EMPYREAN ENERGY PLC
Registered Number 05387837
Annual Report and Accounts 2018
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
Statement of Accounting Policies
Notes to Financial Statements
1
2
4
6
10
20
23
25
26
30
31
32
33
34
39
Company Information
Directors
Secretary and Registered Office
Principal Administrative Office
Auditors
Nominated Adviser and Broker
Solicitors
Registrars
Patrick Cross (Non-Executive Chairman)
Thomas Kelly (Chief Executive Officer)
Gajendra Bisht (Executive Director)
John Laycock (Non-Executive Director)
Jonathan Whyte
200 Strand
London WC2R 1DJ
UNITED KINGDOM
Unit 32/33, 22 Railway Road
Subiaco WA 6008
AUSTRALIA
Phone: +61 8 9380 9920
Fax: +61 8 9381 5064
Email: enquiries@empyreanenergy.com
BDO LLP
55 Baker Street
London W1U 7EU
UNITED KINGDOM
Cenkos Securities Plc
66 Hanover Street
Edinburgh EH2 1EL
UNITED KINGDOM
Kerman & Co LLP
200 Strand
London WC2R 1DJ
UNITED KINGDOM
Link Asset Services
The Registry
34 Beckenham Road
Beckenham BR3 4TU
UNITED KINGDOM
1
Highlights
Reporting period
Block 29/11, Pearl River Mouth Basin, China (EME 100%)
580km2 3D seismic survey successfully completed in August 2017;
Interpretation of onboard processed seismic data confirmed structural validity of Jade and Topaz
prospects within Block 29/11;
Third significant target identified named “Pearl”, located north of the Topaz prospect within Block
29/11; and
Total Preliminary Prospective Resources (Best) Estimate of 591 MMbbl from Jade, Topaz and Pearl
prospects.
Duyung PSC Project, Indonesia (EME 10%)
Secured a 10% interest in the Duyung PSC, offshore Indonesia, in April 2017;
Mako South-1 well was drilled to a total depth of 1,707 feet and the drilling and testing operations were
completed in June 2017;
Mako South-1 well results exceeded expectations encountering excellent reservoir quality, gas
saturation, porosity, permeability and flow rates; and
Mako South-1 well flowed at a stabilised rate of 10.9 cubic feet of gas per day with multi Darcy
permeability.
Sacramento Basin, California USA (EME 25-30%)
Negotiated a 25-30% working interest in the Northern Sacramento Basin package of gas projects;
Northern Sacramento Basin projects includes the Dempsey and Alvarez prospects plus a Dempsey
Trend AMI with multiple targets;
Dempsey 1-15 well spudded in August 2017 and reached total depth of 9,747 feet; and
Wireline logs confirmed numerous potential gas bearing zones. Comprehensive production testing
commenced in November 2017.
Post reporting period
Block 29/11, Pearl River Mouth Basin, China (EME 100%)
Based on comprehensive seismic interpretation of fully processed 3D data, 31% uplift in best case
Prospective (Un-risked) Resources from 591 MMbbl to 774 MMbbl in Jade, Topaz and Pearl prospects
announced in June 2018; and
Detailed Oil Migration Study completed in June 2018. The study helped interpret effective oil migration
pathways into the Jade, Topaz and Pearl prospects from proven hydrocarbon kitchen sags.
2
Highlights
Duyung PSC Project, Indonesia (EME 10%)
The operator, Conrad Petroleum made significant progress with completion of detailed and
comprehensive technical studies by incorporating all the sub-surface data collected in the discovery
well;
In addition, substantial commercial and facilities studies have been completed as a part of the Plan of
Development (POD);
POD, including reserves certification, submitted to the Indonesian regulator SKKMigas in August 2018;
and
Heads of Agreement signed with regional utility for sale of Mako gas.
Sacramento Basin, California USA (EME 25-30%)
The JV discussed and agreed to conduct a comprehensive testing operation. A total of three zones (Zone
2, 3, and 4) were high-graded for testing in the well;
Comprehensive data was collected to understand the key parameters (porosity and permeability) of
the reservoir;
Commercial Gas Flows from combined zones commenced at Dempsey at ~ 1,300 mcf per day;
JV now undertaking further subsurface work to assess the prospectivity of other opportunities along
the Dempsey trend in light of the results of Dempsey 1-15;
Cash flow from production at Dempsey commenced in July 2018; and
Applications submitted to commence operations at Alvarez well.
Empyrean CEO Tom Kelly said, “After the sale of our interest in the Sugarloaf AMI in Texas in 2016, Empyrean
has successfully reconstructed the Company through a series of strategic acquisitions and the Company now
holds an exciting portfolio of exploration projects in China, Indonesia and the USA.
The Company has actively worked with the operators to make substantial progress in each project during the
year. As a result, we have made a discovery in Indonesia; proven commercial gas in the Sacramento Basin
(Dempsey 1-15) in California; and successfully completed the acquisition, processing and interpretation of a
large 3D survey over the key prospects in China.
We expect that work over the remainder of the calendar year will continue to add significant value for the
Company and its shareholders through the focused advancement of these projects.”
3
Chairman’s Statement
After a significant restructuring of its activities in the prior year, which included the sale of our interest in the
Sugarloaf asset in Texas, Empyrean has successfully developed into an active exploration company through a
series of exciting project acquisitions in China, Indonesia and the United States.
In December 2016 Empyrean acquired a permit covering 100% of the exploration rights for Block 29/11, located
in the Pearl River Mouth Basin, offshore China. Under the negotiated terms, the China National Offshore Oil
Company Limited (CNOOC Limited) have a back in right to 51% of the PSC if a commercial discovery is made
following Empyrean entering a PSC.
Empyrean commenced a 580km2 seismic acquisition survey on Block 29/11 in June 2017 which was completed
in August of the same year, with preliminary interpretation confirming the structural validity of two key
prospects, Jade and Topaz, which had previously been identified in vintage 2D seismic surveys, and identifying
a third significant target named Pearl, located to the north of Topaz. All three prospects have significant resource
potential and the prospective resource estimates were upgraded in June 2018, as detailed in the Operational
Review. Empyrean has also recently completed an Oil Migration Study which has established effective potential
oil migration pathways into the Jade, Topaz and Pearl prospects.
In April 2017 Empyrean acquired a 10% interest in the offshore Duyung PSC in Indonesia and participated in the
drilling of the Mako South-1 well in June 2017. As previously reported, this well exceeded expectations with a
stabilised flow rate of 10.9 cubic feet of high quality methane gas per day with excellent permeability (in the
multi Darcy range). The results significantly de-risked the project, confirming a large accumulation of gas with
extremely good reservoir quality. In August 2018 the Plan of Development (POD), including a certification of
reserves, was submitted by the operator, West Natuna Exploration Limited, to the Indonesian regulator
SKKMigas. During preparation of the POD, a Heads of Agreement was signed with a regional utility for the sale
of all Mako gas.
In May 2017 Empyrean entered into an agreement with ASX listed Sacgasco Limited, to test a group of projects
in the Sacramento Basin California, including two mature gas prospects in Dempsey (EME 30%) and Alvarez (EME
25%) and also further identified follow up prospects along the Dempsey trend (EME 30%). Following completion
of a 2,970 metre appraisal and exploration well, Dempsey 1-15, the operator has tested multiple gas zones
which, subsequent to the reporting period end, resulted in the production of commercial gas flows. The plan at
the time of this report was to connect to nearby wells to further increase production and cash flow.
Applications have also been submitted to the regulator to permit the re-entry of the Alvarez 1 wellbore. Analysis
is currently being conducted with a view to assessing the integrity of the wellbore and the forward plan.
On the corporate front, the Company said farewell to Frank Brophy who retired in December 2017. Frank was
with Empyrean for 12 years and made an invaluable contribution over that time and his technical knowledge,
and friendship, is greatly missed. However, with Frank’s departure the Company was fortunate to have the highly
qualified Gajendra Bisht on the Board and he has assumed the technical oversight role across the Company’s
project portfolio. I’d also like to thank the Board and staff for their contribution during the year, in particular
Tom Kelly who contributes so much time and effort and continues to drive Empyrean forward.
4
Chairman’s Statement
The Company is excited about the position it is in, with a stronger oil price and interests in three high impact
exploration projects in energy hungry markets. Work will continue to accelerate all three projects to maximise
their value. While the activities above continue, in parallel the Board continues to evaluate new projects to
position the Company for renewed growth and to further increase shareholder value.
______________________________
Patrick Cross
Non-Executive Chairman
6 August 2018
5
Strategic Report
Business Overview and Likely Future Developments
Following the sale of the Sugarloaf Asset in 2016 and a return of capital of 7.9p per share (totaling approximately
£17,500,000) to shareholders the Company has re-established itself as an exploration company with a focus on
high impact projects in proven hydrocarbon basins near to energy hungry markets that are close to existing
infrastructure. The Company and its partners are actively in engaged in exploration and development activities
and are exploring various strategic options on all three projects, with the aim of maximising value for
shareholders.
During the year the Company raised funds at various points to support the appraisal and exploration program
and for working capital purposes. On 13 June 2017 the Company announced that it had raised £862,800 through
a placing of 16,080,000 shares at 3.5p per share to raise £562,800 and through the exercise of 15,000,000
options by Tom Kelly at an exercise price of 2p to raise £300,000. On 20 June 2017 the Company announced that
it had raised £660,000 through a placing of 12,000,000 shares at 5.5p per share. On 2 August the Company
announced that it had raised £1,000,000 through the issue of 11,764,706 shares at 8.5p per share. On 20
February 2018 the Company announced that it had raised £600,000 through the exercise of 15,000,000 options
by Tom Kelly at an exercise price of 4p.
The strategy is to continue to add value for shareholders by participating in late stage, mature exploration
projects with low assessed geological risks. The Board and management recognise that exploration for
hydrocarbons is a risky venture and there will be failures and challenges, however the Company has a team with
a proven track record of finding hydrocarbons and advancing projects through exploration, appraisal and into
production. The stronger oil price is also timely, particularly with regard to our China operations.
Management continually evaluates project opportunities that meet strict investment guidelines with an aim of
adding value for all shareholders.
Operations and Outlook
As at 31 March 2018 the Company has the following interests:
The Company has an interest in Block 29/11 offshore China (100% during exploration and 49% upon any
commercial discovery). Empyrean is the operator with 100% of the exploration rights of the 1800km2 permit
during the exploration phase of the project. Empyrean completed a 580km2 3D seismic acquisition survey in
August 2017 and preliminary internal interpretation of the raw seismic data has confirmed the structural viability
of two key prospects (Jade and Topaz) and identified a third significant prospect (Pearl). Geological work and
further seismic interpretation resulted in upgraded prospective resource estimates on these three prospects
being released subsequent to year end, as well as results from an Oil Migration Study, as detailed in the
Operational Review.
The Company acquired a 10% interest in the Duyung PSC, offshore Indonesia, from Conrad Petroleum Pte Ltd
(Conrad Petroleum) in April 2017. The Duyung PSC covers an offshore permit of approximately 1,100km2 in the
prolific West Natuna Basin. The main asset in the permit is the Mako shallow gas discovery that has an
independently verified 2C and 3C gas resource of between 430-650 Bcf recoverable gas, that was completed
before drilling the Mako South-1 well. The appraisal well, Mako South-1, was spudded in June 2017 with results
exceeding expectations encountering excellent reservoir quality rock with high permeability sands in the multi
Darcy range with 23 feet of gas bearing reservoir. This zone flowed gas at a stabilized rate of 10.9 million cubic
feet per day through a 2-inch choke. The gas is of high-quality being close to 100% methane. On the back of
6
Strategic Report
results from the Mako South-1 well the operator submitted a detailed Plan of Development, including a
certification of reserves, to the Indonesian regulator in August 2018. As part of the POD submission, a Heads of
Agreement was signed with a regional utility for the sale of all Mako gas.
