GPO Box 2975 Melbourne, Victoria 3000 Australia Telephone: 1300 850 505 (within Australia) or +61 (3) 9415 4000 (outside Australia) Email: web.queries@computershare.com.au Website: www.computershare.com PAPUA NEW GUINEA Computershare Investor Services Pty Limited C/- Kina Securities Level 2, Deloitte Tower Douglas Street (PO Box 1141) Port Moresby, National Capital District Papua New Guinea Telephone: +67 (5) 308 3888 Facsimile: +67 (5) 308 3899 2 Production Income 20 Gross Profit from Production 20000 20 ReSultS in 2010/11 production income $52.5M Production Income 60 50 40 30 60 10 50 0 2007 2008 2009 2010 2011 40 30 20 10 0 60 50 Cash Balance Gross profit from production $43.4M 2007 2008 2009 2010 2011 30 40 2007 2008 2009 2010 2011 50000 60 10 50 0 40000 40 30000 30 20000 20 25 10000 10 20 0 0 Production Income Gross Profit from Production 60 50 40 30 20 10 cAsh BAlAnce up $52.8M 2007 2008 2009 2010 2011 0 50000 40000 30000 20000 10000 0 2007 2008 2009 2010 2011 Gross Profit from Production Cash Balance After Tax Net Profit 30000 25000 20000 15000 10000 5000 0 -5000 -10000 -15000 -20000 -25000 -30000 2007 2008 2009 2010 2011 50000 60 50 40000 40 30000 30 20 15 25 10000 30000 25000 20000 15000 0 10000 5000 0 -5000 -10000 10 -15000 30000 -20000 5 25000 -25000 20000 -30000 15000 0 10000 5000 0 -5000 -10000 -15000 -20000 -25000 -30000 10000 50000 10 0 40000 0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 30000 After Tax Net Profit 20000 After tAx profit $19.1M 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2008 2009 2010 2011 Production Income Gross Profit from Production Cash Balance 20 After Tax Net Profit 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Cash Balance 15 After Tax Net Profit 10 25 20 30000 5 25000 20000 15000 0 10000 5000 Cue Energy Resources Limited Annual Report 2011 3 2008 2009 2010 2011 15 0 -5000 -10000 10 -15000 -20000 5 -25000 -30000 0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2008 2009 2010 2011 2008 2009 2010 2011 60 50 40 30 20 10 0 60 50 40 30 20 10 0 25 20 15 10 5 0 About cue enerGy Cue Energy Resources Limited is an oil and gas exploration and production company with a focus on SE Asia and Australasia. We have petroleum assets in Papua New Guinea, Indonesia, New Zealand and Australia. The company has continuously grown over recent years through a mix of acquisitions and discoveries. It is Cue Energy’s objective to develop a robust and substantial E & P company with a focus on the Asia Pacific region and market capitalisation in excess of A$1 Billion through: - maximising value of existing assets - building organisational capability - aggressively pursuing new E & P assets - developing a balanced portfolio of exploration, development and production opportunities - increasing stakes in assets to 30-50% rather than current levels of 20-40% and take up operatorship as required - actively pursuing value accretive mergers and acquisitions 4 JoInt ventuRe InteReStS INDONESIA AUSTRALIA Sampang PSC Oil, Gas Production Santos* SPC Cue(i) 45% 40% 15% Mahakam Hilir PSC Exploration SPC* Cue 60% 40% PAPUA NEW GUINEA 40.149650% 36.35974% 15.921718% 5.568892% 3.285651%) 2.0% PDL 3 Oil Production SHP Oil Search Santos* Cue (SE Gobe Unit PRG PRL14 Gas Resources Oil Search* Murray Cue PRL9 Gas Resources Oil Search* Santos Cue 62.556% 26.497% 10.947% 45.106% 40% 14.894% Carnarvon Basin Permits WA-389-P Exploration 65% Woodside* Cue 35% WA-359-P Exploration 40% Apache* 30% Cue 28.5% Moby Oil & Gas Exoil 1.5% WA-360-P Exploration 50% Braspetro BV* 25% MEO 15% Cue Rankin 10% WA-409-P Exploration 40% Apache* 30% Cue 28.5% Moby Oil & Gas Exoil 1.5% WA-361-P Exploration MEO* Mineralogy Cue 50% 35% 15% NEW ZEALAND Maari Oil Field PMP 38160 Oil Production 69% OMV* 16% Todd 10% Horizon Cue 5% PEP 51149 Exploration Todd* Cue AGL PEP51313 Exploration 50% Todd* 30% Horizon 20% Cue 61.425% 20% 18.575% (i) 8.181878% in the Jeruk field. * Operator Cue Energy Resources Limited Annual Report 2011 5 CHAIRMAn’S letter The past year was another good year for Cue in an increasingly uncertain business environment. Our net profit after tax for the year was $19.1 million down from $27.5 million for 2010. This was a creditable performance given the large fluctuations in the Australian dollar to US Dollar exchange rate which significantly impacted our Australian dollar earnings. The result was also significantly affected by the accounting treatment of our oil hedging activities (we hedged 10,000 barrels per month of our production at a price of USD98 per barrel) and the write off of our T/37P and T/38P exploration activities in the Bass Basin. The company’s gross profit was $43.4 million which is comparable to the 2010 result of $43.6 million. Oil production volumes were down from 590,000 barrels to 501,000 barrels but increased oil prices counteracted this fall to a large extent. Gas volumes sold were up to 2.9 BCF from 2.1 BCF in 2010 as a consequence of a full year of gas export from the Oyong field in Indonesia. The company’s balance sheet continues to improve. The company’s cash balance increased with $52.5 million on hand on 30th June. Maari Project debt continued to be paid off with an outstanding balance on 30th June of only AUD5.1 million. We continued to divest non-core assets and sold our 20% interest in the Cash/Maple gas field in AC/RL7 in the Timor Sea to PTTEP Australia for USD8 million. In New Zealand the Maari and Manaia production was impacted by a number of electrical submersible pump failures. Workovers have been performed to replace the failed pumps and at the time of writing the reported pump reliability appears to have improved. 6 Further reserves are being evaluated in the Maari Mangahewa and M2A sands and in the Manaia Moki sands which could contain up to a further 40 million barrels of oil. Drilling activities and facility upgrades are being planned over the next 12 months with a view to drilling additional producers and water injectors in the summer of 2013/14. Cue continues to explore in the Taranaki Basin. In permit PEP 51313 we acquired a new 3D seismic survey over the Matariki trend and a 2D seismic survey over the Te Whatu feature. In permit PEP 51149 we acquired 150 km of conventional 2D marine seismic data, 29 km of conventional land data and 60 km of shallow water “transition zone” data over the Pungaheru feature. All of this data is currently being interpreted to mature potentially drillable prospects. In Indonesia the Oyong field continues to outperform expectations with oil and associated gas exports above forecast. The Wortel field development is well advanced, is on schedule for completion in December this year and is expected to be completed within budget. The addition of Wortel will increase gas production from the Sampang PSC to around 90 mmscfd. Realised gas price for Wortel gas has been negotiated with Indonesia Power at Grati at a significantly higher level than that of Oyong. Cue continues to work closely with the Operator of the Sampang PSC Santos to try and commercialise static resources in the permit such as the Jeruk discovery. During the year Cue farmed in to the Mahakam Hilir permit in the Kutei basin. Cue will be in Joint Venture with Singapore Petroleum Company Limited (a subsidiary of Petrochina). Cue will pay 40% of the back costs and 40% of the costs of drilling two exploration wells in return for 40% equity in the permit. The Naga Selatan and Naga Utara prospects to be drilled in fourth quarter 2011 are expected to contain around 20 million barrels of recoverable oil and 80 billion cubic feet of recoverable gas respectively. The prospects are relatively low risk as they are onshore, there are numerous oil and gas seeps in the vicinity and the prospects are on trend with other discoveries within the basin. There are existing gas pipelines and processing infrastructure within close proximity of the permit and so gas may be rapidly monetised by sale of gas to local power stations or via the Bontang LNG facility. We are very pleased to be involved in this significant exploration opportunity with one of our major shareholders. In Papua New Guinea, SE Gobe oil production continues to exceed expectations. Construction of the pipeline which is to be run from the gas fields in the Southern Highlands to the new LNG terminal in Port Moresby is under construction. A project is under way to build a gas processing plant to process the SE Gobe associated and gas cap gas to pipeline specification so that it may be used to commission the LNG terminal. A gas sales agreement for the SE Gobe gas is being finalised and first gas is expected to flow in June 2012. This will represent a significant step forward in the commercialisation of Cue’s static gas resources in PNG. The Barikewa gas field is adjacent to the PNG LNG gas pipeline and Cue is working with the operator Oil Search to identify a way of monetising this resource. Once a commercial export route has been identified further appraisal drilling of Barikewa will be initiated. In the Carnarvon basin in WA 389-P Woodside (65% and operator) completed the Movida 3D seismic survey and we expect an announcement to drill a well in the permit in the near future. We expect that drilling will commence in 1Q 2012. This will be very exciting for Cue with the potential for us to own 35% of a multi trillion cubic foot gas resource with the operator being committed to early commercialisation via its Pluto LNG facility. In WA 359-P and WA409-P Apache (40% and Operator) acquired the Zeebries 3D seismic survey. Drilling decisions in these permits are also expected in 2012. All in all 2011 continued to create a solid platform for further growth of our company. Our forward production profile will continue to provide healthy cash flow to pay for the company’s exploration and field development activities for the foreseeable future. Additional production is expected to come through exploration success and commercialising static resources in our existing asset portfolio. Additionally we are aggressively seeking further exploration and production opportunities to continue our growth. Finally, Bob Coppin our long serving CEO retired after 16 years service with Cue. The Board of Cue thanks Bob for his contribution to the growth of the company. The Board also welcomes Mark Paton our new Chief Executive Officer. Mark has had a long and distinguished career in the oil and gas industry with BP in the North Sea and Middle East, BHP Petroleum in Northern Australia and AGR Asia Pacific (formerly Upstream Petroleum). Mark and his partners built Upstream Petroleum (a significant Australian oil and gas service company from 1997 to 2006) when it was sold to the AGR Group of Norway. The application of Mark’s oil and gas expertise and proven entrepreneurial track record bodes well for Cue’s future growth. The Board wishes Mark every success in his new role. Richard Tweedie Chairman 29th of September 2011 Cue Energy Resources Limited Annual Report 2011 7 CHIef exeCutIve offICeR’S review This is my first annual report as CEO of Cue, having taken over from Bob Coppin in February who retired after 16 years with the company. Bob’s legacy was a solid company with healthy cash flows from three oil and gas producing assets, over $40 million in cash and only USD8 million in debt. The company also had excellent exploration prospects in New Zealand and the North West Shelf of Australia with the near term exploration commitments being paid for by others as part of farm-out processes. The company had very low overheads employing just seven full time employees. This has established a company which provides an excellent platform for further growth. In the first few months in the job I have reviewed Cue’s current portfolio of assets and confirmed our forward strategy and focus. Going forward, Cue will continue to focus on Australia, New Zealand and SE Asian conventional oil and gas resources and our range is currently set as approximately an eight hour flight from our Melbourne headquarters. Applying all of the latest exploration tools at our disposal improves the chances of a discovery, nevertheless, irrespective of how much work is done before drilling the risk cannot be reduced to zero. Typically, a good exploration prospect will have a chance of success in the range of one in four to one in eight but in the success case will provide a material addition to the company’s reserves and cash flows. Hence, in order to improve the chances of growing 8 To date Cue has owned a small portion of producing assets in the range of 5 to 40% of the equity in a joint venture. In the future you will see Cue holding a larger percentage of the equity in our assets. As this percentage increases Cue will be more likely to be asked to operate the asset on behalf of the joint venture. To enable us to meet this challenge we are already investing in the key personnel and management systems required to be a successful operator. My background is a production and projects background and in my previous role built a company that established itself as a service provider operating assets on behalf of small oil companies. Now to review the year just past. FY 2011 was a year of consolidation after the rapid growth of the company though the development and first oil production from Maari in FY2010. Oil production volumes were down from 589,978 barrels in 2010 to 500,923 barrels in 2011. This was partly due to the natural decline of the SE Gobe and Oyong reservoirs but also due to unreliability of the electrical submersible pumps (ESP) in the Maari field. A series of workovers to replace ESP’s were successfully executed and we are hopeful that we will see improved pump reliability next year. The decline in Cue’s total oil production was offset by increased gas production which was up from 2.1 BCF in 2010 to 2.9 BCF in 2011 and the increase in oil price. Our gross profit from production was similar to 2010 at $43.4 million. Net profit after tax reduced by around 30% from $27.5 million to $19.1 million. The majority of the reduction was as a result of one off impairment charges from T/37P and T/38P exploration write offs, exchange rate losses and accounting treatment of oil hedging activities. Debt continued to be paid off with the outstanding balance being only AUD5.1 million on 30th June. The company’s cash resources continue to grow with A$52.8 million on the balance sheet as at 30th June 2011. We also cleared the decks and divested of our underperforming or non strategic assets in 2011. We withdrew from the T/37P and T/38P permits in the Bass Basin as we believe these permits to be no longer prospective and wrote off the exploration expenditure associated with these permits. We also sold our 20% interest in the Cash/Maple field in AC/RL7 to PTTEP Australia for a consideration of USD8 Million. Cue through exploration we shall have to in future participate in a statistically significant number of wells. Last year Cue was involved in just one exploration well called Artemis, which was a multi trillion cubic feet prospect on the North West Shelf. Unfortunately this was a dry hole. In future my aim is to increase the number of exploration wells that Cue participates in, with a target of participating in approximately one well per quarter over the next few years. This should provide us with the opportunity to participate in material discoveries. We have already farmed in to the Mahakam Hilir permit in the Kutei basin, onshore Kalimantan and there are two near term drilling activities planned on the Naga Selatan and Naga Utara prospects with mean prospective resources of the order of 20 million barrels of oil and 80 billion cubic feet of gas. We have also reviewed a large number of farm-in opportunities and new acreage releases in our focus area. Next year we can look forward to firm drilling activities in WA-389-P and likely drilling activities in WA-359-P or WA-409-P on the North West Shelf and possible drilling activities in New Zealand permits PEP51313 and PEP51149. We are working hard to build our exploration asset portfolio to create a pipeline of exploration opportunities in future years. Exploration will be funded from net cash flow and farmout processes where possible. In addition to increasing exploration activities, Cue will seek to acquire proven undeveloped resources and producing assets where we can see incremental value to be added through doing so. This may be achieved through direct acquisition of assets or through merger with or acquisition of companies which are value accretive to Cue shareholders. We will seek opportunities where Cue has a competitive advantage through our technical knowledge of the target assets or the relationships that we have within the region. An oil and gas exploration company is a business going out of business unless it continues to replace the reserves it produces, exploration provides the best returns but is accompanied with the highest risks. Cue will be investing a portion of its cash flows in acquiring reserves which have already been discovered but require further appraisal and development. Whilst this may not yield the highest return it provides a more certain path for growth of the company. Within our existing portfolio of assets there are proven undeveloped resources such as the Maari Mangahewa, M2A sands and Manaia Moki sands in New Zealand, Barikewa, Cobra and Iehi in Papua New Guinea and Jeruk in Indonesia which we will endeavour to move from contingent resources to reserves in the coming year. To this end we are working closely with OMV, Oil Search and Santos as operators of these assets to try to find a commercial development approach and increase our production. The development of the PNG LNG project is a possible key to commercialising our static gas resources in PNG. Cue Energy Resources Limited Annual Report 2011 9 pApuA new GuIneA Production Cue’s share of oil production from the SE Gobe field for the financial year was 30,998 barrels (2010: 40,444). The lower volume reflects the expected decline rate for the field. Oil Search, the operator, has estimated field oil reserves at 31 December 2010 to be: Million Barrels of Oil (Gross) Ultimate Recovery Cumulative Production to 31 Dec 2010 Remaining to be produced (Cue Share) Proved (1P) Proved + Probable (2P) Proved, Probable & Possible (3P) 44.185 45.244 47.175 41.401 41.401 41.401 2.784 (0.092) 3.843 (0.127) 5.774 (0.191) These reserves are consistent with SPE guidelines and definitions. The Gobe and SE Gobe gas cap is planned to be blown down to the PNG LNG pipeline (subject to finalising the gas sales agreement) thus commercialising this static resource. The gas will be used as commissioning gas for the LNG processing plant in Port Moresby and hence will be the first gas to be exported. First gas export and commissioning of the PNG LNG facilities is expected in mid 2012. Oil Search are currently installing the processing facilities necessary to process the Gobe field’s associated gas to achieve the gas specification required as a feedstock to the LNG plant. The total volume of gas reserves which could be produced to the PNG LNG plant is expected to be 175.9 BCF over approximately 10 years. OCIP (MSTB) Solution OGIP (BCF) Free OGIP (BCF) Total OGIP (BCF) Ultimate Recovery (BCF) Remaining to be produced (BCF) (Cue Share) 1,000 137.0 91.9 229.0 144.3 144.3 (3.760) 1,300 1,500 152.1 167.6 96.3 100.6 248.4 268.2 175.9 211.2 175.9 (4.584) 211.2 (5.504) Proved (1P) Proved + Probable (2P) Proved, Probable & Possible (3P) (1) OCIP is original condensate in place. (2) Ultimate recovery is Raw Gas at the wellhead including condensate and LPG. No allowance has been made for fuel and flare consumption. PAPUA NEW GUINEA - LOCATIONS CUE LICENSES - PAPUA NEW GUINEA P'Nyang Hides Mt Hagen Moran Juha Agogo Kutubu Fold Belt Gobe SE Gobe Foreland PDL 3 PRL14 Goroka Scale 100km Lae Barikewa PRL 9 Elk/ Antelope KUMUL OIL TERMINAL Kerema PRL14 PDL3 3333333LLLLLLLLLLLLLLDDDDDDDD South East Gobe Field Cobra -1A Bilip Oil Field Iehi Gas Field PRL9 Barikewa Gas Field Scale 20km Port Moresby PNG LNG LEGEND CUE Licence Oil Fields Gas Fields Prospects/Leads Wells Oil Pipeline Proposed Gas Pipeline Fault 10 Chief exeCutive OffiCer’s Review Appraisal The gross recoverable contingent gas resources volume in the Barikewa discovery was 176 billion cubic feet (2C). Commercialising this static resource will be a key activity for the PRL9 joint venture in 2012. Negotiations have been initiated with the PNG LNG operator Exxon Mobil to establish whether Barikewa gas can contribute to further LNG processing trains in Port Moresby and thereby accelerate development of the field. Additionally alternative schemes using Barikewa gas for power generation for the local population or mine sites is being reviewed. IndoneSIA Production Cue’s share of oil production for the financial year was 197,720 barrels (2010: 188,101 barrels). The field production volume exceeded that forecast due to better than expected reservoir performance and very high facility uptime. Cue’s share of gas production from the Oyong field was 2.93 billion cubic feet (2010: 2.12 billion cubic feet). The gas is being sold under a long term contract to the Indonesia Power electricity generating station at Grati. Estimated gross oil and gas reserves as at 31 December 2010 were: In Place Volumes Ultimate Recovery Cumulative Production to 31 Dec 10 Remaining Reserves as at 31 Dec 10 Oil Gas Remaining oil Cue Share Remaining gas Cue Share Oil (million bbl) Gas (BCF) (1) 1P 58.8 7.29 5.9 1.39 0.07 - - 2P 65.6 7.48 5.9 1.58 0.08 - - 3P 77.4 7.72 5.9 1.82 0.10 - - 1P 119 89 25.9 - - 63.1 6.15 2P 136 111 25.9 - - 85.1 8.29 3P 159 130 25.9 - - 104.1 10.15 (1) For gas, estimates of in-place and recoverable volumes include both free gas and solution gas, and recoverable