EMPYREAN ENERGY PLC
Registered Number 05387837
Annual Report and Accounts 2014
Contents
Company Information
Highlights
Chairman’s Statement
Strategic Report
Operational Review
Directors’ Report
Corporate Governance Report
Statement of Directors’ Responsibilities
Report of the Independent Auditors
Statement of Comprehensive Income
Statement of Financial Position
Statement of Cash Flows
Statement of Changes in Equity
Notes to Financial Statements
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6
12
15
19
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25
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28
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Company Information
Directors
Secretary and Registered Office
Patrick Cross (Non-Executive Chairman)
Thomas Kelly (Chief Executive Officer)
Frank Brophy (Technical Director)
John Laycock (Finance Director)
Elizabeth Hunt
200 Strand
London WC2R 1DJ
Principal Administrative Office
Level 11, London House,
216 St Georges Terrace
Perth WA 6000
Australia
GPO Box 2517
Perth WA 6831
Australia
Phone: +61 8 9481 0389
Fax: +61 8 9463 6103
Email: enquiries@empyreanenergy.com
BDO LLP
55 Baker Street
London W1U 7EU
UNITED KINGDOM
Auditors
Nominated Adviser and Broker
Cenkos Securities Plc
66 Hanover Street
Edinburgh EH2 1EL
1
Company Information
Solicitors
Kerman & Co LLP
200 Strand
London WC2R 1DJ
DLA Piper UK LLP
3 Noble Street
London EC2V 7EE
Registrars
Capita Asset Services
34 Beckenham Road
Beckenham, Kent BR3 4TU
2
Highlights
• Record financial results and production following a significant step-up in production at flagship
Marathon Oil operated Sugarloaf AMI project (EME 3% working interest) targeting formations
including the prolific Eagle Ford Shale and Austin Chalk in Texas
o
51% increase in revenues for the 12 months to 31 March 2014 to US$13,883,854 (2013:
US$9,180,544)
o
83% increase in net profit after tax for the 12 months to 31 March 2014 to US$5,221,102
(2013: US$2,846,890)
o
50% increase in production net to Empyrean (before royalties) for the 12 months to 31 March
2014 to 335,305 barrels of oil equivalent (2013: 223,500 barrels of oil equivalent)
•
Substantial increase in activity at Sugarloaf with 43 wells spudded and 39 wells brought into
production during the period
o Well spacing initiatives – 90% of wells drilled in 2013 at 60 acre spacing or less resulting in
an approximate 45% increase in 30 day initial production rates over wells previously drilled at
greater than 60 acre spacing
o Reduction in drilling costs following improvement in drilling techniques and introduction of
drill pads
•
Intensive drilling programme planned with 100 wells targeted in calendar year 2014
o Funding available for current drilling schedule
•
Significant potential from the overlying Austin Chalk formation
o Early Austin Chalk wells drilled to date performing similarly to the Eagle Ford Shale wells
o Further development of the Austin Chalk anticipated to require in the order of a further 300
wells, with down spacing potential of approximately 235 further wells
• Updated reserves report to 31 December 2013 on Sugarloaf AMI released in May 2014 showed:
o
o
o
54% increase in 1P Reserves to 3.54 Mmboe
48% increase in 2P reserves to 6.53 Mmboe
2C Contingent Resource for the Austin Chalk formation of 3.87 Mmboe
•
•
Piloting 30 acre well spacing during 2014 in selected areas of the Eagle Ford Shale
Further repayments to Macquarie Bank reducing debt to US$10.67m as at 31 March 2014 and to
US$9.17m as at 29 August 2014
•
Formal Sales Process and Strategic Review announced 10 July 2014
Empyrean CEO Tom Kelly said, “This has been a year of tremendous growth for Empyrean. We are confident
that this will continue as Marathon continues to ramp up drilling at our primary asset, with the potential for an
accelerated uptrend as the Austin Chalk appraisal continues successfully. Significant potential reserves upside
exists within both the Eagle Ford Shale and the Austin Chalk, with the latter showing signs of being a
transformational pay-zone for the Company and its partners following recent successful appraisal wells.
Empyrean has chosen to undertake a Formal Sales Process and Strategic Review with highly regarded advisors
in Cenkos and Macquarie Bank, advising and coordinating the process, against the backdrop of recent, increased
levels of corporate activity and industry interest in the region and in order to maximise value for its
shareholders.”
3
Chairman’s Statement
I am pleased to report that Empyrean Energy Plc (‘the Company’) has completed its ninth year of operations and
enjoyed its best financial result since its AIM IPO. This has been achieved following a significant increase in
oil and gas production, particularly from the de-risked flagship US onshore asset, the Sugarloaf AMI Project in
Texas (‘Sugarloaf’). As described in more detail below, Empyrean continues to benefit from an aggressive
work programme being undertaken at two objectives available at Sugarloaf and the board of directors are
pleased with the demonstrable increase in value both during the period and post period end.
In terms of unlocking value, an updated report by DeGolyer and MacNaughton into the reserves at Sugarloaf as
at 31 December 2013 has revised the 1P Reserves upwards by 54% to 3.54 million barrels of oil equivalent
(‘MMboe’) and the 2P reserves upwards by 48% to 6.53 MMboe, over previously reported reserves. Of
particular importance is a new 2C Contingent Resource for the Austin Chalk formation of 3.87 MMboe that
provides additional short term potential for further Reserve increases and value creation should further drilling
continue to show promising results.
The operator of this field, Marathon Oil Corporation (NYSE: MRO) ('Marathon' or the 'Operator'), has
continued to demonstrate excellent expertise across all technical and operational areas, and has succeeded with
initiatives to improve efficiencies and optimise performance across a number of key areas. These include
reduced drilling times, improved stimulation and completion techniques, reduced well spacing and reduced spud
to production cycle times. As a result, well productivity has improved substantially, and drilling and completion
costs have reduced and are forecast by Marathon to continue to improve through 2014. Marathon has declared
its intention to pursue the co-development of the Austin Chalk simultaneously with the Eagle Ford Shale. Early
Austin Chalk wells are performing similarly to the Eagle Ford Shale, and the Company is confident that the 2C
Contingent Resource allocated by DeGolyer MacNaughton can be moved into 2P Reserves with further drilling
and appraisal in the short term.
This aggressive development at Sugarloaf has had a very positive effect on our financials for the year. Revenue
in the year to 31 March 2014 was $13.88 million, 51% above the previous year ($9.18 million). Net profit, at
$5.221 million was 83% higher than the same period last year.
The Eagle Ford Shale is one of the most prolific onshore US plays. This is evidenced by the impressive
production of wells targeting the formation resulting in extensive corporate activity amongst partners in
Sugarloaf, with acquisition prices demonstrating the quality of the liquids rich acreage, most recently Baytex’s
acquisition of Aurora, one of our partners at Sugarloaf, at a price of A$4.20 per share and an implied market
capitalisation of A$1.84 billion
Reflecting Empyrean’s development into a substantial and profitable energy producer, this year has also seen a
number of organisational changes. Most obvious has been the change to its accounting functional currency
from Sterling to US dollars, to mirror the fact that almost all the Company’s revenues and expenditures are in
that currency. The Company has also appointed a new Nominated Advisor (‘NOMAD’) in Cenkos, new
4
Chairman’s Statement
Auditor in BDO and a new Public Relations team in St Brides Media & Finance, as reported in the half year
Interim Results.
Outside of Sugarloaf, which continues to demonstrate substantial upside potential through the future co-
development of the Austin Chalk alongside the Eagle Ford Shale, Empyrean has holdings in the contiguous
Sugarloaf Block A, the Riverbend project, and the Eagle Oil Pool Development project in California, providing
it with an appropriate mix of advanced exploration through to development projects. On 10 July 2014, the
Company announced a Strategic Review and Formal Sales Process with the goal of maximising value for
shareholders. Macquarie Capital has been appointed to assist with this process. The Company looks forward to
updating shareholders on this process in due course. In conclusion, the Company has enjoyed an excellent year’s
growth in production, revenue and profits, and is confident it can continue to deliver better value for
shareholders.
______________________________
Patrick Cross
Non-Executive Chairman
5 September 2014
5
Strategic Report
BUSINESS OVERVIEW AND DEVELOPMENTS
Empyrean was established to finance the exploration, development and production of energy resource projects
in geopolitically stable environments.
The Company is focused on non-operating working interest positions in projects that have drill ready targets
that substantially short cut the life-cycle of typical hydrocarbon projects by entering the project after exploration
concept, initial exploration and drill target identification work has been completed.
Empyrean’s core asset is a 3% working interest in the Sugarloaf AMI Project in Texas which is an advanced
Eagle Ford Shale condensate, gas and natural gas liquids development operated by Marathon Oil Company.
The Company identified and negotiated an interest in this project at the exploration stage immediately prior to
drilling and was part of the initial discovery well. Due to the fact that this asset represents the majority of the
Company’s current intrinsic value, it is the primary focus of the Board and is integral to this Strategic Report.
The Company’s non-core assets are outlined within the Operational Review on pages 12 to 14.
The Sugarloaf AMI Project sits within the ‘sweet spot’ of the Eagle Ford Shale field fairway and has
tremendous additional reserve potential from down spacing initiatives that are being trialed on the Eagle Ford
Shale and the appraisal and development of the overlying Austin Chalk.
6
Strategic Report
RESERVES
Reserves at the Sugarloaf AMI Project were updated in a report by DeGolyer & MacNaughton to 31 December
2013 and the increase over the previous Netherland Sewell and Associates Inc report to 30 September 2012 are
summarised below:
Sugarloaf AMI
(EME 3%, net 2.25% after royalties)
Revised
31 Dec 2013
MMboe
Reported as at
1 Sept 2012
MMboe
Increase
%
1P Reserves
2P Reserves
3P Reserves
2C Contingent Resources
2P + 2C
3.54
6.52
8.92
3.87
10.39
2.32
4.40
New
New
New
53
48
New
New
New
The contingent resource of 3.87 MMboe is Austin Chalk locations. The contingent resource status is due to the
limited number of wells producing from the Austin Chalk as at 31 December 2013 and the early stage of
appraisal. Since 31 December, Marathon has demonstrated a commitment to further appraise and pursue co-
development opportunities for the Austin Chalk with the Eagle Ford Shale.