The Company entered into an agreement with ASX listed Sacgasco Limited (Sacgasco), a Sacramento Basin
focused natural gas developer and producer, in May 2017, to test a group of projects in the Sacramento Basin
California, including two mature, multi-TcF gas prospects in Dempsey (EME 30%) and Alvarez (EME 25%) and
further identified follow up prospects along the Dempsey trend (EME 30%). Following completion of an appraisal
and exploration well, Dempsey 1-15, the operator has tested multiple gas zones which, subsequent to the
reporting period end, resulted in the production of commercial gas flows which will generate near term cash
flow. The JV is currently considering options including connecting to nearby wells to further increase the
production rate. Applications have recently been submitted for work to commence at the Alvarez prospect.
The Company also has a 58.084% working interest in the Eagle Oil Pool Development Project asset in California
and a 10% working interest in the Riverbend Project in Texas. Further detailed analysis on all projects is provided
in the Operational Review on page 10.
Strategy
The Company’s goal is to maximise value for shareholders. Empyrean will allocate its resources appropriately
given the risk versus reward profile of our projects in order to achieve its goal. Risk assessment and evaluation
is an essential part of the Company’s planning and an important aspect of the Company’s internal control system.
These risks are first rigorously assessed at a technical level before the Company takes on a project and then
diligently managed by the Company throughout the project timeline. 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 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 estimated capital costs, operating costs, reserves, recovery and
production levels; actions of host governments or other regulatory authorities; and failure to find a hydrocarbon
or finding uneconomic hydrocarbons. The Company employs geological experts and engages independent
consultants where necessary to review exploration data as it is produced.
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. The Company monitors the current and forecast oil prices on a regular basis.
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. In particular, the Company’s existing exploration
assets are located in China, Indonesia and the USA and currently require US$ denominated funding to take them
forward. The Company monitors the ongoing economic situations in the countries in which it has activities.
7
Strategic Report
Financing Risk
Future investment is dependent on having sufficient funds to enable the exploration or development of projects,
whether through debt or equity funding. The Company has raised funds in GBP and has had surplus US$
available from the sale of Sugarloaf in 2016. In addition, the Company is currently expecting a refund in USD
from the IRS. There is the potential to be exposed to foreign exchange losses or profits on any funds that the
Company converts into GBP or converts from GBP to US$ as the Company’s exploration assets require payments
for services to be made in US$. The Company prepares cash flow forecasts and monitors its expenditure against
budget, raising funds when necessary.
Market Risk
Securing sufficient and profitable sales contracts to support operations is a key business risk. Empyrean’s
exploration projects in California require the renewing of certain leases from time to time. There is some risk
that some leases may not be able to be negotiated or that the terms may be different. The Company also
operates in China and Indonesia and there are risks associated with the demand for hydrocarbons and the
different pricing between markets for different commodities such as gas versus oil.
Environmental Risk
For some assets, the Company is dependent on other operators for the performance of exploration and
production activities and will be largely unable to direct, control or influence the activities and costs of these
operators. The Company carefully considers the technical, HSSE and financial capabilities of future potential
operators during any farm-out process. The Company currently operates Block 29/11 in offshore China.
Financial Position and Performance of the Business
Net loss after tax for the year was US$2.63m (2017: US$10.28m net loss). Total assets were US$12.28m (2017:
US$7.41m), the increase mainly due to capitalised exploration expenditure on the Company’s three primary
projects. Total liabilities were US$2.89m (2017: US$2.66m), the slight increase due to movement in the
derivative liability valuation. The Company’s cash position at 31 March 2018 was US$0.39m (2017: US$6.11m)
with net operating cash outflows of US$0.99m (2017: US$3.43m).
Key Performance Indicators
Over the last few years the key financial performance indicators (“KPI’s”) for the Company have been revenue
and net profit. The key non-financial KPI’s over that time have been the Company’s reserves and share price.
Given the sale of the Company’s primary producing asset in 2016, Sugarloaf AMI, revenue, net profit, reserves
and share price were deemed to be no longer the most appropriate indicator of the performance of the
Company. With the Company’s successful re-build as an exploration company with portfolio of projects aimed
at adding value for shareholders – the Company’s share price is again a key KPI. Since the return of value to
shareholders, the Company’s share price has grown from 1p to over 27p in September 2017 and is 7.8p at the
time of writing this report. In addition, with the Company becoming an active explorer, exploration results across
all projects, resource estimates at the Chinese project and production from California are important KPIs and to
this end, all of the Company’s projects have achieved positive results which are detailed further in the
Operational Review.
8
Strategic Report
The share price performance over the 24 months to 30 June 2018 is represented graphically below.
The strategic report and operational review was approved by the Board on 6 August 2018 and signed on the
Board’s behalf.
____________________
Thomas Kelly
Chief Executive Officer
6 August 2018
9
Operational Review
Following the sale of the Company’s interest in the Sugarloaf AMI in 2016 and the subsequent return of capital
to shareholders, Empyrean has been successfully transformed into an exploration focused company with an
active work programme conducted during the financial year. The management and Board have been successful
in establishing an exciting portfolio of value accretive projects in China, Indonesia and the United States with
transformative potential.
All of these assets have one common thread - they are located in a proven and prolific geological play systems
with strong commercialisation options in the vicinity of these assets. In addition, Empyrean has now become an
operator with 100% working interest in Block 29/11, offshore China, acquired in December 2016.
In April 2017, Empyrean acquired a 10% shareholding in the Duyung PSC in offshore Indonesia from Conrad
Petroleum. The portfolio was enhanced by the acquisition of a third project when Empyrean entered into an
agreement with ASX listed Sacgasco Limited to farm in to a package of gas projects in the Sacramento Basin,
onshore California in which Empyrean has a 25-30% working interest.
Empyrean has retained an interest in the Riverbend Project (10 % WI) located in the Tyler and Jasper counties,
onshore Texas and a 58.084% WI in the Eagle Oil Pool Development Project, located in the prolific San Joaquin
Basin onshore, Southern California. However, no technical work has been undertaken on these projects during
the year.
China Block 29/11 Project (100% WI)
Block 29/11 is located in the prolific Pearl River Mouth Basin, offshore China approximately 200km Southeast of
Hong Kong. This acquisition of this block heralded a new phase for Empyrean when it became an operator with
100% of the exploration rights of the permit during the exploration phase of the project. In the event of a
commercial discovery, and subject to Empyrean first entering a Production Sharing Contract (PSC), China
National Offshore Oil Corporation Limited (CNOOC) will have a back in right to 51% of the permit.
The initial contractual term called Geophysical Service Agreement (GSA) is for two years with a work programme
commitment of acquisition, processing and interpretation of 500km2 of 3D seismic data.
Completion of 3D Seismic Survey
In June 2017 Empyrean commenced a 3D seismic acquisition survey covering two key prospects, Jade and Topaz.
These prospects were mapped in vintage 2D seismic data.
The 3D seismic survey acquisition was completed successfully in August 2017. Empyrean exceeded the work
obligation of the permit for the current GSA phase by acquiring 580km2 data for evaluating the permits
prospectivity comprehensively.
The survey was completed on schedule with no Health, Safety and Environmental (HSE) issues.
In September 2017 Empyrean completed an internal interpretation and preliminary mapping of the Seismic
Boat’s raw 3D data. The main aim of this work was to confirm the structural validity of the Jade and Topaz
prospects. This mapping exercise also helped identify a third significant prospect named Pearl, located
immediately north of the Topaz prospect.
10
Operational Review
Preliminary mapping estimated the gross unrisked prospective resources for Jade, Topaz and Pearl and these
results were published in August 2017 with a total Preliminary Prospective Resources (Best) Estimate of 591
million barrels of oil (“MMbbl”) from the Jade, Topaz and Pearl prospects.
Completion of Processing of 3D seismic data
Following the successful acquisition of a large 3D survey with no HSE issues in August 2017, Empyrean focused
on processing the seismic data optimally. Empyrean had regular interaction with the China Oilfield Services
Limited (COSL) processing team at all stages of the project. Time (PSTM) and Depth (PSDM) processing of the
3D seismic data was completed in January 2018. The final processed data was of high-quality that clearly imaged
the potential reservoirs, faults and deeper basin.
Interpretation of the processed data commenced immediately following the completion of processing using
both internal technical capability and an additional expert consultant Geophysicist that Empyrean contracted
specifically for the task.
Arising from the 3D seismic interpretation, the Jade and Topaz prospects have developed into better defined
and very substantial opportunities. The Pearl Prospect, which was a substantial lead based on the vintage
regional 2D seismic, has evolved into a significant prospect following the 3D seismic interpretation. The results
indicated that all three prospects are large and are in favourable geological settings.
Figure 1: China Block 29/11, Jade and Topaz Prospects
Based on the results of comprehensive interpretation of the fully processed seismic data, the prospective (un-
risked) resources of these three major high graded prospects was revised upwards by 31%, as per the table
below. The revised estimates are higher than previously reported estimates because of detailed mapping and
improved assessment of reservoir parameters.
Gross (100%) ‘Best’ case Prospective Resources combined are estimated at 774 MMbbl on an un-risked basis, as
per below.
11
Operational Review
Timeline
Block 29/11 China: Gross Prospective (un-risked) Resources MMbbl
September 2017
June 2018
(Seismic Boat Raw 3D data)
(Final Processed 3D data)
Prospect
Low Case
Best Case
High Case
Low Case
Best Case
High Case
Jade
Topaz
Pearl
89
280
84
103
365
123
143
498
206
94
292
94
190
435
149
303
728
256
Given, one of the major challenges with resource estimation rests heavily with an estimation of Gross Rock
Volume (GRV), a critical step to reducing the uncertainty of estimating GRV is to better understand and quantify
velocity field and depth conversion. As a result, two approaches were taken for depth ‘conversion of time’
interpretation of the seismic marker for the potential reservoir top. The resulting two GRVs from two structure
maps were then combined to generate an industry standard probabilistic result using Monte Carlo simulation
with 1,000 trials (using Crystal Ball software). This probabilistic method has produced Gross Prospective (un-
risked) Resources as shown below.
Figure 2: Block 29/11 – Topaz Prospect
Block 29/11 China: Gross Prospective (un-risked) Resources MMbbl
Probabilistic Estimates
Prospect
P90
P50
P10
Mean
Jade
Topaz
Pearl
110
298
105
183
431
152
230
631
220
202
453
159
Oil Migration Study Completed
Substantial geological work was also undertaken during the year, focusing on migration pathways of oil in the
basin which culminated in an Oil Migration Study (the Study) which was completed in June 2018.
12
Operational Review
During the Study, geoscientists from the CNOOC Limited Shenzhen branch were very supportive and shared the
comprehensive viewpoints of their previous study in this area.
Figure 3: Proven and interpreted migration pathways from Baiyun Sag East
The Study established the maturity profile of source rock, and unambiguously established that the source rock
in the Baiyun Sag East (BSE) area was at peak maturity when oil expulsion commenced. The main implications
for Block 29/11 prospectivity are very positive with the entire source rock within BSE interpreted to have
produced abundant hydrocarbons. In addition, any potential oil accumulation in Block 29/11 prospects are
expected to be light and therefore similar to the oil discoveries around Block 29/11 that range from 33-38 API.
