EMPIRE ENERGY GROUP LIMITED
and its controlled entities
ABN 29 002 148 361
DECEMBER 2017 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
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
SHAREHOLDER INFORMATION
3
4
17
26
27
28
29
31
32
70
75
2
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CORPORATE DIRECTORY
Directors
B W McLeod (Executive Chairman)
D H Sutton
L Tang
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 Place
Sydney NSW 2000
Australia & New Zealand Banking Group Limited
242 Pitt Street
Sydney NSW 2000
PNC Bank
249 Fifth Avenue
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
Barry Conge Harris LLP
700 Milam St, Suite 1100
Houston, TX 77002
Stock Exchange Listings
Australia
Australian Securities Exchange
(Home Exchange Sydney, New South Wales)
ASX Code: EEG - Ordinary Shares
United States of America
New York OTC 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.
2017 OVERVIEW & HIGHLIGHTS
GROUP
- Over one of the greatest periods of upheavals in the upstream energy industry, the Company has posted
positive cashflow each year of operation, during this period.
- Group Revenue $13.8 million (2016: $13.9 million).
- US EBITDAX $3.9 million (2016: $3.8 million).
- Group EBITDA $2.5 million (2016: $2.3 million).
- Net production 1,191 Boe/d (2016: 1,203 Boe/d).
-
1P Reserves 8.3 MMBoe, (2016: 7.9 MMBoe) with 1P PV10 of $45.3 million (2016: $56.5 million).
- Net tangible Assets US$20.2 million or ~A$0.03 cents per share.
- Underwritten rights issue for $4.6 million (A$6.1 million) completed.
- Repayment of $2.2 million of credit facility.
USA – APPALACHIA & MIDCON
- USA operations traded within a difficult environment throughout the first half of 2017 with oil and gas
prices remaining stuck at low levels. However, the second half of the year saw continued improvements
in oil prices, but with gas prices after differential remaining well below $3.00/Mcf.
-
-
-
-
The Company’s conservative hedging program provided another year of steady earnings. Oil hedging
ran off at the end of 2017. Gas hedging remains in place for gas (~62% over 2018 at an average price
of around $4.11/Mcf).
The Company monitors individual oil wells daily, enabling wells to be produced profitably at prevailing
oil prices. The management team was able to maintain production at a stable level year on year. This
was an exceptional result in a region where production declines are normally +10%pa.
Two wells were drilled and completed in the Central Kansas Uplift during the second quarter with initial
production rates of 40 BOPD and 55 BOPD respectively. The infill wells were selected from 3D seismic
and were completed in the targeted Arbuckle formation. The zone is known for its proven, sustainability
of long life production. With water driven reservoirs the wells were put on small choke to prevent water
coning and are now at constant production rates of ~14Bbl/d.
The Company maintains a significant inventory of well locations in Kansas and Oklahoma. Drilling has
been curtailed due to fluctuating oil prices over 2017 along with capital constraints. In addition, the
Company is revaluing all development acreage as it negotiates to add additional inventory at
considerably cheaper bonus costs than current options, as well as acquiring recent 3D seismic at
significantly reduced costs.
- During the year approximately 7,500 acres of mineral leases either expired or were sold. In all cases the
same leases can now be acquired at significantly lower costs.
-
In Appalachia the Company continues to redirect natural gas produced to lower cost outlets, as well as
seeking opportunities to increase operating efficiencies through replacement of compressors, pipelines
and acquisition of strategic access points to third party pipelines.
- Gross oil production 192,000 Bbls (Net 126,000 Bbls) (2016: Gross 194,000 Bbls).
- Gross natural gas production 2.31 Bcf (Net 1.85 Bcf) (2016: Gross 2.36 Bcf).
-
The reduction in 1P PV10 was related to 2017 sale revenue, a negative variance in gas prices and a
steepening in the backwardation of both oil and gas prices.
-
The Company’s US$200 million credit facility matures February 2019.
4
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
INDEPENDENT REVIEW OF OIL & GAS RESERVES
Although the Company reports its US reserves based on a discount rate of 10%, for Australian reporting purposes
the Company had utilised a discount rate of 8%. With the recent increase in the cost of capital and to align its
Australian accounts (IFRS reporting) with its US accounts (GAAP reporting) a 10% discount rate for all reserve
cashflow reporting is now utilised. For 2017 this generated an increase in the impairment (non-cash) write down.
AUSTRALIA – NORTHERN TERRITORY
-
A Prospective Resource P (50) (“PRP (50)”) of ~2.1 billion Boe or ~12.0Tcfe was announced in February
2016 for the Company’s NT Assets. The PRP (50) covers approximately 5.5 million acres of the total
14.5 million acres held by the Company and with an average shale thickness of 330 feet. In most of the
area reviewed, the shale thickness can be considerably thicker than that used for the PRP (50) estimate.
(Refer to page 11 for definition of Prospective Resource)
- No exploration work was undertaken while the Northern Territory Government completes its fracking
review. It is expected a decision will be made in the short term. Work continued with finalising
agreements with Traditional Owners.
- Negotiations and discussions continue with potential partners for funding of the Company’s project. The
outcome of these discussions will be based on the final outcome of the Northern Territory inquiry into
fracking.
B.
OPERATIONS
The Company maintains a small head office in Australia and manages oil & 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.
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
Dec 31, 2017
Dec 31, 2016
% change
Gross Production:
Oil (MBbls)
Natural gas (MMcf)
Net Production:
Oil (MBbls)
Natural gas (MMcf)
Net production (MBoe):
1.0
192
2,313
126
1,852
435
194
2,362
123
1,895
439
Net Daily Production (Boe/d):
1,191
1,203
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 ($/Boe)
Lifting Costs (incl taxes):
Oil ($/Bbl)
Natural gas ($/Mcf) (a)
Oil Equivalents ($/Boe)
1.1
$61.62
$ 2.99
$30.61
$45.83
$ 2.42
$23.61
$21.36
$ 1.17
$11.17
$62.21
$ 3.04
$30.59
$38.52
$ 1.76
$18.40
$21.54
$ 1.61
$13.01
-1%
-2%
2%
-2%
-1%
-1%
-1%
-2%
1%
19%
38%
28%
-1%
-27%
-14%
2P Reserves (MMBoe):
11.6
15.0
-23%
(a) For the 2017 fiscal year lifting costs for Appalachia were adjusted to bring in line with both calculation
of MidCon lifting costs and industry standards. This meant insurance expenses and non-operating
vehicle costs were reallocated to Field Overhead expense.
Notes to Table A
1.0
1.1
BOE - based on SEC guidelines of an oil:gas ratio of 1:6.
Lifting Costs - includes lease operating expenses, production and ad valorem taxes.
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
Notes
Dec 31,
2017
Dec 31,
2016
% change
Oil (MBbls)
Appalachia
Mid-Con
Total (MBbls)
Natural gas (MMcf)
Appalachia
Mid-Con
Total (MMcf)
3
123
126
1,843
10
1,853
3
120
123
1,880
15
1,895
24%
2%
2%
-2%
34%
-2%
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 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 operating
performance.
EBITDAX is an important supplemental measure of operating performance because it
eliminates items that have little bearing on operating performance and so highlights trends in
the 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
credit agreements.
Securities analysts and investors generally use EBITDAX (cash flow modelling) in the
comparative evaluation of companies.
Management and external users of financial statements, rely on the use of EBITDAX to assess:
the financial performance of assets without regard to financing methods, capital
structure or historical cost basis;
•
7
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
•
•
•
•
the ability of assets to generate cash sufficient to pay interest costs and support
indebtedness;
operating performance and return on capital as compared to those of other
companies in the 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
For the EBITDAX report actual numbers for production, income and expenses have been utilised. This method
generates differences between what is shown in the EBITDAX accounts and that represented in the statutory
accounts.
The table below provides a reconciliation EBITDAX to the financial statements.
Net Earning – Effective Date (In $ thousands)
Dec 31, 2017
Dec 31, 2016
EBITDAX- production date
Net Earnings- effective date
$3,863
$(4,779)
$3,794
$(4,161)
Intergroup management fee
$150
$150
Revenue and expenses (remaining Empire Group)
Other Income
Unrealised derivative movements*
General and administration – head office
General and administration – other*
(Impairment)/Write-back of asset *
Net (loss)/profit before income tax expense
*
Indicates non-cash items
$12
$(1,701)
$(11)
$(73)
$(13,578)
$(19,980)
$10
$(7,590)
$(10)
$(46)
$28,144
$16,497
EBITDAX in Table C relates to Empire Energy E&P and Net Earnings in Table D reports operational activities of
Empire Energy Group.
8
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
TABLE C
US Operations only (In $ thousands)
Notes
Dec 31, 2017
Dec 31, 2016
% change
Net Revenue:
Oil Sales
Natural Gas Sales
Working Interest
Net Admin Income
Other Income
Total Revenue
Production costs:
Lease operating expenses – Oil
Lease operating expenses – Gas (a)
Taxes - Oil
Taxes - Natural Gas
Total
Field EBITDAX
Less:
Inventory adjustment
Reserve Enhancements
Nonrecurring expenses
G & G Costs
Field Overhead (b)
Total
Operating EBITDAX
Operating Margin
Less:
Field G & A
Corporate G & A
Delay rental payments
Land Overhead & Non-leasing costs
Dry hole expenses
Total
EBITDAX
Net Margin
1.0
1.0
1.1
1.2
1.2
1.3
1.4
1.5
1.6
1.7
1.8
7,762
5,541
4
340
120
7,666
5,757
8
369
119
13,767
13,919
2,482
2,045
214
117
4,858
8,909
30
4
810
4
2,004
2,852
6,057
44.0%
608
1,487
95
4
-
2,194
3,863
28.1%
2,529
2,903
126
153
5,711
8,208
(3)
22
756
26
1,250
2,051
6,157
44.2%
658
1,555
142
6
-
2,361
3,796
27.3%
1%
-4%
-50%
-8%
1%
-1%
-2%
-30%
70%
-24%
-15%
9%
100%
-82%
7%
-85%
60%
39%
-2%
-8%
-4%
-33%
-33%
-
-7%
2%
(a), (b) For the 2017 fiscal year lifting costs for Appalachia were adjusted to bring in line with both calculation
of MidCon lifting costs and industry standards. This meant insurance expenses and non-operating
vehicle costs were reallocated to Field Overhead expense.
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 $3.0 million for natural gas and oil.
1.1 Net Admin Income – as operator for approximately most of the Company’s assets, the Company
charges Working Interest Owners a fee to cover expenses such as administration, general insurance
and supervision etc., or COPAS expenses. As part of this cost there is a net 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, 2017.
1.4 Reserve Enhancements – capital costs relating to the development of behind pipe reserves, plus
polymer treatment program for wells.
1.5 Nonrecurring expenses – Costs relating to ongoing upgrade of well bores, wellhead equipment well
and tank battery sites etc.
1.6 Field Overhead – 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. Around 50% of this is covered by Net Admin
Income (refer Note 1.1 above).
1.7 Field G&A - Empire Energy has field offices in each region it operates. Operations are expansive with
over 2,200 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, third party reservoir engineering
reviews etc.
1.8 Corporate G&A – Empire Energy manages its USA operations from a corporate head office at
Canonsburg, PA., where a staff of 4 full time and 1 part-time hold responsibility for financial
management, control and reporting and HR Services. Major expenses for the period were - salaries
and wages $271,795; audit/tax and accounting $324,842; travel and accommodation $53,862; rent
and associated, IT and office costs $118,490; Professional Services $38,276 and Management and
Director Fees $369,018 (of which $150,000 was paid to Empire Energy Group Limited).
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)
Notes
Dec 31, 2017
EBITDAX
Geological Services
Acquisition related expenses
Capital Raising Expenses
Australian Head Office
Northern Territory exploration expenses
1.9
1.10
Total
EBITDA
Less:
Expiration costs
ARO
Depn, Depletion, Amortisation
Total
EBIT
Less:
Interest
Interest (non-cash)
1.11
(Gain) loss on sale of assets (non-cash)
P&A vs. ARO (non-cash)
Bad debts (non-cash)
Net Earnings before Tax
3,863
-
(76)
159
1,127
149
1,359
2,504
143
503
1,479
2,125
379
2,948
171
74
89
402
Dec 31,
2016
3,796
17
55
21
1,140
289
1,522
2,274
299
478
1,621
2,398
(124)
2,416
369
42
150
(26)
% change
2%
n/a
n/a
657%
-1%
-48%
-10%
10%
-52%
5%
-9%
-11%
n/a
22%
-54%
76%
-41%
n/a
8%
(3,305)
(3,075)
Notes to Table D:
1.9
engineering, tax and accounting advice, transition fees, recruitment and relocation costs.
Acquisition related expenses – Directly associated with acquisitions and include legal,
1.10
Australian Head Office – net cost of Australian operations (expenses are net of income
received). Major expenses were consultants $365,505; salaries $222,502; audit & accounting $100,635;
listing related expenses $57,799; rent, communications, IT hardware and support services $165,190
Australian expenses currency translation at AUD/USA 0.7555.
1.11
2016.
Interest (non-cash) – decreased due to warrant amortisation from previous years taken up in
G.
CAPITAL EXPENDITURE
Capex (In $ thousands)
Notes
Dec 31, 2017
Dec 31, 2016
% change
Capital Expenditures
Acquisition Capital
New Wells - IDC
New Wells - Capital
Undeveloped Leases
Northern Territory, Australia
Total
82
242
162
2
871
1,359
49
580
23
32
499
1,183
67%
-58%
604%
-94%
75%
15%
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, 2017 was $37.9 million (cf
$40.1 million at Dec 2016) at an average rate of LIBOR+6.5%. Principal repayments made in 2017 and 2016
were ~$2.2 million and ~$465,000 respectively. Interest expense is estimated to average $247,000/mth over
2017. The Credit Facility expires on 17 April 2019.
I.
HEDGING
Due to the risk/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 or on the other hand increase as
non-economic wells are shut-in.
Year
2018
2019
Total
Est. Net
mmBtu
Hedged
mmBtu
Average
Est. Net
Hedged
%
$/mmBtu
Bbl
Bbl
1,620,000
1,008,000
62.2%
1,550,000
498,000
32.1%
3,170,000
1,506,000
47.5%
$4.11
$3.45
$3.89
-
-
-
-
-
-
%
-
-
-
Average
$/Bbl
-
-
-
The fair value (marked to market) of combined oil and gas hedges in place as at December 31, 2017 was $1.6
million. Oil and gas hedge contracts were valued based on NYMEX Henry Hub and WTI forward curves at market
close on December 31, 2017.
