EMPIRE ENERGY GROUP LIMITED
and its controlled entities
ABN 29 002 148 361
DECEMBER 2012 ANNUAL REPORT
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONTENTS
EMPIRE GROUP INFORMATION
EXECUTIVE CHAIRMAN’S REVIEW OF OPERATIONS
DIRECTORS’ REPORT
AUDITOR’S INDEPENDENCE DECLARATION
CORPORATE GOVERNANCE STATEMENT
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOW
NOTES TO THE FINANCIAL STATEMENTS
DIRECTORS’ DECLARATION
INDEPENDENT AUDITORS REPORT
SHAREHOLDER INFORMATION
3
4
22
30
31
38
39
40
42
43
84
85
87
2
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Empire Group Information
Directors
B W McLeod (Executive Chairman)
D H Sutton
K A Torpey
Joint Company Secretaries
D L Hughes
R V Ryan
Registered Offices
Australian Office
Level 7
151 Macquarie Street
Sydney NSW 2000 Australia
Telephone: (02) 9251 1846
Facsimile: (02) 9251 0244
US Office
380 Southpointe Boulevard
Suite 130
Canonsburg PA 15317 USA
Auditors
Nexia Court & Co
Level 16, No.1 Market Street
Sydney NSW 2000
US Auditors
Schneider Downs & Co. Inc
1133 Penn Avenue
Pittsburgh PA 15222
Share Registry
Computershare Investor Services Pty Limited
Level 3
60 Carrington Street
Sydney NSW 2000
Telephone: 1300 85 05 05
www.empireenergygroup.net
Bankers
Australian & New Zealand Banking Group Limited
Macquarie Bank Limited
PNC Bank
Solicitors
Clifford Chance
Level 16
No.1 O’Connell Street
Sydney NSW 2000
US Solicitors
K&L Gates LLP
K&L Gates Center
210 Sixth Avenue
Pittsburgh PA 15222-2613
Stock Exchange Listings
Australia
Australian Securities Exchange
(Home Exchange Sydney, New South Wales)
ASX Code: EEG - Ordinary Shares
United States of America
New York OTCQX Market: Code: EEGNY
OTC#: 452869103
Sponsor: Bank of New York
1 ADR for 20 Ordinary shares
3
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operations
A.
HIGHLIGHTS - 2012
Revenue and EBITDAX steady compared to previous period.
Production steady at 1,413 Boe/d.
Drilling program continuing with 4 wells completed.
Acquisition of oil producing assets in Gove County, KS
Debt pay down of US$10.5 million.
Commencement of geological and preliminary reconnaissance studies in
the McArthur Basin.
Significant progress in negotiations for agreement with the Traditional
Owners in both Native Title and Aboriginal Land leases.
B.
OPERATIONS OVERVIEW
US operations over the year under review continued as expected. Production declines from
existing wells were at negligible rates over the previous year, with additional oil production from
new and re-worked oil wells. Although gas production was lower than the previous year this
was mainly due the inability to get pipe capacity in mid-2012 when main transportation pipelines
where packed or new higher volume compressors were being installed.
While a small “bolt on” acquisition was completed in Gove County, KS, the most disappointing
aspect of the past 12 months was the considerable time and resources spent on bidding for
four additional acquisitions, with the Company missing two opportunities, one to a higher bidder
and one at the same price, with the remaining two opportunities were withdrawn from the
market. The Company is still in discussion on these assets and is reviewing other similar
opportunities, all primarily oil producing assets within the Mid-Con region. The major strategy of
the Company is to continue to grow its production base through the selective acquisition of
producing assets with significant development opportunities attached.
Operations over 2012 can be summarised as follows:
- Empire Energy operates approximately 1,800 gas wells and 256 oil wells. Current
production is ~1,400 Boe/d (36% oil).
- Wells drilled over 2011 and 2012 are now being reworked targeting additional up-hole
formations. Considerable success has been experienced for very little capital outlay. An
example is the Seifkes #13 well initially completed in the first 1 foot of pay in the
Arbuckle which came on stream at a flow rate on around 6.5Bbl/d. In February 2013
moving up 9 feet to the second 1 foot pay zone in the Arbuckle the new zone came on
stream at 90Bb/d and had an initial 30 day average rate of 45Bbl/d. For the same well
there remains a further 6 oil bearing horizons up hole in both the Arbuckle and the
Lansing Group for an additional 24 feet of pay. All wells drilled by the Company are
being developed on a similar basis.
- The Company has received approval in principle to acquire around 101 miles of pipeline
in Western New York. This pipeline transports natural gas production from gathering
networks into major pipelines, is in poor condition and is often shut-in for repair. The
Company is expected to repair this pipeline for minimal cost over a 6 month period and
increase net production to the Company by around 5% over the first 12 months of
operation.
4
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
- The Company continues to identify additional behind pipe Bass Island oil formations in
New York State and has recently bought on stream a second oil well.
-
In expectation of the lifting of the fracking moratorium in New York State, resources are
being allocated to ensuring the Company’s extensive New York land holdings (more
than 3,500 leases) have been reviewed and are in good standing.
- Landowner negotiations continue for the 14.5 million acres of shale formations secured
onshore, in the McArthur Basin, Northern Territory, Australia. The Company is expecting
that at least 3 licences will be finalised by mid-2013. With the knowledge that the Basin
is hydrocarbon bearing, in 2012 geological studies commenced on licence areas with
the underlying objective to identify prospective areas for initial seismic and exploration
drilling. Analysis of existing core from the region also commenced in 2012.
C.
OPERATIONS REVIEW
The Company maintains a small Head office in Australia and manages the exploration program
in the McArthur Basin, Northern Territory, through its 100% owned subsidiary Imperial Oil &
Gas Ltd. The Group’s producing operations are carried out through its 95% owned USA
subsidiary Empire Energy Group USA, LLC and its 100% owned subsidiary Empire Energy
E&P, LLC (‘Empire E&P’).
TABLE A
Operating Statistics
(In $ thousands, except units)
Notes
Dec 31, 2012
Dec 31, 2011
% change
Gross Production:
Oil (MBbls)
Natural gas (MMcf)
285.1
2,574.6
277.6
2,702.3
Net Production:
Oil (MBbls)
Natural gas (MMcf)
Net production (Mboe):
1.0
182.9
1,970.0
511.2
178.1
2,026.6
515.9
Net Daily Production (Boe/d):
1,401
1,413
Average sales price per unit (after hedging):
Oil ($/Bbl)
Natural gas ($/Mcf)
Average sales price per unit (before hedging):
Oil ($/Bbl)
Natural gas ($/Mcf)
Lifting Costs (incl taxes):
1.1
Oil ($/Bbl)
Natural gas ($/Mcf)
$85.20
$5.54
$88.45
$3.05
$24.30
$2.18
$85.92
$5.89
$89.88
$4.24
$24.00
$2.10
3%
-5%
3%
-3%
-1%
-1%
-1%
-6%
-2%
-28%
1%
4%
2P Reserves (MMBoe)
1.2
11,390
15,900
-28%
5
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Notes to Table A:
1.0
Based on SEC guidelines of an oil;gas ratio of 1:6.
1.1
1.2
Lifting Costs - includes lease operating expenses, production and ad valorem
taxes.
2P Reserves – reserves where updated as of December 1, 2012 by Ralph E Davis
Associates, Inc., Houston, TX (Appalachian assets) and LaRoche Petroleum
Consultants Ltd, Dallas, TX (Kansas assets). At balance date, due to prevailing gas
prices it was determined that the booked natural gas Puds were uneconomic and as
such the Pud reserves were not included in 2P Reserve calculations. Refer to
Section 1.3 for more detail.
US operations are producing approximately 7,100 Mcf/d and 781 Bbl/d or 1,400 Boe/day
(net). Conversion of natural gas (1,000mmbtu) to a barrel of oil equivalent is based on a
6:1 ratio. Although this conversion ratio may be useful in terms of energy equivalents, it is
not relevant in terms of value equivalent, with NYMEX Henry Hub currently at $3.87/Mcf
and WTI at $95/Bbl.
In Appalachia, focus has been based on lower declining natural gas prices and
implementing processes to reduce operating costs, while at the same time improving
production from existing operating wells. This process has incurred minimal short term
capex, which will continue through 2013. Opportunities to acquire production, pipelines,
meters, taps into mainline gas transportation networks and acreage will continue. Total
acquisitions of $280,000 where completed in early 2012.
D.
REVIEW OF OPERATING RESULTS
USA OPERATIONS
In addition to the information presented in this financial report, to assist stakeholders in gaining
a more comprehensive understanding of the operations of Empire Energy Group, the financial
results have also been prepared with reference to an EBITDAX format.
The presentation of “EBITDAX” accounting, which is a non-IFRS or statutory financial measure,
may therefore not be comparable to similar measures presented by other companies.
Management have attempted to ensure that EBITDAX accounting presented is consistent with
reporting by other similar E&P companies so a useful production and financial comparison can
be made.
The EBITDAX accounts, based on the production date, are not meant to reconcile to the
statutory accounts as the latter have been prepared on an accrual basis (effective date).
However, if the EBITDAX accounts are prepared on an effective date basis they can then be
reconciled to the statutory accounts, see Section F.
EBITDAX represents net income (loss) before interest expense, taxes, and depreciation,
amortization, development and exploration expenses. Nonrecurring expenses have also been
included in EBITDAX. In summary, all revenues and operating expenses of the Company’s
business are included in EBITDAX. All non-cash expenses, which may distort the presentation
of operations as shown in the statutory accounts, have been either eliminated or reallocated
and aggregated below the EBITDAX line.
6
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
In summary, we believe that:
•
•
•
•
•
EBITDAX provides stakeholders with a much simpler and clear measure of our
operating performance.
EBITDAX is an important supplemental measure of operating performance
because it eliminates items that have little bearing on our operating performance
and so highlights trends in our core business that may not otherwise be apparent
when relying solely on current statutory accounting and financial measures.
EBITDAX is the material component of the covenants that are imposed on the
Company under our credit agreements.
Securities analysts and investors generally use EBITDAX (cash flow modelling)
in the comparative evaluation of companies.
Management and external users of our financial statements, rely on the use of
EBITDAX to assess:
•
•
•
•
•
the financial performance of our assets without regard to financing
methods, capital structure or historical cost basis;
the ability of our assets to generate cash sufficient to pay interest costs
and support our indebtedness;
our operating performance and return on capital as compared to those
of other companies in our industry, without regard to financing or capital
structure; and
the feasibility and effectiveness of acquisitions and capital expenditure
projects; and
the overall rates of return on alternative investment opportunities.
Other companies may calculate EBITDAX differently than as presented. Based on the premises
set out above, the following schedules present comparative operating statistics and financials
on an EBITDAX basis:
7
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
TABLE B
Operations
(In $ thousands)
Notes
Dec 31, 2012
Dec 31, 2011
% change
Net Revenue:
Oil Sales
Natural gas Sales
WI Income
Net Admin Income
Other Income
Net Revenue
Production costs:
Lease operating expenses - Oil
Lease operating expenses - Gas
Taxes - Oil
Taxes - Natural gas
1.5
Total
Field EBITDAX
Gross Margin
Less:
Inventory Adjustment
Nonrecurring expenses
Non Field F&A
Delayed Rental Payments
Operating EBITDAX
Operating Margin
Less:
Field G&A
Corporate G&A
Acquisition related expenses
Indirect Acquisition expenses
Land & Leasing Costs
1.6
1.7
1.8
1.9
1.10
1.11
1.12
1.13
Gain on sale of oil and natural gas properties
Head Office Net G&A
1.14
EBITDAX
Net Margin
$15,586
$10,906
$9
$399
$255
$15,304
$11,945
$34
$231
$144
$27,155
$27,658
$3,623
$3,050
$691
$642
$8,006
$3,335
$3,628
$974
$614
$8,550
$19,149
70.5%
$19,108
69.1%
$(54)
$1,964
$705
$266
$2,881
$16,268
59.9%
$591
$1,283
$184
$359
$209
$0
$856
$3,482
$12,786
47.1%
$184
$1,633
$632
$205
$2,654
$16,454
59.5%
$331
$1,305
$342
$566
$153
-$1,090
$1,383
$2,990
$13,464
48.7%
2%
-9%
-74%
73%
77%
-2%
9%
-16%
-29%
5%
-6%
0%
-129%
20%
12%
30%
9%
-1%
79%
-2%
-46%
-37%
37%
-100%
-38%
16%
-5%
8
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Notes to Table B:
1.3
Oil and Natural gas Sales –include realised hedges, being $4.9 million and ($611,000) for
natural gas and oil respectively.
1.4
Net Admin Income – as operator for approximately 99% of the Company’s assets, the Company
charges Working Interest Owners a fee to cover expenses such as administration, general
insurance, supervision etc., generally known as COPAS expenses. As part of this cost there is a
profit margin which accrues to the Company.
1.5
Taxes – relate to production and includes production, severance and ad valorem taxes.
1.6
Inventory Adjustment – adjustment for oil in tanks as of December 31, 2012.
1.7
1.8
1.9
Nonrecurring expenses –Kansas assets acquired in 2010 have been bought up to an expected
standard of operation along with increased production of the wells under rework programs. This
has, for the second year, included significant non-recurring expenditure focused on the upgrade
of poorly maintained roadways, tank battery infrastructure and wellhead equipment as well as on
ongoing program of repairing wells with split casing. These expenses are budgeted to be lower
over 2013. In addition the Company has commenced a polymer treatment program for wells
were the oil cut is decreasing due to an increasing flow of water. A polymer treatment program
costs around $125,000/well. These costs will be expensed. Two wells were treated in 2012.
Non Field F&A –field supervision and indirect operational expenses including motor vehicles,
fuel, mechanics, roustabouts, supervisors, lease and land management, general property
insurances, environmental and reserve reporting etc. Over the period the Company employed
new Landman in both Appalachia and Mid-Con. An additional $150,000 relates to the review and
digitisation of all 3,500+ leases in New York State.
Field G&A – Empire Energy has field offices in each region it operates. In logistical terms
Appalachia operations are personnel intensive including over 1,800 wells, 3,700 leases, 1,600
right of ways, 20 marketing agreements, 35 employees and 2 contract pumpers operating across
a large area of western New York and western Pennsylvania. Kansas operations are less
personnel intensive including around 200 oil and gas wells, 65 injection wells, 85 HBP leases, 5
employees and 13 contract pumpers operating across a large area (12 counties) of central
Kansas. Field G&A expenses include expenses such as utilities, IT, postage, office rental (where
applicable) etc.
1.10 Corporate G&A – Empire Energy manages its USA operations from a corporate head office at
Canonsburg, PA were a staff of 6 hold responsibility for financial management, control and
reporting and HR Services. Significant expenses for the period were - salaries and wages
$407,769; audit/tax and accounting $286,712; travel and accommodation $74,485; rent and
accommodation costs $95,889; Professional Services $127,089 and Management and Director
fees $332,667 (of which $150,000 was paid to Empire Energy Group Limited).
1.11 Acquisition related expenses – Directly associated with acquisitions and include legal, tax and
accounting advice, transition fees, recruitment and relocation costs and engineering expenses.
These are driven by the acquisitions successfully concluded or in progress.
1.12
Indirect acquisition related expenses – Contracted services required to implement a
successful acquisition may include data review and integration, ongoing legal review of assets
(especially leases and joint venture arrangements), accounting support, environmental and spill
plan strategies, computer hardware and software, HR and IT services for systems integration etc.
1.13
Land & Leasing Costs – costs related to land leasing expenses for new leases and renewals.
1.14 Head Office Net G&A – net cost of Australian operations (expenses are net of income received).
Major expenses were consultants $362,495; salaries $283,132; audit & accounting $161,295;
listing related expenses $172,774; rent, communications and IT $173,291.
9
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
NET EARNINGS
E.
TABLE C
Net Earnings
(In $ thousands) Notes
Dec 31, 2012
Dec 31, 2011 % change
EBITDAX
Geological Services
Dry Hole Expenses
Exploration - Australia
EBITDA
Less:
ARO, accretion expenses
Depn, depletion and amortisation
1.15
EBIT
Interest
State Taxes
Income Taxes
Net Earnings
1.16
$12,786
$13,464
$23
$109
$883
$1,015
$11,771
$1,728
$7,379
$9,107
$2,664
$2,728
$22
$(1,821)
$929
$75
$476
$477
$1,028
$12,436
$503
$6,810
$7,313
$5,123
$3,580
$106
$1,621
$2,465
-5%
-69%
-77%
85%
-1%
-5%
243%
8%
25%
-40%
-24%
-79%
-62%
Notes to Table C:
1.15 Accretion Expenses includes one-off lease expiration write downs of $1,026,978 in New
York and Kansas.
1.16 Credit Facility The draw down on the Macquarie Bank Limited Credit Facility as at 31
December 2012 was $49.4 million (cf $58.1 million at Dec 2011) at an average rate of
LIBOR+4.0%. Over 2012, Empire Energy has drawn down $1.7 million and repaid $10.5
million ($14.7 million in 2011) of existing loan facilities. Interest expense is estimated to
average $170,000/mth over 2013.
F.
RECONCILIATION OF EBITDAX ACCOUNTS TO STATUTORY ACCOUNTS
At the time of this EBITDAX report, actual numbers for production, income and expenses have
been utilised. This method therefore generates an additional difference between what is shown
in the EBITDAX and what is represented in the statutory accounts.
The EBITDAX in Table B and the net earning in Table C report operational activities of Empire
Energy Group. The note below provides a reconciliation to the financial statements.
10
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Net Earning - Effective Date
(In $ thousands)
Net Earnings- production date
Net Earnings- effective date
Net Earnings - effective date (Empire E&P)
Intergroup management fee
Revenue and expenses (remaining Empire Group)
Other Income
Oil and gas production*
Exploration assets written off
Impairment of assets*
Depreciation, depletion and amortisation*
General and administration – head office
General and administration – other*
Finance costs – interest expense
Finance costs – other*
Other expenses
Net loss before income tax expense
*
Indicates non-cash items
G.
COMMENTS ON OPERATIONS
1.1 Hedging
Dec 31, 2012
$929
$1,628
$1,628
$150
$623
$(129)
$(833)
$(172)
$(18)
$(1,944)
$(75)
$(192)
$(1,002)
$(62)
$(2,025)
Due to the leverage growth model implemented by Empire Energy, an aggressive hedging
strategy is adopted to ensure commodity risk is eliminated over the period that a major portion
of debt financing is repaid. The Empire Energy acquisition model metric is to target a 5 year
debt repayment from project cash flows. The portion of production hedged will be naturally
reduced as drill bit production comes on line.
Year
Est. Net
mmBtu
1,950,000
2013
1,850,000
2014
1,790,000
2015
1,730,000
2016
1,675,000
2017
1,620,000
2018
Total 10,615,000
Hedged
%
mmBtu
72.2%
1,407,720
72.2%
1,335,488
1,166,000
65.1%
1,200,000 69.4%
34.0%
31.5%
58.3%
570,000
510,000
6,189,208
%
Average Est. Net Hedged
Bbl
$/mmBtu
$5.97
$5.91
$5.45
$4.43
$4.57
$4.75
$5.33
Bbl
149,298 113,160 75.8%
141,058 105,120 74.5%
73.6%
98,160
133,280
33.2%
42,000
126,616
32.9%
39,600
120,285
670,537 398,040 59.4%
Average
$/Bbl
$90.00
$90.00
$90.00
$85.67
$85.23
$89.07
The fair value gain (marked to market) gain of combined oil and gas hedges in place for the
Period was $1.4 million (net of tax). Oil and gas hedge contracts were valued based on NYMEX
Henry Hub and WTI forward curves at market close on December 31, 2012.
11
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
1.2 Exploration & Development
Capex
(In $ thousands)
Acquisitions
New wells ‐ IDC
New wells ‐ well head equipment
Dec 31, 2012
$2,596
$1,705
$465
$4,766
Dec 31, 2011
$130
$2,047
$580
$2,757
% change
1895%
‐17%
‐20%
73%
Expenditure: Total drilling expenditure in Kansas over 2012 was $1.6 million. A total of 4 wells
were drilled in Kansas of which 4 have been bought on line and are currently producing. In
addition, a small producing operation with 12 to 14 drilling locations was purchased in Kansas
in mid year and additional pipeline, wells and acreage were acquired in New York State.
Low gas prices are causing a rationalisation of assets in the industry, and within the region of
the Empire Group’s existing assets, additional opportunities exist to add bolt-on production
assets and infrastructure at attractive costs.
1.3 Reserves
Net 2P Reserves: An updated Reserve Estimate was carried out as of December 1, 2012. An
updated summary of 2P Reserves is shown below. Total 2P reserves are 11.3 million Boe. At
reserve update, due to the extended payback of conventional gas wells drilled and completed in
Company properties in the Appalachia region, directors decided to exclude Pud Reserves. This
resulted in a right down of approximately 5MMboe. These reserves are mainly held by
production and will be written back at higher gas prices.
2P MBoe
e
o
b
M
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
‐
2006
2007
2008
2009
2010
2011
2012
Oil Bbl 2P
Sub‐economic @ current ngas prices
Gas Boe 2P
Empire E&P has adopted the SEC standard of 6 Mcf to 1 Bbl when converting natural gas to
Boe. Boe may be misleading, particularly if used in isolation. A Boe conversion ratio of 6 Mcf to
1 Bbl is based on energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead.
12
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Possible Reserves and Resources: In addition to the 2P reserves, the Empire Group is
undertaking a detailed review of its 300,000+ acres held in western New York and north
western Pennsylvania. This acreage (see below) covers a number of oil and gas bearing
horizons and is currently producing from the Medina and Queenston formations. Recent
independent reports have indicated +70MMBbls and 200 Bcf in the Marcellus Shale and
Resources of at least 4.6 Tcf in Utica Shale.
1.4 Land Position
The following tables summarise the Company’s land holdings in both Appalachia and Mid-
Continental region.
1.4.1 Appalachia
Total
State
NY
NY
NY
NY
NY
NY
NY
NY
NY
NY
PA
PA
PA
PA
37,467
22,366
County
Cattaraugus
Cayuga
Chautauqua
Erie
Niagra
Onondaga
Ontario
Seneca
Wayne
Wyoming
Erie
Clarion
Jefferson
Armstrong
Total
Held by Production
Acreage HBP Ac.
17,813
368
175,336 164,160
8,451
0
0
0
3,276
3,946
338
7,496
3,753
1,598
718
336,931 211,917
8,969
1,259
1,550
16,916
24,631
34,137
338
7,670
3,920
1,654
718
Marcellus
Ac.
37,467
0
175,184
8,969
1,259
0
0
0
0
0
1,317
50
0
0
224,246
197,970
Utica Ac.