volume estimates are shown as “Sales Gas” figures. (2) Oil and gas volumes are net of Indonesian government share of production. These reserves are consistent with SPE guidelines and definitions. SAMPANG PSC - INDONESIA MAHAKAM HILIR PSC - INDONESIA M a d u r a M a d u r a Sampang Sampang Pamekasan Pamekasan Puteran Puteran Raja Raja Genteng Genteng Sampang PSC Sampang PSC Kentang Kentang Area 2 Area 2 OYONG FIELD OYONG FIELD Kerawai Kerawai Bakung Bakung Area I Area I JERUK JERUK Herbras Utara Herbras Utara Area 3 Area 3 Paus Paus Ubur-Ubur Ubur-Ubur Area 4 Area 4 Persik WORTEL-1 Persik WORTEL-1 Pare Pare Oyong-Grati 14” Pipeline Oyong-Grati 14” Pipeline Scale 20km Scale 20km G a s P i p e l i n e G a s P i p e l i n e E a s t J a v a 2 8 ” E a s t J a v a 2 8 ” Sambutan Oil/ Gas Field Sambutan Oil/ Gas Field Naga Utara Prospect (Northern Dragon) Naga Utara Prospect (Northern Dragon) South Perlang Oil Field South Perlang Oil Field MAHAKAM HILIR PSC MAHAKAM HILIR PSC New 2D seismic New 2D seismic Naga Selatan Prospect (Southern Dragon) Naga Selatan Prospect (Southern Dragon) Kacang Panjang Kacang Panjang Bengkoang Bengkoang Grati Grati J a v a J a v a LEGEND LEGEND CUE Contract Oil Fields Gas Field Prospects Gas Pipeline CUE Contract Oil Fields Gas Field Prospects Gas Pipeline M a d u r a S t r a i t M a d u r a S t r a i t Sei Nangka Oil Field Nangka Oil Field Sei Probolinggo Probolinggo Besuki Besuki Scale 5km Scale 5km Cue Energy Resources Limited Annual Report 2011 11 Development Wortel The development of the Wortel gas field was progressed during 2011 and is expected to be on stream in December 2011. At the time of printing the report the project was on schedule and was expected to be completed within the USD105.1 million budget. The development comprises a small well head platform on the field with two gas production wells and a seven kilometre pipeline to the Oyong facilities, with subsequent gas transportation through the existing pipeline to Grati. The combined export gas rate for Oyong and Wortel is expected to increase from 60mmscfd in 2011 to 90mmscfd once Wortel is on stream. Negotiations for the sale of Wortel gas have been concluded with the gas being sold to Indonesia Power at Grati at a significantly higher price than that agreed for the sale of Oyong gas. Non associated gas in place (BCF) Ultimate gas recovery (BCF) (Cue share) Condensate recovery (Million barrels) (Cue share) Proved (1P) Proved + Probable (2P) Proved, Probable & Possible (3P) 95 134 166 62.8 (8.76) 103.6 (14.45) 122.4 (17.07) 0.19 (0.02) 0.31 (0.03) 0.37 (0.036) Note: (1) Cue’s share is net of Indonesian government share of production. Oyong An additional infill well is planned to be drilled in the south east of the Oyong field immediately after drilling the Wortel development wells towards the end of 2011. The well is expected to add between 1.3 and 2.4 million barrels of additional recoverable oil. Jeruk Further work was carried out on the Jeruk field during 2011. The Sampang PSC joint venture continues to investigate the potential for development of the Jeruk oilfield. The development of Jeruk is technically and economically challenging. Cue estimates that the P50 recoverable reserves (2C) at approximately 15 million barrels. PEP 51313 - NEW ZEALAND Scale 10km Pukeko - 1 Hine Pukeko PMP 38160 PEP 51313 Maari Manaia Te Whatu-2 Te W hatu Pike Paua Matariki Strat-Play Matariki Paikea Rehua Pungarehu Lead Maari-1 M Moki-1 Maari-2 Maa Maari Well Head Head Platform m PMP 38160 Moki-2A Maari South PEP51149 Tipoka Lead Te Kiri Prospect Puanga North Tasman -1 Puanga-iti 3D seismic Takurua Tasman-1 Manaia -1 Maui -4 m 0 0 1 Scale 10km Scale 10km 12 LEGEND CUE Permit Oil Fields Gas Fields Prospects Leads Oil Pipeline Gas Pipeline 2D lines Wells Chief exeCutive OffiCer’s Review new ZeAlAnd Maari Oil Field Cue’s share of oil production from the Maari field for the financial year was 269,680 barrels (2010: 360,750 barrels). This was significantly below forecast and was a disappointing result. Much of the deferred production was attributable to failures of electrical submersible pumps. A total of seven workovers were performed during the year to replace the pumps. We are hopeful that the reliability of the pumps will improve as we make improvements to the well completion and the pump configuration. Overall facility uptime has improved from 70% in calendar year 2010 to 83% in calendar year 2011 to date. Manaia An eight kilometre Manaia -1 extended reach appraisal well was successfully drilled from the Maari platform to the Mangahewa reservoir of the nearby Manaia oil discovery. Manaia -1 commenced production in October 2010 at a rate of around 3800bopd. Development A number of incremental development opportunities exist in the Maari and Manaia fields. The Mangahewa sand below the current Moki horizon in the Maari field is currently not being produced but has been confirmed to contain producible oil via intersection by other wells. Additionally, the Moki horizon in the Manaia reservoir is not intersected by the extended reach well but Moki reserves at Manaia were confirmed by the drilling of the Maui 4 well. There is also potential oil in the deeper F sands at Maari and Manaia. The development of these additional reserves is being studied and should culminate in further appraisal and development drilling commencing in 2013. OMV, the operator, has estimated field reserves at 31 December 2010 to be: Reservoir Maari Moki Maari M2A* Manaia Mangahewa* Ultimate recovery Proved (1P) Ultimate recovery Proved + Probable (2P) Cumulative Production to 31 Dec 2010 Remaining to be produced (2P) (Cue share) 39.6 (28.5 developed) 1.4 1.57 57.5 3.0 6.27 11.7 0.17 48.8 (2.29) 6.1 (0.31) * Reserves relate to a single production well in each reservoir. These reserves are consistent with SPE guidelines and definitions. Oil production between 31 December 2010 and 30 June 2011 was 2.73 million barrels. Remaining to be produced at 30 June 2011 was 43.1 million barrels (2P) with Cue’s share being 2.15 million barrels. PEP 51149 - NEW ZEALAND PMP 38160 - NEW ZEALAND Scale 10km Pukeko - 1 Hine Pukeko PMP 38160 PEP 51313 Maari Manaia Paikea Te Whatu-2 Te W hatu Rehua Pike Paua Matariki Strat-Play Matariki LEGEND CUE Permit Oil Fields Gas Fields Prospects Leads Oil Pipeline Gas Pipeline 2D lines Wells Maari-1 M Moki-1 Maari-2 Moki-2A Maari South Maari Well Maa Head Platform Head m PMP 38160 Hine Scale 10km Pukeko - 1 Pungarehu Lead Pukeko PMP 38160 PEP 51313 PEP51149 Te Whatu-2 Te W hatu Paikea Rehua Matariki Strat-Play Tipoka Lead Matariki Maari Manaia Pike Paua Puanga North Tasman -1 3D seismic Takurua Puanga-iti Tasman-1 Manaia -1 Maui -4 m 0 0 1 Scale 10km Scale 10km Maari-1 M Moki-1 Maari Well Maa m Head Head Platform PMP 38160 Maari-2 Moki-2A Maari South Pungarehu Lead PEP51149 Tipoka Lead Te Kiri Prospect Puanga North Tasman -1 Te Kiri Prospect Puanga-iti 3D seismic Takurua Tasman-1 Manaia -1 Maui -4 LEGEND CUE Permit Oil Fields Gas Fields Prospects Leads Oil Pipeline Gas Pipeline 2D lines Wells m 0 0 1 Scale 10km Scale 10km Cue Energy Resources Limited Annual Report 2011 13 Taranaki Basin Cue farmed into the offshore PEP 51313 and the onshore PEP 51149 permits in the Taranaki Basin in October, 2009. PEP 51313 is adjacent to the Maari and Manaia fields and incorporates the area of the earlier PEP 38494 permit in which Cue had an interest. The permit contains several large prospects. In April and May 2010, a 200 square km 3D seismic survey was acquired over the large Matariki prospect and subsequently in April 2011 a 636 km 2D seismic survey was acquired over the Te Whatu prospect. This data is currently being used to mature prospects for future drilling decisions. The onshore PEP 51149 permit has potential to contain significant gas accumulations with some potential for oil. The Te Kiri 3D dataset has recently been reprocessed and in April 2011 150 km of conventional 2D marine data, 29 km of conventional land data and 60 km of shallow water “transition zone” data was acquired. This data will be used to mature prospects for future drilling decisions. AuStRAlIA Carnarvon Basin Cue has a participating interest in five large contiguous offshore exploration permits in the Outer Rankin area of the Carnarvon Basin. The permits have the potential to contain large gas accumulations in a region where there are three LNG developments proposed or under development. In April 2010, Woodside Energy Ltd agreed to farm into Cue’s 100% interest in permit WA-389-P. Woodside obtained a 65% interest in the permit by committing to pay US$5 million in past costs, funding the reprocessing of the existing 3D seismic data, the acquisition of 1440 square kilometres of new 3D seismic data and the drilling of the first exploration well. Cue retains a 35% free carried interest through the farmin work programme. Woodside became operator of the permit. WA-389-P contains the large Caterina prospect which has potential to contain up to 8 trillion cubic feet of recoverable gas. The permit also contains several other large prospects that each has the potential to contain in excess of one trillion cubic feet of recoverable gas. The new and reprocessed 3D seismic data will be available in late September, 2011. The first exploration well is expected to be drilled in late 1Q, 2012. In the southern most WA-360-P permit, where Cue has farmed out to MEO Australia, MEO drilled the Artemis-1 well in late 2010. Unfortunately this was a dry hole. Cue had a 15% free carried interest in the well. In October, 2010 Apache Northwest Pty Ltd agreed to farmin to Cue’s 50% interest in permits WA-359P and WA-409-P. Apache agreed to acquire a minimum of 1000 square kilometres of seismic data over both permits in return for a 40% interest in both permits. Cue’s interest was reduced to 30% in both permits. Apache has the option to commit to drilling one well in one of the permits in return for up to a 30% interest. Apache has become operator of both permits. Apache completed acquisition of the new 3D seismic called the Zeebries 3D in May, 2011 and is expected to make drilling decisions in 2012. Bass Basin Cue withdrew from the T/37P and T/38P permits in the Bass Basin in late 2010. We believe the permits to be unprospective following the drilling of the Spikey Beach-1 well in September 2009. This was a dry hole. Mark John Paton Chief Executive Officer 29th of September 2011 Caterina Prospect Movida Prospect WA-389-P Scale 25km A(cid:4)ca Prospect New ZEEBRIES 3D WA-409-P WA-359-P Banambu Deep Prospect WA-361-P Maxwell Lead WA-361-P WA-360-P CARNARVON BASIN PERMITS - AUSTRALIA 14 Chief exeCutive OffiCer’s Review Cue Energy Resources Limited Annual Report 2011 15 CoRpoRAte GoveRnAnCe stAtement Introduction The Directors of Cue Energy Resources Limited recognise the need for high standards of corporate governance and are focused on fulfilling their responsibilities individually and as a Board to all of the Company’s stakeholders. The following description of the governance arrangements of Cue Energy Resources Limited (“the Company”) for the year ended 30 June 2011 addresses those principles set out in the 2nd edition of the ASX Corporate Governance Principles and Recommendations (Revised Recommendations). Given the size and structure of the Company, the nature of its business, the stage of its development and the cost of strict and detailed compliance with all of the recommendations the Company has adopted some modified systems, procedures and practices which it considers allow it to meet the principles of good corporate governance. The Company’s practices aim for consistency with those of the principles and recommendations. The Company considers that its adopted practices are appropriate to it in this regard. At the end of this Corporate Governance Statement a table is included detailing the recommendations with which the Company does not strictly comply. The following detail addresses the Company’s practices in complying with the principles. 16 Principle 1: Laying Solid Foundations for Management and Oversight The role of the Board is to lead and oversee the management and direction of the Company. After appropriate consultation with Executive management, the Board: • • defines and sets its business objectives. It subsequently monitors performance and achievement of the Company’s objectives; oversees the reporting on matters of compliance with corporate policies and laws, takes responsibility for risk management processes and a review of Executive management, remuneration practices and insurance needs of the Company; • monitors and approves financial performance and budgets; and • reports to shareholders. The Board regularly discusses and reviews its performance. The Chairperson also discusses with each Director their requirements, performance and aspects of involvement in the Company. The Directors discuss and evaluate the role fulfilled by management individually and together. This is reviewed against the discussed and agreed objectives of the Company and the effectiveness in carrying out those objectives. Each member of the Board has committed to spending sufficient time to enable them to carry out their duties as a Director of the Company. One third of the Directors retire annually and are free to seek re-election by shareholders. Principle 2: Structuring the Board to Add Value The recommendations of best practice are that a majority of the Directors and in particular the Chairperson should be independent. An independent Director is one who: • • • • • • • does not hold an executive position; is not a substantial shareholder of the Company or an officer or otherwise associated directly or indirectly with a substantial shareholder of the Company; has not within the last 3 years been employed in an executive capacity by the Company or another group member or been a Director after ceasing to hold such employment; is not a principal of a professional adviser to the Company or another group member; is not a significant supplier or customer of the Company or another group member, or an officer of, or otherwise associated directly or indirectly with a significant supplier or customer; has no significant contractual relationship with the Company or any other group member other than as a Director of the Company; and is free from any interest and any business or other relationship which could or could reasonably be perceived to materially interfere with the Directors ability to act in the best interests of the Company. It is considered that a majority of independent Directors is the optimal composition to add value to your Company. This is due to the size and nature of the Company’s business and risk profile of the Company. Corporate Governance practices are in place to support competent and objective operation of the Board and to provide investor assurance in relation to Board decision making. Composition of the Board Nomination of Other Board Members The ASX Corporate Governance Council recommends that the composition of the Board be determined so as to provide a Company with a broad base of industry, business, technical, administrative, corporate skills and experience considered necessary to represent shareholders and fulfill the business objectives of a Company. The Board at least annually reviews its composition to determine if additional core strengths are required to be added to the Board in light of the nature of the Company businesses and its objectives. The Board does not believe that at this point in the Company’s development it is necessary to appoint additional Directors. Independent Advice Each of the Directors is entitled to seek independent advice at Company expense to assist them to carry out their responsibilities. Cue Energy Resources Limited Annual Report 2011 17 Principle 3: Promotion of Ethical and Responsible Decision-Making Directors, officers, employees and consultants to the Company are required to observe high standards of behavior and business ethics in conducting business on behalf of the Company and they are required to maintain a reputation of integrity on the part of both the Company and themselves. The Company does not contract with or otherwise engage any person or party where it considers integrity may be compromised. Directors are required to disclose to the Board actual or potential conflicts of interest that may or might reasonably be thought to exist between the interests of the Director or the interests of any other party in so far as it affects the activities of the Company and to act in accordance with the Corporations Act if conflict cannot be removed or if it persists. That involves taking no part in the decision making process or discussions where that conflict does arise. Directors are required to make disclosure of any share trading. The Company policy in relation to share trading is that officers, employees and contractors are prohibited from trading whilst in possession of unpublished price sensitive information concerning the Company. That is information which a reasonable person would expect to have a material effect on the price or value of the Company shares. An officer must discuss the proposal to acquire or sell shares with the chairman prior to doing so to ensure that there is no price sensitive information of which that officer might not be aware. The undertaking of any trading in shares must be notified to the Company secretary who makes disclosure to ASX. The company does not have a formal diversity policy, given the size of the Company at this point in time. However, the Company applies the common sense principle that the person of the right experience, skills and aptitude for a particular vocational need will be chosen for a vacancy within the company. Principle 4: Safeguarding Integrity in Financial Reporting An Audit Committee has been established. The committee consists of the following: R.G. Tweedie (Chairman) L. Musca S.J. Koroknay The main responsibilities of the Audit Committee are to; • • review the annual financial statements with the Chief Executive Officer, the Chief Financial Officer and the external auditors and make appropriate recommendations to the Board; review all regular financial reports to be made to the public prior to their release and make appropriate recommendations to the Board; • monitor compliance with statutory Australian and secondary stock exchange requirements for financial reporting; • review reports from management and external auditors on any significant proposed regulatory, accounting or reporting issues, to assess the potential impact on the Company’s financial reporting process. The Chief Executive Officer and the Chief Financial Officer are required to state in writing that the Company’s Financial Reports present a true and fair view in all material respects of the Company’s financial condition and operational results in accordance with relevant accounting standards. The committee is also charged with the responsibilities of recommending to the Board the appointment, removal and remuneration of the external auditors and reviewing the terms of their engagement and the scope and quality of the audit. An analysis of fees paid to the external auditors, including a breakdown of fees for non audit services, is provided in the notes to the financial statements. It is the policy of the external auditors to provide an annual declaration of their independence to the Board. Each Board member has access to the external auditors and the auditor has access to each Board member. Principle 5: Making Timely and Balanced Disclosure The Public Officer A.M. Knox, has been nominated as the person responsible for communications with the Australian Securities Exchange (ASX). This role includes responsibility for ensuring compliance with the continuous disclosure requirement in the ASX Listing Rules and overseeing and co-ordinating information disclosure to the ASX, analysts, brokers, shareholders, secondary exchanges, the media and the public. All material information concerning the Company, including its financial situation, performance and ownership are posted on the Company web site to ensure all investors have equal and timely access. Principle 6: Respecting the Rights of Shareholders The Board recognises its responsibility to ensure that its shareholders are informed of all major developments affecting the Company. All shareholders receive a copy of the Company’s annual report and both the annual and half yearly reports are posted on the Company’s web site. Quarterly reports are prepared in accordance with ASX listing rules. A copy is posted on the Company’s web site. Regular updates on operations are made via ASX releases. Information on the Company is posted on the Company’s website. When analysts are briefed on aspects of the Company’s operation, the material used in the presentation is released to the ASX and posted on the Company’s website. The Company website includes the option for shareholders to contact the Company for direct email updates of Company matters. The external auditor is requested to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the audit report. 