The Study validated the interpreted oil migration pathways from the known oil sources of the Enping Formation
(Paleocene aged) within the BSE into the several oil discoveries made by CNOOC Limited to the immediate West
and South of Block 29/11 since 2010, and thus provided strong evidence of a prolific petroleum system in the
area. At the same time, the Study interprets effective migration pathways from BSE towards the northern flank
of the Baiyun uplift where the Jade and Topaz prospects are located.
In addition, 28km2 of 3D seismic data that was acquired outside Block 29/11 over the 2013 CNOOC Limited oil
discovery LH 23-1d-1 which is located 8km west of the Jade prospect, helps confirm potential “fill-and-spill”
pathways to the Jade structure from the oil discovery. Whilst early exploration techniques such as this are no
guarantee of exploration success, the Company believes that this form of “seismic tie” to a nearby known
discovery helps to reduce the risks associated with exploration and helps to provide an improved understanding
of the geology in the basin and within Block 29/11.
Comprehensive interpretation of the 2017 3D seismic data has helped map a new sub-basin called Baiyun Sag
North (BSN). BSN is located between the Jade and Topaz prospects and is entirely within Block 29/11. The Study
confirms a potential effective migration pathway from BSN into Jade and Topaz.
13
Operational Review
Figure 4: Interpreted migration pathways from Baiyun Sag North
The Study also indicates that the Pearl Prospect is potentially located in a migration shadow for oil migrating
from BSE or BSN. As a result, further work has been done focusing on the possibility of migration from the
Huizhou Sag located NW of Block 29/11. The Liuhua 11-1 field complex that contained an estimated 1.1 billion
barrels of oil is located immediately North of Block 29/11 and has been interpreted to have received oil from
Huizhou Sag. Additional work completed now indicates that the Pearl prospect is located favourably for receiving
oil charge from Huizhou Sag.
Having successfully completed the committed work program for the first phase (GSA), the Company intends to
exercise its option to enter a PSC on the Block, on pre-negotiated terms, with CNOOC. The key term for entry
into the PSC is commitment to and demonstration of the financial capacity to drill an exploration well on the
Block within two and half years.
Duyung PSC, Indonesia (10% WI)
In April 2017, Empyrean acquired from Conrad Petroleum a 10% shareholding in West Natuna Exploration Ltd
(WNEL), which holds a 100% Participating Interest in the Duyung Production Sharing Contract (Duyung PSC) in
offshore Indonesia and is the operator of the Duyung PSC.
The Duyung PSC covers an offshore permit of approximately 1,100km2 in the prolific West Natuna Basin. The
main asset in the permit is the Mako shallow gas discovery that has an independently verified 2C and 3C gas
resource of between 430-650 Bcf recoverable gas. In addition, the operator has been successful in mapping
exploration prospects and leads within the permit.
14
Operational Review
The appraisal well, Mako South-1, was spudded on 16 June 2017 using a jackup rig located in water depths of
308 ft. The well reached a Total Depth (TD) of 1,707 ft on 22 June 2017.
The Mako South-1 well results exceeded the Company’s expectations encountering excellent reservoir quality
rock with high permeability sands in the multi Darcy range with 23 feet of gas bearing reservoir. This zone flowed
gas at a stabilized rate of 10.9 million cubic feet per day through a 2-inch choke. The gas is of high-quality being
close to 100% methane.
Initial interpretation of the test results demonstrated that the sandstone reservoir is expected to be laterally
contiguous with exceptional permeabilities in the multi Darcy range.
Conrad Petroleum made significant progress with completion of detailed and comprehensive technical studies
by incorporating all the sub-surface data collected in the discovery well. Substantial commercial and facilities
studies have been completed as a part of the Plan of Development (POD). The POD was submitted to the
Indonesian oil and gas regulator SKKMigas in August 2018. The Mako POD process paves the way for the Duyung
PSC to convert into a Production Permit through to 2037 following approval of the POD by the Indonesian
Ministry of Energy and Mines. As part of the POD submission, WNEL has negotiated and signed a Heads of
Agreement for the sale of all Mako gas to a regional utility.
Furthermore, as part of the POD submission, Indonesian government owned and accredited consultant Lemigas
completed a certification of reserves (Lemigas Reserves) based primarily on the Mako South-1 well and an area
of circumference spreading out from the well. In addition, Conrad has completed an internal calculation of its
contingent resources (Contingent Resources) based on the full Mako Gas Field. The Conrad preliminary estimate
of 2C Contingent Resources of 373Bcf is expected to be converted into reserves following a Final Investment
Decision (FID) by WNEL and the signing of a GSA and agreements to access (Access Agreements) the West
Natuna Transport System (WNTS), the pipeline that carries gas to mainland Singapore. Conrad also has plans for
third party certification of its Contingent Resources using current Society of Petroleum Engineers (SPE) standards
in due course. The “Lemigas Reserves” are shown in the table below:
“Lemigas Reserve” Certification*
Initial Gas In Place (Bcf)
Recoverable Gas Reserve (Bcf) as at April 01, 2018
1P
38.03
30.42
2P
190.38
152.30
3P
620.70
496.56
Lemigas Mako POD “Reserves”
* It is important to note that “reserves” in this context does not equate with the current SPE definitions followed by Conrad but does signify
approval for WNEL to extract the certified volume of gas.
Work on the FID, GSA and Access Agreements is a priority for WNEL in the coming 12 months.
Recently completed re-processing of 2009 vintage 2D seismic data utilising the latest advanced techniques has
substantially improved imaging of the geological features underneath the Mako Gas Field. Ongoing evaluation
of this data has identified a significant exploration ‘lead’, named Mako Deep. Whilst Mako Deep is named due
to its proximity below the Mako Gas Field, it is in fact relatively shallow by industry standards at 2000-6000ft
below mean sea level. Mako Deep is likely to contain well developed thick sand packages as proven by the
Tengirri-1 well (drilled by Conoco in 1975). Provisional initial estimates show that Mako Deep has the potential
to contain very large quantities of recoverable hydrocarbons, both oil and natural gas. Seismic interpretation,
and analysis of the cuttings of the old Tengirri well are underway to further delineate and de-risk this exciting
‘lead’ for potential future drilling that could be executed sometime during 2019.
15
Operational Review
Figure 5: Mako Gas field, Duyung PSC, Indonesia
Multi Project Farm-in in Sacramento Basin, California (25%-30% WI)
In May 2017, Empyrean entered into an agreement with ASX listed Sacgasco Limited to farm-in to a package of
gas projects in the Northern Sacramento Basin, onshore California. The package includes two technically mature
multi-Tcf gas potential prospects, Dempsey and Alvarez, and an Area of Mutual Interest (AMI) along trend from
Dempsey that includes at least three already identified Dempsey style follow up prospects.
Empyrean earned a 30% interest in the Dempsey Prospect by paying US$2,100,000 towards the cost of drilling
the Dempsey 1-15 exploration well. These drilling costs had a promoted cap of US$3,200,000 and Empyrean
paid its working interest of 30% towards any additional costs towards Dempsey 1-15, including completion costs.
Dempsey 1-15 well was spudded on 2 August 2017 and drilled to a TD of 2,970 metres (9,747 feet) in September
2017. Wireline logs confirmed numerous potentially gas-bearing zones. A comprehensive production testing
programme was designed to assess the production capability of these zones through 2017 and 2018. A total of
three zones (Zone 2, 3, and 4) in the well were tested.
As of July 2018, Dempsey 1-15 is producing into the sales gas pipeline at an approximate rate of 1,300 mcf per
day from Field Level Kione Sandstone and the combined Zones 2 and 3 with subsequent cash flow from this
production expected in Q3 2018.
16
Operational Review
Figure 6: California Projects Location Map
Based on test data the Dempsey 1-15 well has produced clean dry natural gas from a vertical interval of over
2000 feet, and this information will be integrated with geology and seismic to evaluate production options,
including reservoir production enhancement through fracture stimulation, and alternative deviated well
configurations. Production data and economic assessments will determine the development plans for Dempsey
reservoirs and associated JV drilling activities in the Sacramento Basin. Sacgasco also advised of advanced plans
to connect four idle wells into the sales gas system in the Dempsey area that are hoped to add to production
and cash flow.
Sacgasco has commenced preparatory work on the Alvarez project and applications have recently been
submitted for exploration work to commence at the Alvarez prospect. The initial plan at Alvarez is to assess the
integrity of the well bore as the basis for a decision to either log through casing and perforate zones of interest
for natural gas production or alternatively drill a side-track to enable gas-filled reservoir assessment in a newly
drilled interval of reservoirs.
17
Alvares Appraisal ProjectDempsey Area Production
Operational Review
Figure 7: Dempsey 1-15 well, Sacramento Basin, California USA
Empyrean will earn a 25% working interest in the Alvarez appraisal prospect by paying 33.33% of the costs of
the next Alvarez appraisal well.
The Dempsey Trend AMI, in which Empyrean will earn a 30% interest, extends to approximately 250,000 acres
(including the Dempsey structure) and includes at least three large Dempsey style identified follow up prospects.
Empyrean will provide technical assistance to Sacgasco to further mature prospects within the Dempsey Trend
AMI and will also have an option to participate in the already identified prospects on the following basis:
Prospect #1: EME pays 60% of dry hole cost (i.e. to testing and setting production casing or
abandonment) to earn 30% WI
Prospect #2: EME pays 45% of dry hole cost (i.e. to testing and setting production casing or
abandonment) to earn 30% WI
Prospect #3: EME pays 45% of dry hole cost (i.e. to testing and setting production casing or
abandonment) to earn 30% WI
18
Operational Review
Riverbend Project (10%)
Located in Jasper County, Texas, USA, the Cartwright No.1 re-entry well produces gas and condensate from the
arenaceous Wilcox Formation.
The Cartwright No.1 well is currently virtually suspended producing only nominal amounts of gas condensate.
Little or no work has been completed on the project in the year and no budget has been prepared for 2018/19
whilst the Company focuses on other projects. The Company fully impaired the carrying value of the asset at 31
March 2017 and any subsequent expenditure, mainly for license fees, has been expensed through the profit and
loss statement.
Eagle Oil Pool Development Project (58.084% WI)
The Eagle Oil Pool Development Projects is located in the prolific San Joaquin Basin onshore, southern California.
No appraisal operations were carried out during this period. It is anticipated that, should there be a sustained
improvement in the oil price, a vertical well test of the primary objective, the Eocene Gatchell Sand, followed by
a horizontal appraisal well, would be the most likely scenario.
Little or no work has been completed on the project in the year and no budget has been prepared for 2018/19
whilst the Company focuses on other projects. The Company fully impaired the carrying value of the asset at 31
March 2017 and any subsequent expenditure, mainly for license fees, has been expensed through the profit and
loss statement.
The information contained in this report was completed and reviewed by the Company's Executive Director
(Technical), Mr Gajendra (Gaz) Bisht, who has over 29 years' experience as a petroleum geoscientist.
Definitions
2C: Contingent resources are quantities of petroleum estimated, as of a given date, to be potentially recoverable
from known accumulations by application of development projects, but which are not currently considered to
be commercially recoverable. The range of uncertainty is expressed as 1C (low), 2C (best) and 3C (high).
*CAUTIONARY Statement: The estimated quantities of oil that may potentially be recovered by the application
of a future development project relates to undiscovered accumulations. These estimates have both an
associated risk of discovery and a risk of development. Further exploration, appraisal and evaluation is required
to determine the existence of a significant quantity of potentially movable hydrocarbons.