31,073
22,366
60,101
705
1,259
1,550
16,916
24,631
33,895
0
6,353
50
0
0
198,899
100,696
2013
0
1,583
0
0
0
0
0
4,511
2,502
0
0
0
0
0
8,596
Expiry
2015
7,259
2,866
0
0
0
814
648
425
1,216
0
0
31
56
0
2014
0
588
0
0
0
0
194
559
0
0
0
87
6
0
2016+
4,299
5,383
0
294
951
22
4,938
4,033
4,330
0
0
50
0
0
1,434 13,314 24,300
13
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
1.4.2 Mid-Continental
State
County
920
80
966
160
5,600
716
1,080
Total
Gross
Ac
2,387
716
1,080
2,946
5,600
400
920
80
966
160
160
160
80
73
640
320
2,790
2,299
1,679
Barton
Clark
Comanche
Ellis
Gove
Graham
Harvey
Kiowa
Meade
Ness
Pawnee
Pratt
Reno
Rice
Rooks
Rush
Russell
Stafford
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
KS
ND Mountrail
Total
Miss. = Mississippi Lime
A/LKC = Arbuckle/Lansing‐Kansas City
160
80
73
Miss. A/LKC
HBP
Ac
2013
2014
2015
2016
Expiry
2,232
155
560
960
1,120
80
493
716
1,080
2,386
2,560
320
80
633
160
160
160
80
2,387
716
920
2,946
5,600
400
326
160
160
80
73
640
320
2,790
2,299
640
160
2,790
2,139
160
960
920
73
160
1,679
23,456 11,514 19,817 16,296
1,679
3,847
1,360
2,113
0
H.
APPALACHIA - UNCONVENTIONAL
Empire E&P continues geological and engineering review of its significant land
holding in western New York and northern Pennsylvania. Both the potential Marcellus
and Utica shale regions are shown in the maps below. (On the following two maps,
Empire E&P leases are highlighted in yellow).
The scope of the study reviewed basic information to prepare estimates of the
reserves and contingent resources. Possible Reserves and Resource estimates
were prepared by Ralph E Davis Associates, using acceptable evaluation
principals and were based, in large part, on the basic information as supplied.
The quantities presented are estimated reserves and resources of oil and natural
gas that geologic and engineering data demonstrate are “In-Place”, and can be
recovered from known reservoirs. All volumes presented are gross volume
(8/8ths), and have not subtracted associated royalty burdens.
14
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
1.1 Shale – Possible Reserves/Potential Resources – Total Marcellus Acreage ~224,000ac
Formation
Acreage
Marcellus (1)
~100,000 (2)
Type
Oil (1)
Category
Possible (3P)
70,295 MBbl
Marcellus
~100,000 (2)
Gas (4)
Possible (3P)
199 Bcf
1.2 Shale - Potential Resources – Total Utica Acreage ~198,000ac
Formation
Acreage
Utica (3)
40,000 (2)
Type
Gas
Category
GIP
Resource (3C)
4,638 Bcf
Notes:
(1) Wells within the defined Marcellus oil resource zone were calculated to produce between 2-
5,000 Bbls/5 acres. The most likely outcome was utilized with a 3% RF (recovery factor).
(2) Resource based on portion of total estimated Marcellus and Utica acreage.
(3) Utica shale gas potential resources have only been calculated for the region where drill data
is available. Very few wells have been drilled into the Utica and estimates for GIP have only
been made were the few existing wells have been drilled. Empire holds additional acreage
outside the current potential resource region. It is expected that as with shale characteristics,
the shale formations will continue within the remaining acreage. The potential GIP should
increase if more data was available.
(4) Under current capital and gas prices, it is estimated that the Marcellus shale gas wells would
be marginally economic.
1.3 The New York Fracking Moratorium
There was a further delay in the final issuance of New York State’s Supplemental Generic
Environmental Impact Statement (“SGEIS”). Value extraction from the Company’s Marcellus
and Utica shale play is dependent on final SGEIS issuance that would allow high volume
hydraulic fracturing (“Fracking’) of horizontal wells. There was some anticipation that the SGEIS
would be issued in February 2013. However:
On February 12, 2013, the New York State Department of Environmental Conservation
(“DEC”) was advised by the New York State Department of Health (“DOH”) that they
would need “a few more weeks” to complete their health review of the proposed SGEIS.
Issuance of the final SGEIS is contingent upon a determination that the SGEIS has
adequately addressed health concerns. Nevertheless, the DEC’s commissioner has
15
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
gone on record as saying that, “this does not mean that the issuance of Fracking would
be delayed;
The DEC can accept and process Fracking permit applications 10 days after issuance
of the SGEIS”.
Fracking technology has continued to advance, resulting in increased EURs and
reduced well costs in the shale industry. Fracking has proven to be very successful in
major shale plays in the in the Marcellus and Utica in nearby States of Pennsylvania,
West Virginia and Ohio.
Projects of the scale that the Company holds, approximately 400,000 acres of shale
development will require significant capital investment. Consequently, the Company
would seek to work with partners on the development of these assets, following the
initial de-risking phase.
I.
NORTHERN TERRITORY – A LARGE EMERGING PETROLEUM PLAY
In 2010 Empire Energy Group Limited, through its 100% owned subsidiary Imperial Oil & Gas
(“Imperial”), completed a regional opportunity screening and proactively secured 100%
interest in 59,000 square km (14.6million acres) of prospective shale gas exploration acreage,
approximating to 75% of the entire central trough of the Proterozoic McArthur Basin
(Exploration Permit Applications EP(A) 180 – 188). The McArthur Basin is an underexplored
petroleum frontier basin with direct indications of oil & gas. Indeed there has been no
petroleum exploration of the Walker Trough in the northern McArthur Basin. Exploration
wells drilled in the nearby south McArthur Basin in 2012 discovered gas in the same thick
carbon-rich black petroliferous shales that are widespread in Imperial’s acreage.
1.1
Proven Petroleum Systems
16
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Analogue shale gas basins suggest
potential recoverable s h a l e & c o n v e n t i o n a l g a s resources as well as associated liquids.
Imperials extensive acreage contains multi-Tcf of
The grant of the Permits and commencement of exploration operations will occur once
agreements have been negotiated with Traditional Land Owners. Imperial has developed
excellent relations with Traditional Owners and progress is well advanced. Accordingly Imperial
anticipates grant of the first of its permits in mid-2013 with seismic acquisition to commence
soon thereafter and exploration drilling during 2013-14.
There is an existing gas pipeline across Imperial’s EP(A)187 and one planned through
EP(A) 180 & 181.
Initial Targets
1.2
1.2.1 Unconventional - Shale Formations
17
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
The i ni ti al target petroleum resource is in 1.64 billion year old Palaeo- Proterozoic organic-
rich black shales of the Barney Creek Formation and equivalents. These were first proven
gas-prone in the southern McArthur Basin. The 1979 mineral core hole GRNT-79-09 ignited
and sustained a 6m high yellow smoky gas flare for approximately 6 months producing an
estimated 0.5 Bcf at 6mmscfd. Gas analysis revealed C1-C7 and minimal CO2. Also, oil
bleeds are common in cores hence shale oil offers secondary potential. Drilling of Cow
Lagoon-1 and Glyde-1 in 2012 produced free flowing gas confirming the McArthur Basin
formations to be hydrocarbon bearing.
The shallower 1.43 billion year old Meso-Proterozoic Velkerri Formation also contains carbon-
rich black shales & siltstones providing a second shale oil & gas exploration target in
Imperial’s southern EP(A)s 187 & 188 and the western regions of EP(A) 181, 182 & 184. The
Velkerri Formation is the focus of shale gas exploration in the adjacent Beetaloo Basin to the
south.
1.2.2 Conventional Petroleum Reservoirs
While unconventional shales provide the primary oil & gas target there are associated
carbonate and clastic formations that offer incremental conventional resource potential.
Imperial’s primary objective for the initial seismic and drilling campaign is to constrain the
potential for commercially viable shale petroleum resources.
In addition, the structural modelling work has identified a number of potentially large four-way
dip-closed traps in the areas targeted for initial exploration. These targets will be evaluated for
potential conventional reservoirs in such structures while maintaining a direct focus on shale
targets. The two maps below show both the proposed seismic lines to be undertaken in 2013
(when agreements with Traditional Owners are completed). The potential conventional traps
will be targeted as initial exploration well locations, with the shale horizons being targeted
beneath the four-way dip-closed traps.
1.2.2.1 EPA 180
18
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
1.2.2.2 EPA 182
1.2.3 Analytical Program
Being a frontier basin the regional extent, quality, and thermal maturity of the gas shales
must be carefully constrained. Potential gas & oil-prone sweet spots are presently being
delineated. The Australian Shale Research Group is currently analysing 650 Proterozoic shale
samples from 10 cores. These will characterize the nature and distribution of hydrocarbons
in the Southern portion of Imperial’s license areas and provide for prediction in the northern
areas where there are no existing petroleum geochemical data.
The analytical work involves mineralogical, organic geochemistry, diagenesis and porosity
analyses. The emerging geochemical results are currently being interpreted and assimilated
into a sequence stratigraphic framework along with the results from a basin structural
geological modelling study that commenced in 2012.
1.2.4 Permitting
Land access and permit grant in six of the seven permit application areas requires approval of
the Traditional Aboriginal Landowners given they are in Aboriginal Freehold Land. Since late
2010 Imperial has held 11 ‘on-country’ meetings with Traditional Owners who express strong
support to negotiate the terms of Exploration Agreements for each area. On some occasions
at such meetings there may be sparse attendance, or lack of representation, by key senior
In such
Traditional Owner decision-makers, or
funeral ceremonies.
there may be
19
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
circumstances no definitive decision may be achieved. The negotiation of exploration
agreements are currently at an advanced stage.
1.2.5 Gas to Gove
Imperial’s McArthur Basin acreage is strategically located just 80 km from the Gove Refinery. In
the event of gas discovery, depending on the scale of resource, Imperial can potentially supply
gas locally into the proposed new gas pipeline or to support directly mining operations in the
area, to replace diverted gas quotas for use in Darwin, or for inter-state or overseas export.
In 4Q 2012 Imperial presented its proposed exploration plans for 2013 onwards to the Northern
Territory Chief Minister’s ‘Strategic Gas Action Group’. The Group strongly endorsed Imperial’s
achievements in accelerating the licensing process and expediting its forward exploration
programs in the region.
20
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
J.
FUTURE
The Company’s prime strategy remains to:
Identify new upstream producing oil assets to acquire and integrate into existing
operations; and
Build a position of ‘significance’ in the oil and gas industry. The target would be
to reach an initial production milestone of over 2,500 Boe/day by 2013, and then
a next target of 5,000 Boe/d; and
Focus on existing well re-works to maintain steady state production and reduce
both oil and gas lifting costs; and
Monetise the Company’s potential large scale unconventional sources of shale
oil, gas liquids and dry gas in the Marcellus, Utica, Appalachia and the McArthur
Basin, Northern Territory, Australia; and
Ensure the value of the Company’s achievements are reflected in its market
capitalization.
Since the last quarter of 2012 the Company has participated in a number of
presentations to investors, analysts and brokers along with participating in
industry events. This is part of an ongoing initiative to further promote the
Company and will continue into 2013.
I would also like to acknowledge the many employees, shareholders and stakeholders who
have provided support and assistance in continuing the development of the Company. Although
2012 was disappointing in not being able to secure the acquisition of additional producing
assets, significant progress has been made in all areas of operation.
Operations developed in the Mid-Con region can expand production several fold with little
additional G&A expense. Appalachia expansion is a little constrained by current natural gas
prices, but increasing efficiencies will see increasing attractive returns as natural gas prices
creep back to the $4.00/Mcf range. Significant progress has been made in the Northern
Territory with both an expansion of the Company’s operational team and the ongoing
development of strong relations with the Northern Land Council and other supportive
Governmental bodies in the Northern Territory.
Subject to the successful outcome of several events expected over 2013, the nature and scale
of the Company has the potential to change significantly.
Bruce McLeod
Chairman & CEO
The information in this report which relates to reserves is based on information compiled by Ralph E Davis
Associates Inc, Houston, Texas, and LaRoche Petroleum Consultants Ltd., Dallas, Texas, both certified professional
petroleum engineers with over five years experience and are qualified in accordance with the requirements of Listing
Rule 5.11.
Neither Ralph E Davis Associates Inc, nor LaRoche Petroleum Consultants Ltd., nor any of their employees have
any interest in Empire Energy E&P, LLC or the properties reported herein.
21
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the financial year ended 31 December 2012
In respect of the financial year ended 31 December 2012, the Directors of Empire Energy Group Limited
(“Company”) present their report together with the Financial Report of the Company and of the consolidated entity
(“Empire Group”), being the Company and its controlled entities, and the Auditor’s Report thereon.
Directors
The following persons held office as Directors of Empire Energy Group Limited at anytime during or since the end of
the financial year:
B W McLeod
D H Sutton
K A Torpey
Executive Chairman
Non-Executive Director
Non-Executive Director
All the Directors have been in office since the start of the financial year unless otherwise stated.
Principal Activities
During the financial year the principal continuing activities of the consolidated entity consisted of:
The acquisition, development, production, exploration and sale of oil and natural gas. The Empire Group sells its oil
and gas products primarily to owners of domestic pipelines and refiners located in Pennsylvania, New York and
Kansas.
Reviewing new exploration, development and business opportunities in the oil and gas sector to enhance
shareholder value.
Current initiatives are centred on the McArthur Basin in the Northern Territory.
Consolidated Results
The consolidated net loss of the Empire Group for the financial year ended 31 December 2012 after providing for
income tax was US$203,577 compared to a consolidated net loss for the previous corresponding reporting period of
US$1,436,800.
Review of Operations
For information on a review of the Empire Group’s operations refer to the Executive Chairman’s Review of
Operations Report contained on pages 4 to 21 of this annual report.
Dividends
The Directors have not recommended the payment of a final dividend.
Significant Changes in State of Affairs
Significant changes in the state of affairs of the consolidated entity during the financial period were as follows:
(i) Capital Structure
Contributed equity of the Company increased by US$2,129,681 (from US$71,195,874 to US$73,325,555) during the
financial period as a result of:
-
-
Issue of 6,666,666 shares in June 2012 pursuant to the exercise of 6,666,666
options @ A$0.15 expiring 22 June 2012
Issue of 6,666,666 shares in December 2012 pursuant to the exercise of
6,666,666 options at $0.165 expiring 22 December 2012
Less transaction costs associated with the above mentioned share issues
US$
990,380
1,148,950
(9,649)
2,129,681
Funds raised from the issues were utilised towards repayment of group borrowings.
(ii) Acquisition of oil producing assets
In July 2012 the Company announced that its 95% owned subsidiary Empire Energy E&P, LLC had acquired a
97.9% working interest in producing petroleum properties located in Gove County in the Central Kansas Uplift,
Kansas for a purchase price of US$1.7million. The acquired assets consist of 3,360 gross (2,648 net) acres of land
with preliminary estimated proven and probable recoverable reserves of 470,000 barrels of oil.
22
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2012
Likely Developments
Except for information disclosed on certain developments and the expected results of those developments included
in this report under review of operations, further information on likely developments in the operations of the
consolidated entity and the expected results of those operations have not been disclosed in this report because the
Directors believe it would be likely to result in unreasonable prejudice to the consolidated entity.
Matters Subsequent to Balance Date
1) Rollover Macquarie Bank Facility
On 15 January 2013 the Company announced that the Macquarie Bank US$150 million credit facility had been
extended for a further 3 years through to 28 February 2016.
The extension of the credit facility will enable the company to continue to target the acquisition of assets that offer
attractive aggregation and growth potential and demonstrates Macquarie Bank’s support of the Company’s
operations.
2) The New York Department of Environmental Conservation (‘DEC’)
Defacto moratorium on hydraulic fracking in New York State ended on 1 July 2011, the DEC implemented public
comment periods commencing August 2011 and extending to 11 January 2013. The DEC has previously released its
recommendations on mitigating the environmental impacts of high-volume hydraulic fracking.
The timing of the release of guidelines and the issue of permits is still unknown. In early 2013 the DEC filed a notice
of continuation for 90 days in order to allow the NY State Commissioner of Health, time to complete his review of the
draft Supplemental Generic Environmental Impact Statement. On 6 March 2013 the New York State Assembly
passed a bill to further suspend the issuance of high volume hydraulic fracturing until May 15, 2015, this bill was not
ratified by the Senate which favours controlled hydraulic fracturing. The Governor is currently awaiting additional
recommendations from the NY Department of Health at which time the DEC will determine a decision deadline.
There were no other matters or circumstances that have arisen since 31 December 2012 that has significantly
affected or may significantly affect:
the operations, in financial years subsequent to 31 December 2012, of the Empire Group; or
the results of those operations; or
the state of affairs in financial years subsequent to 31 December 2012 of the Empire Group.
Information on Directors
Bruce William McLeod, B.Sc (Maths), M.Com (Econ)
Executive Chairman
Age 60
Experience and Expertise
Mr McLeod has had extensive experience in the Australian capital markets. Over the past 20 years he has been
involved in raising debt and equity capital for a number of resource, property projects and companies, as well as the
takeover and rationalisation of listed and unlisted companies. Prior to this he spent 6 years with a major international
bank, where he was Executive Director, responsible for the financial and capital markets operations.
Appointed a Director of the Company on 21 May 1996.
Special Responsibilities
Chairman of the Board – Chief Executive Officer
Member of Audit Committee
Other Current Directorships
Chairman of Mayan Iron Corporation Ltd.
Former Directorships in Last 3 Years
Earth Heat Resources Ltd from 6 February 2008 to 22 January 2010.
Carnegie Wave Energy Limited from 1 November 1996 to 6 May 2011.
23
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2012
David Henty Sutton, B.Com ACIS Age 69
Non-Executive Director
Experience and Expertise
Mr Sutton has many years’ experience as a Director of companies involved with share broking and investment
banking. He currently owns and manages Dayton Way Financial Pty Ltd, a boutique financial services company
focussing on the global resource sector.
Prior to his current role he was a partner and director of several securities exchange member firms. He became a
member of the Stock Exchange of Melbourne and subsequently Australian Securities Exchange Limited.
Appointed a Director of the Company on 17 January 1997.
Special Responsibilities
Member of Remuneration Committee
Member of Audit Committee
Other Current Directorships
Chairman of Silver Mines Limited, AAT Corporation Limited, Precious Metals Investments and Chairman of Sinovus
Mining Limited.
Former Directorships in Last 3 Years
Director of Earth Heat Resources Ltd from 14 October 2007 to 11 May 2011.
Kevin Anthony Torpey, B.E., MIE Aus., CP Eng, FAusIMM, (CP)
Non-Executive Director
Age 74
Experience and Expertise
Mr Torpey is a Chartered Professional Engineer and a graduate from Sydney University. Over the last 40 years he
has been involved in the development of many diverse major projects involving oil, iron ore, aluminium, nickel,
lead/zinc, uranium, magnesite, coal and gold, located locally and in Ireland and Indonesia.
Generally these projects have been associated with major companies such as Consolidated Goldfields, EZ
Industries, Alcan, International Nickel, Tara Minerals Limited (Ireland), Noranda, Denison Mines (Canada), Toyota,
Mitsubishi and Iwatani. For the last 20 years his association has mainly been as a corporate officer initially as
Managing Director of Denison Mines (Australia) and then Managing Director of Devex Limited. Over the last few
years he has acted as a consultant to a number of companies involved in mining projects and new technologies.
Appointed a Director of the Company on 26 November 1992.
Special Responsibilities
Member of Remuneration Committee
Member of Audit Committee
Other Current Directorships
Non-Executive Director of Latrobe Magnesium Limited
Former Directorships in Last 3 Years
None
Joint Company Secretaries
David Hughes
Mr Hughes was appointed to the position of Company Secretary on 11 November 1992. Before joining Empire
Energy Group Limited he has held similar positions with other listed companies for over 20 years. He is currently
acting as Company Secretary/Joint Company Secretary of the following other listed public companies:
Latrobe Magnesium Limited and Joint Company Secretary of Hudson Investment Group Limited , Tiaro Coal Limited,
Hudson Resources Limited, Australian Bauxite Limited, Sovereign Gold Company Limited and Raffles Capital
Limited.
24
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2012
Rachel Ryan
Ms Ryan was employed in the Company’s Corporate Finances division in February 2006. She was appointed Joint
Company Secretary on 21 July 2010. She resigned on 3 February 2012 and re-joined the Empire Group on 5 March
2012 and now serves the Company as Joint Company Secretary and General Manager Operations.
Executives
Kylie Arizabaleta B.Bus (Acct) (Fin)
Ms Arizabaleta was appointed to the position of Financial Controller on 5 March 2012. Before joining Empire Energy
Group Limited she worked in the public practice as an external auditor and holds over 8 years’ experience.
Dr John Warburton (FGS, MAICD)
Director & CEO, Imperial Oil & Gas Pty Ltd
Dr Warburton was appointed as an advisor to the Empire Group in February 2010 and as a director and Chief
Executive Officer to the Company’s wholly owned subsidiary Imperial Oil and Gas Pty Ltd on 18 March 2011. A
Geoscientist by profession, Dr Warburton has 28 years of technical and leadership experience in International
Petroleum E&P including 11 years with BP and 4 years as General Manager Exploration & New Business for
LASMO-Eni in Pakistan. Dr Warburton is the Director of Sydney-based Petroleum Exploration Business Consultancy
Insight Exploration and he maintains a strong global executive network.
Dr Warburton’s extensive operated & non-operated petroleum expertise covers the Middle East, Kazakhstan,
Azerbaijan, North & West Africa, Pakistan, Europe, Australia, New Zealand, PNG, SE Asia, China, Korea and Japan.
John has been involved in the discovery of commercial oil & gas fields in Pakistan, UK, Kazakhstan, Azerbaijan and
PNG and he has published 28 internationally recognised technical articles with particular focus on petroleum
exploration in complex fold and thrust belts.
Dr Warburton has a First Class B.Sc. Honours Degree in Geological Sciences and a Ph.D. in Structural Geology. He
is a Member of the Australian Institute of Company Directors, an Alumni of Cranfield Business School UK and a
Fellow of the Geological Society of London. Insight Exploration is a Sustaining Member of the Petroleum Exploration
Society of Great Britain.
Geoff Hokin
Explorations & Operations, Imperial Oil & Gas Pty Ltd
Mr Hokin has 9 years’ experience as a field geologist in the unconventional gas and coal sectors, with various senior
geologist roles with a number of companies including Armour Energy Limited, Metgasco Limited and Arrow Energy
Limited. Mr Hokin has extensive geological and business experience in other operations.
