EMPIRE ENERGY GROUP LIMITED
and its controlled entities
ABN 29 002 148 361
DECEMBER 2014 ANNUAL REPORT
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONTENTS
CORPORATE DIRECTORY
EXECUTIVE CHAIRMAN’S REVIEW OF OPERATIONS
DIRECTORS’ REPORT
AUDITOR’S INDEPENDENCE DECLARATION
CORPORATE GOVERNANCE STATEMENT
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO THE FINANCIAL STATEMENTS
DIRECTORS’ DECLARATION
INDEPENDENT AUDITOR’S REPORT
SHAREHOLDER INFORMATION
3
4
19
27
28
35
36
37
39
40
81
82
84
2
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CORPORATE DIRECTORY
Directors
B W McLeod (Executive Chairman)
D H Sutton
K A Torpey
Registered Offices
Australian Office
Level 7
151 Macquarie Street
Sydney NSW 2000
US Office
380 Southpointe Boulevard
Suite 130
Canonsburg PA 15317
Auditors
Nexia Australia
Level 16,1 Market Street
Sydney NSW 2000
US Auditors
Schneider Downs & Co. Inc
One PPG Place, Suite 1700
Pittsburgh PA 15222
Share Registry
Computershare Investor Services Pty Limited
Level 3
60 Carrington Street
Sydney NSW 2000
Telephone: 1300 85 05 05
Bankers
Macquarie Bank Limited
50 Martin Pace
Sydney NSW 2000
Australia & New Zealand Banking Group Limited
242 Pitt Street
Sydney NSW 2000
PNC Bank
One PNC Plaza
Pittsburgh PA 15222
Company Secretary
R V Ryan
Australian Solicitors
Clifford Chance
Level 16
1 O’Connell Street
Sydney NSW 2000
US Solicitors
K&L Gates LLP
K&L Gates Center
210 Sixth Avenue
Pittsburgh PA 15222-2613
Reed Smith LLP
599 Lexington Ave
New York NY 10022
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
www.empireenergygroup.net
3
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operations
A.
2014 OVERVIEW
USA
- Revenue $23.4 million. (2013: $25.4 million)
- Operating EBITDAX $11.8 million. (2013: $15.5 million)
- Gross oil production 240,200 Bbls (Net 154,900 Bbls). (2013: Gross 256,500 Bbls)
- Gross natural gas production 2.4 Bcf (Net 1.9 Bcf). (2013: Gross 2.5 Bcf)
- Average 2014 net production 1,291 Boe/d. (2013: 1,347 Boe/d)
- 2P reserves increased by ~40% to 14.3 MMBoe (2013:10.3 MMBoe) producing an
NPV10 of $87 million at NYMEX Strip as at December 31, 2014.
- Over 2014 the Company has drilled and completed 21 wells, 12 in New York (0 dry
wells) and 9 in the Mid-Con (2 dry wells) for a 95% success rate.
- The current environment for E&P companies is very challenging, but this has
presented opportunities to expand production, increase development assets and
offer alternatives to enhance operating efficiencies. On this basis the Company is:
o
Seeking to further aggregate joint venture acreage in northern Oklahoma
and also to drill up to 4 joint venture wells over 2015. At current pricing and
costs a typical Mississippian vertical well generates an IRR ~30%.
In negotiation with several partners with attractive farm-in structures.
o
o Reviewing opportunities to increase production and development assets
through acquisition.
- The Company recognised a non-cash impairment charge of ~$9.8 million, after tax,
on its 2014 full year accounts. The impairment charge relates to the historic book
value of USA oil and gas assets and is based on the NYMEX Strip as at December
31, 2014. Over the same period the Company recognised an after tax gain of ~$6.9
million on its hedging contracts which will be realised over the next 3 years.
AUSTRALIA
- A Prospective Resource P(50) estimate for the Company’s McArthur Basin
tenements was announced in early 2015. Refer to below.
- Negotiations with Traditional Owners and potential joint venture partners continue
for the Company’s tenements in the McArthur Basin, Northern Territory Australia.
- Finalisation of negotiations and agreement for EP 187, awarded in early 2015.
- Drilling of four exploration core holes in EP 184 in the McArthur Basin.
- Completion of the first stage of Risk Segment Mapping over the Company’s
McArthur Basin Tenements.
4
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
B.
OPERATIONS
The Company maintains a small head office in Australia and manages the oil and gas
production operations through its 100% owned USA subsidiary Empire Energy E&P, LLC
(‘Empire E&P’). The exploration program in the McArthur Basin, Northern Territory, is operated
through its 100% owned subsidiary Imperial Oil & Gas Pty Ltd. Operations over 2014 and
events since Balance Date can be summarised as follows:
- Current production is 1,291 Boe/d (~60% oil by revenue). Overall production decreased
by around 4% for the year.
- The Company’s annual drilling program is to drill at least 5 to 10 wells per year.
-
In December 2014 the Company announced its 50/50 Joint Venture (‘JV’) with Raya
Group Limited for the acquisition and development of acreage in Northern Oklahoma.
The Companies propose to undertake a low cost, vertical drilling program targeting
Mississippi Lime and Wilcox formations. The JV provides Empire the ability to
for more efficient
consolidate a
development through economies of scale and cost sharing. The initial target for the
acquisition is +9,000 net acres. The JV agreement was signed on January 29, 2015.
larger contiguous acreage position allowing
- The Company’s focus will be to drill and complete new wells in its Mississippi Lime play
in northern Oklahoma. At current prices a typical well drilled in the Mississippi chert is
expected to produce a +30% IRR.
- The Company is continuing negotiations for additional opportunities such as acreage
and production acquisitions, joint ventures and farm-in’s to increase production with an
emphasis on the Mid-Con region and a focus on oil production.
- Landowner negotiations continue for the 14.6 million acres of shale formations secured
onshore, in the McArthur Basin, Northern Territory, Australia. The first of the Company’s
exploration permits EP184 was granted in August 2013. EP187 was approved by
aboriginal landowners in late 2013 with formal grant of the Exploration Permit by the
Northern Territory Government in March 2015.
-
In December 2014 New York State Governor Cuomo announced his intention to prohibit
large-scale hydraulic fracturing in New York. The State Department of Environmental
Conservation (‘DEC’) has not yet issued its report on which the Governors decision was
made and the moratorium on fracking in New York State remains in place. To formalise
the New York State position on high volume fracking the DEC is required to issue a final
Supplemental Generic Environmental Impact Statement, that Commissioner Joseph
Martens says should be completed by the end of March 2015. The document is
expected to be closely scrutinized by fracking supporters, looking very closely for ways
to legally challenge the fracking ban. The Company is currently reviewing avenues to
recover value for what it believes is its right to develop its oil and gas shale resources in
good faith.
- On March 20, 2015 the Federal Government released its guidelines for fracking on
Federal Lands through the USA, including New York State. There is no indication how
Federal approvals throughout the USA reconciles with a fracking ban in New York State.
5
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
C.
OPERATIONS REVIEW – USA
TABLE A
Operating Statistics
Notes
(Units in thousands)
Dec 31, 2014
Gross Production:
Dec 31, 2013
% change
Oil (MBbls)
Natural gas (MMcf)
240.23
2,427.75
256.52
2,526.51
Net Production:
Oil (MBbls)
Natural gas (MMcf)
Net production (MBoe):
1.0
154.96
1,898.36
471.35
164.48
1,962.11
491.50
Net Daily Production (Boe/d):
1,291
1,347
Average sales price per unit (after hedging):
Oil ($/Bbl)
Natural gas ($/Mcf)
Oil Equivalents (Boe)
Average sales price per unit (before hedging):
Oil ($/Bbl)
Natural gas ($/Mcf)
Oil Equivalents (Boe)
Lifting Costs (incl taxes):
1.1
Oil ($/Bbl)
Natural gas ($/Mcf)
Oil Equivalents (Boe)
2P Reserves (MMBoe):
$84.90
$ 5.00
$48.04
$87.42
$ 3.93
$44.57
$28.20
$ 2.11
$17.76
14.3
$85.89
$ 5.37
$50.20
$91.18
$ 3.77
$45.56
$24.04
$ 1.73
$14.96
10.3
Notes to Table A
1.0 BOE - based on SEC guidelines of an oil:gas ratio of 1:6.
1.1 Lifting Costs - includes lease operating expenses, production and ad valorem taxes.
-6%
-4%
-6%
-3%
-4%
-4%
-1%
-7%
-4%
-4%
4%
-2%
17%
22%
19%
39%
6
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
D. NET PRODUCTION BY REGION - USA
TABLE B
Operating Statistics
(In thousands) Notes
Dec 31, 2014
Dec 31, 2013
% change
Oil (MBbls)
Appalachia
Mid-Con
Total (MBbls)
Natural Gas (MMcf)
Appalachia (MMcf)
Mid-Con
Total (MMcf)
3.41
151.55
154.96
3.64
160.84
164.48
1,880.81
17.55
1,898.36
1,947.78
14.33
1,962.11
-6%
-6%
-6%
-3%
22%
-3%
E.
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.
EBITDAX represents net income (loss) before interest expense, taxes, and depreciation,
amortization, development and exploration expenses. Nonrecurring expenses have 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.
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.
7
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
•
•
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:
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.
EBITDAX in Table C below and Net Earnings in Table D which follow, report operational
activities of Empire Energy Group. The table below provides a reconciliation to the financial
statements.
Net Earning - Effective Date
(In $ thousands)
Net Earnings- production date
Net Earnings- effective date
Intergroup management fee
Revenue and expenses (remaining Empire Group)
Other Income
Other Income*
Finance Income
Impairment of assets*
General and administration – head office
General and administration – other*
Finance costs – other*
Other expenses
Net loss before income tax expense
*
Indicates non-cash items
Dec 31, 2014
Dec 31, 2013
$(3,088)
$(2,336)
$150
$18
-
$6,616
$(13,995)
$(18)
$(368)
-
-
$(9,933)
$369
$535
$150
$216
$38
-
$(33)
$(216)
$(400)
$(2,177)
-
$(1,887)
8
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
TABLE C
Operations
(In $ thousands) Notes
Dec 31, 2014
Dec 31, 2013
% change
Net Revenue:
Oil Sales
Natural gas Sales
WI Income
Net Admin Income
Other Income
Net Revenue
1.0
1.0
1.1
$13,156
$9,466
$23
-
$740
$14,126
$10,522
$24
$453
$256
$23,385
$25,381
Production costs:
Lease operating expenses - Oil
Lease operating expenses - Gas
Taxes - Oil
Taxes - Natural gas
1.2
Total
$3,741
$3,384
$629
$617
$8,371
$3,363
$2,895
$575
$487
$7,320
Field EBITDAX
Gross Margin
Less:
Inventory Adjustment
Reserve Enhancements
Nonrecurring expenses
G&G Costs
Non Field F&A
Delayed Rental Payments
Operating EBITDAX
Operating Margin
Less:
Field G&A
Corporate G&A
Acquisition related expenses
Land & Leasing Costs
Head Office Net G&A
EBITDAX
Net Margin
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
$15,014
64.2%
$18,061
71.2%
$163
$347
$1,646
$118
$720
$260
$3,254
$11,760
50.3%
$694
$1,801
$661
$8
$1,387
$4,551
$7,209
30.8%
$(235)
$417
$1,345
$10
$720
$314
$2,571
$15,490
61.0%
$796
$1,492
$255
$288
$1,367
$4,198
$11,292
44.5%
-7%
-10%
-4%
-100%
189%
-8%
11%
17%
9%
27%
14%
-17%
-169%
-17%
22%
1,080%
0%
-17%
27%
-24%
-13%
21%
159%
-97%
1%
8%
-36%
9
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Notes to Table C:
1.0
Oil and Natural gas Sales –includes realised net hedges of $1.6 million for natural gas and oil.
1.1
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 and supervision etc., generally known as COPAS expenses. As part of this cost there
is a profit margin which accrues to the Company.
1.2
Taxes – includes production, severance and ad valorem taxes.
1.3
Inventory Adjustment – adjustment for oil in tanks as of December 31, 2014.
1.4
1.5
1.6
1.7
1.8
1.9
Reserve Enhancements – capital costs relating to the development of behind pipe reserves,
plus polymer treatment program for wells.
Nonrecurring expenses – Costs relating to ongoing upgrade of well bores, wellhead equipment
well and tank battery sites etc. These costs were higher than budgeted with nonrecurring costs
expected to decline over 2015 as well maintenance programs are completed. The environment of
lower oil prices makes it difficult to achieve an adequate payback on future well upgrades.
Non Field F&A – field supervision and indirect operational expenses including motor vehicles,
fuel, mechanics, roustabouts, supervisors, lease administration and land management, general
property insurances, environmental and reserve reporting etc.
Field G&A - Empire Energy has field offices in each region it operates. In logistical terms
operations are intensive with over 2,000 operating wells, 3,700 leases, 1,600 right of ways, 20
marketing agreements, 40 employees and 15 contract pumpers operating in two regional areas,
Appalachia and the Mid-Con. Field G&A expenses include expenses such as utilities, IT,
postage, office rental, reservoir engineering reviews etc.
Corporate G&A – Empire Energy manages its USA operations from a corporate head office at
Canonsburg, PA were a staff of 4 full time and 2 part time hold responsibility for financial
management, financial control, reporting and HR Services. Major expenses for the period were -
salaries and wages $296,533; audit/tax and accounting $376,081; travel and accommodation
$200,520; rent and accommodation costs $152,313; Professional Services $176,517 and
Management and Director fees $329,650 (of which $150,000 was paid to Empire Energy Group
Limited).
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 that have been bid on or that are currently in progress or
negotiation. Several acquisitions and/or potential mergers which were developed over 2014
continue under negotiations.