____________________
Gajendra Bisht M.Sc. (Tech) in Applied Geology
Executive Director (Technical)
6 August 2018
19
Directors’ Report
The Directors are pleased to present their report on the affairs of the Company, together with the audited
financial statements for the period 1 April 2017 to 31 March 2018.
Dividends
The Directors do not propose the payment of a dividend.
Directors and Directors’ Interests
Directors of the Company who served during the year
Patrick Cross – Non-Executive Chairman
Dr 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 countries. He also worked for 2 years as President of Cable and Wireless
Japan, and 6 years as Managing Director of BBC World Ltd. Dr 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 was non-executive chairman of Mercom Capital Plc, was a non-executive director of
Orca Interactive Limited and is a Trustee of the Royal Society of Tropical Medicine and Hygiene. At the time of
this report Dr Cross holds or has a beneficial interest in 625,000 shares in the Company.
Thomas Kelly – Chief Executive Officer
Mr Kelly has had more than 25 years corporate, finance and investment banking experience. During this period,
Thomas Kelly has been involved 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. Mr Kelly is a founding Director of Empyrean Energy Plc. At the time of this report Mr Kelly holds or has
a beneficial interest in 70,881,563 shares in the Company and 15,000,000 options in the Company exercisable
at 2p on or before 26 July 2019.
Gajendra Bisht – Executive Director (Technical) [Appointed 14 June 2017]
Mr Bisht is an oil and gas professional with over 29 years of proven skills in all aspects of Exploration and
Production. In past 5 years, he has developed strong business acumen in strategy framing and execution and
has built deep and effective relationships with international companies as well as regulators in South East and
North Asia, particularly in Indonesia, China and Malaysia. At the time of this report Mr Bisht holds or has a
beneficial interest in 31,250,000 shares in the Company.
John Laycock – Non-Executive Director
Mr 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. Mr Laycock has a degree
in Mechanical Engineering from Bristol University and is a Fellow of the Chartered Institute of Management
Accountants, who is based in the UK. At the time of this report Mr Laycock holds or has a beneficial interest in
1,700,000 shares in the Company.
20
Directors’ Report
Frank Brophy – Technical Director (Resigned 31 December 2017)
Mr Brophy has over 50 years’ experience as a petroleum geologist in the exploration, development and
production of many world class projects. Mr Brophy’s roles have seen him involved with operations in many
locations around the world including Australia, Asia, Europe, USA, Africa and the Middle East.
Insurance
The Company maintains liability insurance for the Directors and officers of the Company.
Going Concern
The Company’s principal activity during the year has been the acquisition and development of its exploration
projects. At year end the Company had a cash balance of US$0.39m (2017: US$6.12m) and made a loss after
income tax of US$2.63m (2017: US$10.28m).
The Directors have prepared cash flow forecasts for the Company covering the period to 30 June 2019 and show
that the Company will require further funding within the next 12 months. The Directors have an appropriate
plan to raise additional funds as and when it is required, either through the sale of existing assets, through joint
ventures of existing assets or through equity or debt funding.
The Directors have therefore concluded that it is appropriate to prepare the Company’s financial statements on
a going concern basis. However, in the absence of additional funding being in place these conditions indicate
the existence of a material uncertainty which may cast significant doubt over the Company’s ability to continue
as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the
normal course of business. The financial statements do not include the adjustments that would result if the
Company was unable to continue as a going concern.
Financial, Liquidity and Cashflow Risk Management
Refer to Note 18 in the financial statements for further details.
Post Reporting Date Events
Significant events post reporting date were as follows:
In July 2018 the Company received notification from the United States Internal Revenue Service (IRS) that it
would receive US$905,000 on 23 July 2018, being a refund of 2017 corporation tax paid.
In June 2018 the Company received US$396,000 from HM Revenue & Customs (HMRC), being a refund of 2017
corporation tax paid.
In June 2018 the Company announced the results of comprehensive processing and interpretation of the 608km2
of 3D seismic data that it successfully acquired during 2017. Based on the results of the comprehensive
processing and interpretation of the final 3D data, the prospective (un-risked) resources of these three major
high graded prospects have been revised upwards by 31%. The revised estimates are higher than previously
reported estimates because of detailed mapping and improved assessment of reservoir parameters. Gross
(100%) ‘Best’ case Prospective Resources combined are now estimated at 774 MMbbl on an un-risked basis.
21
Directors’ Report
In June 2018 the Company announced that it had completed an Oil Migration Study which has established
effective potential oil migration pathways into the Jade, Topaz and Pearl prospects. The Study has interpreted
the Pearl prospect to be filled via a pathway from the large oil field to the North and has identified a new small
sub basin within Block 29/11 between the Jade and Topaz prospects. The Study has also established a seismic
tie with additional migration pathways between the 2013 CNOOC oil discovery LH 23-1d-1, immediately west of
Block 29/11 and the Jade prospect. The Study indicates valid drilling targets that are of significant size with
relatively low geological risk.
In May 2018, following completion of the appraisal and exploration well, Dempsey 1-15 and testing of multiple
gas zones through 2017 and 2018, Empyrean announced that the Dempsey 1-15 well will produce into the sales
gas pipeline at an anticipated rate of 1,200 mcf per day from Field Level Kione Sandstone and the combined
Zones 2 and 3 with subsequent cash flow from this production expected during Q3 2018.
In August 2018, the Company announced that Conrad Petroleum had submitted a detailed Plan of Development,
including a certification of reserves, to the Indonesian regulator in August 2018. As part of the POD submission,
a Heads of Agreement was signed with a Singaporean utility for the sale of all Mako gas.
Strategic Report
The Company has chosen, in accordance with Section 414C of the Companies Act 2006, to set out the likely
future developments in the business of the Company which would otherwise be required to be contained in the
report of the Directors within the Strategic Report on pages 6 to 9.
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.
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
6 August 2018
22
Corporate Governance Report
The Directors are committed to maintaining high standards of corporate governance. Under the AIM rules,
compliance with the UK Corporate Governance Code (The Code) as published in 2016 is voluntary. The Company
recognises that an effective Board facilitates the effective discharge of the duties imposed by law on Directors
and contributes to the delivery of the Company’s strategic objectives. Whilst it is not required to apply the main
and supporting principles of good governance set out in the UK Corporate Governance in 2016 by the Financial
Reporting Council, the Company has policies and practises that are consistent with the spirit of The Code.
The London Stock Exchange has announced that all AIM companies will be required to apply a recognised
corporate governance code from the 28 September 2018. In connection with the introduction of these new
requirements, the Quoted Companies Alliance has published a new corporate governance code which the
Company will be applying from 28 September 2018.
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 11 times throughout the year and each member attended each meeting. 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 and meets the criteria for independence under The Code. 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 and meets the Company’s criteria for independence.
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 3 times and each member attended 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 assesses the independence of, 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).
23
Corporate Governance Report
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 2 times during the year and each member attended each meeting. It is
responsible for reviewing the performance of the Executive Director 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
the Company’s website
(www.empyreanenergy.com/corporate/governance).
found on
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 meetings 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
The Company is cognisant of its responsibilities under the Bribery Act and has implemented an Anti-Bribery
policy.
UK City Code on Takeovers and Mergers
The Company is subject to the UK City Code on Takeovers and Mergers.
Market Abuse Regime
The Company has adopted and operates a share dealing code for Directors and senior employees on
substantially the same terms as the Model Code and MAR appended to the Listing Rules of the UKLA.
24
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the annual 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 trading
securities on AIM.
In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements 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
____________________
Thomas Kelly
Chief Executive Officer
6 August 2018
25
Independent Auditor’s Report to the Members of Empyrean Energy Plc
Opinion
We have audited the financial statements of Empyrean Energy Plc (the ‘Company’) for the year ended 31
March 2018 which comprise the statement of comprehensive income, the statement of financial position, the
statement of cash flows and the statement of changes in equity and notes to the financial statements,
including a summary of significant accounting policies.
The financial reporting framework that has been applied in the preparation of the Company financial
statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the
European Union.
In our opinion the financial statements: give a true and fair view of the state of the of the Company’s affairs as
at 31 March 2018 and of its loss for the year then ended; have been properly prepared in accordance with
IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the
Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable
law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the
audit of the financial statements section of our report. We are independent of the Company in accordance
with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the
FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Material uncertainty relating to going concern
We draw attention to note 1 to the financial statements which explains that the Company requires further
funding in order to continue to meet its obligations and liabilities as they fall due as well as to continue to
undertake the required work programme for the Company’s principal assets.
The matters explained in note 1 indicate that a material uncertainty exists that may cast significant doubt on
the Company‘s ability to continue as a going concern. The financial statements do not include the adjustments
that would result if the Company were unable to continue as a going concern. Our opinion is not modified in
respect of this matter.
We considered going concern to be a key audit matter based on our assessment of the risk and the effect on
our audit. We performed the following work in response to this key audit matter.
We challenged management and the director’s forecasts to assess the Company’s ability to meet its financial
obligations as they fall due within the period of twelve months from the date of approval of the financial
statements. We reviewed the assumptions and inputs in the cash flow forecast and assessed whether these
were in line with our understanding of the Company’s operations, contractual obligations, general operating
costs and other information obtained by us during the course of the audit.
We performed an accuracy check on the mechanics of the cash flow forecast model prepared by management
and the directors.
We sensitized the cash flow to remove uncertain cash flows from equity raises and revenues from assets which
have yet to move into development. We discussed with the directors their plans to raise further funds in the
near future and considered their viability taking into account the Company’s has successfully raised funds in
the past.
26
Independent Auditor’s Report to the Members of Empyrean Energy Plc
We considered the adequacy of the disclosure in the financial statements of this matter.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the financial statements of the current period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on:
the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement
team. These matters were addressed in the context of our audit of the financial statements as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the
matter described in the Material uncertainty in relation to going concern section, we have determined the
matters described below to be the key audit matters to be communicated in our report.
Carrying value of exploration and evaluation assets
The Company’s exploration and evaluation assets represent the most significant asset on its statement of
financial position totalling $7.82m as at 31 March 2018. Management and the directors are required to assess
whether there is any evidence of any indicators of impairment of the assets and ensure all costs capitalised
meet the recognition criteria of IFRS 6 (refer to note 1 and 8). Given the significance of the assets on the
Company’s statement of financial position and the significant judgement involved in the assessment of the
carrying values of the asset and the capitalisation of associated costs there is an increased risk of material
misstatement.
Our response
We evaluated management’s and the directors’ impairment review for the Company’s two material, principal
assets, Sacramento and China. We critically challenged the considerations made as to whether or not there
were any indicators of impairment identified. We also performed substantive testing on the costs capitalised
to the exploration and evaluation asset in relation to both projects.
Our specific audit testing in this regard included:
• We selected a sample of costs capitalized in the period for testing. We obtained supporting evidence for the
amount capitalized and used the recognition criteria in IFRS 6 to ascertain whether this is a reasonable
expense to capitalize.
• Verification of licencing status in order to confirm legal title and validity of the right to explore.
• Reviewed approved budget forecasts and minutes of management and board meetings to confirm the
Company’s intention to continue the exploration work on the licence.
• Obtained an understanding of management’s expectation of commercial viability and reviewed available
technical documentation and discussed results and operations with the management team.