Meetings of Directors
The number of Directors’ meetings and committee meetings held and the attendance by each of the Directors of the
Company at those meetings during the financial year were:
Directors’ Meetings
Remuneration Committee
Meetings
Audit Committee
Meetings
Director
Attended
Held Whilst in
Office
Attended
Held Whilst in
Office
Attended
Mr B W McLeod
Mr D H Sutton
Mr K A Torpey
8
8
8
8
8
8
-
1
1
-
1
1
2
2
2
Held
Whilst in
Office
2
2
2
The audit committee comprises the full Board of Directors. Mr D H Sutton and Mr K A Torpey were members of the
remuneration committee during the financial year.
Retirement, Election and Continuation in Office of Directors
Mr D H Sutton is the Director retiring by rotation at the next Annual General Meeting in accordance with Article 50.1
of the Company’s Constitution and being eligible offers himself for re-election.
Remuneration Report – Audited
This report outlines the remuneration arrangements in place for Directors and Executives of the Empire Group.
25
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2012
Remuneration Committee
The Remuneration Committee reviews and approves policy for determining executives remuneration and any
amendments to that policy. The Committee makes recommendations to the Board on the remuneration of Executive
Directors (including base salary, incentive payments, equity awards and service contracts) and remuneration issues
for Non-Executive Directors.
The members of the Remuneration Committee during the period were:
D H Sutton – Independent Non-Executive - Chairman
K A Torpey – Independent Non-Executive
The Committee meets as often as required but not less than once per year. The Committee met once during the
period and Committee member’s attendance record is disclosed in the table of Directors Meetings shown above.
Executive Directors’ and Executive Remuneration
Executive remuneration and other terms of employment are reviewed annually and are based predominantly on the
past year’s growth of the Empire Group’s net tangible assets and shareholder value, having regard to performance
against goals set at the start of the year, relevant comparative information and independent expert advice. As well as
basic salary, remuneration packages include superannuation and other bonuses and incentives linked to
predetermined performance criteria. Executive Directors and executives are able to participate in an Employee Share
Option Scheme.
Remuneration packages are set at levels that are intended to attract and retain executives capable of managing the
Consolidated Entity’s operations. Consideration is also given to reasonableness, acceptability to shareholders and
appropriateness for the current level of operations.
Performance Based Remuneration
As part of the Executive Directors’ remuneration package there is a performance-based component, consisting of
key performance indicators (KPIs). The intention of this program is to facilitate goal congruence between executives
and that of the Empire Group and shareholders.
Performance in relation to the KPIs will be assessed annually, with bonuses being awarded depending on
performance of the Empire Group over the past year. Following the assessment, the KPIs will be reviewed by the
Remuneration Committee in light of the desired and actual outcomes, and their efficiency assessed in relation to the
Empire Group’s goals and shareholder wealth, before KPIs are set for the following year.
Non-Executive Directors’ Remuneration
Remuneration of Non-executive Directors is determined by the Board based on recommendations from the
Remuneration Committee and the maximum amount approved by shareholders from time to time. Non-executive
Directors are also able to participate in an Employee Share Option Scheme.
The Board undertakes an annual review of its performance and the performance of the Board Committees against
goals set at the start of the year. Details of the nature and amount of each element of the remuneration of each
Director of Empire Energy Group Limited and each specified executive of the Empire Group receiving the highest
remuneration are set out in the following tables.
December 2012
Short term benefits
Cash
salary
and fees
US$
Bonus
payments
US$
Non-
monetary
US$
Post-
employment
benefits
Super
contributions
US$
Long-
term
benefits
Long
service
leave
Share/option
based
payments*
Total
US$
362,495
20,714
-
113,927
-
-
Directors
B W McLeod
K A Torpey
D H Sutton
J Warburton
Empire Energy Executives
A Boyer
* Share/Option based payments reflect a proportion of the independently valued cost of options granted under the
Employee Share Option Plan. The cost shown is a non-cash cost and includes, on a pro-rata basis, the
independently valued cost of previous options issued. Once the options reach vesting date, the cost shown
amortises to $0.
302,923*
16,395*
16,395*
-
-
1,864
20,714
28,540
-
-
156,000
221,114
39,481
7,571*
-
-
-
-
-
-
-
-
-
-
807,885
38,973
37,109
221,114
203,052
26
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2012
December 2011
Directors
B W McLeod
K A Torpey
D H Sutton
Short term benefits
Cash
salary
and fees
US$
Bonus
payments
US$
Non-
monetary
US$
Post-
employment
benefits
Super
contributions
US$
Long-
term
benefits
Long
service
leave
Share/option
based
payments*
Total
US$
361,165
20,638
-
206,380
-
-
49,603
-
-
-
1,857
20,638
-
-
-
195,451*
-
-
812,599
22,495
20,638
Specified Executive of the
Empire Group
D L Hughes
R Ryan
Empire Energy Executives
A Boyer
* Share/Option based payments reflect a proportion of the independently valued cost of options granted under the
Employee Share Option Plan. The cost shown is a non-cash cost and includes, on a pro-rata basis, the
independently valued cost of previous options issued. Once the options reach vesting date, the cost shown
amortises to $0.
80,488
105,426
27,567*
27,567*
1,294
10,772
14,180
1,255
7,244
9,488
164,165
48,732
-
-
-
-
-
-
130,773
154,508
212,897
Service Agreements
Remuneration and other terms of employment with Mr B W McLeod (Executive Chairman) have been formalised in a
service agreement. The terms of this agreement are as detailed below:
Terms of the agreement:
Base salary of A$350,000 per annum to be reviewed at least annually by the remuneration committee
Payment of termination benefits apply other than for gross misconduct
Performance based incentive bonus based on annual performance set against key performance indicators
•
•
•
• Other benefits include provision of fully maintained motor vehicle, participation in the Company’s executive
option plan and membership of Empire Energy USA, LLC management incentive scheme.
These terms are currently under review by the remuneration committee.
There are no other service agreements in place formalising the terms of remuneration of directors or specified
executives of the Company and the consolidated entity.
Loans to Directors and Executives
There were no loans made to Directors or Specified Executives of the Company and the consolidated entity during
the period commencing at the beginning of the financial period and up to the date of this report.
There are no loans outstanding at the date of this report.
Share Options Granted to Directors and Specified Executives
During the financial year 7,000,000 executive options to acquire ordinary shares were granted to Directors and
specified executives of the Company. 3,500,000 executive options were granted to Directors following the approval
of shareholders at an annual general meeting of members of the Company held on 31 May 2012. In addition
3,500,000 executive options were granted to specified executives of the Company.
All options were issued pursuant to the Company’s Employee Share Option Plan which provides vesting restrictions
based on minimum term of employment conditions.
27
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2012
At the date of this report there were 13,800,000 unissued shares held under option to Directors and specified
executives. These options are exercisable of the following basis:
Number –
Executive Options
3,500,000 executive options
1,650,000 executive options
1,650,000 executive options
7,000,000 executive options
13,800,000
Directors’ Interests and Benefits
Exercise Price A$
$0.15
$0.17
$0.18
$0.35
Expiry Date
1 July 2013
1 July 2013
31 December 2013
31 December 2014
The relevant interest of each director and specified executive in the share capital of the Company as at the date of
this report is:
Particulars of Interests in the Issued Capital of the Company
Director
B W McLeod
D H Sutton
K A Torpey
Direct Interest
Indirect Interest
Shares
Options
Shares
Options
255,429
438,301
118,055
-
-
-
6,684,331
194,999
2,073,394
7,300,000
750,000
750,000
End of Audited Remuneration Report
Share Options
Movements
Grant of Options
During the financial year 7,000,000 executive options to acquire ordinary shares were granted pursuant to the terms
of the Company’s employee share option plan. Vesting of these options is subject to minimum period of employment
conditions. The options were granted on the following terms:
No. of Options Executive Options
Exercise Price A$
Expiry Date
7,000,000 executive options
$0.35
31 December 2014
No options were granted in the period since the end of the financial year and up to the date of this report.
Exercise of Options
13,333,332 unlisted options were exercised by Macquarie Bank Limited during the financial year. These options
were exercised on the following terms:
-
-
6,666,666 unlisted options exercisable at A$0.15 expiring 22 June 2012
6,666,666 unlisted options exercisable at A$0.165 expiring 22 December 2012
No options were exercised in the period since the end of the financial ear and up to the date of this report.
Expiry of Options
6,666,666 unlisted options exercisable at A$0.18 were not exercised by their expiry date of 22 December 2012 and
as a consequence have lapsed.
Since the end of the financial year a further 66,666 options exercisable at A$0.1575 were not exercised by their
expiry date of 5 March 2013 and as a consequence have lapsed.
At the date of this report the total number of unissued shares held under option was 13,800,000. These options are
exercisable on the following terms.
Number
Exercise Price A$
Expiry Date
3,500,000 Executive options
1,650,000 Executive options
1,650,000 Executive options
7,000,000 Executive options
13,800,000
$0.15
$0.17
$0.18
$0.35
1 July 2013
1 July 2013
31 December 2013
31 December 2014
28
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2012
Directors’ and Officers’ Indemnities and Insurance
During the financial year Empire Energy Group Limited paid an insurance premium, insuring the Company’s
Directors (as named in this report), Company secretaries, executive officers and employees against liabilities not
prohibited from insurance by the Corporations Act 2001.
A confidentiality clause in the insurance contract prohibits disclosure of the amount of the premium and the nature of
insured liabilities.
Proceedings on Behalf of the Company
No person has applied for leave of court to bring proceedings on behalf of the Company or intervene in any
proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all
or any part of those proceedings.
The Company was not a party to any such proceedings during the year.
Environmental Regulations
There are significant environmental regulations surrounding mining activities which have been conducted by the
Empire Group. However, there has been no breach of these regulations during the financial period or since the end
of the financial period and up to the date of this report.
Declaration by the Chief Executive Officer and Chief Financial Officer
The Directors have received and considered declarations from the Chief Executive Officer and Chief Financial Officer
in accordance with Section 295A of the Corporations Act. The declaration states that in their opinion the Company’s
and Consolidated Entity’s financial reports for the financial year ended 31 December 2012 present a true and fair
view in all material aspects of the financial position and performance and are in accordance with relevant accounting
standards.
Non-Audit Services
The Directors are satisfied that the provision of non-audit services during the period by the auditor (or by another
person or firm on the auditors behalf) is compatible with the general standard of independence for auditors imposed
by the Corporations Act 2001.
Details of amounts paid or payable to the auditor for non-audit services are outlined in Note 35 to the financial
statements.
The audit firm is engaged to provide tax compliance services. The Directors believe that given the size of the Empire
Group’s operations and the knowledge of those operations by the audit firm that it is appropriate for the auditor to
provide these services. The Directors are of the opinion that these services will not compromise the auditor’s
independence requirements of the Corporations Act 2001.
Auditors’ Independence Declaration Under Section 307 of the Corporations Act 2001
A copy of the Auditors’ Independence declaration as required under Section 307C of the Corporations Act 2001 is
set out on page 30 and forms part of the Director’s Report for the financial year ended 31 December 2012.
Auditor
Nexia Court & Co continues in office in accordance with Section 327 of the Corporations Act 2001. No officers of the
Empire Group were previously partners of the audit firm.
This report is made in accordance with a resolution of the Directors.
B W McLEOD
Director
Sydney 28 March 2013
29
AUDITOR’S INDEPENDENCE DECLARATION
The Board of Directors
Empire Energy Group Limited
Level 7, 151 Macquarie Street
SYDNEY NSW 2000
28 March 2013
Dear Board Members
Auditor’s Independence Declaration under section 307C of the Corporations Act 2001
In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of
independence to the directors of Empire Energy Group Limited.
As lead audit partner for the audit of the financial statements of Empire Energy Group Limited for the financial
period ended 31 December 2012, I declare that to the best of my knowledge and belief, there have been no
contraventions of:
(a)
the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
(b)
any applicable code of professional conduct in relation to the audit.
Yours sincerely
Nexia Court & Co.
Chartered Accountants
Andrew Hoffmann
Partner
30
EMPIRE ENERGY GROUP LIMITED
and it controlled entities
Corporate Governance Statement
OVERVIEW
The Company and the Board of Directors are committed to achieving and demonstrating the highest standards of
corporate governance and aim to comply with the “Principles of Good Corporate Governance and Best Practice
recommendations” set by the ASX Corporate Governance Council (“CGC”).
However, given the current size of both the Company’s operations and the Board of Directors, it is not appropriate,
cost effective or practical to comply fully with those principles and recommendations. Where a recommendation has
not been adopted this fact has been disclosed together with the reasons for the departure.
Consistent with the ASX best practice recommendations, the Company’s corporate government practices are
regularly reviewed and are available on the Company’s website. www.empireenergygroup.net
Compliance with ASX Corporate Governance Council best practice recommendations
The ASX listing rules requires public listed companies to include in their annual report a statement regarding the
extent to which they have adopted the ASX Corporate Governance Council best practice recommendations. This
statement provides details of the Company’s adoption of the best practice recommendations.
PRINCIPLE 1 - LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT
Companies should establish and disclose the respective roles and responsibilities of board and management.
Board Responsibilities
The Board of directors is accountable to shareholders for the performance of the Company. In carrying out its
responsibilities, the board undertakes to serve the interest of shareholders honestly, fairly and diligently.
The Board’s responsibilities are encompassed in a formal charter published on the Company’s website. The charter
is reviewed annually to determine whether any changes are necessary or desirable.
The responsibilities of the board include:
Ensuring adequate risk management processes exist and are complied with;
- Reporting to shareholders and the market;
-
- Reviewing internal controls and external audit reports;
-
- Monitoring financial performance, including approval of the annual and half-yearly financial reports and
Ensuring regulatory compliance;
liaison with the Company’s auditors;
- Reviewing the performance of senior management;
- Monitoring the Board composition, Director selection and Board processes and performance;
-
- Reviewing the assumptions and rationale underlying the annual plans; and
-
Authorising and monitoring major investment and strategic commitments.
Validating and approving corporate strategy;
Directors’ Education
The Company issues a formal letter of appointment for new directors setting out the terms and conditions relevant to
that appointment and the expectations of the role of the director.
The Company also provides a formal induction process which provides key information on the nature of the business
and its operations.
Continuing education is provided via the regular Board updates provided by the divisional chief executives.
Role of Chairman and Chief Executive Officer (CEO)
The Chairman is also the Chief Executive Officer and is responsible for leading the Board, ensuring that Board
activities are organised and efficiently conducted and for ensuring the Directors are properly briefed for meetings.
The Chairman is also responsible for implementing the consolidated entity’s strategies and Board policies.
The Chief Executive Officer has been delegated responsibility for managing the day to day operations of the Empire
Group.
A formal charter is in place which lays out the duties and responsibilities of the CEO. This charter also requires that
the responsibilities and accountabilities of both the board of directors and the CEO are clearly defined. The
assessment and monitoring of the CEO is the responsibility of the board.
Performance is assessed against pre-determined objectives on a regular basis.
31
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Corporate Governance Statement
The Chairman’s other responsibilities include:
•
•
Ensuring that general meetings are conducted efficiently and that shareholders have adequate opportunity
to air their views and obtain answers to their queries.
Present the view of the Board formally.
PRINCIPLE 2 – STRUCTURE THE BOARD TO ADD VALUE
Companies should have a board of an effective composition, size and commitment to efficiently discharge its
responsibilities and duties.
Composition of the Board
Currently the Board of Directors comprises three members, one executive non-independent Director, who is also the
Chairman and Chief Executive Officer and two non-executive independent Directors, all of whom have a broad range
of skills and expertise.
In determining independence the board has regard to the guidelines of directors’ independence in the ASX
Corporate Governance Council and Best practice Recommendations and other best practice guidelines.
Each director’s independent status is regularly assessed by the Board.
The Company does not comply with recommendations 2.2 and 2.3 which provides that the chair should be an
independent Director and the role of the chair and CEO should not be exercised by the same individual.
At this stage of the Company’s development, the board considers it is neither appropriate nor cost effective for there
to be an independent chairman and a separate CEO.
This matter continues to be under review and as circumstances allow, consideration will be given to the appropriate
time to move to adopting the ASX Corporate Governance Guidelines.
The board considers that its composition provides for the timely and efficient decision making required for the Empire
Group in its current circumstances.
The board’s size and composition is subject to limits imposed by the Company’s constitution which provides for a
minimum of three directors and a maximum of seven.
Details of the members of the board, their experience, expertise and qualifications are set out in the Director’s Report
on pages 23 to 24.
The position/status and term in office of each Director at the date of this report is as follows: -
Name of Director
Bruce McLeod
David Sutton
Kevin Torpey
Position/Status
Executive Chairman – Non-Independent
Non-Executive – Independent
Non-Executive – Independent
Term in Office
17 years 4 months
16 years 8 months
20 years 10 months
The Board currently holds up to 12 scheduled meetings each financial year together with any ad hoc meetings as
may be necessary. The Board met 8 times during the year and Directors attendance is disclosed on page 25 of the
Directors’ Report.
Access to independent professional advice
All directors are required to bring an independent judgment to bear on Board decisions. To facilitate this, each
Director has the right of access to all relevant Company information and to the Company’s Executives. The directors
also have access to external resources as required to fully discharge their obligations as Directors of the Company.
The use of this resource is co-ordinated through the Chairman of the Board.
Nomination committee
The Company does not comply with recommendation 2.4 in that the board has not yet formed a separate nomination
committee. All matters that would normally be responsibility of a nomination committee are dealt with by the full
board of Directors.
The Company has not adopted recommendation 2.4 as the board considers that the Company and the board are
currently not of sufficient size to justify the establishment of a separate nomination committee.
32
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Corporate Governance Statement
The Board reviews its composition on an annual basis to ensure that the Board has the appropriate mix of expertise
and experience. When a vacancy exists, for whatever reasons, or where it is considered that the Board would benefit
from the services of a new Director with particular skills, the Board will select appropriate candidates with relevant
qualifications, skills and experience. External advisors may be used to assist in such a process. The Board will then
appoint the most suitable candidate who must stand for election at the next general meeting of shareholders.
For directors retiring by rotation, the board assesses that director before recommending re-election.
Board performance evaluation
The Company has processes in place to review the performance of the board and its committees and individual
directors. Each year the board of directors give consideration to broad corporate governance matters, including the
relevance of existing committees and to reviewing its own and individual directors’ performance. The Chairman is
responsible for monitoring the contribution of individual directors and consulting with them in any areas of
improvement.
Individual directors use an approved form to assess the performance of the Board and the Chairman.
PRINCIPLE 3 – PROMOTE ETHICAL AND RESPONSIBLE DECISION MAKING
Companies should actively promote ethical and responsible decision making.
Code of conduct
The Board acknowledges the need for continued maintenance of the highest standards of Corporate Governance
Practices and ethical conduct by all Directors and employees of the consolidated entity.
The Company has established a code of conduct applicable to all Directors and employees. The requirement to
comply with the code is mandatory and is communicated to all employees. The code sets out standards of conduct,
behaviour and professionalism.
The shareholder communications strategy, the securities trading policy, the continuous disclosure policy collectively
form a solid ethical foundation for Empire Group’s ethical practices. A copy of these documents has been posted on
the Company’s website.
Approach to diversity
The Board recognises the benefits of diversity at boards in senior management and within the organisation generally
and recognises the organisational strengths, deeper problem solving ability and opportunity for innovation that
diversity brings to an organisation.
The Company has established a diversity policy which set out the beliefs, goals and strategies of the Company and
makes reference to all the characteristics that makes individuals different from each other. The policy sets out the
positive steps taken to ensure that current and prospective employees are not discriminated against, either directly or
indirectly on such characteristics as gender, age, disability, marital status, sexual orientation, religion, ethnicity or any
other area of potential difference. The Company is committed to gender diversity at all levels of the organisation.
Gender equality is a key component of the Company’s diversity strategy. The implementation of this policy aims to
reflect both the circumstances of the Company and the industry in which it operates.
The Company’s diversity policy includes a requirement that:
-
-
-
the Board establish measurable objectives for achieving gender diversity; and
the Board assess annually the objectives set for achieving gender diversity; and
the Board assess annually the progress made towards achieving the objectives set.
In accordance with this policy and ASX corporate governance principles, the Board has established the following
objectives in relation to gender diversity. The aim is to achieve these objectives over the coming 3 to 5 years as
Director and senior executive positions become vacant and appropriately skilled candidates are available.
Representation of female employees in the organisation workforce is as follows:
Actual at 31 December
2012
Empire Group
Objective
Number
Percentage Number
Percentage
Progress towards
meeting objective
Number
Percentage
Whole organisation
Senior Executive positions
Board
10
3
-
14%
25%
-
12
4
1
20%
33%
25%
-
-
-
A copy of the Company’s diversity policy has been posted on the Company’s website.
-
-
-
33
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Corporate Governance Statement
Policy on dealing in Company securities
The Company has adopted a policy on how Directors, key management personnel, contractors and all other
employees can deal in the securities of the Company.
This policy aims to ensure that the reputation of the Company is not adversely impacted by perceptions of trading in
the Company’s securities at inappropriate times or in an inappropriate manner. In addition to the specific prohibition
on insider trading Directors and all other employees must also not deal in the Company’s securities during the
following closed periods, being the four week period before or 48 hours after:
the release of the Empire Group’s annual results to the ASX
the release of the Empire Group’s half-year results to the ASX
the release of the Empire Group’s quarterly cashflow and activities reports to the ASX
the annual general meeting
a.
b.
c.
d.
e. such other periods as advised by the Board of Directors or Chief Executive Officer (such as prior to ASX
being advised of a significant matter or event)
Requests to trade during the closed periods may be considered in exceptional circumstances. At all other times
Directors, key management personnel and all other employees are not permitted to buy or sell securities in the
Company without first obtaining written consent from the Chairman. When the Chairman trades Company securities
written approval has to be obtained from an independent Director.
The Company has introduced compliance standards and procedures to ensure that the policy is properly
implemented. In addition there is also an internal review mechanism to assess compliance and effectiveness.
A copy of the Company’s securities trading policy was lodged with the ASX Company Announcements office on 23
December 2010 and is also posted on the Company’s website.
PRINCIPLE 4 – SAFEGUARD INTEGRITY IN FINANCIAL REPORTING
Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.
Audit Committee
The audit committee comprises of the full Board of Directors.
The committee met twice during the year under review.
The committee has adopted a formal charter, a copy of the formal charter is posted on the Company’s website.
The responsibilities of the Audit Committee include:
-
reviewing the annual and half year financial reports to ensure compliance with Australian Accounting
Standards and generally accepted accounting principles;
- monitoring corporate risk management practices;
-
-
-
-
review and approval of the consolidated entity’s accounting policies and procedures;
reviewing external audit plans;
reviewing the nomination, performance and independence of the external auditors; and
organising, reviewing and reporting on any special reviews or investigations deemed necessary by the
Board.
The audit committee has received confirmation in writing from the Chief Executive Officer and Chief Financial Officer
that:
The Empire Group’s financial statements for the financial year ended 31 December 2012 present a true and fair view
in all material respects of the Empire Group’s financial position and operational results and are in accordance with
relevant accounting standards.