18 Corporate GovernanCe Statement Principle 7: Recognising and Managing Risk The Board is responsible for reviewing and approving the Company’s risk management systems and internal controls by working in conjunction with management to ensure that the Company continues to develop appropriate and sound systems and strategies for risk management, including the appropriate segregation of duties and the employment and training of suitably qualified and experienced personnel. Risk Management The four key risks for the Company are exploration success, loss of production facility integrity and oil and gas prices and markets. The issue with exploration is one of balancing the potential rewards with the cost of information and the cost of drilling a dry hole. The Company employs a number of strategies to mitigate its risks including farming out prospects which do not meet it’s risk profile, and acquiring 3D seismic in order to better define prospects. The Company utilises industry standard software to evaluate prospect economics. Another way in which the Company reduces it’s exploration risk is by peer review of prospects both internally and by co-venturers. Cue currently produces oil and gas from three production facilities which are operated by others. The operators of the facilities are competent oil companies with a track record of safely and economically operating oil and gas facilities. The operator is responsible for maintaining facility integrity so that it can continue to produce oil and gas. Cue regularly reviews the processes used by the operator to maintain facility integrity through attendance at Technical Committee meetings and site visits. The Company is subject to commodity and currency price fluctuation through the sale of crude oil denominated in $US. The Company constantly monitors crude oil price swaps and currency option contracts available to manage its commodity price risk. The Board is responsible for approval of acquisition and disposal of exploration and development interests. The Board is also responsible for overseeing identification and development of strategies to mitigate price risk, including hedging and also asset protection and potential liabilities via insurance. The Company has in place internal control processes, and undertakes such modifications as are necessary to ensure reasonable levels of control are maintained. Authorisation of equity raisings, entering into debt facilities and major capital expenditure or commitments require Board approval. All routine operating expenditures are the responsibility of management in accordance with programmes and budgets approved by the Board. The Company currently has a full time staff of ten. The company also employs a part time health, safety, environment and quality coordinator who provides an internal audit function. The company’s intention is to operate its business in accordance with the latest revision of the international standards ISO 9001, ISO14001 and ISO18001. In relation to its responsibilities the Board’s consideration includes the following: • Review of internal controls and recommendations of enhancements; • Monitoring of compliance with the Corporations Act 2001, Australian Securities Exchange, Australian Taxation Office and Australian Securities and Investments Commission requirements; • • Improving the quality of the management and accounting information; and Follow-up and rectification by management of deficiencies or breakdown in controls or procedures. • Monitoring compliance with all applicable laws in the countries in which Cue operates. Occupational Health, Safety & Environment (OHS&E) The Board has determined that due to its small size it would not be efficient to maintain a separate Occupational Health, Safety & Environment Committee. The responsibilities performed by this Committee is assumed by the Board. During 2010 the company appointed a professional health, safety, environment and quality coordinator to provide the Board and management of the company with advice relating to OHS & E matters. Principle 8: Remunerate Fairly and Responsibly A Remuneration and Nomination Committee has been established. The committee consists of the following: L. Musca (Chairman) R.G. Tweedie S.J. Koroknay The Remuneration and Nomination Committee makes recommendations to the full Board on remuneration packages and other terms of employment and reviews the composition of the Board having regard to the Company’s present and future needs. Remuneration and other terms of employment are reviewed annually by the committee having regard to performance and relevant comparative information. As well as a base salary, remuneration packages include superannuation, termination entitlements, fringe benefits, shares and options. Remuneration packages are set at levels that are intended to attract and retain high calibre staff and align the interest of the executives with those of the Company shareholders. Remuneration of Non-Executive Directors is determined by the Board within the maximum amount approved by the shareholders from time to time. Further information on Directors’ and Executives’ remuneration is set out in the Directors’ Report and Remuneration Report. Cue Energy Resources Limited Annual Report 2011 19 Table of Departures and Explanations (from the Recommendations of the ASX Corporate Governance Council) Departure (from Recommendation) Explanation 2.5 and 2.6 There has been no formal documented disclosure of the process for performance evaluation of the Board, committees, individual Directors and Key Executives. Given the size of the Company and the involvement of all three Directors a policy has not to date been required. The Directors continually monitor and discuss performance. There is no separate section on the Company website currently devoted to Corporate Governance. 3.1 No formal code of conduct has been established as to practices necessary to maintain confidence in the Company integrity or as to reporting and investigating unethical practices. 3.2 and 3.3 No formal policy exists for work place personnel diversity, which includes gender diversity. 4.3 The Audit Committee does not have a formal charter. It is not considered that a code of conduct or reporting guide is yet necessary. The principles are followed. It is not considered that a formal diversity policy is required, given the small size of the Company and its work force. The principles are followed to the extent that appropriate skill, experience, aptitude and competence are the key criteria for personnel selection. The practices adopted by the Board recognise that proper compliance with legal and other obligations is mandatory for the Company as a whole. Given the size of the Company, the entire Board works intimately with the management and Audit Committee. The Board feels that adequate procedures are in place and that a formal audit charter is not necessary at this time. 5.1 6.1 No written policy and procedure exists to ensure that compliance with ASX Listing Rules disclosure requirements are met at senior management level. There are only four Key Management Personnel of the Company and the Board does not consider that a written policy is at this time required. It will be reviewed as the activities of the Company increase. The Company ensures continuous disclosure is met but has no further formally designed or disclosed communication strategy with shareholders. The Board is conscious of the need to continually keep shareholders and markets advised. The procedures adopted within the Company, although not written, are weighted towards informing shareholders and markets. 7.1 and 7.2 There has been no written implementation of policy on risk oversight and management or for senior management to make statements to the Board concerning those matters. However senior management makes regular written reports on risk assessment to the Board. Given the nature and size of the Company, its business interests and the involvement of all Directors who all have business management skills, it is not considered necessary to document this practice at this time. 20 Corporate GovernanCe Statement Cue Energy Resources Limited Annual Report 2011 21 AnnuAl RepoRt of dIReCtoRS Your Directors present their report on the Company and its controlled entities (“the Group”) for the financial year ended 30 June 2011. Directors The names of Directors of the Company in office during the year and up to the date of this report were: Richard G. Tweedie Leon Musca Steven J. Koroknay Company Secretary Andrew M. Knox Principal Activities The principal activities of the group are petroleum exploration, development and production. There has been no significant change in the nature of these activities during the year. Cue Energy Resources Limited (‘Cue’) is listed on the Australian Securities Exchange, the New Zealand Stock Exchange and the Port Moresby Stock Exchange. The Company has an American Depositary Receipt (ADR) program sponsored by the Bank of New York and these are traded via the OTCQX Market in the US. Principal Place of Business Level 21, 114 William Street Melbourne 3000 Australia Registered Office Level 21, 114 William Street Melbourne 3000 Australia Dividends No dividends were paid to members during the financial year (2010: NIL) or have been approved subsequent to balance date. 22 Changes in State of Affairs During the financial year, there was no significant change in the state of affairs of the consolidated entity. At the date of this report the following options were outstanding: 3,966,665 unlisted options to senior management and employees over fully paid ordinary shares. Options are exercisable as follows: 2010/2011 Results Consolidated entity revenue for the year ended 30 June 2011 was $59.670M (2010: $64.488M). Consolidated entity expenses totalled $33.909M (2010: $25.137M) including production and amortisation expenses and impairment write downs. The operating profit before income tax expense for the year was $25.761M (2010: $39.351M). Consolidated entity tax expense for the year was $6.654M (2010: $11.841M). Consolidated entity profit after income tax expense was $19.107M (2010: $27.510M). The Net Tangible Assets of the company on 30th June 2011 were 17.3 cents per share (2010: 10.7 cents) Review of Operations Information on the operations and financial position of the group and its business strategies and prospects is set out in the Chairman’s and Chief Executive Officer’s report sections of this annual report. Shareholders’ Equity & Capital Structure Total Shareholders’ Equity as at 30 June 2011 was $118.833M (2010: $99.426M). At balance date Cue had issued share capital of $151.8M (2010: $151.5M). The total number of shares on issue at 30 June 2011 was 694,819,718 (2010: 693,319,718). Options and Other Rights of Conversion Options As at 30 June 2011 the following options were outstanding: Unlisted 4,300,000 unlisted options to senior management and employees over fully paid ordinary shares. Options are exercisable as follows: Number of Options Exercise Price (cents) 1,200,000 700,002 1,033,333 1,033,332 333,333 15 20 22.5 25 35 Expiry Date 19/04/12 19/04/12 19/04/12 19/04/12 19/04/12 Number of Options Exercise Price (cents) 1,033,333 533,334 1,033,333 1,033,332 333,333 15 20 22.5 25 35 Expiry Date 19/04/12 19/04/12 19/04/12 19/04/12 19/04/12 Environmental Regulation and Performance This year has seen a renewed focus in the area of Health, Safety and Environment (HSE). Within the last year there have been zero incidents, zero lost time injuries and zero significant spills within Cue Energy Resources. Among our joint venture operations there has been one lost time injury and three minor spills at the Maari Field and zero significant incidents or injuries for SE Gobe and Oyong fields. Cue Energy Resources continues to monitor the progress and close out of these incidents and work with our Joint Venture partners and operators to improve overall health and safety performance and minimise any impact on the environment. There have been a number of initiatives taken in order to improve HSE performance through the implementation of an HSE management system that is suitable for all countries and all levels of operations that the business may wish to be involved with. The overall aim of the system is to not just meet legislative requirements but to show a true commitment to HSE for the sake of Cue Energy Resources personnel, contractors, assets and the environment. The HSE Management system itself consists of HSE policies and objectives, outlines the risks identified for the business and what controls and processes are required to reduce these risks to as low as reasonably practicable. The system is compliant with not only Australia and New Zealand standards but international standards and industry best practices and expectations. Through ongoing commitment by both senior management and staff alike, this system will continually improve overall Health, Safety and Environmental performance of the company. The Group holds participating interests in a number of exploration and production titles as detailed in Note 12 and 14 to the financial statements. The various authorities granting such licences require the holder to comply with the directions and terms of the grant of the licence. Cue Energy Resources Limited Annual Report 2011 23 The Group aims to ensure that the highest standard of environmental care is achieved. The Board maintains the responsibility to ensure that the Group’s environment policies are adhered to and to ensure that the Group is aware of and is in compliance with all relevant environmental legislation. There have been no environmental breaches during the 2011 financial year. There have been no significant known breaches of the Group’s licence conditions during the 2011 financial year. Future Developments The particular information required by Section 299(1) (e) of the Corporations Act 2001 has been omitted from the report because the Directors believe that it would result in unreasonable prejudice to the economic entity. Directors Meetings The following table sets out the number of meetings of the Board of Directors held during the year and the number of meetings attended by each Director. Richard G. Tweedie Leon Musca Steven J. Koroknay Board Audit Committee Remuneration and Nomination Committee Held Attended Held Attended Held Attended 6 6 6 6 6 5 2 2 2 2 2 1 1 1 1 1 1 1 Information on directors and executives, including qualifications and experience is as follows: Special Responsibilities Chairman of Board of Directors Member of Remuneration and Nomination Committee Chairman of Audit Committee Non-Executive Director Member of Audit Committee Member of Remuneration and Nomination Committee Particulars of Directors’ Interests in shares and options of Cue Energy Resources Limited at the date of this report Direct Indirect 277,541 3,363,477 Nil options Nil 100,000 Nil options Qualifications and Experience Directors: R.G. Tweedie LL.B Director of Todd Petroleum Mining(ii) Company Limited - Appointed 04/09/1987 retired 31/12/2010 Director of Cue Energy Resources Limited(i) Appointed 16/07/2001 S.J. Koroknay BE(Hons)- Civil Eng (Sydney) FAICD, FIEA Non-Executive Director Innamincka Petroleum Limited(i) - Appointed 15/05/08 - resigned 24/06/11 Non-Executive Chairman Galilee Energy Limited(i) - Appointed 20/01/09 Non-Executive Director Cue Energy Resources Limited(i) - Appointed 09/10/09 Non-Executive Director Metgasco Limited(i) - Appointed 20/01/10 L. Musca LL.B Barrister and Solicitor Director of Cue Energy Resources Limited(i) - Appointed 17/11/1999 Independent Non-Executive Director Chairman of Remuneration and Nomination Committee Member of Audit Committee Nil 12,771,227 Nil options 24 ANNUAL REPORT OF DIRECTORS Special Responsibilities Chief Executive Officer - Appointed 08/02/2011 Chief Executive Officer - Retired 07/02/2011 Chief Financial Officer Company Secretary Public Officer Particulars of Directors’ Interests in shares and options of Cue Energy Resources Limited at the date of this report Direct Indirect Nil 1,492,881 2,700,000 500,000 1,058,252 1,500,000 1,500,000 options Qualifications and Experience Executives: M.J Paton B.SC (Hons), MIChemE R.J. Coppin B.Sc (Hons), FAICD Director of Cue Energy Holdings Limited A.M. Knox B.Com, CA, CPA, FAICD Director of Cue Energy Resources Limited - Appointed 16/09/2009 - Resigned 09/10/2009(i) Director of all Cue Energy Resources Limited subsidiaries Director of Rimfire Pacific Mining NL - Appointed 08/07/2005(i) - Retired 31/03/2011 Director of Axis Mining NL - Appointed 08/07/2005(ii) - Retired 31/03/11 (i) Refers to ASX listed directorship held over the past three years. (ii) Refers to unlisted public company directorships held over the past three years. No shares in subsidiary companies are held by the Directors and no remuneration or other benefits were paid or are due and payable by subsidiary companies. Remuneration Report (Audited) This Remuneration Report, which forms part of the Directors Report, sets out information about the remuneration of Cue Energy Limited’s Directors and its senior management for the financial year ended 30 June 2011. The prescribed details for each person covered by this report are detailed below under the following headings: (A) Director and Executive Details (B) Remuneration Policy (C) Details of Remuneration of Directors and Executives (D) Equity Based Remuneration (E) Relationship between Remuneration Policy and Company Performance (A) Director and Executive Details The following persons acted as Directors of the company during or since the end of the financial year: R.G. Tweedie (Chairman) L. Musca (Non Executive Director) S. Koroknay (Non Executive Director) The term “Key Management Personnel” is used in this Remuneration Report to refer to the following persons: M.J. Paton (Chief Executive Officer appointed 8 February 2011) R.J. Coppin (Chief Executive Officer retired 7 February 2011) A.M. Knox (Chief Financial Officer/Company Secretary) A. B. Parks (Chief Commercial Officer appointed 21 March 2011) T. White (Exploration Manager)(i) (i) Mr T White was designated as a Key Management Personnel from 1 July 2010. Unless otherwise stated the persons named above held their current position for the whole of the financial year and since the end of the financial year. Cue Energy Resources Limited Annual Report 2011 25 (B) Remuneration Policy Executives The Board’s policy for remuneration of Executives and Directors is detailed below. Remuneration packages are set at levels that are intended to attract and retain high calibre Directors and employees and align the interest of the Directors and Executives with those of the Company shareholders. Remuneration policy is established and implemented solely by the Remuneration and Nomination Committee which is comprised of Non Executive Directors only. Remuneration and other terms and conditions of employment are reviewed annually by the Remuneration and Nomination Committee having regard to performance and relevant employment market information. As well as a base salary, remuneration packages include superannuation, annual incentive plan cash bonuses, termination entitlements, fringe benefits and share based incentives in the form of a share option scheme. From 1 July 2011, the company has implemented a performance rights plan as the primary share based incentive for services provided from that date. The performance rights plan is described below. Performance measures and targets applicable to the award of performance rights and annual cash bonuses will be established by the Board on an annual basis. However, the Board is conscious of its responsibility for the performance of the Company. Directors and Executives are encouraged to hold shares in the Company to align their interests with those of shareholders. No remuneration or other benefits are paid to Directors or Key Executives by any subsidiary companies. (C) Details of Remuneration Remuneration structure The structure of non-executive Director and executive remuneration is separate and distinct. Non-Executive Directors Remuneration of Non-Executive Directors is determined by the Board within the maximum amount approved by the shareholders from time to time. The amount currently approved is $400,000, which was approved at the Annual General Meeting held on 12 November 2009. The Company’s policy is to remunerate Non-Executive Directors at a fixed fee for time, commitment and responsibilities. Remuneration for Non-Executive Directors is not linked to individual or company performance, however, to align Directors’ interests with shareholders’ interests, Non-Executive Directors are encouraged to hold shares in the Company. The Board retains the discretion to award options or performance rights to Non-Executive Directors based on the recommendation of the Remuneration and Nomination Committee subject always to shareholder approval. During 2011 the Remuneration and Nomination Committee reviewed fees payed to Non Executive Directors and resolved that the Director’s fees for each of the two Non Executive Directors and Chairman be increased to $100,000 per annum effective 1 January 2011. Executives receive a mixture of fixed and variable pay and a blend of short and long term incentives as appropriate. Remuneration packages contain the following key elements:- • • • • Fixed compensation component inclusive of base salary, superannuation and non-monetary benefits. Short term incentive programme incorporating performance based cash bonuses. Superannuation. Long term incentives incorporating share based payments including performance rights (from 1 July 2011) and share options granted as long term performance incentives or in lieu of services. The award of long term incentives, such as share options and/or performance rights (as discussed below from 1st July 2011) ensures that the total compensation package awarded to executives matches the stage of development of the Company at a given point in time. The grant of share options or performance rights is designed to recognise and reward the efforts of executives as well as to provide additional incentive. These grants may be subject to the successful completion of performance hurdles. Executives are prohibited from entering into transactions or arrangements which limit the economic risk of participating in unvested entitlements. The Remuneration and Nomination Committee is responsible for determining and reviewing remuneration