A summary of the Reserves and Contingent Resources, calculated on a 2.25% Net Revenue Interest (‘NRI’)
basis after royalties, and the Net Present Value using a 10% discount rate (‘NPV(10)’) as at 31 December 2013
and included in the DeGolyer MacNaughton report is contained in the table below:
Oil &
Condensate
MMBBLS
Natural Gas
Liquids
MMBBLS
Sales Gas MMcf
Barrels of Oil
Equivalent
MMboe
NPV(10)US$
million
1P Reserves
2P Reserves
3P Reserves
2C
1,542
2,649
3,486
1,094
835
1,636
2,302
1,189
6,999
13,420
18,768
9,509
3.544
6.521
8.915
3.868
52.9
97.0
139.5
-
OPERATIONS AND OUTLOOK
As at 5 September 2014 the company had an interest in 143 gross producing wells at the Sugarloaf AMI Project
with a further 29 wells awaiting or having completion operations carried out and 2 wells drilling. Significantly,
of these wells, 7 are producing from the Austin Chalk with 4 wells that were awaiting or undergoing completion
operations and 1 drilling. There were a further 10 Austin Chalk wells, scheduled, that are yet to spud.
7
Strategic Report
Marathon Oil Company (“Marathon”), the operator at the Sugarloaf AMI Project has estimated that
approximately 100 wells are to be spud during the 2014 calendar year. There have been 50 wells spud to 5
September 2014, with 41targetting the Eagle Ford Shale and 9 targeting the Austin Chalk.
Marathon has successfully trialed 40 acre spacing for Eagle Ford Shale locations with selected areas being
trialed for 30 acre spacing. The DeGolyer & MacNaughton reserves report assumes 60 acre spacing for Austin
Chalk locations.
It is expected that Austin Chalk contingent resources will shift to proven and probable reserves as further Austin
Chalk wells are drilled and put on production. This represents a significant potential opportunity for the
Company to add to reserves in the short to medium term along with continued well down-spacing initiatives.
STRATEGY
Our goal is to maximise value for shareholders. Our strategy is to allocate our resources appropriately given the
risk versus reward profile of our projects in order to achieve our goal. Recent years have seen the Company
transform from a pure hydrocarbon explorer into a producer, changing the risk versus reward profile
dramatically for the Company and, at a project level, for the Sugarloaf AMI Project. Given the comparatively
de-risked nature of our core Sugarloaf AMI Project when compared with our other assets, Empyrean has
become more focused on ensuring that it has been able to continue to fund the appraisal and development in
order to add significant value for shareholders whilst the reserves, production and revenue profile of this asset
has been rapidly increasing over the 24 months to 31 March 2014. This intrinsic value increase has been further
demonstrated by recent corporate activity within the Sugarloaf AMI Project acreage with Canadian listed
Baytex Energy Corp successfully completing the acquisition of former Australian Stock Exchange (“ASX”)
listed Aurora Oil and Gas on 11 June 2014.
On 10 July 2014 Empyrean announced a Strategic Review as part of a Formal Sales Process. An extract from
the announcement reads as follows:
“Review of options
Recent corporate acquisitions around Sugarloaf have demonstrated that high quality Eagle Ford Shale assets are
in demand. This activity, together with recent reserve updates by Empyrean and other partners in the Project,
has had positive implications on the underlying value of the Sugarloaf asset.
The board of Empyrean (the “Board”), which has been focused on maximising the commerciality of the
Sugarloaf asset alongside its experienced major partners and on demonstrating its future upside potential, has
now resolved to consider a number of strategic options to allow the Company to capitalise on recent, increased
levels of corporate activity and industry interest in the region and to maximise value for its shareholders.
These options may include a farm down or disposal of existing assets or a corporate transaction such as a
merger with or acquisition of the Company's securities by a third party or a sale of the business. Discussions in
relation to a merger with a third party or a sale of the Company will take place within the context of a "formal
sale process" in accordance with Note 2 on Rule 2.6 of the City Code on Takeovers and Mergers (the "Code").
The formal sale process
The Company has appointed Macquarie Capital to conduct the formal sale process only and Cenkos Securities
plc as its joint financial adviser and adviser under Rule 3 of the Code to oversee the process.”
For further details please refer to the announcement dated 10 July 2014.
8
Strategic Report
PRINCIPLE RISKS AND UNCERTAINTIES
The Company’s activities are carried out principally in North America. Risk assessment and evaluation is an
essential part of the Company’s planning and an important aspect of the Company’s internal control system.
The principal risks and uncertainties are considered to be the following:
Exploration, Development and Production Risks
Exploration and development activities may be delayed or adversely affected by factors outside the Company’s
control, in particular; climatic conditions; performance of joint venture partners or suppliers; availability, delays
or failures in commissioning or installing plant and equipment; unknown geological conditions resulting in
uneconomic or dry wells; remoteness of location; failure to achieve estimate capital costs, operating costs,
reserves, recovery and production levels; actions of host governments or other regulatory authorities.
Commodity Risk
The demand for, and pricing of, oil and gas is dependent on global and local supply and demand, weather
conditions, availability of alternative fuels, actions of governments or cartels and general economic and political
developments. Empyrean undertakes appropriate levels of commodity price hedging relative to its level of debt
and production.
Currency Risk
The currency most commonly used in the pricing of petroleum commodities and for significant exploration and
production costs is US dollar ($US), thus creating minimal currency exposure as the functional currency has
been changed to US dollars (US$) this year and for the comparative years commencing 1 April 2012.
General and Economic Risk
As a consequence of activities in different parts of the world the Company may be subject to political, economic
and other uncertainties both locally and internationally, including but not limited to inflation, interest rates,
market sentiments, equity and financing market conditions.
Financing Risk
The Company is dependent on having sufficient funds to enable the exploration or development of projects,
whether through debt or equity funding.
FINANCIAL POSITION AND PERFORMANCE OF THE BUSINESS
Continued successful appraisal and development at the Sugarloaf AMI Project has seen the financial position of
the company continue to improve over the 12 months to 31 March 2014.
Revenue has increased by 51% to US$13,883,857 (2013: US$9,180,544). Net Profit has increased by 83% to
US$5,221,102 (2013: US$2,846,890). The Graph below represents monthly revenue received by Empyrean in
relation to the Sugarloaf AMI for a two year period ended March 31, 2014.
9
Strategic Report
As at 31 March 2014 the Company had outstanding debt of US$10.67m. This debt has been further reduced
with a repayment of US$1.5m on 30 June 2014 and stands at US$9.17m as at 3 September 2014.
These financial improvements are as a result of strong revenue from the Sugarloaf AMI Project as further wells
are brought into production. The Company received in excess of 85% of its revenue from liquids production and
continued strong condensate prices are contributing positively to this revenue.
KEY PERFORMANCE INDICATORS
The key financial performance indicators (‘KPI’s) for the company are Revenue and Net Profit detailed above.
The non-financial KPI is the Company’s share price.
These KPI’s are assessed in relation to the Company’s capital requirements, growth prospects and debt levels to
ensure that the Company meets performance objectives whilst maintaining manageable levels of debt in order to
grow the business.
The share price performance over the 18 months to 28 August 2014 is represented graphically below:
The strategic report was approved by the board on 03/09/2014 and signed on the board’s behalf.
10
USD- USD350,000.00 USD700,000.00 USD1,050,000.00 USD1,400,000.001/04/20121/08/20121/12/20121/04/20131/08/20131/12/2013
Strategic Report
____________________
Thomas Kelly
Chief Executive Officer
5 September 2014
11
Operational Review
Empyrean has continued to focus its operational activities during the past 12 months on the development of the
Sugarloaf AMI Project, which lies within the greater Eagle Ford Shale play in onshore Texas. The Sugarloaf
AMI Project is located onshore East Texas in Karnes County. The company holds a 3% working interest in
approximately 24,000 acres. Marathon Oil Corporation (“Marathon” NYSE: MRO), replaced Hillcorp as
operator in late 2011 and has since maintained an accelerated drilling programme targeting as the primary
objective, the Cretaceous Eagle Ford Shale.
In the adjacent Block A, Empyrean holds a 7.5% working interest in 4 producing wells in addition to a lesser
interest in another 2 recently drilled wells, one of which commenced production in late 2013. Block A is
operated by ConocoPhillips, and Empyrean will have the opportunity to participate in further wells if they are
proposed on acreage covered by the existing producing wells that Empyrean already has an interest in .
The Riverbend Project onshore Texas is the third area of interest, where Empyrean first became involved in
2009. After several unsuccessful attempts to produce economic quantities of gas and condensate from 2 wells
targeting the Austin Chalk, Empyrean agreed with the newly appointed operator, Krescent Energy Partners
II,LP ( KEP II), to re-enter Cartwright -1 well and test the shallower Wilcox Formation. The operation was
successful and the well commenced the production of gas and minor condensate in May 2013.
The fourth Empyrean project located onshore California in the San Joaquin Basin is the Eagle Oil Pool
Development Project. Empyrean has an increased working interest of 57.2 % and the operator remains Strata-X
Energy (TSX.V:SXE). There have been no operations carried out during the past 12 months.
Sugarloaf AMI Project( Block B) ( 3% WI)
The Eagle Ford Shale play is the primary target in the Sugarloaf AMI Project. It is termed “unconventional“
because shale, being impermeable, has traditionally been the necessary barrier to fluid migration in porous,
permeable reservoirs resulting in the eventual accumulation of hydrocarbons in a so-called petroleum “trap”.
Shale can also be a hydrocarbon source rock in addition to being a barrier. The Eagle Ford Shale is rich in
organic material, and has in the area of the Sugarloaf AMI Project been subjected to the time duration and
temperature requirements for in situ hydrocarbons generation. However, the entrapped hydrocarbons can only
be released by increasing the density, size and connectivity of microfractures within the shale. This can best be
accomplished by combining fraccing operations with horizontal drilling. The fraccing releases the hydrocarbons
by creating permeability, while the horizontal drilling exposes much greater volumes of “unconventional”
reservoir to the fraccing process.