1.10
Land & Leasing Costs – costs related to land leasing expenses for new leases and renewals.
1.11 Head Office (Australian) Net G&A – net cost of Australian operations (expenses are net of
income received). Major expenses were consultants $449,452; salaries $290,127; audit &
accounting $124,016; listing related expenses $99,398; rent, communications, IT hardware and
support services $180,952.
10
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
F.
NET EARNINGS
TABLE D
Net Earnings
(In $ thousands)
Dec 31, 2014
Dec 31, 2013 % change
EBITDAX
Geological Services
Capital Raising Expenses 1.12
Dry Hole Expenses
Exploration - Australia
EBITDA
Less:
ARO, accretion expenses
Depn, depletion & amortisation
EBIT
Interest
Net Earnings
$7,209
$11,292
$35
$595
$443
$461
$1,534
$5,675
$567
$6,009
$6,576
$(901)
$2,187
$(3,088)
$41
-
$729
$1,303
$2,073
$9,219
$957
$5,360
$6,317
$2,902
$2,533
$369
-36%
-15%
100%
-39%
-65%
-26%
-38%
-41%
-12%
4%
N/A
-14%
N/A
Notes to Table D:
1.12 Over 2014 the Company commenced a capital raising program in the USA. A prospectus was
lodged mid-year 2014. Due to market conditions the raising was not pursued, however the
Company is now PCAOB compliant to enable a capital raising in the future.
G.
CAPITAL EXPENDITURE
Capex
(In $ thousands)
Dec 31, 2014
Dec 31, 2013 % change
Acquisitions
New wells - IDC
New wells - well head equipment
Undeveloped Leases
Exploration - Australia (EP 184)
$(1,252)
$2,392
$1,066
$1,211
$1,490
$4,907
$6
$4,021
$507
$(1,212)
-
$3,322
n/a
-41%
110%
200%
n/a
48%
Expenditure: A total of 9 wells were drilled in Kansas of which 6 had been bought on line by
the end of 2014, 2 wells drilled were dry and were plugged and abandoned. A total of 12 wells
were drilled in Appalachia in the newly identified Emerald Oil Field. The wells were due to be
bought on line in early 2015, but due to the recent very cold winter the wells were covered in
over 10 feet of snow. The wells should now be bought on line in April 2015.
11
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
H.
CREDIT FACILITY
The draw down on the Macquarie Bank Limited Credit Facility as at December 31, 2014 was
$42.5 million (cf $41.7 million at Dec 2013) at an average rate of LIBOR+4.2%. Principal
repayments made in 2014 and 2013 were ~$3.7 million and ~$7.7 million respectively. Over
2014 Empire made drawdowns totalling $3.5 million for drilling. Interest expense is estimated to
average $160,000/mth over 2015. The Company has exceeded the minimum cumulative
payment obligation through the maturity date of the credit facility.
I.
HEDGING
Due to the growth model implemented by Empire, a comprehensive hedging strategy has been
adopted to ensure a reduction in commodity risk over the period that a major portion of debt
financing is repaid. The portion of production hedged will naturally reduce as drill bit production
comes on line.
Year
2015
2016
2017
2018
2019
Total
Hedged
Est. Net
mmBtu
mmBtu
1,790,000
1,166,000
1,730,000 1,305,000
1,068,000
1,675,000
1,008,000
1,620,000
491,500
1,550,000
5,038,500
8,365,000
%
65.1%
75.4%
63.8%
62.2%
31.7%
60.2%
Average
$/mmBtu
$5.45
$4.35
$4.05
$4.11
$3.45
$4.40
Est. Net Hedged
Bbl
133,280
126,000
119,500
Bbl
98,160
42,000
39,600
%
73.6%
33.3%
33.1%
Average
$/Bbl
$90.00
$85.67
$85.23
378,780
179,760
47.5%
$87.94
The fair value (marked to market) of combined oil and gas hedges in place as at December 31,
2014 was $9.9 million. Oil and gas hedge contracts were valued based on NYMEX Henry Hub
and WTI forward curves at market close on December 31, 2014.
12
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
J.
RESERVES – USA
The Company’s reserves are reviewed annually by independent third party reserve engineers.
The scope of the reviews is to prepare an estimate of the proved, probable and possible
reserves attributable to Empire’s ownership position in the subject properties.
Reserves as at December 31, 2014 – USA (NYMEX Strip Dec 31, 2014)
Reserves - As of Jan 1, 2015
Oil
(Mbbls)
Gas
(MMcf)
MBoe
Gross
Wells
Capex
US$M
PV0
US$M
PV10
US$M
Region (Reserves) - USA
Proved Developed Producing
Proved Developed Non-producing
Proved Behind Pipe
Proved Undeveloped
Total 1P
Probable
Total 2P
Possible
Possible - Shale (NY)
Total 3P
1,792
26,716
6,245
2,108
$0
$107,097
$45,549
324
0
387
2,503
2,925
5,428
1,436
90,740
97,604
26
38
2,143
28,923
24,174
53,097
3,820
12,600
69,517
328
6
744
45
1
76
$2,334
$12,733
$5,471
$31
$92
$25
$11,871
$10,273
$2,211
7,323
2,230
$14,236
$130,195
$53,256
6,954
265
$70,699
$143,599
$33,404
14,277
2,495
$84,935
$273,794
$86,660
2,072
234
$28,811
$37,587
$7,943
92,840
109,189
2,729
$113,746
$311,381
$94,603
Prospective Resource P(50) - Australia (NT)
198,000
9,891,000
1,846,500
Prospective Resource P(50) - Shale (NY)
0
1,220,800
203,467
Total Reserves & Resources
295,604 11,181,317
2,159,156
$113,746
$311,381
$94,603
Notes to Reserves
-
“Prospective Resources” is the estimated quantities of petroleum that may potentially be
recovered by the application of a future development project(s) relate to undiscovered
accumulations. These estimates have both an associated risk of discovery and a risk of
development. Further exploration appraisal and evaluation is required to determine the
existence of a significant quantity of potentially moveable hydrocarbons.
- The scope of the Reserve Studies reviewed basic information to prepare estimates of
the reserves and contingent resources.
- 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.
- Oil prices are based on NYMEX West Texas Intermediate (WTI).
- Gas prices are based on NYMEX Henry Hub (HH).
- Prices were adjusted for any pricing differential from field prices due to adjustments for
location, quality and gravity, against the NYMEX price. This pricing differential was held
constant to the economic limit of the properties.
- All costs are held constant throughout the lives of the properties.
- The probabilistic method was used to calculate P50 reserves.
- The deterministic method was used to calculate 1P, 2P & 3P reserves.
- The reference point used for the purpose of measuring and assessing the estimated
petroleum reserves is the wellhead.
13
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
-
-
-
-
-
-
-
“PV0” Net revenue is calculated net of royalties, production taxes, lease operating
expenses, and capital expenditures but before Federal Income Taxes.
“PV10” is defined as the discounted Net Revenues of the company’s reserves using a
10% discount factor.
“1P Reserves” or “Proved Reserves” are defined as Reserves which have a 90%
probability that the actual quantities recovered will equal or exceed the estimate.
“Probable Reserves” are defined as Reserves that should have at least a 50%
probability that the actual quantities recovered will equal or exceed the estimate.
“Possible Reserves” are defined as Reserves that should have at least a 10%
probability that the actual quantities recovered will equal or exceed the estimate.
“Bbl” is defined as a barrel of oil.
“Boe” is defined as a barrel of oil equivalent, using the ratio of 6 Mcf of Natural Gas to 1
Bbl of Crude Oil. This is based on energy conversion and does not reflect the current
economic difference between the value of 1 Mcf of Natural Gas and 1 Bbl of Crude Oil.
“M” is defined as a thousand.
“MMBoe” is defined as a million barrels of oil equivalent.
“Mcf” is defined as a thousand cubic feet of gas.
-
-
-
- All volumes presented are net volumes and have had subtracted associated royalty
burdens.
- 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 in Western NY and NW
Pennsylvania. Estimates for GIP have 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.
- Reserve estimates have been prepared by the following independent reserve engineers:
- New York & Pennsylvania (Appalachia) - Ralph E. Davis Associates, Inc.
- Kansas (Mid-Con) - LaRoche Petroleum Consultants Ltd.
- Oklahoma (Mid-Con) - Pinnacle Energy Services, LLC.
- Northern Territory - Muir & Associates P/L and Fluid Energy Consultants.
- The following NYMEX price strip, as at December 31, 2014, was used to calculate
reserves and cash flow:
Year
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
$/Bbl
$/Mcf
56.26
62.63
66.55
68.50
69.75
70.58
71.28
71.57
71.62
71.62
3.03
3.46
3.76
3.96
4.12
4.25
4.37
4.49
4.61
4.69
14
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Reconciliation of Reserves – USA (NYMEX Strip Dec 31, 2014)
Net Reserves/Resources - Mboe
1P
2P
3P
Prospective
(P50)**
As at January 1, 2014
Production
Changes(1)
Appalachia (2)
Mid-Con
TOTAL
Appalachia
Mid-Con
Appalachia
Mid-Con
As at January 1, 2015
Appalachia (2)
Mid-Con
Northern Territory
5,322
3,087
8,409
-311
-155
133
-753
5,144
2,180
-
6,575
3,754
10,329
95,589
4,122
99,711
203,467
203,467
-5
3,954
6,570
7,708
-
5,761
3,718
101,350
7,840
-
-
-
203,467
1,846,500(3)
TOTAL
7,324
14,278
109,190
2,049,967
(1) Includes acquisitions, divestments, discoveries, extensions and revisions.
(2) Includes shale reserves although proposed fracking ban in NY State affect
approximately 95% of the Company's leases. These reserves have been included
but with zero value. On the 28 January 2015 the DEC Commissioner informed the
public that the planned ban on large-scale fracking can be revisited by the State at
any time, but likely won’t be in the near future. The Company does not expect this
to happen in the short to medium term. Wells within the defined Marcellus oil
resource zone were calculated to produce between 2-5,000 Bbls/5 acres. A
conservative 3% recovery factor was utilised.
1P, 2P & 3P are calculated on a deterministic basis with applicable volumes are
measured at the wellhead.
(3) The Company has completed its initial stage of delineating a prospective resource
in its Northern Territory MacArthur Basin acreage. Over the past 3 years this
program has included on ground exploration (where possible under Aboriginal
Land requirements), review of existing well and log data, assaying of core and 3D
geological modelling of the entire basin. Based on this data, the Company has had
completed an independent Prospective Resource P(50) estimate of 1,846 MMBoe,
unrisked. Prospective resources are as yet undiscovered and as such carry
significant exploration risk. The degree of uncertainty is ‘most likely’.
** Unrisked - this estimate of prospective petroleum resources must be read in
conjunction with the cautionary statement on page13.
15
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Net 2P Reserves: An updated Reserve Estimate was carried out as of December 31, 2014 at
the NYMEX strip as at December 31, 2014. An updated summary of 2P Reserves is shown
below. Total 2P reserves are 14.3 MMBoe. Due to the extended payback of conventional gas
wells drilled and completed in the Appalachia region, most natural gas reserves have been
excluded. This resulted in a right down of approximately 5 MMboe. These reserves are mainly
held by production and will be written back at higher gas prices.
Reserves - 2P MBoe
)
E
O
B
M
(
P
2
L
A
T
O
T
20,000
15,000
10,000
5,000
-
2006
2007
2008
2009
2010
2011
2012
2013
2014
2P MBoe
Uneconomic @ current Ngas price
In 2012 30.9MMcf Appalachia Natural gas placed into contingent category due to marginal profitability at current prices
Reconciliation of Economic Summary Projections – USA (NYMEX Strip Dec 31, 2014)
Reserves - PV10
1P
2P
3P
As at January 1, 2014
Sales 2014
Changes (1)
As at January 1, 2015
Appalachia (2)
Mid-Con
Hedging
$28,866
$76,145
$4,123
$39,036
$91,919
$43,557
$100,494
TOTAL
$109,134
$130,955
$144,051
Appalachia
Mid-Con
Hedges Realised
Appalachia
Mid-Con
Hedging
Appalachia (2)
Mid-Con
Hedging
TOTAL
-$7,617
-$13,151
-$1,636
$2,873
-$33,860
$7,422
$24,122
$29,134
$9,909
$63,165
-$9,207
-$35,088
-$6,272
-$43,176
$29,829
$56,831
$37,285
$57,318
$86,660
$94,603
(1) Includes changes in strip prices, acquisitions, divestments, discoveries, extensions and revisions.
(2) Excludes any value attributable to shale reserves.
16
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Land Position
The following table summarises the Company’s land holdings in the Northern Territory Australia
and the Appalachia and Mid-Continental regions in the United States as at December 31, 2014.
State
Total
HBP
Marcellus
Utica
Miss
CKU
2015
2016
2017
2018+
Net Ac
Net Ac
Net Ac
Net Ac
Net Ac
Net Ac
Net Ac
Net Ac
Net Ac
Net Ac
Expiry
NY
PA
OK
KS
265,806
224,589
235,191
130,642
15,727
15,552
8,543
7,058
3,337
3,337
20,899
20,019
-
-
-
-
NT
~14,600,000
-
-
3,337
-
-
-
125
-
2,100
17,919
480
13,638
5,420
17,075
4,886
-
-
-
-
-
-
50
3,337
-
TOTAL
14,905,769
263,497
243,734
137,700
5,437
17,919
14,243
5,420
17,075
8,273
Miss. = Mississippi Lime
CKU = Central Kansas Uplift:
Arbuckle
Simpson
Viola
Lansing/Kansas City
K.
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 program and proactively secured 100%
interest in 59,000 square km (14.6 million acres) of prospective shale gas exploration acreage,
approximately equal to 75% of the entire central trough of the Proterozoic McArthur Basin.