arrangements. The Remuneration and Nomination Committee assesses the appropriateness of the nature and amount of remuneration of executives on a periodic basis, by reference to relevant employment market conditions, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality, high performing Director and executive team. The charter adopted by the Remuneration and Nomination Committee aims to align rewards with achievement of strategic objectives and creation of shareholder wealth. Fixed Compensation Fixed Compensation consists of base salary (which is calculated on a total cost base and including any FBT changes related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds. The base salary is reflective of market rates for companies of similar size and industry which is reviewed annually to ensure market competitiveness. During 2011, the Remuneration and Nomination Committee reviewed the salaries paid to peer company executives in determining the salary of Cue Key Management Personnel. This base salary is fixed remuneration and is not subject to performance of the company. Base salary is reviewed annually and adjusted as determined by the Remuneration and Nomination Committee on 1st January each year. There is no guaranteed base salary increase included in any executive’s contracts. Short term incentives The Board at its sole discretion may elect to pay short term incentives in the form of performance based cash bonuses to executives based on the recommendation of the Remuneration and Nomination Committee. Any payment of short term incentives is dependent on the achievement of performance targets as determined by the Board. These targets shall include a combination of key strategic, financial and personal performance measures which have major influence 26 ANNUAL REPORT OF DIRECTORS over company performance in the short term. Short term incentive payments may also be made at the discretion of the Board to reward an executive’s participation in ad-hoc projects or activities. The Remuneration and Nomination Committee may adjust short- term incentive payments based on an executive’s achievement of performance milestones. During the year, the Board exercised its discretion to pay short term incentives to Key Management Personnel who were employed by the company during the 2009/10 Financial Year in recognition of the company’s exceptional performance in that year. On 22nd June the Board approved the implementation of a new annual incentive plan and established the performance measures and targets for the 2012 Financial Year. Letters of offer to participate in the annual incentive plan detailing the cash bonuses to be paid under the plan and the performance standards to be achieved to realise the bonus payments were distributed to Key Management Personnel and other qualifying employees on 30th June 2011 applicable for service from 1 July 2011. Long term incentives The Board has decided to implement a performance rights plan effective from 1 July 2011. The Remuneration and Nomination Committee recommends the grant of performance rights as incentives for its executives, to maintain their long term commitment to the Company. The use of long term incentives is considered a valuable means of aligning the interest of shareholders and the individuals to whom such long term incentives are provided. It also provides the Remuneration and Nomination Committee with a range of incentives to attract and retain key management, including executives. The number of share options or performance rights granted and their terms and conditions are determined by the Board and defined in the Performance Rights Plan Rules and can be adjusted to reflect specific performance hurdles (as discussed below) in order to best match such awards with the actual circumstances of the Company at a given point in time. Post employment benefits The Company makes superannuation contributions for the Australian based employees and directors as required by law. Details of the nature and amount of each major element of remuneration of each Director of the Company and other Key Management Personnel of the consolidated entity are: Compensation of Key Management Personnel – 2011: Short-Term Annual Incentive Plan Bonus (iv) $ Cash salary and fees $ Post Employment Share-Based Non monetary benefits (ii) $ Super- annuation $ Retire- ment benefits $ Share Purchases (i) Options (iii) $ $ Total Option Based Related % - 76,453 83,332 159,785 179,963 170,207 - - - - - - Key Management Personnel 2011 Name Non-Executive Directors R.G. Tweedie S.J. Koroknay L. Musca Total R.J. Coppin M.J. Paton A.M. Knox A.B. Parks T. White Total Total remuneration of Executives and Directors - - - - - 6,881 - 6,881 - - - - 83,332 - - 83,332 12,732 50,000 505,835 326,803 70,000 45,578 114,800 - 344,141 70,000 - - - 19,792 23,245 4,259 50,004 - - - - 1,135,914 140,000 58,310 147,300 505,835 - - - - - - 1,295,699 140,000 58,310 154,181 505,835 83,332 Total Perfor- mance Based % - - - - - - 15 - 15 - - Total $ 83,332 83,334 83,332 249,998 748,530 189,999 465,626 119,059 464,145 - - - - - - - - - - 1,987,359 - 2,237,357 - - - - - - - - - - - (i) Shares purchased on market (refer Directors Saving Plan below). (ii) Non performance based salary sacrifice benefits, including motor vehicle expenses. (iii) Relates to shares and options granted in prior periods; which have vested in the current period. (iv) Relates to bonuses granted in the current period. Cue Energy Resources Limited Annual Report 2011 27 (C) Details of Remuneration (Cont’) Compensation of Key Management Personnel – 2010: 2010 Short-Term Post Employment Share-Based Cash salary and fees $ Annual Incentive Plan Bonus $ Non monetary benefits (ii) $ Super- annuation $ Retire- ment benefits $ Share Purchases (i) Options (iii) $ $ Total Option Based Related % Total $ Total Perfor- mance Based % Name Non-Executive Directors R.G. Tweedie S. Koroknay L. Musca E.G. Albers(iv) Total - 29,252 66,667 12,055 107,974 Key Management Personnel R.J. Coppin A.M. Knox Total Total remuneration of Executives and Directors 259,326 249,499 508,825 616,799 - - - - - - - - - - - - - - 67,238 50,190 117,428 - 19,300 - - 19,300 49,200 23,460 72,660 117,428 91,960 - - - - - - - - - 66,667 - - - 66,667 - 39,981 39,981 - - - - - 14,919 14,919 29,838 106,648 29,838 - - - - - 66,667 48,552 66,667 12,055 193,941 3.8 390,683 14.5 378,049 - - 768,732 962,673 - - - - - - - - - (i) Shares purchased on market (refer Directors Saving Plan below). (ii) Non performance based salary sacrifice benefits, including motor vehicle expenses. (iii) Relates to shares and options granted in prior periods; which have vested in the current period. (iv) E.G. Albers retired 04/09/09. A.M. Knox is a Director of all the subsidiaries in the Group and an Executive of the parent company. R.J. Coppin was a Director of Cue Energy Holdings Ltd and an Executive of the parent company until 7 February 2011. Service Contracts Remuneration and other terms of employment for M.J. Paton is formalised in a service agreement. Details of this agreement are as follows: Title: Chief Executive Officer Agreement commenced: 8 February 2011 Details: Base salary of $480,000 including superannuation to be reviewed annually by the Remuneration and Nomination Committee. 3 months termination notice by either party, short term incentive up to 50% of base salary as per Remuneration and Nomination Committee approval and KPI achievement. Eligible for Long Term Incentive Program. Non solicitation and non compete clauses. No other Key Management Personnel at present has a service contract. Employment letters outline the components of compensation paid to other Key Management Personnel but does not prescribe how compensation levels are modified year to year. Compensation levels are reviewed each year to take into account cost of living changes, any change in the scope of the role performed and any changes to meet the principles of the compensation policy. Retirement Benefits Mr R.J. Coppin retired 7 February 2011. The retirement payment of $505,835 to Mr R.J. Coppin in the 30 June 2011 financial year was a discretionary ex gratia payment resolved by the Board of Directors for services provided inclusive of statutory long service and annual leave payments. 28 ANNUAL REPORT OF DIRECTORS (D) Equity Based Remuneration Share Options As previously stated, from 1 July 2011 the company has implemented a Performance Rights Plan as a mechanism for providing a share based performance incentive for Key Management Personnel and to achieve alignment between Key Management and Shareholder objectives. Until 30 June options were granted to the Executives as part of their remuneration as approved by the Directors. Options granted were not related to a specific performance condition. Options were granted to reward key management personnel for their contribution to achieving specific milestones. Options are granted under the plan for no consideration. Options granted carry no dividend or voting rights. No options were granted in the financial year to 30 June 2011 (2010: Nil). Analysis of movements in share options The movement during the reporting period, by value, of options over ordinary shares in the company held by each Key Management Personnel is detailed below: Granted in Year Value of options Exercised in Year $ (ii) Lapsed in Year A.M. Knox R.J. Coppin (i) Nil Nil Nil 202,500 Nil Nil (i) Retired 7 February 2011. (ii) The value of options exercised during the year is calculated as the market price of shares of the Company as at close of trading on the date options were exercised after deducting the price paid to exercise the option. Share Options Granted as Compensation No share options were granted to Directors or other Key Management Personnel in the financial year to 30 June 2011 (2010: Nil). Share option expense recorded in the 30 June 2010 financial year related to options granted in prior financial years. These vested in the 30 June 2010 financial year. Details of vesting profiles of options granted as remuneration to each Key Management personnel in prior financial years which were recorded as an expense in the 30 June 2010 financial year are detailed below: Executive R.J. Coppin (i) A.M. Knox Number Granted Date Granted Total Value of Option Granted - - - - (i) Retired 7 February 2011. Value of Expensed in 2010 Financial year - - - - Year Options Expire Financial Year Options Vested - - - - No terms of equity settled share based payment transactions granted in prior year (including options granted to Key Management Personnel) have been modified or altered during the reporting period or prior period. Cue Energy Resources Limited Annual Report 2011 29 Exercise of Share Options Granted as Compensation During the reporting period, the following shares were issued on the exercise of options previously granted as compensation: Executive R.J. Coppin (i) No. of Options No. of Shares Issued Total Amount Paid $/Share Value of Options Exercised (ii) $ 500,000 333,334 333,333 333,333 500,000 333,334 333,333 333,333 75,000 66,667 75,000 83,333 92,500 45,000 36,667 28,333 1,500,000 1,500,000 300,000 202,500 (i) Retired 7 February 2011. (ii) The value of options exercised during the year is calculated on the market price of shares of the Company as of close of trading on the date options were exercised after deducting the price paid to exercise the option. There are no amounts unpaid on the shares issued as a result of the exercise of the options in the 2011 financial year. Performance Right Plan Performance rights over shares in Cue Energy Resources Limited are to be granted under the Cue Energy Resources Ltd Performance Rights Plan (“Plan”) from 1 July 2011 for future services provided as approved by the Board on 22nd June 2011. The Plan is designed to align the interests of executives with shareholders by providing direct participation in the benefits of future Company performance over the medium to long term. It is contemplated that Performance rights will be granted to Key Management personnel on an annual basis. Non Executive Directors will not be eligible to participate in the 2011/12 Plan. The participants in the 2011/12 plan are: M.J. Paton, A.M. Knox, A.B. Parks and T. White. For employee services provided from 1 July 2011 participants were granted performance rights under the Plan. On 30 June the closing share price of Cue Energy Resources Ltd on the ASX (Code: CUE) was 26.5 cents. The performance rights granted to Key Management Personnel will vest as ordinary shares in the company if the 30 day volume weighted average share price in Cue Energy Resources Ltd quoted on the ASX increases to 53 cents during the period 1st July 2012 to 30th June 2013. In the event that the share price target is not met within this period then the performance rights lapse. Long term performance targets of the Company will be established every year and the future award of performance rights may be made at the Board’s sole discretion. Following exercise of a performance right, the Company must issue or transfer to the person exercising the performance right the number of shares in respect of which the performance right has been exercised and credited as fully paid. All shares issued or transferred to a participant under this Plan, will, from the date of issue or transfer, rank equally with all other issued shares. Once rights have vested as shares in the company 50% of the shares may be sold on vesting but 50% must be held by the participant for a period of 12 months. Participants will not be required to make any payment for the grant of the performance rights or on the exercise of a vested performance right. The following performance rights were granted to Key Management Personnel on 1 July 2011. Vesting Date Vesting Target M.J. Paton A.M. Knox A.B. Parks T. White 2011 Performance Rights Issue Expire if not vested by 30 June 2013 ASX CUE 53 Cents 1,600,000 800,000 800,000 800,000 The maximum number of performance rights that could vest in future periods and hence be exercised by the participants are as follows: M.J. Paton A.M. Knox A.B. Parks T. White Total Before 30 June 2013 1,600,000 800,000 800,000 800,000 4,000,000 Total 1,600,000 800,000 800,000 800,000 4,000,000 The performance hurdles for the grant of performance rights under the Plan to participants, as described above, are classified as market-based hurdles. 30 ANNUAL REPORT OF DIRECTORS Directors Savings Plan Pursuant to the Directors Savings Plan, Directors can purchase through an appointed trustee, Cue Energy Resources Limited- shares on market in lieu of being paid Directors fees in cash. The number of ordinary shares purchased for the Directors as part of the Plan during the financial year are set out below with the movement in each individual Director’s shareholding: Director Shareholdings Balance at start of year Acquired during year on exercise of options Purchases other than remuneration Purchases as Part of Directors Savings Plan Sales During the year Balance at Report Date Directors 2011 R.G. Tweedie S.J. Koroknay L. Musca Directors 2010 R.G. Tweedie S.J. Koroknay L. Musca 3,363,477 100,000 12,771,227 3,088,539 - 12,771,227 - - - - - - - - - - 100,000 - 277,541 - - 274,938 - - - - - - - - 3,641,018 100,000 12,771,227 3,363,477 100,000 12,771,227 (E) Relationship Between Remuneration Policy and Company Performance Company Performance Review The tables below set out summary information about the company’s earnings and movements in shareholder wealth and Key Management remuneration for the five years to 30 June 2011. Profit Performance Revenue Net profit/(loss) before tax Net profit/(loss) after tax Key Management Remuneration 30 June 2011 $000’s 30 June 2010 $000’s 30 June 2009 $000’s 30 June 2008 $000’s 30 June 2007 $000’s 59,670 25,761 19,107 2,237 64,488 39,351 27,510 963 32,543 (20,905) (24,958) 970 38,845 15,544 11,719 966 9,669 (26,099) (27,623) 1,026 Share Performance 30 June 2011 30 June 2010 30 June 2009 30 June 2008 30 June 2007 Share price at start of year (cents) Share price at end of year (cents) Dividends (cents) Basic earnings/ (loss share (cents) Diluted earnings/(loss) share (cents) 25.0 26.5 - 2.7 2.7 14.5 25.0 - 4.0 4.0 22.5 14.5 - (4.0) (4.0) 17.5 22.5 - 1.9 1.9 19.0 17.5 - (4.4) (4.4) The company’s remuneration policy seeks to reward staff members for their contribution to adding shareholder value and from 30 June 2011 there will be a direct link between remuneration and company share price or financial performance. Cue Energy Resources Limited Annual Report 2011 31 Auditor In accordance with the provisions of the Corporations Act 2001 the Company’s auditor, PKF Chartered Accountants, continues in office. Independence Declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001, is set out on page 33. Non-audit Services The Company may decide to employ the auditor on assignments additional to its statutory audit duties where the auditor’s expertise and experience with the Company are important. The Board of Directors has considered the position and is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor as set out below, did not compromise the audit independence requirement, of the Corporations Act 2001, based on advice received from the Audit Committee, for the following reasons: • All non-audit services have been reviewed by the Board to ensure they do not impact the impartiality and objectivity of the auditor. • None of the services undermine the general principle relating to auditor independence as set out in the Code of Ethics for Professional Accountants, including reviewing or auditing the auditor’s own work, acting in a management or a decision making capacity for the Company, acting as advocate for the Company or jointly sharing economic risk and reward. Audit Services Audit and review of financial reports Non-Audit Services Tax compliance services including review of tax accounting, tax returns and tax advice re tax losses Total $ 71,000 42,682 113,682 Rounding Off of Amounts The Company is a company of the kind referred to in ASIC Class Order 98/0100, dated 10 July 1998, and in accordance with the Class Order amounts in the directors’ report and the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated. Directors’ Insurance and Indemnification of Directors and Auditors During the financial year, the company paid a premium in respect of a contract insuring the directors of the company, the company secretary, and all executive officers of the company and of any related body corporate against a liability incurred as a director, company secretary or executive officer to the extent permitted by the Corporations Act 2001. In accordance with commercial practice, the insurance policy prohibits disclosure of the terms of the policy, including the nature of the liability insured against and the amount of the premium. The company has not otherwise, during or since the end of the financial year indemnified or agreed to indemnify an officer or auditor of the company or any related body corporate against a liability incurred as an officer or auditor. Events Subsequent to Balance Date The Directors are not aware of any matter or circumstance since the end of the financial year, not otherwise dealt with in this report or group financial statements that has significantly or may significantly affect the operations of Cue Energy Resources Limited, the results of those operations or the state of affairs of the Company or Group. On behalf of the Board Richard Tweedie Chairman Dated in Melbourne on this 29th day of September 2011 and signed in accordance with a resolution of the Directors made pursuant to S.298 (2) of the Corporations Act 2001. 3232 ANNUAL REPORT OF DIRECTORS AudItoR’S IndependenCe deClARAtIon Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 33 33 dIReCtoRS’ deClARAtIon The directors of Cue Energy Resources Limited declare that: (a) in the Directors’ opinion the financial statements and notes and the Remuneration report in the Directors Report set out on pages 25 to 31, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2011 and of its performance, for the financial year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and Corporations Regulations 2001. (b the financial report also complies with International Financial Reporting Standards as disclosed in Note 1; and (c) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 by the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2011. Signed in accordance with a resolution of the Directors. Dated in Melbourne this 29th day of September 2011. Richard Tweedie Chairman 34 Financial RepoRt 2011 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 30 June 2011 Production income Production costs Gross profit from production Other income Amortisation costs Impairment expenses Finance costs • Interest expense • Net realised gain/(loss) on oil hedge derivatives • Change in fair value of derivatives • Net foreign currency exchange gain/(loss) Other expenses Profit before income tax Income tax expense Net profit for the year Change in the value of available for sale financial assets Other comprehensive income for the year net of tax Total comprehensive income for the year Net Profit is attributable to: owners of Cue Energy Resources Limited Total comprehensive income for the year is attributable to: owners of Cue Energy Resources Limited Basic earnings per share Diluted earnings per share Consolidated Note 2011 $000’s 2010 $000’s 3 4 - 3 4 4 4 4, 3 10 4, 3 4 6 52,506 (9,113) 43,393 7,164 (9,644) (2,838) (173) (1,209) (935) (5,328) (4,669) 25,761 (6,654) 54,700 (11,076) 43,624 5,464 (11,418) (236) (240) 575 1,420 2,329 (2,167) 39,351 (11,841) 19,107 27,510 - - (141) (141) 19,107 27,369 19,107 27,510 19,107 27,369 Note $ $ 21 21 0.03 0.03 0.04 0.04 The accompanying notes form part of and are to be read in conjunction with these Financial Statements. Cue Energy Resources Limited Annual Report 2011 35 CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 30 June 2011 Current Assets Cash and cash equivalents Trade and other receivables Other financial assets Total Current Assets Non Current Assets Property, plant and equipment Deferred tax assets Exploration and evaluation expenditure Production properties Total Non Current Assets Total Assets Current Liabilities Trade and other payables Other financial liabilities Financial liability-secured Tax liabilities Provisions Total Current Liabilities Non Current Liabilities Financial liability - secured Deferred tax liabilities Provisions Total Non Current Liabilities Total Liabilities Net Assets Equity Issued capital Reserves Accumulated losses Total Equity Consolidated Note 2011 $000’s 2010 $000’s 25(b) 8 10 9 6 12 14 15 10 16 6 17 16 6 17 52,811 17,286 - 70,097 72 11,612 13,166 68,786 93,636 163,733 5,547 935 5,086 5,280 379 29,373 13,035 1,420 43,828 72 15,124 24,817 66,714 106,727 150,555 4,090 - 7,720 4,478 348 17,227 16,636 - 26,727 946 27,673 44,900 6,403 27,217 873 34,493 51,129 118,833 99,426 7 7 151,768 391 (33,326) 118,833 151,468 391 (52,433) 99,426 The accompanying notes form part of and are to be read in conjunction with these Financial Statements. 