132 wells have been spudded since the drilling of the first producing well, Kennedy 1H, in 2007 (which did not
commence producing until January 2010). Marathon has spudded 107 wells to the end of March 2014 since
becoming operator at the end of 2011 and plan to spud approximately 100 wells during the 2014 calendar year.
During the year to 31 March 2014 there have been 43 wells spudded and 39 wells brought on production, which
is a commendable achievement. The drilling and completion operations are highly sophisticated, technically
difficult and have the potential to be time consuming and expensive when problems arise. Logistical
considerations are equally challenging. Sugarloaf AMI partners have profited from the fact that Marathon has
had access to 12 different rigs during the period mentioned and at no time has there been time lost due to rig
unavailability. Nor have any of the wells been unsuccessful as producers or plugged and abandoned.
As mentioned in previous reports, the operator has from the beginning embarked on a programme of technical
initiatives aimed at achieving optimum productivity with maximum economic efficiency. These initiatives fall
into 2 categories: firstly stimulation and completion design, and secondly well spacing.
Improvements in stimulation and completion design have had a marked positive effect on well performance.
Fraccing is complex and there are many variables involved. Perforation clusters, gel loading, propane size,
12
Operational Review
fluids and volumes all play a part, and the object of improving and refining the operation continues to be an
ongoing process. The results have been impressive. Marathon reports an approximate 97% improvement in 30
day IP‘s (initial production measured in barrels of oil equivalent per day) between 2011 and 2014 wells to date.
The record shows a large variation in the early days of production for many of the wells and this does not seem
to be dependent necessarily on well location. Kennedy 5H has been one of the more impressive producers. It
commenced production on the 16 March 2013 and produced 101,976 msc.ft (thousand standard cubic feet) of
gas and 23,078 barrels of condensate in the following month (wellhead measurements). Eight months later, in
December 2013, it produced 62,507 msc.ft of gas and 8,438 barrels of condensate. A more recent well, St.
Christoval Ranch G2H, commenced production on the 31 August 2013 and in the following month produced
95,199 msc.ft of gas and 22,905 barrels of condensate. These 2 wells were among the better producers.
The second category, well spacing, has also shown positive results in productivity due to application of denser
well distribution. 80 acre spacing equates to approximately 750ft between the horizontal branches of each well.
Wells drilled in the early stages of development in 2010-11 were usually located within an 80 acre, or greater,
spacing. In contrast, 90% of the Marathon wells drilled in 2013 were located on a 60 acre, or less, spacing. The
results show an impressive 45% improvement between 2011 and 2013 when comparing the 30 day IP (initial
production) rates. A comparison of the first 180 days of cumulative production over the same period also shows
a 34% increase. These encouraging results strongly support the continuation of infill development and Marathon
has commenced piloting 30 acre infills during 2014.
In addition to the initiatives taken to increase productivity, Marathon has been successful in reducing drilling
costs by developing improved drilling techniques and adopting the practice of common pad drilling. Common
pad drilling reduces mobilization expenses and minimises the time taken between the spudding of consecutive
wells. Time lost is also minimised during fraccing and completion operations. Most of the wells are now being
drilled from common pads. Recently drilled Mobil B AC 1H, for example, is located on an 8 well pad, while the
May B unit 2H-5H wells drilled in January and March 2014 are located on a 4 well pad. The practice of using
multi-well pads has no effect on the vertical or horizontal limitations of a well. Of the 43 wells spudded in the
recent 12 months, measured depths have ranged between 16,296ft (well May B 4H) and 19,473 ft at Morgan
5H. Horizontal distances ranged between 4,250 ft and 7,900ft with an average distance of 5,755 ft.
The effects of improved drilling techniques are manifest in the drill time comparisons with wells drilled only 2
years ago. The time taken in the last 12 months to drill a well to 18,000ft MD (measured depth) varied between
12-15 days. For the well MD’s in the vicinity of 16,500ft the drill time was reduced to 11 days. The well May B
5H reached a TD of 16,492 ft in an impressive 9 days in March 2014. The well drill costs are invariably less
than the fraccing and completion costs, but overall the operator is aiming to reduce total costs to US$ 6.5-7.5
million per well during 2014.
In summary, the rate of drilling new development wells in the AMI is increasing. The operator plans to drill
approximately 100 wells in 2014 alone. The productivities have improved markedly through technical
innovation, and drilling and completion costs have decreased. There are at present 5 central facilities operating
with total existing capacity of 117,000 mscfd and 30,000 barrels of condensate per day. The capacities are
planned to be increased to 320,000 mscfd and 80,000 barrels of condensate respectively. This capacity increase
will be necessary to include the volumes expected with the additional development of the Austin Chalk. Three
wells only were drilled specifically to test this formation in the recent 12 months (Weston Gas Unit 1 10H, 12H
and Children Weston 4H). The 10H and 12H wells produced approximately 85,000 msc.ft of gas and 8,000
barrels of condensate in the first month of production, comparable with some of the better Eagle Ford Shale
wells. It is anticipated that full development of the Austin Chalk could involve the drilling of approximately 300
further wells, based on 60 acre spacing with down spacing potential of approximately 235 further wells. These
would be in addition to the Eagle Ford Shale wells, for which 330 further wells will be required for full
development with down spacing potential of a further 200 wells. Much will depend on the eventual spacing.
13
Operational Review
Sugarloaf Block A (7.5% WI)
Empyrean has held in Sugarloaf Block A 7.5 % WI in 4 producing wells for some time. Production of gas and
condensate from the first of the wells commenced on 13 November 2008. The remaining 3 wells commenced
producing in February 2009. The 4 wells are referred to as TCEI Block A-1 (Kunde No3), A-3 (Baker Trust
No1), A-4 ( Baker Trust No2) and A-5 ( Marlene Olson No1).
Empyrean had elected against participation in further drilling in Block A for almost 5 years to late August 2013.
The decision had been made to focus on the development of the Sugarloaf AMI (Block B). In September 2013
Empyrean announced its decision to accept participation in 2 Eagle Ford Shale wells in Block A. Baker Trust
No 4 was drilled to a measured depth of 17,948ft with a lateral of approximately 5,000ft. It commenced
producing gas condensate on the 29 December 2013, and Empyrean holds an approximate 2.45% WI.
Marlene Olson No 3, the second well in which Empyrean has an approximate 0.85% WI, was drilled to a
measured T.D of 20,601 ft. on the 3 October 2013. The well has a lateral length of approximately 7,000 ft. and
is at present undergoing completion operations.
Both wells are being drilled from the same pad along with a third well to be completed in acreage in which
Empyrean holds no interest. Empyrean’s interest in the 2 wells is less than the previous 7.5% WI because parts
of each well traverse acreage in which no WI is held; the resulting interest being based on a pro rata share.
Riverbend Project (10% WI)
The new operator of the project, Krescent Energy Partners 11,LP ( “KEP11”) proposed re-entering Cartwright
No1 and testing a fresh interval between 9,584ft.-9,590ft in the Wilcox Formation. The previous attempts to
produce from the older Austin Chalk had failed due to obstructions in the production tubing.
Empyrean agreed to participate in the re-entry and the formation was successfully perforated and tested. The
Wilcox Formation had previously exhibited encouraging hydrocarbon “shows” during the initial drilling of the
well.
The early production from this new zone of 30-40 barrels of condensate and 755 msc.ft of gas per day was
above expectations. The well is currently producing 15 barrels of condensate and 400,000 c.ft of gas per day
with minimal operating cost.
Eagle Oil Pool Development Project (57.2% WI)
Empyrean increased its interest from 48.5% to 57.2% at no extra cost to the Company. Although no tangible
operations were performed during the recent 12 months, a vertical well test of the Gatchell sands, and possibly
the Kreyenhagen Shale, would appear to be the next logical step. The results of such a vertical well would have
a strong bearing on the emplacement of a horizontal well if required.
__________
Frank Brophy BSc (Hons)
Executive Technical Director
5 September 2014
14
Directors’ Report (Continued)
The Directors are pleased to present their report on the affairs of the Company, together with the audited
financial statements for the year ended 31 March 2014.
Financial Review and Results
2014
2013
US$’000
US$’000
5,221
13,884
(1,398)
(3,926)
10,866
2,847
9,181
(1,117)
(3,515)
16,868
Profit for the year on ordinary activities of the Company after taxation
Revenue from oil and gas sales
Operating Costs
Amortisation of the oil and gas properties
Exploration and Development costs
Dividends
The Directors do not propose the payment of a dividend.
Directors and Directors’ Interests
Patrick Cross – Non-Executive Chairman
Patrick Cross has international experience in corporate finance, organisation structures, marketing and joint
venture operations. His previous positions include 25 years with BP specialising in marketing, strategic
planning and business development across different cultures. He also worked for two years as President of
Cable and Wireless Japan, and six years as Managing Director of BBC World Ltd. Patrick Cross has operated in
South America, Asia, Europe and the United Kingdom establishing relationships at senior levels with major
companies, Governments and the European Commission. He is non-executive chairman of Mercom Oil Sands
Plc and a Trustee of The Royal Society of Tropical Medicine and Hygiene.
Thomas Kelly – Chief Executive Officer
Thomas Kelly has had more than 20 years corporate, finance and investment banking experience. During this
period, Thomas Kelly has had involvement in and been responsible for the financing of numerous listed
companies on the Australian Securities Exchange (ASX) and several mergers and acquisitions within the
Australian corporate sector. He held a previous directorship of ASX listed Brazilian Metals Group, formerly
Lefroy Resources Limited.
Frank Brophy – Technical Director
Frank Brophy has over 50 years’ experience as a petroleum geologist in the exploration, development and
production of many world class projects. Frank Brophy’s roles have seen him involved with operations in many
locations around the world including Australia, Asia, Europe, USA, the Middle East, North Africa and the
Sudan. Recent experience includes four years as General Manager of the Hanoi operation in North Vietnam, for
France based company Maurel et Prom, and almost two years in Sicily representing the same company in gas
appraisal and development. Frank Brophy’s previous positions also include his former role as International
Business Development Manager for Ampolex Limited, Chief Geologist of Elf Aquitaine Australia and
Exploration Manager for five years with Peko Oil Limited.