Our application of materiality
FY 2018
FY 2017
Materiality/ $
180,000
140,000
Basis for materiality
1.5% of total assets
2% of total assets
We consider total assets to be the financial metric of the most interest to shareholders and other users of the
financial statements, given the Company’s status as an exploration company and therefore consider this to be
an appropriate basis for materiality.
27
Independent Auditor’s Report to the Members of Empyrean Energy Plc
We apply the concept of materiality both in planning and performing our audit and in evaluating the effect of
misstatements. We consider materiality to be the magnitude by which misstatements, including omissions,
could influence the economic decisions of reasonable users that are taken on the basis of the financial
statements. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as
we also take account of the nature of identified misstatements, and the particular circumstances of their
occurrence, when evaluating their effect on the financial statements as a whole.
Performance materiality is the application of materiality at the individual account or balance level set at an
amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as a whole. Performance
materiality was set at 75% (2017: 75%) of the above materiality levels.
We agreed with the audit committee that we would report to the committee all individual audit differences
identified during the course of our audit in excess of $9,000 (2017: $7,000). There were no misstatements
identified during the course of our audit that were individually, or in aggregate, considered to be material in
terms of their absolute monetary value or on qualitative grounds.
An overview of the scope of our audit
We performed a full scope audit on the financial statements of the Company.
All audit work was undertaken by BDO LLP.
Other information
The directors are responsible for the other information. The other information comprises the information
included in the annual report, other than the financial statements and our auditor’s report thereon. Our
opinion on the financial statements does not cover the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact. We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
•the information given in the strategic report and the directors’ report for the financial year for which the
financial statements are prepared is consistent with the financial statements; and
•the strategic report and the directors’ report have been prepared in accordance with applicable legal
requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding company and its environment obtained in the course of the
audit, we have not identified material misstatements in the strategic report or the directors’ report.
28
Independent Auditor’s Report to the Members of Empyrean Energy Plc
We have nothing to report in respect of the following matters in relation to which 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 parent company 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.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view, and for such
internal control as the directors determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial
Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor’s report.
Use of our report
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.
Matt Crane (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London
6 August 2018
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
29
Statement of Comprehensive Income
For the Year Ended 31 March 2018
Revenue
Cost of sales
Operating costs
Impairment of oil and gas properties
Amortisation
Total cost of sales
Gross loss
Administrative expenditure
Administrative expenses
Compliance fees
Directors’ remuneration
Foreign exchange differences
Total administrative expenditure
Operating loss
Finance costs
Loss from continuing operations before taxation
Tax benefit in current year
Loss from continuing operations after taxation
Profit on discontinued operations net of tax
Loss after taxation
Total comprehensive loss for the year
Earnings per share from continuing operations (expressed in cents)
- Basic
- Diluted
Earnings per share from discontinued operations (expressed in
cents)
- Basic
- Diluted
Notes
2018
US$’000
2017
US$’000
30
1
2, 8
2
3
5
9
6
6
(1)
(48)
-
(49)
(19)
(397)
(225)
(415)
114
(923)
(23)
(6,960)
(11)
(6,994)
(6,993)
(2,202)
(284)
(637)
-
(3,121)
(942)
(10,116)
(2,558)
(3,005)
(3,500)
797
(13,121)
2,839
(2,703)
(10,282)
73
-
(2,630)
(10,282)
(2,630)
(10,282)
(0.71)c
(0.71)c
(4.62)c
(4.62)c
0.02c
0.02c
-
-
The accompanying accounting policies and notes form an integral part of these financial statements.
30
Statement of Financial Position
As at 31 March 2018
Company Number: 05387837
Assets
Non-current assets
Oil and gas properties: exploration and evaluation
Oil and gas properties: development and production
Investments
Total non-current assets
Current assets
Trade and other receivables
Corporation tax receivable
Contingent consideration receivable
Cash and cash equivalents
Total current assets
Liabilities
Current liabilities
Trade and other payables
Provisions
Derivative financial liabilities
Total current liabilities
Net current (liabilities)/assets
Net assets
Shareholders’ equity
Share capital
Share premium reserve
Share based payment reserve
Retained losses
Total equity
Notes
2018
US$’000
2017
US$’000
8
9
10
11
5
7
12
13
15
7,820
-
2,572
10,392
183
1,320
-
388
1,891
374
54
2,463
2,891
(1,000)
9,392
1,205
25,280
10
(17,103)
87
57
-
144
65
540
554
6,106
7,265
2,178
25
459
2,662
4,603
4,747
754
18,466
2,421
(16,894)
9,392
4,747
The Financial Statements were approved by the Board of Directors on 6 August 2018 and were signed on its
behalf by:
______________________________
Patrick Cross
Chairman
____________________
Thomas Kelly
Chief Executive Officer
The accompanying accounting policies and notes form an integral part of these financial statements.
31
Statement of Cash Flows
For the Year Ended 31 March 2018
Notes
2018
US$’000
2017
US$’000
Payment for operating activities – continuing operations
Payment for operating activities – discontinued operations
Receipt of/(payment for) corporation tax
Net cash outflow from operating activities
14
Net proceeds from disposal of discontinued operations
Amounts held in escrow
Purchase of oil and gas properties: exploration and evaluation –
continuing operations
Purchase of oil and gas properties: development and production –
continuing operations
Acquisition of investments
Payment for exploration bonds and bank guarantees
(1,002)
-
17
(985)
73
-
(7,725)
-
(2,572)
(150)
(1,309)
(116)
(2,007)
(3,432)
-
16,875
(17)
(80)
-
-
Net cash (outflow)/inflow for investing activities
(10,374)
16,778
Issue of ordinary share capital
Return of value
Payment of equity issue costs
Finance expenses received
Net cash inflow/(outflow) from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the start of the year
Forex gain/(loss) on cash held
Cash and cash equivalents at the end of the year
5,635
-
(108)
-
44
(21,785)
(63)
22
5,527
(21,782)
(5,832)
6,106
114
(8,436)
17,473
(2,931)
388
6,106
32
Statement of Changes in Equity
For the Year Ended 31 March 2018
Share
capital
Share
premium
reserve
Note
US$’000
US$’000
Share
based
payment
reserve
US$’000
Retained loss
Total
equity
US$’000
US$’000
Balance at 1 April 2016
710
40,250
2,946
(7,201)
36,705
Loss after tax for the year
Total comprehensive loss for
the year
Contributions by and
distributions to owners
Shares issued following exercise
of options
Creation of B shares
Return of value (cancellation of
B shares)
Transfer of expired options
Share based payment expense
Contributions by and
distributions to owners
Balance at 1 April 2017
Loss after tax for the year
Total comprehensive loss for
the year
Contributions by and
distributions to owners
Shares issued in the period
Equity issue costs
Transfer of expired options
Share based payment expense
Contributions by and
distributions to owners
15
15
15
(21,784)
-
-
44
754
-
-
451
-
-
-
451
-
-
44
-
-
-
21,784
(21,784)
-
-
-
(21,784)
-
-
-
-
-
(589)
64
(525)
(10,282)
(10,282)
(10,282)
(10,282)
-
-
44
-
-
589
-
(21,784)
-
64
589
(21,676)
18,466
2,421
(16,894)
4,747
-
-
-
-
(2,630)
(2,630)
(2,630)
(2,630)
6,922
(108)
-
-
-
-
(2,421)
10
-
-
2,421
-
7,373
(108)
-
10
6,814
(2,411)
2,421
7,275
Balance at 31 March 2018
1,205
25,280
10
(17,103)
9,392
The accompanying accounting policies and notes form an integral part of these financial statements.
33
Notes to the Financial Statements
For the Year Ended 31 March 2018
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. The financial report is presented in the functional currency, US dollars and all values are
shown in thousands of US dollars (US$’000).
The preparation of financial statements in compliance with adopted IFRS requires the use of certain critical
accounting estimates. It also requires Company management to exercise judgment in applying the Company's
accounting policies. The areas where significant judgments and estimates have been made in preparing the
financial statements and their effect are disclosed below.
Basis of measurement
The financial statements have been prepared on a historical cost basis, except for the following items (refer to
individual accounting policies for details):
- Derivative financial liability
Nature of business
The Company is a public limited company incorporated and domiciled in England and Wales. The address of the
registered office is 200 Strand, London, WC2R 1DJ. The Company is in the business of financing the exploration,
development and production of energy resource projects in regions with energy hungry markets close to existing
infrastructure. The Company has typically focused on non-operating working interest positions in projects that
have drill ready targets that substantially short cut the life-cycle of hydrocarbon projects by entering the project
after exploration concept, initial exploration and drill target identification work has largely been completed.
Going concern
The Company’s principal activity during the year has been the acquisition and development of its exploration
projects. At year end the Company had a cash balance of US$0.39m (2017: US$6.12m) and made a loss after
income tax of US$2.63m (2017: US$10.28m).
The Directors have prepared cash flow forecasts for the Company covering the period to 30 June 2019 and show
that the Company will require further funding within the next 12 months. The Directors have an appropriate
plan to raise additional funds as and when it is required, either through the sale of existing assets, through joint
ventures of existing assets or through equity or debt funding.
The Directors have therefore concluded that it is appropriate to prepare the Company’s financial statements on
a going concern basis. However, in the absence of additional funding being in place these conditions indicate
the existence of a material uncertainty which may cast significant doubt over the Company’s ability to continue
as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the
normal course of business. The financial statements do not include the adjustments that would result if the
Company was unable to continue as a going concern.
Basis of accounting and adoption of new and revised standards
(a) New and amended standards adopted by the Company:
There were no new standards effective for the first time for periods beginning on or after 1 April 2017 that have
had a significant effect on the Company’s financial statements.
34
Notes to the Financial Statements
For the Year Ended 31 March 2018
(b) Standards, amendments and interpretations that are not yet effective and have not been early adopted:
Any standards and interpretations that have been issued but are not yet effective, and that are available for
early application, have not been applied by the Company in these financial statements. International Financial
Reporting Standards that have recently been issued or amended but are not yet effective have not been adopted
for the annual reporting period ended 31 March 2018:
IFRS 15 ‘Revenue from Contracts with Customers’ was issued by the IASB in May 2014. It is effective for
accounting periods beginning on or after 1 January 2018. The new standard will replace existing accounting
standards and provides enhanced detail on the principle of recognising revenue to reflect the transfer of goods
and services to customers at a value which the company expects to be entitled to receive. The standard also
updates revenue disclosure requirements. Sales revenue in the 2019 financial year is expected as Dempsey 1-15
well will shortly produce into the sales gas pipeline resulting in the production of commercial gas flows and
subsequent cash flows. Management will assess the principals of IFRS 15 to ensure future revenues from this
well are recognised appropriately. The adoption of IFRS 15 will have no impact on the 31 March 2018 financial
statements as material revenues were not earned in this period.
IFRS 9 was published in July 2014 and will be effective from 1 January 2018. It is applicable to financial assets
and financial liabilities, and covers the classification, measurement, impairment and de-recognition of financial
assets and financial liabilities together with a new hedge accounting model. The Company is still assessing the
impact of this standard on the accounting for the investment in West Natuna Exploration Limited.
IFRS 16 ‘Leases’ – IFRS 16 ‘Leases’ was issued by the IASB in January 2016 and is effective for accounting periods
beginning on or after 1 January 2019. The Directors are currently evaluating the financial and operational impact
of this standard, however do not consider that it will have a material impact as the Company does not currently
have any material lease arrangements.
Revenue recognition
Revenue is derived from sales of oil and gas to third party customers. Sales of oil and gas production are
recognised 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 recognised
net of local ad valorem taxes.
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 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.