J.
RESERVES – USA
The Company’s reserves are reviewed annually by independent third-party reservoir engineers. The scope of the
reviews is to prepare an estimate of the proved, probable and possible reserves attributable to Empire’s ownership
position in the subject properties.
Reserves as at December 31, 2017 – USA (NYMEX Strip Dec 31, 2017)
Reserves - As of Dec 31, 2017
Reserves (Reserves)
Proved Developed Producing
Proved Developed Non-producing
Proved Behind Pipe
Proved Undeveloped
Total 1P
Probable
Total 2P
Possible
Possible - NY Shale
Total 3P
Prospective Resource P(50) Shale (NY)
Gross
Wells
Oil
(Mbbls)
Gas (MMcf)
MBoe
Capex
US$M
PV0
US$M
PV10
US$M
2,211
19
6
79
2,315
84
2,399
208
2,607
1,606
476
132
1,015
3,229
1,259
4,488
1,749
90,740
96,977
203,500
26,787
-
39
3,396
30,222
12,654
42,876
3,772
12,460
59,108
1,221,000
6,070
476
139
1,581
8,266
3,368
11,634
2,378
92,816
106,828
407,000
$0
$907
$484
$14,627
$16,018
$19,981
$35,999
$24,589
$62,547
$10,085
$4,488
$27,305
$104,425
$47,201
$151,626
$54,848
$31,800
$5,094
$1,257
$7,134
$45,285
$13,687
$58,972
$11,225
$60,588
$206,474
$70,197
Prospective Resource P(50) - Aust (NT)
222,000
11,076,000
2,068,000
Total Reserves & Resources
522,477
12,356,108
2,581,828
USA Reserves by: Graves & Co Consulting & Pinnacle Energy Services, LLC
Northern Territory Resources by: Muir & Associates P/L and Fluid Energy Consultants
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.
12
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
- 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 measuring and assessing the estimated petroleum reserves is the wellhead.
“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) and Kansas (Mid-Con) – Graves & Co Consulting.
- Oklahoma (Mid-Con) - Pinnacle Energy Services, LLC.
- Northern Territory - Muir & Associates P/L and Fluid Energy Consultants.
- The following NYMEX prices, as at December 31, 2017, was used to calculate reserves and cash flow:
Year
2018
2019
2020
2021
2022
2023
2024
2025
2026+
$/Bbl
59.06
55.92
53.78
52.56
52.13
51.86
51.90
52.20
52.57
$/Mcf
2.80
2.80
2.81
2.84
2.88
2.92
2.89
2.82
2.84
13
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Reconciliation of Reserves – USA (NYMEX Strip Dec 31, 2017)
Reserves/Resources - MBoe
1P
2P
3P
Prospective (P50)
As at January 1, 2017
Appalachia (2)
Mid-Con
4,699
3,240
6,004
9,008
101,022
9,097
Northern Territory (3)
TOTAL
7,939
15,012
110,119
Production 2017
Changes (1)
Appalachia
Mid-Con
Appalachia(2)
Mid-Con
Northern Territory (3)
As at January 1, 2018
-316
-123
834
-68
464
-3,841
278
-3,568
Appalachia (2)
Mid-Con
5,217
3,049
Northern Territory (3)
TOTAL
8,266
Change
4%
6,468
5,166
11,634
-22%
101,300
5,528
106,828
-3%
407,000
0
2,068,000
2,475,000
0
0
407,000
0
2,068,000
2,475,000
(1) Includes acquisitions, divestments, discoveries, extensions and revisions.
(2) 3P includes shale reserves but subject to current fracking ban in NY State.
(3) Prospective (P50) Resource Estimate calculated on probalistic basis
(4) 1P, 2P & 3P are calculated on a deterministic basis with applicable volumes are measured at the wellhead.
US Reserves by: Graves & Co Consulting & Pinnacle Energy Services, LLC.
Northern Territory Resources by Muir & Associates P/L and Fluid Energy Consultants
Net 2P Reserves: An updated Reserve Estimate was carried out as of December 31, 2017 at the NYMEX strip
as at December 31, 2017, with summary of 2P Reserves shown above. Total 2P reserves are 11.6 MMBoe.
Approximately 4.5 MMBoe of 2P reserves are uneconomic at current gas prices. Uneconomic reserves are mostly
in New York State and held by production and will be written back at higher gas prices.
14
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
Reconciliation of Economic Summary Projections – USA (NYMEX Strip Dec 31, 2017)
PV10 ($M)
1P
2P
3P
As at January 1, 2017
Sales 2017
Changes (1)
As at January 1, 2018
Appalachia (2)
Mid-Con
TOTAL
$17,621
$38,852
$56,473
$21,287
$70,170
$91,457
$28,969
$71,354
$100,323
Appalachia
Mid-Con
-$4,729
-$5,806
Appalachia
$960
Mid-Con
-$1,614
-$5,531
-$26,954
Appalachia (2)
Mid-Con
TOTAL
$13,852
$31,432
$45,284
$15,756
$43,216
$58,972
-$8,669
-$21,457
$20,300
$49,897
$70,197
-30%
(1) Includes changes in strip prices, acquisitions, divestments, discoveries, extensions and revisions.
(2) Excludes any value attributable to NY shale reserves.
US Reserves by: Graves & Co Consulting & Pinnacle Energy Services, LLC.
Change
-36%
-20%
Land Position
The following table summarises the Company’s land holdings in Appalachia and the Mid-Continental regions,
United States and the Northern Territory, Australia, as at December 31, 2017.
State
NY
PA
OK
KS
NT
Total
(Gross Acres)
258,258
15,198
1,440
14,624
14,500,000
HBP
Marcellus
Utica
Miss.
CKU
2018
2019
2020+
246,119
258,258
131,899
-
15,198
-
14,384
8,293
-
-
6,975
-
-
-
1,440
5,062
-
-
1,418
-
1,440
13,904
2,715
7,990
-
-
-
240
TOTAL
275,701
14,789,520
Marcellus/Utica = Shales, Appalachia
Miss. = Mississippi Lime
CKU = Central Kansas Uplift = Arbuckle, Simpson, Viola, Lansing/Kansas City
266,551
138,874
6,502
13,904
2,858
2,715
8,230
K. NORTHERN TERRITORY – A LARGE EMERGING PETROLEUM PLAY
Empire Energy Group Limited, through its 100% owned subsidiary Imperial Oil & Gas Pty Ltd (“Imperial”), holds a
100% interest in 59,000 square km (14.5 million acres) of prospective shale oil and gas exploration acreage, in the
central depositional trough of the Proterozoic McArthur Basin. The McArthur Basin is an underexplored petroleum
frontier basin.
- Of significant importance in 2017 was the flowing of gas from a fracked well in the Beetaloo sub-basin, within
the McArthur Basin.The Amungee-1 horizontal well, is now referred to as the Beetaloo Basin ‘discovery well’,
which is proof of concept that the McArthur Basin shale can be fractured to flow natural gas. The Company
holds around 635,000 acres in the Beetaloo Basin with a Prospective Resource P(50) of ~2Tcfe.
-
Imperial confirmed from historical core hole data, the shale source petroleum rock prospectivity in the
Wollogorang and McDermott Formations of the Tawallah Group. Live oil was reported within the McDermott
Formation. The oil came from a 230-foot interval between 1,800 and 2,030-foot drill depth. This data was
15
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Executive Chairman’s Review of Operation (Continued)
supported by Imperial well drilled in 2014 that intersected 66ft of thick black organic rich shale intervals of the
formation in a near surface position in the southern McArthur Basin, adjacent to EP187. The presence of this
deeper hydrocarbon generation from these formations demonstrates the increased potential for hydrocarbons
below the Barney Creek Shale in EP187 and previously considered barren regions of EP184.
- A Prospective Resource P(50) (“PRP(50)”) has not been calculated for the McDermott formation, but total
areas mapped are approximately 2,000,000 acres, with an expected net average thickness of around 400 feet
and with projected TOC’s between 6% to 7% in EP187, EP184 and EP(A)183 and EP(A)188.
- Further correlation work shows that the same Tawallah Group of shales (and/or equivalents) extend
northwards, underlying the Barney Creek shale equivalents in EPA’s 180, 181 and 182, adding a further
estimated 10,000,000 acres to the potential resource base. This has the possibility of adding very significant
additional resources to the current PRP(50). Utilising a geological discount factor of just 10% (discounted by
90%) a PRP(50) = 221 MMBoe (3.7Tcfe) was calculated for the known Wollogorang Shales within the
Company’s tenements.
-
In 2016 the Northern Territory Labor Party announced a review of fracking practices and procedures. While
this review is being undertaken there will be no seismic or drilling done by Imperial.
The Company completed at its request, an independent Prospective Resource as set out below:
INDEPENDENTLY CERTIFIED ESTIMATED PROSPECTIVE RESOURCE (Unrisked)
IDENTIFIED
Barney Creek Formation
Velkerri Formation
Wollogorang Formation
Bcf
MMBO
Bcf
MMBO
Bcf
MMBO
AREA M ac
2,982
635
1,384
P90
3,304
66
383
8
524
10
MMBOE
Conversion Factor oil:gas is 1:6. Refer to page 12 for definition of Prospective Resource
TOTAL
786
P50
8,699
174
1,192
24
1,185
24
2,068
P10
20,172
403
3,086
62
2,371
47
4,783
L. COMPONENT 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
Mel Hainey
John P Dick
Wal Muir
Organisation
Graves & Co. Consulting LLC
Pinnacle Energy Services, LLC
Muir and Associate P/L
Qualifications
BSc
BPE
BSc,MBA
Professional Organisation
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.
16
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
DIRECTORS’ REPORT
For the financial year ended 31 December 2017
In respect of the financial year ended 31 December 2017, 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
L Tang
Executive Chairman
Non-Executive Director
Non-Executive Director – resigned 2 June 2017
Non-Executive Director – appointed 2 June 2017
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 2017 after providing for
income tax was US$20,107,246 compared to a consolidated net profit for the previous corresponding reporting period
of US$16,448,929.
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 16 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.
17
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2017
MATTERS SUBSEQUENT TO BALANCE DATE
1) On the 12 February 2018 the Company announced the placement of 150 million fully paid ordinary shares to
sophisticated and institutional investors at an average issue price of $0.0125 per share, raising A$1,875,000 (before
costs).
The Placement shares were to be issued with the issue of 75,000,000 Placement shares under ASX Listing Rule
7.1 and 75,000,000 Placement shares to be issued under Listing Rule 7.1A.
The Company determined to proceed with the capital raising of $1,875,000 by way of two tranches with both
tranches being issued at $0.0125 under Listing Rule 7.1:
- Tranche 1 of 75,000,000 shares to be issued at $0.0125 and allotted under the Company’s existing capacity
under Listing Rule 7.1.
73,000,000 Tranche 1 shares were issued on 16 February 2018. Due to a delay with cleared funds the
remaining 2,000,000 Tranche 1 were issued on 22 February 2018 under Listing Rule 7.1.
- Tranche 2, being 75,000,000 shares at an issue price of $0.0125 to be issued under Listing Rule 7.1 subject
to approval by shareholders at a Extraordinary General Meeting of the Company to be held 6 April 2018.
Tranche 2 shares if approved will be issued to a number of parties at an issue price of $0.0125 being the same
price as the previously allotted Tranche 1 shares. It is noted that the same parties who participated in the placement
of Tranche 1 shares will take up Tranche 2 shares
2) On 16 February 2018 the Company issued 5,000,000 unlisted options exercisable at $0.03 expiring 31 January
2020 to Baillieu Holst Ltd (or nominee/s) for services rendered to the company for assistance in capital raising.
3) On 8 March 2018 the Company announced the appointment of Mr Alex Underwood as an Executive of Empire and
a Director and Chief Executive Officer of the Company’s wholly owned subsidiary, Imperial Oil & Gas Pty Limited.
The addition of Mr Underwood to the Company’s executive management team will support the Executive Chairman
and the Imperial operations team with the strategic development of the Company’s McArthur Basin assets located
in the Northern Territory, Australia, as well as assisting the Company to achieve its underlying objective of
restructuring its USA balance sheet and the acquisition of additional producing assets. Subject to the Corporations
Act 2001 (Cth) and ASX Listing Rules, as a component of Mr Underwood’s appointment to partially offset value
forgone in his previous employer share plan, the Company will issue Mr Underwood (or nominee) 4,500,000 fully
paid ordinary shares (vesting in three equal tranches at 12 month periods) and 6,000,000 options (vesting in two
equal tranches of 12 month periods, exercisable at $0.03 on or before 30 December 2021).
4) On 27 March 2018 the Final Report of the Scientific Inquiry into Hydraulic Fracturing in the Northern Territory was
released. The overall finding of the Inquiry was that, if all its recommendations are implemented in full, the risks
associated with fracture stimulation of unconventional reservoirs can be adequately managed, and in some cases
eliminated. The Report does not make any recommendations as to whether fracture stimulation of unconventional
reservoirs should be allowed, as that decision lies with the Northern Territory Government. However, the Report
makes 135 recommendations for the regulation of the onshore shale gas industry, should it be allowed to develop
by the Government.
5) There were no other matters or circumstances that have arisen since 31 December 2017 that has significantly
affected or may significantly affect:
•
•
•
the operations, in financial years subsequent to 31 December 2017, of the Empire Group; or
the results of those operations; or
the state of affairs in financial years subsequent to 31 December 2017 of the Empire Group.
INFORMATION ON DIRECTORS
Bruce William McLeod, B.Sc (Maths), M.Com (Econ)
Executive Chairman
Age 65
Experience and Expertise
Mr McLeod has had extensive experience in the Australian capital markets. Over the past 25 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.
18
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2017
Special Responsibilities
Chairman of the Board – Chief Executive Officer and Member of Audit Committee
Other Current Directorships
Chairman of Anson Resources Limited.
Former Directorships in Last 3 Years
None.
David Henty Sutton, B.Com ACIS
Non-Executive Director
Age 74
Experience and Expertise
Mr Sutton has many years’ experience as a Director of companies involved with share broking and investment banking.