15
Directors’ Report (Continued)
John Laycock – Finance Director
John Laycock has over 30 years’ experience in accounting, finance and risk management. His previous
positions include 22 years with BP both in UK and international experience in France and Japan. John Laycock
has a degree in Mechanical Engineering from Bristol University and is a Chartered Management Accountant.
He is based in the UK and currently works for an electricity generating company.
The Directors who served during the year to 31 March 2014 had, at that time, the following beneficial interests
in the securities of the Company:
31 March 2014
31 March 2013
Number of ordinary
shares
Number of options
over ordinary shares
Number of ordinary
shares
Number of options
over ordinary shares
Patrick Cross
Thomas Kelly
Frank Brophy
John Laycock
340,000
1,400,000
340,000
1,900,000
20,881,563
13,500,000
20,881,563
17,900,000
2,233,333
900,000
9,000,000
1,200,000
2,233,333
11,450,000
700,000
1,400,000
Other than those items disclosed above, there have been no changes in Directors’ interests since the year-end.
For further details on options held by Directors, refer to Note 5 of the Financial Statements.
Directors’ Remuneration
The Company’s policy on remuneration of directors is to attract, retain and motivate the best people,
recognising they are key to the ongoing success of the business.
Details of the Directors’ emoluments and of payments made for professional services rendered are set out in
Note 5 to the Financial Statements.
Employment Policies
The Company is committed to promoting policies which ensure that high calibre employees are attracted,
retained and motivated, to ensure the ongoing success of the business. Employees and those who seek to work
within the Company are treated equally regardless of sex, marital status, creed, colour, race or ethnic origin.
Insurance
The Company maintains liability insurance for the Directors and officers of the Company.
Significant Shareholdings
On 18 August 2014 the following parties had notified the Company as being interested in 3% or more of the
Company’s ordinary share capital, inclusive of Directors holdings above 3%:
16
Directors’ Report (Continued)
Thomas Kelly
Richard Appleby
James Kight
Share Capital
31 July 2014
Ordinary shares of £0.002 each
% of issued share capital
20,881,563
11,072,000
10,000,000
9.43%
5.00%
4.51%
Information relating to capital structure shares and issued during the period is given in Note 15 to the Financial
Statements.
In summary, there are currently 221,433,853 ordinary shares on issue and a total of 74,900,000 options/warrants
currently granted. Further information is provided in Note 15 to the Financial Statements.
Going Concern
The Directors consider that the Company has adequate resources to continue in operational existence for the
foreseeable future and that it is therefore appropriate to adopt the going concern basis in preparing its financial
statements. The net current liabilities of US$817,259 (2013: US$2,068,000 net current liabilities) are alleviated
with the Macquarie Bank Facility. Empyrean has reached certain Reserve hurdles under Tranche B of the
Macquarie Bank Facility to obtain further drawdowns if required. Any further draw downs on the Macquarie
Bank Facility are subject to the bank’s normal credit department approvals for draw downs under the facility. In
addition, the Company has in the money options and warrants that will further reduce the net current liabilities
position if they are exercised before expiry. These options and warrants are detailed note 15 to the Financial
Statements.
Post Reporting Date Events
On 20 May 2014 the Company announced an increase in Reserves following a report being prepared by
DeGolyer MacNaughton to 31 December 2013. A summary of this report is included in the Strategic Report on
pages 6-to 11 of this Annual Report.
On 3 July 2014 the Company announced that it had repaid a further US$1.5 million of debt under its Macquarie
Bank Facility, thus reducing the amount outstanding on the facility to US$9.17 million.
On 10 July 2014 the Company announced that it had entered into a Formal Sales Process and Strategic Review.
Further details are provided in the Strategic Report on pages 6 to 11 of this Annual Report.
Auditors
The Auditors, BDO LLP, have indicated their willingness to continue in office and a resolution that they be
reappointed will be proposed at the Annual General Meeting.
Internal Controls
The Board is responsible for maintaining a strong system of internal control to safeguard shareholders’
investments and the Company’s assets. The system of internal financial control is designed to provide
reasonable, but not absolute, assurance against material misstatement or loss.
The Board has approved financial budgets and cash forecasts. In addition, it has implemented procedures to
ensure compliance with accounting standards and effective reporting.
17
Directors’ Report (Continued)
Environment, Health and Safety
The Company is committed to conducting its operations in a responsible manner that protects the health and
safety of employees, contractors and the public and minimises the impact on the environment. To accomplish
this the Company is committed to ensuring compliance with all applicable legislation and standards; ensure an
effective management team is in place and that all personnel and contractors are aware of their health, safety
and environmental responsibilities; creation of a safe and healthy working environment; identify, evaluate and
control the risks and impact associated with all company activities; monitor, evaluate and report health, safety
and environmental performance; seek to achieve continuous improvement in health, safety and environmental
performance.
Statement of Disclosure to Auditors
Each person who is a Director at the date of approval of this Annual Report confirms that:
•
•
so far as the Director is aware, there is no relevant audit information of which the Company’s Auditors are
not informed; and
the Director has taken all steps required to make himself aware of any relevant audit information and to
establish that the Company’s Auditors are informed of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s418 of the
Companies Act 2006.
By order of the Board
____________________
Thomas Kelly
Chief Executive Officer
5 September 2014
18
Corporate Governance Report (Continued)
The Directors are committed to maintaining high standards of corporate governance. The Directors have
established procedures, so far as is practicable, given the Company’s size, to comply with the UK Corporate
Governance Code (“UK Code”) as modified by the recommendations of the Quoted Companies Alliance (“QCA
Code”). The Directors make no statement of compliance with the code overall and do not explain in detail any
aspect of the code which they do not comply. The Company has adopted and operates a share dealing code for
directors and senior employees on substantially the same terms as the Model Code appended to the Listing
Rules of the UK Listing Authority.
The Board
The Board met 12 times throughout the year and each member was in attendance at each meeting except the
Chairman who was unable to attend one meeting, the CEO who was unable to attend one meeting and the
Technical Director who was unable to attend two meetings. To enable the Board to perform its duties, each of
the Directors has full access to all relevant information and to the services of the Company Secretary. If
necessary the non-executive directors may take independent professional advice at the Company’s expense.
The Board currently includes two executive directors and two non-executive directors. The Board has delegated
specific responsibilities to the committees described below.
Patrick Cross is a Non-Executive Director and Chairman of the Company. His experience and knowledge of the
Company makes his contribution to the Board such that it is appropriate for him to remain on the Board and in
his position as Chairman. John Laycock is a Non-Executive Director of the Company.
Performance Evaluation
The Chairman is responsible for the performance evaluation of the executive and non-executive directors. The
Non-Executive Finance Director is responsible for the performance evaluation of the Chairman. The Board as a
whole is responsible for the performance evaluation of the Committees and its own performance. These
assessments occurred throughout the year.
The Audit Committee
The Audit Committee comprises Patrick Cross and John Laycock, and is chaired by John Laycock. During the
year the Audit Committee met twice and each member was in attendance at each meeting. The Audit
Committee reviews the Company’s annual and interim financial statements before submission to the Board for
approval. The Audit Committee also reviews regular reports from management and the external auditors on
accounting and internal control matters. When appropriate, the Audit Committee monitors the progress of
action taken in relation to such matters. The Audit Committee also recommends the appointment of, and
reviews the fees of, the external auditors. The Audit Committee has considered the need for an internal audit
function and has deemed the need unnecessary as the Company is not of a size to warrant such a function. The
Audit Committee Charter can be found on the Company’s website
(www.empyreanenergy.com/corporate/governance).
The Remuneration Committee
The Remuneration Committee is made up of Patrick Cross and John Laycock, and is chaired by John Laycock.
The Remuneration Committee met once during the year ended 31 March 2014 and each member was in
attendance at the meeting. It is responsible for reviewing the performance of the Executive Directors and for
setting the scale and structure of their remuneration, paying due regard to the interests of shareholders as a
whole and the performance of the Company. The Remuneration Committee Charter can be found on the
Company’s website (www.empyreanenergy.com/corporate/governance).
Nomination Committee
The role of a Nomination Committee is to help achieve a structured Board that adds value to the Company by
19
Corporate Governance Report (Continued)
ensuring an appropriate mix of skills are present in Directors on the Board at all times. As the whole Board
only consists of 4 members, the Company does not have a Nomination Committee because it would not be a
more efficient mechanism than the full Board for focusing the Company on specific issues. The full Board
carries out the functions of the Nomination Committee. The Board did not meet formally as the Nomination
Committee during the financial year however any relevant matters were discussed on an as-required basis from
time to time during regular meetings of the Board.
Internal Control
The Board is responsible for the Company’s system of internal control and for reviewing its effectiveness
annually. Such a system is designed to manage rather than eliminate risk of failure to achieve business
objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
The Board has established a continuous process for identifying, evaluating and managing the Company’s
significant risks. This process involves the monitoring of all controls including financial, operational and
compliance controls and risk management. It is based principally on reviewing reports from senior management
and professional advisors to ensure any significant weaknesses are promptly remedied and to indicate a need for
more extensive monitoring.
Relationship with Shareholders
The Board attaches a high importance to maintaining good relationships with shareholders and seeks to keep
them fully updated on the Company’s performance, strategy and management. In addition the Board welcomes
as many shareholders as possible to attend its general meeting and encourages open discussion after formal
proceedings.
Corporate Social Responsibility
Whilst the Company is cognisant of its corporate social responsibilities, the Company considers that it is not of
the size to warrant a formal policy as the issues that are relevant to this policy are mostly the responsibility of
the operators of the wells with which the Company has agreements.
Bribery Act
Whilst the Company is cognisant of its responsibilities under the Bribery Act, the Company considers that it is
not of the size to warrant a formal policy as the Company ensures, through due diligence, that it does not deal
with countries known to participate in bribery.
UK City Code on Takeovers and Mergers
The Company is subject to the UK City Code on Takeovers and Mergers.