The structure of the audit committee does not comply with recommendation 4.2 in that it does not consist only of
non-executive independent Directors and it is chaired by an independent chair who is not chair of the board.
The Board considers that the Company and the Board are not of sufficient size to warrant the establishment of a
separate audit committee.
34
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Corporate Governance Statement
External auditors
The full Board is responsible for the appointment, removal and remuneration of the external auditors, and reviewing
the terms of their engagement, and the scope and quality of the audit. In fulfilling its responsibilities, the Board
receives regular reports from management and the external auditors at least once a year, or more frequently if
necessary. The external auditors have a clear line of direct communication at any time to the Chairman of the Board.
The current auditors, Nexia Court & Co., were appointed in 1992. The Australian accounting bodies’ statement on
professional independence requires mandatory rotation of audit partners for listed companies every five years.
Nexia Court & Co. confirms that they conform with the requirements of the statement.
Nexia Court & Co. are required to attend the Annual General Meeting and be available to answer shareholder
questions about the conduct of the audit and the preparation and content of the Auditor's Report.
PRINCIPLE 5 – MAKING TIMELY AND BALANCED DISCLOSURE
Companies should promote timely and balanced disclosure of the matters concerning the Company.
The Company has a written policy on information disclosure that focuses on ensuring compliance with ASX Listing
Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance.
The Company Secretary in consultation with the Chairman, is responsible for communications with the ASX. The
Company Secretary is also responsible for ensuring compliance with the continuous disclosure requirements of the
ASX Listing Rules, and overseeing and co-ordinating information disclosure to the ASX, analysts, brokers,
shareholders, the media and the general public.
A copy of the Company’s policy of continuous disclosure is posted on the Company’s website.
PRINCIPLE 6 – RESPECT THE RIGHTS OF SHAREHOLDERS
Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.
Communication with shareholders
The Board recognises and respects the rights of our shareholders as the beneficial owners of the Company. In order
to facilitate the effective exercise of those rights, the Company has adopted a shareholder communication policy that
aims to empower shareholders by:
-
-
-
communicating effectively with them;
providing easy access to balanced and understandable information about the Empire Group; and
encouraging and facilitating shareholder participation in general meetings.
The Company achieves this through the following avenues:
Regular mailings
The Company provides shareholders with copies of all announcements made to the ASX by mail on request. Copies
are also available via an electronic link to the ASX web site, ensuring that all shareholders are kept informed about
the Empire Group.
Shareholders also have the option of receiving a hard copy of the Annual Report each year.
General meetings
All shareholders are invited to attend the Annual General Meetings which are held in Sydney. The full Board and
senior executives are present and available to answer questions from the floor, as are the External Auditor and a
representative from the Company’s legal advisors.
A copy of the Company’s shareholder communications policy is posted on the Company’s website.
The Company also posts corporate
www.empireenergygroup.net
information
in
the
Investor Section of
its Company website at
35
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Corporate Governance Statement
PRINCIPLE 7 – RECOGNISE AND MANAGE RISK
Companies should establish a sound system of risk oversight and management and internal control.
The Board oversees the establishment, implementation and review of the Company’s Risk Management System. To
ensure it meets its responsibilities, the Board has implemented appropriate systems for identifying, assessing,
monitoring and managing material risk throughout the organisation.
Management is required to provide monthly status reports to the Board which identify potential areas of business risk
arising from changes in the financial and economic circumstances of its operating environment.
The Board regularly assesses the Company’s performance in light of risks identified by such reports.
Management are also required to design implement and review the Company’s risk management and internal control
system. The Board reviews the effectiveness of the implementation of the Company’s risk management and internal
control system on a regular basis.
The Board does not employ an internal auditor, although as part of the Company’s strategy to implement an
integrated framework of control, the Board requested the external auditors review internal control procedures.
Recommendations once presented are considered by the Board.
The chief executive officer and chief financial officer have stated in writing to the board that:
-
-
-
The Empire Group’s financial reports present a true and fair view in all material respects of the Empire
Group’s financial position and operating results and are in accordance with relevant accounting standards.
The integrity of the financial statements is founded on a sound system of risk management and internal
compliance and control which implements the policies adopted by the Board.
The Company’s risk management and internal compliance and control system is operating efficiently in all
material respects.
The board requires this declaration to be made bi-annually.
PRINCIPLE 8 – REMUNERATE FAIRLY AND RESPONSIBLY
Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that the
relationship to performance is clear.
The Board has established a remuneration committee. The committee comprised the following members during the
year:
Mr D Sutton – Independent Non-Executive
Mr K Torpey – Independent Non-Executive
Mr D Sutton is the Chairman of the remuneration committee.
The Company does not comply with recommendation 8.2 as the remuneration committee does not have at least
three members. The Board considers that the function of the remuneration committee is not jeopardised by its
current structure. The Board considers that the size of the Company does not warrant the appointment of additional
members to the Remuneration Committee.
The committee has adopted a formal charter, a copy of the formal charter has been posted on the Company’s
website. The main responsibilities of the Remuneration Committee include:
-
-
-
-
-
-
review and approve the Company’s policy for determining executive remuneration and any amendments to
that policy;
review the on-going appropriateness and relevance of the policy;
consider and make recommendations to the Board on the remuneration of executive Directors (including
base salary, incentive payments, equity awards and service contracts);
review and approve the design of all equity based plans;
review and approve the total proposed payments under each plan; and
review and approve the remuneration levels for non-executive Directors.
The committee met once during the year and the Committee Members attendance record is disclosed in the table of
Director’s Meetings included in the Directors’ Report at page 25.
36
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Corporate Governance Statement
Executive Directors and Executive remuneration
The remuneration committee reviews and approves the policy for determining executive’s remuneration and any
amendments to that policy.
Executive remuneration and other terms of employment are reviewed annually having regard to relevant comparative
information and independent expert advice.
Remuneration packages include basic salary, superannuation and the rights of participation in the Company’s
Employee Share Option Plan.
Remuneration packages are set at levels that are intended to attract and retain executives capable of effectively
managing the Company’s operations.
Consideration is also given to reasonableness, acceptability to shareholders and appropriateness for the current
level of operations.
Non-executive directors
Remuneration of Non-Executive Directors is determined by the Board based on relevant comparative independent
expert advice and the maximum amount approved by shareholders from time to time.
Non-Executive Directors have the right to participate in the Company’s Share Option Plan.
Further information on directors and executive remuneration is included in the audited remuneration report which
forms part of the directors’ report.
37
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the year ended 31 December 2012
Revenue from continuing operations
Gain on sale of acreage
Other income
Expenses
Oil and gas production
Exploration assets written off
Leasing expiration expenses
Impairment of assets
Depreciation, depletion and amortisation
General and administration
Finance costs
Other Expenses
(Loss)/profit before income tax expense from continuing
operations
Note
Year ended
December 2012
US$
Year ended
December 2011
US$
5
7
6
9
9
9
8
26,643,095
-
1,047,433
27,690,528
27,994,122
1,092,250
446,459
29,532,831
(10,761,387)
(1,029,897)
(1,026,978)
(171,728)
(4,750,416)
(4,479,136)
(7,270,176)
(226,210)
(11,423,460)
(640,880)
-
(275,959)
(5,044,732)
(4,870,263)
(7,093,222)
-
(2,025,400)
184,315
Income tax benefit/(expense)
10
1,821,823
(1,621,115)
(Loss)/profit after
continuing operations
income
tax
(expense)/benefit
from
Other comprehensive income
Gain on the revaluation of available-for-sale assets
Exchange differences on translation of foreign operations
Net change in the fair value of cash flow hedges, net of tax
(203,577)
(1,436,800)
48,490
61,312
(1,424,955)
108,031
(184,555)
2,561,887
Other comprehensive income for the year, net of tax
(1,315,153)
2,485,363
Total comprehensive income for the year
(1,518,730)
1,048,563
(Loss)/profit for the year is attributable to:
Equity holders of Empire Energy Group Limited
Non-controlling interests
Total comprehensive income for the year is attributable to:
Equity holders of Empire Energy Group Limited
Non-controlling interests
(220,723)
17,146
(203,577)
(1,561,718)
124,918
(1,436,800)
(1,472,169)
(46,561)
(1,518,730)
642,099
406,464
1,048,563
Basic earnings per share
Diluted earnings per share
30
30
Cents per share
(0.08)
(0.08)
Cents per share
(0.66)
(0.66)
The above statements of comprehensive income should be read in conjunction with the accompanying notes.
38
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
as at 31 December 2012
Note
As at
December 2012
US$
As at
December 2011
US$
CURRENT ASSETS
Cash and cash equivalents
Trade and other receivables
Prepayments
Inventories
Financial assets, including derivatives
Current income tax receivable
TOTAL CURRENT ASSETS
NON-CURRENT ASSETS
Financial assets, including derivatives
Oil and gas properties
Property, plant and equipment
Intangible assets
TOTAL NON-CURRENT ASSETS
TOTAL ASSETS
CURRENT LIABILITIES
Trade and other payables
Financial liabilities, including derivatives
Interest-bearing liabilities
Provisions
Current income tax liability
TOTAL CURRENT LIABILITIES
NON-CURRENT LIABILITIES
Financial liabilities, including derivatives
Interest-bearing liabilities
Provisions
Deferred income tax liability
TOTAL NON-CURRENT LIABILITIES
TOTAL LIABILITIES
NET ASSETS
EQUITY
Contributed equity
Reserves
Accumulated losses
Equity is attributable to:
Equity holders of Empire Energy Group Limited
Non-controlling interests
TOTAL SHAREHOLDERS’ EQUITY
29
11
12
13
14
14
15
15
16
17
18
19
20
18
19
20
10(f)
6,189,192
5,097,864
171,973
805,646
3,267,501
853,875
4,448,495
5,577,262
417,677
585,822
4,243,779
552,000
16,386,051
15,825,035
5,024,544
98,018,856
939,758
70,367
6,942,218
96,460,487
3,842,386
83,308
104,053,525
107,328,399
120,439,576
123,153,434
6,415,637
248,575
48,924,343
85,567
-
4,161,263
1,229,486
53,896,869
93,464
-
55,674,122
59,381,082
525,953
40,191
6,015,635
7,070,000
1,136,390
54,806
4,944,295
7,610,331
13,651,779
13,745,822
69,325,901
73,126,904
51,113,675
50,026,530
21
22
73,325,555
6,710,795
(30,576,059)
71,195,874
8,421,566
(31,327,674)
49,460,291
1,653,384
48,289,766
1,736,764
51,113,675
50,026,530
The above consolidated statements of financial position should be read in conjunction with the accompanying notes.
39
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
for the year ended 31 December 2012
Consolidated
Issued Capital
Fair Value
Reserve
Foreign
Currency
Translation
Reserve
Options
Reserve
Accumulated
Losses
Attributable to
owners of
equity parent
Non-
Controlling
Interests
Total Equity
Balance at 31 December 2011
71,195,874
5,249,754
150,387
3,021,425
(31,327,674)
48,289,766
1,736,764
50,026,530
Total Comprehensive income for year
Profit after income tax from continuing operations
Exchange differences on translation of foreign operations
Gain on the revaluation available-for-sale investments, net of
tax
Net change in the fair value of cash flow hedges, net of tax
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
Issue of ordinary shares
Less: share issue transaction costs
Options lapsed in period, transferred to retained earnings
Options issued during the year
Warrants issued during the year
Dilution of non-controlling interest
Distribution to non-controlling interests
Total transactions with owners
-
-
-
-
-
-
-
48,490
(1,361,248)
-
61,312
-
-
(1,312,758)
61,312
2,139,330
(9,649)
-
-
-
-
-
2,129,681
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(972,338)
513,013
-
-
-
(220,723)
(220,723)
17,146
(203,577)
-
-
-
61,312
48,490
-
-
61,312
48,490
(1,361,248)
(63,707)
(1,424,955)
(220,723)
(1,472,169)
(46,561)
(1,518,730)
-
-
972,338
-
-
-
-
2,139,330
(9,649)
-
513,013
-
-
-
-
-
-
-
-
-
2,139,330
(9,649)
-
513,013
-
-
(36,819)
(36,819)
(36,819)
2,605,875
(459,325)
972,338
2,642,694
Balance at 31 December 2012
73,325,555
3,936,996
211,699
2,562,100
(30,576,059)
49,460,291
1,653,384
51,113,675
The above consolidated statements of changes in equity should be read in conjunction with the accompanying notes.
40
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2012
Consolidated
Balance at 31 December 2010
Effect of prior period adjustment
Revised 31 December 2010
Total Comprehensive income for year
Profit after income tax from continuing operations
Exchange differences on translation of foreign operations
Gain on the revaluation available-for-sale investments, net of
tax
Net change in the fair value of cash flow hedges, net of tax
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
Issue of ordinary shares
Less: share issue transaction costs
Options lapsed in period, transferred to retained earnings
Options issued during the year
Warrants issued during the year
Dilution of non-controlling interest
Distribution to non-controlling interests
Issued Capital
Fair Value
Reserve
Foreign
Currency
Translation
Reserve
Options
Reserve
Accumulated
Losses
Attributable to
owners of
equity parent
Non-
Controlling
Interests
Total Equity
55,486,551
2,021,792
334,942
2,057,718
(26,847,184)
33,053,819
2,343,821
35,397,640
-
789,850
-
-
(4,270,000)
(3,480,150)
-
(3,480,150)
55,486,551
2,811,642
334,942
2,057,718
(31,117,184)
29,573,669
2,343,821
31,917,490
-
-
-
-
-
-
-
-
(184,555)
108,031
2,280,341
-
-
2,388,372
(184,555)
(1,561,718)
(1,561,718)
124,918
(1,436,800)
-
-
-
(184,555)
108,031
2,280,341
-
-
(184,555)
108,031
281,546
2,561,887
(1,561,718)
642,099
406,464
1,048,563
16,516,519
(807,196)
-
-
-
-
-
-
-
-
-
-
49,740
-
-
-
590,708
-
-
16,516,519
(807,196)
-
246,627
1,292,742
825,306
15,046
760,520
-
-
-
-
-
-
-
16,516,519
(807,196)
-
246,627
62,618
1,355,360
(825,307)
(250,832)
-
(250,832)
-
-
-
-
-
-
-
(590,708)
246,627
1,292,742
-
-
-
-
-
-
-
-
Total transactions with owners
15,709,323
49,740
963,707
1,351,228
18,073,998
(1,013,521)
17,060,477
Balance at 31 December 2011
71,195,874
5,249,754
150,387
3,021,425
(31,327,674)
48,289,766
1,736,764
50,026,530
The above consolidated statements of changes in equity should be read in conjunction with the accompanying notes.
41
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENTS OF CASH FLOW
for the year ended 31 December 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers
Payments to suppliers and employees
Interest received
Interest paid
Income taxes received/(paid)
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of acreage
Proceeds from sale of oil and gas assets
Proceeds from sale of investments in equities
Payments for oil and gas assets
Payments for property, plant and equipment
Payments for investments in equities
Note
Year ended
31 December
2012
US$
Year ended
31 December
2011
US$
29
7
27,427,882
(13,766,793)
24,328
(2,774,130)
1,193,352
26,124,877
(15,846,711)
77,416
(3,571,734)
(2,305,694)
12,104,639
4,478,154
-
105,000
810,068
(3,588,626)
(616,688)
(400,000)
-
-
38,696
(2,755,268)
(478,088)
(27,500)
Net cash flows from investing activities
(3,690,246)
(3,222,160)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuing of shares
Proceeds from interest bearing liabilities
Repayment of proceeds from issuing shares
Repayment of interest bearing liabilities
Finance lease payments
Distribution to non-controlling interests
2,129,681
1,725,500
-
(10,523,054)
(13,151)
(36,819)
15,709,323
280,207
-
(15,011,747)
(13,559)
(250,832)
Net cash flows from financing activities
(6,717,843)
713,392
Net increase in cash and cash equivalents
1,696,550
1,969,386
Cash and cash equivalents at beginning of financial year
Effect of exchange rate changes on cash and cash equivalents
4,448,495
44,147
2,665,474
(186,365)
CASH AND CASH EQUIVALENTS AT THE END OF
FINANCIAL YEAR
29
6,189,192
4,448,495
The above consolidated statements of cash flow should be read in conjunction with the accompanying notes.
42
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
1.
SIGNIFICANT ACCOUNTING POLICIES
Corporate information
The financial report covers Empire Energy Group Limited and its controlled entities (“Empire Group”). Empire
Energy Group Limited is a company limited by shares whose shares are publicly traded on the Australian Securities
Exchange. The parent entity of the Empire Group is incorporated and domiciled in Australia with its core operations
in the United States of America (“USA”). Separate financial statements for Empire Energy Group Limited as an
individual entity are no longer presented as the consequence of a change to the Corporations Act 2001; limited
financial information for Empire Energy Group Limited, as an individual entity, is included in Note 31.
The principal activities of the Empire Group during the financial year are described in the Directors’ Report.
The financial report of the Empire Group for the year ended 31 December 2012 was authorised for issue in
accordance with a resolution of Directors on 28 March 2013.
Basis of preparation
The general purpose financial statements have been prepared in accordance with Australian Accounting Standards,
other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group
Interpretations, and the requirements of the Corporations Act 2001, as appropriate for for-profit orientated entities.
The consolidated financial statements have been prepared on a cost basis, modified, where applicable, by the
measurement at fair value of available-for-sale financial assets and derivative financial instruments.
Statement of compliance
The financial report complies with Australian Accounting Standards (‘AASB’s’). Compliance with AASBs ensures that
the financial report, comprising the financial statements and accompanying notes, complies with International
Financial Reporting Standards (‘IFRS’).
Presentation currency
Because of sustained international growth, the Empire Group’s cash flows and economic returns are now principally
denominated in US dollars (“US$”). From 1 July 2011, Company changed the currency in which it presents its
consolidated and parent Company financial statements from Australian dollars to US dollars.
New, revised or amending Accounting Standards and Interpretations adopted
None of the new standards and amendments to standards that are mandatory for the first time for the financial year
beginning 1 January 2012 affected any of the amounts recognised in the current period or any prior period and are
not likely to affect future periods.
Early adoption of standards
The Empire Group has not elected to apply any pronouncements before their operative date in the annual reporting
period beginning 1 January 2012.
Principles of Consolidation
The consolidated financial statements comprise the financial statements of Empire Energy Group Limited and its
controlled entities.
Controlled entities are all those entities over which the Empire Group has the power to govern the financial and
operating policies. Controlled entities are consolidated from the date on which control is transferred to the Empire
Group and cease to be consolidated from the date on which control is transferred out of the Empire Group.
Jointly controlled entities are accounted for using the equity method (equity accounted investees) and are initially
recognised at cost.
All intercompany transactions, balance, including unrealised profits arising from intercompany transactions, have
been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered.
43
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership,
without the loss of control, is accounted for as an equity transaction, where the difference between the consideration
transferred and the book value of the share of the non-controlling interest acquired is recognised directly in the equity
attributable to the parent.
Non-controlling interest in the results and equity of subsidiaries are shown separately in the consolidated statement
of comprehensive income and consolidated statement of financial position. Losses incurred by the Empire Group are
attributed to non-controlling interest in full, even if that results in a deficit balance.
Business combinations
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as
the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-
controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest
in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Those oil and gas
reserves and resources that are able to be reliably valued are recognised in the assessment of fair values on
acquisition.
Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the
amount recognised for non-controlling interest; and over the net identifiable assets acquired and liabilities assumed.
If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is
recognised in profit or loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of
impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the
Empire Group’s cash generating units that are expected to benefit from the synergies of the combination, irrespective
of whether other assets or liabilities of the acquiree are assigned to those units.
Foreign Currency Translations
The financial report is presented in United States Dollars (US$) which is the functional currency for the majority of the
entities within the Empire Group. The functional currency of Empire Energy Group Limited is in Australian Dollars.
Foreign currency transactions
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies at the end of the reporting period are translated to
US dollars at the foreign exchange rate ruling at that date.
Foreign operations
The assets and liabilities of entities that have a functional currency in A$ are translated to US$ at exchange rates at
the reporting date. The revenue and expense of entities that have a functional currency in A$ are translated to US
dollars at exchange rates at the dates of the transaction. Foreign currency differences on translation are recognised
directly in equity.
Revenue recognition
Natural gas revenue
Revenue from the sale of natural gas is recognised when natural gas has been delivered to a custody transfer point,
persuasive evidence of a sales arrangement exists, the rights and responsibility of ownership pass to the purchaser
upon delivery, collection of revenue from the sale is reasonably assured, and the sales price is fixed or determinable.
Natural gas is sold by the Empire Group under contracts with terms ranging from one month up to the life of the well.
Virtually all of the Empire Group contracts' pricing provisions are tied to a market index with certain adjustments
based on, among other factors, whether a well delivers to a gathering or transmission line, quality of natural gas and
prevailing supply and demand conditions, so that the price of the natural gas fluctuates to remain competitive with
other available natural gas suppliers.
Because there are timing differences between the delivery of natural gas and the Empire Group's receipt of a
delivery statement, the Empire Group has unbilled revenues. These revenues are accrued based upon volumetric
data from the Empire Group's records and the Empire Group's estimates of the related transportation and
compression fees, which are, in turn, based upon applicable product prices.
44
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Oil revenue
Revenue from the sale of oil is recognised when the significant risks and rewards of ownership have been
transferred to the buyer and can be measured reliably, which is usually at the time of lifting, transferred into a vessel,
pipe or other delivery mechanism.
Well operations
Well operations and pipeline income are recognised when persuasive evidence of an arrangement exists, services
have been rendered, collection of revenues is reasonably assured and the sales price is fixed or determinable. The
Empire Group is paid a monthly operating fee for each well it operates for outside owners. The fee covers monthly
operating and accounting costs, insurance and other recurring costs. The Empire Group might also receive
additional compensation for special nonrecurring activities, such as reworks and recompletions.
Finance income
Finance income comprises interest income on funds invested. Interest income is recognised as it accrues, using the
effective interest method.
Cash and cash equivalents
Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term,
highly liquid investments with original maturities of three months or less that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value. For the statement of cash flows
presentation purposes, cash and cash equivalents also includes bank overdrafts, which are shown within borrowings
in current liabilities on the statement of financial position.
Trade and other receivables
Trade receivables, which generally have 30-90 day terms, are recognised and carried at original invoice amount less
an allowance for any uncollectible amounts.
An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are
written-off when identified.
Inventories
Inventories consists of crude oil, stated at the lower of cost to produce or market and other production supplies
intended to be used in natural gas and crude oil operations.
Financial Assets, including derivatives
The Empire Group utilises oil and gas forward contracts to manage the exposure to price volatility. The Empire
Group recognises its derivatives on the consolidated statement of financial performance at fair value at the end of
each period. Changes in the fair value of the oil and gas forward contracts that are designated and meet the required
criteria for a cash flow hedge are reported in consolidated comprehensive income.