He is the Executive Chairman and Director of APC securities Pty Ltd. 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
Sinovus Mining Limited, and Avalon Pacific Capital Pty Ltd (formerly Dayton Way Financial)
Former Directorships in Last 3 Years
Silver Mines Limited, EHG Corporation Ltd, Chairman Precious Metals Limited
Kevin Anthony Torpey, B.E., MIE Aus., CP Eng, FAusIMM, (CP)
Non-Executive Director
Age 78 (resigned 2 June 2017)
Experience and Expertise
Mr Torpey is a Chartered Professional Engineer and a graduate from Sydney University. Over the last 42 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.
Mr Torpey resigned as a Director on 2 June 2017.
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
Lin Tang, MBA (Acct), B.Tech (Acct)
Non-Executive Director
Age 36
Experience and Expertise
Ms Tang has over 12 years of experience within the finance and energy sectors. Previously she spent 7 years in the
Energy Finance SBU at China Minsheng Banking Corporation, Beijing, China. Prior to that she was the Financial
Manager for Global Oil Corporation Limited which has among other operating assets, three Production Sharing
19
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2017
Contracts with PetroChina in Jilin province, China. Ms Tang has an MBA in Accounting (Monmouth University, NJ,
USA) and a Bachelor of Technology.
Appointed a Director of the Company on 2 June 2017.
Special Responsibilities
Member of Remuneration Committee and Member of Audit Committee
Other Current Directorships
Nil
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 9 years’ experience.
Alex Underwood (LLB, BCom (Hons))
Director, Imperial Oil & Gas Pty Ltd
Mr Underwood was appointed as an Executive of Empire and a Director and Chief Executive Officer of the Company’s
wholly owned subsidiary, Imperial Oil & Gas Pty Limited on the 6 March 2018. The addition of Mr Underwood to the
Company’s executive management team will support the Executive Chairman and the Imperial operations team with the
strategic development of the Company’s McArthur Basin assets located in the Northern Territory, Australia, as well as
assisting the Company to achieve its underlying objective of restructuring its USA balance sheet by the acquisition of
additional producing assets.
Mr Underwood has nearly 15 years of specialist upstream oil and gas investing and financing experience. Mr Underwood’s
former experience includes working for the Commonwealth Bank of Australia in Singapore (Director, Natural Resources
2015 – 2017) and Macquarie Bank, in Sydney and Singapore (Associate Director, Energy Markets Division 2006 – 2015).
Prior to this he worked for BHP Billiton Petroleum in Perth and Melbourne. Over this period, he has successfully invested
debt and equity capital in a number of listed and unlisted oil and gas companies with assets in the United States, Australia
and Asia. His focus has been on the identification of value creation opportunities for upstream oil and gas development
and production assets.
Professor John Warburton (PhD, FGS, MAICD)
Director, Imperial Oil & Gas Pty Ltd
Prof Warburton was appointed as an advisor to the Empire Energy Group in February 2010. From March 2011 to
March 2014 he served as CEO of the Company’s wholly owned subsidiary Imperial Oil & Gas Pty Ltd where he
continues as Non-Executive Director. A Geoscientist by profession, Prof Warburton has 35 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. Prof Warburton is currently Chief of Geoscience & Exploration
Excellence at Oil Search Limited and is an Independent Non-Executive Director of Senex Energy Limited where he
also serves on the People & Remuneration and Nominations Committees.
John’s petroleum industry expertise covers the Middle East, Central and East Asia, Africa, Pakistan, Europe, Australia,
New Zealand and PNG. John has been involved in the discovery of commercial oil & gas fields in Pakistan, UK,
Kazakhstan, Azerbaijan and PNG and he has published over 30 internationally recognised technical articles with
particular focus on petroleum systems and complex fold and thrust belts.
Prof Warburton has a First Class B.Sc. Honours Degree in Geological Sciences and a Ph.D. in Structural Geology. He
is a Member of the Australian Institute of Company Directors, an Alumni of Cranfield Business School UK and a Fellow
of the Geological Society of London. John is a visiting Professor of the School of Earth & Environment at the University
20
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2017
of Leeds, UK where he also serves on the External Advisory Board at the Centre for Integrated Petroleum Engineering
& Geoscience.
Geoff Hokin MSc(Hons) Geology; MSc Geology; Dip Coal Geology; Dip Arts Anthropology & Cross-Cultural
Psychology, Dip Training & Assessment, Cert IV Bus Mgmt.
Explorations & Operations, Imperial Oil & Gas Pty Ltd
Mr Hokin has 15 years’ experience as an exploration geologist in the unconventional gas and coal sectors with various
senior geology roles with a number of companies including Armour Energy Limited, Metgasco Limited, Arrow Energy
Limited, and Xstrata Coal Australia. Mr Hokin has extensive geological and executive management experience to
Executive Director level in other operations. He has authored and co-authored a number of publications including ‘An
emerging shale gas play in the Northern Territory’ (2012) and ‘Peasant resistance and Disadvantage’ (2017). Mr Hokin
also has significant qualifications and experience in safety and risk management, team leadership, conflict resolution,
and project management.
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
Ms L Tang
14
14
8
6
14
14
8
6
-
2
2
-
-
2
2
-
6
6
3
3
Held
Whilst in
Office
6
6
3
3
The audit committee comprises the full Board of Directors. Mr B W McLeod, Mr D H Sutton, Mr K A Torpey and Ms L
Tang were members of the remuneration committee during the financial year.
Retirement, Election and Continuation in Office of Directors
Mr D 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.
Ms L Tang was appointed a Director 2 June 2017, as a new addition to the Board Ms Tang will stand for re-election at
the Company’s next Annual General Meeting.
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 – resigned 2 June 2017
L Tang - Independent Non-Executive – appointed 2 June 2017
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.
21
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2017
Executive Directors’ and Executive Remuneration
Executive remuneration and other terms of employment are reviewed annually and are based predominantly on the
past year’s growth of the Empire Group’s net tangible assets and shareholder value, having regard to performance
against goals set at the start of the year, relevant comparative information and independent expert advice. As well as
basic salary, remuneration packages include superannuation and other bonuses and incentives linked to
predetermined performance criteria. Executive Directors and executives are able to participate in an Employee Share
Option Scheme. Remuneration packages are set at levels that are intended to attract and retain executives capable
of managing the Consolidated Entity’s operations. Consideration is also given to reasonableness, acceptability to
shareholders and appropriateness for the current level of operations.
Performance Based Remuneration
As part of the Executive Directors’ remuneration package there is a performance-based component, consisting of key
performance indicators (KPIs). The intention of this program is to facilitate goal congruence between executives and
that of the Empire Group and shareholders.
Performance in relation to the KPIs will be assessed annually, with bonuses being awarded depending on performance
of the Empire Group over the past year. Following the assessment, the KPIs will be reviewed by the Remuneration
Committee in light of the desired and actual outcomes, and their efficiency assessed in relation to the Empire Group’s
goals and shareholder wealth.
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.
Short term benefits
December 2017
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$
Directors
B W McLeod
K A Torpey
D H Sutton
L Tang
J Warburton
Executives
A Boyer
365,489(1)
7,555
-
7,555
16,999
31,063(2)
-
-
-
-
25,791
-
-
-
-
-
718
15,110
-
-
-
-
-
-
-
1,206 423,549
8,273
15,110
7,555
16,999
-
-
-
-
-
219,018
241 282,772
63,513
(1) Includes accrued $145,135 but not paid. * 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 $19,058 the non-cash loss on options relating to the
above directors that expired over the year was $32,462. The net non-cash cost of options issued to the above directors and executives
for the year was $(13,404).
(2) In relation to a bonus issued in December 2014.
-
-
22
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2017
Short term benefits
December 2016
Cash salary
and fees
US$
Bonus
payments
US$
Non-
monetary
US$
Post-
employment
benefits
Super
contributions
US$
Long-term
benefits
Long
service
leave
Share/option
based
payments*
Total
US$
Directors
B W McLeod
K A Torpey
D H Sutton
J Warburton
Executives
A Boyer
342,925(1)
14,886
-
26,795
-
-
-
-
26,414
-
-
-
-
2,010
14,886
-
-
-
-
-
15,288 384,627
16,896
14,886
26,795
-
-
-
-
253,000(2)
3,893 319,452
62,559
(1) Includes accrued $216,732 but not paid. * 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 $18,185 the non-cash loss on options relating to the
above directors that expired over the year was $30,976. The net non-cash cost of options issued to the above directors and executives
for the year was $(12,790).
(2) Includes $78,000 of previous payments from 2013 to 2016 not paid.
Service Agreements
-
-
Terms of employment with Mr B W McLeod (Executive Chairman) have been formalised in a service agreement. The
terms of this agreement are as detailed below:
Terms of the agreement:
•
•
•
•
Agreed management consultant fees of A$483,771 in 2017 to be reviewed 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
Director/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 there were 13,000,000 executive options to acquire ordinary shares granted to Directors and
specified executives of the Company.
At the date of this report there were 13,000,000 unissued shares held under option to Directors and specified
executives.
Directors’ Interests and Benefits
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
Direct Interest
Director
B W McLeod
D H Sutton
L Tang
End of Audited Remuneration Report
-
1,683,079
-
Shares
Options
-
-
-
Indirect Interest
Shares
Options
24,229,999
384,333
-
5,000,000
-
-
23
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2017
SHARE OPTIONS
Movements
Grant of Options
The following options were granted during the financial year:
Number
1,000,000 Unlisted options
13,000,000 Unlisted options
Exercise Price
A$
$0.028*
$0.03
Expiry Date
25 August 2019
31 December 2021
* Following a Pro-Rata Rights Issue announced in December 2016 the original exercise price of these options ($0.03)
was adjusted pursuant to the terms and conditions of the options and ASX Listing Rule 6.22.
On 16 February 2018 the Company issued 5,000,000 unlisted options exercisable at $0.03 expiring 31 January 2020
to Baillieu Holst Ltd (or nominee/s) for services rendered to the company for assistance in capital raising.
At the date of this report there were 19,000,000 unlisted options granted.
Exercise of Options
No options were exercised during the financial year or in the period since the end of the financial year and up to the
date of this report.
Expiry of Options
No options have expired since the end of the financial year and up to the date of this report.
At the date of this report the total number of unissued shares held under option was 19,000,000. These options are
exercisable on the following terms.
Number
1,000,000
13,000,000
5,000,000
Unlisted options
Unlisted options
Unlisted options
Exercise Price
pre Rights Issue
A$
$0.028
$0.03
$0.03
Expiry Date
25 August 2019
31 December 2021
31 January 2020
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 buyback 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.
24
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
Directors’ Report
for the year ended 31 December 2017
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 Group Executive Officer and Chief Financial Controller
The Directors have received and considered declarations from the Chief Executive Officer and Chief Financial
Controller 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 2017 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 32 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 26 and forms part of the Director’s Report for the financial year ended 31 December 2017.
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 29 March 2018
25
The Board of Directors
Empire Energy Group Limited
Level 7, 151 Macquarie Street
SYDNEY NSW 2000
29 March 2018
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 2017, 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 Sydney Partnership
Lester Wills
Partner
26
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
for the year ended 31 December 2017
Note
Year ended
December 2017
US$
Year ended
December 2016
US$
Sales Revenue
Cost of Sales
Gross Profit
Other income
General and administration expenses
Exploration expenses
Other non-cash expenses
Operating (Loss)/Profit before interest costs
Net interest (expense)/income
(Loss)/Profit before income tax expense
Income tax expense
(Loss)/Profit after income tax benefit/(expense) from
continuing operations
Other comprehensive (loss)/ income
Exchange differences on translation of foreign operations
Other comprehensive (loss)/income for the year, net of tax
5a
6
5b
8a
7
9a
13,942,325
(8,357,296)
5,585,029
126,409
(2,978,837)
(148,873)
(19,597,489)
(17,013,761)
14,538,956
(8,604,524)
5,934,432
229,770
(3,301,879)
(318,869)
16,373,999
18,917,453
(2,966,623)
(2,420,361)
(19,980,384)
16,497,092
(126,862)
(48,163)
(20,107,246)
16,448,929
(28,993)
(28,993)
26,890
26,890
Total comprehensive (loss)/income for the year
(20,136,239)
16,475,819
Basic earnings per share
Diluted earnings per share
28
28
Cents per share
(2.13)
(2.13)
Cents per share
4.76
4.76
The above statements of profit or loss and other comprehensive income should be read in conjunction with the
accompanying notes.
27
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 31 December 2017
Note
As at
December 2017
US$
As at
December 2016
US$
CURRENT ASSETS
Cash and cash equivalents
Trade and other receivables
Prepayments
Inventories
Financial assets, including derivatives
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
Interest-bearing liabilities
Provisions
TOTAL CURRENT LIABILITIES
NON-CURRENT LIABILITIES
Provisions
TOTAL NON-CURRENT LIABILITIES
TOTAL LIABILITIES
NET ASSETS
EQUITY
Contributed equity
Reserves
Accumulated losses
TOTAL SHAREHOLDERS’ EQUITY
10
11
12
13
13
14
14
15
16
17
18
18
19
908,318
2,397,842
237,237
540,706
1,265,784
641,493
2,175,522
437,535
544,772
2,022,174
5,349,887
5,821,496
316,935
69,614,396
493,663
68,217
1,334,091
83,943,173
487,872
68,217
70,493,211
85,833,353
75,843,098
91,654,849
3,405,031
36,976,225
12,289
3,871,331
38,656,987
6,986
40,393,545
42,535,304
15,186,576
12,902,647
15,186,576
12,902,647
55,580,121
55,437,951
20,262,977
36,216,898
78,415,335
5,152,638
(63,304,996)
74,239,177
5,175,471
(43,197,750)
20,262,977
36,216,898
The above consolidated statements of financial position should be read in conjunction with the accompanying notes.