The McArthur Basin is an underexplored petroleum frontier basin with direct positive
indications of oil & gas. Exploration wells drilled in the nearby Southern McArthur Basin in
2012 discovered gas in the same thick carbon-rich black proliferous shales that are widespread
in Imperial’s acreage.
Estimated Potential Resource
The Company has completed its initial stage of delineating a prospective resource in its
Northern Territory McArthur Basin acreage. Over the past 3 years this program has included on
ground exploration (where possible) under Aboriginal Land requirements, review of existing well
and log data, reinterpretation of existing seismic, assaying of core and 3D geological modelling
of the basin. Based on this data, the Company has had completed an independent Prospective
Resource P(50) estimate of 1,846 MMBoe, unrisked.
2014 Work Program
Over 2014 Imperial drilled four exploration core holes in the St Vidgeon region of Northern
EP184. The drilling was done to ascertain if the shale-bearing formations in the region contain
petroleum source rocks of sufficient quality to generate potentially recoverable hydrocarbon
reserves. The drilling confirmed that the St Vidgeon Formation contains carbonaceous black
17
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
shale. Calculations indicate the original TOC content of the St Vidgeon organic shale
encountered was in the order of up to 3.85%.
Land access agreements to progress grant approvals for the tenements EP(A) 180, 181, 182
and 183 have advanced with the Traditional Owners and the Northern Land Council (NLC). With
final agreement for tenements EP(A) 180, 181 and 182 now expected by the end of 2015.
Formal granting of EP187 by the Department of Mines and Energy occurred in March 2015.
Ongoing Exploration program
Although affected by international commodity markets, Imperial is continuing to develop plans
for its Northern Territory acreage, including:
Planning an exploration program for EP187. This will include, the reinterpretation of all
available seismic data across this exploration permit as well as all available
geomagnetic, electromagnetic and digital elevation data. Where available data from
historical bore holes will be reviewed and reinterpreted in light of more recent available
data.
Continued field mapping and shale sampling along key outcrop intervals to further
constrain the petroleum potential of the prospective Barney Creek and the Velkerri
Formation.
Continue the development of the Tenements Lead & Prospect Inventory including
identifying drilling targets in areas proximal to existing live oil and gas shows or finds
and to existing gas pipeline infrastructure and/or right of ways. Such targets will be
further quantified and ranked as drilling candidates.
Ongoing hydrology and mapping studies.
Due to the scale and the potential of the McArthur Basin to provide a source of natural
gas to the expanding LNG industry the Company is seeking a potential partner/s to
develop the project over the medium to long term.
Competent Persons statement
The information in this report which relates to the Company’s reserves is based on, and fairly represents, information and
supporting documentation prepared by or under the supervision of the following qualified petroleum reserves and resources
evaluators, all of whom are licensed professional petroleum engineer’s, geologists or other geoscientists with over five years’
experience and are qualified in accordance with the requirements of Listing Rule 5.42:
Name
Allen Barron
William Kazmann
John P Dick
Wal Muir
Qualifications
Organisation
Ralph E Davis Associates, Inc
BSc
LaRoche Petroleum Consultants, Ltd MSc
BPE
Pinnacle Energy Services, LLC
BSc,MBA
Muir and Associate P/L
Professional Organisation
SPE
SPE
SPE
PESA
* SPE: Society of Petroleum Engineers
*PESA: Petroleum Exploration Society of Australia
None of the above evaluators or their employers have any interest in Empire Energy E&P, LLC or the properties reported herein.
The evaluators mentioned above consent to the inclusion in the report of the matters based on their information in the form and
context in which it appears.
Note Regarding Forward- Looking Statements
Certain statements made and information contained in this press release are forward-looking statements
and forward looking information (collectively referred to as “forward-looking statements”) within the
meaning of Australian securities laws. All statements other than statements of historic fact are forward-
looking statements.
18
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
DIRECTORS’ REPORT
for the financial year ended 31 December 2014
In respect of the financial year ended 31 December 2014, 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 any time 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.
The Company holds two exploration licences and five licence applications over 14.6 million acres in the McArthur
Basin, in the Northern Territory. Work undertaken to date has shown this region to be highly prospective for oil and
gas shale.
CONSOLIDATED RESULTS
The consolidated net loss of the Empire Group for the financial year ended 31 December 2014 after providing for
income tax was US$4,753,285 compared to a consolidated net loss for the previous corresponding reporting period
of US$2,263,197.
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 18 of this annual report.
DIVIDENDS
The Directors have not recommended the payment of a final dividend.
SIGNIFICANT CHANGES IN STATE OF AFFAIRS
There were no significant changes in the state of affairs of the consolidated entity during the financial period under
review.
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.
19
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2014
MATTERS SUBSEQUENT TO BALANCE DATE
1) Joint Venture with Raya Group
In February 2015 the Company entered into a Joint Venture with Raya Group Limited. The Joint Venture allows both
parties to jointly identify, acquire and develop oil and gas leases in an area of mutual interest in Northern Oklahoma,
USA.
2) Exploration Permit
Exploration Permit EP187 in the Northern Territory was formally granted by the Northern Territory Government in
March 2015.
There were no other matters or circumstances that have arisen since 31 December 2014 that has significantly
affected or may significantly affect:
•
•
•
the operations, in financial years subsequent to 31 December 2014, of the Empire Group; or
the results of those operations; or
the state of affairs in financial years subsequent to 31 December 2014 of the Empire Group.
INFORMATION ON DIRECTORS
Bruce William McLeod, B.Sc (Maths), M.Com (Econ)
Executive Chairman
Age 62
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 and Member of Audit Committee
Other Current Directorships
Chairman of Mayan Iron Corporation Ltd.
Former Directorships in Last 3 Years
None.
David Henty Sutton, B.Com ACIS
Non-Executive Director
Age 71
Experience and Expertise
Mr Sutton has many years’ experience as a Director of companies involved with share broking and investment
banking. He is an Executive Director of Dayton Way Financial, a boutique financial services company focussing on
the global resource sector.
Prior to his current roles 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 and Member of Audit Committee
Other Current Directorships
Chairman of Silver Mines Limited, EHG Corporation Ltd, Precious Metals, Sinovus Mining Limited, and Dayton Way
Financial.
Former Directorships in Last 3 Years
AAT Corporation Limited.
20
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2014
Kevin Anthony Torpey, B.E., MIE Aus., CP Eng, FAusIMM, (CP)
Non-Executive Director
Age 76
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 and Member of Audit Committee
Other Current Directorships
Non-Executive Director of Latrobe Magnesium Limited
Former Directorships in Last 3 Years
None
COMPANY SECRETARY
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 and assumed the role of Company Secretary on 31 July 2013. Ms Ryan also
serves in the role of General Manager Operations.
EXECUTIVES
Kylie Arizabaleta B.Bus (Acct) (Fin)
Financial Controller
Ms Arizabaleta was appointed to the position of Financial Controller in March 2012. Before joining Empire Energy
Group Limited she worked in the private 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 Energy Group in February 2010 and from March 2011 to
March 2014 served as CEO of the Company’s wholly owned subsidiary Imperial Oil & Gas Pty Ltd. He continues as
Non-Executive Director of Imperial Oil & Gas. A Geoscientist by profession, Dr Warburton has 32 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, a Fellow
of the Geological Society of London and serves on the External Advisory Board at the Centre for Integrated
Petroleum Engineering & Geoscience at the University of Leeds, UK.
Geoff Hokin MSc(Hons) geology; MSc geology; Dip geology; Dip TAA, Cert IV Bus Mgmt.; Cert IV TAA
Explorations & Operations, Imperial Oil & Gas Pty Ltd
Mr Hokin holds the qualifications of Master Science (Honours) in Geology (exploration, and basin setting and
analysis). He has 12 years’ experience as an exploration geologist in the unconventional gas and coal sectors with
21
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2014
various senior geology roles with a number of companies including Armour Energy Limited, Metgasco Limited and
Arrow Energy Limited. Mr Hokin has extensive geological and executive management business experience to
Company Director level 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
16
16
16
16
16
16
-
2
2
-
2
2
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.
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 twice 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
22
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2014
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.
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
performance goals set. Details of the nature and amount of each element of the remuneration of each Director and
each specified executive of the Empire Group receiving the highest remuneration are set out in the following tables.
December 2014
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$
-
-
-
-
96,265
168,000
18,058
-
44,480
-
-
-
1,625
18,058
377,322 72,148***
-
-
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 (“ESOP”). The cost shown is a non-cash cost and includes, on a pro-rata basis, the
independently valued cost of options issued. Once the options reach vesting date, the cost shown amortises to $0.
The non-cash cost of the above options issued under the ESOP over the year was $124,043 the non-cash loss on
options relating to the above directors that expired over the year was $54,868. The net non-cash cost of options
issued to the above directors and executives for the year was $69,175.
*** Under the terms of the existing performance plan Mr B W McLeod would have been eligible for a payment of
$72,148 in 2014 based on the increase in 2P reserves. Due to the current conditions of the energy industry, the
Company and Mr McLeod have agreed to defer the payment for a period of 12 months, or until an earlier time when
both the Remuneration Committee and Mr McLeod agree that conditions are suitable for the performance payment
to be granted in part or in full.
86,901
10,085
10,085
-
48,852
16,972
6,650
-
-
-
-
-
580,851
29,768
28,143
96,265
240,474
December 2013
Short term benefits
Cash
salary
and fees
US$
Bonus
payments
US$
Non-
monetary
US$
Post-
employment
benefits
Super
contributions
US$
Long-
term
benefits
Long
service
leave
Share/option
based
payments**
Total
US$
-
-
-
58,520
-
-
385,237
19,359
-
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 (“ESOP”). The cost shown is a non-cash cost and includes, on a pro-rata basis, the
independently valued cost of options issued. Once the options reach vesting date, the cost shown amortises to $0.
The non-cash cost of the above options issued under the ESOP over the year was $222,353 the non-cash loss on
options relating to the above directors that expired over the year was $131,116. The net non-cash cost of options
issued to the above directors and executives for the year was $91,237.
151,981
26,134
26,134
-
-
1,742
19,359
275,763
173,000
46,667
18,104
-
-
-
-
-
-
-
-
-
-
595,738
47,235
45,493
275,763
237,771
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:
23
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2014
Terms of the agreement:
•
•
•
•
Base salary of A$417,900 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
Long term incentives occurring up on the monetisation of an asset, this long term incentive continues
beyond term of the agreement
• Other benefits include provision of fully maintained motor vehicle and participation in the Company’s
Employee Share Option Plan
The terms of the agreement have been approved 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 6,500,000 executive options to acquire ordinary shares were granted to Directors and
specified executives of the Company. 3,000,000 executive options were granted to a Director following the approval
of shareholders at an annual general meeting of members of the Company held on 30 May 2014. 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.
At the date of this report there were 12,500,000 unissued shares held under option to Directors and specified
executives. These options are exercisable of the following basis:
Number
1,500,000 Executive options
4,500,000 Executive options
3,500,000 Executive options
1,500,000 Executive options
1,500,000 Executive options
12,500,000
Directors’ Interests and Benefits
Exercise Price A$
$0.18
$0.17
$0.15
$0.17
$0.18
Expiry Date
31 December 2015
31 December 2015
31 December 2016
31 December 2016
31 December 2016
The relevant interest of each director and specified executive in the share capital of the Company as at the date of
this report is:
Particulars of Interests in the Issued Capital of the Company
Director
B W McLeod
D H Sutton
K A Torpey
Direct Interest
Shares
165,239
438,301
118,055
Options
-
-
-
Indirect Interest
Shares
Options
7,073,126
194,999
2,073,394
6,000,000
-
-
End of Audited Remuneration Report
SHARE OPTIONS
Movements
Grant of Options
During the financial year 6,500,000 executive options to acquire ordinary shares were granted pursuant to the terms
of the Company’s employee share option plan. Vesting of these options is subject to minimum period of employment
conditions. The options were granted on the following terms:
24
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2014
No. of Options Executive Options
Exercise Price A$
3,500,000 executive options
1,500,000 executive options
1,500,000 executive options
$0.15
$0.17
$0.18
Expiry Date
31 December 2016
31 December 2016
31 December 2016
During the financial year 4,250,000 options were granted to Macquarie Bank Limited as a component for amending
the existing terms of the Company’s credit facility. The unlisted options are exercisable at A$0.12 and expire 26
February 2016.
Exercise of Options
No options were exercised during the financial year or in the period since the end of the financial year and up to the
date of this report.
Expiry of Options
6,500,000 unlisted options exercisable at A$0.35 were not exercised by their expiry date of 31 December 2014 and
as a consequence have lapsed.
During the financial year the following options lapsed due to the holder of the options not meeting the minimum terms
of employment requirement under the Employee Share Option Plan:
500,000 unlisted options exercisable at A$0.35 prior to 31 December 2014 lapsed.
500,000 unlisted options exercisable at A$0.17 prior to 31 December 2015 lapsed.
At the date of this report the total number of unissued shares held under option was 16,750,000. These options are
exercisable on the following terms.
Number
1,500,000 Executive options
4,500,000 Executive options
4,250,000 Macquarie Bank Limited
3,500,000 Executive options
1,500,000 Executive options
1,500,000 Executive options
16,750,000
Exercise Price A$
$0.18
$0.17
$0.12
$0.15
$0.17
$0.18
Expiry Date
31 December 2015
31 December 2015
26 February 2016
31 December 2016
31 December 2016
31 December 2016
PERFORMANCE RIGHTS
During the 2013 financial year the Company issued 2,500,000 Performance Rights over fully paid ordinary shares in
the Company as part consideration for the buy back of the minority interest equity holder in Empire Energy USA LLC.