20
Statement of Directors’ Responsibilities
The directors are responsible for preparing the Strategic Report, Directors’ Report and the financial statements
in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the
directors have elected to prepare the company financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not
approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs
of the Company and of the profit or loss of the Company for that period. The directors are also required to
prepare financial statements in accordance with the rules of the London Stock Exchange for companies whose
securities are traded on AIM.
In preparing these financial statements, the directors are required to:
•
select suitable accounting policies and then apply them consistently;
• make judgments and accounting estimates that are reasonable and prudent;
•
•
state whether they have been prepared in accordance with IFRSs as adopted by the European Union,
subject to any material departures disclosed and explained in the financial statements;
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the
Company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the
Company’s transactions and disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with the requirements of the
Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for
taking reasonable steps for the prevention and detection of fraud and other irregularities.
Website publication
The directors are responsible for ensuring the annual report and the financial statements are made available on a
website. Financial statements are published on the Company's website in accordance with legislation in the
United Kingdom governing the preparation and dissemination of financial statements, which may vary from
legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility
of the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements
contained therein.
Company number: 05387837
On behalf of the Board
____________________
Thomas Kelly
Chief Executive Officer
5 September 2014
21
Independent Auditor’s Report to the Members of Empyrean Energy Plc
We have audited the financial statements of Empyrean Energy Plc for the year ended 31 March 2014 which
comprise the statement of comprehensive income, the statement of financial position, the statement of cash
flows, the statement of changes in equity and the related notes. The financial reporting framework that has been
applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as
adopted by the European Union.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members
those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the
company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view. Our
responsibility is to audit and express an opinion on the financial statements in accordance with applicable law
and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the
Financial Reporting Council’s (FRC’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the FRC’s website at
www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion
•
the financial statements give a true and fair view of the state of the company’s affairs as at 31 March 2014
and of the company’s profit for the year then ended;
•
•
the financial statements have been properly prepared in accordance with IFRSs as adopted by the
European Union;
the financial statements have been prepared in accordance with the requirements of the Companies Act
2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ report and Strategic Report for the financial year for
which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to
report to you if, in our opinion:
•
adequate accounting records have not been kept, or returns adequate for our audit have not been received
from branches not visited by us; or
•
the financial statements are not in agreement with the accounting records and returns; or
•
certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Scott Knight, (senior statutory auditor)
For and on behalf of BDO LLP, statutory auditor
London
United Kingdom
5 September 2014
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127)
22
Statement of Comprehensive Income
For the Year Ended 31 March 2014
Revenue
Cost of sales
Operating costs
Gain/(loss) on hedge contract
Amortisation - oil and gas properties
Total cost of sales
Gross profit
Administrative expenses
Other Administrative expenses
Directors’ remuneration
Compliance fees
Total expenditure
Operating profit
2014
Restated
2013
Notes
US$’000
US$’000
13,884
9,181
9
2
(1,398)
(833)
(199)
(3,926)
(5,523)
-
(3,515)
(4,348)
8,361
4,833
(515)
(816)
(445)
(650)
(752)
(525)
(1,776)
(1,926)
6,585
2,906
Finance expense
3
(1,364)
(59)
Profit on ordinary activities before taxation
5,221
2,847
Taxation on profit on ordinary activities
6
-
-
Profit for the financial year
5,221
2,847
23
Statement of Comprehensive Income
For the Year Ended 31 March 2014
Other comprehensive income
-
-
Total comprehensive income for the year
5,221
2,847
Attributable to:
Equity shareholders of the Company
5,221
2,847
Earnings per share
- Basic (cents)
- Diluted (cents)
7
7
2.37
2.36
1.32
1.32
All financial results presented are from continuing operations. The accompanying accounting policies and notes
form an integral part of these financial statements.
24
Statement of Financial Position
As at 31 March 2014
Assets
Non-current assets
Oil and gas properties – Exploration and evaluation
Oil and gas properties – Development and production
Total non-current assets
Current assets
Trade and other receivables
Cash and cash equivalents
Total current assets
Liabilities
Current liabilities
Trade and other payables
Bank borrowings
Total current liabilities
2014
Restated
2013
Restated
2012
Notes
US$’000
US$’000 US$’000
8
9
10
11
11
8,929
33,325
42,254
9,007
6,575
26,176
12,255
35,183
21,830
1,887
1,513
3,400
1,643
2,575
4,218
1,978
1,067
1,388
2,460
3,045
3,848
113
1,030
5,000
5,113
-
1,030
Net current assets / (liabilities)
(818)
(2,068)
2,818
Non-current liabilities
Bank Borrowings
Provision for decommissioning costs
Total non-current liabilities
12
13
7,222
4,470
700
218
7,440
-
28,645
-
700
25
Statement of Financial Position
As at 31 March 2014
Net assets
33,996
27,594
23,948
Shareholders’ equity
Share capital
Share premium
Share based payment reserves
Retained losses
16
17
709
40,202
2,946
706
682
40,075
39,388
2,946
1,806
(9,861)
(15,082)
(17,928)
Total equity
33,996
28,645
23,948
The financial statements were approved by the Board of Directors on 5 September 2014 and were signed on its
behalf by:
______________________________
Patrick Cross
Chairman
____________________
Thomas Kelly
Chief Executive Officer
The accompanying accounting policies and notes form an integral part of these financial statements.
Company number 05387837.
26
Statement of Cash Flows
For the Year Ended 31 March 2014
2014
Restated
2013
Notes
US$’000
US$’000
Net cash inflow from operating activities
14
11,805
4,959
Investing activities
Purchase of exploration assets
Purchase of oil and gas properties
(2,379)
(2,526)
(8,487)
(14,341)
Net cash outflow from investing activities
(10,866)
(16,868)
Financing activities
Issue of ordinary share capital
Proceeds from borrowings
Interest Paid
Repayment of borrowings
130
5,150
(773)
(5,000)
710
9,804
-
Net cash (outflow)/inflow from financing activities
(493)
10,514
Increase / (decrease) in net cash and cash equivalents
Cash and cash equivalents at the start of the year
446
1,067
(1,393)
2,460
Cash and cash equivalents at the end of the year
1,513
1,067
The accompanying accounting policies and notes form an integral part of these financial statements.
27
Statement of Changes in Equity
For the Year Ended 31 March 2014
Share capital Share premium
reserve
Share based
payment reserve
Retained deficit
Total equity
US$’000
US$’000
US$’000
US$’000
US$’000
682
39,389
1,806
(17,928)
23,949
24
686
-
-
-
-
-
-
-
-
-
-
1,140
-
-
-
-
-
710
-
1,140
2,846
2,846
2,846
2,846
706
40,075
2,946
(15,082)
28,645
3
-
-
-
127
-
-
-
-
-
-
-
-
130
5,221
5,221
-
-
5,221
5351
709
40,202
2,946
(9,861)
33,996
Balance At 1
April 2012
Share capital
issued
Cost of shares
issued
Share based
payments
(Macquarie Bank)
Profit for the year
Comprehensive
profit for the year
Balance At 31
March 2013
Share capital
issued
Profit for the year
Other
comprehensive
income
Comprehensive
profit for the year
Balance At 31
March 2014
The accompanying accounting policies and notes form an integral part of these financial statements.
28
Notes to the Financial Statements
For the Year Ended 31 March 2014
Accounting policies, significant judgements, estimates and assumptions
Basis of preparation
The Company’s financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as adopted by the European Union and Companies Act 2006. The principal accounting
policies are summarised below. They have all been applied consistently throughout the year. The financial
report is presented in the functional currency, US dollars and all values are shown in thousands of US dollars
(US$’000) for the first time this year.
These financial statements have been prepared under the historical cost convention modified by the revaluation
of certain financial assets and liabilities.
Going concern
The Directors consider that the Company has adequate resources to continue in operational existence for the
foreseeable future and that it is therefore appropriate to adopt the going concern basis in preparing its financial
statements. The net current liabilities of US$817,259 (2013: US$2,068,000 net current liabilities) are alleviated
with the Macquarie Bank Facility. Empyrean has reached certain Reserve hurdles under Tranche B of the
Macquarie Bank Facility to obtain further drawdowns if required. Any further draw downs on the Macquarie
Bank Facility are subject to the bank’s normal credit department approvals for draw downs under the facility. In
addition, the Company has in the money options and warrants that will further reduce the net current liabilities
position if they are exercised before expiry. These options and warrants are detailed note 15 to the Financial
Statements.
Basis of accounting and adoption of new and revised standards
a) Standards, amendments and interpretations effective in 2013:
The following new standards and amendments to standards are mandatory for the first time for the company for the
financial year beginning 1 April 2013. Except as noted, the implementation of these standards did not have a
material effect on the Company:
Standard
Impact on initial application
Effective date
IAS 1 (Amendment)
Presentation of items of other comprehensive
income
IFRS 13
Fair value measurement
IAS 19 (Amendment 2011)
Employee benefits
IFRS 7 (Amendment 2011)
Disclosures – offsetting financial assets and
financial liabilities
IAS 16 (improvements)
Classification of servicing equipment
1 July 2012
1 January 2013
1 January 2013
1 January 2013
1 January 2013
b) Standards, amendments and interpretations that are not yet effective and have not been early adopted:
Standard
Impact on initial application
Effective date
IAS 32 (Amendment 2011)
Offsetting financial assets and financial liabilities
1 January 2014
IFRS 11
IFRS 10
Joint arrangements
Consolidated financial statements
1 January 2014*
1 January 2014*
29
Notes to the Financial Statements
For the Year Ended 31 March 2014
IFRS 12
Disclosure of interest in other entities
IAS 27 (Amendment 2011)
Separate financial statements
1 January 2014*
1 January 2014*
IAS 28 (Amendment 2011)
Investments in associates and joint ventures
1 January 2014*
IFRIC 21
IFRS 9
Levies
Financial instruments
1 January 2014
TBC
*
Effective date 1 January 2014 for the EU.
The Company does not expect the pronouncements to have a material impact on the Company’s earnings or
shareholders’ funds.