28
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2017
Consolidated
Issued Capital
Fair Value
Reserve
Foreign
Currency
Translation
Reserve
Options
Reserve
Accumulated
Losses
Attributable to
owners of
equity parent
Total Equity
Balance at 31 December 2016
74,239,177
127,396
(69,343)
5,117,418
(43,197,750)
36,216,898
36,216,898
Total Comprehensive income for year
Profit after income tax from continuing operations
Exchange differences on translation of foreign operations
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
Issue of ordinary shares
Less: share issue transaction costs
Options issued during the year – share-based payments
Total transactions with owners
-
-
-
4,635,835
(459,677)
-
4,176,158
-
-
-
-
-
-
-
-
(28,990)
(28,990)
-
-
-
-
-
-
-
-
-
6,157
6,157
(20,107,246)
(20,107,246)
(20,107,246)
-
(28,990)
(28,990)
(20,107,246)
(20,136,236)
(20,136,236)
-
-
-
-
4,635,835
(459,677)
6,157
4,635,835
(459,677)
6,157
4,182,315
4,182,315
Balance at 31 December 2017
78,415,335
127,396
(98,333)
5,123,575
(63,304,996)
20,262,977
20,262,977
The above consolidated statements of changes in equity should be read in conjunction with the accompanying notes.
29
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2017
Consolidated
Issued Capital
Fair Value
Reserve
Foreign
Currency
Translation
Reserve
Options
Reserve
Accumulated
Losses
Attributable to
owners of
equity parent
Total Equity
Balance at 31 December 2015
74,240,545
127,396
(96,233)
4,405,702
(59,991,158)
18,686,252
18,686,252
Total Comprehensive income for year
Profit after income tax from continuing operations
Exchange differences on translation of foreign operations
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
-
-
-
30,304
(31,672)
-
-
-
(1,368)
-
-
-
-
-
-
-
-
-
-
26,890
26,890
-
-
-
-
-
-
-
-
-
-
-
(344,479)
36,613
1,019,582
711,716
16,448,929
16,448,929
16,448,929
-
26,890
26,890
16,448,929
16,475,819
16,475,819
-
-
344,479
-
-
344,479
30,304
(31,672)
-
36,613
1,019,582
1,054,827
30,304
(31,672)
-
36,613
1,019,582
1,054,827
Balance at 31 December 2016
74,239,177
127,396
(69,343)
5,117,418
(43,197,750)
36,216,898
36,216,898
The above consolidated statements of changes in equity should be read in conjunction with the accompanying notes.
30
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 31 December 2016
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
Note
Year ended
31 December
2017
US$
Year ended
31 December
2016
US$
13,839,036
(11,777,677)
1,976
(2,966,623)
(126,862)
(1,030,150)
14,417,766
(11,993,762)
298
(2,267,051)
(48,163)
109,088
27(b)
120,226
-
(588,714)
(143,988)
49,419
-
(119,038)
(69,281)
Net cash flows from investing activities
(612,476)
(138,900)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuing of shares
Repayment of interest bearing liabilities
Finance lease payments
4,176,158
(2,178,743)
(27,539)
(1,368)
(464,881)
(13,298)
Net cash flows from financing activities
1,969,876
(479,547)
Net increase/(decrease) in cash and cash equivalents
327,250
(509,359)
Cash and cash equivalents at beginning of financial year
Effect of exchange rate changes on cash and cash equivalents
641,493
(60,425)
1,126,543
24,309
CASH AND CASH EQUIVALENTS AT THE END OF
FINANCIAL YEAR
27(a)
908,318
641,493
The above consolidated statements of cash flow should be read in conjunction with the accompanying notes.
31
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2016
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”).
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 2017 was authorised for issue in accordance
with a resolution of Directors on 28 March 2018.
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, 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
Presented Empire Group’s cash flows and economic returns are in US dollars (“US$”).
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 2017 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 2017.
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.
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.
32
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
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.
33
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
34
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 or cash
generating unit.
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.
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,
35
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 recognised 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
Empire Energy Group and its wholly-owned Australian resident entities form a tax-consolidated Empire Group. As a
consequence, all members of the tax-consolidated Empire Group have been taxed as a single entity since 1 July 2003.
The head entity within the tax-consolidated Empire Group is Empire Energy Group Limited.
Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the
members of the tax-consolidated Empire Group are recognised in the separate financial statements of the members
of the tax-consolidated Empire Group using the ‘separate taxpayer within Empire Group’ approach by reference to the
carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values applying
under tax consolidation.
Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries are
assumed by the head entity in the tax-consolidated Empire Group and are recognised by the Empire Group as amounts
payable/(receivable) to/from other entities in the tax-consolidated Empire Group in conjunction with any tax funding
arrangement amounts (refer below). Any difference between these amounts is recognised by the Empire Group as an
equity contribution or distribution.
The Empire Group recognises deferred tax assets arising from unused tax losses of the tax consolidated Empire Group
to the extent that it is probable that future taxable profits of the tax consolidated Empire Group will be available against
which the asset can be utilised.
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.
36
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Earnings per share
Earnings per share is calculated by dividing the profit attributable to the owners of Empire Energy Group Limited,
excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares
outstanding during the financial year.
There are no preference shares issued in Empire Energy Group Limited, thereby resulting in no dilutive effect being
noted in any calculation of diluted earnings per share.
Share based payment transactions
The Empire Group provides benefits to directors and senior executives of the Empire Group through the executive
share option plan whereby eligible participants render services in exchange for options over shares.
New and Revised Standards that are effective for Annual Periods beginning on or after 1 January 2017
AASB 2016-2 Disclosure Initiative: Amendments to AASB 107
This Standard amends ASB 107 Statement of Cash Flows to include additional disclosures and reconciliation relating
to changes in liabilities arising from financing activities, including both changes arising from cashflows and non-cash
changes.
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
2017. 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. New and Revised Standards that are not
effective for Annual Periods beginning on or after 1 January 2018.
New and Revised Standards that are effective for Annual Periods beginning on or after 1 January 2018
AASB 9 Financial Instruments
AASB 9 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:
37
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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
instrument that are not held for trading in other comprehensive income.
(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.
i. Where the fair value option is used for financial liabilities the change in fair value, the change
attributable to changes in credit risk are present in other comprehensive income (OCI) and 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 made to other standards as a result
of AASB 9 by AASB 2014-7 and AASB 2014-8. The mandatory application date of AASB 9 has been deferred to annual
reporting periods beginning on or after 1 January 2018 by AASB 2014-1.
AASB 15 Revenue from Contracts with Customers
AASB 15 replaces AASB 118 Revenue, AASB 111 Construction Contracts and four interpretations issued by the AASB
and amends the principles for recognising revenue from contracts with customers. The Standard requires an entity to
recognise revenue on a basis that depicts the transfer of promised goods or services to customers at an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve
that principle, an entity shall apply all of the following steps:
(a) identify the contract with a customer;
(b) identify the separate performance obligations in the contract;
(c) determine the transaction price;
(d) allocate the transaction price to the separate performance obligations in the contract; and
(e) recognise revenue when (or as) the entity satisfies a performance obligation.
Consequential amendments to other Standards are made by AASB 2014-5 Amendments to Australian Accounting
Standards arising from AASB 15. Adoption of this Standard would also incorporate amendments arising from AASB
2016-3 Clarifications to AASB 15
AASB 16 Leases (effective for accounting periods beginning on or after 1 January 2019)
AASB 16 replaces AASB 117 Leases and sets out the principles for the recognition, measurement, presentation and
disclosure of leases.
AASB 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all
leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise
a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its
obligations to make lease payments.
A lessee measure right-of-use assets similarly to other non-financial assets (such as property, plant and equipment)
and lease liabilities similarly to other financial liabilities. As a consequence, a lessee recognises depreciation of the
right-of-use asset and interest on the lease liability, and also classifies cash repayments of the lease liability into a
principal portion and an interest portion and presents them in the statement of cash flows applying AASB 107
Statement of Cash Flows.
AASB 16 substantially carries forward the lessor accounting requirements in AASB 117 Leases. Accordingly, a lessor
continues to classify its leases as operating leases or finance leases.
Early application is permitted provided the entity also applies AASB 15 Revenue from Contracts with Customers at or
before the same date. The Group is currently assessing the impact of these Standards.
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:
38
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
2. CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
• Note 8
• Note 9
• Note 14
• Note 18
• Note 24
– Impairment expense
– Income tax
– Oil and gas properties
– Provisions for liabilities and charges
– Share based payments
Judgments
In the process of applying the Empire Group’s accounting policies, the Directors have made the following judgments
at apart from those involving estimates, which may have the most significant effect on the amounts recognised in the
consolidated financial statements:
Reserves base
Estimates of recoverable quantities of proven, probable and possible reserves reported include judgmental
assumptions regarding commodity prices, exchange rates, discount rates and production and transportation costs for
future cash flows. It also requires interpretation of complex and difficult geological and geophysical models in order to
make assessment of the size, shape, depth and quality of reservoirs, and their anticipated recoveries. The economic,
geological and technical factors used to estimate may change from period to period. Changes in reported reserves
can impact asset carrying values and the recognition of deferred tax assets due to changes in expected future cash
flows. Reserves are integral to the amount of amortisation charged to the income statement. Future development costs
are estimated using assumptions as to the number of wells required to produce the commercial reserves, the cost of
such wells and associated production and other capital costs. The current NYMEX forward oil and gas price curves
are used for price assumptions. The Empire Group uses suitably qualified persons to prepare annual evaluation of
proven hydrocarbon reserves, compliant with US professional standards for petroleum engineers.
Carrying value of oil and gas assets
Oil and gas properties are depreciated using the units-of-production (UOP) method over proved developed and
undeveloped reserves.
The calculation of the UOP rate of depreciation, depletion and amortisation could be impacted to the extent that actual
production in the future is different from current forecast production based on proved reserves. This would generally
result from significant changes in any of the factors or assumptions used in estimating reserves. Estimates of gas
reserve quantities provide the basis for calculation of depletion, depreciation and amortisation and impairment, each
of which represents a significant component of the consolidated financial statements.
These factors could include changes in proved reserves, the effect on proved reserves of differences between actual
commodity prices and commodity price assumptions, and unforeseen operational issues.
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).
Recoverable amount
The recoverable amount of an asset is the greater of its fair value less costs of disposal and its value-in-use, using an
asset’s estimated future cash flows (as described below) discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and risks specific to the asset.
Significant judgement – Impairment of oil and gas assets
For oil and gas assets, the expected future cash flow estimation is based on a number of factors, variables and
assumptions, the most important of which are estimates of reserves, future production profiles, commodity prices,
costs and foreign exchange rates. In most cases, the present value of future cash flows is most sensitive to estimates
of future oil price and discount rates.
39
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
2. CRITICAL ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (Continued)
The estimated future cash flows for the value-in-use calculation are based on estimates, the most significant of which
are hydrocarbon reserves, future production profiles, commodity prices, operating costs and any future development
costs necessary to produce the reserves.
Estimates of future commodity prices are based on the Group’s best estimate of future market prices with reference to
external market analysts’ forecasts, current spot prices and forward curves. Future commodity prices are reviewed at
least annually.
The discount rates applied to the future forecast cash flows are based on the Group’s weighted average cost of capital,
adjusted for risks where appropriate, including functional currency of the asset, and risk profile of the country in which
the asset operates.
In the event that future circumstances vary from these assumptions, the recoverable amount of the Group’s oil and
gas assets could change materially and result in impairment losses or the reversal of previous impairment losses.
Due to the interrelated nature of the assumptions, movements in any one variable can have an indirect impact on
others and individual variables rarely change in isolation. Additionally, management can be expected to respond to
some movements, to mitigate downsides and take advantage of upsides, as circumstances allow. Consequently, it is
impracticable to estimate the indirect impact that a change in one assumption has on other variables and hence, on
the likelihood, or extent, of impairments or reversals of impairments under the different sets of assumptions in
subsequent reporting periods.
Asset retirement obligations
Asset retirement costs will be incurred by the Empire Group at the end of the operating life of some of Empire Group’s
facilities and properties. The ultimate asset retirement costs are uncertain and cost estimates can vary in response to
many factors including changes to relevant legal requirements, the emergence of new restoration techniques or
experience at other production sites. The expected timing and amount of expenditure can also change, for example,
in response to changes in reserves or changes in laws and regulations or their interpretation. As a result, there could
be significant adjustments to the provisions established which would affect future financial results.
Share-based payments
The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value
of the equity instruments at the date which they are granted. The fair value is determined by using either the Binomial
or Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The
accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the
carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and
equity.
3. GOING CONCERN
The consolidated financial statements have been prepared on a going concern basis, which contemplates the
realisation of assets and settlement of liabilities in the normal course of business.
The Empire Group’s Statement of Financial Position reflects an excess of current liabilities over current assets of
$35.04m. This is primarily due to the Board determining the debt facilities be classified as current liabilities although
the current credit facility does not expire until 17 February 2019. Net assets are $20.27m.
At December 31, 2017 the Group had breached the interest cover financial covenant on its borrowings with Macquarie
Bank. The interest cover ratio of 1.3 respectively was below the required 1.8. Refer to Note 17. This has not been
rectified at the date of this report and no formal waiver has been obtained from Macquarie Bank.
The directors have reviewed the Group’s financial position and are of the opinion that the use of the going concern
basis of accounting is appropriate as they believe the Group will secure the additional funds to meet both working
capital and capital expenditure requirements, as and when required. However, if the Group is not successful in securing
sufficient additional funds or through other arrangements when required, then to meet its expenditure targets there
may be uncertainty about whether the Group is able to realise assets and/or extinguish liabilities in the normal course
of business at the amounts stated in the financial report.
The financial report does not contain any adjustments relating to the recoverability and classification of recorded assets
or to the amounts or classification of recorded assets or liabilities that might be necessary should the Group not be
able to continue as a going concern.
40
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
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 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.
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. For the year ended 31 December
2017 the Empire Group hedged approximately 98% of its oil (2016: 98%) and 63% of its total gas production (2016:
63%).
41
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
4. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
For 2018 the Empire Group has approximately 63% of current estimated gas production hedged at $4.11/Mcf. Oil
hedging ran off at the end of 2017.
(iii)
Interest rate risk
The Empire Group is constantly monitoring its exposure to trends and fluctuations in interest rates in order to manage
interest rate risk. The Empire Group’s exposure to interest rate risk at 31 December 2017 is set out in the following
tables.
The Empire Group’s exposure to the risk of changes in market interest rates relates primarily to the Empire Group’s
long-term debt obligations with a floating interest rate in the US. The Empire Group manages its interest cost using a
mix of fixed and variable rate debt.
The Empire Group’s policy is to continually review the portion of its US$ 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 2017.
The Empire Group monitors forecasts and actual cash flows and the maturity profiles of financial assets and liabilities
to manage its liquidity risk.