The minority interest holder also received 4,000,000 fully paid ordinary shares in the issued capital of Empire Energy
Group Limited. The Performance Rights are exercisable at no cost under the following events:
-
-
Lifting of the current moratorium on oil and/or natural gas fracking in New York State;
If the Company sells, transfers or assigns all or substantially all of its property interest Chautauqua and
Cattaraugus Counties in the State of New York to an unaffiliated third party then the performance rights will
vest in accordance with the following schedule:
Fair Market Value of Consideration
Received by the Company
Less than $25.0 million
Performance rights exercisable
0.0%
At least $25.0 million but less than $45.0
million
Percentage calculated by dividing Fair Market Value
of Consideration received by the Company by $45.0
million.
$45.0 million or more
100.0%
-
If the holder of the Performance Rights in any way disposes of more than 75% of the 4 million ordinary
shares assigned as part of the minority interest buy back transaction prior to either the moratorium being
terminated or a third party sale being consummated then the performance rights will be cancelled.
25
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2014
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 Secretary, 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 2014 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 34 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 27 and forms part of the Director’s Report for the financial year ended 31 December 2014.
Auditor
Nexia Australia 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 31 March 2015
26
AUDITOR’S INDEPENDENCE DECLARATION
The Board of Directors
Empire Energy Group Limited
Level 7, 151 Macquarie Street
SYDNEY NSW 2000
31 March 2015
To the Board of Directors of Empire Energy Group Limited
Auditor’s Independence Declaration under section 307C of the Corporations Act 2001
As lead audit partner for the audit of the financial statements of Empire Energy Group Limited for the
financial year ended 31 December 2014, 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
Robert Mayberry
Partner
27
EMPIRE ENERGY GROUP LIMITED
and its 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.
28
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 20 to 22.
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
18 years 4 months
17 years 8 months
21 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 16 times during the year and Directors attendance is disclosed on page 22 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.
29
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
2014
Empire Group
Objective
Progress towards
meeting objective
Percentage Number
Percentage Number
Percentage
Whole organisation
Senior Executive positions
Board
Number
11
3
-
18%
30%
-
15
4
1
25%
40%
25%
3
-
-
A copy of the Company’s diversity policy has been posted on the Company’s website.
73%
-
-
30
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 2014 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.
31
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 Australia, 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 Australia confirms that they conform with the requirements of the statement.
Nexia Australia 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
32
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 twice 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 22.
33
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.
34
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
for the year ended 31 December 2014
Revenue from continuing operations
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
Finance costs (non-cash)
Finance income
Other Expenses
Loss before income tax expense from continuing
operations
Note
Year ended
December 2014
US$
Year ended
December 2013
US$
5
6
8
8
8
7
7
7
23,570,157
898,141
24,468,298
25,886,370
681,667
26,568,037
(12,130,866)
(780,082)
(188,518)
(13,995,331)
(5,842,203)
(5,305,912)
(2,021,849)
(709,755)
6,615,916
(42,807)
(11,328,681)
(2,023,255)
(152,379)
(33,470)
(5,028,214)
(4,470,650)
(2,232,176)
(3,158,384)
-
(28,265)
(9,933,109)
(1,887,437)
Income tax benefit/(expense)
9a
5,179,824
(375,760)
Loss after income tax expense from continuing operations
(4,753,285)
(2,263,197)
Other comprehensive income
Loss on the revaluation of available-for-sale assets
Exchange differences on translation of foreign operations
(151,750)
(29,160)
(220,121)
(102,889)
Other comprehensive income for the year, net of tax
(180,910)
(323,010)
Total comprehensive income for the year
(4,934,195)
(2,586,207)
Loss 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
(4,753,285)
-
(4,753,285)
(2,343,254)
80,056
(2,263,198)
(4,934,195)
-
(4,934,195)
(2,644,068)
51,903
(2,592,165)
Basic earnings per share
Diluted earnings per share
29
29
Cents per share
(1.54)
(1.54)
Cents per share
(0.77)
(0.77)
The above statements of comprehensive income should be read in conjunction with the accompanying notes.
35
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 31 December 2014
Note
As at
December 2014
US$
As at
December 2013
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
TOTAL CURRENT LIABILITIES
NON-CURRENT LIABILITIES
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
TOTAL SHAREHOLDERS’ EQUITY
10
11
12
13
13
14
14
15
16
17
18
19
18
19
9(e)
20
3,092,991
4,471,855
242,184
611,002
6,558,148
-
2,322,720
4,674,518
203,316
995,610
2,327,334
201,533
14,976,180
10,725,031
5,157,977
81,876,604
672,778
68,217
3,493,532
96,763,108
874,252
68,217
87,775,576
101,199,109
102,751,756
111,924,140
5,771,978
-
41,776,843
12,245
5,746,774
542,633
41,099,354
5,351
47,561,066
47,394,112
42,434
7,953,969
2,062,080
62,607
7,788,880
7,316,000
10,058,483
15,167,487
57,619,549
62,561,599
45,132,207
49,362,541
73,683,238
4,441,130
(32,992,161)
73,683,238
3,932,889
(28,253,586)
45,132,207
49,362,541
45,132,207
49,362,541
The above consolidated statements of financial position should be read in conjunction with the accompanying notes.
36
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2014
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 2013
73,683,238
284,291
108,810
3,539,788
(28,253,586)
49,362,541
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
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 – share-based payments
Warrants issued during the year
Total transactions with owners
-
-
-
-
-
-
-
-
-
-
-
-
-
(29,160)
(151,750)
-
(151,750)
(29,160)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(14,710)
317,238
386,623
689,151
(4,753,285)
(4,753,285)
-
-
(29,160)
(151,750)
(4,753,285)
(4,934,195)
-
-
-
-
14,710
-
-
-
14,710
317,238
386,623
703,861
Balance at 31 December 2014
73,683,238
132,541
79,650
4,228,939
(32,992,161)
45,132,207
-
-
-
-
-
-
-
-
-
-
-
-
49,362,541
(4,753,285)
(29,160)
(151,750)
(4,934,195)
-
-
-
317,238
386,623
703,861
45,132,207
The above consolidated statements of changes in equity should be read in conjunction with the accompanying notes.
37
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2013
Consolidated
Balance at 31 December 2012
Correction to prior period balances
Issued
Capital
Fair Value
Reserve
Foreign
Currency
Translation
Reserve
Options
Reserve
Accumulated
Losses
Attributable to
owners of
equity parent
Non-
Controlling
Interests
Total Equity
73,325,555
3,936,996
211,699
2,562,100
(30,576,059)
49,460,291
1,653,384
51,113,675
-
(3,712,200)
-
-
3,712,200
-
-
-
Balance at 31 December 2012 (restated)
73,325,555
224,796
211,699
2,562,100
(26,863,859)
49,460,291
1,653,384
51,113,675
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
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
Acquisition of non-controlling interest without change in control
Total transactions with owners
357,683
-
-
-
-
-
-
(220,121)
-
(102,889)
-
(220,121)
(102,889)
(2,343,254)
(2,343,254)
80,056
(2,263,198)
(5,956)
-
(108,845)
(220,121)
-
-
(108,845)
(220,121)
(2,349,210)
(2,672,220)
80,056
(2,592,164)
372,520
(14,837)
-
-
-
-
-
-
-
-
-
279,616
279,616
-
-
-
-
-
-
-
-
-
372,520
(14,837)
9,744
-
461,514
424,929
-
-
949,739
959,483
-
-
-
-
19,685
372,520
(14,837)
-
461,514
444,614
1,330,344
(1,753,125)
(422,781)
2,574,470
(1,733,400)
841,030
-
-
-
-
-
-
(9,744)
461,514
424,929
100,989
977,688
Balance at 31 December 2013
73,683,238
284,291
108,810
3,539,788
(28,253,586)
49,362,541
-
49,362,541
The above consolidated statements of changes in equity should be read in conjunction with the accompanying notes.
38
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 31 December 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers
Payments to suppliers and employees
Interest received
Interest paid
Income taxes paid
Net cash flows from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of oil and gas assets
Proceeds from sale of investments in equity
Payments for oil and gas assets
Payments for property, plant and equipment
Payments for investments in equities
Note
Year ended
31 December
2014
US$
Year ended
31 December
2013
US$
28(b)
23,919,521
(16,938,010)
3,916
(2,021,849)
127,436
5,091,014
1,769,209
-
(6,700,803)
(95,233)
-
26,868,135
(17,696,844)
3,087
(2,218,897)
568,610
7,524,091
-
250,580
(2,100,482)
(1,152,845)
(89,480)
Net cash flows from investing activities
(5,026,827)
(3,092,227)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from interest bearing liabilities
Net proceeds from issuing of shares
Repayment of interest bearing liabilities
Finance lease payments
Distribution to non-controlling interests
Loan acquisition costs
Net cash flows from financing activities
Net increase in cash and cash equivalents
4,500,603
-
(3,736,186)
(20,173)
-
-
-
(14,837)
(7,731,600)
22,416
(56,216)
(494,169)
744,244
(8,274,406)
808,431
(3,842,542)
Cash and cash equivalents at beginning of financial year
Effect of exchange rate changes on cash and cash equivalents
2,322,720
(38,160)
6,189,192
(23,930)
CASH AND CASH EQUIVALENTS AT THE END OF
FINANCIAL YEAR
28(a)
3,092,991
2,322,720
The above consolidated statements of cash flow should be read in conjunction with the accompanying notes.
39
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
1.
SIGNIFICANT ACCOUNTING POLICIES
Corporate information
The financial report covers Empire Energy Group Limited and its controlled entities (“Empire Group”). Empire Group
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 Group as an individual entity are no longer presented as
the consequence of a change to the Corporations Act 2001; limited financial information for Empire Group, as an
individual entity, is included in Note 32.
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 2014 was authorised for issue in
accordance with a resolution of Directors on 31 March 2015.
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 2014 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 2014.
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.
40
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
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.
41
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
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 as well as fair value gains on oil and gas derivatives
the group is party to. 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 are recognised in the statement of profit
and loss.
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.
42
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
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 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. For unlisted
investments, where information regarding the fair value is unreliable, the investment is held at cost under AASB139.
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. Goodwill is tested for impairment annually under AASB 136.
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.
43
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
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 a discount rate that reflects market conditions as at
reporting date. 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.
44
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
Correction of prior period balances
Empire undertook a review of its hedge accounting policy during the year and found that in order to comply with
AASB 139 Financial instruments: Recognition and Measurement, any fair value gains and losses should be
recognised in the statement of profit and loss at each reporting date where in previous periods, gains or losses were
taken to equity. This error has been rectified by restating each of the affected financial statement line items to prior
periods as follows:
December 2013
December 2012
Consolidated Statement of
Financial Position
(Extract)
Previous
Amount
$000
Adjustment
$000
Restated
Amount
$000
Previous
Amount
$000
Adjustment
$000
Restated
Amount
$000
Reserves
6,421
(2,488)
3,933
6,711
(3,712)
2,999
Accumulated losses
(30,741)
2,488
(28,253)
(30,576)
3,712
(26,864)
45
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
1.
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consolidated Statement of Profit or Loss and Other
Comprehensive Income (Extract)
Finance costs
Profit before income tax
Income tax expense
Loss for the period
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
(Loss) for the year is attributable to:
December 2013
Previous
Amount
$000
(1,245)
26
(1,065)
(1,039)
(1,547)
(2,586)
Adjustment
$000
(1,913)
(1,913)
689
Restated
Amount
$000
(3,158)
(1,887)
(376)
(1,224)
(2,263)
1,224
-
(323)
(2,586)
Equity holders of Empire Energy Group Limited
(1,119)
(1,224)
(2,343)
Basic earnings per share (cents)
Diluted earnings per share (cents)
(0.37)
(0.37)
(0.40)
(0.40)
(0.77)
(0.77)
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 2014. 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
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 2015 but the impact of its adoption is yet to be assessed by the consolidated
entity.
New and Revised Standards that are effective for Annual Periods beginning on or after 1 January 2014
AASB 2012-3 Amendments to Australian Accounting Standards - Offsetting Financial Assets and Financial Liabilities
to address
AASB 2012-3 adds application guidance
inconsistencies identified in applying some of the offsetting criteria of AASB 132, including clarifying the meaning of
"currently has a legally enforceable right of set-off" and that some gross settlement systems may be considered
equivalent to net settlement.
Instruments: Presentation
to AASB 132 Financial
46
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
AASB 2013-3 Recoverable Amount Disclosures for Non-Financial Assets
Amends the disclosure requirements in AASB 136 Impairment of Assets. The amendments include the requirement
to disclose additional information about the fair value measurement when the recoverable amount of impaired assets
is based on fair value less costs of disposal.
AASB 2013-4 Novation of Derivatives and Continuation of Hedge Accounting [AASB 139]
Amends AASB 139 Financial Instruments: Recognition and Measurement to permit the continuation of hedge
accounting in specified circumstances where a derivative, which has been designated as a hedging instrument, is
novated from one counterparty to a central counterparty as a consequence of laws or regulations.
AASB 2013-7 Amendments to Australian Accounting Standards - Life Insurance Contracts
Amends AASB 1038 arising from AASB 10 Consolidated Financial Statements in relation to consolidation and
interests of policyholders.
AASB1031 Materiality
Deletes all the previous Australian guidance in AASB 1031 on materiality, including the quantitative thresholds, and
cross references the definition of ‘material’ to the Framework for the Preparation and Presentation of Financial
Statements and AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
AASB 1053 Application of Tiers of Australian Accounting Standards (Reduced Disclosure Regime)
This standard establishes a differential financial reporting framework consisting of two tiers of reporting requirements
for preparing general purpose financial statements:
i) Tier 1: Australian Accounting Standards
ii) Tier 2: Australian Accounting Standards -Reduced Disclosure Requirements Tier 2 comprises the recognition,
measurement and presentation requirements of Tier 1 and substantially reduced disclosures corresponding to those
requirements. Consequential amendments to other standards to implement the regime were introduced by AASB
2010-2, 2011-2, 2011-6, 2011-11, 2012-1, 2012-7, 2012-11, 2013-6 and 2014-2.
AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel
Disclosure Requirements
The amendment removes the requirements in AASB 124 to disclose individual KMP remuneration, equity holdings,
loans, and other transactions and balances in relation to disclosing entities that are not companies.
AASB 2014-1 Amendments to Australian Accounting Standards
This Standard makes amendments to other Accounting Standards for:
A. Annual Improvements to IFRSs 2010–2012 Cycle and Annual Improvements to IFRSs 2011–2013 Cycle –
applicable from 1 July 2014. Amendments relate to:
AASB 2 – clarifying vesting and non-vesting conditions in share-based payment arrangements;
AASB 3 – clarifies that contingent consideration in a business combination is accounted for at fair value through
profit and loss;
AASB 8 – disclosure of the judgements used in applying the aggregation criteria and of segment assets;
AASB 3 – clarifies that business combination requirements do not apply to the formation of joint arrangements
in the financial statements of the joint arrangement itself;
AASB 116/138 – clarification of proportionate restatement of accumulated depreciation on revaluation of
property, plant and equipment and intangibles;
AASB 124 – clarification of KMP where an entity has a management entity/responsible entity;
AASB 13 - Clarification of the scope exemption for measuring the fair value of financial assets and liabilities on
a portfolio basis;
AASB 3/140 – clarifying the interrelationship between AASB 3 and AASB 140 when classifying property as
either an investment property or property, plant and equipment and whether that property constitutes a
business.
B. Amendments to AASB 119 Employee Benefits in relation to the requirements for contributions from employees or
third parties that are linked to service – applicable from 1 July 2014;
47
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
C. Amendments to particular Australian Accounting Standards to delete their references to AASB 1031 Materiality –
applicable from 1 July 2014;
D. Amendments to AASB 1 First-time Adoption of Australian Accounting Standards, which arise from the issuance of
AASB 14 Regulatory Deferral Accounts - applicable from 1 July 2016;
E. Defers the application date of AASB 9 Financial Instruments to annual reporting periods beginning on or after 1
January 2018 and other consequential amendments - applicable from 1 January 2015.
AASB 2014-3 Accounting for Acquisitions of Interests in Joint Operations – Amendments to AASB 11
This amendment to AASB 11 Joint Arrangements requires the acquirer of an interest in a joint operation in which the
activity constitutes a business, as defined in AASB 3 Business Combinations, to apply all of the principles on
business combinations accounting in AASB 3.
AASB 9 (2014) Financial Instruments
AASB 9 (2014) includes requirements for the classification and measurement of financial assets and incorporates
amendments to the accounting for financial liabilities and hedge accounting rules to remove the quantitative hedge
effectiveness tests and have been replaced with a business model test. AASB 9 improves and simplifies the
approach for classification and measurement of financial assets compared with the requirements of AASB 139 as
follows:
a) Financial assets that are debt instruments will be classified based on (1) the objective of the entity's
business model for managing the financial assets; (2) the characteristics of the contractual cash flows.
b) Allows an irrevocable election on initial recognition to present gains and losses on investments in equity
instruments that are not held for trading in other comprehensive income. Dividends in respect of these
investments that are a return on investment can be recognised in profit or loss and there is no impairment or
recycling on disposal of the instrument.
c) Financial assets can be designated and measured at fair value through profit or loss at initial recognition if
doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise
from measuring assets or liabilities, or recognising the gains and losses on them, on different bases.
d) Where the fair value option is used for financial liabilities the change in fair value is to be accounted for as
follows:
i)
ii)
The change attributable to changes in credit risk are presented in other comprehensive income
(OCI)
The remaining change is presented in profit or loss. AASB 2012-6 also modifies the relief from
restating prior periods by amending AASB 7 to require additional disclosures on transition to AASB
9 in some circumstances. Consequential amendments were also made to other standards as a
result of AASB 9 by AASB 2014-7 and AASB 2014-8.
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 8
• Note 9
• Note 14
• Note 19
• Note 25
– Impairment expense
– Income tax
– Oil and gas properties
– Provisions for liabilities and charges
– Share based payments
48
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
2. CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (Continued)
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
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.
49
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
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
$32,584,886. This is primarily due to the Board determining that debt facilities be classified as current liabilities as
described in Note 18 under classification of borrowings.
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.
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.
50
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
4
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
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 2014 the Empire Group hedged
approximately 47% of its oil (2013: 72%) and 60% of its total gas production (2013: 75%).
The Empire Group has approximately 3,687 thousand cubic feet (mcf) of monthly natural gas production and
197,000 barrels of oil production hedged at amounts ranging from $4.36 to $6.30/mcf for natural gas expiring in
January 2015 through December 2019 and $85.23 to $90 per barrel for oil expiring in January 2015 through
December 2017.
(iii)
Interest rate risk
The Empire Group is constantly monitoring its exposure to trends and fluctuations in interest rates in order to
manage interest rate risk. The Empire Group’s exposure to interest rate risk at 31 December 2014 is set out in the
following tables:
The Empire Group’s exposure to the risk of changes in market interest rates relates primarily to the Empire Group’s
long-term debt obligations with a floating interest rate in the US. The Empire Group manages its interest cost using a
mix of fixed and variable rate debt.
The Empire Group’s policy is to continually review the portion of its US$ 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 2014.
The Empire Group monitors forecasts and actual cash flows and the maturity profiles of financial assets and liabilities
to manage its liquidity risk.
31 December 2014
Financial Assets
Cash and cash
equivalents
Trade and other
receivables
Financial assets
Financial Liabilities
Trade & other payables
Financial liabilities,
including derivatives
Interest-bearing liabilities
%
Floating
Interest Rate
Fixed Interest Maturing in
Over 1 to 5
1 Year or
Years
Less
Non-Interest
Bearing
Total
1.86
3,092,991
-
-
3,092,991
-
-
-
-
-
-
-
-
-
3,092,991
4,471,855
11,716,125
16,187,980
4,471,855
11,716,125
19,280,971
-
-
-
5,771,978
5,771,978
4.14
-
41,776,843
- 41,776,843
-
-
-
42,434
42,434
-
-
5,771,978
-
41,819,277
47,591,255
51
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
4
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
31 December 2013
Financial Assets
Cash and cash
equivalents
Trade and other
receivables
Financial assets
Financial Liabilities
Trade & other payables
Financial liabilities,
including derivatives
Interest-bearing liabilities
%
Floating
Interest Rate
Fixed Interest Maturing in
Over 1 to 5
1 Year or
Years
Less
Non-Interest
Bearing
Total
1.86
2,322,720
-
-
2,322,720
-
-
-
-
-
-
-
-
-
2,322,720
4,674,518
5,820,866
10,495,384
4,674,518
5,820,866
12,818,104
-
-
-
5,746,774
5,746,774
4.00
-
41,099,354
- 41,099,354
-
-
-
62,607
62,607
542,633
-
6,289,407
542,633
41,161,961
47,451,368
(iv)
Empire Group Sensitivity
Based on the financial instruments held at 31 December 2014 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 2015. Should interest rates increase by 1% the
impact on post-tax profit would be a decrease of approximately US$417,000.
(B)
CREDIT RISK
Credit risk is the risk that the other party to the financial instrument will fail to discharge their financial obligation in
respect of that instrument resulting in the Empire Group incurring a financial loss. The Empire Group’s exposure to
credit risk arises from potential default of the counter party with the maximum exposure equal to the carrying amount
of these instruments. There are no significant concentrations of credit risk within the Empire Group.
The Empire Group trades only with recognised, credit worthy third parties. In the US, trade receivables, (balances
with oil and gas purchases) have not exposed the Empire Group to any bad debt to date. All derivatives are with the
same counterparty.
In the US, all of the purchasers that the Empire Group’s operators choose to deal with are major oil companies.
Trade and other receivable balances are monitored on an ongoing basis with the Empire Group’s exposure to bad
debts minimal.
The maximum exposure to credit risk at balance date is as follows:
Trade, other receivables,
and derivatives
2014
US$
2013
US$
15,497,982
9,638,786
The maximum exposure to credit risk at balance by country is as follows:
Australia
United States of America
2014
US$
-
15,497,982
2013
US$
-
9,638,786
52
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
4
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
(C)
LIQUIDITY RISK
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.
Fair
Value
US$
Carrying
Amount
US$
Contractual
Cash flows
US$
1 year
US$
1-5 years
US$
5,771,978
41,776,843
5,771,978
41,776,843
5,771,978
41,776,843
5,771,978
41,776,843
-
-
42,434
42,434
42,434
-
42,434
(11,178,999)
-
(11,178,999)
-
(11,178,999)
-
(6,558,148)
-
(4,620,851)
-
Fair
Value
US$
Carrying
Amount
US$
Contractual
Cash flows
US$
1 year
US$
1-5 years
US$
5,746,751
41,099,354
5,746,751
41,099,354
5,746,751
41,099,354
5,746,774
41,099,354
-
-
62,607
62,607
62,607
-
62,607
(5,105,716)
542,633
(5,105,716)
542,633
(5,105,716)
542,633
(2,327,334)
542,633
(2,778,382)
-
Maturity Analysis
31 December 2014
Non Derivatives
Current
Trade and other payables
Interest bearing liabilities
Non-current
Interest bearing liabilities
Derivatives
Financial asset
Financial liability
Maturity Analysis
31 December 2013
Non Derivatives
Current
Trade and other payables
Interest bearing liabilities
Non-current
Interest bearing liabilities
Derivatives
Financial asset
Financial liability
(D) EQUITY RISK
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.
53
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
4
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
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.
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 2014
Assets
Available-for-sale – equity
securities
Unlisted available-for-sale
equities
Fair value of derivatives
Total assets
Liabilities
Fair value of derivatives
Total liabilities
Consolidated
31 December 2013
Assets
Available-for-sale – equity
securities
Unlisted available-for-sale
equities
Fair value of derivatives
Total assets
Liabilities
Fair value of derivatives
Total liabilities
Level 1
Level 2
Level 3
Total
55,106
-
-
-
-
-
55,106
482,020
482,020
11,178,999
-
11,178,999
55,106
11,178,999
482,020
11,716,125
-
-
Level 1
Level 2
225,669
-
-
225,669
-
-
-
-
-
-
5,105,716
5,105,716
542,633
542,633
Level 3
-
-
-
489,480
-
489,480
-
-
-
-
Total
225,669
489,480
5,105,716
5,820,865
542,633
542,633
54
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
4
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
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.
5 REVENUE
Revenue from oil and gas sales
Revenue from drilling operations
Revenue from well operations
6 OTHER INCOME
Gain on sale of investment
Gain on sale of asset
Interest income
Rental income
Other income
7 FINANCE COSTS/INCOME
Interest paid/payable on financial liabilities
Accretion of asset retirement obligation (note 19)
Unwind of discount on debt
Unwind of overriding royalty interest
Fair value loss on forward commodity contracts
Total finance costs
Fair value gain on forward commodity contracts
Total finance income
2014
US$
22,678,332
-
891,825
23,570,157
2013
US$
24,976,934
-
909,436
25,886,370
-
739,208
3,916
18,196
136,821
898,141
206,274
-
3,779
8,912
462,702
681,667
2,021,849
378,334
331,421
-
-
2,731,604
6,615,916
6,615,916
2,216,758
404,512
555,029
300,895
1,913,366
5,390,560
-
-
55
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
8 EXPENSES
Profit/(loss) before income tax includes the following specific
expenses:
2014
US$
2013
US$
Depreciation, depletion and amortisation
Oil & Gas properties and plant & equipment (note 14)
Intangible assets (note 15)
Employee benefits expense
Defined contribution superannuation expense
Other employee expenses
Total employee benefits expense
Impairment expense
Impairment for oil and gas properties
Impairment of available-for-sale financial assets(a)
Total impairment expense
5,842,203
-
5,842,203
47,617
4,610,362
4,657,979
5,026,064
2,150
5,028,214
37,377
4,140,429
4,177,806
13,995,331
-
13,995,331
-
33,470
33,470
Loss on disposal of property, plant & equipment
-
28,265
Leasing expiration expenses (b)
188,518
152,379
(a) Impairment expense
For the period 31 December 2014 the Company impaired the oil and gas properties by $13,995,331 due to the
decline in oil prices.
(b) Leasing expiration expense
A charge of $188,518 has been taken against the book value of undeveloped leases which have expired, or are to
expire. The Company has an ongoing program to renew expiring leases, to take up options on expiring leases or
acquire new leases if and when possible. The charge is a non-cash entry which has no effect on cash-flows.
56
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
9
INCOME TAX
a.