3636 Financial report 2011 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2011 Consolidated Balance at 1 July 2010 Profit for the period Other comprehensive income Total comprehensive income for the period Transactions with the owners in their capacity as owners: Security-based payments Issue of shares, net of costs Balance at 30 June 2011 Consolidated Balance at 1 July 2009 Profit for the period Other comprehensive income Total comprehensive income for the period Transactions with the owners in their capacity as owners: Security-based payments Issue of shares, net of costs Balance at 30 June 2010 Issued Capital Accumulated Losses Share-based Payments Reserve Available for Sale Reserve $’000 $’000 $’000 $’000 151,468 (52,433) 391 - - - - 300 19,107 - 19,107 - - - - - - - 151,768 (33,326) 391 - - - - - - - Issued Capital Accumulated Losses Share-based Payments Reserve Available for Sale Reserve $’000 $’000 $’000 $’000 Total $’000 99,426 19,107 - 19,107 - 300 118,833 Total $’000 62,332 27,510 (141) 141,800 (79,943) 334 - - - - 9,668 27,510 - 27,510 - - 151,468 (52,433) - - - 57 - 391 141 - (141) (141) 27,369 - - - 57 9,668 99,426 The accompanying notes form part of and are to be read in conjunction with these Financial Statements. Cue Energy Resources Limited Annual Report 2011 37 Consolidated Note 2011 $000’s 2010 $000’s 49,026 349 (3,459) (173) (2,901) (1,607) 41,235 (2,185) 5,050 (24) (6,575) - 54,713 288 (11,268) (386) (229) (898) 42,220 (6,734) - (23) (11,426) 670 (3,734) (17,513) 300 (9,036) - (8,736) 28,765 29,373 (5,327) 52,811 - (10,070) 9,668 (402) 24,305 4,324 744 29,373 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 30 June 2011 Cash Flows From Operating Activities Receipts from customers Interest received Payments to employees and other suppliers Interest paid Income tax paid Royalties paid Net Cash Provided by Operating Activities 25(a) Cash Flows From Investing Activities Payments for exploration expenditure Proceeds on refund of exploration expenditures Payment for office equipment Payments for production property Proceeds on sale of investments Net Cash Used In Investing Activities Cash Flows From Financing Activities Proceeds from borrowings Repayment of borrowings Proceeds from entitlement offer, net of costs Net Cash Used In Financing Activities Net Increase in Cash and Cash Equivalents Cash and cash equivalents at the beginning of the period Effect of exchange rate change on foreign currency balances held at the beginning of the year Cash and Cash Equivalents at the end of the Period 25(b) The accompanying notes form part of and are to be read in conjunction with these Financial Statements. 3838 Financial report 2011 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS for the year ended 30 June 2011 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cue Energy Resources Limited is incorporated and domiciled in Australia. The financial report was authorised for issue by the Directors on the date the Directors’ Declaration was signed. (a) Operations and principal activities Operations comprise petroleum exploration, development and production activities. (b) Statement of compliance The financial report is a general purpose financial report presented in Australian dollars which has been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations adopted by the Australian Accounting Standards Board (“AASB”) and the Corporations Act 2001. International Financial Reporting Standards (“IFRSs”) form the basis of Australian Accounting Standards adopted by the AASB. The financial reports of the consolidated entity also comply with IFRS and interpretations adopted by the International Accounting Standards Board. The accounting policies set out below have been applied consistently to all periods presented in this report. (c) Basis of preparation The financial report has been prepared for a going concern using the historical cost basis except for shares held in listed companies, which are recognised at fair value. Fair value means the amount for which an asset could be exchanged, or liability settled, between knowledgeable, willing partners in an arm’s length transaction. (d) Critical accounting estimates and judgements The preparation of a financial report in conformity with Australian Accounting Standards requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. These accounting policies have been consistently applied by each entity in the consolidated entity. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. (i) Recovery of deferred tax assets Deferred tax assets resulting from unused tax losses have been recognised on the basis that management considers it is probable that future tax profits will be available to utilise the unused tax losses. (ii) Share-based payment transactions The Group measures the cost of equity settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using the Black Scholes Option Valuation Model. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity (see note 23). The Group measures the cost of cash-settled share-based payments at fair value at the grant date using the Black-Scholes Option Valuation Model by taking into account the terms and conditions upon which the instruments were granted. (iii) Impairment testing Determining whether exploration expenditure and production properties is impaired. Production properties impairment testing requires an estimation of the value in use of the cash generating units to which deferred production property expenses have been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate present value. (iv) Useful life of production property assets As detailed at Note 1 (m) “Production Properties”, production properties are amortised on a unit of production basis, with separate calculations being made for each resource. Estimates of reserve quantities are a critical estimate impacting amortisation of production property assets. (v) Estimates of reserve quantities The estimated quantities of Proven and Probable hydrocarbon reserves reported by the Company are integral to the calculation of depletion and depreciation expense and to assessments of possible impairment of assets. Estimated reserve quantities are based upon interpretations of geological and geophysical models and assessments of the technical feasibility and commercial viability of producing the reserves. These assessments require assumptions to be made regarding future development and production costs, commodity prices, exchange rates and fiscal regimes. The estimates of reserves may change from period to period as the economic assumptions used to estimate the reserves can change from period to period, and as additional geological data is generated during the course of operations. Reserves estimates are prepared in accordance with the Company’s policies and procedures for reserves estimation which conform to guidelines prepared by the Society of Petroleum Engineers. Cue Energy Resources Limited Annual Report 2011 39 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’) (e) Adoption of new and revised accounting standards All new and revised Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are relevant to Cue Energy Resources Limited and its subsidiary’s operations and effective for annual reporting periods beginning on 1 July 2010 have been adopted by the consolidated entity. Consideration has been given to the following standards, amendments to standards and interpretations, identified as those which may impact the entity in the period of initial application. They are available for early adoption at 30 June 2011, but have not been applied in preparing this financial report: Details of New Standard / Amendment / Interpretation AASB 10 replaces AASB 127 and outlines 3 key elements of control. According to AASB 10 an investor controls an investee if and only if the investor has all the following: (a) power over the investee; (b) exposure, or rights, to variable returns from its involvement with the investee; and (c) the ability to use its power over the investee to affect the amount of the investor’s returns AASB 11 replaces the AASB 131 Interests in Joint Ventures. The previous standard had 3 types of Joint ventures whereas AASB 11 only has two. These are: • • Joint Operations; and Joint Ventures. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Those parties are called joint venturers. Joint ventures must now be accounted for using the equity method of accounting. The option to proportionately consolidate a joint venture entity has been removed. This will have significant implications for entities that currently use proportionate consolidation. Some entities only have interests in joint ventures and only use proportionate consolidation. Adopting AASB 11 will cause them to use equity accounting and will result in a different presentation in the Statement of Comprehensive Income, Statement of Financial Position and Statement of Cash Flows. AASB 12 provides the disclosure requirements for entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. As such, it pulls together and replaces disclosure requirements from many existing standards. Issue Date Operative Date (Annual reporting period beginning on or after) Aug 2011 1 Jan 2013 Aug 2011 1 Jan 2013 Aug 2011 1 Jan 2013 AASB No. Title 10 Consolidation 11 Joint Arrangements 12 Disclosure of Interests in Other Entities 4040 Financial report 2011 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’) AASB No. Title Details of New Standard / Amendment / Interpretation Issue Date Operative Date (Annual reporting period beginning on or after) 13 Fair Value Measurement AASB 13: defines fair value; Sep 2011 1 Jan 2013 (a) sets out in a single IFRS a framework for measuring fair value; and (b) requires disclosures about fair value measurements. Fair value is defined as: “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price)”. The standard does not require fair value measurements in addition to those already required or permitted by other IFRSs. 1053 Application of Tiers of Australian Accounting Standards This Standard establishes a differential financial reporting framework consisting of two Tiers of reporting requirements for preparing general purpose financial statements: June 2010 1 July 2013 (a) Tier 1: Australian Accounting Standards; and (b) Tier 2: Australian Accounting Standards – Reduced Disclosure. (c) As a listed company, Cue Energy Resources Limited is required to comply with Tier 1 reporting. 2010 – 2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements This Standard gives effect to Australian Accounting Standards – Reduced Disclosure Requirements. AASB 1053 provides further information regarding the differential reporting framework and the two tiers of reporting requirements for preparing general purpose financial statements. Jun 2010 1 Jul 2013 The Company does not anticipate early adoption of any of the above reporting requirements. The consolidated entity is still currently evaluating the impact that ASSB II “Joint Arrangements” will have on its financial statements, however, the Company does not expect the requirements of other Accounting Standards to have any material effect on the consolidated entity’s financial statements. (f) Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Cue Energy Resources Limited (‘’company’’ or ‘’parent entity’’) as at 30 June 2011 and the results of all subsidiaries for the year then ended. Cue Energy Resources Limited and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity. Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Refer to Note 1(w) for the details. The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest is recognised directly in equity attributable to the parent. Non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of comprehensive income and statement of financial position of the consolidated entity. Losses incurred by the consolidated entity are attributed to the non- controlling interest in full, even if that results in a deficit balance. Where the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non- controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The consolidated entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Investments in subsidiaries are accounted for at cost in the individual financial statements of Cue Energy Resources Limited. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 41 41 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’) (g) Revenue recognition Revenue is recognised in the statement of comprehensive income when the significant risks and rewards of ownership have been transferred to the buyer. Revenue is recognised and measured at the fair value of the consideration or contributions received, net of goods and service tax (“GST”), to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Sales revenue Sales revenue is recognised on the basis of the Group’s interest in a producing field (“entitlements” method), when the physical product and associated risks and rewards of ownership pass to the purchaser, which is generally at the time of ship or truck loading, or in certain instances the product entering the pipeline. Revenue earned under a production sharing contract (“PSC”) is recognised on a net entitlements basis according to the terms of the PSC. Interest income Interest revenue is recognised as interest accrues using the effective interest method. This is a method calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial assets to the net carrying amount of the financial asset. Other income Other income is recognised in the statement of comprehensive income at the fair value of the consideration received or receivable, net of GST, when the significant risks and rewards of ownership have been transferred to the buyer or when the service has been performed. The gain or loss arising on disposal of a non-current asset is included as other income at the date control of the asset passes to the buyer. The gain or loss on disposal is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal. (h) Exploration and evaluation project expenditure Costs incurred during the exploration, evaluation and development stages of specific areas of interest are accumulated. Such expenditure comprises net direct costs and an appropriate portion of related overhead expenditure, but does not include general overheads or administrative expenditure not having a specific nexus with a particular area of interest. Expenditure is only carried forward as an asset where it is expected to be fully recouped through the successful development of the area, or where activities to date have not yet reached a stage to allow adequate assessment regarding existence of economically recoverable reserves, and active and significant operations in relation to the area are continuing. Ultimate recoupment of costs is dependent on successful development and commercial exploitation, or alternatively, sale of respective areas. Costs are written off as soon as an area has been abandoned or considered to be non-commercial. No amortisation is provided in respect of projects in the exploration, evaluation and development stages until they are reclassified as production properties. Restoration costs recognised in respect of areas of interest in the exploration and evaluation stage are carried forward as exploration, evaluation and development expenditure. (i) Impairment The carrying amounts of the Company’s and consolidated entity’s assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indications exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds the recoverable amount. Impairment losses are recognised in the statement of comprehensive income, unless an asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through profit or loss. Impairment losses recognised in respect of cash-generating units are allocated to reduce the carrying amount of the assets in the unit (group of units) on a pro rata basis. (j) Calculation of recoverable amount For oil and gas assets the estimated future cash flows are based on value in use calculations using estimates of hydrocarbon reserves, future production profiles, commodity prices, operating costs and any future development costs necessary to produce the reserves. Estimates of future commodity prices are based on contracted prices where applicable or based on forward market prices where available. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the assets belongs. (k) Reversals of impairment An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. No impairment loss is reversed in respect of goodwill. (l) Capitalisation of borrowing costs Borrowing costs, including interest and finance charges relating to major oil and gas assets under development up to the date of commencement of commercial operations, are capitalised as a component of the cost of development. Where funds are borrowed specifically for qualifying projects the actual borrowing costs incurred are capitalised. Where the projects are funded through general borrowings the borrowing costs are capitalised based on the weighted average borrowing rates. Borrowing costs incurred after commencement of commercial operations are expensed. 4242 Financial report 2011 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’) (m) Production properties Restoration Production properties are carried at balance date at cost less accumulated amortisation and accumulated impairment losses. Production properties represent the accumulation of all exploration, evaluation, development and acquisition costs in relation to areas of interest in which production licences have been granted. Amortisation of costs is provided on the unit-of-production basis, separate calculations being made for each resource. The unit-of- production basis results in an amortisation charge proportional to the depletion of economically recoverable reserves (comprising both proven and probable reserves). Amounts (including subsidies) received during the exploration, evaluation, development or construction phases which are in the nature of reimbursement or recoupment of previously incurred costs are offset against such costs. (n) Property, plant and equipment Class of Fixed Asset Plant and equipment Depreciation Rate 5-33% All items of property, plant and equipment are initially recorded at cost. Property, plant and equipment is carried at cost less accumulated depreciation and accumulated impairment losses. Depreciation is calculated on a diminishing value basis so as to allocate the cost of each item of equipment over its expected economic life. The economic life of equipment has due regard to physical life limitations and to present assessments of economic recovery. Estimates of remaining useful lives are made on a regular basis for all assets, with annual reassessment for major items. Gains and losses on disposal of property, plant and equipment are taken into account in determining the operating results for the year. (o) Cash and cash equivalents For purposes of the statement of cash flows, cash includes deposits at call which are readily convertible to cash on hand and which are used in the cash management function on a day-to-day basis, net of outstanding bank overdrafts. (p) Receivables Trade accounts receivable, amounts due from related parties and other receivables represent the principal amounts due at balance date plus accrued interest and less, where applicable, any unearned income and allowance for doubtful accounts. Provisions for future environmental restoration are recognised where there is a present obligation as a result of exploration, development, production, transportation or storage activities having been undertaken, and it is probable that an outflow of economic benefits will be required to settle the obligation. The estimated future obligations include the costs of removing facilities, abandoning wells and restoring the affected areas. The provision of future restoration costs is the best estimate of the present value of the future expenditure required to settle the restoration obligation at the reporting date, based on current legal requirements. Future restoration costs are reviewed annually and any changes in the estimate are reflected in the present value of the restoration provision at the balance sheet date, with a corresponding change in the cost of the associated asset. The amount of the provision for future restoration costs relating to exploration, development and production facilities is capitalised and depleted as a component of the cost of