42
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
4. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
%
Floating
Interest Rate
Fixed Interest Maturing in
Over 1 to 5
1 Year or
Years
Less
Non-Interest
Bearing
Total
31 December 2017
Financial Assets
Cash and cash
equivalents
Trade and other
receivables
Financial assets
0.83
908,318
-
-
908,318
-
-
-
-
Financial Liabilities
Trade & other payables
Interest-bearing liabilities
8.06
-
-
-
-
36,976,225
36,976,225
-
-
-
-
-
-
-
-
908,318
2,397,842
1,582,719
3,980,561
2,397,842
1,582,719
4,888,879
3,405,031
-
3,405,031
3,405,031
36,976,225
40,381,256
31 December 2016
Financial Assets
Cash and cash
equivalents
Trade and other
receivables
Financial assets
Financial Liabilities
Trade & other payables
Interest-bearing liabilities
%
Floating
Interest Rate
Fixed Interest Maturing in
Over 1 to 5
1 Year or
Years
Less
Non-Interest
Bearing
Total
1.65
641,493
-
-
641,493
-
-
-
-
-
-
-
-
-
641,493
2,175,522
3,356,265
5,531,787
2,175,522
3,356,265
6,173,280
7.27
-
-
-
38,656,987
- 38,656,987
-
-
-
3,871,331
-
3,871,331
38,656,987
3,871,331
42,528,318
(iv)
Empire Group Sensitivity
Based on the financial instruments held at 31 December 2017, had the NYMEX WTI 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 2018. Should interest rates increase by 1% the impact
on post-tax profit would be a decrease of approximately US$370,000.
(B)
CREDIT RISK
Credit risk is the risk that the other party to the financial instrument will fail to discharge their financial obligation in
respect of that instrument resulting in the Empire Group incurring a financial loss. The Empire Group’s exposure to
credit risk arises from potential default of the counter party with the maximum exposure equal to the carrying amount
of these instruments. There are no significant concentrations of credit risk within the Empire Group.
The Empire Group trades only with recognised, credit worthy third parties. In the US, trade receivables, (balances with
oil and gas purchases) have not exposed the Empire Group to any bad debt to date. All derivatives are with the same
counterparty.
In the US, all of the purchasers that the Empire Group’s operators choose to deal with are major oil or gas companies.
Trade and other receivable balances are monitored on an ongoing basis with the Empire Group’s exposure to bad
debts minimal.
43
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
4. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
The maximum exposure to credit risk at balance date is as follows:
Trade, other receivables,
and derivatives
2017
US$
2016
US$
3,784,127
5,438,127
The maximum exposure to credit risk at balance by country is as follows:
Australia
United States of America
(C)
LIQUIDITY RISK
2017
US$
-
3,784,127
2016
US$
-
5,438,127
Liquidity risk is the inability to access funds, both anticipated and unforeseen, which may lead to the Empire Group
being unable to meet its obligations in an orderly manner as they arise.
The Empire Group’s liquidity position is managed to ensure sufficient funds are available to meet financial commitments
in a timely and cost-effective manner. The Empire Group is primarily funded through on-going cash flow, debt funding
and equity capital raisings, as and when required.
Funding is in place with reputable financial institutions in the US and Australia. The borrowing base is re-determined
and reviewed once a year. Bank compliance reporting is undertaken quarterly and adherence to covenants checked
regularly. Management also regularly monitors actual and forecast cash flows to manage liquidity risk.
Maturity Analysis
31 December 2017
Non Derivatives
Current
Trade and other payables
Interest bearing liabilities
Derivatives
Financial asset
Financial liability
Maturity Analysis
31 December 2016
Non Derivatives
Current
Trade and other payables
Interest bearing liabilities
Derivatives
Financial asset
Financial liability
Fair
Value
US$
Carrying
Amount
US$
Contractual
Cash flows
US$
1 year
US$
1-5 years
US$
3,405,031
37,946,361
3,405,031
37,976,225
3,405,031
37,946,561
3,405,031
37,946,561
-
-
(1,582,719)
-
(1,582,719)
-
Fair
Value
US$
Carrying
Amount
US$
(1,582,719)
-
Contractual
Cash flows
US$
(1,265,784)
-
(316,935)
-
1 year
US$
1-5 years
US$
3,871,331
40,156,562
3,871,331
37,636,987
3,871,331
40,156,562
3,871,331
40,156,562
-
-
(3,283,904)
-
(3,283,904)
-
(3,283,904)
-
(2,022,174)
-
(1,261,730)
-
44
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
4. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
(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.
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.
45
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
4. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
Consolidated
31 December 2017
Assets
Unlisted available-for-sale
equities
Fair value of derivatives
Total assets
Liabilities
Fair value of derivatives
Total liabilities
Consolidated
31 December 2016
Assets
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
Level 1
-
-
-
-
-
-
-
-
-
-
-
78,000
1,582,719
1,582,719
-
78,000
78,000
1,582,719
1,660,719
Level 2
-
-
-
3,283,904
3,283,904
-
-
-
-
-
-
Level 3
Total
72,360
-
72,360
-
-
72,360
3,283,904
3,356,264
-
-
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 operation 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
a. Sales revenue
Revenue from oil and gas sales
Revenue from well operations
b. Other income
Interest income
Rental income
Other income
2017
US$
2016
US$
13,205,070
737,255
13,942,325
13,626,195
912,761
14,538,956
1,976
11,554
112,879
126,409
298
9,500
219,972
229,770
46
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
6. COST OF SALES
Oil and gas production
7. INTEREST EXPENSE
Interest paid/payable on financial liabilities
8. EXPENSES
a. Other non-cash expenses
Leasing expiration expenses (note 8c)
Impairment of assets (note 8c)
Depreciation, depletion and amortisation
Finance costs (note 8b)
Unrealised derivative movement
Other expenses
Total other expenses
b. Finance expenses (non-cash)
Accretion of asset retirement obligation (note 18)
Unwind of discount of debt
Total finance costs (non-cash)
c. (Loss)/Profit before income tax includes the following specific
expenses:
Depreciation, depletion and amortisation
Oil & Gas properties and plant & equipment (note 14)
Employee benefits expense
Defined contribution superannuation expense
Other employee expenses
Total employee benefits expense
Impairment expense(a)
Impairment of additional asset retirement obligation
Impairment of available for sale financial assets and receivables
Impairment of property plant & equipment
Reversal of impairment of property plant & equipment
Total (write back)/impairment expense
2017
US$
2016
US$
(8,357,296)
(8,357,296)
(8,604,524)
(8,604,524)
2,966,623
2,966,623
(2,420,361)
(2,420,361)
142,500
13,654,019
2,943,375
1,032,139
1,701,185
124,271
298,600
(27,762,128)
2,213,627
1,131,819
7,589,547
154,536
19,597,489
(16,373,999)
502,900
529,239
477,568
654,251
1,032,139
1,131,819
2,943,375
2,943,375
17,911
4,072,760
4,090,671
2,213,627
2,213,627
17,665
3,940,621
3,958,285
1,832,503
75,553
11,745,963
-
13,654,019
400,000
482,336
296,274
(28,940,738)
(27,762,128)
Loss on disposal of property, plant & equipment
76,675
-
Leasing expiration expense (b)
142,500
298,600
(a) Impairment expense
For the period 31 December 2017, the Company impaired oil and gas properties by $11,745,963 due to the decline in
gas prices and an increase in the discount rate used resulting in a reduction of the recoverable amount of those assets
at prices at the end of the period. Furthermore, an increase in the asset retirement obligation of $1,832,503, resulting
from the accounting differences between US GAAP and IFRS, was recognised as an impairment charge.
For the period 31 December 2016, the Company wrote back the oil and gas properties by $28,940,738 due to the
increase in oil prices resulting in an increase of the recoverable amount of those assets(1). Furthermore, an increase
in the asset retirement obligation of $400,000, resulting from the accounting differences between US GAAP and IFRS,
was recognised as an impairment charge.
(1) An impairment of oil and gas properties was also recognised during the year of $296,274.
47
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
8. EXPENSES (Continued)
(b) Leasing expiration expense
A charge of $142,500 has been taken against the book value of undeveloped leases which have expired or are to
expire. The Company has an ongoing program to renew expiring leases, to take up options on expiring leases or
acquire new leases if and when possible. The charge is a non-cash entry which has no effect on cash-flows.
9.
INCOME TAX
a.
Income tax expense
Current tax
Deferred tax
Income tax benefit attributable to continuing operations
Deferred income tax expense included in income tax expense comprises:
Increase/(decrease) in deferred tax liabilities (note 9(e))
b. Numerical reconciliation of income tax expense to prima
facie tax payable
Profit/(loss) before income tax
Tax at the Australian tax rate of 27.5% (2016: 30%)
Tax effect of amounts which are not deductible/(taxable) in
calculating taxable income:
- Non-deductible expenses
Withholding tax paid
Deferred tax asset in relation to tax losses and temporary differences
(utilised)/not recognised
Effect of difference in overseas tax rates
Income tax benefit
c. Deferred tax assets not recognised relate to the following:
Tax losses
Capital losses
Other
2017
US$
2016
US$
126,862
48,163
-
-
126,862
48,163
-
-
-
-
(19,980,385)
16,497,092
(5,494,606)
4,949,128
51,737
13,477
34,788
5,104,314
(5,257,551)
465,417
126,862
308,321
48,163
5,055,843
4,202,418
141,410
455,174
141,410
291,842
5,652,427
4,635,670
48
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
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 2017.
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:
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
10. TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Other
11. PREPAYMENTS
Prepayments
12. INVENTORIES
Crude oil and production supplies
2017
US$
2016
US$
397,317
5,531,403
65,069
5,993,789
1,238,534
574,412
95,261
1,908,207
(5,993,789)
(1,908,207)
-
-
1,195,977
3,689,006
1,108,806
5,993,789
1,429,237
-
478,970
1,908,207
(5,993,789)
(1,908,207)
-
-
2,367,081
30,761
2,397,842
2,119,597
55,925
2,175,522
237,237
437,535
540,706
544,772
49
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
13. FINANCIAL ASSETS, INCLUDING DERIVATIVES
Current
2017
US$
2016
US$
Oil and gas price forward contracts
1,265,784
2,022,174
Non-current
Oil and gas price forward contracts
Shares – other corporations:
• Unlisted available-for-sale equities (at cost)
Less: accumulated impairment on unlisted equities
Total Non-current
Commodity hedge contracts outstanding are outlined below.
316,935
1,261,731
-
-
316,935
628,401
(556,041)
1,334,091
2017 NATURAL GAS - HENRY HUB - NYMEX - Swaps
2016 NATURAL GAS - HENRY HUB - NYMEX - Swaps
Premium
Product
Period
Swap
Price
Premium
Product
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
54,000 mmbtu
Jan 17 - Dec 17
456,000 mmbtu
Jan 17 - Dec 17
420,000 mmbtu
Jan 17 - Dec 17
78,000 mmbtu
Jan 17 - Dec 17
420,000 mmbtu
Jan 18 - Dec 18
78,000 mmbtu
Jan 18 - Dec 18
Jan 18 - Dec 18
Jan 18 - Dec 18
Jan 19 - Dec 19
Jan 19 - Dec 19
4.57
4.57
3.45
3.45
4.75
4.75
3.45
3.45
3.45
3.45
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
$Nil
66,000 mmbtu
504,000 mmbtu
420,000 mmbtu
78,000 mmbtu
54,000 mmbtu
456,000 mmbtu
420,000 mmbtu
78,000 mmbtu
420,000 mmbtu
78,000 mmbtu
Period
Swap
Price
Jan 18 - Dec 18
4.75
Jan 18 - Dec 18
4.75
Jan 18 - Dec 18
3.45
Jan 18 - Dec 18
3.45
Jan 19 - Dec 19
3.45
Jan 19 - Dec 19
3.45
-
-
-
-
-
-
-
-
2017 OIL - WTI - NYMEX
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2016 OIL - WTI - NYMEX
Jan 17 - Dec 17
85.23
Jan 17 - Dec 17
63.10
Jan 17 - Dec 17
45.30 –
54.30
$Nil
$Nil
$Nil
39,600 BO
52,800 BO
21,600 BO
50
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
14. OIL AND GAS PROPERTIES AND PROPERTY PLANT & EQUIPMENT
Cost in US$
At 1 January 2017
Additions
New asset retirement obligation
Write-off of asset retirement obligation
Reclassifications
Sale of wells
Disposals
Expiration costs
Write-off of exploration expense
At 31 December 2017
Accumulated Depreciation in US$
At 1 January 2017
Depreciation and depletion
Write-off sale of wells
Write-off plugged wells
Write-back
Impairment
Write-back of impaired assets
At 31 December 2017
Oil & Gas –
Proved
Oil & Gas –
Unproved
Land
Buildings
Equipment
Motor Vehicles
Total
117,053,631
679,398
1,832,503
(58,941)
-
-
(478,226)
-
-
6,584,445
2,432
-
-
-
-
(648)
(142,500)
-
30,591
-
-
-
-
-
-
-
-
328,948
-
-
-
-
-
-
-
-
755,900
140,520
-
-
-
-
-
-
-
669,608
3,468
-
-
-
-
(64,700)
-
-
125,423,123
825,818
1,832,503
(58,941)
-
-
(543,574)
(142,500)
-
119,028,365
6,443,729
30,591
328,948
896,420
608,376
127,336,429
(39,430,683)
(2,828,980)
222,075
-
-
(13,578,466)
-
(55,616,054)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(75,357)
(10,687)
-
-
-
-
-
(643,496)
(74,353)
-
-
-
-
-
(552,291)
(29,355)
-
-
38,950
-
-
(40,701,827)
(2,943,375)
222,075
-
38,950
(13,578,466)
-
(86,044)
(717,849)
(542,696)
(56,962,643)
Opening written down value
77,622,948
6,320,225
30,591
253,591
108,086
95,604
84,431,045
Impact of foreign currency adjustments
-
(241,644)
-
-
(3,867)
(20,216)
(265,727)
Closing written down value
63,412,311
6,202,085
30,591
242,904
174,704
45,464
70,108,059
51
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
14. OIL AND GAS PROPERTIES AND PROPERTY PLANT & EQUIPMENT (continued)
Cost in US$
At 1 January 2016
Additions
New asset retirement obligation
Write-off of asset retirement obligation
Reclassifications
Sale of wells
Disposals
Expiration costs
Write-off of exploration expense
At 31 December 2016
Accumulated Depreciation in US$
At 1 January 2016
Depreciation and depletion
Write-off sale of wells
Write-off plugged wells
Impairment
Write-back of impaired assets
At 31 December 2016
Oil & Gas –
Proved
Oil & Gas –
Unproved
Land
Buildings
Equipment
Motor Vehicles
Total
116,883,304
115,719
1,022,525
(45,249)
-
(96,670)
(791,938)
-
(34,060)
7,243,258
74,849
-
-
-
-
(435,062)
(298,600)
-
30,591
-
-
-
-
-
-
-
-
328,948
-
-
-
-
-
-
-
-
716,286
39,614
-
-
-
-
-
-
-
639,941
29,667
-
-
-
-
-
-
-
125,842,328
259,849
1,022,525
(45,249)
-
(96,670)
(1,227,000)
(298,600)
(34,060)
117,053,631
6,584,445
30,591
328,948
755,900
669,608
125,423,123
(65,603,144)
(2,100,077)
8,825
19,249
(696,274)
28,940,738
(39,430,683)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(62,803)
(12,554)
-
-
-
-
(593,570)
(49,926)
-
-
-
-
(501,221)
(51,070)
-
-
-
-
(66,760,738)
(2,213,627)
8,825
19,249
(696,274)
28,940,738
(75,357)
(643,496)
(552,291)
(40,701,827)
Opening written down value
51,280,160
6,994,863
30,591
266,145
118,401
117,149
58,807,309
Impact of foreign currency adjustments
-
(264,220)
-
-
(4,318)
(21,713)
(290,251)
Closing written down value
77,622,948
6,320,225
30,591
253,591
108,086
95,604
84,431,045
52
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
14. OIL AND GAS PROPERTIES AND PROPERTY PLANT & EQUIPMENT (continued)
At 31 December 2017, 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 for the year ended 31 December 2017 are:
Oil and gas assets
Kansas
Appalachia
Total
Subsurface
assets
US$
42,586,295
33,960,831
76,547,126
Recoverable
amount
US$
31,433,180
13,853,590
45,286,770
The pre tax discount rate that has been applied to the above oil and gas assets is 10% (2016: 8%). Although the
Company reports its US reserves based on a discount rate of 10%, for Australian reporting purposes the Company
had utilised a discount rate of 8% in 2016. With the recent increase in the cost of capital and to align its Australian
accounts (IFRS reporting) with its US accounts (GAAP reporting) a 10% discount rate for all reserve cashflow reporting
is now utilised. For 2017 this has generated an increase in the impairment (non-cash) write down.