Income tax expense
Current tax
Deferred tax
Adjustments for current tax of prior periods
Income tax (benefit)/expense attributable to continuing operations
Deferred income tax expense included in income tax expense comprises:
(Increase)/decrease/ in deferred tax assets (note 9(f))
Increase/(decrease) in deferred tax liabilities (note 9(e))
b. Numerical reconciliation of income tax expense to prima
facie tax payable
(Loss)/profit before income tax
Tax at the Australian tax rate of 30% (2013: 30%)
Tax effect of amounts which are not deductible/(taxable) in
calculating taxable income:
-
Income tax not assessable
- Non-deductible expenses
- Other deductible expenses
Difference in overseas tax rates
Tax (over)/underprovided in prior year
State taxes paid or payable
Withholding tax paid
Deferred tax asset in relation to tax losses and temporary differences
not recognised
Income tax expense/(benefit)
c. Deferred tax assets not recognised relate to the following:
Tax losses
Capital losses
2014
US$
2013
US$
74,096
(5,253,920)
-
5,179,824
143,646
246,000
(59,915)
375,760
-
(5,253,920)
(5,253,920)
-
246,000
246,000
(9,933,109)
(1,887,437)
(2,979,933)
(556,231)
-
(2,834,729)
-
-
-
-
-
-
441,150
341,416
-
250
41,848
136,617
148,839
(5,179,824)
463,708
375,760
2,698,822
2,549,383
141,410
141,410
2,839,632
2,690,793
57
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
9 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.
d. Dividend Franking Account
There are no franking account credits available as at 31 December 2014.
e. Deferred tax liabilities
The balance comprises temporary differences
attributable to:
Forward commodity contracts
Oil & Gas and Property, Plant & Equipment
Other
Set-off of deferred tax liabilities pursuant to set-off
provisions (note f)
Net deferred tax liabilities
f. Deferred tax assets
The balance comprises temporary differences
attributable to:
Tax losses carried forward
Accrued asset retirement obligation
Oil & Gas and Property, Plant & Equipment
Other
Set-off of deferred tax assets pursuant to set-off
provisions (note e)
Net deferred tax assets
2014
US$
2013
US$
3,699,298
8,270,981
60,267
2,053,387
6,619,573
12,030,546
8,672,960
(9,968,466)
2,062,080
(1,356,960)
7,316,000
1,380,617
1,083,512
7,348,127
156,210
9,968,466
245,685
1,099,028
-
12,247
1,356,960
(9,968,466)
(1,356,960)
-
-
58
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
10 TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Other
2014
US$
2013
US$
4,413,218
58,637
4,471,855
4,608,646
65,872
4,674,518
11 PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments
242,184
203,316
12 INVENTORIES
Crude oil and production supplies
611,002
995,610
13 FINANCIAL ASSETS, INCLUDING DERIVATIVES
Current
Oil and gas price forward contracts
6,558,148
2,327,334
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
4,620,851
2,778,382
55,106
638,061
(156,041)
5,157,977
225,670
645,521
(156,041)
3,493,532
59
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
13 FINANCIAL ASSETS, INCLUDING DERIVATIVES (Continued)
Commodity hedge contracts outstanding are outlined below.
2014 NATURAL GAS - HENRY HUB - NYMEX - Swaps 2013 NATURAL GAS - HENRY HUB - NYMEX - Swaps
Period
Swap
Price
Premium
Product
Period
Swap
Price
Premium
Product
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Jan 14 - Dec 14
6.15
$Nil
238,372 mmbtu
Jan 14 - Dec 14
6.21
$Nil
238,372 mmbtu
Jan 14 - Dec 14
6.15
$Nil
238,372 mmbtu
Jan 14 - Dec 14
6.26
$Nil
238,372 mmbtu
Jan 14 - Dec 14
6.30
$Nil
5,000 mmbtu
Jan 15 - Dec 15
5.45
$Nil
1,116,000 mmbtu
Jan 15 - Dec 15
Jan 14 - Dec 14
Jan 15 - Dec 15
5.45
$Nil
156,000 mmbtu
Jan 15 - Dec 15
Jan 14 - Dec 14
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
2014 OIL - WTI - NYMEX
Jan 15 - Dec 15
90
Jan 16 - Dec 16
85.67
Jan 17 - Dec 17
85.23
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
72,000 mmbtu
Jan 16 - Dec 16
528,000 mmbtu
Jan 16 - Dec 16
528,000 mmbtu
Jan 16 - Dec 16
504,000 mmbtu
Jan 17 - Dec 17
456,000 mmbtu
Jan 18 - Dec 18
2013 OIL - WTI - NYMEX
Jan 14 - Dec 14
98,160 BO
Jan 15 - Dec 15
90
90
42,000 BO
Jan 16 - Dec 16
85.67
39,600 BO
Jan 17 - Dec 17
85.23
5.27
5.45
5.27
5.45
4.49
4.49
4.37
4.57
4.75
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
217,000 mmbtu
1,116,00
0
mmbtu
159,000 mmbtu
156,000 mmbtu
72,000 mmbtu
528,000 mmbtu
528,000 mmbtu
504,000 mmbtu
456,000 mmbtu
105,120 BO
98,160 BO
42,000 BO
39,600 BO
60
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
14 OIL AND GAS PROPERTIES AND PROPERTY PLANT & EQUIPMENT
Cost in US$
At 1 January 2014
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 2014
Accumulated Depreciation in US$
At 1 January 2014
Depreciation and depletion
Disposals
Impairment
Oil & Gas –
Proved and
producing
Oil & Gas –
Unproved & not
producing
Note
Land
Buildings
Equipment
Motor Vehicles
Total
111,088,039
3,836,441
53,360
(48,441)
120
(1,886,327)
4,225,830
2,874,877
-
-
-
(25)
- (377,036)
-
- -
-
30,591
-
-
-
-
-
-
-
-
310,286
-
-
-
(120)
18,782
-
-
-
736,352
76,233
709,700
19,000
-
-
- -
- -
(95,042)
(94,756)
- -
- -
117,100,798
6,806,551
53,360
(48,441)
-
(2,057,368)
(377,036)
-
-
-
-
113,043,192
6,723,646
30,591
328,948
717,543
633,942
121,477,864
(18,550,760)
(5,577,000)
-
-
-
-
(35,831)
(12,553)
(462,221)
(126,516)
(403,121)
(126,134)
(19,451,933)
(5,842,203)
232,857 -
-
(1,866)
80,417
68,051
379,459
(13,995,331) -
-
-
-
-
(13,995,331)
At 31 December 2014
(37,890,234)
-
-
(50,250)
(508,320)
(461,204)
(38,910,008)
Opening written down value
92,537,279
4,225,830
30,591
274,455
274,131
306,579
97,648,865
Impact of foreign currency adjustments
-
-
-
-
(2,992)
(15,482)
(18,474)
Closing written down value
75,152,958
6,723,646
30,591
278,698
206,231
157,258
82,549,382
61
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
14 OIL AND GAS PROPERTIES AND PROPERTY PLANT & EQUIPMENT (continued)
Oil & Gas –
Proved and
producing
Oil & Gas –
Unproved & not
producing
Note
Land
Buildings
Equipment
Motor Vehicles
Total
Cost in US$
At 1 January 2013
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 2013
Accumulated Depreciation in US$
At 1 January 2013
Depreciation and depletion
Disposals
Impairment
106,126,081
2,606,338
1,418,263 -
-
5,587,535
457,900
(49,530)
986,887
-
(938,076)
-
- (152,379)
- (729,150)
- -
30,591
-
-
-
-
-
-
-
-
304,209
6,077
612,386
77,140
722,155
116,388
-
-
- -
- -
(77,678)
-
-
-
-
-
-
- 51,165
(4,339)
- -
- -
113,382,957
3,263,843
1,418,263
(49,530)
48,811
(82,017)
(152,379)
(729,150)
(51,165)
-
111,088,039
4,225,830
30,591
310,286
736,352
709,700
117,100,798
(13,694,760)
(4,856,000)
-
-
- -
- -
-
-
-
-
(23,885)
(11,946)
-
-
(343,131)
(119,090)
-
-
(364,093)
(39,028)
(14,425,869)
(5,026,064)
- -
- -
At 31 December 2013
(18,550,760)
-
-
(35,831)
(462,221)
(403,121)
(19,451,933)
Opening written down value
92,431,321
5,587,535
30,591
280,324
274,131
358,062
98,957,088
Impact of foreign currency adjustments
-
-
-
-
(1,578)
(9,927)
(11,505)
Closing written down value
92,537,279
4,225,830
30,591
274,455
272,553
296,652
97,637,360
62
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
14 OIL AND GAS PROPERTIES AND PROPERTY PLANT & EQUIPMENT (continued)
At 31 December 2014, the group reassessed the carrying amounts of its non-current assets for indicators of
impairment in accordance with the Group’s accounting policy.
Estimates of recoverable amounts are based on an asset’s value in use or fair value less costs to sell, using a
discounted cash flow method, and are most sensitive to the key assumptions described in note 2.
Recoverable amounts and resulting impairment write-downs recognised in the year ended 31 December 2014 are:
Oil and gas assets
Kansas
Appalachia
Total
Subsurface
assets
US$
43,167,043
28,293,059
71,460,102
Recoverable
amount
US$
31,999,221
25,465,550
57,454,771
The post tax discount rate that has been applied to the above oil and gas assets is 8%. The impairment charges
noted above primarily result from a lower oil price environment.
15 INTANGIBLE ASSETS
Goodwill
Other intangible asset
Movement in Other Intangible assets
Carrying value at beginning of financial year
Transfer to debt
Amortisation
Carrying value end of financial year
16 TRADE AND OTHER PAYABLES
Current
Trade creditors
Other creditors
17 FINANCIAL LIABILITIES, INCLUDING DERIVATIVES
Current
Oil and gas forward price contracts
18 INTEREST-BEARING LIABILITIES
Current
Finance lease liability
Bank loan -secured
Non-current
Finance lease liability
2014
US$
2013
US$
68,217
68,217
-
-
68,217
68,217
-
-
-
-
2,150
-
(2,150)
-
5,696,470
75,508
5,771,978
5,677,120
69,654
5,746,774
-
-
542,633
542,633
18,928
41,757,915
99,273
41,000,081
41,776,843
41,099,354
42,434
62,607
In February 2008, the Empire Group entered into a Credit Facility totalling $200,000,000 under the following terms:
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 re-determined
from time to time in accordance with the Revolver based on changes with operations and opportunities. Interest
63
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
18 INTEREST-BEARING LIABILITIES (Continued)
accrues on the outstanding borrowings at rate options selected by the Company and based on the prime lending rate
(3.25% at December 31, 2014) or the London Inter-Bank Offered Rate (60-Day NOTE LIBOR) (0.21445% at
December 31, 2014) plus 2.5%. At December 31, 2014, the Company’s rate option was London Inter-Bank Offered
Rate (LIBOR). There was no availability under the Revolver at December 31, 2014 and 2013.
A $150,000,000 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. There is $2,100,000 available under Tranche C-6 of the Term Facility.
Loans under the facilities are secured by the assets of the Company. Under terms of the facilities, the Company is
required to maintain financial ratios customary for the oil and gas industry. The Company repays the facilities
monthly to the extent of an applicable percentage of net operating cash flow and capital transactions. Principal
payments made in 2014 and 2013 were approximately $3,703,000 and $7,699,000, respectively. The Company has
exceeded the minimum cumulative principal payment obligation through the maturity date of the credit facilities.
The discount on the debt is approximately $583,000 and $361,000 at 31 December 2014 and 2013, respectively.
Additional interest expense of $164,000 and $579,000 for the years ended December 31, 2014 and 2013 is related
to the amortization of the discount on debt.
In 2014, in connection with the Revolver and Term Facility, the bank received 14,131 of non-diluting warrants ($0.01)
equivalent to 10% of the issued capital of the Empire Energy USA, LLC (2013: 16,252). In addition, the bank also
receives a 3% overriding royalty interest in the acquired properties of the Company.
In conjunction with the debt financing by the bank in 2010, 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.
In February 2014 a further 4,250,000 unlisted options exercisable at A$0.12 and expiring 26 February 2016 were
issued to the bank to enable further drawdown on the Credit Facility. These options were independently valued at
A$195,500. The recorded value of the options of $1,687,000 was expensed over the life of the loan facility.
A summary of period end debt is as follows:
Term
Tranche
Tranche 1
Tranche 3
Tranche 4
Revolver
Sub-Total
Less – Discount on debt:
2014
US$
2013
US$
1,720,233
6,181,553
19,585,871
12,027,354
3,000,000
42,515,011
(757,096)
-
6,181,553
19,585,871
12,950,814
3,000,000
41,718,238
(718,157)
Total debt
41,757,915
41,000,081
64
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
18 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 2014 and during the year the loan covenants were in compliance.
19 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
2014
US$
2013
US$
12,245
5,351
7,953,969
7,788,880
7,788,880
53,359
(266,604)
378,334
6,015,635
1,418,263
(49,530)
404,512
7,953,969
7,788,880
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.
65
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
20 CONTRIBUTED EQUITY
a) Shares
Issued Capital
Balance at beginning of period
Movement in ordinary share capital
- Issue of 4,000,000 fully paid ordinary shares in September 2013 @
A$0.10 as part consideration for the acquisition of Empire Energy USA.
Less costs associated with the share issues detailed above
2014
US$
2013
US$
73,683,238
73,325,555
-
-
372,520
(14,837)
Balance as at 31 December 2014
73,683,238
73,683,238
b) Shares
Movements in ordinary issued shares
Balance at beginning of period
Movement in ordinary share capital
- Issue of fully paid ordinary shares in September 2013 @ A$0.10 as
part consideration for the acquisition of Empire Energy USA
No. of shares
No. of shares
308,863,682
304,863,682
-
4,000,000
- Balance as at 31 December 2014
308,863,682
308,863,682
66
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
20 CONTRIBUTED EQUITY (Continued)
Share Options
Movements
Granted
During the financial year 6,500,000 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
No options were exercised during the financial year or in the end of the financial year and up to the date of this
report.
Expiry/Lapse of Options
The following unlisted options were not exercised by their expiry date and as a consequence have lapsed:
-
6,500,000 unlisted options at A$0.35 expiring 31 December 2014
The following unlisted options lapsed due to not meeting the minimum terms of employment requirement under the
Employee Share Option Plan:
-
-
500,000 unlisted options at A$0.35 prior to 31 December 2014
500,000 unlisted options at A$0.17 prior to 31 December 2015
Since the end of the financial year no further unlisted options had expired.