Revenue recognition
Revenue is derived from sales of oil and gas to third party customers. Sales of oil and gas production are
recognized at the time of delivery of the product to the purchaser which is when the risks and rewards of
ownership pass and are included in the statement of comprehensive income as Revenue. Revenue is recognized
net of local ad valorem taxes.
Interest revenue is accrued on a time basis, by reference to the principal outstanding at the effective interest
rate applicable.
Cash and cash equivalents
Cash and short-term deposits comprise cash at bank and in hand and short-term deposits with an original
maturity of three months or less from the date of issue. For the purposes of the Cash Flow Statement, cash and
cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.
Tax
The major components of tax on profit or loss include current and deferred tax. Current tax is based on the profit
or loss adjusted for items that are non-assessable or disallowed and is calculated using tax rates that have been
enacted or substantively enacted by the reporting date.
Tax is charged or credited to the income statement, except when the tax relates to items credited or charged
directly to equity, in which case the tax is also dealt with in equity.
Deferred tax
Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the
statement of financial position differs to its tax base.
Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be
available, against which the difference can be utilised. The amount of the asset or liability is determined using
tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when
the deferred tax liabilities/(assets) are settled/(recovered).
The Company has considered whether to recognize a deferred tax asset and has determined that this is not
appropriate in line with IAS 12 as the conditions for recognition are not satisfied.
Royalties
Royalties or taxes based on production quantities or calculated as a percentage of revenue taken out of net
revenue proceeds received.
30
Notes to the Financial Statements
For the Year Ended 31 March 2014
Foreign currencies
Transactions denominated in foreign currencies are translated into US dollars at the spot rate on the date of the
transaction or, where no contract exists, at average monthly rates. Monetary assets and liabilities denominated
in foreign currencies which are held at the year-end are translated into US dollars at year-end exchange rates.
Exchange differences on monetary items are taken to the Statement of Comprehensive Income.
Items included in the financial statements are measured using the currency of the primary economic
environment in which the Company operates (the functional currency). This is the first year then the financial
statements are presented in USD, which is also the functional currency of the Company.
Change in functional currency and presentation currency
Prior to 31 March 2014 the Company’s financial statements were presented in UK Sterling and the functional
currency of the Company was also assumed to also be UK sterling. As at 31 March 2014 the directors have
reviewed the transactions that underpin the Company’s operations and have noted that the majority of these are
denominated in US Dollars. The Directors have decided that US Dollar is more reflective of the underlying
operations of the Group and as such a change in functional currency has been enacted. Given the trigger for
change occurred prior to the 31 March 2014 reporting period the adjustment has been retrospectively applied
from 31 March 2012.
In line with the requirements of IAS 21 the Directors have chosen to change the presentational currency of the
Company to US Dollars. The change in presentation currency is a change in accounting policy, as if the new
presentation currency has always been the entity’s presentation currency and therefore requires a retrospective
change. The Directors retrospectively adjusted the presentation currency from the earliest practical point which
has been deemed the opening period for the 31 March 2014 financial statements, being 1 April 2012.
Oil and gas assets: exploration and evaluation
The Company applies the full cost method of accounting for Exploration and Evaluation (‘E&E’) costs, having
regard to the requirements of IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’. Under the full cost
method of accounting, costs of exploring for and evaluating oil and gas properties are accumulated and
capitalised by reference to appropriate cash generating units (‘CGUs’). Such CGUs are based on geographic
areas such as a concession and are not larger than a segment.
E&E costs are initially capitalised within ‘Intangible assets’. Such E&E costs may include costs of license
acquisition, third party technical services and studies, seismic acquisition, exploration drilling and testing, but
do not include costs incurred prior to having obtained the legal rights to explore an area, which are expensed
directly to the income statement as they are incurred.
Plant, Property and Equipment (‘PPE’) acquired for use in E&E activities are classified as property, plant and
equipment. However, to the extent that such PPE is consumed in developing an intangible E&E asset, the
amount reflecting that consumption is recorded as part of the cost of the intangible E&E asset.
Intangible E&E assets related to exploration licenses are not depreciated and are carried forward until the
existence (or otherwise) of commercial reserves has been determined. The Company’s definition of commercial
reserves for such purpose is proven and probable reserves on an entitlement basis.
If commercial reserves have been discovered, the related E&E assets are assessed for impairment on a CGU
basis as set out below and any impairment loss is recognised in the income statement. The carrying value, after
any impairment loss, of the relevant E&E assets is then reclassified as development and production assets within
property, plant and equipment and are amortised on a unit of production basis over the life of the commercial
31
Notes to the Financial Statements
For the Year Ended 31 March 2014
reserves of the pool to which they relate. Intangible E&E assets that relate to E&E activities that are not yet
determined to have resulted in the discovery of commercial reserves remain capitalised as intangible E&E assets
at cost, subject to meeting impairment tests as set out below.
E&E assets are assessed for impairment when facts and circumstances suggest that the carrying amount may
exceed its recoverable amount. Such indicators include the point at which a determination is made as to whether
or not commercial reserves exist. Where the E&E assets concerned fall within the scope of an established CGU,
the E&E assets are tested for impairment together with all development and production assets associated with
that CGU, as a single cash generating unit. The aggregate carrying value is compared against the expected
recoverable amount of the pool. The recoverable amount is the higher of value in use and the fair value less
costs to sell. Value in use is assessed generally by reference to the present value of the future net cash flows
expected to be derived from production of commercial reserves. Where the E&E assets to be tested fall outside
the scope of any established CGU, there will generally be no commercial reserves and the E&E assets
concerned will generally be written off in full. Any impairment loss is recognised in the income statement.
Oil and gas assets: development and production
Development and production assets are accumulated on a field-by-field basis and represent the cost of
developing the commercial reserves discovered and bringing them into production, together with the
decommissioning asset (see below) and the E&E expenditures incurred in finding commercial reserves
transferred from intangible E&E assets as outlined above. They are presented as oil and gas properties in Note 9.
The net book values of producing assets are depreciated on units of production basis. The depletion rate was
calculated using the proven 1P reserves.
An impairment test is performed whenever events and circumstances arising during the development or
production phase indicate that the carrying value of a development or production asset may exceed its
recoverable amount. The aggregate carrying value is compared against the expected recoverable amount of the
cash generating unit. The recoverable amount is the higher of value in use and the fair value less costs to sell.
Value in use is assessed generally by reference to the present value of the future net cash flows expected to be
derived from production of commercial reserves. The cash generating unit applied for impairment test purposes
is generally the field, except that a number of field interests may be grouped as a single cash generating unit
where the cash flows of each field are interdependent.
The Company has potential decommissioning obligations in respect of its producing interests. The extent to
which a provision is required in respect of these potential obligations depends, inter alia, on the legal
requirements at the time of decommissioning, the cost and timing of any necessary decommissioning works, and
the discount rate to be applied to such costs. The Company recognised a provision in its accounts at March 31,
2014.
Financial assets
Financial assets are recognised at initial recognition at fair value plus, in the case of financial assets not recorded
at fair value through profit and loss, transaction costs that are attributable to the acquisition of the financial
asset. The Company’s financial assets consist of loans and receivables, cash and cash equivalents and financial
assets classified as fair value through profit or loss.
All financials assets, other than cash and cash equivalents are initially measured at fair value and subsequently
at amortised cost.
Cash and cash equivalents comprise cash on hand or held on current account or on short-term deposits (up to 90
days) at variable interest rates. Any interest earned is accrued monthly and classified as finance income.
32
Notes to the Financial Statements
For the Year Ended 31 March 2014
Financial liabilities
All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and
payables, net of directly attributable transaction costs. The Company’s financial liabilities include trade and
other payables, loans and borrowings including bank loans and derivative financial liabilities.
All financial liabilities are initially stated at their fair value and subsequently at amortised cost. Interest and
other borrowing costs are recognised on a time-proportion basis using the effective interest method and
expensed as part of financing costs in the statement of comprehensive income.
Share-based payments
The Company issues equity-settled share-based payments to certain employees. Equity-settled share-based
payments are measured at fair value at the date of grant. The fair value determined at the grant date of the
equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the
Company’s estimate of shares that will eventually vest.
Where equity instruments are granted to persons other than employees, the income statement is charged with the
fair value of goods and services received.
Significant accounting judgements, estimates and assumptions
The Company makes judgements and assumptions concerning the future that impact the application of policies
and reported amounts. The resulting accounting estimates calculated using these judgements and assumptions
will, by definition, seldom equal the related actual results but are based on historical experience and
expectations of future events. The judgements and key sources of estimation uncertainty that have a significant
effect on the amounts recognised in the financial statements are discussed below.
Impairment of assets
Financial and non-financial assets are subject to impairment reviews based on whether current or future events
and circumstances suggest that their recoverable amount may be less than their carrying value. Recoverable
amount is based on a calculation of expected future cash flows which includes management assumptions and
estimates of future performance.
Exploration and evaluation expenditure
The Company’s policy for E&E expenditure requires an assessment of both the future likely economic benefits
from future exploitation or sale and whether the activities are at a stage that permit a reasonable assessment of
the existence of reserves. Any such assessment may change as new information becomes available. If after
capitalisation, information becomes available suggesting that the recovery of the carrying amount is unlikely,
the relevant capitalised amount is written off in the statement of comprehensive income in the period when the
new information becomes available.
Share-based payments
Certain Directors of the Company receive remuneration in the form of equity-settled share-based payment
transactions, whereby services are rendered in exchange for rights over shares (“equity-settled transactions”).
The cost of equity-settled transactions with Directors and the Company Secretary is measured by reference to
the fair value at the date at which they are granted. The fair value is determined using the Black-Scholes pricing
model. The cost of equity-settled transactions with parties other than Directors and the Company Secretary is
measured at the fair value of the services received at the date of receipt, with a corresponding increase in equity.
33
Notes to the Financial Statements
For the Year Ended 31 March 2014
Change in accounting policies
In line with the requirements of IAS 21 the Directors have chosen to change the presentational currency of the
company to US dollar. The change in presentation currency is a change in accounting policy, as if the new
presentation currency has always been the entity’s presentation currency and therefore requires a retrospective
change. The Directors retrospectively adjusted the presentation currency from the earliest practical point which
has been deemed the opening period for the 31 March 2014 financial statements, 1 April 2012.