those activities. (s) Employee benefits The following liabilities arising in respect of employees benefits are measured at their nominal amounts: - wages and salaries and annual leave expected to be settled within twelve months of the reporting date; and - other employee benefits expected to be settled within twelve months of the reporting date. All other employee benefit liabilities expected to be settled more than 12 months after the reporting date are measured at the present value of the estimated future cash outflows in respect of services provided up to the reporting date. Liabilities are determined after taking into consideration estimated future increase in wages and salaries and past experience regarding staff departures. Related on- costs are included. (t) Joint ventures When a member of the group participates in a joint venture arrangement, the member recognises its proportionate interest in the individual assets, liabilities, revenue and expenses of the joint venture. The liabilities recognised include its share of those for which it is jointly liable. Details of major joint venture interests are set out in Note 18. (q) Payables (u) Income tax Payables represent the principal amounts outstanding at balance date plus, where applicable, any accrued interest. Trade payables are normally paid within 30 days. (r) Provisions A provision is recognised in the statement of financial position when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risk specific to the liability. The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 43 43 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’) (u) Income tax (Cont’) Transactions and Balances Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Cue Energy Resources Limited (the ‘head entity’) and its wholly- owned Australian controlled entities have formed an income tax consolidated group under the tax consolidation regime effective 1 July 2010. The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the group allocation approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entitles in the tax consolidated group. Assets or liabilities arising under tax funding agreement with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. (v) Foreign currency Functional and presentation currency The financial statements of each group entity are measured using its functional currency, which is the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars, as this is the parent entity’s functional and presentation currency. Transaction in foreign currencies of entities within the consolidated entity are translated into functional currency at the rate of exchange ruling at the date of the transaction. Foreign currency monetary items that are outstanding at the reporting date (other than monetary items arising under foreign currency contracts where the exchange rate for that monetary item is fixed in the contract) are translated using the spot rate at the end of financial year. Resulting exchange differences arising on settlement or re-statement are recognized as revenues and expenses for the financial year. (w) Business Combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the consolidated entity assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the consolidated entity’s operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the consolidated entity remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not measured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-exiting investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. 4444 Financial report 2011 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’) (w) Business Combinations (cont) (y) Financial instruments Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months form the date of acquisition or (ii) when the acquirer receives all the information possible to determine fair value. (x) Share-based payment transactions Equity settled transactions: The Group provides benefits in the form of share-based payments to executives, senior management and general staff. These personnel render services in exchange for shares or rights over shares (equity- settled transactions). The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value for the options over ordinary shares are determined using the Black-Scholes Option Valuation Model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company (market conditions) if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the vesting date). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting date has expired and (ii) the Group’s best estimate of the number of equity instruments that will ultimately vest. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. The profit and loss charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is only conditional upon a market condition. If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of earnings per share (see note 21). Classification The group classifies its financial instruments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for- sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its financial instruments at the initial recognition. Financial assets at fair value through profit or loss Upon initial recognition a financial asset or financial liability is designated as at fair value through profit or loss when: (a) an entire contract containing one or more embedded derivatives is designated as a financial asset or financial liability at fair value through profit or loss. (b) doing so results in more relevant information, because either: (i) it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising gains or losses on them on different bases; or (ii) a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to key management personnel. Investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured are not designated as at fair value though profit or loss. Present investment strategy is to keep assets in a highly liquid state and almost all of the investment assets are held in cash. A gain or loss arising from a change in the fair value of a financial asset or financial liability classified as at fair value through profit or loss is recognised in profit or loss. Derivate financial instruments and hedging The Group can use derivative financial instruments (including forward currency contracts, forward commodity contracts and interest rate swaps) to hedge its risks associated with foreign currency, commodity prices and interest rate fluctuations. Such derivate financial instruments are initially recognised at fair value on the date at which a derivate contract is entered into and are subsequently remeasured to fair value. Certain other derivate instruments which are economic hedges are also held for trading for the purpose of making short-term gains. These derivatives do not qualify for hedge accounting and changes in fair value are recognised immediately in profit or loss in income or expenses. Derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Held for trading derivate assets and liabilities are classified as current in the statement of financial position. Derivative assets and liabilities are classified as non-current when the remaining maturity is more than 12 months, or current when the remaining maturity is less than 12 months. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 45 45 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’) (y) Financial instruments (Cont’) The fair values of forward currency contracts are calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair values of interest rate swaps are determined using a valuation technique based on cash flows discounted to present value using current market interest rates. The fair value of commodity contracts are also determined using a discounted cash flow valuation technique using cash flow estimates based on observable and unobservable forward prices for the commodity. Any gains or losses arising from changes in the fair value of derivatives, except for those that qualify as cash flow hedges, are taken directly to profit or loss for the year. Non-listed investments for which fair value cannot be reliably measured, are carried at cost and tested for impairment. Held-to-maturity investments Fixed term investments intended to be held to maturity are classified as held-to-maturity investments. They are measured at amortised cost using the effective interest rate method. Loans and receivables Loan and receivables are measured at fair value at inception and subsequently at amortised cost using the effective interest rate method. Interest income is recognised by applying the effective interest rate method. Available-for-sale Available-for-sale financial assets include any financial assets not included in the above categories and are measured at fair value. Unrealised gains and losses arising from changes in fair value are taken directly to equity. The cumulative gain or loss is held in equity until the financial asset is de-recognised, at which time the cumulative gain or loss held in equity is recognised in profit and loss. An impairment loss arising in relation to an “available-for-sale” instrument is recognised directly in profit and loss for the period Financial liabilities Financial liabilities include trade payables, other creditors and loans from third parties including inter-company balances and loans from or other amounts due to director-related entities. Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principle payments and amortisation. Impairment of financial assets The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for- sale, a significant or prolonged decline in the fair value of a security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in the statement of comprehensive income. Impairment losses recognised in the statement of comprehensive income on equity instruments classified as available-for-sale are not reversed through the statement of comprehensive income. Full disclosure of information about financial instruments to which the Group is a party is provided in Note 2. (z) Leases Leases of property, plant and equipment where substantially all the risks and benefits incidental to ownership of the asset, are classified as finance leases. Finance leases are capitalised, recorded as an asset and a liability equal to the present value of the minimum lease payments, including any residual payments as determined by the lease contract. Leased assets are amortised on a straight line basis over the estimated useful lives where it is likely that the consolidated entity will obtain legal ownership of the asset on expiry of the lease. Lease payments are allocated over both the lease interest expense and the lease liability. Lease payments for operating leases where substantial risks and benefits remain with the lessor are charged as expenses in the periods in which they are incurred. (aa) Contributed equity Ordinary share capital is recognised at the fair value of the consideration received by the company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received. Ordinary share capital bears no special terms or conditions affecting income or capital entitlements of the shareholders. (ab) Earnings per share Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends) and preference share dividends, divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share is calculated as net profit attributable to members of the parent, adjusted for: • • costs of servicing equity (other than dividends) and preference share dividends; the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and • other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares; divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. (ac) Rounding The amounts contained in this financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the company under ASIC Class Order 98/0100. The Company is an entity to which the Class Order applies. 4646 Financial report 2011 2. FINANCIAL INSTRUMENTS The Group’s principal financial instruments comprise receivables, payables, borrowings, available for sale financial assets, cash and short term deposits. The Group manages its exposure to key financial risks, including interest rate and currency risk through management’s regular assessment of financial risks. The objective of the assessment is to support the delivery of the Group’s financial targets whilst protecting future financial security. The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, commodity price risk, other price risk, credit risk and liquidity risk. The Group uses different methods to measure and manage different types of risk to which it is exposed. These include monitoring levels of exposure to interest rate and foreign exchange risk and assessments of market forecasts for interest rate, foreign exchange and commodity prices. Aging analyses and monitoring of specific credit allowances are undertaken to manage credit risk and liquidity risk is monitored through the development of future rolling cash flow forecasts. These risks are summarised below. Primary responsibility for identification and control of financial risks rests with the Chief Financial Officer under the authority of the Board. The Board reviews and agrees management’s assessment for managing each of the risks identified below, including foreign currency risk, interest rate risk, credit allowances, and future cash flow forecast projections. The carrying amounts and net fair values of the economic entity’s financial assets and liabilities at balance date are: Consolidated Financial assets Cash and cash equivalents Trade and other receivables Other financial assets Non-traded financial assets Financial liabilities Trade and other payables Other financial liabilities-derivatives Current liability – tax Financial liabilities-secured Non-traded financial liabilities Risk Exposures and Responses (a) Fair Values Carrying Amount Net Fair Value 2011 $000’s 2010 $000’s 2011 $000’s 2010 $000’s 52,811 17,286 - 70,097 5,547 935 5,280 5,086 16,848 29,373 13,035 1,420 43,828 4,090 - 4,478 14,123 22,691 52,811 17,286 - 70,097 5,547 935 5,280 5,086 16,848 29,373 13,035 1,420 43,828 4,090 - 4,478 14,123 22,691 The financial assets and liabilities of the Group are recognised on the statement of financial position at their fair value in accordance with the accounting policies in Note 1. Net Fair Values The net fair value of traded instruments have been valued at the quoted market bid price at balance date adjusted for transaction costs expected to be incurred. For other assets and other liabilities the net fair value approximates their carrying value. Basis for determining fair values The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments: Trade and other receivables The carrying value less impairment provision of trade receivables is a reasonable approximation of their fair values due to the short-term nature of trade receivables. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 47 47 2. FINANCIAL INSTRUMENTS (Cont’) Available-for-sale financial assets The fair value of available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date. Derivatives 10,000 barrels per month have been sold forward up until 31 December 2011 at Dated Brent USD98 per barrel (2010: 90,000 bbls at Tapis USD86 per barrel). Fair value is determined by reference to active market pricing at balance date. Financial liabilities Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. Where these cash flows are in a foreign currency the present value is converted into Australian dollars at the foreign exchange spot rate prevailing at reporting date. Trade and other payables The carrying value of trade payables is a reasonable approximation of their fair values due to the short term nature of trade payables. The following table details the entities fair value of financial instruments categorised by the following levels: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs) 30 June 2011 Level 1 Level 2 Level 3 Level 4 Financial assets held at fair value through profit & loss Forward Sale (Swap) instrument Total - - (935) (935) 30 June 2010 Level 1 Level 2 Level 3 Financial assets held at fair value through profit & loss Forward Sale (Swap) instrument Total (b) Interest Rate Risk 1,420 1,420 - - - - - - - - Level 4 1,420 1,420 The Group’s exposure to market interest rate is related primarily to the Group’s cash deposits (Note 25b) and borrowings (Note 16). At balance date, the Group had the following mix of financial assets and liabilities exposed to Australian and overseas variable interest rate risk that are not designated in cash flow hedges: Financial Assets Cash & cash equivalents Financial Liabilities Other financial liabilities Financial liabilities-secured Net exposure 4848 Consolidated 2011 $000’s 2010 $000’s 52,811 29,373 (935) (5,086) 46,790 - (14,123) 15,250 Financial report 2011 2. FINANCIAL INSTRUMENTS (Cont’) The Group constantly analyses its interest rate opportunity and exposure. Within this analysis consideration is given to existing positions and alternative arrangement on fixed or variable deposits. The following sensitivity analysis is based on the interest rate opportunity/risk in existence at balance date. At 30 June, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows: Based upon the average balance of net exposure during the year, if interest rates changed by +/-1%, with all other variables held constant, the estimated impact on post-tax profit and equity would have been: Impact on post-tax profit Interest rates +1% Interest rates –1% Impact on equity Interest rates +1% Interest rates –1% Consolidated 2011 $000’s 2010 $000’s 519 (519) 519 (519) 161 (161) 161 (161) A movement of + and – 1% is selected because this historically is within a range of rate movements and available economic data suggests this range is reasonable. (c) Foreign Exchange Risk The Group is subject to foreign exchange rate risk on its international exploration and appraisal activities where costs are incurred in foreign currencies, in particular United States dollars. The Board approved the policy of holding certain funds in United States dollars to manage foreign exchange risk. The Group’s exposure to foreign exchange risk at the reporting date was as follows (holdings are shown in AUD equivalent): Consolidated Financial assets Cash and cash equivalents Receivables Financial liabilities Current payables Financial liabilities-secured 30 June 2011 30 June 2010 USD $000’s NZD $000’s PNG KINA $000’s USD $000’s NZD $000’s PNG KINA $000’s 49,571 9,557 2,889 5,086 1,229 216 1,205 - 7 - - - 22,693 12,608 2,830 14,123 363 302 968 - 9 - 5 - For the year ended as at 30 June, if the currencies set out in the table below, strengthened or weakened against the US dollar by the percentage shown, with all other variables held constant, net profit for the year would increase/(decrease) and net assets would increase / (decrease) by: Impact on post-tax profit AUD/USD +10% AUD/USD -10% Impact on equity AUD/USD +10% AUD/USD -10% Consolidated 2011 $000’s 2010 $000’s (2,195) 2,195 (2,195) 2,195 (1,589) 1,589 (1,589) 1,589 Management believes the balance date risk exposures are representative of the risk exposure inherent in the financial instruments. A movement of + and – 10% is selected because a review of recent exchange rate movements and economic data suggests this range is reasonable. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 49 49 2. FINANCIAL INSTRUMENTS (Cont’) (d) Commodity price risk The Group is involved in oil and gas exploration and appraisal and since April 1998 has received revenue from the sale of hydrocarbons. Exposure to commodity price risk is therefore limited to this production and from successful exploration and appraisal activities the quantum of which at this stage cannot be measured. Commodity price risk exposure The Group is exposed to commodity price fluctuations through the sale of petroleum products denominated in US dollars. The Group may enter into commodity crude oil price swap and option contracts to manage its commodity price risk. At 30 June 2011 the Group has an open oil price swap contract (2010: 90,000 bbls at Tapis USD86 per bbl). The contract is current for 60,000 barrels at Dated Brent USD98 per barrel. Sensitivity of the oil swap contract to changes of +/- 20% would impact on post tax profit and equity as follows: Impact on post-tax profit US dollar oil price +20% US dollar oil price –20% Impact on equity US dollar oil price +20% US dollar oil price –20% Consolidated 2011 $000’s 2010 $000’s 429 (429) 429 (429) 199 (199) 199 (199) If the US dollar oil price changed by +/-20% from the average oil price during the year, with all other variables held constant, the estimated impact on post-tax profit and equity would have been: Impact on post-tax profit US dollar oil price +20% US dollar oil price –20% Impact on equity US dollar oil price +20% US dollar oil price –20% Consolidated 2011 $000’s 2010 $000’s 4,674 (4,674) 4,674 (4,674) 6,157 (6,157) 6,157 (6,157) Management believes the balance date risk exposures are representative of the risk exposure inherent in the financial instruments. A movement of + and – 20% is selected because a review of historical oil price movements and economic data suggests this range is reasonable. Other price risks The Group is exposed to equity price risks arising from equity investments. Equity investments are held for strategic rather than trading purposes. The Group does not actively trade these investments and the potential impact of any movements in equity market prices would have an insignificant impact on profit and equity. The Group’s sensitivity to equity prices has not changed significantly from the prior year and is not material. 