15. INTANGIBLE ASSETS
Goodwill
16. TRADE AND OTHER PAYABLES
Current
Trade creditors
Other creditors
17. INTEREST-BEARING LIABILITIES
Current
Finance lease liability
Bank loan -secured
Non-current
Finance lease liability
Classification of Borrowings
2017
US$
2016
US$
68,217
68,217
68,217
68,217
3,366,359
38,672
3,405,031
3,843,827
27,504
3,871,331
-
36,976,225
31,257
38,625,730
36,976,225
38,656,987
-
-
These accounts are presented on the basis that all borrowings have 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 Group to classify liabilities as current if the 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 February 2016 the Company extended the Facility for a further 3 years through to 26 February 2019. However this
did not alter the classification of borrowings on the Statement of Financial Position.
53
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
17. INTEREST-BEARING LIABILITIES (Continued)
Credit Facility Summary
Empire Energy USA, LLC maintains a long-term credit facility with Macquarie Bank Limited (Macquarie), which matures
on 17 February 2019, consisting of the following:
Revolver facility (revolving line-of-credit):
Term Loan facility:
$50,000,000
$150,000,000
Uses of credit facility:
Revolver:
To refinance existing debt and to undertake acquisitions. The Revolver is subject to a
borrowing base consistent with normal and customary oil and gas lending practices of the
bank.
Term Loan:
As an acquisition and development term credit facility to undertake acquisitions and
support capital expenditure under an agreed development plan for oil and gas properties
and services companies in the United States. Drawdown on the Term Facility is based
on predefined benchmarks and segregated in tranches.
the borrowing base limit changes with operations and opportunities with approval
of the lender.
Credit facility structure
Revolver:
Term Loan:
Borrowing base limit
Interest rate
Availability (1)
Maturity
Repayment
(1)
Borrowing base limit
Current portion payable
Interest rate
Availability (1)
Maturity
Repayment (2)
(1)
(2)
$3,000,000
LIBOR+6.5%
Nil
Feb 2019
Feb 2019
$35,083,291
$1,500,000
LIBOR+6.5%
Nil
Feb 2019
Amortization
draw down is based on predefined benchmarks, with approval of the lender.
repayment is monthly from net cash flow and capital transaction proceeds of USA
operations, with remaining payable at maturity.
Other features of the credit facility:
• Outstanding borrowings under the facilities are secured by a majority of the assets of the Company. The
Revolver and Term Facility are guaranteed by the Company.
• Reserve Assessment of 1P reserves are based on third party reserve engineering consultants.
• Under terms of the facilities, the Company is required to maintain financial ratios customary for the oil and
gas industry. These include certain operational and financial covenants for which the Company is required
to maintain, the most restrictive of which is the adjusted proved developed producing (PDP) present value
(PV).
Key financial covenants:
Fees:
1.5x 1P PV10 coverage to net loan (after adjustment for cash & hedges).
1.0x PDP PV10 coverage to net loan (after adjustment for cash & hedges).
1.0x Current Ratio.
1.8x EBITDA/Interest Ratio.
1.0% on draw down amount.
The Group breached the EBITDA/Interest ratio at 31 December 2017. No formal waiver letter was obtained
from Macquarie Bank. Please refer to Note 3 for further details.
54
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
17. INTEREST-BEARING LIABILITIES (Continued)
Amendments to Credit Facility:
On January 19, 2017, the Company entered into a Second Amendment to the Credit Facility rollover of April 2016.
This required a payment of $1,500,000 which was made in in February 2017 in accordance with the Second
Amendment. Following an increase in interest rate margin from 4.7% to 6.5%, a further change to the loan covenants
was an adjustment to the Interest Coverage Ratio to at least 1.8 to 1.00. This applied to the four most recent fiscal
quarters beginning with the fiscal quarter ending December 31, 2016. The current Interest Coverage Ratio is 1.51 to
1.
Under the terms of the Loan Facility (“Facility”), Empire Energy allocates 90% of monthly free cash flow to repay
principal outstanding. Principal payments made in 2017 and 2016 were approximately $2,178,743 and $464,880,
respectively.
The expected loan repayments over the next 12 months comprise payment of 90% of any monthly free cash flow.
A summary of period end debt is as follows:
Term
Tranche A
Tranche B
Tranche C
Tranche D
Revolver
Sub-Total
Less discount on debt
Less deferred financing costs, net
Acquisition Commitment (1)
Finance Lease Liability
Total Current Debt
Current portion due 31 December 2017
Residual current balance
Current debt per balance sheet
(1)
2017
US$
2016
US$
6,181,553
10,583,403
9,681,605
8,500,000
3,000,000
37,946,561
-
(970,336)
36,976,225
-
-
36,976,225
6,181,553
10,583,403
10,360,349
10,000,000
3,000,000
40,125,305
-
(1,499,575)
38,625,730
-
31,257
38,656,987
-
36,976,225
36,976,225
1,500,000
37,156,987
38,656,987
In February 2016 the Company elected not to complete a purchase of assets and as such the debt liability
was not drawn. Refer to Note 33 (3).
18. 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
Change in estimate(a)
Balance end of the period
2017
US$
2016
US$
12,289
6,986
15,186,576
12,902,647
12,902,647
7,467
(58,941)
502,900
1,832,503
11,496,833
622,802
(94,556)
477,568
400,000
15,186,576
12,902,647
(a) Due to the write down of oil and gas properties to their recoverable amount $1,832,503 (2016: $400,000) has
been written off as impaired from the carrying value of the oil and gas properties, refer to Note 8c.
55
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
18. PROVISIONS (continued)
Asset Retirement Obligation
The Empire Group makes full provision for the future costs of decommissioning oil and gas production facilities and
pipelines on a discounted basis on the installation or acquisition of those facilities.
The provision represents the present value of decommissioning costs which are expected to be incurred up to 2050.
The estimated liability is based on historical experience in plugging and abandoning wells, estimated remaining lives
of those based on reserve estimates, external estimates as to the cost to plug and abandon the wells in the future, and
regulatory requirements. Assumptions, based on the current economic environment, have been made which
management believe are a reasonable basis upon which to estimate the future liability. These estimates are reviewed
regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will
ultimately depend upon future market prices for the necessary decommissioning works. Furthermore, the timing of
decommissioning is likely to depend on when the assets cease to produce at economically viable rates. This in turn
will depend upon the future oil and gas prices, which are inherently uncertain.
19. CONTRIBUTED EQUITY
a) Shares
Issued Capital
Balance at beginning of period
Movement in ordinary share capital
2017
US$
2016
US$
74,239,177
74,240,545
- Issue of 2,000,000 fully paid ordinary shares in July 2016 @ A$0.01 in
lieu of cash payment for fees for services rendered
- Issue of 1,000,000 fully paid ordinary shares in August 2016 @
A$0.02 in lieu of cash payment for fees for services rendered
-
-
15,042
15,262
- Issue of 236,538,079 fully paid ordinary shares in January 2017
@$0.008 pursuant to a Pro-Rata Rights Issue
- - Issue of 196,175,000 fully paid ordinary shares in February 2017
being shortfall shares to the Pro-Rata Rights Issue
-
- - Issue of 17,693,153 fully paid ordinary shares in February 2017 in lieu
of cash payment for fees and services rendered
-
- - Issue of 37,750,000 fully paid ordinary shares in February 2017 as a
private placement to raise funds
-
- - Issue of 74,222,500 fully paid ordinary shares in May 2017 as a
private placement to raise funds
-
- - Issue of 187,500,000 fully paid ordinary shares in June 2017 as a
private placement to raise funds
-
- - Issue of 13,544,567 fully paid ordinary shares in June 2017 in lieu of
cash payment for fees and services rendered
Less costs associated with the share issues detailed above
1,445,342
1,209,850
108,806
232,148
448,838
1,108,500
82,351
(459,677)
-
-
-
-
-
-
-
(31,672)
Balance as at 31 December 2017
_____________
78,415,335
_____________
74,239,177
56
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
19. CONTRIBUTED EQUITY (continued)
b) Shares
Issued shares
2017
No. of shares
2016
No. of shares
Balance at beginning of period
347,313,877
344,313,877
Movement in ordinary share capital
- Issue of 2,000,000 fully paid ordinary shares in July 2016 @ A$0.01 in
lieu of cash payment for fees for services rendered
- Issue of 1,000,000 fully paid ordinary shares in August 2016 @
A$0.02 in lieu of cash payment for fees for services rendered
- Issue of 236,538,079 fully paid ordinary shares in January 2017
@$0.008 pursuant to a Pro-Rata Rights Issue
- - Issue of 196,175,000 fully paid ordinary shares in February 2017
being shortfall shares to the Pro-Rata Rights Issue
-
- - Issue of 17,693,153 fully paid ordinary shares in February 2017 in lieu
of cash payment for fees and services rendered
-
- - Issue of 37,750,000 fully paid ordinary shares in February 2017 as a
private placement to raise funds
-
- - Issue of 74,222,500 fully paid ordinary shares in May 2017 as a
private placement to raise funds
-
- - Issue of 187,500,000 fully paid ordinary shares in June 2017 as a
private placement to raise funds
-
- - Issue of 13,544,567 fully paid ordinary shares in June 2017 in lieu of
cash payment for fees and services rendered
-
-
2,000,000
1,000,000
236,538,079
196,175,000
17,693,153
37,750,000
74,222,500
187,500,000
13,544,567
-
-
-
-
-
-
-
_____________
1,110,737,176
_____________
347,313,877
Balance as at 31 December 2017
Share Options
Movements
Granted
13,000,000 options were granted during the financial period. The options were granted pursuant to the Company’s
Employee Share Option plan. The exercise price of the granted options is $0.03 expiring 30 December 2021.
Since the end of the financial period and the date of this report the Company issued 5,000,000 unlisted options
exercisable at $0.03 expiring 31 January 2020.
Exercise of Options
No options were exercised during the financial year or in the end of the financial year and up to the date of this report.
Expiry/Lapse of Options
No options have expired/lapsed since the end of the financial year.
At balance date the Empire Group had on issue, the following securities:
57
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
19. CONTRIBUTED EQUITY (continued)
Shares
-
1,110,737,176 listed fully paid ordinary shares – ASX Code: EEG
The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully
paid. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to
one vote per share at meetings of the Company. No dividends were paid or declared during the year, or since the year-
end.
Options
At balance date the Company had 14,000,000 unissued shares under option. These options are exercisable on the
following terms:
Number
1,000,000 Unlisted options
13,000,000 Unlisted options
14,000,000
Exercise Price A$
$0.028*
$0.03
Expiry Date
25 August 2019
30 December 2021
* Following a Pro-Rata Rights Issue announced in December 2016 the original exercise price of these options
($0.03) was adjusted pursuant to the terms and conditions of the options and ASX Listing Rule 6.22.
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 buyback 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.
20. 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.
58
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
21. 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 2017, the Empire Group had no environmental contingencies
requiring specific disclosure or accrual.
There have been no other changes in contingent liabilities since the last annual reporting date.
22. 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$40,000 in compensation.
23. COMMITMENTS FOR EXPENDITURE
Exploration and Mining Tenement Leases
In order to maintain current rights of tenure to exploration and mining tenements, the Company and the companies in
the consolidated entity are required to outlay lease rentals and to meet the minimum expenditure requirements of the
various Government Authorities. These obligations are subject to re-negotiation upon expiry of the relevant leases or
when application for a mining licence is made. No expenditure commitment exists at 31 December 2017.
i) Equipment and Operating Leases
Commitments in relation to equipment/motor vehicle leases contracted
for at and subsequent to the reporting date but not recognised as
liabilities:
2017
US$
2016
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
257,536
232,536
261,536
-
291,469
225,469
328,937
-
751,608
845,875
The Company leased its US corporate headquarters under a non-cancellable operating lease of monthly payments
ranging from $3,665 to $3,966 through February 2022. Net rental expense approximated $55,000 and $97,000, net of
reimbursements, for the years ended 31 December 2017 and 31 December 2016. The Kansas headquarters four-year
lease agreement is of monthly payments of approximately $2,853 to $2,945 through April 2021. The net rental expense
approximated $34,000 for the years ended December 31, 2017 and 2016.