At balance date the Empire Group had on issue, the following securities:
Shares
-
308,863,682 listed fully paid ordinary shares – ASX Code: EEG
The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are
fully paid. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are
entitled to one vote per share at meetings of the Company. No dividends were paid or declared during the year, or
since the year-end.
Options
At balance date the Company had 16,750,000 unissued shares under option. These options are exercisable on the
following terms:
Number
1,500,000 Executive options
4,500,000 Executive options
4,250,000 Macquarie Bank Limited
3,500,000 Executive options
1,500,000 Executive options
1,500,000 Executive options
Exercise Price A$
$0.18
$0.17
$0.12
$0.15
$0.17
$0.18
Expiry Date
31 December 2015
31 December 2015
26 February 2016
31 December 2016
31 December 2016
31 December 2016
16,750,000
Performance Rights
During the 2013 financial year the Company issued 2,500,000 Performance Rights over fully paid ordinary shares in
the Company as part consideration for the buy back of the minority interest equity holder in Empire Energy USA LLC.
The minority interest holder also received 4,000,000 fully paid ordinary shares in the issued capital of Empire Energy
Group Limited. The Performance Rights are exercisable at no cost under the following events:
-
-
Lifting of the current moratorium on oil and/or natural gas fracking in New York State;
If the Company sells, transfers or assigns all or substantially all of its property interest Chautauqua and
Cattaraugus Counties in the State of New York to an unaffiliated third party then the performance rights will
vest in accordance with the following schedule:
67
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
20 CONTRIBUTED EQUITY (Continued)
Fair Market Value of Consideration
Received by the Company
Less than $25.0 million
Performance rights exercisable
0.0%
At least $25.0 million but less than $45.0
million
Percentage calculated by dividing Fair Market Value
of Consideration received by the Company by $45.0
million.
$45.0 million or more
100.0%
-
If the holder of the Performance Rights in any way disposes of more than 75% of the 4 million ordinary
shares assigned as part of the minority interest buy back transaction prior to either the moratorium being
terminated or a third party sale being consummated then the performance rights will be cancelled.
21 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.
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.
22 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 2014, 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.
23 CONTINGENT ASSETS
The Company has a claim outstanding against the JV Partner for a 75% interest in the Carrolltown Prospect Gas
Wells. The Company expects to receive ~US$40,000 in compensation.
68
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
24 COMMITMENTS FOR EXPENDITURE
Exploration and Mining Tenement Leases
In order to maintain current rights of tenure to exploration and mining tenements, the Company and the companies in
the consolidated entity are required to outlay lease rentals and to meet the minimum expenditure requirements of the
various Government Authorities. These obligations are subject to re-negotiation upon expiry of the relevant leases or
when application for a mining licence is made. No expenditure commitment exists at 31 December 2014.
i) Equipment and Operating Leases
Commitments in relation to equipment/motor vehicle leases contracted
for at and subsequent to the reporting date but not recognised as
liabilities:
2014
US$
2013
US$
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
307,311
215,381
214,152
-
300,543
260,543
300,641
-
736,844
861,727
The Company leased its US corporate headquarters under a non-cancellable operating lease of monthly payments
of approximately $6,900 through February 2013 and $7,400 through February 2017. Net rental expense
approximated $89,000 and $86,000, net of reimbursements, for the year ended 31 December 2014 and 31
December 2013.
The Company leases trucks under an operating agreement. The term of the agreement begins upon the delivery of
each truck and lasts for a period of up to 48 months. Lease payments in 2014 and 2013 were approximately
$235,000 and $183,000 respectively. The Empire Group has the option to acquire the leased assets at the agreed
value on the expiry of the leases.
69
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
24 COMMITMENTS FOR EXPENDITURE (Continued)
ii) Property Licence
The Company has entered into a cancellable licence agreement over the occupation of office premises. The leased
assets were pledged as security over the lease commitment.
The term of the occupancy licence was for a term of 59 months and concluded on 30 June 2011. Since expiry of the
occupancy licence the Company has occupied the premises on a month to month basis. Terms on a new licence
agreement are being negotiated.
25 SHARE BASED PAYMENTS
a)
Employee Share Option Plan 2014
A new executive share option plan was approved by shareholders at the annual general meeting of members held
on 30 May 2014. This plan replaces the previous executive option plan approved by shareholders on 30 November
2010. Persons eligible to participate include executive officers of the Company or a subsidiary, including a director
holding salaried employment or office in the Company or subsidiary.
Options are granted under the plan for no consideration. The vesting date of options granted under the plan is
subject to minimum term of employment conditions. Options granted under the plan carry no dividend or voting
rights.
The exercise price of options is based on a minimum of the weighted average market price of shares sold in the
ordinary course of trading on the ASX during the 5 trading days ending on the date the option is granted multiplied by
0.8.each option entitles the holder to subscribe for 1 unissued share.
Year Ending – 31 December 2014
During the financial year the following options were granted pursuant to the Employee Share Option Plan 2014.
No. of Options
Grant Date
Vesting Date
Exercise Date A$
Expiry Date
3,500,000 15 July 2014
1,500,000 15 July 2014
1,500,000 15 July 2014
6,500,000
15 July 2016
15 July 2016
15 July 2016
$0.15
$0.17
$0.18
31 December 2016
31 December 2016
31 December 2016
Year Ending – 31 December 2013
During the 2013 financial year the following options were granted pursuant to the Employee Share Option Plan 2010.
No. of Options
Grant Date
1,500,000 28 June 2013
5,000,000 28 June 2013
6,500,000
Vesting Date
28 June 2015
28 June 2015
Exercise Date A$
Expiry Date
$0.18
$0.17
31 December 2015
31 December 2015
70
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
25 SHARE BASED PAYMENTS (Continued)
b)
Options
During the 2014 financial year 4,250,000 options were granted to Macquarie Bank Limited as a component for
amending the terms of the Company’s credit facility. The unlisted options are exercisable at A$0.12 and expire 26
February 2016.
The options outstanding at 31 December 2014 are detailed below.
Expiry Date
Exercise
Price
Balance at
start of year
Granted
during year
Expired
during year
Exercised
during year
Balance at
end of year
Grant Date
20 April 2012(1)
31 May 2012(1)
30 June 2012(1)
28 June 2013(1)
28 June 2013(1)
31 December 2014
35 cents
1,250,000
31 December 2014
35 cents
3,500,000
31 December 2014
35 cents
2,250,000
-
-
-
31 December 2015
18 cents
1,500,000
31 December 2015
17 cents
5,000,000
26 February 2014
26 February 2016
12 cents
15 July 2014(2)
15 July 2014(2)
15 July 2014(2)
31 December 2016
15 cents
31 December 2016
17 cents
31 December 2016
18 cents
-
-
-
-
1,250,000
3,500,000
2,250,000
-
500,000
-
-
-
-
-
-
4,250,000
3,500,000
1,500,000
1,500,000
-
-
-
-
-
-
-
-
-
-
-
-
-
1,500,000
4,500,000
4,250,000
3,500,000
1,500,000
1,500,000
16,750,000
13,500,000
10,750,000
(7,500,000)
(1) Options granted pursuant to Employee Share Plan approved 30 November 2010. The plan provides for vesting restrictions on
minimum period of employment.
(2) Options granted pursuant to Employee Share Plan approved 30 May 2014. The plan provides for vesting restrictions on minimum
period of employment
c)
Expenses arising from share based payment transactions
Year ending - 31 December 2014
6,500,000 future options were granted pursuant to the Empire Group’s Employee Share Options Plan.
4,250,000 future options were granted to Macquarie Bank Limited as a component for amending the existing terms
of the Company’s credit facility.
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 $351,370.
Year ending - 31 December 2013
6,500,000 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 $406,090.
4,000,000 fully paid ordinary shares and 2,500,000 performance rights were issued as consideration for a minority
interest buy back in Empire Energy USA LLC. The cost of the fully paid ordinary shares for this financial period was
$372,520. The share based payments transactions costs for the Performance Rights during the financial year for
these Performance Rights based on a pro-rata portion of the vesting period was $50,333
71
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
26 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
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
23,570,157
25,886,370
-
-
-
-
Other income (excluding Finance income)
136,821
462,702
739,208
206,274
18,196
8,912
Reportable segment profit/(loss) before tax
(6,217,981)
3,298,413
739,208
172,804 (1,731,561)
(1,800,803)
-
-
-
- 23,570,157
25,886,370
-
894,225
677,888
-
(7,210,334)
1,590,414
Finance income
Finance costs
Profit/(loss) for the period before tax
6,619,832
3,087
408,561
1,324,977
4,913
(3,745)
(408,561)
(1,324,977)
6,624,745
(658)
(3,130,637)
(6,706,759)
-
(9,528)
(8,777)
408,561
1,324,977
(2,731,604)
(5,390,599)
(9,933,109)
(1,887,437)
Reportable segment assets
102,071,512
110,743,730
1,588,259
5,680,847
443,326
765,259
(1,351,341)
(5,265,696)
102,751,716
111,924,140
Reportable segment liabilities
56,268,208
57,295,903
-
-
1,351,341
5,265,696
57,619,549
62,561,599
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
(378,334)
(404,512)
- Discount on debt & overriding royalty interest
(331,421)
(855,924)
-
-
-
-
Fair value gain/(loss) on forward commodity contracts
6,615,916
(1,913,366)
Capital expenditure
(6,764,678)
(4,482,501)
-
-
(95,233)
(199,604)
(5,817,881)
(5,009,458)
(13,995,331)
-
-
-
(33,470)
-
(23,809)
(18,760)
-
-
739,208
206,274
(188,518)
(152,379)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(5,841,690)
(5,028,218)
- (13,995,331)
(33,470)
-
739,208
206,274
-
(188,518)
(152,379)
-
(378,334)
(404,512)
-
(331,421)
(855,924)
6,615,916
(1,913,366)
-
(6,859,911)
(4,682,105)
72
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
26 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 customers
Revenues from two major customers of the Empire Group’s Oil & Gas segment represents approximately
$16,263,408 (2013: one major customer $18,379,323) of the Empire Group’s total revenues.
27 RELATED PARTY DISCLOSURES
a. Disclosures Relating to Directors
i.
The names of persons who were directors of the Company at any time during the financial year were:
• B W McLeod
• D H Sutton
• K A Torpey
ii.
Directors’ Shareholdings
Number of shares held by the Company Directors
Balance at
31 December
2013
Acquired during
period through Share
Purchase Plan
Other changes
during period
Balance at
31 December 2014
7,238,365
663,300
2,191,449
-
-
-
-
-
-
7,238,365
663,300
2,191,449
Director
B W McLeod
D H Sutton
K A Torpey
Option holdings
Number of options over ordinary shares in the Company held during the financial period by each Director of the
Company, including their related entities are set out below:
Director
Balance at 1
January 2014
Granted during
year as
Remuneration
Exercised
during year
Expiring
during year
Balance at
31 December
2014
Vested
exercisable at 31
December 2014
B W McLeod
D H Sutton
K A Torpey
5,000,000
750,000
750,000
3,000,000
-
-
-
-
-
2,000,000
750,000
750,000
6,000,000
-
-
-
-
-
73
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
27 RELATED PARTY DISCLOSURES (Continued)
The options held by Directors’ were issued under an Employee Share Option Plan and are exercisable on the
following basis and subject to a minimum term of employment conditions:
Director
B W McLeod
No. of options
Exercise Price A$
1,500,000
1,500,000
1,500,000
1,500,000
$0.18
$0.17
$0.18
$0.17
Expiry Date
31 December 2015
31 December 2015
31 December 2016
31 December 2016
iii.
Transactions with Key Management Personnel
1) B W McLeod is a director and shareholder of Eastern & Pacific Capital
Pty Limited. The Empire Group incurred the following transactions:
- Management consultant fees
- Bonus payment
2) Aggregate amounts payable to Directors and their related Companies
at balance date:
- Eastern & Pacific Capital
- Bonus and consulting fees
3)
J Warburton is a director and CEO of wholly-owned subsidiary
Imperial Oil & Gas Pty Limited. The Empire Group paid the following
transactions:
-
Advisory fees
- Director fees
2014
US$
2013
US$
377,322
72,148
385,237
-
82,104
193,322
69,178
27,087
275,763
-
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. These balances, along with associated charges, are eliminated on
consolidation.
74
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2014
27 RELATED PARTY DISCLOSURES (Continued)
c.
Investments in Controlled Companies
Country of
Incorporation
Class of
Share
Controlling Empire Group
Empire Energy Group Limited
Australia
Interest Held
December
2014
%
December
2013
%
Controlled Companies
Imperial Oil & Gas Pty Limited
Mega First Mining NL
Imperial Technologies Pty Limited1
Imperial Resources, LLC2
Imperial Energy Pty Ltd
Cobalt Energy Pty Ltd
Empire Energy USA, LLC
Australia
Vanuatu
Australia
USA
Australia
Australia
USA
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
Nil
100
100
100
100
100
100
100
100
100
100
100
All entities are audited by Nexia Australia with the exception of Mega First Mining NL, a Company incorporated in
Vanuatu and Empire Energy USA LLC and Imperial Resources, LLC the latter two companies incorporated in the
USA which is audited by Schneider Downs.
1 During the 2013 financial year the Company made application for the voluntary deregistration of Imperial
Technologies Pty Limited a non-operating subsidiaries under subsection 601AA(2) of the Corporations Act 2001.
The Company was deregistered on 20 February 2014.