Management has undertaken to amortise developed wells on a units of production basis and as required by IAS
8 the change has been applied retrospectively. As a result adjustments were made to prior year for the value of
Amortisation in the books of the accounts. The retrospective change in prior years amounted to a $340,940
increase in the book value of the assets as at 1 April 2013. Retained earnings were adjusted accordingly.
1. Segmental analysis
The primary segmental reporting format is determined to be the geographical segment according to the
location of the asset. The Directors consider the Company to have two business being the exploration for,
development and production of oil and gas properties.
There is one geographical trading segment being North America which is involved in the exploration for,
development and production of oil and gas properties. The Company’s registered office is located in the
United Kingdom.
Details
Exploration
Production
Corporate
Total
31 Mar 14
31 Mar 13 31 Mar 14 31 Mar 13 31 Mar 14 31 Mar 13 31 Mar 14 31 Mar 13
US$’000
US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Revenue
Cost of sales
Gross profit
Exploration
expenditure
impairment
-
(54)
(54)
-
-
-
13,884
9,181
(5,469)
(4,348)
8,415
4,833
-
-
-
-
-
-
13,884
9,181
(5,523)
(4,348)
8,361
4,833
(86)
(105)
-
-
(86)
(105)
Segment result
(140)
(105)
8,415
4,833
8,275
4,728
Unallocated
corporate
expenses
(1,690)
(1,821)
(1,690)
(1,821)
34
Notes to the Financial Statements
For the Year Ended 31 March 2014
Operating profit
Finance expense
Profit on ordinary
activities before
taxation
Taxation
Profit for the
financial year
Total
comprehensive
profit for the
financial year
6,585
2,906
(1,364)
(59)
5,221
2,847
-
-
5,221
2,847
5,221
2,847
Segment assets
8,930
9,007
33,325
26,175
42,037
35,182
Unallocated
corporate assets
Total assets
3,400
2,328
3,400
2,328
45,655
37,510
Segment liabilities
(1,212)
(8)
(1,246)
(8)
Unallocated
corporate
liabilities
Total liabilities
Revenue by Customer
Customer
Marathon oil
Conoco Philips
(11,068)
(9,908)
(11,068)
(9,908)
(12,314)
(9,916)
Revenue 2014 US$’000
$ 13,380
$ 504
$ 13,884
Revenue 2013 US$’000
$ 8,741
$ 440
$ 9,181
2. Administrative expenses
2014
US$’000
Restated
2013
US$’000
35
Notes to the Financial Statements
For the Year Ended 31 March 2014
The operating profit is stated after charging:
Bank charges
Audit fees
Communications
Insurance
Travel
Other
3. Finance expense
Amortisation of finance costs
Interest paid
4. Share based payments
(156)
(304)
(15)
(8)
(85)
(88)
(77)
(55)
(17)
(53)
(82)
(34)
(429)
(545)
(395)
(969)
(1,364)
-
(59)
(59)
The Company had no employees during the year, other than Directors and the Company Secretary who are
either directly employed or employed on a consultancy basis or a combination.
The Company’s equity settled share based payments comprise options granted to Macquarie Bank. The
option value per security is being spread over the expected life of the facility.
During the year ended 31 March 2014, there were no options were granted to Directors and the Company
Secretary. Options were Issued to Macquarie in relation to the loan facility. These are disclosed in detail
under Note 16.
36
Notes to the Financial Statements
For the Year Ended 31 March 2014
5. Directors’ emoluments
Fees and salary paid
Fees and salary paid
2014
2013
US$’000
US$’000
2014
£’000
2013
£’000
71
53
394
298
57
41
393
261
44
33
247
187
36
26
250
165
816
752
491
477
Non-Executive
Directors:
Patrick Cross
John Laycock
Executive Directors:
Thomas Kelly(1)
Frank Brophy(2)
(1) Services provided by Apnea Holdings Pty Ltd
(2) Services provided by F J Brophy Pty Ltd
No UK pension benefits are provided for any UK resident Director.
Directors’ share options
The terms of the share option interests of Directors in office during the year ended 31 March 2014 were as
follows:
Grant date
Options
held 31
March
2013
Options
granted
during
year
Options
expired
during
year
Options
exercised
during
year
Options
held 31
March
2014
Exercise
price (£)
Expiry date
Patrick Cross
28 May 2010
500,000
23 March 2011
650,000
2 March 2012
750,000
-
-
-
(500,000)
-
-
Thomas Kelly
28 May 2010
4,400,000
-
(4,400,000)
-
-
-
-
-
£0.06
28 May 2013
650,000
£0.08
2014*
750,000
£0.08
2 March 2015
-
£0.06
28 May 2013
37
Notes to the Financial Statements
For the Year Ended 31 March 2014
23 March 2011
6,000,000
2 March 2012
7,500,000
-
-
-
-
Frank Brophy
28 May 2010
2,450,000
-
(2,450,000)
23 March 2011
4,000,000
2 March 2012
5,000,000
John Laycock
28 May 2010
-
23 March 2011
650,000
2 March 2012
750,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6,000,000
£0.08
2014*
7,500,000
£0.08
2 March 2015
-
£0.06
28 May 2013
4,000,000
£0.08
2014*
5,000,000
£0.08
2 March 2015
-
£0.06
28 May 2013
-
(200,000)
450,000
£0.08
2014*
-
-
750,000
£0.08
2 March 2015
32,650,000
-
(7,350,000)
(200,000) 25,100,000
*As announced on 20 March 2014, these options had their expiry date extended to four months following the
publication of the Company’s Annual Report & Accounts for the period to 31 March 2014.
38
Notes to the Financial Statements
For the Year Ended 31 March 2014
6. Taxation
Current year taxation
2014
US$’000
Restated
2013
US$’000
UK corporation tax at 23% (2013: 24%)
-
-
Factors affecting the tax charge for the year
Profit on ordinary activities before tax
Profit on ordinary activities at the UK standard rate of 23% (2013:
24%)
Effect of different Tax Rate in US
Add back disallowable expense
Effects of accelerated capital allowances
Utilisation of tax losses brought forward
Current year taxation
5,221
1,201
835
2,833
(4,234)
(635)
-
2,847
683
427
1,371
(2,481)
(-)
-
The Company has considered whether to create a deferred tax asset and has considered that sufficient taxable
profits will not be generated in the near future to utilise the losess carried forward in the US due to forecast
future capital spend.
Tax losses of approximately US$43.1m are available to be claimed going forward.
7. Earnings per share
The basic earnings per share is derived by dividing the profit for the year attributable to ordinary shareholders
by the weighted average number of shares in issue.
2014
2013
Profit for the year
$5,220,102
$2,846,890
39
Notes to the Financial Statements
For the Year Ended 31 March 2014
Weighted average number of ordinary shares of £0.002 on issue
220,587,000
216,090,000
Earnings per share – basic
2.37 cents
1.32 cents
Profit adjusted for dilutive effects
$5,220,102
$2,846,890
Weighted average number of ordinary shares of £0.002 on issue
inclusive of outstanding options
Earnings per share – diluted
220,826,194
217,799,000
2.36 cents
1.31 cents
2014
US$’000
Restated
2013
US$’000
8. Oil and gas properties: Properties, exploration and
evaluation
At 1 April 2013
Additions
Reclassified to oil and gas properties (Note 9)
Impairment - intangible assets
9,007
2,379
(2,370)
(86)
6,679
2,527
(94)
(105)
At 31 March 2014
8,929
9,007
9. Oil and gas properties: Development and production
At 1 April 2013
Additions
Reclassified from intangible assets (Note 8)
Oil and gas decommissioning asset
Amortisation – oil and gas properties
26,176
8,487
2,370
218
(3,926)
15,255
14,341
94
-
(3,514)
At 31 March 2014
33,325
26,176
40
Notes to the Financial Statements
For the Year Ended 31 March 2014
10. Trade and other receivables
Trade and other receivables
Accrued revenue
Prepayments
VAT receivable
11. Current trade and other payables
Trade payables
Accrued expenses
Hedge instrument payable
Borrowing(1)
(1) Refer to Note 12 for the non-current Macquarie Bank Facility.
161
1,607
112
7
161
1,589
224
4
1,887
1,978
1,362
176
105
2,575
68
45
-
5,000
4,218
5,113
2014
US$’000
Restated
2013
US$’000
12. Non-current trade and other payables
Borrowing(1)
7,222
4,470
Total non-current trade and other payables
7,222
4,470
41
Notes to the Financial Statements
For the Year Ended 31 March 2014
The Macquarie Bank Facility totaling US$10,671,000 was entered into on 30 May 2012, drawn down on twice
during the year and is repayable at an interest rate of 9% pa plus LIBOR. The first repayment was on 28 June 2013
and 3 repayments have been made subsequently. Refer to Note 11 for the current Macquarie Bank Facility. The
Macquarie Bank Facility is secured by a fixed and floating charge over the Company, a Company guarantee and a
specific charge over the Sugarloaf AMI asset.
13.
Provision for decommissioning costs
The provision for decommissioning costs is calculated on the following assumptions:
decommissioning cost of $70,000 per well (gross)
-
- US CPI rate of 2% and long term bond rate of 3%
- Average life of 19 years
14. Reconciliation of operating profit to operating cash flows
Profit for the year before tax
Amortisation – oil and gas properties
Loss on hedging liability
Finance costs
Impairment - intangible assets
Decrease / (increase) in receivables
Increase / (decrease) in payables
5,221
3,926
199
1,364
86
(416)
1,425
2,847
3,515
-
-
105
(590)
(916)
Net cash inflow from operating activities
11,805
4,959
15. Called up share capital
The authorised share capital of the Company and the called up and fully paid amounts at 31 March 2014 were
as follows:
Authorised
1,000,000,000 ordinary shares of 0.2p each
£2,000
£2,000
Issued and fully paid
221,433,853 (2013: 220,433,853) ordinary shares of 0.2p each
£443
$709
£426
$706
42
Notes to the Financial Statements
For the Year Ended 31 March 2014
On 14 August 2013, 200,000 fully paid ordinary shares of 0.2p each were issued as a result of option
conversions for cash at a price of £0.08 per share.