Derivatives are classified as current or non-current depending on the expected period of realisation.
Oil and gas properties
Oil and gas properties are stated at cost, less accumulated depreciation and accumulated impairment losses.
Oil and natural gas exploration and development expenditure is accounted for using the successful efforts method of
accounting for gas producing activities. Costs to acquire mineral interests in gas properties, drill and equip
exploratory wells that find proved reserves, and drill and equip development wells and related asset retirement costs
are capitalised. Depletion is based on cost less estimated salvage value using the unit-of-production method. The
process of estimating and evaluating gas reserves is complex, requiring significant decisions in the evaluation of
geological, geophysical, engineering and economic data. Costs to drill exploratory wells that do not find proved
reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.
45
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Major maintenance and repairs
Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets,
inspection costs and overhaul costs. Where an asset or part of an asset that was separately depreciated and is now
written off is replaced and it is probable that future economic benefits associated with the item will flow to the Empire
Group, the expenditure is capitalised. Where part of the asset was not separately considered as a component, the
replacement value is used to estimate the carrying amount of the replaced assets which is immediately written off.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. The
capitalised value of a finance lease is also included within property, plant and equipment. Plant and equipment are
depreciated over their estimated useful lives using the straight line method as follows:
Plant and equipment December 2012 December 2011
10-20%
10-20%
Assets are depreciated from the date of acquisition. Profits and losses on sales of property, plant and equipment are
taken into account in determining the results for the year.
For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the
cash-generating unit to which the asset belongs.
Recoverable amount of assets
At each reporting date, the Empire Group assesses whether there is any indication that an asset may be impaired.
Where an indicator of impairment exists, the Empire Group makes a formal estimate of recoverable amount. Where
the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written
down to its recoverable amount.
Recoverable amount is the greater of value less costs to sell and value in use. It is determined for an individual
asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does
not generate cash inflows that are largely independent of those from other assets or Empire Groups of assets, in
which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
Investments
All investments are initially recognised at cost, being the fair value of the consideration given and including
acquisition charges associated with the investment.
Certain investments in equity securities are classified as available-for-sale financial assets. Subsequent to initial
recognition, they are measured at fair value and changes therein are recognised directly in equity. When an
investment is derecognised, the cumulative gain or loss in equity is transferred to profit or loss.
For investments that are actively traded in organised financial markets, fair value is determined by reference to Stock
Exchange quoted market bid prices at the close of business on the reporting date.
Intangible Assets
Intangible assets consist of goodwill and software assets. Software assets are being amortised on a straight-line
basis over 5 years.
Interest-bearing liabilities
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to
initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and
redemption value being recognised in the income statement over the period of the borrowings on an effective interest
basis.
46
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Provisions – Employee Benefits
Obligations for contributions to accumulation plans are recognised as an expense in the consolidated statements of
comprehensive income as incurred.
Liabilities for employee benefits for wages, salaries, annual leave and represent present obligations resulting from
employees’ services provided to reporting date, calculated at undiscounted amounts based on remuneration wage
and salary rates that the Empire Group expects to pay as at the reporting date including related on-costs, such as,
workers compensation insurance, superannuation and payroll tax.
Asset Retirement Obligations
Asset retirement obligations are recognised when the Empire Group has a present legal or constructive obligation as
a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a
reliable estimate of the amount of obligation can be made. The present value of the estimated asset retirement costs
is capitalised as part of the carrying amount oil and gas properties. For the Empire Group, asset retirement
obligations primarily relate to the plugging and abandonment of oil and gas-producing facilities.
The estimated liability is based on historical experience in plugging and abandoning wells, estimated remaining lives
of those based on reserve estimates, external estimates as to the cost to plug and abandon the wells in the future,
and regulatory requirements. The liability is discounted using the US subsidiaries weighted average cost of capital as
an approximate for a market-based discount rate. Revisions to the liability could occur due to changes in estimates of
plugging and abandonment costs, remaining lives of the wells, if regulations enact new plugging and abandonment
requirements, or there is a change in the market-based discount rate. Changes in the estimated timing of
decommissioning or decommissions cost estimates are dealt with prospectively by recording an adjustment to the
provision, and a corresponding adjustment to oil and gas properties. The unwinding of the discount of the asset
retirement obligation is included as a finance cost.
Income tax
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially
enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation
purposes. The amount of deferred tax provided is based on the expected manner of realisation of settlement of the
carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available
against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable
that the related tax benefit will be realised.
Tax consolidation
The Empire Group and its wholly-owned Australian resident entities are part of a tax-consolidated Empire Group. As
a consequence, all members of the tax-consolidated Empire Group are taxed as a single entity from 1 July 2003. The
head entity within the tax-consolidated Empire Group is Empire Energy Group Limited.
Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the
members of the tax-consolidated Empire Group are recognised in the separate financial statements of the members
of the tax-consolidated Empire Group using the ‘separate taxpayer within Empire Group’ approach by reference to
the carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values
applying under tax consolidation.
Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries are
assumed by the head entity in the tax-consolidated Empire Group and are recognised by the Empire Group as
amounts payable/(receivable) to/from other entities in the tax-consolidated Empire Group in conjunction with any tax
funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Empire
Group as an equity contribution or distribution.
The Empire Group recognises deferred tax assets arising from unused tax losses of the tax consolidated Empire
Group to the extent that it is probable that future taxable profits of the tax consolidated Empire Group will be
available against which the asset can be utilised.
47
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised
assessments of the probability of recoverability is recognised by the head entity only.
Nature of tax funding arrangements and tax sharing arrangements
The head entity, in conjunction with other members of the tax-consolidated Empire Group, has entered into a tax
funding arrangement which sets out the funding obligations of members of the tax-consolidated Empire Group in
respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current
tax liability/(asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity,
resulting in the head entity recognising an inter-entity receivable/(payable) equal in amount to the tax liability/(asset)
assumed. The inter-entity receivables/(payables) are at call.
Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing
of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities.
The head entity in conjunction with other members of the tax-consolidated Empire Group, has also entered into a tax
sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax
liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been
recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing
agreement is considered remote.
Goods and Services Tax
Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where
the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances the
GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense.
Receivables and payables are stated with the amount of GST included.
The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the
Consolidated Statement of Financial Position.
Cash flows are included in the statement of cash lows on a gross basis. The GST components of cash flows arising
from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating
cash flows.
Share based payment transactions
The Empire Group provides benefits to directors and senior executives of the Empire Group through the executive
share option plan whereby eligible participants render services in exchange for options over shares.
New Accounting Standards and Interpretations not yet adopted
Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet
mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 31
December 2012. The consolidated entity’s assessment of the impact of these new or amended Accounting
Standards and Interpretations, most relevant to the consolidated entity, are set out below.
AASB 9 Financial Instruments, 2009-011 Amendments to Australian Accounting Standards arising from AASB 9 and
2010-7 Amendments to Australian Accounting Standards arising from AASB 9
This standard and its consequential amendments are applicable to annual reporting periods beginning on or after 1
January 2013 and completes phase 1 of the IASB’s project to replace IAS 39 (being the international equivalent to
AASB 139 ‘Financial Instruments: Recognition and Measurement’). This standard introduces new classification and
measurement models for financial assets, using a single approach to determine whether a financial asset is
measured at amortised cost or fair value. To be classified and measured to amortised cost, assets must satisfy the
business model test for managing the financial assets and have certain contractual cash flow characteristics. All
other financial instrument assets are to be classified and measured at fair value. This standard allows an irrevocable
election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading) in other
comprehensive income, with dividends as a return on these investments being recognised in profit or loss. In
addition, those equity instruments measured at fair value through other comprehensive income would no longer have
to apply any impairment requirements nor would there be any ‘recycling’ of gains or losses through profit or loss on
disposal
48
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The accounting for financial liabilities continues to be classified and measured in accordance with AASB 139, with
one exception, being that the portion of a change of fair value relating to the entity’s own credit risk is to be
presented in other comprehensive income unless it would create an accounting mismatch. The consolidated entity
will adopt this standard from 1 January 2013 but the impact of its adoption is yet to be assessed by the consolidated
entity.
AASB 10 Consolidated Financial Statements
This standard is applicable to annual reporting periods beginning on or after 1 January 2013. The standard has a
new definition of ‘control’. Control exists when the reporting entity is exposed, or has the rights, to variable returns
(e.g. dividends, remuneration, returns that are not available to other interest holders including losses) from its
involvement with another entity and has the ability to affect those returns through its ‘power’ over that other entity.
A reporting entity has power when it has rights (e.g. voting rights, potential voting rights, rights to appoint key
management, decision making rights, kick out rights) that give it the current ability to direct the activities that
significantly affect the investee’s return (e.g. Operating policies, capital decisions, appointment of key management).
The consolidated entity will not only have to consider its holdings and rights but also the holdings and rights of other
shareholders in order to determine whether it has the necessary power for consolidation purposes. The adoption of
this standard from 1 January 2013 may have an impact where the consolidated entity has a holding of less than 50%
in an entity, has de facto control, and is not currently consolidating that entity.
AASB 11 Joint Arrangements
This standard is applicable to annual reporting periods on or after 1 January 2013. The standard defines which
entities qualify as joint ventures and removes the option to account for joint ventures using proportional
consolidation. Joint ventures, where the parties to the agreement have the rights to the assets and obligations for
accounting. Joint operations, where the parties to the agreements have the rights to the assets and obligations for
the liabilities will account for the assets, liabilities, revenues and expenses separately, using proportionate
consolidation. The adoption of this standard from 1 January 2013 will not have a material impact on the
consolidated entity.
AASB 12 Disclosure of Interests in Other Entities
This standard is applicable to annual reporting periods beginning on or after 1 January 2013. It contains the entire
disclosure requirement associated with other entities, being subsidiaries, associates and joint ventures. The
disclosure requirements have been significantly enhanced when compared to the disclosures previously located in
AASB 127 ‘Consolidated and Separate Financial Statements’, AASB 128 ‘Investments in Associates’, AASB 131
‘Interests in Joint Ventures’ and Interpretation 112 ‘Consolidation – Special Purpose Entities’. The adoption of this
standard from 1 January 2013 will increase the amount of disclosures required to be given by the consolidated entity
such as significant judgements and assumptions made in determining whether it has a controlling or non-controlling
interest in another entity and the type of non-controlling interest and the nature and risks involved.
AASB 13 Fair Value Management and AASB 2011-8 Amendments to Australian Accounting Standards arising from
AASB 13
This standard and its consequential amendments are applicable to annual reporting periods beginning on or after 1
January 2013. The standard provides a single robust measurement framework, with clear measurement objectives,
for measuring fair value using the ‘exit price’ and it provides guidance on measuring fair value when a market
becomes less active. The ‘highest and best use’ approach would be used to measure assets whereas liabilities
would be based on transfer value. As the standard does not introduce any new requirements for the use of fair
value, its impact on adoption by the consolidated entity from 1 January 2013 should be minimal, although there will
be increased disclosures where fair value is used
AASB 127 Separate Financial Statements (Revised)
AASB 128 Investments in Associates and Joint Ventures (Reissued)
These standards are applicable to annual reporting periods beginning on or after 1 January 2013. They have been
modified to remove specific guidance that is now contained in AASB 10, AASB 11 and AASB 12. The adoption of
these revised standards from 1 January 2013 will not have a material impact on the consolidated entity.
49
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
AASB 119 Employee Benefits (September 2011)
This revised standard is applicable to annual reporting periods beginning on or after 1 January 2013. The
amendments eliminate the corridor approach for the deferral of gains and losses; streamlines the presentation of
changes in assets and liabilities arising from defined benefit plans, including requiring remeasurements to be
presented in other comprehensive income; and enhances the disclosure requirements for defined benefit plans. The
adoption of the revised standard from 1 January 2013 will require increased disclosures by the consolidated entity.
AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel
Disclosure Requirement
These amendments are applicable to annual reporting periods beginning on or after 1 July 2013, with early adoption
not permitted. They amend AASB 124 ‘Related Party Disclosures’ by removing the disclosure requirements for
individual key management personnel (‘KMP’). The adoption of these amendments from 1 January 2014 will remove
the duplication of information relating to individual KMP in the notes to the financial statements and the directors
report. As the aggregate disclosures are still required by AASB 124 and during the transitional period the
requirements may be included in the Corporations Act or other legislation, it is expected that the amendments will not
have a material impact on the consolidated entity.
AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint
Arrangements Standards
The amendments are applicable to annual reporting periods beginning on or after 1 January 2013. The amendments
make numerous consequential changes to a range of Australian Accounting Standards and Interpretations, following
the issuance of AASB 10, AASB 11, AASB 12 and revised AASB 17 and AASB 128. The adoption of these
amendments from 1 January 2013 will not have a material impact on the consolidated entity.
AASB 2011-9 Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive
Income
These amendments are applicable to annual reporting periods beginning on or after 1 July 2012. The amendments
requires grouping together of items within other comprehensive income on the basis of whether they will eventually
by ‘recycled’ to the profit or loss (reclassification adjustments). The change provides clarity about the nature of items
presented as other comprehensive income and the related tax presentation. The adoption of the revised standard
from 1 January 2013 will impact the consolidated entity’s presentation of its statement of comprehensive income.
AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and
Financial Liabilities
The amendments are applicable to annual reporting periods beginning on or after 1 July 2013. The disclosure
requirements of AASB 7 ‘Financial Instruments: Disclosures’ (and consequential amendments to AASB 132
‘Financial Instruments: Presentation’) have been enhanced to provide users of financial statements with information
about netting arrangements, including rights of set-off related to an entity’s financial instruments and the effects of
such rights on its statement of financial position. The adoption of the amendments from 1 January 2013 will increase
the disclosures by the consolidated entity.
AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities
The amendments are applicable to annual reporting periods beginning on or after 1 July 2014. The amendments
add application guidance to address inconsistencies in the application of the offsetting criteria in AASB 132 ‘Financial
Instruments: Presentation”, by clarifying the meaning of “currently has a legally enforceable right of set-off and
clarifies that some gross settlement systems may be considered to be equivalent to net settlement. The adoption of
the amendments from 1 January 2014 will not have a material impact on the consolidated entity.
AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 Cycle
The amendments are applicable to annual reporting periods beginning on or after 1 July 2013. The amendments
affect five Australian Accounting Standards as follows: Confirmation that repeat application of AASB 1 (IFRS 1) ‘First
time Adoption of Australian Accounting Standards’ is permitted; Clarification of borrowing cost exemption in AASB 1;
Clarification of the comparative information requirements when an entity provides an optional third column or is
required to present a third statement of financial position in accordance with AASB 101 ‘Presentation of Financial
Statements’;
50
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Clarification that servicing of equipment is covered by AASB 116 ‘Property, Plant and Equipment’, if such equipment
is used for more than one period; clarification that the tax effect of distribution to holders of equity instruments and
equity transaction costs in AASB 132 ‘Financial Instruments: Presentation’ should be accounted for in accordance
with AASB 112 ‘Income Taxes’; and clarification of the financial reporting requirements in AASB 134 ’Interim
Financial Reporting’ and the disclosure requirements of segment assets and liabilities. The adoption of the
amendments from 1 January 2013 will not have a material impact on the consolidated entity.
2. CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
In preparing the Empire Group’s consolidated financial statements. Management are required to make judgments,
estimates and assumptions that affect the reported amounts of assets, liabilities and recognised contingent liabilities at
the end of the reporting period and amounts of revenues and expenses recognised during the reporting period.
Estimates and judgments are continuously evaluated and are based on management’s experience and other factors,
including expectations of future events that are believed to be reasonable under the circumstances. However, uncertainty
about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying
amount of the asset or liability in future periods.
Estimates and assumptions
In particular, information about significant areas of estimation uncertainty considered by management in preparing the
consolidated financial statements are described in the following notes:
• Note 9
• Note 10
• Note 15
• Note 20
• Note 26
– Impairment expense
– Income tax
– Oil and gas properties
– Provisions for liabilities and charges
– Share based payments
Judgments
In the process of applying the Empire Group’s accounting policies, the Directors have made the following judgments
at apart from those involving estimates, which may have the most significant effect on the amounts recognised in the
consolidated financial statements:
Reserves base
Estimates of recoverable quantities of proven, probable and possible reserves reported include judgmental
assumptions regarding commodity prices, exchange rates, discount rates and production and transportation costs for
future cash flows. It also requires interpretation of complex and difficult geological and geophysical models in order
to make assessment of the size, shape, depth and quality of reservoirs, and their anticipated recoveries. The
economic, geological and technical factors used to estimate may change from period to period. Changes in reported
reserves can impact asset carrying values and the recognition of deferred tax assets due to changes in expected
future cash flows. Reserves are integral to the amount of amortisation charged to the income statement. Future
development costs are estimated using assumptions as to the number of wells required to produce the commercial
reserves, the cost of such wells and associated production and other capital costs. The current NYMEX forward oil
and gas price curves are used for price assumptions. The Empire Group uses suitably qualified persons to prepare
annual evaluation of proven hydrocarbon reserves, compliant with US professional standards for petroleum
engineers.
Carrying value of oil and gas assets
Oil and gas properties are depreciated using the units-of-production (UOP) method over proved developed and
undeveloped reserves.
The calculation of the UOP rate of depreciation, depletion and amortisation could be impacted to the extent that
actual production in the future is different from current forecast production based on proved reserves. This would
generally result from significant changes in any of the factors or assumptions used in estimating reserves. Estimates
of gas reserve quantities provide the basis for calculation of depletion, depreciation and amortisation and
impairment, each of which represents a significant component of the consolidated financial statements.
These factors could include changes in proved reserves, the effect on proved reserves of differences between actual
commodity prices and commodity price assumptions, and unforeseen operational issues
51
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
2. CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (Continued)
Impairment indicators
The fair value of oil and gas properties is determined with reference to estimates of recoverable quantities of
reserves (as outlined above) to determine the estimated future cash flows. An impairment loss is recognised for the
amount by which the asset or Empire Group of assets carrying value exceeds the present value of its future cash
flows. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are
separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of
assets (cash generating units).
Asset retirement obligations
Asset retirement costs will be incurred by the Empire Group at the end of the operating life of some of Empire
Group’s facilities and properties. The ultimate asset retirement costs are uncertain and cost estimates can vary in
response to many factors including changes to relevant legal requirements, the emergence of new restoration
techniques or experience at other production sites. The expected timing and amount of expenditure can also change,
for example, in response to changes in reserves or changes in laws and regulations or their interpretation. As a
result, there could be significant adjustments to the provisions established which would affect future financial results.
Share-based payments
The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair
value of the equity instruments at the date which they are granted. The fair value is determined by using either the
Binomial or Black-Scholes model taking into account the terms and conditions upon which the instruments were
granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no
impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit
or loss and equity.
3. GOING CONCERN
The consolidated financial statements have been prepared on a going concern basis, which contemplates the
realisation of assets and settlement of liabilities in the ordinary course of business.
The Empire Group’s Statement of Financial Position reflects an excess of current liabilities over current assets of
$39,288,071. This is primarily due to the Board determining that debt facilities be classified as current liabilities as
described in Note 19.
In January 2013 the debt facilities were extended for a further three years. The Company has decided to maintain
the debt facility as a current liability.
Due to the liquidity of operating assets, the Board also determined that the USA operating assets could be classified
as current assets.
4. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Empire Group’s principal financial instruments, other than derivatives comprise bank loans, available for sale
financial assets, and cash and cash equivalents. The main purpose of these financial instruments is to raise finance
for the Empire Group’s operations. The Empire Group has various other financial assets and liabilities such as trade
receivables and payables, which arise from its operations. The Empire Group also enters derivative transactions,
principally interest rate swaps and commodity hedges.
The board has overall responsibility for the determination of the Empire Group’s risk management objectives and
policies and has the responsibility for designing and operating processes that ensure the effective implementation of
the objectives and policies to the Empire Group’s finance function. The board receives monthly reports through which
it reviews the effectiveness of the processes put in place and appropriateness of the objectives and policies it sets.
The overall objective of the board is to set policies that seek to reduce risk as far as possible without unduly affecting
the Empire Group’s competitiveness and flexibility.
The Empire Group is exposed to risks that arise from its use of financial instruments. The main risks arising from the
Empire Group’s financial instruments are interest rate risk commodity price risk, liquidity risk, equity risk, and credit
risk. This note describes the Empire Group’s objectives, policies and processes for managing those risks and
methods used to measure them. Further quantitative information in respect of these risks is presented throughout
these financial statements.
52
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
4
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
There have been no substantive changes in the Empire Group’s exposure to financial instrument risks, its objectives,
policies and processes for managing those risks or the methods used to measure them from previous periods unless
otherwise stated in this note.
Further details regarding these policies are set out below:
(A)
MARKET RISK
(i)
Foreign Exchange Risk
The Empire Group’s core operations are located in the United States where both revenues and expenditures are
recorded. The Statement of Financial Position can be affected by movement in the US$/A$ exchange rates upon
translation of the A$ operations into the US$ presentation currency.
Foreign exchange risk arises from commercial transactions and recognised assets and liabilities denominated in a
currency that is not the entity’s functional currency. The Empire Group seeks to mitigate the effect of its foreign
currency exposure by borrowing in US$ for US operations and maintaining a minimum cash balance in Australia.
Excluding presentation translation adjustments, the Empire Group’s exposure to foreign exchange risk at the
reporting date is limited to loans and investments between the Parent entity and the US subsidiaries.
(ii)
Commodity Price Risk
The Empire Group’s revenues and cash flows are exposed to commodity price fluctuations, in particular oil and gas
prices. The Empire Group enters forward commodity hedges to manage its exposure to falling spot oil and gas
prices. To mitigate a portion of the exposure to adverse market changes, the Empire Group’s commodity hedging
programs utilise financial instruments based on regional benchmarks including NYMEX WTI for oil and NYMEX
Natural Gas Henry Hub for gas.
The Empire Group enters into derivative instruments for the Empire Group’s production to protect against price
declines in future periods while retaining some of the benefits of price increases. While these derivatives are
structured to reduce exposure to changes in price associated with the derivative commodity, they also limit benefits
the Empire Group might otherwise have received from price changes in the physical market. The Empire Group
believes the derivative instruments in place continue to be effective in achieving the risk management objectives for
which they were intended.
The Empire Group’s policy is to maintain a balance between spot and hedged sales, with not more than 75% of
production being hedged at any point in time. For the year ended 31 December 2012 the Empire Group hedged
approximately 72% of its oil (2011:74%) and 83% of its total gas production (2011: 85%).
The Empire Group has approximately 120,000 thousand cubic feet (mcf) of monthly natural gas production and
12,000 barrels of oil production hedged at amounts ranging from $4.37 to $6.30/mcf for natural gas expiring in
January 2013 through December 2018 and $85.23 to $90 per barrel for oil expiring in January 2013 through
December 2017.