2 Renamed Empire Energy Holdings, LLC on 28 January 2015.
75
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
28 NOTES TO THE STATEMENT 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
3,092,991
2,322,720
December 2014
US$
December 2013
US$
(b) Reconciliation of profit after income tax expense to net cash
flows from operating activities
Loss for the period after income tax expense
(4,753,285)
(2,263,197)
Adjustments for non-cash items:
Depreciation & amortisation expense
Impairment of property, plant & equipment
(Gain)/Loss on disposal of Property, plant & equipment
Write-off ARO
Write-off of exploration expenditure
Expiration of leases
Impairment of available for sale financial assets
Profit/Loss on disposal of available for sale financial assets
Discount on debt
Asset retirement obligation accretion
Share-based payment expense
Unrealised (gain)/loss on forward commodity contracts
Operating profit before changes in working capital and provisions
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 Provisions
Change in Deferred Tax Liability
5,842,203
13,995,331
(693,211)
-
186,348
188,518
-
-
331,421
378,334
317,239
(6,615,916)
9,176,182
204,456
345,257
384,608
201,533
25,204
6,894
(5,253,920)
(4,085,968)
5,028,214
-
74,293
40,387
729,151
152,379
33,470
(206,274)
853,785
404,512
461,514
1,913,366
7,221,600
423,346
(80,154)
(189,964)
652,342
(668,863)
(80,216)
246,000
302,491
Net cash flows from operating activities
5,091,014
7,524,091
(c) Non-Cash Financing and Investing Activities
During the current financial year the following transactions occurred:
The Company granted 6,500,000 executive options to acquire ordinary shares in the capital of the Company to
Directors and specified executives of the Company. 3,500,000 of these Options are exercisable at A$0.15 and
expire on 31 December 2016, 1,500,000 Options are exercisable at A$0.17 and expire on 31 December 2016 the
remaining 1,500,000 Options are exercisable at A$0.18 and expire 31 December 2016. 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 January 2015 at A$178,000.
The Company granted 4,250,000 options to Macquarie Bank Limited as a component for amending the existing
terms of the Company’s credit facility. The unlisted options are exercisable at A$0.12 and expire 26 February
2016. These options were independently valued in July 2014 at A$195,500.
76
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
28 NOTES TO THE STATEMENT OF CASH FLOWS (Continued)
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:
-
-
-
-
-
5,000,000 options exercisable @ A$0.17 expiring 31/12/2015
4,250,000 options exercisable @ A$0.12 expiring 26/02/2015
3,500,000 options exercisable @ A$0.15 expiring 31/12/2016
1,500,000 options exercisable @ A$0.17 expiring 31/12/2016
1,500,000 options exercisable @ A$0.18 expiring 31/12/2016
A$220,178
A$89,984
A$23,498
A$9,028
A$8,682
A$351,370
During the previous financial year the following transactions occurred:
The Company granted 6,500,000 executive options to acquire ordinary shares in the capital of the Company
to Directors and specified executives of the Company. 5,000,000 of these Options are exercisable at A$0.17
and expire on 31 December 2015, the remaining 1,500,000 Options are exercisable at A$0.18 and expire 31
December 2015. 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 2013 at A$213,000.
4,000,000 fully paid ordinary shares and 2,500,000 performance rights were issued as consideration for a
minority interest buy back in Empire Energy USA LLC. The cost of the fully paid ordinary shares for this
financial period was $372,520. The share based payments transactions costs for the Performance Rights
during the financial year for these Performance Rights based on a pro-rata portion of the vesting period was
$56,250.
-
-
-
29 EARNINGS PER SHARE
Basic earnings per share (cents per share)
Diluted earnings per share (cents per share)
2014
(1.54)
(1.54)
2013
(0.77)
(0.77)
Loss/profit used in the calculation of basic and diluted earnings per share
(4,753,285)
(2,343,258)
Weighted average number of ordinary shares on issue used in the calculation of
basic earnings per share
308,863,682
306,014,367
Weighted average number of potential ordinary shares used in the calculation of
diluted earnings per share
308,863,682
306,014,367
30 SUPERANNUATION COMMITMENTS
The Empire Group contributed to externally managed accumulation superannuation plans on behalf of employees.
Empire Group contributions are made in accordance with the Empire Group’s legal requirements.
31 BUSINESS COMBINATIONS
There were no business combinations in the financial year ending 31 December 2014.
77
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
32 PARENT ENTITY INFORMATION
Information relating to Empire Energy Group Limited:
Current Assets
Total Assets
Current Liabilities
Total Liabilities
Shareholder's Equity:
Issued Capital
Reserves
- Fair value reserve
- Foreign currency translation reserve
- Options reserve
- Share based payment reserve
- General Reserve
Accumulated Losses
Total Shareholder’s Equity
Loss for the period
2014
US$
2013
US$
295,941
36,805,066
(527,335)
(5,518,802)
426,182
37, 963,007
(915,315)
(2,814,206)
(73,683,238)
(73,683,238)
(6,659)
(661,657)
(176,017)
(29,981)
(1,465,232)
(1,160,728)
(172,650)
(235,167)
(174,624)
(145,196)
35,964,477
37,526,298
(40,260,126)
(37,843,486)
(496,131)
(628,642)
Total Comprehensive income
(1,290,509)
(2,267,791)
33 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.
78
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
33
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:
Short term benefits
Post-
employment
benefits
Long-
term
benefits
Cash
salary
and fees
US$
Bonus
payments
US$
Non-
monetary
US$
Super
contributions
US$
Long
service
leave
Share/option
based
payments *
Total
US$
December 2014
Directors
B W McLeod
K A Torpey
D H Sutton
J Warburton
377,322 72,148***
-
-
-
18,058
-
96,265
44,480
-
-
-
-
1,625
18,058
-
-
-
-
-
-
86,901*
10,085*
10,085*
-
580,851
29,768
28,143
96,265
16,972*
240,474
Empire Energy Executives
A Boyer
168,000
6,650
48,852
-
* Share/Option based payments reflect a proportion of the independently valued cost of options granted under the
Employee Share Option Plan (“ESOP”). The net 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. The Cost of the above options issued under the ESOP over the year was $124,043. The loss on
options relating to the above directors that expired over the year was $54,868. The net cost of options issued to the
above directors and executives for the year was $69,175.
*** Under the terms of the existing performance plan Mr B W McLeod would have been eligible for a payment of
$72,148 in 2014 based on the increase in 2P reserves. Due to the current conditions of the energy industry, the
Company and Mr McLeod have agreed to defer the payment for a period of 12 months, or until an earlier time when
both the Remuneration Committee and Mr McLeod agree that conditions are suitable for the performance payment
to be granted.
Short term benefits
Post-
employment
benefits
Long-
term
benefits
December 2013
Directors
B W McLeod
K A Torpey
D H Sutton
J Warburton
Cash
salary
and fees
US$
385,237
19,359
-
275,763
Empire Energy Executives
A Boyer
173,000
Bonus
payments
US$
Non-
monetary
US$
Super
contributions
US$
Long
service
leave
Share/option
based
payments *
Total
US$
-
-
-
-
-
58,520
-
-
-
-
1,742
19,359
-
46,667
-
-
-
-
-
-
151,981*
26,134*
26,134*
-
595,738
47,235
45,493
275,763
18,104*
237,771
* Share/Option based payments reflect a proportion of the independently valued cost of options granted under the
Employee Share Option Plan (“ESOP”). The net 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. The Cost of the above options issued under the ESOP over the year was $222,353 the loss on
options relating to the above directors that expired over the year was $131,116. The net cost of options issued to the
above directors and executives for the year was $91,237.
79
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
34 AUDITORS’ REMUNERATION
Audit Services
Auditors of the Company – Nexia Australia:
Audit and review of financial reports
Other auditors:
2014
US$
2013
US$
100,156
89,872
Audit and review of financial reports
206,262
150,466
Other services
Auditors of the Company – Nexia Australia:
Taxation services
Other auditors:
Taxation services
306,418
240,338
23,860
10,116
68,937
92,797
55,262
65,378
35
MATTERS SUBSEQUENT TO BALANCE DATE
1) Joint Venture with Raya Group
In February 2015 the Company entered into a Joint Venture with Raya Group Limited. The Joint Venture allows both
parties to jointly identify, acquire and develop oil and gas leases in an area of mutual interest in Northern Oklahoma,
USA.
2) Exploration Permit
Exploration Permit EP187 in the Northern Territory was formally granted by the Northern Territory Government in
March 2015.
There were no other matters or circumstances that have arisen since 31 December 2014 that has significantly
affected or may significantly affect:
•
•
•
the operations, in financial years subsequent to 31 December 2014, of the Empire Group; or
the results of those operations; or
the state of affairs in financial years subsequent to 31 December 2014 of the Empire Group.
80
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 22 to 24, 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 2014
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 2014.
Signed in accordance with a resolution of the directors.
B W McLEOD
Director
Dated: 31 March 2015
81
INDEPENDENT AUDITOR’S REPORT
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF EMPIRE ENERGY 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 2014, the statement of profit or loss
and other comprehensive income, the statement of changes in equity and the 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 company and 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 gives a true and fair view and 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 of the financial report that gives a true and fair view 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.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.
Independence
In conducting our audit, we have complied with the independence requirements of the Corporations
Act 2001. We confirm that the independence declaration required by the Corporations Act 2001
would be in the same terms if it had been given to the directors as at the time of this auditor’s report.
82
Opinion
In our opinion:
(a)
the financial report of Empire Energy Group Limited is in accordance with the Corporations Act
2001, including:
(i)
(ii)
giving a true and fair view of the consolidated entity’s financial position as at 31
December 2014 and of its performance for the year ended on that date; and
complying with Australian Accounting Standards and the Corporations Regulations 2001;
and
(b)
the financial statements also comply with International Financial Reporting Standards as
disclosed in Note 1.
Report on the Remuneration Report
We have audited the Remuneration Report included in pages 22 to 24 of the directors’ report for the
year ended 31 December 2014. The directors of the company 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.
Opinion
In our opinion, the Remuneration Report of Empire Energy Group Limited for the year ended 31
December 2014, complies with section 300A of the Corporations Act 2001.
Nexia Court and Co
Chartered Accountants
Robert Mayberry
Partner
Sydney
Dated: 31 March 2015
83
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
SHAREHOLDER INFORMATION
ORDINARY SHARES
a
Substantial Shareholders as at 17 March 2015
Name
Macquarie Bank Limited (Metals & Energy CAP DIV A/C)
HSBC Custody Nominees (Australia) Limited – A/C 2
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
25,916,533
%
Holding
17.38
8.39
Holders
327
841
477
867
315
Number of
Shares
130,259
2,368,015
3,628,733
32,533,933
270,202,742
%
Holding
0.04
0.77
1.17
10.53
87.49
2,827
308,863,682
100.00
i
ii
Number of holders of less than a marketable parcel
Percentage held by 20 largest holders
1,913
50.19
c
Twenty Largest Shareholders as at 17 March 2015
Name
Macquarie Bank Limited
HSBC Custody Nominees (Australia) Limited - A/C 2
1
2
3 WYT Nominees Pty Ltd
Rhodes Capital Pty Ltd
4
Armco Barriers Pty Ltd
5
Ms Michelle Wong
6
John Wardman & Associates Pty Ltd
7
Mr Sean Dennehy
8
9
Commonwealth Energy Assets LLC
10 Remond Holdings Pty Limited
11 Mr Kenneth Murray & Mrs Ruth Murray
12
J P Morgan Nominees Australia Limited
13 Chifley Portfolios Pty Ltd
14 Dryca Pty Ltd
15 Fanchel Pty Ltd
16 McGee Constructions Pty Ltd
17 Classic Roofing Pty Limited
18 CK Corporate Pty Ltd
19 Australian Executor Trustees Limited
20 Serlett Pty Ltd
Number of
Shares
53,666,666
25,916,533
11,200,451
6,175,056
6,000,000
5,431,098
4,400,000
4,227,644
4,000,000
3,951,401
3,800,000
3,769,160
3,675,321
3,180,000
3,145,900
2,875,000
2,700,000
2,350,000
2,296,147
2,257,532
155,017,909
%
Holding
17.38
8.39
3.63
2.00
1.94
1.76
1.42
1.37
1.30
1.28
1.23
1.22
1.19
1.03
1.02
0.93
0.87
0.76
0.74
0.73
50.19
d
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.
84
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
SHAREHOLDER INFORMATON (Continued)
UNQUOTED SECURITIES AS AT 17 MARCH 2015
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 $0.18 expiring 31 December 2015
Executive options exercisable at $0.17 expiring 31 December 2015
Executive options exercisable at $0.12 expiring 26 February 2016
Executive options exercisable at $0.15 expiring 31 December 2016
Executive options exercisable at $0.17 expiring 31 December 2016
Executive options exercisable at $0.18 expiring 31 December 2016
1,500,000
4,500,000
4,250,000
3,500,000
1,500,000
1,500,000
Unlisted Performance Rights subject to certain preconditions being met
2,5000,000
1
7
1
7
1
1
1
Voting Rights
There are no voting rights attached to any of the unquoted securities listed above.
LIST OF PETROLEUM EXPLORATION LICENCE APPLICATIONS & EXPLORATION LICENCES - AUSTRALIA
State
NT
NT
NT
NT
NT
NT
NT
Status
Under application
Under application
Under application
Under application
Granted
Granted
5 year moratorium
Interest
100%
100%
100%
100%
100%
100%
100%
Permit
EP(A) 180
EP(A) 181
EP(A) 182
EP(A) 183
EP 184*
EP 187
EP(A) 188
*Pastoral Lease subject to Native Title
LIST OF MINERAL LEASES - USA
A full list of the mineral (oil & gas) leases and rights of way held by the Company was announced on the Australian
Securities Exchange on 30 March 2015. Given the extensive list (67 pages) it was not practical to include this listing in the
Annual Report of the Company.
85