5050 Financial report 2011 2. FINANCIAL INSTRUMENTS (Cont’) (e) Liquidity risk Liquidity Risk is the risk that the group, although balance sheet solvent, cannot meet or generate sufficient cash resources to meet its payment obligations in full as they fall due, or can only do so at materially disadvantageous terms. Ultimate responsibility for liquidity risk management rests with the Board of directors, who have established an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. he Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities and by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. The Group predominantly funded the Maari oil field development from external borrowings as part of its liquidity risk management process. As the field is now in production, the production receipts are being used to directly pay down the project borrowings directly reducing the Group’s exposure to liquidity risk. During the year the Company received equity of $0.3 million on conversion of options. The Group is consequently more than sufficiently solvent to meet its payment obligations in full as they fall due. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Group aims to maintain flexibility in funding to meet ongoing operational requirements, exploration and development expenditure, and small-to-medium-sized opportunistic projects and investments, by keeping committed credit facilities available. The following table analyses the contractual maturities of the Group’s financial liabilities into relevant groupings based on the remaining period at the reporting date to the contractual undiscounted cash flows comprising principal and interest repayments. Estimated variable interest expense is based upon appropriate yield curves existing as at 30 June 2011. Consolidated 2011 Non-derivative financial liabilities Trade and other payables (i) Current tax liability Bank loans Derivative financial liabilities Other financial liabilities-derivatives 2010 Non-derivative financial liabilities Trade and other payables (i) Current tax liability Bank loans (i) Repayment within 3 months. (f) Credit risk 12 months or less $000’s 1 to 2 years $000’s 2 to 5 years $000’s More than 5 years $000’s 5,547 5,280 5,086 15,913 935 935 4,090 4,478 7,720 16,288 - - - - - - - - 6,403 6,403 - - - - - - - - - - - - - - - - - - - - Credit risk arises from the financial assets of the group, which comprise cash and cash equivalents, trade and other receivables, available-for-sale financial assets. The Group’s exposure to credit risk arises from potential default of the counter party, with maximum exposure equal to the carrying amount of these instruments. Exposure at balance date is addressed in each applicable note. The Group does not hold any credit derivatives to offset its credit exposure. The Group trades only with recognised, creditworthy third parties, and as such collateral is not requested nor is it the Group’s policy to securitize its trade and other receivables. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures including an assessment of their independent credit rating, financial position, past experience and industry reputation. The risks are regularly monitored. At balance date there are no significant concentrations of credit risk within the Group. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 51 51 3. REVENUE Operating Revenue Production income Other Income Management fees Interest from cash and cash equivalents Profit on sale of available for sale Financial assets Profit on sale of exploration assets Oil Hedge Recognition (at fair value) Income: – – realised unrealised – Net foreign currency gain Total Revenue Consolidated 2011 $000’s 2010 $000’s 52,506 54,700 73 312 163 322 - 474 6,779 4,505 - - - - 575 1,420 2,329 4,324 59,670 64,488 5252 Financial report 2011 4. EXPENSES Operating Expenses Production costs Amortisation production properties Interest expense Net realised loss on oil hedge derivatives Change in fair value of derivatives Net foreign currency loss Exploration and evaluation costs written off (Note 12) Other Expenses Depreciation Employee expense (net of superannuation) Superannuation contribution expense Administrative expenses Operating lease expense Share based payments expense Other expense Total Operating Expenses 5. AUDITORS REMUNERATION Amounts paid or due and payable to the auditor for: Consolidated 2011 $000’s 2010 $000’s 9,113 9,644 173 1,209 935 5,328 2,838 24 2,956 191 1,265 150 83 4,669 33,909 11,076 11,418 240 - - - 236 26 1,200 156 522 156 107 2,167 25,137 Consolidated 2011 2010 Audit or review of the financial reports 71,000 71,500 Other Services: Tax compliance services 42,682 113,682 20,000 91,500 No other services were provided by the auditor during the period, other than those set out above. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 53 53 6. TAXATION Income Tax Expense Current tax Adjustment to prior periods Deferred tax Income tax expense/(benefit) is attributable to: Profit from continuing operations Aggregate income tax expense Deferred Income tax (revenue)/expenses included in income tax comprises: Decrease/(increase) in deferred tax assets (Decrease)/increase in deferred tax liabilities Numerical reconciliation of income tax expense to prima facie tax on accounting profit/(loss) Consolidated Entity 2011 $000’s 2010 $000’s 3,632 - 3,022 6,654 6,654 6,654 (3,512) 490 (3,022) 3,160 822 7,859 11,841 11,841 11,841 (3,456) 11,315 7,859 Profit/(loss) from continuing operations before income tax expense 25,761 39,351 Tax expense/(benefit) at Australian tax rate of 30% (2010: 30%) 7,742 11,805 Exploration written off Equity cost deductions Unrealised timing differences Difference in overseas tax rates Non-Allowable/(Allowable) mining deductions Other adjustments Tax losses carried forward Adjustments to current tax from prior periods Previously unrecognised tax losses now recognised to reduce tax expense - - 3,501 (767) (2,337) 870 87 (2,442) - (214) - 1,770 - - (822) (698) Income tax expense/(benefit) 6,654 11,841 Tax losses Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit at 30% Current tax liabilities Income tax payable attributable to: Parent Entity Other wholly owned subsidiaries 14,257 4,277 19,509 5,853 - 5,280 5,280 - 4,478 4,478 5454 Financial report 2011 6. TAXATION (Cont’) Non-current assets – deferred tax assets Movements - Consolidated At 30 June 2009 (Charged)/credited to the income statement At 30 June 2010 (Charged)/credited to the income statement At 30 June 2011 Non-current liabilities – deferred tax liabilities Movements - Consolidated At 30 June 2009 (Charged)/credited to the income statement At 30 June 2010 (Charged)/credited to the income statement At 30 June 2011 Deferred tax balances – net impact on income tax expenses 30 June 2010 30 June 2011 Tax Losses $000’s Total $000’s 11,668 3,456 15,124 (3,512) 11,612 11,668 3,456 15,124 (3,512) 11,612 Exploration Assets Total (15,902) (11,315) (27,217) 490 (15,902) (11,315) (27,217) 490 (26,727) (26,727) (12,093) (15,115) (12,093) (15,115) The Company has also prepared forward projections of taxable future profits over 5 years to determine whether it will have sufficient taxable profits to recoup the losses it has recorded in the current period as deferred tax assets. These projections are based upon taxable income to the subsidiary entity in the form of hydrocarbon receipts. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 55 55 7. CAPITAL AND RESERVES (a) Share capital Issued and paid up 694,819,718 (2010: 693,319,718) ordinary fully paid shares Balance at 1 July 2010 Entitlement offer of 1 for 5 @ 0.15 cents 64,455,711 shares 625,000 shares issued to employees (refer to share based payment reserve) 1,500,000 options exercised Closing balance Shares Consolidated 2011 $000’s 2010 $000’s 2011 2010 151,468 141,800 693,319,718 628,239,007 - - 300 9,668 - - - - 64,455,711 - 1,500,000 625,000 151,768 151,468 694,819,718 693,319,718 Ordinary shares have the right to receive dividends as declared and, in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and moneys paid up on shares held. Ordinary shares entitle holders to one vote, either in person or by proxy at a meeting of the Company. The Company has an unlimited authorised capital and the shares have no par value. (b) Share based payment reserve Balance at 1 July Share Rights 625,000 share rights granted 16/04/08 Vested 01/01/10 150,000 share rights granted 01/10/08 Vested 01/01/11 Closing balance Share based payment reserve Nature and purpose of reserve Consolidated 2011 $000’s 2010 $000’s 391 - - 391 334 46 11 391 This reserve is used to record the value of equity benefits provided as part of agreements entered into by the company during the year. Refer to note 23 and the remuneration section of the Director’s Report for details. 5656 Financial report 2011 7. CAPITAL AND RESERVES (Cont’) (c) Unlisted Options As at 30 June 2011 the following Unlisted options were outstanding: 4,300,000 Unlisted options to employees, over fully paid shares. Options are exercisable as follows: No. of Options 01/07/10 Exercise Price (cents) 1,700,000 333,334 333,333 333,333 1,033,334 1,033,333 1,033,333 5,800,000 15 22.5 25 35 20 22.5 25 Grant Date Expiry Date 12/02/09 19/04/12 01/10/08 19/04/12 01/10/08 19/04/12 01/10/08 19/04/12 23/04/07 19/04/12 23/04/07 19/04/12 23/04/07 19/04/12 There are no further conditions attached to the options. Options: Granted During Year Expired Lapsed No. of Options 30/06/11 Vested - - - - - - - - - - - - - - - - 500,000 1,200,000 1,200,000 - - - 333,334 333,333 333,333 333,334 333,333 333,333 700,000 700,000 700,000 333,334 333,333 333,333 700,000 700,000 700,000 1,500,000 4,300,000 4,300,000 Option holders do not have the right to receive a dividend and are not entitled to vote at a meeting of the Company. Options may be exercised at any time from the date they vest to the date of their expiry. Share options convert into ordinary shares on a one for one basis on the date they are exercised. (d) Available for sale financial assets reserve Nature and purpose of reserve The fair value reserve recognises the cumulative net change in the fair value of the available for sale investments until the investment is realised. Refer to Statement of Changes in Equity for movement in the reserve accounts. (e) Capital management When managing capital, management’s objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the entity. Management are constantly adjusting the capital structure to take advantage of favourable costs of capital or high returns on assets. As the market is constantly changing, management may change the amount of dividends to be paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 57 57 7. CAPITAL AND RESERVES (Cont’) During 2011 management did not pay any dividends. There has been no change to the strategy adopted by management to control the capital of the entity. The gearing ratios for the year ended 30 June 2011 and 30 June 2010 are as follows: Financial liabilities-secured Other current liabilities (excluding provisions) Total Less cash and cash equivalents Net debt Total equity Total capital Gearing ratio Consolidated Group 2011 $000’s 2010 $000’s 5,086 11,762 16,848 52,811 (35,963) 118,833 151,768 14,123 8,568 22,691 29,373 (6,682) 99,426 151,468 -% -% Net assets have significantly increased from 2010, as the proceeds from production from the Maari oil field has been used to reduce the Groups borrowings which funded the development of the Maari oil field development. Cue Taranaki Pty Ltd, pursuant to its debt facility arrangements, has undertaken not to issue shares to third parties. Apart from this undertaking the Group is not subject to any externally imposed capital requirements. 8. TRADE AND OTHER RECEIVABLES Current receivables Trade receivables Non-trade receivables and prepayments The ageing of trade receivables at the reporting date was as follows: Less than one month One to three months Three to six months Six to twelve months Greater than twelve months Consolidated Group 2011 $000’s 2010 $000’s 8,782 8,504 17,286 6,295 6,740 13,035 8,782 6,295 - - - - - - - - 8,782 6,295 Trade receivables are non-interest-bearing and settlement terms are generally within 30 days. Trade receivables are neither past due nor impaired and relate to a number of independent customers for whom there is no recent history of default. At 30 June 2011 non trade receivables include an amount of $8.224 million owing from the sale of exploration assets, which was paid on 5 July 2011. Impaired receivables At 30 June 2011 there were no current trade receivables that were impaired (2010: $nil). The balance of the allowance for impairment in respect of trade receivables at 30 June 2011 was $nil (2010: $nil). There has been no movement in the allowance during the year. The Directors consider the carrying value of receivables reflect their fair values. 5858 Financial report 2011 9. PROPERTY, PLANT AND EQUIPMENT Office and computer equipment Cost Accumulated depreciation Consolidated 2011 $000’s 2010 $000’s 312 (240) 72 288 (216) 72 Reconciliation of the carrying amounts of each class of property plant and equipment at the beginning and end of the current financial year are set out below: Balance at beginning of year Additions Disposals Depreciation expense Balance at end of year 10. OTHER FINANCIAL ASSETS Current Assets Recognition of oil swap based on market price at balance date Balance at end of year Current Liability Recognition of oil swap based on market price at balance date Balance at end of year Consolidated 2011 $000’s 2010 $000’s 72 24 - (24) 72 75 23 - (26) 72 Consolidated 2011 $000’s 2010 $000’s - - 935 935 1,420 1,420 - - Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 59 59 11. SHARES IN SUBSIDIARIES AT BALANCE DATE Shares held by the parent entity at balance date: Subsidiary Companies Cue PNG Oil Company Pty Ltd Cue Energy Holdings Ltd Cue Mahakam Hilir Pty Ltd (formerly Cue Energy Indonesia Pty Ltd) Cue (Ashmore Cartier) Pty Ltd Cue Sampang Pty Ltd Cue Taranaki Pty Ltd Toro Oil Pty Ltd Cue Malaysia Sdn Bhd* Parent 2011 $ 2010 $ Interest Held Country of Incorporation Principal Activity Petroleum production & exploration Australia Australia Administration 100% 100% 1 1 1 2 1 1 1 2 1 1 1 2 1 1 1 - 100% Australia 100% Australia 100% Australia 100% Australia 100% Australia 100% Malaysia Petroleum production & exploration Petroleum exploration Petroleum exploration Petroleum exploration Petroleum exploration Petroleum production Petroleum exploration Petroleum exploration Galveston Mining Corporation Pty Ltd 1,286,678 1,286,678 100% Australia Less accumulated impairment losses (1,286,678) (1,286,678) - - Cue Exploration Pty Ltd 1,929,077 1,929,077 100% Australia Less accumulated impairment losses (1,343,808) (1,343,808) Total All companies in the Group have a 30 June balance date. 585,269 585,269 585,279 585,277 *On 8 June 2011, Cue Malaysia Sdn Bhd was incorporated. The two Malaysian resident directors are Kevin Forbes Blues and Peter Ian Dias. 6060 Financial report 2011 12. EXPLORATION AND EVALUATION EXPENDITURE Costs carried forward in respect of areas of interest in exploration and evaluation phase Expenditure incurred during the year Expenditure transferred to Production properties during the year Expenditure refunded during the year Expenditure reversed on sale of exploration licence Expenditure written off during the year Closing balance Accumulated costs incurred on current areas of interest net of amounts written off - - Sampang PSC - Mahakam Hilir PSC - - - - PNG PRL 9 PNG PRL14 PNG PDL 3 (non unitized) Carnarvon Basin EP363 - WA-359-P - WA-360-P - WA-361-P - - - - - - 1,677 135 T/37P T/38P PEP 51313 PEP 51149 - AC/RL7 Net accumulated exploration and evaluation expenditure 13. IMPAIRMENT OF PRODUCTION PROPERTY ASSETS Consolidated 2011 $000’s 2010 $000’s 24,817 1,791 (5,109) (5,050) (445) (2,838) 13,166 3,023 26 1,977 220 209 - 120 470 143 1,677 135 - - 3,768 1,398 - 13,166 17,377 7,515 - - - (75) 24,817 8,530 - 1,894 180 209 45 117 450 144 5,982 106 2,041 762 2,612 1,300 445 24,817 At 30 June 2011 the Group reassessed the carrying amount of its oil and gas assets, Production Properties (refer Note 14 and Note 1(j)), for indicators of impairment such as changes in future prices, future costs and reserves. As a result, the recoverable amounts of cash-generating units were formally reassessed but no impairment write-downs were required. Estimates of recoverable amounts are based on the assets’ value in use, determined by discounting each asset’s estimated future cash flows at asset specific discount rates. The pre-tax discount rates applied were equivalent to post-tax discount rates of 10% (2010: 10%) depending on the nature of the risks specific to each asset. Where an asset does not generate cash flows that are largely independent from other assets or groups of assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 61 61 14. PRODUCTION PROPERTIES Balance at beginning of year Expenditure incurred during the year Expenditure transferred from exploration expenditure Amortisation and restoration expense Balance at end of year Net accumulated costs incurred on areas of interest - PNG PDL 3 (unitized) - Oyong – Sampang PSC(i) - Maari – PMP 38160 Total Consolidated 2011 $000’s 2010 $000’s 66,714 6,607 5,109 (9,644) 68,290 9,842 - (11,418) 68,786 66,714 488 21,093 47,205 68,786 617 17,581 48,516 66,714 (i) As a result of a project arrangement in the Jeruk field within the Sampang PSC, Indonesia; Cue may have to reimburse certain monies spent by the incoming party from future profit oil within the Sampang PSC. However, due to the significant uncertainty surrounding the probability of having to make such reimbursement the Company has not recorded a liability in relation to the costs that may be reimbursed. 15. TRADE AND OTHER PAYABLES Current Trade Creditors and accruals Directors and Director related entities Consolidated 2011 $000’s 2010 $000’s 5,472 75 5,547 4,040 50 4,090 The Directors consider the carrying amount of payables reflect their fair values. Trade creditors are generally settled within 30 days. The Group does not have any significant concentration of credit risks. 6262 Financial report 2011 16. INTEREST-BEARING LOANS AND BORROWINGS This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate and foreign currency risk, see Note 2. Interest bearing liabilities Bank loans – secured - current - non-current Bank loans – secured Consolidated 2011 $000’s 2010 $000’s 5,086 - 5,086 7,720 6,403 14,123 A lending facility of US$20 million was entered into during the 2008 reporting period which bears a floating rate of interest. The facility is secured by a first charge over the Group’s interests in the Maari assets in New Zealand with a carrying amount at 30 June 2011 of $47.205 million. The parent company has also provided a financial guarantee for Cue Taranaki Pty Ltd’s performance, as required by the Maari FPSO lease and contract. The Group is subject to certain covenants which are common for such a facility. The average rate for the year was 1.5% (2010: 1.5%), and $5.1 million (2010: $14.1 million) was outstanding at balance date. The facility is available until 2012, and the current amount drawn down is expected to be fully repaid by 2012 directly from production receipts following commencement of production in February 2009. 17. PROVISIONS Current Employee benefits Non-Current Employee benefits Restoration Consolidated 2011 $000’s 2010 $000’s 379 106 840 946 348 33 840 873 Movements in each class of provision during the financial year, other than provisions relating to employee benefits are set out below: Consolidated Balance at 1 July 2010 Provisions made during the year Provisions used during the year Balance at 30 June 2011 Restoration Total Restoration $000’s 840 - - 840 Provisions for future removal and restoration costs are recognised where there is a present obligation as a result of exploration, development, production, transportation or storage activities having been undertaken, and it is probable that an outflow of economic benefits will be required to settle the obligation. The estimated future obligations include costs of removing facilities, abandoning wells and restoring the affected areas. Expected timing of outflow of restoration liabilities is not in the next 12 months from balance date. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 63 63 18. INTERESTS IN JOINT VENTURES Property Operator Petroleum Exploration Properties Carnarvon Basin – Western Australia Cue Interest (%) Gross Area (Km2) Net Area (Km2) Permit Expiry Date WA-359-P WA-360-P WA-361-P WA-389-P WA-409-P New Zealand PEP 51149 PEP 51313 Papua New Guinea PRL 9 PRL 14 Cue Energy Resources Limited Cue Energy Resources Limited Cue Energy Resources Limited Cue Energy Resources Limited Cue Energy Resources Limited Todd Exploration Limited Todd Exploration Limited Oil Search Ltd Oil Search Ltd 30 15 15 35 30 20 20 14.894 10.947 1,218 1,215 649 3,825 569 636 2,593 596 427 609 243 97 3,825 284 127 519 89.1 46.8 31/01/2012 31/01/2012 30/01/2016 29/08/2013 30/04/2014 22/09/2013 29/07/2014 17/12/2012 21/11/2015 Petroleum Production and Exploration Properties New Zealand PMP 38160 Madura - Indonesia OMV New Zealand Limited 5 80 4 02/12/2027 Sampang PSC Santos (Sampang) Pty Ltd 15 (8.181818 Jeruk field) 2,006 300.9 04/12/2027 Papua New Guinea PDL 3 Barracuda Pty Ltd 5.568892 85 4.7 23/12/2021 6464 Financial report 2011 18. INTERESTS IN JOINT VENTURES (Cont’) The share of assets and liabilities of the joint ventures and borrowings attributed to Joint Ventures have been included under the relevant headings: Current Assets: Receivables Non Current Assets: Exploration and Evaluation Expenditure (Note 12) Production Properties (Note 14) Net Assets employed in the Joint Ventures Current Liabilities: Payables – cash calls by operator Other financial liabilities Financial liabilities-secured Non Current Liabilities: Financial liabilities-secured Other Income and expenses of the consolidated entity attributable to joint ventures: Income Expenses No contingent liabilities exist. Commitments are disclosed in Note 19. 