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 2017 and 2016 were approximately $239,000
and $320,000 respectively. The Empire Group has the option to acquire the leased assets at the agreed value on the
expiry of the leases.
59
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
23. 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.
24. SHARE BASED PAYMENTS
Year Ending – 31 December 2017
During the 2017 financial period the following share based payments occurred:
The Company granted 17,693,153 ordinary fully paid shares to a company in February 2017 in lieu of cash payment
of A$141,545 for services rendered, at a deemed issued price of $0.008 per share.
The Company granted 13,544,567 ordinary fully paid shares to a company in June 2017 in lieu of cash payment of
A$108,357 for services rendered, at a deemed issued price of $0.008 per share.
During the financial year the following options were granted pursuant to the Employee Share Option Plan.
No. of Options
13,000,000
Grant Date
10 July 2017
Vesting Date
10 July 2019
Exercise Date A$
$0.03
Expiry Date
31 December 2021
Year Ending – 31 December 2016
During the 2016 financial year the following share based payments occurred:
The Company granted 2,000,000 ordinary fully paid shares to a company in July 2016 in lieu of cash payment of
A$20,000 for services rendered, at a deemed issued price of $0.01 per share.
The Company granted 1,000,000 ordinary fully paid shares to a company in August 2016 in lieu of cash payment of
A$20,000 for services rendered, at a deemed issued price of $0.02 per share along with 1,000,000 unlisted options
exercisable at $0.03 prior to 25 August 2019. Options were issued for nil cash consideration.
During the 2016 financial year no options were granted pursuant to the Employee Share Option Plan.
a)
Options
The options outstanding at 31 December 2017 are detailed below.
Balance at
start of year
Exercise
Price
Expiry Date
Grant Date
Granted
during year
Expired
during year
Exercised
during year
Balance at
end of year
25 August 2016(1)
25 August 2019
3 cents
1,000,000
-
10 July 2017(2)
31 December 2021
3 cents
-
13,000,000
1,000,000
13,000,000
-
-
-
-
-
-
1,000,000
13,000,000
14,000,000
(1) Options granted in lieu of cash payment for fees for services rendered to the Company
(2) Options granted pursuant to Employee Share Plan approved 31 May 2017. The plan provides for vesting restrictions on minimum
period of employment
b)
Expenses arising from share based payment transactions
Year ending - 31 December 2017
The share based payments transactions costs during the financial year relate to previously granted options based on
a pro-rata portion of the vesting period was A$8,150.
Year ending - 31 December 2016
The share based payments transactions costs during the financial year relate to previously granted options based on
a pro-rata portion of the vesting period was A$49,195.
60
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
25. 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.
Reportable segment (loss)/profit before tax
(14,784,209)
21,185,415
Oil & Gas
Investments
Other
Eliminations
Total
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
13,942,325
14,538,955
171,409
219,972
-
-
-
-
-
-
-
-
(75,555)
(140,312)
(1,203,455)
(1,137,179)
-
-
-
-
-
-
13,942,325
14,538,955
95,854
79,660
(15,988,296)
20,048,236
1,976
298
523,715
358,972
4,697
738
(523,715)
(358,972)
6,673
1,036
(4,517,774)
(3,901,079)
-
-
(4,703)
(10,073)
523,715
358,972
(3,998,762)
(3,552,180)
(19,980,384)
16,497,092
75,415,798
92,267,669
3,932,327
72,361
349,300
203,888
(3,854,327)
(889,069)
75,843,098
91,654,849
55,580,121
55,437,951
-
889,069
-
-
-
(889,069)
55,580,121
55,437,951
Non-cash items included in Finance costs:
- Asset retirement obligation accretion
(502,900)
(477,845)
- Discount on debt & overriding royalty interest
(529,239)
(654,251)
- Fair value gain/(loss) on forward commodity contracts
-
-
Capital expenditure
(2,514,333)
(1,213,093)
(2,931,443)
(2,200,961)
(13,654,019)
(1,178,610)
-
-
28,940,738
-
(142,500)
(298,600)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(11,726)
(12,666)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(143,988)
(69,281)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,943,169)
(2,213,627)
(13,654,019)
(1,178,610)
-
-
28,940,738
-
(142,500)
(298,600)
(502,900)
(477,845)
(529,239)
(654,251)
-
-
(2,658,321)
(1,282,374)
61
in USD
Revenue (external)
Other income (excluding Finance income)
Finance income
Finance costs
Profit/(loss) for the period before tax
Reportable segment assets
Reportable segment liabilities
Other material non-cash items:
Gain on disposal of acreage
- Depreciation and amortisation
- Impairment expense
- Reversal of impairment
- Gain on disposal
- Lease expiration costs
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
25. 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. Information reported to the Chief Operating decision maker (CODM) allows resource to be
allocated and subsequent performance to be analysed. This is reviewed on a monthly basis.
The Empire Group’s reportable segments under AASB 8 and reviewed by the CODM 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 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 $8,229,774
(2016: two major customers $7,531,662) of the Empire Group’s total revenues.
26. RELATED PARTY DISCLOSURES
a. Disclosures Relating to Directors
i.
The names of persons who were directors of the Company at any time during the financial year were:
• B W McLeod
• D H Sutton
• L Tang
• K A Torpey
ii.
Directors’ Shareholdings
Number of shares held by the Company Directors
Director
Balance at
1 January 2017
Acquired during
period through Pro
Rata Rights Issue
Other changes
during period
Balance at
31 December 2017
B W McLeod
D H Sutton
L Tang
8,924,997
734,295
-
15,305,002
-
-
-
-
-
24,229,999
734,295
-
Option holdings
Number of options over ordinary shares in the Company held during the financial period by each Director of the
Company, including their related entities are set out below:
Director
Balance at 1
January 2017
Granted during
year as
Remuneration
Exercised
during year
Expiring
during year
Balance at
31 December
2017
Vested
exercisable at 31
December 2017
B W McLeod
D H Sutton
L Tang
-
-
-
5,000,000
-
-
-
-
-
-
-
-
5,000,000
-
-
-
-
-
62
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
26. RELATED PARTY DISCLOSURES (Continued)
The options held by Directors’ were issued under an Employee Share Option Plan and were exercisable on the
following basis and subject to a minimum term of employment conditions:
Director
B W McLeod
No. of options
Exercise Price A$
5,000,000
$0.03
Expiry Date
31 December 2021
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
* of this amount $220,354 was paid during the financial period (2016: $126,193)
2017
US$
2016
US$
365,489
31,063
342,925
-
2) Aggregate amounts payable to Directors and their related Companies
at balance date:
- Eastern & Pacific Capital
- Management consultant fees accrued during the year
- Bonus payments accrued from previous years
- Reimbursements
145,135
-
-
216,732
29,750
33,761
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
-
17,550
2,137
26,795
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.
c.
Investments in Controlled Companies
Country of
Incorporation
Class of
Share
Controlling Empire Group
Empire Energy Group Limited
Australia
Interest Held
December
2017
%
December
2016
%
Controlled Companies
Imperial Oil & Gas Pty Limited
Imperial Energy Pty Ltd
Cobalt Energy Pty Ltd
Empire Energy Holdings, LLC
Empire Energy USA, LLC
Empire Energy (MidCon), LLC
Empire Energy E&P, LLC
Australia
Australia
Australia
USA
USA
USA
USA
Ordinary
Ordinary
Ordinary
Units
Units
Units
Units
100
100
100
100
100
100
100
100
100
100
100
100
100
100
All entities are audited by Nexia Australia with the exception of Empire Energy Holdings, LLC, Empire Energy USA
LLC, Empire Energy (MidCon), LLC and Empire Energy E&P, LLC which are companies incorporated in the USA and
are audited by Schneider Downs.
63
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
27. NOTES TO THE STATEMENT OF CASH FLOWS
December 2017
US$
December 2016
US$
(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
908,318
641,493
(b) Reconciliation of profit after income tax expense to net cash
flows from operating activities
(Loss)/Profit for the period after income tax expense
(20,107,246)
16,448,929
Adjustments for non-cash items:
Depreciation & amortisation expense
Impairment of property, plant & equipment
Impairment of available for sale assets and related receivables
Loss/(gain) on disposal of property, plant & equipment
(Write-back) of property, plant & equipment
Expiration of leases
Profit/Loss on disposal of available for sale financial assets
Discount on debt
Asset retirement obligation accretion
Share-based payment expense
Unrealised loss/(gain) on forward commodity contracts
Operating profit before changes in working capital and provisions
2,943,375
13,578,466
75,553
76,675
2,213,627
696,274
482,366
-
-
(28,940,738)
142,500
332,660
-
529,236
502,900
6,157
1,701,187
(551,197)
-
654,251
428,538
36,613
7,589,547
(57,933)
Change in Trade and other receivables
(222,320)
(383,384)
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
Net cash flows from operating activities
200,298
4,066
-
(466,300)
5,303
-
(478,953)
(1,030,150)
234,508
8,412
-
312,876
(5,394)
-
167,021
109,088
(c) Non-Cash Financing and Investing Activities
During the current financial the following non cash financing and investing activities occurred:
The Company granted 17,693,153 ordinary fully paid shares to a company in February 2017 in lieu of cash payment
of A$141,545 for services rendered, at a deemed issued price of $0.008 per share.
The Company granted 13,544,567 ordinary fully paid shares to a company in June 2017 in lieu of cash payment of
A$108,357 for services rendered, at a deemed issued price of $0.008 per share.
A proportional value of options already issued based on a pro-rata portion of the vesting period was expensed during
the financial year as follows:
-
-
1,000,000 options exercisable @ A$0.028 expiring 25/08/2019
13,000,000 options exercisable @ A$0.03 expiring 31/12/2021
A$4,000
A$4,150
A$8,150
During the previous financial year the following non cash financing and investing activities occurred:
64
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
27. NOTES TO THE STATEMENT OF CASH FLOWS (Continued)
The Company granted 2,000,000 ordinary fully paid shares to a company in July 2016 in lieu of cash payment of
$20,000 for services rendered, at a deemed issued price of $0.01 per share.
The Company granted 1,000,000 ordinary fully paid shares to a company in August 2016 in lieu of cash payment of
$20,000 for services rendered, at a deemed issued price of $0.02 per share along with 1,000,000 unlisted options
exercisable at $0.03 prior to 25 August 2019. Options were issued for nil cash consideration.
(d) Reconciliation of Liabilities arising from Financing Activities
Balance at
1 January 2017
Financing
Cashflows
Warrant
Expense
Amortisation
of warrants
Other
changes
Balance at
31 December 2017
38,656,987
(2,206,282)
171,171
358,068
(3,719)
36,976,225
Interest
bearing
borrowings
28. EARNINGS PER SHARE
Basic earnings per share (cents per share)
Diluted earnings per share (cents per share)
2017
(2.13)
(2.13)
2016
4.76
4.76
Profit/loss used in the calculation of basic and diluted earnings per share
(20,107,246)
16,448,929
Weighted average number of ordinary shares on issue used in the calculation of
basic earnings per share
944,413,550
345,634,425
Weighted average number of potential ordinary shares used in the calculation of
diluted earnings per share
944,413,550
345,634,425
29. SUPERANNUATION COMMITMENTS
The Empire Group contributed to externally managed accumulation superannuation plans on behalf of employees.
Empire Group contributions are made in accordance with the Empire Group’s legal requirements.
65
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
30. PARENT ENTITY INFORMATION
Information relating to Empire Energy Group Limited:
Current Assets
Total Assets
Current Liabilities
Total Liabilities
Shareholder's Equity:
Issued Capital
Reserves
- Fair value reserve
- Foreign currency translation reserve
- Options reserve
- Share based payment reserve
- General Reserve
Accumulated Losses
Total Shareholder’s Equity
Profit/(loss) for the period
Total Comprehensive income
2017
US$
2016
US$
298,297
42,797,593
1,392,274
1,392,274
146,433
35,921,121
(1,531,433)
(1,531,433)
(78,415,334)
(74,239,177)
(575,677)
5,877,345
(1,346,396)
(166,540)
(228,254)
34,030,457
(40,824,399)
892,357
1,686,676
(575,677)
8,000,137
(1,510,540)
(167,567)
(241,272)
34,344,408
(34,389,688)
461,128
456,907
66
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
31.
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.
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
December 2017
Cash salary
and fees
US$
Bonus
payments
US$
Non-
monetary
US$
Post-
employment
benefits
Super
contributions
US$
Long-
term
benefits
Long
service
leave
365,489(1)
7,555
-
7,555
16,999
31,063(2)
-
-
-
-
25,791
-
-
-
-
-
718
15,110
-
-
Share/option
based
payments*
Total
US$
-
-
-
-
-
1,206
-
-
-
-
423,549
8,273
15,110
7,555
16,999
-
219,018
63,513
(1) Includes accrued $145,135 but not paid. * 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 $19,058 the non-cash loss on options relating to the
above directors that expired over the year was $32,462. The net non-cash cost of options issued to the above directors and executives
for the year was $(13,404).
(2) In relation to a bonus issued in December 2014.
3141
-
-
282,772
Short term benefits
December 2016
Cash salary
and fees
US$
Bonus
payments
US$
Non-
monetary
US$
Post-
employment
benefits
Super
contributions
US$
Long-term
benefits
Long
service
leave
Share/option
based
payments*
Total
US$
342,925(1)
14,886
-
26,795
-
-
-
-
26,414
-
-
-
-
2,010
14,886
-
-
-
-
-
15,288 384,627
16,896
14,886
26,795
-
-
-
-
253,000(2)
3,893 319,452
62,559
(1) Includes accrued $216,732 but not paid. * 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 $18,185 the non-cash loss on options relating to the
above directors that expired over the year was $30,976. The net non-cash cost of options issued to the above directors and executives
for the year was $(12,790).
(2) Includes $78,000 of previous payments from 2013 to 2016 not paid.