(a) 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 recognise a deferred tax asset in relation to
carried-forward losses and has determined that this is not appropriate in line with IAS 12 as the conditions for
recognition are not satisfied.
35
Notes to the Financial Statements
For the Year Ended 31 March 2018
Foreign currency translation
Transactions denominated in foreign currencies are translated into US dollars at contracted rates 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).
Provisions
Provisions are recognised when the Company has a present obligation as a result of a past event which it is
probable will result in an outflow of economic benefits that can be reliably estimated.
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 oil and gas
properties: exploration and evaluation. 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
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.
36
Notes to the Financial Statements
For the Year Ended 31 March 2018
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 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 8. The net book
values of producing assets are depreciated on units of production basis. 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.
Investments
Financial assets are defined in IAS 39 as investments in equity instruments that do not have a quoted price in an
active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be
settled by delivery of such equity instruments, which shall be measured at cost. The Company acquired a 10%
working interest in the Duyung PSC, Indonesia during the period. Due to the 10% shareholding and lack of
significant influence over operations, under IAS 39 the project has been classified as an investment, measured
at cost. Subsequent exploration expenditure is included as a further investment contribution in the period.
Discontinued operations
A discontinued operation is a component of an entity that either has been disposed of, or that is classified as
held for sale, and represents a separate major line of business or geographical area of operations; and is a part
of a single coordinated plan to dispose of a separate major line of business or geographical area of operations;
or is a subsidiary acquired exclusively with a view to resale. Non-current assets held for sale and discontinued
operations are carried at the lower of carrying value or fair value less costs to sell. Any gain or loss from disposal
of a business, together with the results of these operations until the date of disposal, is reported separately as
discontinued operations. The financial information of discontinued operations is excluded from the respective
captions in the financial statements and related notes for the current and comparative period and disclosed as
results from discontinued operations.
Financial instruments
Financial assets and liabilities are recognised in the statement of financial position when the Company becomes
party to the contractual provision of the instrument.
(a) Financial assets
The Company’s financial assets consist of loans and receivables (trade and other receivables, excluding
prepayments, and cash and cash equivalents) and financial assets classified as fair value through profit or loss
(contingent consideration receivable). Loans and receivables are initially measured at fair value and
subsequently at amortised cost. Financial assets designated as fair value through the profit or loss are measured
at fair value through the profit or loss at the point of initial recognition and subsequent revalued at each
reporting date. Movements in the fair value of derivative financial assets are recognised in the profit or loss in
the period in which they occur.
37
Notes to the Financial Statements
For the Year Ended 31 March 2018
(b) Financial liabilities
All financial liabilities are classified as fair value through the profit and loss and financial liabilities at amortised
cost. The Company’s financial liabilities at amortised cost include trade and other payables and its financial
liabilities at fair value through the profit or loss include the derivative financial liabilities. Financial liabilities at
amortised cost, 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. Derivative financial liabilities are initially
recognised at fair value of the date a derivative contract is entered into and subsequently re-measured at each
reporting date. The method of recognising the resulting gain or loss depends on whether the derivative is
designated as a hedging instrument, and if so, the nature of the item being hedged. The Company has not
designated any derivatives as hedges as at 31 March 2017 or 31 March 2018.
(c) Impairment
At each reporting date, the Company assess whether there is objective evidence that a financial instrument has
been impaired. Impairment losses are recognised in the Statement of Comprehensive Income.
Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or
options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable
to the issue of new shares or options for the acquisition of a business are not included in the cost of the
acquisition as part of the purchase consideration.
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 over the vesting period, based on the Company’s estimate of
shares that will eventually vest. The fair value of options is ascertained using a Black-Scholes pricing model which
incorporates all market vesting conditions. Where equity instruments are granted to persons other than
employees, the income statement is charged with the fair value of goods and services received.
Critical accounting estimates and judgements
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.
Critical estimates
The following are the critical estimates that management has made in the process of applying the entity’s
accounting policies and that have the most significant effect on the amounts recognised in the financial
statements.
(a) Carrying value of exploration and evaluation assets
The Company monitors internal and external indicators of impairment relating to its exploration and evaluation
assets. Management has considered whether any indicators of impairment have arisen over certain assets
relating to the Company’s exploration licenses. Management consider the exploration results to date and assess
whether, with the information available, there is any suggestion that a commercial operation is unlikely to
proceed. In addition, management have considered the likely success of renewing the licences, the impact of
any instances of non-compliance with license terms and are continuing with the exploration and evaluation of
the sites. After considering all relevant factors, management were of the opinion that no impairment was
required in relation to the costs capitalised to exploration and evaluation assets.
38
Notes to the Financial Statements
For the Year Ended 31 March 2018
(b) Income tax provision
The Company is subject to income tax in several jurisdictions and significant judgement is required in
determining the provision for income taxes. During the ordinary course of business, there are transactions and
calculations for which the ultimate tax determination is uncertain. As a result, the company recognises tax
liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are
recognised when, despite the company's belief that its tax return positions are supportable, the company
believes that certain positions are likely to be challenged and may not be fully sustained upon review by tax
authorities. The company believes that its accruals for tax liabilities are adequate for all open audit years based
on its assessment of many factors including past experience and interpretations of tax law. This assessment
relies on estimates and assumptions and may involve a series of complex judgments about future events. To the
extent that the final tax outcome of these matters is different than the amounts recorded, such differences will
impact income tax expense in the period in which such determination is made.
1. Segmental analysis
The Directors consider the Company to have three geographical segments, being China (Block 29/11 project),
Indonesia (Duyung PSC project) and North America (Sacramento Basin project), which are all currently in the
exploration and evaluation phase. The prior year numbers have been restated to reflect the updated
segments. Corporate costs relate to the administration and financing costs of the Company and are not
directly attributable to the individual projects. The Company’s registered office is located in the United
Kingdom.
Details
China
US$’000
Indonesia
US$’000
USA
US$’000
Corporate
US$’000
Total
US$’000
31 March 2018
Revenue from continued operations
Profit on sale of discontinued operations
Cost of sales of continued operations
Cost of sales of discontinued operations
Segment result
Unallocated corporate expenses
Operating loss
Finance income and expense
Loss before taxation
Tax benefit in current year
Loss after taxation
Total comprehensive loss for the financial
year
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30
73
(48)
(1)
54
-
54
-
54
-
54
-
-
-
-
(923)
(923)
(2,558)
(3,481)
797
(2,684)
30
73
(48)
(1)
54
(923)
(869)
(2,558)
(3,427)
797
(2,630)
54
(2,684)
(2,630)
Segment assets
Unallocated corporate assets
Total assets
Segment liabilities
Unallocated corporate liabilities
Total liabilities
4,596
-
4,596
41
-
41
2,722
-
2,722
3,254
-
3,254
-
-
-
81
-
81
-
1,711
1,711
-
2,769
2,769
10,572
1,711
12,283
122
2,769
2,891
39
Notes to the Financial Statements
For the Year Ended 31 March 2018
1. Segmental analysis (continued)
Details
31 March 2017
Revenue from continued operations
Profit on sale of discontinued operations
Cost of sales of continued operations
Cost of sales of discontinued operations
Segment result
Unallocated corporate expenses
Operating loss
Finance income and expense
Loss before taxation
Tax benefit in current year
Loss after taxation
Total comprehensive loss for the financial year
Segment assets
Unallocated corporate assets
Total assets
Segment liabilities
Unallocated corporate liabilities
Total liabilities
China
US$’000
USA
US$’000
Corporate
US$’000
Total
US$’000
-
-
-
-
-
-
-
-
-
-
-
-
87
-
87
-
-
-
1
-
(6,994)
-
(6,993)
-
(6,993)
-
(6,993)
-
(6,993)
(6,993)
611
-
611
337
-
337
-
-
-
-
-
(3,123)
(3,123)
(3,005)
(6,128)
2,839
(3,289)
1
-
(6,994)
-
(6,993)
(3,123)
(10,116)
(3,005)
(13,121)
2,839
(10,282)
(3,289)
(10,282)
-
6,711
6,711
-
2,325
2,325
698
6,711
7,409
337
2,325
2,662
40
Notes to the Financial Statements
For the Year Ended 31 March 2018
2. Operating loss
The operating loss is stated after charging:
Audit and tax fees
Consideration shares for Block 29/11 offshore China
Impairment of oil and gas properties
Amortisation
Auditor’s Remuneration
2018
US$’000
2017
US$’000
(46)
-
(48)
-
(94)
Amounts paid to BDO LLP and their associates in respect of both audit and non-audit services:
Fees payable to the Company’s auditor for the audit of the Company
annual accounts
Fees payable to the Company’s auditor and its associates in respect
of:
- Other services relating to taxation
14
32
3. Finance costs
Revaluation (loss)/gain on contingent consideration receivable
Fair value movement on derivative liability
Interest received/receivable
Net effective of de-recognition and re-recognition of derivative
financial liability
Share based finance costs
Foreign exchange differences on finance arrangements
Interest paid/payable
Total finance costs
46
2018
US$’000
(554)
(2,004)
-
-
-
-
-
(2,558)
(99)
(1,740)
(6,960)
(11)
(8,810)
34
65
99
2017
US$’000
183
(553)
25
289
(64)
(2,882)
(3)
(3,005)
41
Notes to the Financial Statements
For the Year Ended 31 March 2018
4. Directors’ emoluments
Fees and salary
Bonus payment
Social security
contributions
2018
2017
US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
2017
2018
2017
2018
Short-term
employment
benefits (total)
2018
2017
US$’000 US$’000
Non-Executive
Directors:
Patrick Cross
John Laycock
Frank Brophy(a)
Executive
Directors:
Thomas Kelly(b)
Gajendra
Bisht(c)(d)
24
14
32
24
14
43
296
185
290
N/A
551
371
-
-
-
-
-
-
-
-
-
282
N/A
282
2
1
-
-
-
3
2
1
-
26
15
32
26
15
43
-
N/A
296
185
572
N/A
3
554
656
(a) Services provided by F J Brophy Pty Ltd for technical services. Frank Brophy retired as a Non-Executive
Director on 31 December 2017.
(b) Services provided by Apnea Holdings Pty Ltd. On 13 June 2017 Tom Kelly exercised 15,000,000 options
at an exercise price of £0.02. The closing share price of the Company on 13 June 2017 was £0.388. On
20 February 2018 Tom Kelly exercised 15,000,000 options at an exercise price of £0.04. The closing
share price of the Company on 20 February 2018 was £0.119. These options were not granted to Mr
Kelly as part of his remuneration but were acquired by Mr Kelly in an arms-length transaction. Mr
Kelly has not sold any shares during the reporting period.
(c) Services provided by Topaz Energy Pty Ltd for technical services. Gajendra Bisht was appointed as an
Executive Director on 14 June 2017. 75% of Mr Bisht’s fees are capitalised to exploration and
evaluation expenditure (Note 8), in addition to 100% of consulting fees Mr Bisht received pre-
appointment as director.
(d) On 4 April 2017 the Company held a Shareholder General Meeting whereby shareholders approved
the allotment of 70,000,000 shares at 0.2p each to Topaz Energy Pty Ltd in relation with services
provided by Topaz Energy Pty Ltd (a company wholly owned by and of which Gajendra Bisht is a
Director) in relation to the introduction of the opportunity and successful award of the permit for
100% of the exploration rights for Block 29/11, China to the Company. These shares were
subsequently issued on 21 April 2017. The share issue settled the total value of US$1,740,000 which
was accrued for at 31 March 2017, therefore is excluded from Mr Bisht’s Director fees in FY2018.