(iii)
Interest rate risk
The Empire Group is constantly monitoring its exposure to trends and fluctuations in interest rates in order to
manage interest rate risk. The Empire Group’s exposure to interest rate risk at 31 December 2012 is set out in the
following tables:
The Empire Group’s exposure to the risk of changes in market interest rates relates primarily to the Empire Group’s
long-term debt obligations with a floating interest rate in the US. The Empire Group manages its interest cost using a
mix of fixed and variable rate debt. The Empire Group’s policy is to continually review the portion of its US$
Borrowings that are either at floating or fixed rates of interest. To manage this mix in a cost-efficient manner, the
Empire Group previously entered into interest rate swaps, in which Empire agrees to exchange, at specified
intervals, the difference between fixed and variable interest rate amounts calculated by reference to an agreed upon
notional principal amount. These swaps were designated to hedge underlying debt obligations. There are no interest
rate swaps at 31 December 2012.
53
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
4
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
The Empire Group monitors forecasts and actual cash flows and the maturity profiles of financial assets and liabilities
to manage its liquidity risk.
%
Floating
Interest Rate
Fixed Interest Maturing in
Over 1 to 5
1 Year or
Years
Less
Non-Interest
Bearing
Total
31 December 2012
Financial Assets
Cash and cash
equivalents
Trade and other
receivables
Financial assets
2.37%
6,189,192
-
-
6,189,192
Financial Liabilities
Trade & other payables
Financial liabilities,
including derivatives
Interest-bearing liabilities
4.26%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6,189,192
5,097,864
8,292,045
5,097,864
8,292,045
13,389,909
19,579,101
6,415,637
6,415,637
-
48,924,343
48,924,343
-
40,191
774,528
-
774,528
48,964,534
40,191
7,190,165
56,154,699
%
Floating
Interest Rate
Fixed Interest Maturing in
Over 1 to 5
1 Year or
Years
Less
Non-Interest
Bearing
Total
31 December 2011
Financial Assets
Cash and cash
equivalents
Trade and other
receivables
Financial assets
Financial Liabilities
Trade & other payables
Financial liabilities,
including derivatives
Interest-bearing liabilities
5.43%
(iv)
Empire Group Sensitivity
2.93%
4,448,495
-
-
-
-
-
-
-
-
-
-
-
4,448,495
5,577,262
11,185,997
16,763,259
5, 577,262
11,185,997
21,211,754
4,161,263
4,161,263
-
53,896,869
53,896,869
-
54,806
54,806
2,365,876
-
2,365,876
53,951,675
6,527,139
60,478,814
-
-
4,448,495
-
-
-
-
Based on the financial instruments held at 31 December 2012 had the WTI NYMEX and Henry Hub prices
increase/decreased by 10% and 10% respectively, with all other variables held constant, the Empire Group’s post-
tax profit for the year would not change due to the extent of effective hedging of oil and gas production. Equity would
not have changed under either scenario.
The directors do not expect any reduction in interest rates during 2013. Should interest rates increase by 1% the
impact on post-tax profit would be a decrease of approximately US$490,000.
54
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
4
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
(B)
CREDIT RISK
Credit risk is the risk that the other party to the financial instrument will fail to discharge their financial obligation in
respect of that instrument resulting in the Empire Group incurring a financial loss. The Empire Group’s exposure to
credit risk arises from potential default of the counter party with the maximum exposure equal to the carrying amount
of these instruments. There are no significant concentrations of credit risk within the Empire Group.
The Empire Group trades only with recognised, credit worthy third parties. In the US, trade receivables, (balances
with oil and gas purchases) have not exposed the Empire Group to any bad debt to date. All derivatives are with the
same counterparty.
In the US, all of the purchasers that the Empire Group’s operators choose to deal with are major oil companies.
Trade and other receivable balances are monitored on an ongoing basis with the Empire Group’s exposure to bad
debts minimal.
The maximum exposure to credit risk at balance date is as follows:
Trade, other receivables,
and derivatives
2012
US$
2011
US$
12,262,264
15,844,543
The maximum exposure to credit risk at balance by country is as follows:
Australia
United States of America
(C)
LIQUIDITY RISK
2012
US$
132,608
12,129,656
2011
US$
228,004
15,616,539
Liquidity risk is the inability to access funds, both anticipated and unforseen, which may lead to the Empire Group
being unable to meet its obligations in an orderly manner as they arise.
The Empire Group’s liquidity position is managed to ensure sufficient funds are available to meet financial
commitments in a timely and cost-effective manner. The Empire Group is primarily funded through on-going cash
flow, debt funding and equity capital raisings, as and when required.
Funding is in place with reputable financial institutions in the US and Australia. The borrowing base is re-determined
and reviewed once a year. Bank compliance reporting is undertaken quarterly and adherence to covenants checked
regularly. Management also regularly monitors actual and forecast cash flows to manage liquidity risk.
Maturity Analysis
31 December 2012
Non Derivatives
Current
Trade and other payables
Interest bearing liabilities
Non-current
Interest bearing liabilities
Derivatives
Cashflow hedge asset
Cashflow hedge liability
Interest rate swap liability
Fair
Value
US$
Carrying
Amount
US$
Contractual
Cash flows
US$
1 year
US$
1-5 years
US$
6,415,637
49,557,474
6,415,637
48,924,343
6,415,637
49,557,474
6,415,637
49,557,474
-
-
40,191
40,191
40,191
-
40,191
(7,189,553)
774,528
-
(7,189,553)
774,528
-
(7,189,553)
774,528
-
(3,267,501)
248,575
-
-
525,953
-
55
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
4
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
Maturity Analysis
31 December 2011
Non Derivatives
Current
Trade and other payables
Interest bearing liabilities
Non-current
Interest bearing liabilities
Derivatives
Cashflow hedge asset
Cashflow hedge liability
Interest rate swap liability
(D) EQUITY RISK
Fair
Value
US$
Carrying
Amount
US$
Contractual
Cash flows
US$
1 year
US$
1-5 years
US$
4,161,263
58,313,578
4,161,263
53,896,869
4,161,263
58,313,578
4,161,263
58,313,578
-
-
54,806
54,806
54,806
-
54,806
(10,267,281)
2,231,825
(10,267,281)
2,231,825
(10,267,281)
2,231,825
(4,243,779)
1,095,435
(6,023,502)
1,136,390
134,051
134,501
134,051
134,051
-
The Empire Group is exposed to equity securities price risk arising from investments held by the Empire Group which
are classified as available for sale assets. Investments in equity securities are managed by the Board
The Empire Group relies on equity markets to raise capital for its exploration and development activities, and is thus
exposed to equity market volatility.
In addition, the Empire Group undertakes limited investment in listed and seed capital opportunities. Unlisted
investments are held at cost less impairment as no market valuation is available.
Equity price risk arises from investments in equity securities and Empire Energy Group Limited’s issued capital.
The Company’s equity risk is considered minimal and as such no sensitivity analysis has been completed.
Fair Value of Financial Assets and Liabilities
The fair value of all monetary financial assets and liabilities of Empire Energy Group Limited approximate their
carrying value there were no off-balance financial assets and liabilities at year end.
56
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
4
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
Fair value of financial instruments
The Empire Group is required to classify financial instruments, measured at fair value, using a three level hierarchy,
being:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability,
either directly (as prices) or indirectly (derived from prices); and
Level 3: Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
An instrument is required to be classified in its entirety on the basis of the lowest level of valuation inputs that is
significant to fair value. Considerable judgement is required to determine what is significant to fair value and
therefore which category the financial instrument is placed in can be subjective.
The fair value of financial instruments classified as level 3 is determined by the use of valuation models. These
include discounted cash flow analysis or the use of observable inputs that require significant adjustments based on
unobservable inputs.
Consolidated
31 December 2012
Assets
Available-for-sale – equity
securities
Cash flow hedge
Total assets
Liabilities
Cash flow hedge and interest
rate swap
Total liabilities
Consolidated
31 December 2011
Assets
Available-for-sale – equity
securities
Cash flow hedge
Total assets
Liabilities
Cash flow hedge and interest
rate swap
Total liabilities
Level 1
Level 2
Level 3
Total
595,038
-
595,038
-
7,297,007
7,297,007
-
-
774,528
774,528
Level 1
Level 2
Level 3
918,716
-
-
10,267,281
918,716
10,267,281
-
-
2,365,876
2,365,876
-
-
-
-
-
-
-
-
-
-
595,038
7,297,007
7,892,045
774,528
774,528
Total
918,716
10,267,281
11,185,997
2,365,876
2,365,876
There were no transfers between levels during the financial year.
Capital Risk Management
The Company considers its capital to comprise its ordinary share capital and reserves.
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, either through altering its dividend policy,
new share issues, or consideration of debt the Company considers not only its short-term position but also its long-
term operational and strategic objectives.
57
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
5 REVENUE
Revenue from oil and gas sales
Revenue from drilling operations
Revenue from well operations
6 OTHER INCOME
Gain on sale of investment
Interest income
Rental income
Other income
7 GAIN FROM SALE OF ACREAGE
Gain on sale of investment
2012
US$
26,271,695
-
371,400
26,643,095
2011
US$
27,163,406
66,597
764,119
27,994,122
594,483
25,523
5,440
421,987
1,047,433
31,473
77,416
12,382
325,188
446,459
-
1,092,250
On 30 June 2010, the Empire Group sold its interest in oil and gas leaseholds in 5,897 acres for $25,708,374,
located in the Marcellus Shale formations. A gain of $23,512,829 was recognised for the 5,897 acres for the year-
ended 30 June 2010. On 1 July 2010, the Empire Group received $24,616,124 in connection with the sale. The
difference of $1,092,250 represents payment for an additional 257 acres for which the Empire Group delivered clear
title in 2011. The gain from the sale of the 257 acres, which amounted to $1,092,250 has been recognised in the
year ended 31 December 2011.
8 FINANCE COSTS
Interest paid/payable on financial liabilities
Interest paid/payable to related parties
Accretion of asset retirement obligation (note 20)
Unwind of discount on debt
Unwind of overriding royalty interest
Total finance costs
9 EXPENSES
Profit/(loss) before income tax includes the following specific
expenses:
Depreciation, depletion and amortisation
Oil & Gas properties and plant & equipment (note 15)
Intangible assets (note 16)
Employee benefits expense
Defined contribution superannuation expense
Other employee expenses
Total employee benefits expense
Impairment expense
Impairment of available-for-sale financial assets
Impairment of property, plant & equipment(a)
Total impairment expense
2,768,186
7,580
701,093
1,993,380
1,799,937
3,568,690
12,031
503,388
2,355,234
653,879
7,270,176
7,093,222
4,737,475
12,941
4,750,416
53,180
4,060,413
4,113,593
5,008,877
35,855
5,044,732
45,932
3,859,224
3,905,156
171,728
-
171,728
142,612
133,347
275,959
Loss on disposal of property, plant & equipment
197,337
66,673
Leasing expiration expenses (b)
1,026,978
-
58
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
9 EXPENSES (Continued)
(a) Impairment expense
For the period ending December 2011 the Empire Group impaired the gas drilling rig by $133,347 down to the
estimated fair value less costs to sell. The fair value was based on advertised prices of similar equipment. The asset
is included in the Oil & Gas segment as per Note 27.
(b) Leasing expiration expense
A charge of $1,026,978 has been taken against the book value of undeveloped leases which have expired, or are to
expire. The Company has an ongoing program to renew expiring leases, to take up options on expiring leases or
acquire new leases if and when possible. The charge is a non-cash entry which has no effect on cash-flows.
59
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
10
INCOME TAX
a.
Income tax expense
Current tax
Deferred tax
Adjustments for current tax of prior periods
2012
US$
2011
US$
191,051
(586,360)
(1,426,514)
468,598
598,646
553,871
Income tax (benefit)/expense attributable to continuing operations
(1,821,823)
1,621,115
Deferred income tax expense included in income tax expense comprises:
Decrease/(increase) in deferred tax assets (note 10(g))
(Decrease)/increase in deferred tax liabilities (note 10(f))
b. Numerical reconciliation of income tax expense to prima
facie tax payable
(Loss)/profit before income tax
Tax at the Australian tax rate of 30% (2011: 30%)
Tax effect of amounts which are not deductible/(taxable) in
calculating taxable income:
-
Income tax not assessable
- Non-deductible expenses
- Other deductible expenses
Difference in overseas tax rates
Tax (over)/underprovided in prior year
State taxes paid or payable
Withholding tax paid
Deferred tax asset in relation to tax losses and temporary differences
not recognised
Income tax (benefit)/expense
c. Tax expense (income) relating to items of other
comprehensive income
Cash flow hedges
d. Deferred tax assets not recognised relate to the following:
Tax losses
Capital losses
-
(586,360)
(586,360)
-
598,646
598,646
(2,025,400)
184,315
(607,620)
55,295
-
-
-
-
(1,426,514)
48,615
142,436
(21,403)
658,565
66,960
75,994
553,871
(63,049)
317,243
21,260
(22,361)
(1,821,823)
1,621,115
10(h)
2,788,360
2,742,331
2,340,627
2,618,079
146,840
164,638
2,487,467
2,782,717
60
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
10 INCOME TAX (Continued)
The potential benefit of the deferred tax asset attributable to tax losses will only be obtained if:
(i) the consolidated entity derives future assessable income of a nature and of an amount sufficient to enable
the benefit from the deduction for the loss to be realised; or
(ii) the consolidated entity continues to comply with the conditions for deductibility imposed by the law; and
(iii) no changes in tax legislation adversely affect the consolidated entity in realising the asset.
e. Dividend Franking Account
There are no franking account credits available as at 31 December 2012.
f. Deferred tax liabilities
The balance comprises temporary differences attributable to:
Cash flow hedges
Oil & Gas and Property, Plant & Equipment
Set-off of deferred tax liabilities pursuant to set-off
provisions (note g)
Net deferred tax liabilities
g. Deferred tax assets
The balance comprises temporary differences attributable to:
Tax losses carried forward
Accrued interest
Accrued asset retirement obligation
State taxes offset
Other
2,788,360
5,719,942
2,742,331
5,495,770
8,508,302
8,238,101
(1,438,302)
(627,770)
7,070,000
7,610,331
619,341
92,271
721,322
-
5,368
-
80,747
446,267
98,012
2,744
1,438,302
627,770
Set-off of deferred tax assets pursuant to set-off provisions (note f)
(1,438,302)
(627,770)
Net deferred tax assets
-
-
h. Movements in temporary differences in the period:
The movements in the above temporary differences are all recognised in the Profit or Loss with the exception of the
movement in the cash flow hedges. The movement is reconciled as follows:
Opening balance
Charged/(credited):
- to profit or loss
- to other comprehensive income
Closing balance
2,742,331
(789,850)
-
46,029
2,788,360
-
3,532,181
2,742,331
61
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
11 TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Other
2012
US$
2011
US$
4,965,257
132,607
5,097,864
5,349,258
228,004
5,577,262
12 PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments
171,973
417,677
13 INVENTORIES
Crude oil and production supplies
805,646
585,822
14 FINANCIAL ASSETS, INCLUDING DERIVATIVES
Current
Oil and gas price forward contracts
3,267,501
4,243,779
Non-current
Oil and gas price forward contracts
Shares – other corporations:
Listed available-for-sale equities (at fair value)
Unlisted available-for-sale equities (at cost)
Less: accumulated impairment on unlisted equities
Total Non-current
4,029,506
6,023,502
595,038
556,041
(156,041)
5,024,544
918,716
156,041
(156,041)
6,942,218
62
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
Commodity hedge contracts outstanding are outlined below.
2012 NATURAL GAS - HENRY HUB - NYMEX - Swaps 2011 NATURAL GAS - HENRY HUB - NYMEX - Swaps
Period
Swap
Price
Premium
Product
Period
Swap
Price
Premium
Product
-
-
Jan 13 - Dec 13
Jan 14 - Dec 14
Jan 13 - Dec 13
Jan 14 - Dec 14
Jan 13 - Dec 13
Jan 14 - Dec 14
Jan 13 - Dec 13
Jan 14 - Dec 14
Jan 13 - Dec 13
Jan 14 - Dec 14
Jan 13 - Dec 13
Jan 14 - Dec 14
Jan 15 - Dec 15
Jan 13 - Dec 13
Jan 14 - Dec 14
Jan 15 - Dec 15
-
-
6.15
6.15
6.21
6.21
6.15
6.15
6.26
6.26
6.30
6.30
5.08
5.27
5.45
5.08
5.27
5.45
Jan 16 - Dec 16
4.49
Jan 16 - Dec 16
4.49
Jan 16 - Dec 16
Jan 17 - Dec 17
Jan 18 - Dec 18
4.37
4.57
4.75
2012 OIL - WTI - NYMEX
Jan 13 - Dec 13
Jan 14 - Dec 14
Jan 15 - Dec 15
90
90
90
Jan 16 - Dec 16
85.67
Jan 17 - Dec 17
85.23
-
-
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
-
-
Jan 12 - Dec 12
Jan 12 - Dec 12
255,179 mmbtu
Jan 12 - Dec 12
238,372 mmbtu
Jan 13 - Dec 13
Jan 14 - Dec 14
255,179 mmbtu
Jan 12 - Dec 12
238,372 mmbtu
Jan 13 - Dec 13
Jan 14 - Dec 14
255,179 mmbtu
Jan 12 - Dec 12
238,372 mmbtu
Jan 13 - Dec 13
Jan 14 - Dec 14
255,179 mmbtu
Jan 12 - Dec 12
238,372 mmbtu
Jan 13 - Dec 13
Jan 14 - Dec 14
76,000 mmbtu
Jan 12 - Dec 12
5,000 mmbtu
Jan 13 - Dec 13
247,000 mmbtu
Jan 12 - Dec 12
217,000 mmbtu
Jan 13 - Dec 13
1,116,000 mmbtu
Jan 14 - Dec 14
Jan 15 - Dec 15
55,000 mmbtu
Jan 13 - Dec 13
159,000 mmbtu
Jan 14 - Dec 14
156,000 mmbtu
72,000 mmbtu
528,000 mmbtu
528,000 mmbtu
504,000 mmbtu
456,000 mmbtu
-
-
-
-
-
-
8
6
6.15
6.15
6.15
6.21
6.21
6.21
6.15
6.15
6.15
6.26
6.26
6.26
6.3
6.3
4.77
5.08
5.27
5.45
5.08
5.27
-
-
-
-
-
-
2011 OIL - WTI - NYMEX
113,160 BO
Jan 12 - Dec 12
105,120 BO
Jan 13 - Dec 13
98,160 BO
Jan 14 - Dec 14
Jan 15 - Dec 15
42,000 BO
39,600 BO
-
-
90
90
90
90
-
-
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
-
-
-
-
-
-
$Nil
$Nil
$Nil
$Nil
-
-
72,000 mmbtu
30,000 mmbtu
275,089 mmbtu
255,179 mmbtu
238,372 mmbtu
275,089 mmbtu
255,179 mmbtu
238,372 mmbtu
275,089 mmbtu
255,179 mmbtu
238,372 mmbtu
275,089 mmbtu
255,179 mmbtu
238,372 mmbtu
84,000 mmbtu
76,000 mmbtu
198,000 mmbtu
247,000 mmbtu
217,000 mmbtu
1,116,00
0
mmbtu
55,000 mmbtu
159,000 mmbtu
-
-
-
-
-
-
-
-
-
-
-
-
120,800 BO
113,160 BO
105,120 BO
98,160 BO
-
-
-
-
63
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
15 OIL AND GAS PROPERTIES AND PROPERTY PLANT & EQUIPMENT
Cost in US$
At 1 January 2012
Additions
New asset retirement obligation
Write-off of asset retirement obligation
Reclassifications
Disposals
Expiration costs
Write-off of exploration expense
Write-off to prepayments/inventory
At 31 December 2012
Accumulated Depreciation in US$
At 1 January 2012
Depreciation and depletion
Disposals
Impairment
At 31 December 2012
Oil & Gas –
Proved and
producing
Oil & Gas –
Unproved & not
producing
Note
Land
Buildings
Equipment
Motor Vehicles
Total
104,840,268
2,580,916
427,936
(57,689)
1,063,550
(3,079,055)
-
-
350,155
3,612,210
1,523,833
-
-
1,675,609
-
(1,026,978)
(197,139)
-
2,056,355
-
-
-
(2,025,764)
-
-
-
-
304,209
-
-
-
-
-
-
-
-
1,374,810
130,048
-
-
(713,395)
(141,055)
-
-
(38,022)
721,391
764
-
-
-
-
-
-
-
112,909,243
4,235,561
427,936
(57,689)
-
(3,220,110)
(1,026,978)
(197,139)
312,133
106,126,081
5,587,535
30,591
304,209
612,386
722,155
113,382,957
(11,991,992)
(4,479,995)
2,777,227
-
(13,694,760)
-
-
-
-
-
-
-
-
-
-
(16,181)
(7,704)
-
-
(372,450)
(111,625)
140,944
-
(225,943)
(138,150)
-
-
(12,606,566)
(4,737,475)
2,918,171
-
(23,885)
(343,131)
(364,093)
(14,425,869)
Opening written down value
92,848,276
3,612,210
2,056,355
288,028
1,002,361
495,448
100,302,677
Impact of foreign currency adjustments
-
-
-
-
302
1,224
1,526
Closing written down value
92,431,321
5,587,535
30,591
280,324
269,557
359,286
98,958,614
64
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
15 OIL AND GAS PROPERTIES AND PROPERTY PLANT & EQUIPMENT (continued)
Oil & Gas –
Proved and
producing
Oil & Gas –
Unproved & not
producing
Note
Cost in US$
At 1 January 2011
Additions
Write-off of asset retirement obligation
Disposals
Write-off of exploration expense
Transfers
Transfers to inventory
At 31 December 2011
Accumulated Depreciation in US$
At 1 January 2011
Depreciation and depletion
Disposals
Impairment
At 31 December 2011
103,673,808
2,403,056
(50,717)
-
(471,265)
(364,463)
(350,151)
104,840,268
(7,360,152)
(4,638,740)
6,900
-
(11,991,992)
3,264,763
352,210
-
-
-
(4,763)
-
3,612,210
-
-
-
-
-
Land
Buildings
Equipment
Motor Vehicles
Total
2,019,925
36,430
-
-
-
-
-
244,644
-
-
-
-
59,565
-
985,976
418,415
-
(304,285)
(5,101)
279,806
-
1,434,004
33,078
-
(775,546)
-
29,855
-
111,623,120
3,233,354
(50,717)
(1,079,831)
(476,367)
-
(350,150)
2,056,355
304,209
1,374,810
721,391
112,899,409
-
-
-
-
-
(8,660)
(7,521)
-
-
(546,482)
(136,955)
310,987
-
(552,373)
(232,525)
692,302
(133,347)
(8,467,667)
(5,015,741)
1,010,189
(133,347)
(16,181)
(372,450)
(225,943)
(12,606,566)
Opening written down value
96,313,656
3,264,763
2,019,925
235,984
439,494
881,631
103,155,453
Impact of foreign currency adjustments
-
-
-
1
-1
-
Closing written down value
92,848,276
3,612,210
2,056,355
288,028
1,002,361
495,447
100,302,677
65
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
16 INTANGIBLE ASSETS
Goodwill
Other intangible asset
Movement in Other Intangible assets
Carrying value at beginning of financial year
Transfer to debt
Amortisation
2012
US$
2011
US$
68,217
2,150
70,367
15,091
-
(12,941)
68,217
15,091
83,308
82,466
(31,520)
(35,855)
Carrying value end of financial year
2,150
15,091
17 TRADE AND OTHER PAYABLES
Current
Trade creditors
Other creditors
18 FINANCIAL LIABILITIES, INCLUDING DERIVATIVE
Current
Interest rate swaps
Oil and gas forward price contracts
Non-current
Oil and gas forward price contracts
19 INTEREST-BEARING LIABILITIES
Current
Finance lease liability
Bank loan -secured
Other loans
Other loans – related party
Non-current
Finance lease liability
6,076,018
339,619
6,415,637
3,848,843
312,420
4,161,263
-
248,575
248,575
134,051
1,095,435
1,229,486
525,953
1,136,390
99,447
48,783,724
-
41,172
48,924,343
109,896
53,692,913
38,583
55,477
53,896,869
40,191
54,806
In February 2008, the Empire Group entered into a facility maturing February 2013, this facility has been extended
for a further three years maturing February 2016 and consists of the following:
A $50,000,000 revolving line-of-credit facility (Revolver) used to refinance existing debt and to undertake future
acquisitions; the Revolver is subject to a borrowing base consistent with normal and customary oil and gas lending
practices of the bank. The borrowing base limit at the time of the replacement was $3,000,000 and is redetermined
from time to time in accordance with the Revolver. Interest accrues on the outstanding borrowings at rate options
selected by the Empire Group and based on the prime lending rate (3.25% at 31 December 2012 and 2011) or the
London InterBank Offered Rate (LIBOR) (0.2535% at 31 December 2012 and 0.4271% at 31 December 2011) rate
plus 2.5%. At 31 December 2012 and 2011, the Empire Group's rate option was LIBOR. The borrowing base
availability changes with operations and opportunities.