19. COMMITMENTS FOR EXPENDITURE a) Exploration tenements Consolidated 2011 $000’s 2010 $000’s 8,782 6,606 13,166 68,786 81,952 5,547 935 5,086 - - 24,817 66,714 91,531 - - 7,720 6,403 840 52,506 9,113 54,700 22,970 In order to maintain current rights of tenure to petroleum exploration tenements, the Group has discretionary exploration expenditure requirements up until expiry of the primary term of the tenements. These requirements, which are subject to renegotiation and are not provided for in the financial statements, are payable as follows: Not later than one year Later than one year but not later than 2 years Later than 2 years but not later than 5 years Later than 5 years Consolidated 2011 $000’s 2010 $000’s 21,015 921 26 - 21,962 2,587 6,782 216 - 9,585 If the economic entity decides to relinquish certain tenements and/or does not meet these obligations, assets recognised in the balance sheet may require review in order to determine the appropriateness of carrying values. The sale, transfer or farm-out of exploration rights to third parties could potentially reduce or extinguish these obligations. All commitments relate to Joint Venture projects. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 65 65 19. COMMITMENTS FOR EXPENDITURE (Cont’) b) Development expenditure Not later than one year Later than one year but not later than 2 years Later than 2 years but not later than 5 years Later than 5 years All development expenditure commitments relates to the development of oil and gas fields. c) Lease commitments Non-cancellable operating lease relating to rentals are payable as follows: Not later than one year Later than one year but not later than five years Later than five years Consolidated 2011 $000’s 9,964 - - - 2010 $000’s 13,100 4,300 - - 9,964 17,400 Consolidated 2011 $000’s 2010 $000’s 123 369 - 492 95 - - 95 During the year ended 30 June 2011 the Group recognised $0.15 million (2010: $0.15 million) as an expense in the income statement in respect of operating leases relating to the lease over the company’s business premises. 20. EVENTS SUBSEQUENT TO BALANCE DATE The Directors are not aware of any matter or circumstance since the end of the financial year, not otherwise dealt with in this report that has significantly or may significantly affect the operations of Cue Energy Resources Limited, the results of those operations or the state of affairs of the Company or Group.. 6666 Financial report 2011 21. EARNINGS PER SHARE Basic earnings per share Diluted earnings per share Net profit after tax ($’000) Weighted average number of ordinary shares outstanding during the year (adjusted for ordinary shares issued during the year) used in the calculation of basic earnings per share Consolidated 2011 2010 $0.03 $0.03 $0.04 $0.04 $19,107 $27,510 693,812,869 689,848,012 Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the Parent by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity of the Parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. Consolidated 2011 2010 Earnings used in the calculation of basic and diluted earnings per share reconciles to the net profit after tax in the income statement as follows: Net profit/(loss) attributable to ordinary equity holders of the Parent from continuing operations ($000’s) 19,107 27,510 The weighted average number of shares used for the purposes of calculating diluted earnings per share reconciles to the number used to calculate basic earnings per share as follows: 698,112,869 690,871,346 Share options on issue (i) Diluted earnings/(loss) per share 4,300,000 1,023,334 $0.03 $0.04 (i) Options outstanding issued under the Cue Energy’s Executive Share Option Plan issued to eligible executives have been classified as potential ordinary shares and included in the calculation of diluted earnings per share in 2011. During the year, 1,500,000 (2010: Nil) options were converted to ordinary shares. The diluted earnings per share calculation includes that portion of these options and partly paid shares assumed to be issued for nil consideration weighted with reference to the date of conversion. The weighted average number to be included in 2011 is 493,151 (2010: 1,023,334). Information concerning the classification of securities All outstanding Options are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share. However diluted earnings per share is not materially different from basic earnings per share. The options have been included in the determination of basic earnings per share. Details relating to the options are set out in Note 7(c). 22. FINANCIAL REPORTING BY SEGMENTS Segment information The Group operates predominantly in one business, namely the exploration development and production of hydrocarbons. Revenue is derived from the sale of gas and liquid hydrocarbons. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise interest-earning assets and revenue, interest-bearing, borrowings and expenses, and corporate assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 67 67 22. FINANCIAL REPORTING BY SEGMENTS (Cont’) Geographic segments The Group operates primarily in Australia but also has international operations in Indonesia, Papua New Guinea and New Zealand. Therefore the Group is organised into four principles geographic segments: Australia, New Zealand, Indonesia and Papua New Guinea. These segments are based on the internal reports that are reviewed and used by the Board of directors (who are identified as the chief operating decision makers(CODM)) in assessing performance and in determining the allocation of resources. The CODM assesses the performance of the operating segments based upon a measure of earnings before interest, tax, depreciation and amortisation. The information reported to the CODM is on at best monthly basis. Earnings before interest, tax, depreciation and amortisation (4,952) 18,922 22,382 2,089 2011 Production Revenue Production Expenses Gross Profit Other revenue Interest revenue Interest expense Depreciation and Amortisation Impairment Writedowns Income tax expense 2010 Production Revenue Production Expenses Gross Profit Other revenue AUSTRALIA $000’s NZ $000’s INDONESIA $000’s PNG $000’s All Other Segments $000’s TOTAL $000’s - - - 23,970 (5,048) 25,583 (3,201) 2,953 (864) 18,922 22,382 2,089 7,164 - - - 312 173 - 2,838 - - - 4,918 - 3,644 - - - - 2,702 - - 136 70 308 AUSTRALIA $000’s NZ $000’s INDONESIA $000’s PNG $000’s All Other Segments $000’s - - - 28,480 (3,950) 22,574 (5,977) 3,646 (1,149) 24,530 16,597 2,497 9,788 - - - - - - - - - - - - - - - - - - - - - - - 52,506 (9,113) 43,393 7,164 38,441 312 173 9,644 2,838 6,654 TOTAL $000’s 54,700 (11,076) 43,624 9,788 51,271 322 240 11,443 236 11,841 Earnings before interest, tax, depreciation and amortisation 6,825 25,398 16,596 2,452 Interest revenue Interest expense Depreciation and Amortisation Impairment Writedowns Income tax expense 322 - 26 166 - - 240 6,014 - 3,473 - - 4,356 - 8,531 - - 1,047 70 (163) 6868 Financial report 2011 22. FINANCIAL REPORTING BY SEGMENTS (Cont’) Total segment assets 30 June 2011 30 June 2010 Total segment liabilities 30 June 2011 30 June 2010 AUSTRALIA $000’s NZ $000’s INDONESIA $000’s PNG $000’s All Other Segments $000’s TOTAL $000’s 63,682 47,377 2,737 623 65,140 68,116 24,219 33,023 31,486 31,084 16,685 15,865 3,425 3,978 1,259 1,618 - - - - 163,733 150,555 44,900 51,129 Reconciliation of earnings before interest, tax, depreciation and amortisation (EBITDA) to Net Profit before Income Tax: EBITDA Interest expense Depreciation Amortisation Impairment writedowns Net Profit before Income Tax 2011 $000’s 2010 $000’s 38,440 (173) (24) (9,644) (2,838) 25,761 51,271 (240) (26) (11,418) (236) 39,351 Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 69 69 23. SHARE BASED PAYMENTS Directors and employee benefits – share based payment plans Ownership based compensation payments for employees and executives of the group are made at the discretion of the Board. No share based payments have occurred during the current financial year (2010: Nil). Total share based payment expense recognised during the year ended 30 June 2010 of $58,066 related to share options granted in prior financial years that vested in the 30 June 2010 year. Share-based payments The following reconciles the outstanding options and share rights granted as remuneration in prior financial years at the beginning and end of the year. Balance at beginning of the Year 150,000 5,800,000 2011 Number of Share Rights 2011 Number of Options Granted during the Year Forfeited during the Year Exercised during the Year Expired during the Year Issued Shares during the Year Balance at end of the Year - - - (150,000) - - - - (1,500,000) - - 4,300,000 Weighted average remaining contractual life of share rights is nil (2010: 1.5 years) and the remaining weighted average contracted life of options is 0.75 years (2010: nil). Range of exercise prices for options is disclosed in the Remuneration Report. Balance at beginning of the Year Granted during the Year Lapsed/forfeited during the Year Expired during the Year Issued Shares during the Year Balance at end of the Year 2010 Number of Share Rights 2010 Number of Options 150,000 6,800,000 - - - - 150,000 - - (1,000,000) - 5,800,000 Range of exercise prices for options as share rights is disclosed in the Remuneration Report. 7070 Financial report 2011 24. KEY MANAGEMENT PERSONNEL AND RELATED PARTY DISCLOSURES Key Management Personnel The following were Directors of Cue Energy Resources Limited during the financial year: Chairman R.G. Tweedie (Non-Executive) Non-Executive Directors L. Musca S.J. Koroknay Key Management Personnel Executives (other than Directors with the authority for strategic direction and management). Name Position R.J. Coppin (retired 7 Feb 2011) Chief Executive Officer M.J. Paton (appointed 8 Feb 2011) Chief Executive Officer A.M. Knox A. Parks Company Secretary and Chief Financial Officer Chief Commercial Officer T. White (effective KMP 01/07/2010) Exploration Manager Remuneration Management personnel Total remuneration payments and equity issued to Directors and Key Management personnel are summarised below: Elements of Directors and executives remuneration: • • • • Short term employments benefits Post employment benefits – superannuation Share based payments – shares Retirement benefits Directors and Key Management Personnel Compensation The aggregate compensation of the directors and key management personnel of the entity is set out below: Short term employment benefits Post employment benefits Other long term benefits Termination benefits Share based payment Consolidated Entity 2011 $ 1,494,009 154,181 - 505,835 83,332 2,237,357 2010 $ 734,227 91,960 - - 136,486 962,673 Refer to the Remuneration Report in the Director’s Report for detailed compensation disclosures on key management personnel. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 71 71 24. KEY MANAGEMENT PERSONNEL AND RELATED PARTY DISCLOSURES (Cont’) Options holdings The number of options in ordinary shares in the Company held during the financial year by each Director of Cue Energy Resources Limited and each of the Executive Key Management Personnel including their personally related entities are set out below: 2011 Directors R.G. Tweedie S.J. Koroknay L. Musca Executives R.J. Coppin (i) M. Paton (ii) A.M. Knox 2010 Directors R.G. Tweedie S.J. Koroknay L. Musca Executives R.J. Coppin (i) A.M. Knox Balance at start of year Granted during year as remuneration Exercised during year Expired during year Balance at end of year Vested and exercisable at end of year - - - 1,500,000 - 1,500,000 Balance at start of year Granted during year as remuneration - - - 2,000,000 2,000,000 - - - - - - - - - - - - - - 1,500,000 Exercised during year - - - - - - - - - - - - - - - - - - - - - - - - - - 1,500,000 1,500,000 Balance at end of year Vested and exercisable at end of year - - - - - - Expired during year 500,000 500,000 1,500,000 1,500,000 1,500,000 1,500,000 Options issued have been valued using the Black Scholes option valuation methodology in prior financial years and are not based on Company performance, but industry practice. There are no further conditions attached to the options. Shareholdings Directors 2011 R.G. Tweedie S.J. Koroknay L. Musca Directors 2010 R.G. Tweedie S.J. Koroknay L. Musca R.J. Coppin (i) M.J. Paton (ii) A.M. Knox A. Parks T. White Balance at start of year Acquired during year on exercise of options Other Purchases Purchases as part of Directors Savings Plan* Sales during the year Balance at Report Date 3,363,477 100,000 12,771,227 3,088,539 - 12,771,227 - - - - - - 1,700,000 1,500,000 - 2,337,245 106,378 24,000 - - - - - - - - - - 100,000 - - 1,492,881 - 33,043 - 200,000 398,909 277,541 - - 274,938 - - - - - - - - - - - - - - - - - - - - - - 3,641,018 100,000 12,771,227 3,363,477 100,000 12,771,227 3,200,000 1,492,881 2,337,245 139,421 24,000 1,700,000 2,337,245 Key Management Personnel 2011 Key Management Personnel 2010 R.J. Coppin (retired 7 Feb 2011) A.M. Knox 1,500,000 1,938,336 * Share purchases made on behalf of Directors as part of their remuneration for the year ended 30 June 2011. (i) R.J. Coppin retired 7 February 2011. (ii) M. Paton commenced 8 February 2011. 7272 Financial report 2011 24. KEY MANAGEMENT PERSONNEL AND RELATED PARTY DISCLOSURES (Cont’) Related party transactions and balances. Members of the Board of Directors The Directors in office during the year were R.G. Tweedie, L. Musca and S.J. Koroknay. During the year Directors’ fees were paid by the parent company of $249,998 (2010: $193,941). Included in this amount are cash payments of $83,332 to Leon Nominees Pty Ltd of which one Director is associated, $76,453 to S.J. Koroknay and $6,881 to SJK Superannuation Funds of which one Director is associated. Consolidated Entities Details of controlled entity companies are shown in Note 11. Advances to/(from) controlled entities net of provisions at balance date are as follows: Galveston Mining Corporation Pty Ltd Cue Exploration Pty Ltd Cue PNG Oil Pty Ltd Cue (Ashmore Cartier) Pty Ltd Cue Mahakam Hilir Pty Ltd Cue Sampang Pty Ltd Cue Taranaki Pty Ltd Cue Energy Holdings Ltd Cue Energy Malaysia Sdn Bhd 2011 $ - 2,042,812 1,678,343 534,304 25,768 2010 $ 2,803,088 6,293,700 2,668,066 398,226 - - 10,853,003 19,090,157 20,651,806 (573,720) (573,720) - - 22,797,664 43,094,169 Repayment of amounts owing to the Company at 30 June 2011 and all future debts due to the Company, by the controlled entities are subordinated in favour of all other creditors. Cue Energy has agreed to provide sufficient financial assistance to the controlled entities as and when it is needed to enable the controlled entities to continue operations. The parent company has provided a financial guarantee for Cue Taranaki’s performance, as required by the Maari FPSO lease and contract. The parent company provides management, administration and accounting services to the subsidiaries. A management fee of $480,000 (2010: $480,000) and interest of $367,544 (2010: $462,673) was charged respectively by the parent company to Cue PNG Oil Company Pty Ltd. Management fees of $2,423,115 (2010: $1,132,745) and interest of $373,832 (2010: $1,233,293) was charged respectively by the parent company to Cue Taranaki Pty Ltd. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 73 73 25. NOTES TO THE STATEMENT OF CASH FLOWS (a) Reconciliation of operating profit to net cash flows from operating activities: Reported profit after tax Impact of changes in working capital items Decrease/(increase) in receivables Increase/(decrease) in payables Items not involving cash flows Depreciation Amortisation Employee benefits Net loss/(gain) on foreign currency conversion Write down/(up) value of exploration expenditure Reserve movement Net cash flows from operating activities (b) Cash comprises cash balances held within Australia and overseas: Australia Papua New Guinea Cash and bank balances Consolidated 2011 $000’s 2010 $000’s 19,107 27,510 2,045 2,147 24 9,644 103 5,327 2,838 - 41,235 52,804 7 52,811 (11,483) 15,763 26 11,418 72 (744) 75 (417) 42,220 29,364 9 29,373 Statement of Cash Flows cash balance 52,811 29,373 7474 Financial report 2011 26. NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2011 PARENT ENTITY INFORMATION Information relating to Cue Energy Resources Limited: Financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Contributed equity Reserves Accumulated losses Net assets Financial performance Total revenue Profit/(loss) for the period Comprehensive income/(loss) for the period Parent Entity 2011 $000’s 2010 $000’s 52,846 23,455 76,301 (1,721) (105) (1,826) 74,475 37,222 43,751 80,973 (541) (32) (573) 80,400 151,768 151,468 391 391 (77,684) (71,459) 74,475 80,400 4,028,745 (6,225) (6,225) 140,025 11,697 11,697 Repayment of amounts owing to the Company at 30 June 2011 and all future debts due to the Company, by the controlled entity are subordinated in favour of all other creditors. Cue Energy has agreed to provide sufficient financial assistance to the controlled entities as and when it is needed to enable the controlled entities to continue operations. Capital commitments There no commitments for the acquisition of plant and equipment contracted for at the reporting date. Finance leases There are no commitments in relation to finance leases. Contingent liabilities The parent entity is not subject to any liabilities that are considered contingent upon events known at balance date. Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 75 75 7676 Cue Energy Resources Limited Annual Report 2011 Cue Energy Resources Limited Annual Report 2011 77 77 shaReholdeR inFoRmation 1) Spread of Shareholdings 4) Voting Rights Spread of Holdings of quoted shares of no par value in the Company as at 27th of September 2011. At meeting of members or classes of members: (a) each member entitled to vote may vote in person or by proxy, Number Held 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 Over 100,000 Total Ordinary attorney or representative; 238 1,029 959 2,545 468 5,239 (b) on a show of hands, every person present who is a member or a proxy, attorney or representative of a member has one vote; and (c) on a poll, every person present who is a member or a proxy, attorney or representative of a member has: (i) for each fully paid share held by person, or in respect of which he is appointed a proxy, attorney or representative, one vote for the share; (ii) for each partly paid share, only the fraction of one vote which the amount paid (not credited) on the share bears to the total amounts paid and payable on the share (excluding amounts credited), Subject to any rights or restrictions attached to any shares or class or classes of shares. 2) Unmarketable Parcels The number of shareholders holding less than a marketable parcel as at 27th of September is 489. 3) Substantial Shareholders The names and holdings of substantial shareholders in the Company as at 27th of September 2011: Todd Petroleum Mining Company Limited UOB Kay Hian Private Limited Octanex NL Quoted Shares Fully Paid 163,103,314 115,081,671 43,656,168 78 5) Registered Top 20 Shareholders The registered names and holdings of the 20 largest holdings of quoted ordinary shares in the Company as at 27th of September 2011. Ordinary Shares Percentage Held 163,103,314 115,081,671 43,656,168 25,920,000 11,954,397 10,737,130 10,258,596 7,000,000 5,486,489 5,000,000 4,547,572 4,312,604 4,010,784 3,800,000 3,800,000 3,750,000 3,700,621 3,363,477 3,060,465 2,949,990 435,493,278 23.46% 16.55% 6.28% 3.73% 1.72% 1.54% 1.48% 1.01% 0.79% 0.72% 0.65% 0.62% 0.58% 0.55% 0.55% 0.54% 0.53% 0.48% 0.44% 0.42% 62.65% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Shareholder Todd Petroleum Mining Company Limited UOB Kay Hian Private Limited Octanex NL Todd Tasman Oil Ltd Berne No 132 Nominees Pty Ltd Portfolio Securities Pty Ltd JP Morgan Nominees Australia Limited Peter Neville Findlay + Richard Norman Martin Citicorp Nominees Pty Ltd Finot Pty Ltd HSBC Custody Nominees (Australia) Limited Grizzley Holdings Pty Limited Ernest Geoffrey Albers Mr Neil Clifford Abbott & Gellert Ivanson Trustee SCFI Pty Ltd Colin Robert MacEwan & Bronwyn Beder The Albers Companies Incorporated Pty Ltd Richard Tweedie Adziel Pty Ltd Mr Nigel Roy Goldthorpe 6) Holders The number of holders of each class of equity securities as at 27th of September 2011 was:- Class of Security Ordinary Fully Paid Shares Unlisted Options 7) Vendor Securities Number 5,239 5 There are no restricted securities on issue as at 29th of September 2011. Cue Energy Resources Limited Annual Report 2011 79 8) Unquoted Securities 20 largest holders of Unlisted Options as at 29th of September 2011. Name R.J. Coppin (i) A.M. Knox T. White D. Leech A. Iwaniw P. Moffatt (i) R.J. Coppin retired 7 February 2011 Number of Unlisted Options Held Expiring 19/04/12 % Held of Total 19/04/12 Issued Unlisted Options Total Number of Unlisted Options/Shares Held % Held of Total Issued Unlisted Options/Shares - 1,500,000 1,333,333 333,332 400,000 400,000 3,966,665 - 38 34 8 10 10 100 - 1,500,000 1,333,333 333,332 400,000 400,000 3,966,665 - 38 34 8 10 10 100 8080 Shareholder information C u e E n e r g y R e s o u r c e s L i m i t e d A n n u a l R e p o r t 2 0 1 1 AnnuAl RepoRt 2010/11 CUE ENERGY RESOURCES LIMITED CUE ENERGY RESOURCES LIMITED CUE ENERGY RESOURCES LIMITED ABN 45 066 383 971 Level 21, 114 William Street Melbourne Victoria 3000 Australia Telephone: +61 3 9670 8668 Facsimile: + 61 3 9670 8661 Web Site: www.cuenrg.com.au E-mail: mail@cuenrg.com.au