The average number of Directors was 4 during 2018 and 2017. The highest paid director received US$296,000
(2017: US$572,000).
42
Notes to the Financial Statements
For the Year Ended 31 March 2018
2018
US$’000
2017
US$’000
5. Taxation
UK corporation tax (benefit)/charge at 20%
US corporation tax (benefit)/charge at 35%
Total corporation tax (receivable)/payable
Factors affecting the tax charge for the year
Loss from continuing operations
Profit on discontinued operations
Add back: contingent consideration receivable revaluation
(Loss)/profit on ordinary activities before tax
(Loss)/profit on ordinary activities at US rate of 21% (2017: 35%)
Non-deductible expenses
Movement in provisions
Over provision in prior year
Release of tax liability on first contingent consideration payment
Losses offset against prior year project disposal
Deferred tax asset not recognised
Analysed as:
Tax (benefit)/charge on continuing operations
Tax (benefit)/charge on discontinued operations
Tax (benefit)/charge in current year
(396)
(924)
(1,320)
(3,500)
73
-
(3,427)
(720)
534
6
(797)
-
-
180
(797)
(797)
-
(797)
-
(288)
(288)
(13,121)
-
183
(12,938)
(4,528)
326
-
(1,382)
(750)
441
3,054
(2,839)
(2,839)
-
(2,839)
43
Notes to the Financial Statements
For the Year Ended 31 March 2018
6. Earnings per share
2018
2017
The basic earnings per share is derived by dividing the profit/(loss) after taxation for the year attributable
to ordinary shareholders by the weighted average number of shares in issue being 380,423,710 (2017:
222,770,839).
Earnings per share from continuing operations
Loss after taxation from continuing operations
Earnings per share – basic
(US$2,703,000)
(0.71)c
(US$10,282,000)
(4.62)c
Loss after taxation from continuing operations adjusted for
dilutive effects
Earnings per share – diluted
(US$2,703,000)
(0.71)c
(US$10,282,000)
(4.62)c
Earnings per share from discontinued operations
Profit after taxation from discontinued operations
Earnings per share – basic
Profit after taxation from discontinued operations adjusted
for dilutive effects
Earnings per share – diluted
US$73,000
0.02c
US$73,000
0.02c
-
-
-
-
For the current financial year there are dilutive options on issue. The weighted average number of dilutive
shares is 395,423,710. Details of the potentially issuable shares that could dilute earnings per share in future
periods are set out in Notes 13 and 15. For the prior financial year the exercise of the options was anti-
dilutive and as such the diluted earnings per share was the same as the basic loss per share.
7. Contingent consideration receivable
Financial asset recorded at fair value through profit or loss:
Opening balance
Revaluation of contingent consideration receivable (Note 3)
2018
US$’000
2017
US$’000
554
(554)
-
371
183
554
Derivative financial assets consisted of the fair value of contingent consideration amounts attached to the sale
of Sugarloaf AMI on 19 February 2016. The fair value of the options was initially measured at the effective
date of the sale and subsequently remeasured at each reporting period. The final contingency expired 31
December 2017 with no payment received.
44
Notes to the Financial Statements
For the Year Ended 31 March 2018
8. Oil and gas properties: exploration and evaluation
Balance brought forward
Additions(a)
Impairment(b)
Net book value
2018
US$’000
2017
US$’000
87
7,781
(48)
7,820
6,842
116
(6,871)
87
(a) The Company was awarded its permit in China in December 2016. Block 29/11 is located in the Pearl
River Mouth Basin, offshore China. Empyrean is operator with 100% of the exploration right of the
Permit during the exploration phase of the project. The initial contractual term is for two years with a
work programme commitment of acquisition, processing and interpretation of 580km2 of 3D seismic
data. The Company also acquired a working interest in the Sacramento Basin, California during the
period. In May 2017 Empyrean entered into a joint project with ASX listed Sacgasco Limited, to test a
group of projects in the Sacramento Basin, California, including two mature, multi-TcF gas prospects
in Dempsey (EME 30%) and Alvarez (EME 25%) and also further identified follow up prospects along
the Dempsey trend (EME 30%).
(b) In light of current market conditions, little or no work has been completed on the Riverbend or Eagle
Oil projects in the year and no substantial project is forecast for either project in 2018/19 whilst the
Company focuses on other projects. Whilst the Company maintains legal title it has continued to fully
impair the carrying value of the asset at 31 March 2018.
Project
Operator Working
Interest
2018 Carrying
Value
US$’000
2017 Carrying
Value
US$’000
Exploration and evaluation
China Block 29/11
Sacramento Basin
Riverbend
Eagle Oil Pool Development
87
-
-
-
87
*In the event of a commercial discovery, and subject to the Company entering PSC, CNOOC Limited will have
a back in right to 51% of the permit. As at the date of these financial statements no commercial discovery has
been made.
Empyrean Energy
Sacgasco
Huff Energy
Strata-X
100%*
25-30%
10%
58.084%
4,596
3,224
-
-
7,820
45
Notes to the Financial Statements
For the Year Ended 31 March 2018
9. Oil and gas properties: development and production
Balance brought forward
Additions
Amortisation
Impairment
Discontinued operations(a)
Net book value
2018
US$’000
2017
US$’000
57
-
-
-
(57)
-
156
1
(11)
(89)
-
57
(a) The Company sold its interest in minor ancillary leases in Texas in June 2017 in satisfaction of
amounts owing by the Company on those properties. This resulted in a gain on sale of US$73,000.
10. Investments
Balance brought forward
Additions(a)
Total investments
2018
US$’000
2017
US$’000
-
2,572
2,572
-
-
-
(a) The Company acquired a 10% working interest in the Duyung PSC, Indonesia during the period. Due
to the 10% shareholding and lack of significant influence over operations, the acquisition has been
classified as an investment, measured at cost. Subsequent exploration expenditure of US$554,000 has
been included as a further investment contribution in the period. For further information, please refer
to the Operational Review.
11. Trade and other receivables
Trade and other receivables
Accrued revenue
Prepayments
VAT receivable
Bank guarantee – Duyung PSC
Total trade and other receivables
12. Trade and other payables
Trade payables
Other payables
Accrued expenses
Total trade and other payables
2018
US$’000
2017
US$’000
1
30
-
2
150
183
-
-
51
14
-
65
2018
US$’000
2017
US$’000
283
-
91
374
396
1,738
44
2,178
46
Notes to the Financial Statements
For the Year Ended 31 March 2018
13. Derivative financial liabilities
Opening balance
Fair value movement (Note 3)
Extinguishment following substantial modification
Recognition of modified derivative financial liability
Closing balance
2018
US$’000
2017
US$’000
459
2,004
-
-
2,463
195
553
(400)
111
459
Derivative financial liabilities represent the fair value of 15,000,000 options granted to Macquarie Bank and
linked to the extension of a now repaid loan facility held with Macquarie Bank. As announced on 13 March
2017, the Options are currently owned by Apnea Holdings Pty Ltd, a company which is wholly owned by Tom
Kelly, CEO of Empyrean. The options were granted on 27 July 2015 and are referred to as the Tranche 4
options. At the date of grant these were considered to fall outside of the scope of IFRS 2 and unlike Tranches
1-3 were not accounted for as a share-based payment. The Macquarie Bank loan facility was repaid in 2016
but the options did not expire at that point.
During the prior financial year, the Company modified the exercise price of the options. This was deemed to
be a substantial modification under IAS 32 and IAS 39. The value of the derivative financial liability was
extinguished at that point and the fair value of the modified options recognised at the date that they were
granted. As a financial liability at fair value through the profit or loss these were revalued at period end. The
fair value is measured using a Black-Scholes Model with the following inputs:
Fair value of share options and assumptions
Grant date
Expiry date
Share price
Exercise price
Volatility
Option life
Expected dividends
Risk-free interest rate (based on national government bonds)
31 March
2018
31 March
2017
27 July 2015 27 July 2015
26 July 2019 26 July 2019
£0.039
£0.021
83%
2.33
-
0.12%
£0.138
£0.02
79%
1.33
-
0.74%
Expected volatility was determined by calculating the historical volatility of the Company’s share price over
the expected remaining life of the options.
Details of financier options outstanding at 31 March 2018 are as follows:
Option Class
Grant Date
Options awarded
Exercise price (£)
Expiry date
Financier options
(Tranche 4)
27 July 2015
15,000,000
£0.02
26 July 2019
47
Notes to the Financial Statements
For the Year Ended 31 March 2018
13. Derivative financial liabilities (continued)
Details of financier options outstanding at 31 March 2017 are as follows:
Option Class
Grant Date
Options awarded
Exercise price (£)
Expiry date
Financier
options
(Tranche 2)
19 July 2012
15,000,000
£0.021
19 July 2017
Financier
options
(Tranche 3)
25 March 2013
15,000,000
£0.041
25 March 2018
Financier
options
(Tranche 4)
27 July 2015
15,000,000
£0.021
26 July 2019
2018
US$’000
2017
US$’000
14. Reconciliation of net loss before taxation to operating cash
flows
Net loss before taxation
(3,500)
(13,121)
Amortisation – oil and gas properties
Revaluation loss on contingent consideration receivable
Finance costs
Forex (gain)/loss
Impairment – oil and gas properties
Share based payments
Decrease in trade receivables
(Decrease) in trade payables relating to operating activities
Increase/(decrease) in provisions
Net cash inflow from operating activities
15. Called up share capital
Issued and fully paid
413,995,110 (2017: 221,833,853) ordinary shares of 0.2p each
Opening balance (number: 239,833,853)
Share issue (number: 70,000,000)
Share issue (number: 34,316,551)
Exercise of options (number: 15,000,000)
Placement (number: 16,080,000)
Placement (number: 12,000,000)
Placement (number: 11,764,706)
Exercise of options (number: 15,000,000)
Exercise of options (number: 18,000,000)
Closing balance (number: 413,995,110)
-
554
2,004
(114)
48
10
64
(80)
29
(985)
2018
US$’000
1,205
754
180
89
38
41
31
31
41
-
1,205
11
(183)
531
2,883
6,960
(225)
115
(386)
(17)
(3,432)
2017
US$’000
754
710
-
-
-
-
-
-
-
44
754
48
Notes to the Financial Statements
For the Year Ended 31 March 2018
15. Called up share capital (continued)
Ordinary B shares of 7.9p each
Opening balance (number: nil)
New shares issued (number: 221,833,853)
Cancellation/return of value
Closing balance (number: nil)
Share options
2018
US$’000
-
-
-
-
2017
US$’000
-
21,784
(21,784)
-
The number and weighted average exercise prices of share options are as follows:
Outstanding at the beginning of the year
Issued during the year(a)
Adjustment during the year
Exercised during the year
Expired during the year
Weighted
average
exercise
price
2018
Weighted
average
exercise
price
2017
Number
of options
2018
Number
of options
2017
£0.028 45,000,000
2,500,000
£0.170
-
-
£0.030 (30,000,000)
-
-
£0.040 74,400,000
-
-
£0.002
3,000,000
£0.002 (18,000,000)
£0.080 (14,400,000)
Outstanding at the end of the year
£0.042 17,500,000
£0.028 45,000,000
(a) On 20 January 2018, 2,500,000 unlisted options were issued to the Company Secretary, Jonathan
Whyte. The options have an exercise price of £0.17, expire on 30 January 2021 and have a vesting date
of 20 January 2019. The options are being expensed over the life of the options, resulting in a share-based
payment expense of US$9,799 to 31 March 2018.