On 10 February 2014, 150,000 fully paid ordinary shares of 0.2p each were issued as a result of option
conversions for cash at a price of £0.08 per share.
On 28 March 2014, 650,000 fully paid ordinary shares of 0.2p each were issued as a result of option
conversions for cash at a price of £0.08 per share.
Share options and warrants
The following equity instruments have been issued by the Company and have not been exercised at 31 March
2014:
Option class
Grant
date
Options /
warrants
held 31
March
2013
Options /
warrants
granted
during
year
Options /
warrants
expired
during
year
Options /
warrants
exercised
during
year
Options /
warrants
held 31
March
2014
Exercise
price (£)
Expiry
date
Value
per
security
Weighte
d
average
contract
ual life
remaini
ng
(years)
Broker options
9 April
2010
500,000
-
(500,000)
-
-
-
£0.06
16 April
2013
£0.0145
-
£0.06
28 May
2013
£0.0141
28 May
2010
8,575,000
-
(8,575,00
0)
23 March
2011
12,100,00
0
2 March
2012
19 July
2012
19 July
2012
14,800,00
0
15,000,00
0
15,000,00
0
-
-
-
-
-
(1,000,00
0)
11,100,00
0
£0.08
2014(2)
£0.0239
See note
(2)
-
-
-
-
-
-
14,800,00
0
15,000,00
0
15,000,00
0
£0.08
2 March
2015
£0.0311
0.92
£0.08
19 July
2016
£0.018(1)
£0.10
19 July
2016
£0.014(1)
0.92
2.30
43
Director and
Company
Secretary
options
Director and
Company
Secretary
options
Director and
Company
Secretary
options
Financier
options
Financier
options
Notes to the Financial Statements
For the Year Ended 31 March 2014
Financier
options
25 March
2013
15,000,00
0
Warrants
1 March
2012
4,000,000
84,975,00
0
-
-
-
-
-
-
15,000,00
0
25 March
2017
£0.12
£0.016(1)
-
4,000,000
£0.0875
1 March
2015
N/A(3)(4)
2.30
0.92
(9,075,00
0)
(1,000,00
0)
74,900,00
0
(1)The value of these options is being expensed over a period of 4 years.
(2)As announced on 20 March 2014, these options had their expiry date extended to four months following
the publication of the Company’s Annual Report & Accounts for the period to 31 March 2014
(3)Subsequent to year end, the exercise price of the warrants was converted to USD0.147175
(4)On issue of the warrants in 2012, nil value was attributed to the securities.
The weighted average exercise price of options on issue at 31 March 2014 is £0.092.
The fair value of the granted options in 2013 was estimated using a Black Scholes model with the following
inputs:
Grant date
Share price at grant date
Exercise price
Volatility
Expected option life
Dividend yield
Risk free interest rate
19-Jul-12
0.065p
0.08p
50%
4.00 years
-
0.439%
19-Jul-12
0.065p
0.1p
50%
4.00 years
-
0.439%
25-Mar-13
0.0588p
0.12p
50%
4.00 years
-
0.439%
2014
US$’000
Restated
2013
US$’000
16. Reserves
Share based payments reserve
2,947
2,947
Total reserves
2,947
2,947
44
Notes to the Financial Statements
For the Year Ended 31 March 2014
17. Commitments
As at 31 March 2014, the Company had no material capital commitments, other than Authority For
Expenditures (“AFE’s”) received from the operator of the Sugarloaf AMI in the normal course of business for
operations, including future wells and facilities, that the Company intends to participate.
18. Related party transactions
There were no related party transactions during the year ended 31 March 2014 other than disclosed in Note 5.
19. Financial instruments
The Board of Directors determine, as required, the degree to which it is appropriate to use financial
instruments to mitigate risk. Currently the Company’s principal financial instruments comprise cash and the
Macquarie Bank Facility at an interest rate of 9%pa plus LIBOR. Refer to Notes 11 and 12 for further details.
Together with the issue of equity share capital, the main purpose of these is to finance the Company’s
operations. The Company has other financial instruments such as short-term receivables and payables which
arise directly from normal trading.
Interest rate risk
The Company finances its operations through the use of cash deposits at variable rates of interest for a variety
of short-term periods, depending on cash requirements.
Short-term receivables and payables are not exposed to interest rate risk. The company’s borrowing with
Macquarie is subject to the 9% plus LIBOR rate. The company is therefore exposed to the premium paid
above market rates and if market rates were to fall they would not realize the benefit of this.
The following table illustrates sensitivities to the Company’s exposures to changes in interest rates. The tables
indicates the impact of how profit at balance date would have been affected by changes in the relevant risk
variable that management considers to be reasonably possible. These sensitivities assume that the movement
in a particular variable is independent of other variables.
At 31 March 2014, the effect on profit as a result of changes in the interest rate on the Macquarie borrowing
facility ($10,671,000), with all other variable remaining constant would be as follows:
Change in profit
Change
Adjusted 2014
Profit before taxation
Increase in interest rate by 100 basis points
Increase in interest rate by 200 basis points
$’000
(107)
(213)
$’000
5,221
5,114
5,008
45
Notes to the Financial Statements
For the Year Ended 31 March 2014
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or a counter party to a financial
instrument fails to meet its contractual obligations. The Company is mainly exposed to credit risk through
cash and cash equivalents and deposits with banks and financial institutions.
Credit risk in relation to the amount that can be borrowed against the Company’s producing assets is
predominantly determined by the level of proven reserves. Cash flow risk is mitigated by the use of oil price
hedging where appropriate.
Currency risk
The Company’s functional currency is US$ and as the majority of its operating expenses and revenues are
denominated in USD, the Company does not consider that it is exposed to a significant foreign currency risk.
Liquidity risk
The Company’s policy throughout the year has been to ensure that it has adequate liquidity by careful
management of its working capital. Amount held at bank as at 31 March 2014 amounted to US$1,513,000
(2013: US$1,067,000).
Commodity risk
The Board recognises that through the normal course of business the Company is exposed to commodity risks
for the revenue’s received. To manage commodity risk the company entered into a hedging arrangement
during the year to manage the company’s price risk exposure during the year ended March 31, 2014 with
Macquarie.
Capital
In managing its capital, the Company’s primary objective is to maintain a sufficient funding base to enable the
Company to meet its working capital and strategic investment needs. In making decisions to adjust its capital
structure to achieve these aims, through new share issues, the Company considers not only its short-term
position but also its long-term operational and strategic objectives.
Determination of fair values
A number of the Group’s accounting policies and disclosures require the determination of fair value, for both
financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or
disclosure purposes based on the following methods. When applicable, further information about the
assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
(i) Cash & cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses
The fair value of cash & cash equivalents, restricted cash, accounts receivable, accounts payable and accrued
expenses is estimated as the present value of future cash flows, discounted at the market rate of interest at the
reporting date. As at 31 March 2014 and 31 December 2013, the fair value of cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and accrued expenses approximated their carrying value
due to their short term to maturity.
(ii) Derivatives
The fair value of the private placement warrants, Hess warrants and the incentive stock options granted to
employees is calculated using a Black Scholes option pricing model. Measurement inputs include share price
on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic
volatility adjusted for changes expected due to publicly available information), weighted average expected life
of the instruments (based on historical experience and general option holder behavior), expected dividends,
and the risk-free interest rate (based on government bonds). A forfeiture rate is estimated on the grant date and
is adjusted to reflect the actual number of incentive stock options that vest.
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Notes to the Financial Statements
For the Year Ended 31 March 2014
Financial assets:
Cash and cash equivalents
Loans and receivables:
Accounts receivable
Financial Liabilities:
Borrowings
Other financial liabilities
31 March 2014
Carrying value $’000
31 March 2014
Fair value $’000
1,513
161
9,797
1,513
161
9,797
Accounts payable and accrued expenses
1,535
Hedging Instrument Payable 105 105
1,538
The hedging instrument is the only financial instrument whereby a valuation has been applied. A level 1 fair
value measurement is applied and the mark to market valuation is based on the quoted oil price. The different
levels have been defined as follows:
Level 1 Fair Value Measurements
• Level 1 fair value measurements are based on unadjusted quoted market prices
Level 2 Fair Value Measurements
• Level 2 fair value measurements are based on valuation models and techniques where the significant
inputs are derived from quoted indices.
Level 3 Fair Value Measurements
• Level 3 fair value measurements are based on unobservable information.
The Macquarie Hedging Contract closing positions for each month after 31 March 2014 till the current date
are as follows:
March 2014: $19,035 settled in April 2014.
April 2014: $ 23,577 settled in May 2014.
May 2014: $ 22,542 settled in June 2014.
June 2014: $ 33,012 settled in July 2014.
July 2014: $ 23,144 settled in August 2014.
August 2014 $ 606.67 settled in September 2014.
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Notes to the Financial Statements
For the Year Ended 31 March 2014
20. Events after the reporting date
On 20 May 2014 the Company announced an increase in Reserves following a report being prepared by
DeGolyer MacNaughton to 31 December 2013. A summary of this report is included in the Strategic Report
on pages 6 to 11 of this Annual Report.
On 3 July 2014 the Company announced that it had repaid a further US$1.5 million of debt under its
Macquarie Bank Facility, thus reducing the amount outstanding on the facility to US$9.17 million. The
Macquarie Hedging Contract closing positions are detailed for each month after 31 March 2014 in note 19 to
these accounts above.
On 10 July 2014 the Company announced that it had entered into a Formal Sales Process and Strategic
Review. Further details are provided in the Strategic Report on pages 6 to 11 of this Annual Report
There are no other significant post reporting date events.
Financial statements are published on the company’s website in accordance with legislation in the United
Kingdom governing the preparation and dissemination of financial statements, which may vary from
legislation in other jurisdictions. The maintenance and integrity of the group's website is the responsibility of
the directors. The directors' responsibility also extends to the ongoing integrity of the financial statements
contained therein.
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