A $100,000,000 acquisition and development term credit facility (Term Facility) was used to refinance an existing
facility, undertake acquisitions and support capital expenditure under an agreed development plan for oil and gas
properties and services companies in the United States. Drawdown on the Term Facility is based on predefined
benchmarks and drawn down under specific tranches.
66
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
19 INTEREST-BEARING LIABILITIES (Continued)
The Tranche 1 drawdown of $4,700,000 (as amended) has been committed to a defined development drilling
program that commenced in April 2008, which is subject to independently generated reserve reports showing
standard asset-loan coverage customary for commercial loan facilities; this amount under the Term Facility may be
converted to the Revolver. Tranche 2, of $6,046,000 was used to pay additional capital costs associated with the
development of properties. Tranche 3, of $35,900,000 was used for the acquisition of additional properties and the
further development of properties. Tranche 4 originated with the 2010 acquisition with a total borrowing of
approximately $35,300,000. Interest accrues on the outstanding borrowings at rate options selected by the Empire
Group and based on the prime lending rate or the LIBOR rate plus 4.0%. At December 31, 2011, the Empire Group’s
rate option was LIBOR.
Total availability under all the tranches of the Term Facility at December 31, 2012 was approximately $102,000,000;
however, the borrowing base limit changes with operations and opportunities.
Loans under the facilities are secured by the assets of the Empire Group. Under terms of the facilities, the Empire
Group is required to maintain financial ratios customary for the oil and gas industry. Beginning in March 2008, the
Empire Group started to repay the facilities monthly to the extent of an applicable percentage of net operating cash
flow, and capital transactions. Principal payments made in 2012 and 2011 were $10,418,000 and $15,012,000,
respectively. The Revolver and Term loans are guaranteed by Empire Energy Group Limited. The Empire Group has
exceeded the minimum cumulative principal payment obligation through the maturity date of the credit facilities.
In connection with the establishment of the Revolver and Term Facility in 2008, the bank was entitled to receive non-
diluting warrants equivalent to 10% of the issued capital of the Empire Energy Group USA LLC.
As a component of the financing of two acquisitions the Company utilised a short term mezzanine facility on which
the lender received a 3% overriding royalty interest based on the Company’s percentage working interest in
properties acquired. The values assigned to the debt overriding royalty interest and the warrants were allocated
based on their relative fair values. The relative fair value of the warrants, which were determined using the
management’s discounted cash flow pricing model, were recorded as additional paid-in capital and reduced the
carrying value of the debt. The discount on the debt is being amortised to interest expense over the term of the debt
facility and end in February 2013 on expiry of the original debt facility.
In conjunction with the debt financing by the bank in 2008, Empire Energy Group Limited issued options on 500
million shares (33,333,333 options following a share consolidation). These options were independently valued at
$1,687,000. The recorded value of the options of $1,687,000 was expensed over the life of the loan facility.
The Empire Group entered into an interest rate swap agreement to reduce the impact of interest rate changes on the
Empire Group’s variable rate term loan effective July 2009. The notional amount of $7,940,000 expired in July 2012.
A summary of period end debt is as follows:
Term
Tranche 1
Tranche 3
Tranche 4
Revolver
Sub-Total
Less – Discount on debt:
2012
US$
2011
US$
6,181,553
19,748,692
20,486,610
3,000,000
49,416,855
(633,131)
6,181,553
19,748,692
29,179,377
3,000,000
58,109,622
(4,416,709)
Total debt
48,783,724
53,692,913
67
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
19 INTEREST-BEARING LIABILITIES (Continued)
CLASSIFICATION OF BORROWINGS
These accounts are presented on the basis that all debt has been classified as current liabilities. This treatment is as
a result of a strict application of the relevant provisions of AASB 101 Presentation of financial statements ("AASB
101"). This accounting standard requires the Empire Group to classify liabilities as current if the Empire Group does
not have an unconditional right to defer payment for twelve months at period end. However, the expected repayment
of the borrowings is not for complete repayment within the twelve month period. In January 2013 the Company
extended the Facility for a further 3 years through to 28 February 2016.
Under the terms of the Loan Facility (“Facility”), Empire Energy allocates 90% of monthly free cash flow to repay
principle outstanding.
The expected loan repayments over the next 12 months comprise:
- Repayment of 90% of any monthly free cashflows
As at 31 December 2012 and during the year the loan covenants were in compliance.
20 PROVISIONS
Current
Employee entitlements
Non-current
Asset retirement obligations
Movement in Asset Retirement Obligation
Balance at beginning of the period
Additions for the period
Write-off accrued plugging costs
Accretion expense for the period, included in finance costs
Balance end of the period
Asset Retirement Obligation
2012
US$
2011
US$
85,567
93,464
6,015,635
4,944,295
4,944,295
427,936
(57,689)
701,093
6,015,635
4,491,624
-
(50,717)
503,388
4,944,295
The Empire Group makes full provision for the future costs of decommissioning oil and gas production facilities and
pipelines on a discounted basis on the installation or acquisition of those facilities.
The provision represents the present value of decommissioning costs which are expected to be incurred up to 2050.
The estimated liability is based on historical experience in plugging and abandoning wells, estimated remaining lives
of those based on reserve estimates, external estimates as to the cost to plug and abandon the wells in the future,
and regulatory requirements. Assumptions, based on the current economic environment, have been made which
management believe are a reasonable basis upon which to estimate the future liability. These estimates are
reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning
costs will ultimately depend upon future market prices for the necessary decommissioning works. Furthermore, the
timing of decommissioning is likely to depend on when the assets cease to produce at economically viable rates.
This in turn will depend upon the future oil and gas prices, which are inherently uncertain.
68
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
21 CONTRIBUTED EQUITY
a) Shares
Issued Capital
Balance at beginning of period
Movement in ordinary share capital
- Issue of 6,666,666 fully paid ordinary share in June 2012 pursuant to
the exercise of options at A$0.15 expiring 22 June 2012
- Issue of 6,666,666 fully paid ordinary shares in December 2012
pursuant to the exercise of options at A$0.165 expiring 22 December
2012
- Issue of 22,000,000 fully paid ordinary shares in April 2011 @ A$0.12
pursuant to Tranche 1 of a private placement to sophisticated and
professional investors
- Issue of 88,833,333 fully paid ordinary shares in May 2011 @ A$0.12
pursuant to Tranche 2 of a private placement to sophisticated and
professional investors
- Issue of 4,740,429 fully paid ordinary shares in June 2011 @ A$0.12
pursuant to the Empire Group’s share purchase plan
- Issue of 13,333,334 fully paid ordinary shares in December 2011
pursuant to the exercise of the following options:
-
-
6,666,667 options @ A$0.12 expiring 22 December 2011
6,666,667 options @ A$0.135 expiring 22 December 2011
Less costs associated with the share issues detailed above
Balance as at 31 December 2012
b) Shares
Movements in ordinary issued shares
Balance at beginning of period
Movement in ordinary share capital
- Issue of fully paid ordinary shares in June 2012 pursuant to the
exercise of options @ A$0.15 expiring 22 June 2012
- Issue of fully paid ordinary shares in December 2012 pursuant to the
exercise of options @ A$0.165 expiring 22 December 2012
- Issue of fully paid ordinary shares in April 2011 @ A$0.12 pursuant to
Tranche 1 of a private placement to sophisticated and professional
investors
- Issue of fully paid ordinary shares in May 2011 @ A$0.12 pursuant to
Tranche 2 of a private placement to sophisticated and professional
investors
- Issue of fully paid ordinary shares in June 2011 @ A$0.12 pursuant
to the Company’s share purchase plan
- Issue of fully paid ordinary shares in December 2011 pursuant to the
exercise of the following options:
-unlisted options exercisable @ A$0.12 expiring 22 December 2011
2012
US$
2011
US$
71,195,874
55,486,551
990,380
1,148,950
-
-
-
-
-
-
-
2,843,016
11,343,306
606,737
811,040
912,420
(9,649)
(807,196)
73,325,555
71,195,874
No. of shares
No. of shares
291,530,350
162,623,254
6,666,666
6,666,666
-
-
-
-
-
-
22,000,000
88,833,333
4,740,429
6,666,667
-unlisted options exercisable @ A$0.135 expiring 22 December 2011
Balance as at 31 December 2012
-
304,863,682
6,666,667
291,530,350
69
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
21 CONTRIBUTED EQUITY (Continued)
Share Options
Movements
Granted
During the financial year 7,000,000 executive options to acquire ordinary shares were granted pursuant to the terms
of the Company’s employee share option plan. Vesting of these options is subject to minimum period of employment
conditions.
No options were granted in the period since the end of the financial year.
Exercise of Options
13,333,332 unlisted options were exercised during the financial year. These options were exercised on the following
basis:
- 6,666,666 unlisted options exercisable at A$0.15 expiring 22 June 2012
- 6,666,666 unlisted options exercisable at A$0.165 expiring 22 December 2012
No options have been exercised in the period since the end of the financial year and up to the date of this report.
Expiry of Options
6,666,666 unlisted options exercisable at A$0.18 were not exercised by their expiry date of 22 December 2012 and
as a consequence have lapsed.
Since the end of the financial year a further 66,666 unlisted options exercisable at A$0.1575 were not exercised by
their expiry date of 5 March 2013 and as a consequence have lapsed.
At balance date the Empire Group had on issue, the following securities:
Shares
-
304,863,682 listed fully paid ordinary shares – ASX Code: EEG
The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are
fully paid. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are
entitled to one vote per share at meetings of the Company. No dividends were paid or declared during the year, or
since the year-end.
Options
At balance date the Company had 13,866,664 unissued shares under option. These options are exercisable on the
following terms:
Number
Exercise Price (A$)
66,666 Executive options
3,500,000 Executive options
1,650,000 Executive options
1,650,000 Executive options
7,000,000 Executive options
13,866,666
$0.1575
$0.15
$0.17
$0.18
$0.35
Expiry Date
5 March 2013
1 July 2013
1 July 2013
31 December 2013
31 December 2014
22 RESERVES
Fair value reserve
The fair value reserve comprises the cumulative net change in the fair value of available-for-sale assets until the
investment is derecognised and the effective portion of the cumulative net change in the fair value of cash flow
hedging instruments related to hedged transactions that have not yet occurred.
Foreign currency translation reserve
The foreign currency translation reserve comprises all foreign currency differences arising from the translation of the
financial statements of foreign operations.
Option Reserve
The option reserve comprises the value of options issued but not exercised at balance date.
70
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
23 CONTINGENT LIABILITIES
Empire Energy Group Limited has executed a Deed of Guarantee and indemnity in favour of Macquarie Bank
Limited guaranteeing the obligations of each of Empire Energy USA LLC and its subsidiary Empire Energy E&P LLC
pursuant to the Macquarie Bank Limited credit facility.
The Empire Group is involved in various legal proceedings arising out of the normal conduct of its business. In the
opinion of management, the ultimate resolution of such matters will not have a material effect on the consolidated
financial position or results of operations of the Empire Group.
The Empire Group is subject to various federal, state and local laws and regulations relating to the protection of the
environment. The Empire Group has established procedures for the ongoing evaluation of its operations, to identify
potential environmental exposures and to comply with regulatory policies and procedures.
Environmental expenditures that relate to current operations are expensed or capitalised as appropriate.
Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental assessment and or clean-up is
probable, and the costs can be reasonably estimated. The Empire Group maintains insurance that may cover in
whole or in part certain environmental expenditures. At 31 December 2012, the Empire Group had no environmental
contingencies requiring specific disclosure or accrual.
In 1986 Empire Energy Group Limited provided certain tax indemnities to an investor under agreements relating to
research and development of Vitrokele Core Technology.
There have been no changes in contingent liabilities since the last annual reporting date.
24 CONTINGENT ASSETS
The Company has a claim outstanding against the JV Partner for a 75% interest in the Carrolltown Prospect Gas
Wells. Based on negotiations to date, the directors believe that it is probable that their claim will be met in full and
that compensation of $0.55million will be recovered.
25 COMMITMENTS FOR EXPENDITURE
Exploration and Mining Tenement Leases
In order to maintain current rights of tenure to exploration and mining tenements, the Company and the companies in
the consolidated entity are required to outlay lease rentals and to meet the minimum expenditure requirements of the
various Government Authorities. These obligations are subject to re-negotiation upon expiry of the relevant leases or
when application for a mining licence is made. No expenditure commitments exist at 31 December 2012.
i) Equipment Leases
Commitments in relation to equipment/motor vehicle leases contracted
for at and subsequent to the reporting date but not recognised as
liabilities:
Not later than one year
Later than one year not later than two years
Later than two years not later than five years
More than five years
2012
US$
2011
US$
19,082
19,082
21,954
-
19,082
19,082
41,036
-
60,118
79,200
The Empire Group has the option to acquire the leased assets at the agreed value on the expiry of the leases.
ii) Property Licence
The Company has entered into a cancellable licence agreement over the occupation of office premises.
The leased assets were pledged as security over the lease commitment.
The term of the occupancy licence was for a term of 59 months and concluded on 30 June 2011. Since expiry of the
occupancy licence the Company has occupied the premises on a month to month basis. Terms on a new licence
agreement are being negotiated.
71
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
26 SHARE BASED PAYMENTS
a)
Employee Share Option Plan 2010
A new executive share option plan was approved by shareholders at the annual general meeting of members held
on 30 November 2010. This plan replaces the previous executive option plan approved by shareholders on 18 May
2000. Persons eligible to participate include executive officers of the Company or a subsidiary, including a director
holding salaried employment or office in the Company or subsidiary.
Options are granted under the plan for no consideration. The vesting date of options granted under the plan is
subject to minimum term of employment conditions.
Options granted under the plan carry no dividend or voting rights.
The exercise price of options is based on a minimum of the weighted average market price of shares sold in the
ordinary course of trading on the ASX during the 5 trading days ending on the date the option is granted multiplied by
0.8.each option entitles the holder to subscribe for 1 unissued share.
Consolidated – 31 December 2012
During the financial year the following options were granted pursuant to the Employee Share Option Plan 2010.
No. of Options
Grant Date
1,250,000 20 April 2012
3,500,000 31 May 2012
2,250,000 30 June 2012
7,000,000
Vesting Date
20 April 2014
31 May 2012
30 June 2014
Exercise Date A$
Expiry Date
$0.35
$0.35
$0.35
31 December 2014
31 December 2014
31 December 2014
Consolidated – 31 December 2011
During the previous financial year the following options were granted pursuant to the Employee Share Option Plan
2010.
No. of Options
Grant Date
Vesting Date
Exercise Price A$
Expiry Date
3,500,000 23 March 2011
1,650,000 23 March 2011
1,650,000 23 March 2011
23 March 2013
23 March 2013
23 March 2013
$0.15
$0.17
$0.18
1 July 2013
1 July 2013
31 December 2013
6,800,000
The options outstanding at 31 December 2012 are detailed below.
Grant Date
Expiry Date
Exercise
Price
5 March 2008 (1)
5 March 2013
15.75 cents
Balance
at start of
year
66,666
Granted
during
year
-
Exercised
during
year
-
23 March 2011 (2)
1 July 2013
15 cents
3,500,000
23 March 2011(2)
1 July 2013
17 cents
1,650,000
23 March 2011(2)
31 December 2013
18 cents
1,650,000
-
-
-
20 April 2012(2)
31 December 2014
35 cents
31 May 2012 (2)
31 December 2014
35 cents
30 June 2012 (2)
31 December 2014
35 cents
-
-
-
1,250,000
3,500,000
2,250,000
6,866,666
7,000,000
-
-
-
-
-
-
-
Balance at
end of year
66,666
3,500,000
1,650,000
1,650,000
1,250,000
3,500,000
2,250,000
13,866,666
1)
Options granted pursuant to Employee Share Option Plan approved 18 May 2000. The original exercise price and the
number of options granted has been amended to reflect the capital consolidation effected on 4 June 2010 (amended for 15:1
consolidation). Share options are fully vested at balance date.
2)
restrictions based on minimum period of employment conditions.
Options granted pursuant to Employee Share Option Plan approved 30 November 2010. This plan provides for vesting
72
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
26 SHARE BASED PAYMENTS (Continued)
b) Expenses arising from share based payment transactions
Period ending -31 December 2012
7,000,000 future options were granted pursuant to the Empire Groups Employee Share Options Plan. The share
based payments transactions costs during the financial year for these options and previously granted options based
on a pro-rata portion of the vesting period was $513,013.
Period ending – 31 December 2011
6,800,000 future options were granted pursuant to the Empire Groups Employee Share Options Plan. The share
based payment transactions costs during the financial year based on a pro-rata portion of the vesting period was
$246,627.
73
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
27 SEGMENT INFORMATION
The Empire Group has two reportable segments as described below. Information reported to the Empire Group’s chief executive office for the purpose of resource allocation and assessment of
performance is more significantly focused on the category of operations.
in USD
Revenue (external)
Oil & Gas
Investments
Other
Eliminations
Total
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
26,643,095
27,994,122
-
-
-
-
Other income (excluding Finance income)
421,986
1,219,204
594,484
31,476
5,440
213,159
Reportable segment profit/(loss) before tax
6,672,640
9,503,066
422,756
(111,136)
(1,874,507)
(2,199,907)
-
-
-
-
-
-
26,643,095
27,994,122
1,021,910
1,463,839
5,220,889
7,192,023
Finance income
Finance costs
Profit/(loss) for the period before tax
Reportable segment assets
Reportable segment liabilities
Other material non-cash items:
- Gain on disposal of acreage
- Depreciation and amortisation
- Impairment expense
- Gain on disposal
- Lease expiration costs
Non-cash items included in Finance costs:
- Asset retirement obligation accretion
(701,090)
(503,388)
- Discount on debt & overriding royalty interest
(3,793,317)
(3,009,113)
Capital expenditure
(4,635,561)
(3,233,356)
6,060
10,644
1,989,137
517,338
17,827
74,870
(1,989,137)
(517,338)
23,887
85,514
(9,249,634)
(7,587,131)
-
-
(9,679)
(23,429)
1,989,137
517,338
(7,270,176)
(7,093,222)
(2,025,400)
184,315
117,716,515
118,901,533 37,356,711 33,000,610
2,128,023
3,333,185
(36,761,673)
(32,081,894)
120,439,576
123,153,434
(104,681,417)
(104,043,720)
-
-
(1,406,157)
(1,165,078)
36,761,673
32,081,894
(69,325,901)
(73,126,904)
-
1,092,250
(4,732,015)
(5,026,918)
-
-
-
-
-
-
(18,401)
(17,814)
(133,347)
(171,728)
(142,612)
-
-
(1,026,978)
-
-
594,484
31,476
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,092,250
-
-
-
-
(4,750,416)
(5,044,732)
(171,728)
(275,959)
594,484
31,476
(1,026,978)
-
-
(701,090)
(503,388)
-
(3,793,317)
(3,009,113)
-
-
(4,635,561)
(3,233,356)
74
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
27 SEGMENT INFORMATION (Continued)
The revenue reported above represents revenue generated from external customers. There were no intersegment
sales during the period. Included in Other income above are gains disclosed separately of the face of the statement
of Comprehensive Income.
The Empire Group’s reportable segments under AASB 8 are as follows:
Oil and gas operations - includes all oil and gas operations located in the USA. Revenue is derived from the
sale of oil and gas and operation of wells.
Investments - includes all investments in listed and unlisted entities, including the investment in Empire
Energy Group USA (eliminated on consolidation). Revenue is derived from the sale of the investments.
Other - includes all centralised administration costs and other minor other income.
Segment profit/(loss) represents the profit/(loss) earned by each segment without allocation of central administration
costs and directors’ salaries, finance income and finance expense, gains or losses on disposal of associates and
discontinued operations. This is the measure reported to the chief operating decision maker for the purposes of
resource allocation and assessment of segment performance.
Geographical information
All Revenue from external customers is derived from operations in the USA.
The majority of the Empire Group's assets are located in the USA.
Major customer
Revenues from one major customer of the Empire Group’s Oil & Gas segment represents approximately
$11,190,100 (2011: $14,451,172) of the Empire Group’s total revenues.
75
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
28 RELATED PARTY DISCLOSURES
a. Disclosures Relating to Directors
i.
The names of persons who were directors of the Company at any time during the financial year were:
• B W McLeod
• D H Sutton
• K A Torpey
ii.