-
-
Directors
B W McLeod
K A Torpey
D H Sutton
L Tang
J Warburton
Executives
A Boyer
Directors
B W McLeod
K A Torpey
D H Sutton
J Warburton
Executives
A Boyer
67
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
32. AUDITORS’ REMUNERATION
Audit Services
Auditors of the Company – Nexia Australia:
Audit and review of financial reports
Other auditors:
2017
US$
2016
US$
88,922
89,536
Audit and review of financial reports
177,000
89,588
Other services
Auditors of the Company – Nexia Australia:
Taxation services
Other auditors:
Taxation services
265,922
179,124
11,713
12,682
20,106
31,819
1,303
13,985
33. MATTERS SUBSEQUENT TO BALANCE DATE
1) On the 12 February 2018 the Company announced the placement of 150 million fully paid ordinary shares to
sophisticated and institutional investors at an average issue price of $0.0125 per share, raising A$1,875,000 (before
costs).
The Placement shares were to be issued with the issue of 75,000,000 Placement shares under ASX Listing Rule
7.1 and 75,000,000 Placement shares to be issued under Listing Rule 7.1A.
The Company determined to proceed with the capital raising of $1,875,000 by way of two tranches with both
tranches being issued at $0.0125 under Listing Rule 7.1:
- Tranche 1 of 75,000,000 shares to be issued at $0.0125 and allotted under the Company’s existing capacity
under Listing Rule 7.1.
73,000,000 Tranche 1 shares were issued on 16 February 2018. Due to a delay with cleared funds the
remaining 2,000,000 Tranche 1 were issued on 22 February 2018 under Listing Rule 7.1.
- Tranche 2, being 75,000,000 shares at an issue price of $0.0125 to be issued under Listing Rule 7.1 subject
to approval by shareholders at a Extraordinary General Meeting of the Company to be held 6 April 2018.
Tranche 2 shares if approved will be issued to a number of parties at an issue price of $0.0125 being the same
price as the previously allotted Tranche 1 shares. It is noted that the same parties who participated in the placement
of Tranche 1 shares will take up Tranche 2 shares
2) On 16 February 2018 the Company issued 5,000,000 unlisted options exercisable at $0.03 expiring 31 January
2020 to Baillieu Holst Ltd (or nominee/s) for services rendered to the company for assistance in capital raising.
3) On 8 March 2018 the Company announced the appointment of Mr Alex Underwood as an Executive of Empire and
a Director and Chief Executive Officer of the Company’s wholly owned subsidiary, Imperial Oil & Gas Pty Limited.
The addition of Mr Underwood to the Company’s executive management team will support the Executive Chairman
and the Imperial operations team with the strategic development of the Company’s McArthur Basin assets located
in the Northern Territory, Australia, as well as assisting the Company to achieve its underlying objective of
restructuring its USA balance sheet and the acquisition of additional producing assets. Subject to the Corporations
Act 2001 (Cth) and ASX Listing Rules, as a component of Mr Underwood’s appointment to partially offset value
forgone in his previous employer share plan, the Company will issue Mr Underwood (or nominee) 4,500,000 fully
68
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
33. MATTERS SUBSEQUENT TO BALANCE DATE (continued)
paid ordinary shares (vesting in three equal tranches at 12 month periods) and 6,000,000 options (vesting in two
equal tranches of 12 month periods, exercisable at $0.03 on or before 30 December 2021).
4) On 27 March 2018 the Final Report of the Scientific Inquiry into Hydraulic Fracturing in the Northern Territory was
released. The overall finding of the Inquiry was that, if all its recommendations are implemented in full, the risks
associated with fracture stimulation of unconventional reservoirs can be adequately managed, and in some cases
eliminated. The Report does not make any recommendations as to whether fracture stimulation of unconventional
reservoirs should be allowed, as that decision lies with the Northern Territory Government. However, the Report
makes 135 recommendations for the regulation of the onshore shale gas industry, should it be allowed to develop
by the Government.
5) There were no other matters or circumstances that have arisen since 31 December 2017 that has significantly
affected or may significantly affect:
•
•
•
the operations, in financial years subsequent to 31 December 2017, of the Empire Group; or
the results of those operations; or
the state of affairs in financial years subsequent to 31 December 2017 of the Empire Group.
69
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 December 2017
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 17 to 25, 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 2017
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 Controller for the year ended 31 December 2017.
Signed in accordance with a resolution of the directors.
B W McLEOD
Director
Dated: 29 March 2018
70
Independent Auditor’s Report to the Members of Empire Energy Group Limited
Report on the Audit of the Financial Report
Opinion
We have audited the financial report of Empire Energy Group Limited (the Company and its subsidiaries
(the Group)), which comprises the consolidated statement of financial position as at 31 December 2017,
the consolidated statement of profit or loss and other comprehensive income, consolidated statement of
changes in equity and consolidated statement of cash flows for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies, and the directors’ declaration.
In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act
2001, including:
i) giving a true and fair view of the Group’s financial position as at 31 December 2017 and of its
financial performance for the year then ended; and
ii) complying with Australian Accounting Standards and the Corporations Regulations 2001.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those
standards are further described in the ‘Auditor’s responsibilities for the audit of the financial report’ section
of our report. We are independent of the Group in accordance with the auditor independence requirements
of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical
Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our
audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in
accordance with the Code.
We confirm that the independence declaration required by the Corporations Act 2001, which has been
given to the directors of the Company, would be in the same terms if given to the directors as at the time
of this auditor’s report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Material uncertainty related to going concern
We draw your attention to Note 3 ‘Going concern’ of the financial report, which indicates the Group has an
excess of current liabilities over current assets of $35.04m as at 31 December 2017. This is primarily due to
the Board determining the debt facilities be classified as current liabilities although the current credit facility
does not expire until 17 February 2019. In addition, the Group is also in breach of its loan covenants.
In Note 3, the directors state why they consider the going concern basis used in the preparation of the
financial report is appropriate. As discussed in that note, if the Group is not successful in securing sufficient
additional funds when required, there exists a material uncertainty that may cast significant doubt as to
whether the Group will be able to continue as a going concern. Our opinion is not modified in respect of
this matter.
71
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our
audit of the financial report of the current period. These matters were addressed in the context of our audit
of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters.
Key audit matter
How our audit addressed the key audit matter
Impairment of oil and gas
properties
Our procedures included, amongst others:
Refer to note 14 (Oil and Gas
properties and property, plant and
equipment)
Assessing whether the external expert engaged by
management to provide independent valuations were
appropriately experienced and qualified;
At 31 December 2017, the Group
has capitalised proved oil and gas
assets of $63.4m. AASB 136
Impairment of Assets requires
that the recoverable amount of an
asset, or cash generating unit to
which it belongs, be determined
whenever an indicator of
impairment exists.
The Group’s assessment of the
recoverable amount of its
producing oil and gas properties
was a key audit matter because
the carrying value of the assets
are material to the financial
statements and management’s
assessment of recoverable
amounts incorporate significant
internal and external judgements
and assumptions including
commodity prices, available
reserves, residual values and
discount rates.
Asset retirement obligations
Refer to note 18 (Provisions)
The measurement of the provision
for Asset Retirement Obligations
incorporates significant
judgement and uncertainty, with
cost estimates varying in response
to many factors including changes
in technology, legal requirements,
discount rates, past experience at
other production sites, and
estimates of future restoration
We evaluated management’s key assumptions and estimates
used to determine the recoverable amount of its assets,
including those related to forecast commodity prices and
revenue, costs, discount rates and estimated residual values;
We checked the mathematical accuracy of the cash flow
models, testing inputs from valuation reports produced, as well
as external inputs, including spot and forward prices for crude
oil (WTI) and gas at the reporting date;
We assessed the accuracy of management’s forecasting by
assessing the reliability of historical forecasts and reviewing
whether current market conditions would impact those
forecasts; and
Assessing whether appropriate disclosure regarding significant
areas of uncertainty has been made in the financial report.
Our procedures included, amongst others:
Evaluating management’s process of estimating and measuring
the provision for asset retirement obligations;
Evaluating whether the discount rate applied by management
to the forecast cash outflows is appropriate and consistent with
the requirements of AASB 137 Provisions, Contingent Liabilities
and Contingent Assets;
We considered the Group’s estimates of plugging costs per
well, including assessment of whether there have been
changes in technology or costs that would materially impact
those estimates. We compared the estimates for plugging costs
against actual costs incurred in 2017;
72
Key audit matter
How our audit addressed the key audit matter
We considered whether the key assumptions and judgements
used in management’s estimates were consistently applied in
measuring the asset retirement provision and in assessing the
recoverable amount of the related assets; and
We performed sensitivity analysis on management’s estimates
used in calculating the obligation.
Our procedures included, amongst others:
We evaluated management’s process for estimating delivered but un-
invoiced oil and gas sales by:
assessing the historical accuracy of management’s estimates by
comparing previous estimates to the actual delivery for that
period;
comparing estimates of line loss to historical data, as part of
the calculation for November (gas) and December (oil and gas)
revenues;
testing a sample of leases by comparing revenue by well to
revenue as per leases, as well as agreeing production to
relevant purchaser statements; and
to the extent possible, compared the amounts accrued for oil
and gas deliveries to subsequent receipts and/or delivery
statements.
costs.
The expected timing and amount
of expenditure can also change,
for example, in response to
changes in laws and regulations
or their interpretation.
This was a key area of audit focus
due to the size and nature of
these estimates and their
consequential effects on assessing
the recoverable amount of
producing assets.
Revenue estimates
Refer to note 5 (Revenue) and
note 10 (Trade and Other
Receivables)
Due to timing differences between
the delivery of oil and gas and the
receipt of the delivery statement
from the customers, the Group
has recognised accrued revenues
of $1.4m at balance date. These
revenues are accrued based on
volumetric data from the Group's
records and estimated sales prices
for the relevant months.
These considerations combined
create an area of significant
estimation which we have
determined to be a key audit
matter.
Other information
The directors are responsible for the other information. The other information comprises the information in
the Group’s annual report for the year ended 31 December 2017, but does not include the financial report
and the auditor’s report thereon.
Our opinion on the financial report does not cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the other information and,
in doing so, consider whether the other information is materially inconsistent with the financial report or
our knowledge obtained in the audit or otherwise appears to be materially misstated.
73
If, based on the work we have performed, we conclude that there is a material misstatement of the other
information we are required to report that fact. We have nothing to report in this regard.
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 preparing the financial report, the directors are responsible for assessing the Group’s ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern
basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have
no realistic alternative but to do so.
Auditor’s responsibility for the audit of the financial report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with the Australian Auditing Standards will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of users taken on
the basis of this financial report.
A further description of our responsibilities for the audit of the financial report is located at The Australian
Auditing and Assurance Standards Board website at: www.auasb.gov.au/auditors_responsibilities/ar1.pdf.
This description forms part of our auditor’s report.
Report on the Remuneration Report
Opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 21 to 23 of the directors’ Report for the year
ended 31 December 2017.
In our opinion, the Remuneration Report of Empire Energy Group Limited for the year ended 31 December
2017, complies with section 300A of the Corporations Act 2001.
Responsibilities
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.
Nexia Sydney Partnership
Lester Wills
Partner
Dated: 29 March 2018, Sydney
74
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
SHAREHOLDER INFORMATION
ORDINARY SHARES
a
Substantial Shareholders as at 28 February 2018
Name
Global Energy and Resources Development Limited
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
187,500,000
%
Holding
15.81
Holders
307
708
404
808
528
Number of
Shares
119,314
1,991,494
3,029,525
31,388,145
1,149,208,698
%
Holding
0.01
0.17
0.26
2.65
96.92
2,755
1,185,737,176
100.00
i
ii
Number of holders of less than a marketable parcel
Percentage held by 20 largest holders
1,772
45.81
c
Twenty Largest Shareholders grouped as at 22 March 2018 (ungrouped)
Name
Number of
Shares
%
Holding
Global Energy and Resources Development Limited
Macquarie Bank Limited
Mr Kooi Onn Chye
HSBC Custody Nominees (Australia) Limited
Fanchel Pty Ltd
John Wardman & Associates Pty Ltd
Rhodes Capital Pty Ltd
Mrs Ching Ling Yong
Colowell Pty Ltd
1
2
3
4
5
6
7
8
9
10 Mr Frank Douglas Magnus
11 Mr EE Chye Chuan
12
13 Ms Geraldine Tan Choon Shan
14 Soh Chei-Yong + Susie See
15 Grosvenor Equities Pty Ltd
16 Citicorp Nominees Pty Limited
17 Mr Robert Alvarez
18 Cheoy Lee Yachts Australia Pty Ltd
19 Elphinstone Holdings Pty Ltd
20 Mr Liang Kwang Lim + Mrs Jennifer Lynne Lim
Low Peng Koon
187,500,000
53,666,666
38,683,625
32,060,936
30,000,000
20,770,002
19,949,999
17,250,000
15,717,396
14,279,672
12,500,000
12,500,000
12,500,000
12,500,000
11,374,505
11,239,036
10,750,000
10,000,000
10,000,000
10,000,000
543,241,837
15.81
4.53
3.26
2.70
2.53
1.75
1.68
1.45
1.33
1.20
1.05
1.05
1.05
1.05
0.96
0.95
0.91
0.84
0.84
0.84
45.81
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.
75
EMPIRE ENERGY GROUP LIMITED
and its controlled entities
SHAREHOLDER INFORMATON (Continued)
UNQUOTED SECURITIES AS AT 23 MARCH 2018
Class of unquoted securities
No. of securities
No. of holders
- Unlisted options exercisable at $0.28 expiring 25 August 2019
- Unlisted options exercisable at $0.03 expiring 30 December 2021
-
options exercisable at $0.03 expiring 31 January 2020
1,000,000
13,000,000
5,000,000
Unlisted Performance Rights subject to certain preconditions being met
2,500,000
1
9
3
1
Voting Rights
There are no voting rights attached to any of the unquoted securities listed above.
LIST OF MINERAL LEASES – USA AND AUSTRALIA
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 29 March 2018. Given the extensive list (66 pages) it was not practical to include this listing in the Annual
Report of the Company.
CORPORATE GOVERNANCE STATEMENT
The Company’s corporate governance statement can be found on the Company’s website at the following location:
http://empireenergygroup.net/company-overview/corporate-governance
76