Valuation and assumptions of employee options
Grant date
Expiry date
Share price
Exercise price
Volatility
Option life
Expected dividends
Risk-free interest rate (based on national government bonds)
31 March
2018
30 Jan 2018
30 Jan 2021
£0.12
£0.17
79%
3.00
-
0.73%
31 March
2017
-
-
-
-
-
-
-
-
The options outstanding at 31 March 2018 have an exercise price in the range of £0.02 to £0.17 (2017: £0.021
to £0.041) and a weighted average remaining contractual life of 1.54 years (2017: 1.20 years). The remaining
15,000,000 financier options have vested and are fully exercisable at the date of this report.
49
Notes to the Financial Statements
For the Year Ended 31 March 2018
15. Called up share capital (continued)
Details of share options outstanding at 31 March 2018 are as follows:
Option Class
Grant Date
Options awarded
Exercise price (£)
Expiry date
Employee
Options
20 January 2018
2,500,000
£0.17
20 January 2021
Financier options
(Tranche 4)
27 July 2015
15,000,000
£0.02
26 July 2019
Details of share options outstanding at 31 March 2017 are as follows:
Option Class
Grant Date
Options awarded
Exercise price (£)
Expiry date
16. Reserves
Financier options
(Tranche 2)
19 July 2012
15,000,000
£0.021
19 July 2017
Financier options
(Tranche 3)
25 March 2013
15,000,000
£0.041
25 March 2018
Financier options
(Tranche 4)
27 July 2015
15,000,000
£0.021
26 July 2019
Reserve
Share premium
Share based payment reserve
Retained losses
Description and purpose
Amount subscribed for share capital in excess of nominal value.
Records items recognised as expenses on valuation of employee share
options.
All other net gains and losses and transactions with owners not
recognised elsewhere.
17. Related party transactions
Directors are considered Key Management Personnel for the purposes of related party disclosure.
During the financial year Chief Executive Officer Thomas Kelly exercised 30,000,000 EME unlisted options.
On 4 April 2017 the Company held a Shareholder General Meeting whereby shareholders approved the
allotment of 70,000,000 shares at 0.2p each to Topaz Energy Pty Ltd in relation with services provided by
Topaz Energy Pty Ltd (a company wholly owned by and of which Gajendra Bisht is a Director) in relation to
the introduction of the opportunity and successful award of the permit for 100% of the exploration rights
for Block 29/11, China to the Company. These shares were subsequently issued on 21 April 2017, refer to
Note 4 for further details.
There were no other related party transactions during the year ended 31 March 2018 other than those
payments made in regard to Director remuneration disclosed in Note 4.
50
Notes to the Financial Statements
For the Year Ended 31 March 2018
18. Financial risk management
The Company manages its exposure to credit risk, liquidity risk, foreign exchange risk and a variety of
financial risks in accordance with Company policies. These policies are developed in accordance with the
Company’s operational requirements. The Company uses different methods to measure and manage
different types of risks to which it is exposed. These include monitoring levels of exposure to interest rate
and foreign exchange risk and assessment of prevailing and forecast interest rates and foreign exchange
rates. Liquidity risk is managed through the budgeting and forecasting process.
Credit Risk
Exposure to credit risk relating to financial assets arises from the potential non-performance by
counterparties of contract obligations that could lead to a financial loss to the Company.
Credit risk is managed through the maintenance of procedures (such procedures include the utilisation of
systems for approval, granting and removal of credit limits, regular monitoring of exposures against such
limits and monitoring the financial stability of significant customers and counterparties), ensuring to the
extent possible, that customers and counterparties to transactions are of sound credit worthiness. Such
monitoring is used in assessing receivables for impairment. Credit terms are generally 30 days from invoice
date.
Risk is also minimised by investing surplus funds in financial institutions that maintain a high credit rating.
Credit risk related to balances with banks and other financial institutions are managed in accordance with
approved Board policy. The Company’s current investment policy is aimed at maximising the return on
surplus cash, with the aim of outperforming the benchmark within acceptable levels of risk return exposure
and to mitigate the credit and liquidity risks that the Company is exposed to through investment activities.
The following table provides information regarding the credit risk relating to cash and money market
securities based on Standard and Poor’s counterparty credit ratings.
Cash and cash equivalents
- A rated
Total cash and cash equivalents
2018
US$’000
2017
US$’000
388
388
6,106
6,106
Liquidity risk
Liquidity risk arises from the possibility that the Company might encounter difficulty in settling its debts or
otherwise meeting its obligations related to financial liabilities. The Company manages liquidity risk by
maintaining sufficient cash or credit facilities to meet the operating requirements of the business and
investing excess funds in highly liquid short-term investments. The Company’s liquidity needs can be met
through a variety of sources, including the issue of equity instruments and short or long-term borrowings.
Alternative sources of funding in the future could include project debt financing and equity raisings, and
future operating cash flow. These alternatives will be evaluated to determine the optimal mix of capital
resources.
51
Notes to the Financial Statements
For the Year Ended 31 March 2018
18. Financial risk management (continued)
The following table details the Company’s non-derivative financial instruments according to their
contractual maturities. The amounts disclosed are based on contractual undiscounted cash flows. Cash flows
realised from financial assets reflect management’s expectation as to the timing of realisation. Actual timing
may therefore differ from that disclosed. The timing of cash flows presented in the table to settle financial
liabilities reflects the earliest contractual settlement dates.
Trade and other payables (2018)
Trade and other payables (2017)
Less than
6 months
US$’000
6 months
to 1 year
US$’000
1 to 6
years
US$’000
Total
US$’000
283
2,134
-
-
-
-
283
2,134
Capital
In managing its capital, the Company’s primary objective is to maintain a sufficient funding base to enable
the Company to meet its working capital and strategic investment needs. In making decisions to adjust its
capital structure to achieve these aims, through new share issues, the Company considers not only its short-
term position but also its long-term operational and strategic objectives.
Foreign exchange risk
The Company operates internationally and is exposed to foreign exchange risk arising from various currency
exposures. Foreign exchange risk arises from future commitments, assets and liabilities that are
denominated in a currency that is not the functional currency of the Company. The Company’s borrowings
and deposits are largely denominated in US dollars. Currently there are no foreign exchange hedge
programmes in place. However, the Company treasury function manages the purchase of foreign currency
to meet operational requirements.
As at 31 March 2018 the Company’s net exposure to foreign exchange risk was as follows:
Net foreign currency financial assets
Cash and cash equivalents - GBP
Total net exposure
2018
US$’000
2017
US$’000
380
380
459
459
The effect of a 10% strengthening of the USD against the GBP at the reporting date on the GBP-denominated
assets carried within the USD functional currency entity would, all other variables held constant, have
resulted in an increase in post-tax loss for the year and decrease in net assets of US$38,000 (2017:
US$46,000).
Fair value
Fair values are those amounts at which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction. Fair values may be based on information that
is estimated or subject to judgement, where changes in assumptions may have a material impact on the
amounts estimated. Areas of judgement and the assumptions have been detailed below.
52
Notes to the Financial Statements
For the Year Ended 31 March 2018
18. Financial risk management (continued)
Where possible, valuation information used to calculate fair value is extracted from the market, with more
reliable information available from markets that are actively traded. In this regard, fair values for listed
securities are obtained from quoted market prices. Where securities are unlisted and no market quotes are
available, fair value is obtained using discounted cash flow analysis and other valuation techniques
commonly used by market participants.
The following methods and assumptions are used to determine the net fair values of financial assets and
liabilities:
▪
▪
▪
Cash and short-term investments – the carrying amount approximates fair value because of their
short term to maturity;
Trade receivables and trade creditors – the carrying amount approximates fair value; and
Derivative financial assets and liabilities – initially recognised at fair value through profit and loss
at the date the contract is entered into and subsequently re-measured at each reporting date the
fair value of the derivative financial liability options is calculated using a Black-Scholes 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 behaviour), expected dividends, and the risk-
free interest rate (based on government bonds).
No financial assets and financial liabilities are readily traded on organised markets in standardised form.
Financial Instruments Measured at Fair Value
The financial instruments recognised at fair value in the statement of financial position have been analysed
and classified using a fair value hierarchy reflecting the significance of the inputs used in making the
measurements. The fair value hierarchy consists of the following levels:
▪ Quoted prices in active markets for identical assets or liabilities (Level 1);
▪
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly (as prices) or indirectly (derived from prices) (Level 2); and
Inputs for the asset or liability that are not based on observable market data (unobservable inputs)
(Level 3).
▪
The fair value of the financial instruments as well as the methods used to estimate the fair value are
summarised in the table below:
Financial Instruments at Fair Value
Financial assets:
Contingent consideration receivable (Level 3)
Total financial assets
Financial liabilities:
Derivative financial liability (Level 3)(a)
Total financial liabilities
31 March 2018
Fair Value
US$’000
31 March 2017
Fair Value
US$’000
-
-
2,463
2,463
554
554
459
459
(a) The fair value of the Level 3 derivative financial liability has been determined using a Black-
Scholes option pricing model, refer to Note 13 for detailed valuation inputs and assumptions.
53
Notes to the Financial Statements
For the Year Ended 31 March 2018
18. Financial risk management (continued)
Cash and cash equivalents
Cash and short-term deposits in the Statement of Financial Position comprise cash at bank and in hand and
short-term deposits with an original maturity of three months or less. For the purposes of the Cash Flow
Statement, cash and cash equivalents consist of cash and cash equivalents as defined above and which are
readily convertible to a known amount of cash and are subject to an insignificant risk of change in value, net
of outstanding bank overdrafts.
19. Events after the reporting date
In July 2018 the Company received notification from the United States Internal Revenue Service (IRS) that it
would receive US$905,000 on 23 July 2018, being a refund of 2017 corporation tax paid.
In June 2018 the Company received US$396,000 from HM Revenue & Customs (HMRC), being a refund of
2017 corporation tax paid.
No other matters or circumstances have arisen since the end of the financial year which significantly affected
or could significantly affect the operations of the Company, the results of those operations, or the state of
affairs of the Company in future financial years.
20. Committed expenditure
The Company has meet all commitments on all three key projects during the current financial year.
Block 29/11 offshore China
The Company’s committed work program for the Geophysical Service Agreement (GSA) phase for Block
29/11 included acquisition, processing and interpretation of 500km2 for a 3D seismic survey, and a financial
commitment of US$3 million. The Company exceeded the work program commitments during the 2018
financial year. Therefore, commitments for the 2019 financial year consist only of an annual assistance fee
to CNOOC of US$60,000 and an annual personnel representative fee to CNOOC of approximately
US$160,000.
Mako South-1 well offshore Indonesia
Having completed the successful drilling test program at the Mako South 1 well during the 2018 financial
year, the Company has commitment in the 2019 financial year of US$120,000 to complete the Plan of
Development for submission to the Indonesian regulator during Q3 2019. Subsequent financial
commitments and related cash calls are likely to be finalised during Q4 2019 and will be dependent on the
agreed work program going forward.
Sacramento Basin assets Onshore California
The Company earned a 30% interest in the Dempsey Prospect by paying US$2,100,000 towards the costs of
drilling the Dempsey 1-15 exploration well. These drilling costs had a promoted cap of US$3,200,000 and
the Company paid its share of additional costs at Dempsey 1-15, including completion costs. The Company
will earn a 25% interest in the Alvarez appraisal prospect by paying 33.33% of the costs of the Alvarez
appraisal well. At the time of this report, the work plan, cost estimates and timing of expenditure for the
Alvarez prospect have not been finalised.
54