Directors’ Shareholdings
Number of shares held by the Company Directors
Balance at
31 December
2011
Acquired during
period through Share
Purchase Plan
Other changes
during period
Balance at
31 December 2012
6,939,760
983,300
2,191,449
-
-
-
-
(320,000)
-
6,939,760
663,300
2,191,449
Director
B W McLeod
D H Sutton
K A Torpey
Option holdings
Number of options over ordinary shares in the Company held during the financial period by each Director of the
Company, including their related entities are set out below:
Director
Balance at 1
January 2012
Granted during
year as
Remuneration
Exercised
during year
Expiring
during year
Balance at
31 December
2012
Vested
exercisable at 31
December 2012
B W McLeod
D H Sutton
K A Torpey
5,300,000
-
-
2,000,000
750,000
750,000
-
-
-
-
-
-
7,300,000
750,000
750,000
-
-
-
The options held by Directors’ were issued under an Employee Share Option Plan and are exercisable on the
following basis and subject to a minimum term of employment conditions:
Director
B W McLeod
D H Sutton
K A Torpey
No. of options
Exercise Price A$
2,000,000
1,650,000
1,650,000
2,000,000
750,000
750,000
$0.15
$0.17
$0.18
$0.35
$0.35
$0.35
Expiry Date
1 July 2013
1 July 2013
31 December 2013
31 December 2014
31 December 2014
31 December 2014
76
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
28 RELATED PARTY DISCLOSURES (Continued)
iii.
Transactions with Key Management Personnel
1) B W McLeod is a director and shareholder of Eastern & Pacific Capital
Pty Limited. The Empire Group incurred the following transactions:
- Management consultant fees
- Bonus payment
2) W McLeod lent funds to the Empire Group. Interest has been accrued
on this loan.
- Interest accrued on loan facility
3) D H Sutton was a director of a related party Earth Heat Resources
Ltd, he resigned on 11 May 2011.
Investment Earth Heat Resources Ltd
4) Aggregate amounts payable to Directors and their related Companies
at balance date:
- B W McLeod
- Loan
- Interest
- Eastern & Pacific Capital
- Bonus and consulting fees
5)
J Warburton is a director and CEO of wholly-owned subsidiary
Imperial Oil & Gas Pty Limited. The Empire Group paid the following
transactions:
-
Advisory fees
2012
US$
2011
US$
362,495
113,927
361,165
206,380
5,204
5,302
-
76,374
21,750
19,422
21,328
34,150
206,296
502,067
221,114
9,997
77
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
28 RELATED PARTY DISCLOSURES (Continued)
b. Disclosures Relating to Controlled Entities
Empire Energy Group Limited is the ultimate controlling Company of the Consolidated Entity comprising the
Company and its wholly-owned controlled companies.
During the year, the Company advanced and received loans, and provided accounting and administrative services to
other companies in the Consolidated Entity. The accounting and administrative services were provided free of
charge, and the loans are interest bearing for trading subsidiaries and unsecured.
c.
Investments in Controlled Companies
Country of
Incorporation
Class of
Share
Controlling Empire Group
Empire Energy Group Limited
Australia
Controlled Companies
Imperial Oil & Gas Pty Limited
* Vodex Pty Limited
* Imperial Mining Investments Pty Limited
* Jasinv Pty Limited
* Jasrad Pty Limited
Imperial Management Services Pty Limited
Mega First Mining NL
Imperial Technologies Pty Limited
OzNetwork Pty Limited
Imperial Resources LLC
Imperial Energy Pty Ltd
Cobalt Energy Pty Ltd
Empire Energy USA LLC
Australia
Australia
Australia
Australia
Australia
Australia
Vanuatu
Australia
Australia
USA
Australia
Australia
USA
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Interest Held
December
2012
%
December
2011
%
100
Nil
Nil
Nil
Nil
Nil
100
100
81
100
100
100
95
100
100
100
100
100
100
100
100
81
100
100
100
95
All entities are audited by Nexia Court & Co with the exception of Mega First Mining NL, a Company incorporated in
Vanuatu and Empire Energy USA LLC incorporated in the USA which is audited by Schneider Downs.
* During the financial year the Company made application for the voluntary deregistration of the following non-
operating subsidiaries under subsection 601AA(2) of the Corporations Act 2001
Name of Subsidiary
Vodex Pty Ltd
Imperial Mining Investments Pty Ltd
Jasinv Pty Ltd
Jasrad Pty Ltd
Imperial Management Services Pty Limited
Deregistration Date
22 August 2012
22 August 2012
22 August 2012
22 August 2012
13 October 2012
78
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
29 NOTES TO THE STATEMENTS OF CASH FLOWS
(a) Reconciliation of Cash
Cash at the end of the financial year is shown in Statement of Financial
Position as follows:
Cash at bank and in hand
6,189,192
4,448,495
December 2012
US$
December 2011
US$
(b) Reconciliation of profit after income tax expense to net cash
flows from operating activities
(Loss)/profit for the period after income tax expense
(203,577)
(1,436,800)
Adjustments for non-cash items:
Depreciation & amortisation expense
Impairment of property, plant & equipment
Loss on disposal of Property, plant & equipment
Gain on disposal of acreage
Write-off of exploration expenditure
Expiration of leases
Impairment of available for sale financial assets
4,750,416
5,008,878
-
133,347
197,337
66,673
-
(1,092,250)
197,139
476,366
1,026,978
-
171,728
142,612
Profit/Loss on disposal of available for sale financial assets
(594,484)
(31,473)
Amortisation of overriding royalty interest
Discount on debt
Asset retirement obligation accretion
Share-based payment expense
1,799,938
653,879
1,993,380
2,355,234
701,093
513,013
503,387
246,627
Operating profit before changes in working capital and provisions
10,552,961
7,026,480
Change in Trade and other receivables
Change in Prepayments and other current assets
Change in Inventories
Change in Current tax asset
Change in Trade and other payables
Change in Debt
Change in Provisions
Change in Income tax liabilities
Change in Deferred Tax Liability
Net cash flows from operating activities
(c) Non-Cash Financing and Investing Activities
During the current financial year the following transactions occurred:
479,398
(2,447,096)
(66,429)
(348,271)
(219,824)
413,658
(301,875)
(552,000)
2,254,665
805,665
-
8,988
(7,897)
15,730
-
(1,043,000)
(586,360)
598,000
1,551,678
(2,548,326)
12,104,639
4,478,154
-
The Company granted 7,000,000 executive options to acquire ordinary shares in the capital of the Company
to Directors and specified executives of the Company. The Options are exercisable at A$0.35 and expire on
31 December 2014. The options were granted pursuant to the terms of the Company’s Employee Share
Option Plan which provides vesting restrictions based on minimum period of employment conditions.
Shareholder approval was obtained where required. These options were independently valued in July 2012 at
A$576,250.
A proportional value of these options together with previously granted options based on a pro-rata portion of
the vesting period was expensed during the financial year as follows:
79
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
29 NOTES TO THE STATEMENTS OF CASH FLOWS (Continued)
- 7,000,000 options exercisable @ A$0.35 expiring 31/12/14
- 1,650,000 options exercisable @ A$0.18 expiring 31/12/13
- 1,650,000 options exercisable @ A$0.17 expiring 1/7/13
- 3,500,000 options exercisable @ A$0.15 expiring 1/7/13
During the previous financial year the following transactions occurred:
A$174,446.92
A$80,960.60
A$75,177.70
A$164,725.04
A$495,310.26
-
The Company granted 6,800,000 executive options to acquire ordinary shares in the capital of the Company
at various exercise prices and expiry dates. The options were granted pursuant to the terms of the Company’s
Employee Share Option Plan which provides for vesting restrictions based on minimum period of employment
conditions. Shareholder approval was obtained where required. These options were independently valued in
June 2011 at US$650,847. A proportional value of these options $250,585 based on a pro-rata portion of the
vesting period was expensed during the financial year.
30 EARNINGS PER SHARE
Basic earnings per share (cents per share)
Diluted earnings per share (cents per share)
2012
(0.08)
(0.08)
2011
(0.66)
(0.66)
(Loss)/profit used in the calculation of basic and diluted earnings per share
(220,723)
(1,561,718)
Weighted average number of ordinary shares on issue used in the calculation of
basic earnings per share
290,864,302
235,969,091
Weighted average number of potential ordinary shares used in the calculation of
diluted earnings per share
290,864,302
235,969,091
31 SUPERANNUATION COMMITMENTS
The Empire Group contributed to externally managed accumulation superannuation plans on behalf of employees.
Empire Group contributions are made in accordance with the Empire Group’s legal requirements.
32 BUSINESS COMBINATIONS
On 17 July 2012 Empire Energy E&P, LLC announced that it had acquired a 97.9% working interest in producing
petroleum properties located in Gove County in the Central Kansas Uplift, Kansas (the “Acquired Assets”) for a
purchase price of US$1.7 million in cash, subject to closing adjustments. The effective date of this transaction was 1
June 2012 and has been reflected in this financial report.
The Acquired Assets consist of 3,360 gross (2,648 net) acres on land with total preliminary estimated proved and
probable recoverable reserves of 470,000 barrels of oil. As at acquisition date the working interest production from
the Acquired Assets was approximately 20 Bbl/d, which Empire Energy expects to increase through targeting 2
behind pipe Mississippian and Pennsylvanian carbonate opportunities identified by 3D seismic, plus an initial 11
seismic identified drilling locations to be targeted over 2012/13. The Company is the operator of the new assets.
80
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
33 PARENT ENTITY INFORMATION
Information relating to Empire Energy Group Limited:
Current Assets
Total Assets
Current Liabilities
Total Liabilities
Shareholder's Equity:
Issued Capital
Reserves
- Fair value reserve
- Foreign currency translation reserve
- Options reserve
Accumulated Losses
Total Shareholder’s Equity
Profit /(Loss) for the period
Total Comprehensive income
2012
US$
2011
US$
2,069,627
40,365,045
(1,365,966)
(1,406,157)
3,255,146
36,310,641
(1,096,831)
(1,151,637)
(73,325,555)
(71,195,874)
(952,693)
(1,328,286)
(883,583)
37,531,229
(904,203)
(757,593)
(1,342,907)
39,041,572
(38,958,888)
(35,159,005)
538,005
(803,691)
16,396
(760,046)
34 DIRECTORS AND EXECUTIVE OFFICERS REMUNERATION
Determination of Remuneration of Directors
Remuneration of non-executive directors comprise fees determined having regard to industry practice and the need
to obtain appropriate qualified independent persons.
Remuneration of the executive director is determined by the Remuneration Committee (refer statement of Corporate
Governance Practices and the Remuneration Report for further details).
In this respect, consideration is given to normal commercial rates of remuneration for similar levels of responsibility,
consistent with the Empire Group’s level of operations.
Determination of Remuneration of Other Key Management Personnel
Remuneration of senior executives is determined by the Remuneration Committee (refer statement of Main
Corporate Governance Practices for further details). In this respect, consideration is given to normal commercial
rates of remuneration for similar levels of responsibility, consistent with the Empire Group’s level of operations
81
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
34
DIRECTORS AND EXECUTIVE OFFICERS REMUNERATION (Continued)
Directors’ and Executive Officers’ Remuneration
Details of the nature and amount of each major element of the remuneration of each director of the Empire Group
and each named officer of the Empire Group and the Consolidated Entity receiving the highest remuneration are:
December 2012
Directors
B W McLeod
K A Torpey
D H Sutton
J Warburton
Short term benefits
Cash
salary
and fees
US$
Bonus
payments
US$
Non-
monetary
US$
Post-
employment
benefits
Super
contributions
US$
Long-
term
benefits
Long
service
leave
Share/option
based
payments *
Total
US$
362,495
20,714
-
221,114
113,927
-
-
-
28,540
-
-
-
-
1,864
20,714
-
-
-
-
-
-
302,923*
16,395*
16,395*
-
807,885
38,973
37,109
221,114
7,571*
203,052
Empire Energy Executives
A Boyer
156,000
-
39,481
-
* Share/Option based payments reflect a proportion of the independently valued cost of options granted under the
Employee Share Option Plan. The cost shown is a non-cash cost and includes, on a pro-rata basis, the
independently valued cost of previous options issued. Once the options reach vesting date, the cost shown
amortises to $0.
December 2011
Directors
B W McLeod
K A Torpey
D H Sutton
Short term benefits
Cash
salary
and fees
US$
Bonus
payments
US$
Non-
monetary
US$
Post-
employment
benefits
Super
contributions
US$
Long-
term
benefits
Long
service
leave
Share/option
based
payments *
Total
US$
361,165
20,638
-
206,380
-
-
49,603
-
-
-
1,857
20,638
-
-
-
195,451*
-
-
812,599
22,495
20,638
Specified Executive of the
Empire Group
D L Hughes
R Ryan
Empire Energy Executives
A Boyer
80,488
105,426
164,165
-
-
-
14,180
1,255
48,732
7,244
9,488
1,294
10,772
27,567*
27,567*
130,773
154,508
-
-
-
212,897
* Share/Option based payments reflect a proportion of the independently valued cost of options granted under the
Employee Share Option Plan. The cost shown is a non-cash cost and includes, on a pro-rata basis, the
independently valued cost of previous options issued. Once the options reach vesting date, the cost shown
amortises to $0.
.
82
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2012
35 AUDITORS’ REMUNERATION
Audit Services
Auditors of the Company – Nexia Court & Co.:
Audit and review of financial reports
Other auditors:
2012
US$
2011
US$
103,625
124,138
Audit and review of financial reports
138,686
247,233
Other services
Auditors of the Company – Nexia Court & Co.:
Taxation services
Other auditors:
Taxation services
242,311
371,371
19,612
37,978
127,745
147,357
54,593
92,571
36
MATTERS SUBSEQUENT TO BALANCE DATE
1) Rollover Macquarie Bank Facility
On 15 January 2013 the Company announced that the Macquarie Bank US$150 million credit facility had been
extended for a further 3 years through to 28 February 2016.
The extension of the credit facility will enable the company to continue to target the acquisition of assets that offer
attractive aggregation and growth potential and demonstrates Macquarie Bank’s support of the Company’s
operations.
2) The New York Department of Environmental Conservation (‘DEC’)
The defacto moratorium on hydraulic fracking in New York State ended on 1 July 2011, the DEC implemented public
comment periods commencing August 2011 and extending to 11 January 2013. The DEC has previously released its
recommendations on mitigating the environmental impacts of high-volume hydraulic fracking.
The timing of the release of guidelines and the issue of permits is yet unknown. In early 2013 the DEC filed a notice
of continuation for 90 days in order to allow the NY State Commissioner of Health, time to complete his review of the
draft Supplemental Generic Environmental Impact Statement. On 6 March 2013 the New York State Assembly
passed a bill to further suspend the issuance of high volume hydraulic fracturing until May 15, 2015, this bill was not
ratified by the Senate which favours controlled hydraulic fracturing. The Governor is currently awaiting additional
recommendations from the NY Department of Health at which time the DEC will determine a decision deadline.
There were no other matters or circumstances that have arisen since 31 December 2012 that has significantly
affected or may significantly affect:
the operations, in financial years subsequent to 31 December 2012, of the Empire Group; or
the results of those operations; or
the state of affairs in financial years subsequent to 31 December 2012 of the Empire Group.
83
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
DIRECTORS’ DECLARATION
In the opinion of the directors of Empire Energy Group Limited (the “Company”):
a
b
c
The financial statements and notes of the Company and the remuneration disclosures that are contained in
the Remuneration report in the Directors’ report set out on pages 25 to 28, are in accordance with the
Corporations Act 2001, including:
i
ii
Giving a true and fair view of the Company’s and Group’s financial position as at 31 December 2012
and of their performance, for the year ended on that date; and
Complying with Australian Accounting Standards (including the Australian Accounting Interpretations)
and the Corporations Regulations 2001;
the financial report also complies with the International Financial Reporting Standards as disclosed in note
1; and
there are reasonable grounds to believe that the Company will be able to pay its debts as and when they
become due and payable.
The directors have been given the declarations required by section 295A of the Corporations Act 2001 from the
Chief Executive Office and the Chief Financial Officer for the year ended 31 December 2012.
Signed in accordance with a resolution of the directors.
B W McLEOD
Director
Dated: 28 March 2013
84
INDEPENDENT AUDITORS REPORT
INDEPENDENT AUDITORS REPORT
TO THE MEMBERS OF
EMPIRE ENERGY EMPIRE GROUP LIMITED
Report on the Financial Report
We have audited the accompanying financial report of Empire Energy Group Limited, which comprises the
statement of financial position as at 31 December 2012, and the statement of comprehensive income,
statement of changes in equity and statement of cash flows for the year ended on that date, a summary of
significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated
entity comprising the company and the entities it controlled at the year’s end or from time to time during the
financial year.
Directors’ Responsibility for the Financial Report
The directors of the company are responsible for the preparation of the financial report that gives a true and
fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such
internal control as the directors determine is necessary to enable the preparation of the financial report that is
free from material misstatement, whether due to fraud or error. In note 1, the directors also state, in
accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial
statements comply with International Financial Reporting Standards.
Auditor’s Responsibility
Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit
in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with
relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain
reasonable assurance whether the financial report is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial report. The procedures selected depend on the auditor’s judgement, including the assessment of
the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of
the financial report in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by the directors, as well as evaluating the overall presentation of the financial report.
Our procedures include reading the other information in the annual report to determine whether it contains
any material inconsistencies with the financial report.
Our audit did not involve an analysis of the prudence of business decisions made by directors or
management.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
85
INDEPENDENT AUDITORS REPORT
TO THE MEMBERS OF
EMPIRE ENERGY EMPIRE GROUP LIMITED
(CONTINUED)
Independence
In conducting our audit, we have complied with the independence requirements of the Corporations Act
2001.
Auditors’ Opinion
In our opinion:
a.
the financial report of Empire Energy Empire Group Limited is in accordance with the Corporations
Act 2001, including:
i.
ii.
giving a true and fair view of consolidated entity’s financial position as at 31 December 2012
and of its performance for the period ended on that date; and
complying with Australian Accounting Standards (including the Australian Accounting
Interpretations) and the Corporations Regulations 2001; and
b.
the financial report also complies with International Financial Reporting Standards as disclosed in
Note 1.
Report on the Remuneration Report
We have audited the Remuneration Report included in pages 25 to 28 of the directors’ report for the period
ended 31 December 2012. The directors of the Empire Group are responsible for the preparation and
presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001.
Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in
accordance with Australian Auditing Standards.
Auditor’s Opinion
In our opinion, the Remuneration Report of Empire Energy Group Limited for the period ended 31 December
2012 complies with section 300A of the Corporations Act 2001.
Nexia Court & Co
Chartered Accountants
Sydney
Dated: 28 March 2013
Andrew Hoffmann
Partner
86
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
SHAREHOLDER INFORMATION
ORDINARY SHARES
a
Substantial Shareholders as at 28 February 2013
Name
Macquarie Bank Limited (Metals & Energy CAP DIV A/C)
b
Distribution of Fully Paid Ordinary Shares
1
1,001
5,001
10,001
100,001 and over
–
–
–
–
1,000
5,000
10,000
100,000
Total number of holders
Number of
Shares
53,666,666
%
Holding
17.60
Holders
333
936
549
1,083
367
Number of
Shares
136,240
2,678,620
4,170,815
42,171,953
255,706,054
%
Holding
0.04
0.88
1.37
13.83
83.88
3,268
304,863,682
100.00
c
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
d
i
ii
Number of holders of less than a marketable parcel
Percentage held by 20 largest holders
1,101
43.31
Twenty Largest Shareholders as at 28 February 2013
Name
Macquarie Bank Limited (Metals & Energy CAP DIV A/C)y
WYT Nominees Pty Ltd (C&E Wong Super Fund A/C)
Imperial Investments Pty Ltd
HSBC Custody Nominees (Australia) Limited - A/C 2
Armco Barriers Pty Ltd
Rhodes Capital Pty Ltd (B W McLeod Super Fun A/C)
John Wardman & Associates Pty Ltd (The Wardman Super Fund A/C)
ACT2 Pty Ltd
Ms Michelle Wong
Mr Terry McInery & Ms Judy McInery (DRYCA Employee RET A/C)
Classic Roofing Pty Limited (Superannuation Fund Account)
Redmond Holdings Pty Limited (The Defina A/C)
McGee Constructions Pty Ltd (McGorman Super Fund A/C)
JP Morgan Nominees Australia Limited
Mr Kenneth Murray & Mrs Ruth Murray (Murray Super Fund A/C)
CK Corporate Pty Ltd (CK A/C)
Mr Clive Thomas
Mr Iain Richard Campbell McKean
Mr Nathan Nissen (Nissen Super Fund A/C)
Accord Investment Corporation Pty Ltd (Accord Unit A/C)
Number of
Shares
53,666,666
12,850,451
9,321,217
6,706,202
5,455,000
5,122,300
5,000,000
4,450,000
3,781,575
3,000,000
2,950,000
2,841,800
2,475,000
2,458,886
2,400,000
2,050,000
2,013,023
1,850,000
1,819,140
1,800,000
132,011,260
%
Holding
17.60
4.22
3.06
2.20
1.79
1.68
1.64
1.46
1.24
0.98
0.97
0.93
0.81
0.81
0.79
0.67
0.66
0.63
0.60
0.59
43.31
Voting Rights
On a show of hands every member present in person or by proxy shall have one vote and upon a poll every
member, present in person or by proxy, shall have one vote for every share except if the issue price has not been
paid in full, then the holder is only entitled to a fraction of a vote on that share, being, the quotient of the amount
paid up divided by the issue price of that share.
87
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
SHAREHOLDER INFORMATON (Continued)
UNQUOTED SECURITIES AS AT 29 FEBRUARY 2012
Class of unquoted securities
No. of securities
No. of holders
Unlisted Executive Options issued under the terms of the Company’s
executive option plan
-
-
-
-
-
Executive options exercisable at A$0.1575 expiring 5 March 2013
Executive options exercisable at A$0.15 expiring 1 July 2013
Executive options exercisable at A$0.17 expiring 1 July 2013
Executive options exercisable at A$0.18 expiring 31 December 2013
Executive options exercisable at $0.35 expiring 31 December 2014
66,666
3,500,000
1,650,000
1,650,000
7,000,000
1
3
1
1
11
Voting Rights
There are no voting rights attached to any of the unquoted securities listed above.
LIST OF EXPLORATION LICENCE APPLICATIONS - AUSTRALIA
Permit
EP(A) 180
EP(A) 181
EP(A) 182
EP(A) 183
EP(A) 184*
EP(A) 187
EP(A) 188
*Pastoral Lease subject to Native Title
State
NT
NT
NT
NT
NT
NT
NT
Status
Under application
Under application
Under application
Under application
Under application
Under application
Under application
Interest
100%
100%
100%
100%
100%
100%
100%
88